Q1 2020 Earnings Call

Thursday Thursday

Thursday Thursday, good afternoon, and welcome to the First Merchants first quarter 2020 earnings conference call with all participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press star than one on your telephone keypad to withdraw your question, please press * then two, please note today's event is being. Yep.

This presentation contains forward-looking statements made pursuant to the safe harbor provisions of the private Securities litigation Reform Act. Such forward-looking statements can be identified by the use of words, like beliefs expect or May and include statements relating to First Merchants business plan growth strategies loan and Investment Portfolio asset-quality risks and future of these statements are subject to significant uncertainties that may cause results to differ materially from those set forth in such statements including changes in economic conditions. The ability First Merchants to integrate recent acquisitions changes in regulations and requirements of the companies Regulators litigation changes in the credit-worthiness of customers fluctuations in a get rates of interest and other risks and factors identified in First Merchants filings with the Securities and Exchange Commission First Merchants undertakes, no obligation to update any forward-looking statements dead.

Whether written or oral relating to the matters discussed in this presentation, or press release in addition, the company's past results of operations. Do not necessarily indicate. It's anticipate future results. I would now like to turn the conference over to Mike reckon president and CEO, please go ahead. Thank you, Andrea and good afternoon everyone Welcome to our earnings conference call and webcast of the first quarter ending March 31st, 2020 joining me today or Mark Hardwick our Chief Financial Officer and Chief Operating Officer as well as John Martin our chief credit officer.

Also joining me today is Michelle Chi vs. Chi our senior vice president and Director of Finance who's actually be presenting material later in the presentation and Mike Stewart. Our chief banking officers all suck Us in the event that he can add thoughts to questions later in the presentation.

You know given that.

Rapidly changing environment. Our goal was to provide a thorough review of 2020 s first-quarter coupled with an eye towards First Merchants positioning for the balance of the year and into 2012 that we released our earnings in a press release this morning at approximately 8 a.m. Eastern time and our presentation speaks to material from that release the directions that point to the webcast. We're also contained at the back end of that release in my comments begin on page for a slide titled first quarter 2020 highlights.

First Merchants earned earnings per share of $0.62 net income of 34.3 million dollars a return on assets at 1.09% off the earnings per share and net income compared with last year's first quarter of $0.78 and net income of 38.8 million dollars.

Total assets grew to twelve point seven billion dollars twenty 4.3% over the first quarter of 2019 and the growth was a function of our third quarter of 2019 acquisition of Monroe Bank & Trust coupled with the organic growth on the next line down loan growth is 7.9% deposit growth of 8.9% respectively off last year's first quarter.

Through the course of John Martins discussions, you'll hear about loan demand as we see it through the first quarter and a little bit of our pipeline as we move forward in an unusual time. We recorded nineteen point eight million dollars of provision in the first quarter and coupled with less than $600,000 in net charge-offs are reserved increased 23% from a friend which is about the same rate of growth from 3:31 of nineteen Mark and Michelle will have further comments on the provision composition and the reserve level in their presentations.

Are common tangible Equity to assets totaled 9.91% and back to the allowance for a second the allowance plus fair value marks, totaling 1.54% of Life at March 31st.

With the quarter's earnings are tangible Book value increased to $22.46 and 11.9% increase over 2019.

Before Mark speaks in Greater detail on a result. I'd like to summarize a few perspectives on our actions over the last 45 days and so on page five. I have a page that describes First Merchants supporting our employees health and financial stability.

And that cop top couple of bullet points speak to the fact that with over 1,850 team-mates. We've enabled over a thousand of them to work from home have the technology package both available and effective. We provided an additional eighty hours of paid time off for flexibility purposes for our full-time Associates for covid-19, sick and dependent care of the flexibility needed as changes occurred on short notice.

Bottom points really just speak to a culture of high-touch communication with both individuals and the entire company for a rapidly changing set of needs.

And I moved to page six a couple of comments on our support of the business community and up top is kind of the Highlight program of the last month as it relates to business clients. We find ourselves in between to Congress approved fundings. And most of the bullet points here speak to the wave that is just in the process of getting boarded onto our balance sheet as we speak with desirable program for a business banking and commercial lending oriented middle-market organization. And so we had great demand as evidenced in the top Point greater than thirty seven hundred and fifty applications and greater than 750 million dollars funded to businesses benefiting more than 120,000 employees.

In parentheses, you can see that the company brought experience with the SBA programs into the new product announcements John's going to cover it later. But as of March 31st, we had two hundred million dollars in commercial loan modifications approximately 3% of the portfolio and the modification discussions with our clients have gone on John's going to bring you up to speed later on as to where it was on a more current time. Across all the lines of business.

Right ahead of us. We have a team of Bankers evaluating and preparing other aspects of the Care Act specifically the rollout of the Main Street lending program to support larger businesses with a guidance is due soon will be ready to measure the attractiveness of that to our clients relative to our delivery had a strong first-quarter in the second bullet point from the bottom that talks about funding General working Capital Growth and John may make a comment that we didn't have large run-ups on line drawers and he'll have some material to exhibit that point off.

We've offered and are seeing wider use of commercial client technology to maintain operating routines of our commercial clients and the bottom bullet point with heavier use of remote deposit capture devices in the field wire modules being used by all of our clients.

And I moved to page seven additional First Merchants response top bullet point a board-approved action of a million dollar contribution commitment to impact It First Merchants markets through local not-for-profit organizations. We're going to be giving back to front line organizations who are critical and dressing the most basic needs in the markets that we serve.

A couple of bullet points around modified delivery and so the clients have really adapted quite well to Alternative delivery of consumer banking with drive-thru Lobby Lounge drive-thru transactions and Lobby service still available on a individual meeting basis by appointment and a great opportunity to highlight our technology and so our investments of the last couple of years. I've seen increased digital banking use as our call center taking thousands of calls in the steering our clients towards their best Avenue to have their needs met most of multiple channels working in sync to satisfy the needs and answer questions.

drawings going to talk at length

And quanta quantify all of the modification request but on this page consumer and mortgage loan payment deferrals granted on a case-by-case basis up to 90 days without incurring any fees or any credit reporting hardship Bridge loans was an early First Merchants program, even before the cares act just to recognize that we had consumer customers that had needs on what the hard cock began to evidence. It's been useful for us throughout our banking centers and consumer clients and then lastly sharing knowledge and encouraging caution. I think we've seen Nationwide that there's been a higher incidence of fraud attempt and covid-19 scams. And so we're trying to protect our clients through this difficult.

But that having been settled join you later, but Mark's wants to get a little bit deeper into our first quarter results. Thank you. Mike. My comments will begin on slide 9. We're total assets wage increased by two and a half billion dollars or 24.3% percent since the first quarter of 2019 Investments online one increased by $835 million or North nearly 45% during the same period due to strong deposit growth and acquired liquidity while while loans online to increase by one point three billion or 17.9%

Required loans accounted for $733 million of the 1.3 billion in loan growth leaving organic growth to account for $570,000 or 7.9% of our growth.

Additionally online 3 the allowance for loan losses increased by $18 billion or 22.2% over the first quarter of 2019 primarily due to covid-19 Provisions during the first quarter of 2020.

The composition of our eight point six billion dollar loan portfolio shown on the upper right of slide ten produced a yield for the quarter of 4.85% loan yields are under pressure given the hundred and fifty basis point decrease in the primer prime lending rate during the quarter and the trailing impact that it's had on Thursday as well is the graph on the right illustrates 67% of our loans are variable with half for pricing daily. Our loan yield of 485 is down from lack of peak of 5.32% on slide 11 our Investment Portfolio has a longer duration than peer which is a good offset to our variable rate on a portfolio.

And as of March Thirty One 2020 unrealized gain totaled one hundred twenty one point seven million dollars ninety five point six million dollar increase since this time last year, you will also see meaningful realized gains on the sale of Securities. When I cover slide, 16 due to strategic movements within sectors of sectors of our Investment Portfolio to both take advantage of gains and improve yields.

on slide 12

total deposits increased by one point eight billion or 22.6% over the first quarter of 2019 Monroe Bank & Trust accounted for 1.1 billion of the growth pact organic deposits grew by $717 for an annualized 8.9%

common equity on line 7 increased by $322 million from the first quarter of 2019 to the first quarter of 2020 Beyond normal earnings and dividends and a other comprehensive income changes. The one hundred percent stock purchase of Monroe Bank & Trust that we close back in September of 2015 increased Equity by 230 million.

And the completion of our announced share buyback program decreased Equity by $75 billion the company repurchased just over two million 150,000 shares overview of the program.

Capital and liquidity are positioned. Well for the future and management is pleased with the structure of our balance sheet. As we enter this recessionary environment. We believe that that our loan-to-deposit ratio of 87% in our loan to asset ratio of 60% 68% provides the bank with Fortress balance sheet levels of liquidity.

The mix of our deposits on slide 13 is the key to both liquidity strength and low cost funding first-quarter interest bearing deposits cost deposit cost total Dead 106 basis points down from last year's peak of 133 when we include non-interest-bearing demand deposits our interest expense for the quarter total of 88 basis points off all regulatory Capital ratios on slide 14 or above the regulatory definition of well-capitalized and our internal targets, which ensure the banks the bank maintains for trucks like levels of capital.

Now let's turn to slide fifteen the corporation's net interest. Margin Netta fair value declined by an additional 10 basis points from the fourth quarter of 2019 to the first quarter of 2020 this chart going back to the first quarter of 2018 highlights the asset sensitive nature of the bank's balance sheet as the FED funds rate started off just to your journey at a hundred and fifty basis points increased to two hundred fifty basis points during the peak of our margins near the end of 18 and then declined by 255 basis points including this last one hundred fifty basis point decrease in the first quarter of 2022. Just a quarter point.

Despite the the quick and decisive action around deposit rates and 2019 and the first quarter of 2020 and additional upcoming CD maturities during the remote, We anticipate some additional net interest margin compression again next quarter.

Staying with the two-year timeline for a moment.

In the first quarter of 2018. Our loan-to-deposit ratio was 94% And now it's just 87% or liquidity is healthy in this recessionary environment off but challenges. Margin we've essentially traded it liquids loan yields of 4.85% for liquid bond yield of 3.16% off at least $710 of earning assets over this two-year period leading up to the current recession.

Not interesting. Come on slide 16 total 29.8 million as of March Thirty One 2020 and increase of 11.1 million or 59% off primarily due to the acquisition of Monroe Bank & Trust additionally several items in the category provide Nats and natural hedge to the Banks net interest income by growing when rates Define and declining one rates rise.

Customer specific line items accounted for 7.3 million of the increase to include growth and fiduciary and wealth management fees of 2.2 million gains on the sale of mortgage loans increased by two point 1 million derivative hedge fees and card payment fees two separate line items here increased by 1.1 million each and service charges increased $500,000 for the quarter.

Not interest expense on slide 17 total of 66.1 million in the first quarter of 2020 compared to just fifty six point six million in the first quarter of 2019 of the increase our merger with Monroe Bank & Trust accounted for nearly all of this change. I should also add that post integration which we completed in November of nineteen month. We have achieved all of our nails cost savings that were part of our original Target.

Now on slide 18 is Mike mentioned in his opening remarks to decline in both. Net income online eight and DPS online nine were primarily the result of provision expense online to be additionally despite margin pressure the efficiency ratio online ten remained in an impressive 52%

One slide nineteen you can see trends of eps dividends and tangible book value per share and on slide twenty. You will notice our total compound annual growth rate tangible, Next. Thursday is still over 10% totaling 10.12% and our dividend yield is nearly 4% now Michelle Chi vs. Chi our senior Vice President of Finance will cover off a couple of key items related to the cares act and their impact on our financial statement. Thanks Mark. The first item I wanted to discuss is our deferral of life. We use the method of calculating our allowance this quarter and increased our qualitative factor for current economic conditions to arrive at a provision of 19.8 million month. We were prepared to adopt Cecil as of January one the validation work on our models was performed in 2019, and we were ready to go.

in our 10-K

To disclose that are de one adjustment for a January one adoption was an increase of $55 to 65% from the allowance of 80.3 million at December 31st. And am in other liabilities to cover unfunded commitments of approximately 18 million. We used Moody's forecast scenarios in our Cecil models and had selected a few different scenarios to develop an acceptable allowance range. Our models are primarily driven by the unemployment rate. There are other economic indicators in our equations too. But unemployment rate is the most significant change in the last two weeks of March Moody's was rapidly ra forecasting established scenarios and created new covid-19 goes which led us to question the reliability of the forecast.

When presented with a choice of adopting we decided to stay under the incorrect loss method until the forecast risk was lower and there was a bit more certainty with a clear view forward with the hope that the that would allow for interim. Implementation such as April 1st or July 1st now subsequent to us making that decision the transition conditions indicated by the SEC turned out to be desirable than we anticipated if they still have an issue written guidance, but we decided to stay the course and keep our teams moving on their review and Analysis of our results for the quarter.

I think the benefit of waiting to implement is that we will have a better view of the impact of this pandemic the government stimulus programs and the impact of our own initiatives on our region and the communities we serve which should minimize volatility and earnings.

The other thing that the cares act put in play is it allowed us to carry back net operating losses to a prior. With a different tax rate than the current rate as a result of the tax cuts and jobs act taking advantage of that tax rate differential resulted in a one-time adjustment which lowered income tax expense by 1.2 million that along with the large pack lowered our q1 effective tax rate to 9.2% slide twenty-three shows a summary of our allowance on the top right corner is a role Ford showing charge of $600,000 for the quarter adding in the provision to come to an ending allowance of 99.5 million, which is an allowance to total loss coverage ratio of 1.15%

I have box to the allowance plus fair value marks because adding in the remaining fair value marks on line 9 of 33.1 Million results in an adjusted coverage ratio of 1.54% If you do a burned-down analysis using a 2% charge off rate on loans, as of 331, the after-tax impact of total charge off is equal to the allowance plus fair value marks. When you consider our strong Capital levels covered by Mark in addition to this credit coverage, it's apparent we have great balance sheet strength. So I feel like we have more than adequate credit that's going into the second quarter that concludes the items. I wanted to discuss I will now turn it over to our chief credit officer. John Martin.

All right. Thanks, Michelle.

Good afternoon. I'll begin my comments on slide twenty-five with a detailed presentation of the portfolio overlay quarter and modifications review Line and discuss some specific portfolios and mortgage lending. I'm going to quickly review the first quarter asset-quality and then wrap up with my comments and observations off from recent activities. I'm turning to slide twenty-five this slide presents the portfolio from a collateral base perspective and Loans have been grouped page on FDI see reporting which is more closely tied to Collateral in the first quarter the loan portfolio grew 144 million dollars or 6.8% annualized commercial loans grew $194 million dollars of note was a move of roughly 230 million dollars from line for 2 line 5 as projects removed from construction to multi-factor.

And c r e Nonna non-owner-occupied categories. Basically, the first quarter was more of the same steady growth with a stable portfolio growing in the mid to Upper single-digits wage.

Trying to slide twenty-six, which is the new quarter, which is new this quarter. I've grouped the commercial assets by Nate segmentation segments or the North American industry classification system to show the detailed composition of the loan portfolio by primary by borrower primary industry. I draw your attention to the roughly forty four million dollars of restaurant exposure that was moved from lessors of real estate. Naik's From Below to the restaurant and foodservices segment wage provide a clear illustration of the concentration the support statements we've made on prior earnings call that First Merchants is built a diversified commercial portfolio cross-industry month and in a state that has a robust manufacturing base. Our largest exposure is well manufacturing followed by public administration from our Public Finance business wage.

agriculture

along those same lines with little energy production. We have little or no oil and gas exposure other portfolios highlighted of note include $188,000 in hotels and another hundred fifty-two million dollars in a restaurant and Foodservice, which were Industries. We are actively engaging our borrowers for participation in the PPP program as well as loan modifications to help bridge the impacts of the shutdown.

Turning to slide twenty-seven.

And using the same industry segmentation, I presented an overlay of quarter and modification request using the 21 segments as before. This is ur life cycle modifications. It's as of the end of the quarter but you can see the concentration in restaurant and foodservices as well as Dental hotels, I'd note that they were not as fast or request thousand applications. Um, but have since showed an increase. So I I'd ask that you take note of these numbers if you're taking notes at home here. These are um Thursday, we are today 8 rather than just the end of the first quarter which is what the slide was. So updating these portfolio since the end of the quarter roughly 35% of the month Hotel portfolio has requested modifications 63% of the dental portfolio and 28% of the restaurant and Foodservice is portfolio have requested birth.

for us

Overall there have been just over $775 million dollars in commercial modification requests and just over $25 million dollars of consumer modification request.

Moving on to slide twenty-eight line utilization has been stable across the commercial portfolio. And while there have been isolated instances of defensive line drawn down there has not been a wholesale move to draw down lines in order to accumulate cash.

I would add that lines of credit are frequently supported by borrowing bases that are regular regularly monitored and managed as situations change.

Turning to slide twenty-nine. I've included a slide to Spotlight the structured Finance business to help clarify what it is what's included and then dive into the sponge Finance business the structured Finance business. It's kind of the umbrella here contains four primary lines Public Finance. Sponsor Finance debt Capital markets and asset-based lending. The Public Finance business was started in 2015 and it has Consolidated The Lending and depository Gathering activities two cities towns and municipalities. Approximately 85% of the loan portfolio is supported by a taxing Authority while 15% is to public-private partnership supported by project cash flows and collateral.

The sponsor Finance business was started in 2016 and markets to private Equity firms in the Midwest and Southeast. I'll talk more about this in a minute off the debt Capital markets business started in 2018 and formalized our our sale side approach to transactions where First Merchants serves as the agent and syndicator off this business does not have a balance sheet and serves to facilitate the management of participating Bank relationships and finally asset-based lending started in 2019 is supported by a back-office secured credit department with tight controls managing drawers and operations. All for businesses are led by Seasons seasoned Executives with more than 20 years of experience.

Then elaborating return to slide Thirty and Diving deeper into the sponsor Finance business. I've included portfolio highlights of the business office just mentioned. The team is marketing to private Equity firms in the Midwest and Southeast to acquire companies, which have less than ten million dollars in ibadah.

Led by a former Midwest region Chief risk officer for GE with detailed and frequent portfolio oversight new opportunities are structured with revolving credit facility and Senior secured amortizing term loans with lower seen your leverage profiles and less than 40% Target loan-to-value senior debt structures back under right both the opportunity and the private Equity Firm in both single and multi Bank opportunities.

moving his slide Thirty-One

I've included a breakout of the investment real estate portfolio and the related modifications.

The portfolio is 1/3 concentrated multi multi family or 8.2% of total loans. The portfolio is geographically concentrated around our footprint as you should expect with which includes, Indiana, Ohio, Illinois and Michigan, I broken out an estimate of the retail real estate-related exposure where our strategies retail real estate has been to originate projects which are Amazon resistant which does include tenants which require face-to-face contact.

Turning down turning now to slide 32, which I highlight where I highlight excuse me recent mortgage activity.

This is a real bright spot in the quarter with a low interest rate environment. The mortgage lending business has been robust with a strong pipeline some of the items of note including include being able to achieve a modest premium to Market as well as an ability to use a pricing based balance sheet strategy to place 15 year fixed mortgages on balance sheet when a comparable yield to mortgage-backed Securities exists.

And closing out the slide as a result of the strong pricing. We have utilized extended locks to expand the the pipeline without having to add additional processing capacity. And finally the home purchase market for Jumbo loans has continued to remain strong despite the current pandemic environment.

Moving on to slide thirty-three. I've spotlighted the mortgage consumer loan portfolio and the composition of the mortgage and consumer loan modifications modifications thoughts are have been modest by comparison to the overall portfolio side turning two slides $34.35 briefly. I would just add that. This quarter's asset-quality was a continuation of Prior quarter strength and does not yet reflect the economic impact of the pandemic and subsequent shut down. This is a good place for the company to start from home then moving to slide thirty-six. And where do we start from well by engaging our customers and working a path forward. We modified most loans in a recent weeks with a 30-day, excuse me with a 90-day deferral while understanding how the borrow was being affected. We surveyed their access to liquidity and their initial plans.

And structured our deferrals with a push back a principal while occurring interest which will be repaid when the bar returns to a normal pni amortization schedule.

We are.

Getting the cycle with the stronger credit profile and enhance monitoring processes. We are originating PPP loans and helping our customers get access to the program while forward slash forward for the Forgiveness process in anticipation of receiving additional Guidance. The entire First Merchants team who has worked to build the process and deliver results around this program has been amazing. We now have a team focused on Main Street lending program in anticipation of rollout and the opportunities that might exist for our borrowers under that program. Okay think Mike Stewart can share details on

And we have an experienced workout staff and it's established special assets program from the last recession in place and ready to assist borrowers. And finally we continue to maintain our credit underwriting standards supplemented by good judgment and a focus on understanding how the pandemic will impact our borrowers. I'll turn the call over now to Mike reckon. Hey, thank you Jose. I really like your last slide and the top bullet point of it proactively engaging clients and customers to chart the path forward while I seem to be on a a schedule of Records Zoom calls and webinars. The balance of this company is out in front talking to their clients listening to their concerns here and how we can go for them. I share John's appreciation for the team worked at the company is performing so I'm on page 38 my eyes are tempted to get to the bottom where it talks about being well-positioned for this Thursday.

Challenging for the future strength and stability the lines on to that but I don't want to cheat and Skip some summarizing from earlier comments. We're going to go into the second quarter Midway through April with a strong Foundation of pre-tax pre-provision earnings better part of fifty eight million dollars tangible common Equity nearly 10% off. It'll Cecil implementation protection of an allowance and fair value marks of 1.54% of loans of out of liquidity from an 87% loan-to-deposit ratio what John just covered with his a really well Diversified portfolio which with sharp underwriting and portfolio management and it produces a high-performance execution results profitability return on assets and efficiency ratios.

While we maintain evaluation above tangible Book value. We also know that it's 50% of our historical average. So I do think we're well-positioned. We're optimistic in our goal with our material today was to evidence our mindfulness of today's recessionary environment. I think we know what we're up against and we're evaluating virtually all variables in our business office were optimistic about navigating this company in our client for what's ahead. So at this point Andrea, we are open for questions.

We will now begin the question-and-answer sessions to ask a question. You may press * then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the key to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

And our first question comes from Scott siefers of Piper Sandler, please go ahead afternoon guys. Thanks for taking the question. I asked so first question just on Cecil and the uh decision to delay and definitely appreciate the rationale. I guess. I'm just wondering how long it'd take a a big provision despite not be not adopting Cecil which, you know took advantage of sort of the qualitative factors under the incurred method. So in a sense you did a Cecil light bulb Vision, I guess in in in in the sense that it's sort of similar to the larger ones we've seen so far this quarter what would have been the the difference between your provisioning levels this quarter and what they would have been a diesel

You know, we used the Moody's forecasts in our Cecil models to help inform that qualitative adjustment for the provision that we booked. I mean, I think even under the incurred loss model, you can't ignore what's going on in the economy. So I don't think the difference between the incurred loss provision versus the Cecil provision would have been materially different.

Okay, and will that will that be the sort of the way it goes going forward in other words enough flexibility under the qualitative that you could you know prep and really continuing the reserve substantially if needed given, uh eventually Clarity on the forecast. Yeah. I think there's room for that.

Okay, perfect. And then you mentioned in your comments about the hopes to do sort of an interim adoption of Cecil, but then mentioned that some of the transitions stuff was not as favorable going to just a bit more detail on you know how when you might be able to do an interim adoption.

Well, when they when they cares Act was passed it said that we either adopted December 31st at the end of this year or when the emergency Act is canceled. And so that was the provision that was written in the cares act but in the Cecil guidance initially that allowed for interim adoption and we didn't know if that was still going to be in play or not. And we're waiting to give me a sec on the official guidance. They still have an issued it although the SEC account did make a statement that said that we would have to restate back to January one, but we're still waiting on guidance around that.

Okay. All right. Perfect. Thank you very much.

Next question comes from Daniel to Mayo of Raymond James, please. Go ahead.

Good afternoon, guys, thanks for taking my question. I'm doing well. Thank you. So, I guess first, you know given get right in a a a meaty question here on the tax rate given the usage of the in the first quarter. Is that something that uh, you expect that could be used against going forward or is that I think I heard one time in the comments. So any comment around what the tax rate might be going forward be great. That's a one-time item off and we would anticipate if we have similar levels of provision that's tax rate would go to about 12 and half percent and if we didn't have a provision at all, you know, if you guys run through that math it gets to a tax rate of 15 and half percent. So the nol was pretty significant and the fact that we had a large provision this quarter pushed the tax rate even lower.

Got it makes sense. And then I guess on on the margin you mentioned a an expectation for that time to to Contracting the second quarter and then kind of stepping out into the third quarter and Beyond you think given, you know, similar type of rate scenarios that you might see stability there going forward.

Yeah, I do. I kind of anticipated a second quarter second quarter pressure on the margin that was similar to the first quarter and then stabilization soul. And that's just because the rate Cuts happen late in the quarter and and they'll be fully recognized in the second quarter and by then we'll have the majority of birth of our deposit reductions completed. We do still have about 1.1 billion of CDs that were amortized over the next twelve months. However price over the next twelve or I should say and there at about $185 and we're we price down by at least a full percentage point which takes some of the remaining pressure off. But we think we're going to be challenged in the second quarter in a way that similar to the first.

All right, that's terrific. Thanks for answering my questions.

Thank you. Thanks Daniel.

Our next question comes from David Delmont of please go ahead. Hey, good afternoon, everyone. Hope everybody is doing okay during these challenging times first question regarding the the PPP participation. Um, you know, a pretty pretty active origination. I think you said around $750 million. What was the the average rate on Thursday?

Like the average 3%

3% Okay. And what is your expectation for when you know, you're you're probably begin the Forgiveness process like where these books mostly in March or April first part of April. What's you know, what what can we expect for when some of these loans can be paid off? Yeah. They David this is John the PPP program. It has a forgiveness after eight weeks. So it will be actually after or before the court or even ends. They should begin to have a start to see those loans forgiven. I think it took this is Mike Damon the process for forgiveness has not been fully offered yet. And so with John's point, we're actively funding now and so some of the messages that were provided speak to that. So we're actually funding towards the back end of the initial wave and if you think about eight weeks of usage to demonstrate appropriate use for forgiveness through payroll,

It really gets pretty close to the end of the quarter before the Forgiveness process could even get started. So it'll be interesting to see and I'd add to with the second round of funding here. We'll be putting on a month another wave. So, you know, it's eight weeks and then the Forgiveness starts and then we're going to be actively any of the customers that we have that weren't able to get through. The first round will be, you know, obviously queued up for the second round and that 8-week clock will start to kick.

Got it. Okay, and then just another question on the margin, you know Mark. I think you noted that the fair value accretion was 12 basis points or three and a half million this quarter off the schedule look for the remaining quarters of the year.

We expect a a like amount for the remainder of the year.

Okay. Okay. That's all I have for now. Thank you very much. Thanks Damon.

Our next question comes from Teri McKeever of Stevens, please go ahead. All right. Thanks for taking my questions or Teri Jaan. Thanks for all the modifications wage. And the way it was presented in broken out. I guess it start there with a few questions could when when you were getting the the customer requests for modifications was it kind of yes to all your customers or were you was there a level of selectivity where you went through each borrower and and really reviewed the situation.

What I'd say is that you know, we had all of our borrowers complete a business relief assessment questionnaire. We asked them a series of questions about their current business situation financial situation how they plan to navigate the business, um and their access to liquidity checking savings Investments accounts Etc to try and get a forward look on what they might be facing, you know, the first 90 days obviously, they had financial statements that were backwards looking and those all looked, you know, a strong from prior periods. And so we're you know, really, uh, I would say looking at their questionnaire and trying to make an assessment but on balance it was um, fairly accommodating, um to the customers as they request the relief and let's say was in nineteen a request in Fast Forward 90 days and and we yep,

Change in terms of the economic out.

What do you have the flexibility to continue to work with that borrower for another 90 days? Yeah, the guidance that came out Terry actually provided up to them to 90-day periods are basically 6 months without running into TDR as a as a classification. You couldn't be delinquent at the end of the year in order for it not to be a TDR. So you couldn't have granted a an extension, um for a borrower who was delinquent but the idea of like a plan the strategy is to reassess after 90 days and ask even more questions about you know, what are their plans so that as we get closer to the end of that six-month. We have a better understanding of you know, what the borrowers in the bank's strategy will be going for

And then maybe a quick question for Mark just looking at as we try to think about the second quarter certain areas are down more. Maybe the best way for us to model in life is to think about what happened in in March. So, is there any way you can give us a sense for those fee areas that are are down because of the situation and the the level of decline that you saw late in the first quarter.

You know service charges et cetera.

Yeah, you know when I looked through this wealth management fees with decline in the market will have an impact card card activity is is less than eight as as everyone's staying at home and and not going out as as often. You know, everything else is is really strong. I would expect to have another great quarter and gains on the sale of mortgages another great quarter in and derivative hedge income and you know, the Securities gains, I won't be as much we we had some great opportunities in the first quarter to take advantage of the municipal Market Visa Vie the the mortgage back market and I am the same kind of opportunity, but you know the quarter still young. So if we see them, we'll we'll definitely take advantage. There's a little bit of

There's a little bit of service charge related to the cic payment. Is that the right term the payments monthly fee waivers for Michigan release itself. Yes, and then we well that is a positive and then there's a slight offset as we look at all the tax payments and not trying to be accommodative and make sure that the not the tax payments the stimulus payments to Consumers to be sure that they fully recognize that benefit and not use it to walk to cover all overdrafts. So there may be a little bit of pressure there. But like do you have any other thoughts? Yeah, Terry, there's my Kraken to other thoughts on off of what you've already heard the Hedge business. As you know on line item five on Mark's non-interest income slide is a customer hedge and that the demand for that has been great. It's is dead.

Done commercial loan closings which might you know slowed down a little bit, but I've already seen early in the month of April.

That that volume is going to be high and that's a lucrative business for both the bank and for its clients and Mark already spoke to the mortgage volume, but it's particularly strong. We had a hundred and $4,000 of closings in the first quarter. We have a pipeline of a hundred and eighty million dollars in the second quarter. So that gain-on-sale which is predominantly a an 80% or more sale business Auto to stay relatively high as well.

Great. Thank you for that and thanks for all the extra slides and today's presentation. Appreciate it.

You're welcome.

Our next question is a follow-up from Daniel to Mayo of Raymond James, please go ahead.

Thanks for taking my follow up. Just kind of a follow-up on the on the Cecil guidance. So now that you've taken this before to reserve Reserve provision, excuse me, in the first quarter and the reserves are larger. How does that impact? What the the Cecil Day One impact will be when you do impacts.

Bill assuming the January one is the implementation date the what we disclosed in our 10-K would be our adjustment.

So that the the 55 is I mean that would it would still be the same percentage basis off of whatever the reserves are as of that previous endpoint off the one it's if January one Remains The implementation date and so for instance if we're allowed to implement Cecil as of a different day of the year, we would have to take a look at that number. But as of right now with what the SEC at least has said verbally, it sounds like they will have us restate back to the January one date and the guidance that we've provided would still be employed.

I see. Okay. And then this is a separate question just on the wealth management revenues. It looks like they they came up a little bit in the in the first quarter wages based off of like an average market-value or some some kind of inter quarter value that you would expect that that Revenue number to come down the second quarter. I think the the dominie you're asking a question. I think the larger impact in terms of the magnitude of those fees is the year-over-year comparison of Monroe. You might recall Monroe had for a 1.3 billion dollar Bank kind of an outsized private wealth business and actually a a good percentage of the size are the specific question you ask about the derivation of our fee structure. I can't answer off the top of my head. I think it's

I I think it's off of I think his question is off of what date is it over an average period of time or a month end or quarter end period of time I should know that but I don't know.

We can follow up offline. That's fine. I appreciate the question.

Thanks for taking my my follow-ups. Sure.

This concludes our question-and-answer session. I would like to turn the conference back over to Mike for any closing remarks.

Andrea thank you for hosting. I have no other comments other than thankfulness. I hope everyone listening is have the same good luck with health at our company has had better been particularly fortunate that our Associates have stayed in good shape, which is allowed us to have the service of we have and the Esprit de corps that we've enjoyed. I hope the same goes for everyone on the call. Talk to you soon.

The conference has now concluded thank you for attending today's presentation and you may now disconnect.