Q1 2020 Earnings Call

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Please refer to the forward-looking statement disclosure contained in the first quarter 2020 earnings release as well as our SEC filings for a full discussion of the company's risk factors. The information. We provide today is accurate as a March 31st at 5:20, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn the call over to our chief Brown. Thank you Scott. Good morning everyone and thank you for joining us on today's call log.

Yesterday afternoon, we announced our financial results for the first quarter to say the events of the last few months are unprecedented seems like an understatement while the first half of the quarter was marked by strong financial performance. March was characterized by economic and logistical upheaval and uncertainty.

There are very few areas of our client base our associate base or our operations not impacted by the covid-19 crisis in some way.

In a rapidly changing operational and economic landscape. We successfully mobilized our teams with thoughtful changes to maintain the performance in service of our customers and shareholders that they've come to expect and we were pleased that pre-provision Financial results, exceeded our expectations. Despite a hundred fifty basis point drop in interest rates.

We began monitoring the covid-19 pandemic early on preparing in the event it affected our markets.

Asking to be seen on slide nineteen and twenty we immediately activated our pandemic response plan and our executive committee shifted to crisis management working to develop plans and products to boost our clients communities and Associates in a meaningful way.

Our guiding principles and managing the this crisis have been prioritizing associate and client's safety preserving the continuity of our business assisting our communities and ensuring a safety and soundness of our company.

Across our client-facing teams, including our banking centers. We have updated protocols to protect both our Associates and clients enabling us to provide virtually all banking services to our communities.

Over 96% of our banking centers have remained open by utilizing drive-thru capabilities.

Our sales associates support teams and management have transitioned to working remotely with approximately 60% now working from home.

I've been exceptionally pleased with our ability to rapidly adapt and function at a high level despite the challenges.

Additionally, we've also rolled out various associate relief programs for those Associates experiencing financial hardship.

For our customers are planning efforts developed into our covid-19 relief program, which provides comprehensive assistance to clients across all segments through payment deferrals fee waivers for calling deposit clients.

And suspension of vehicle repossessions and residential property foreclosures to name a few.

It's been a busy quarter and we've accomplished a great deal to support the evolving needs of our retail business and governmental clients.

We continue to actively monitor the actions of federal and state governments and our proactively assisting our clients to ensure that they're aware of every program of financial assistance available to them.

Lastly we've also been working to enhance our remote mobile and online processes to seamlessly support a bank anytime anywhere environment.

Since the passage of the cares act the entire bank has mobilized to launch the historic client relief programs that are part of this legislation.

We conducted a significant level of cross training and redeployment of Associates too. Rapidly meet the influx of client requests. Our implementation of the US government's paycheck Protection Program has gone well overall.

To date we've received over $57 loan request representing more than a billion dollars and secured funding for approximately thirty six hundred loans.

representing an excess 750 million dollars

feedback from our clients has been overwhelmingly positive and are proud with the way our Associates have responded as the embodiment of our corporate strategic intent to support the communities in which we work with live. Additionally. We contributed 1 million dollars to help fund covid-19 relief efforts in the communities throughout our footprint, which will put funds directly into the hands of agencies supporting relief efforts.

The results for the first quarter were substantially influenced by the covid-19 pandemic across net income that interest income fee income and most significantly credit costs.

Overall, we recorded adjusted earnings of $0.31 per share a .85% return on average assets a 10.41% return on average tangible in equity and a 58% efficiency ratio when adjusted to remove non-recurring items.

I'll now turn the call over to Jamie to discuss the details of our first quarter results. And after Jamie's discussion, I will wrap up with some comments on specific areas of focus within our credit exposures off and forward-looking commentary.

Thank you are cheap and good morning. Everyone slides four and five provide a summary of our first quarter 2020 performance. Although the first quarter was an eventful one the company's fundamentals and core operating performance remains solid as loan growth fee income and efficiency all met or surpassed our expectations the adoption of Cecil and the impact of the of the pandemic resulted in twenty five point five million dollars of provision expense and reduced overall earnings. However, our earnings power and balance sheet strength has put us in a position to absorb absorb elevated credit costs while maintaining capital in excess of internal and Regulatory targets.

We were pleased with netted.

Interest margin which declined only 12 basis points on an FTE basis compared to the prior quarter foreign-exchange trust and client derivative income. We're all strong during the quarter black and offset and otherwise flat expense base to result in a sub 60% efficiency ratio. We believe we are well-positioned from a regulatory Capital standpoint as long as she has remained relatively flat on a linked quarter basis are tangible common equity ratio declined 82 basis points in the first quarter due to the adoption of Cecil and Chef purchases.

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 30.7 million or 31 cents per share for the quarter which excludes a 1 million dollar contribution to fund covid-19 palm print and 1.5 million dollars of other non-recurring items such as Branch consolidation costs and certain other covid-19 expenses.

As shown on slide seven these adjusted earnings equate to a a return on average assets of 85 basis points and a return on average tangible common Equity of 10.5% despite the slight increase during the quarter are 58.2% adjusted efficiency ratio remains strong and reflects our diligent approach to expense management team.

Turning the slides eight nine net interest. Margin on a fully tax-equivalent. Basis was 3.77% for the first quarter the 12 basis-point declined since birth and was better than we anticipated given a hundred and fifty basis point reduction in interest rates during the quarter the decline in our net interest margin was primarily related to fewer loan and lower purchase accounting accretion During the period while asset yields dropped by 16 basis points during the quarter due to the Fed rate Cuts. We were able to offset them actively managing our funding costs which declined by 13 basis points during the.

The impact of the recent fed actions are further shown on slide, 9 as declining interest rates lower loan fees and purchase accounting cause the yield on loan Klein by 29 basis points and the investment yield dropped by 12 basis points do to lower reinvestment rates.

In response to these declining yields. We aggressively lowered our cost of deposits ten basis points during the period by 10 to fix our current loan mix and balance change is compared to the linked quarter.

End of. Loan balances increased one hundred six million dollars, which was primarily driven by origination the remainder of the portfolio page of Lee unchanged from your end. Archie will provide additional details on various aspects of the loan portfolio later in the presentation.

Flight eleven shows the mix of our deposit base as well as a progression of average deposits from the linked quarter in total average deposit balances were relatively flat during the first quarter as interest-bearing DDA and non interest-bearing deposit growth combined with brokered CD balances to outpace a decline in retail CDs money market accounts and public fund balances as I previously mentioned. We were able to successfully managed deposit costs resulting in a 10 basis-point reduction to 64 basis points off.

Over the near-term we will continue to monitor deposit pricing and make any necessary adjustments based on market conditions and funding needs.

By 12:00 highlights our non-interest income for the quarter. First quarter fee income was positively impacted by a 65% increase in foreign exchange income tax record wealth management fees and continued momentum and client derivatives and Mortgage Banking income.

Non-interest expense for the quarter is shown on slide thirteen higher salaries and benefits were driven by seasonal increases in payroll taxes elevated healthcare costs an incentive compensation related to the aforementioned strong foreign exchange and client derivative income in addition non-interest expenses included 1 million dollar contribution to find covid-19 efforts in our footprint and in approximately 1.5 million dollars of other costs not expected to recur such as merger-related and Branch consolidation costs.

Next I'll turn your attention to slide fourteen which discusses our allowance for credit losses and related provision expense for the quarter as you can see, we made the decision to adopt sick as of January one and our day one impact was in line with what was disclosed in our 10-K our first quarter model resulted in a total ACL which includes both funded and unfunded reserves of 158 million dollars and $25 billion dollars in total provision for credit losses.

The model utilize the Moody's Baseline economic forecast released at the end of March and included considerations for both covid-19.

It's worth noting that substantially all of our first quarter provision expense was related to the expected economic impact from covid-19.

I showed on slide fifteen credit quality was fairly benign in the first quarter as we had nine hundred thousand dollars of net recoveries for the. And a slight increase in non-performing assets.

the increase in npas was driven by a single specialty Finance credit that was modified During the period and classified as a TDR Plus Loans increased by $35 million dollars During the period as three large relationships including the previously mentioned TDR received risk rating downgrades during the.

As shown on slide sixteen and Seventeen Capital ratios remain strong and are in excess of regulatory minimums during the first quarter. We repurchased 880000 shares before suspending the program on March 13th. Our regulatory Capital ratios, remain relatively flat and exceeded internal targets are tangible common equity ratio declined by 82 basis points during the period due primarily to the adoption of Cecil.

We expect our dividend will remain unchanged in the near-term. However, we will continue to evaluate various Capital actions as the economic impact of the covid-19 develops. I'll now turn it back over to our chief for some commentary regarding our loan portfolio and our Outlook is Jamie off, even the current economic circumstances related to the covid-19 pandemic. We've added slides 2125 to highlight specific areas of focus within our loan portfolio.

In the very early stages of forming our strategic response to the pandemic. We thoroughly conducted a review of all asset classes that we would expect to be most directly impacted including restaurants hotels and Retail commercial real estate.

That review included conversations with every bar of a certain size to assess the immediate impact of covid-19 on their business operations.

As of the end of the first quarter our franchise portfolio was $455 million or 5% of total loans.

I review the portfolio subsequent to the broader implementation of stay-at-home orders indicated that approximately $138 of loans to clients with either strong delivery expertise or that utilize a carry-out model will be minimally impacted or potentially see Improvement in revenues.

Fast casual concepts with drive-thrus, which totals approximately $162 have seen material Revenue declines.

Lastly the sit-down casual dining segment which told $155 million dollars at March Thirty one has have seen severe impacts to revenue streams.

Ninety, 3% of the franchise portfolio was passed rated free pandemic.

A significant portion of franchise customers are taking advantage of relief programs including payment deferral the PPP program.

Rent relief and franchisor relief as bit against to revenue disruptions.

Our hotel book it outstanding balances of $401 or 4% of total loans as of the end of the first quarter.

The entire Hotel industry has been substantially impacted by declining occupancies.

So most of our portfolios concentrated in Midwest Metropolitan markets reliant on business travel, which is fair better than other locations.

My portfolio is quite diverse with limited service hotels representing Approximately 80% of our exposure.

Free pandemic 100% of this portfolio was passed rated and has an average loan-to-value of 61%

Again, almost all these customers have taken advantage of relief options.

for the PPP program

the retail CRV portfolio had outstanding balances of $846 billion or 9% of total loans, as of March 31st, loan-to-value is range from sixty to seventy percent across the portfolio.

The bank has focused on strong locations with adequately capitalized sponsors. This is essential in right-sizing deals that do not rebound to pre-crisis levels or in cases where market demand will decrease over next 24 months.

Three pandemic one hundred percent of this portfolio was passed rated majority of this customer segment has also taken advantage of relief or PPO options with us.

Even the challenging environment and uncertainty over the rest of the year. We're adjusting our guidance this quarter flight 26 shows the key factors that we expected impact our performance moving forward.

Long growth is expected to be in the low single-digits excluding the transitory impact of the PPP program.

For deposit growth is expected to be in the mid-single digits.

With the dramatic Fed rate Cuts in March and a gradually declining LIBOR rate. We expect to see further net interest margin compression.

The net interest margin is expected to decline 68 basis points for each twenty-five basis point cut to rates.

We've been very proactive in our deposit cost management and expect cost to rapidly come down in the next quarter and then to continue to gradually fall as higher costs time deposits mature.

Freakonomics forecasts indicate a high likelihood of credit stress over the back half of 2020. Therefore we expect elevated provision expense in the near-term.

The income is expected to increase in the next few months due to higher mortgage Revenue driven by refinance activity.

We anticipate headwinds across deposit overdraft service charge and interchange revenues, which will largely be dependent upon the length of stay at home owners and the time frame required for 6 to return to more normal levels.

Well for an exchange and derivative these are uncertain due to business disruptions in Market volatility.

with respect to expenses

We believe the run-rate to be consistent with the last two quarters.

Follow a disciplined approach to expense management and have paused on most planned hiring discretionary expenditures and significant Investments except where critical to support and operations.

Regarding the PPP program. We will see transitory loan growth and incremental revenue from the 750 million dollars in approved loans with average fees of approximately 3% off.

We anticipate some incremental expenses related to the program.

For 2020 without taking the consideration the impact of PPP loans.

Respect our pretax pre-provision income to be in the range of $220 to $240, assuming that consumer and business activity ramps back up over the second half of the year off.

In conclusion First Financial has weathered many tough times during the banks 156 year history.

This is another of those moments and it's certain to be added to the history books.

Every challenging have been is filled with Great Moments to work together as a company community and a nation. I said earlier how proud I am of the First Financial family and it Bears repeating. I will likely be transformational for the industry and Society but the challenges will also provide unique opportunities to build and strengthen customer relationships improve the digital client experience and evaluate our standing in the communities. We serve or Elevate are standing in the communities. We serve as we move forward. We will continue to be diligent stewards of the company while providing exceptional service and support to our customers and maintaining the well-being of our Associates.

This concludes our prepared comments for the call will now open up the call for questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up and sex before pressing the key to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

Our first question is from Chris from KBW. Go ahead.

Take money buddy. Hey, good morning, Jamie. Can I start with the just the margin? I want to make sure I understand the the slide. So if you look at the first quarter it was you know, a partial reflective of the of the six Cuts, you know, the Fed so is the message that that you're trying to tell on on the core margin that we still have, you know, multiple, you know, 628 basis-point impacts coming as margins reset next couple of quarters, correct? Yeah. So I mean eventually our margin should settle out if you think about it off we had you know, as we've guided in the past our margin gets affected by 25 basis-point rate cuts, it goes down six to eight basis. So if you use the midpoint at 7, I mean when you think about it essentially towards the end of the first quarter we had six of those twenty five basis points.

Ray cut so

Arjun will eventually settle down from the first quarter roughly 40 basis points.

And that and the Crystal one thing to keep in mind. I think we kind of tipped it in the outlets slide is that the you know that assumes then that 1-month Libor comes in line, I guess with with the FED funds rate right now, you know, you're seeing a 45 to 50 basis-point wage differential to wear between fed funds and 1-month Libor. So that assumes that that comes back in line. Okay. Got it. And then yep, maybe maybe a follow-up Jamie on the margin. So if I'm doing the math on the PPP loans, right you're going to get on the loan fees 3% of seven fifty. So call it twenty two million jobs in these loans. I know you have to amortize it but assuming they, you know, come back on, you know, the next quarter or two is that 22 million should be flowing thru? Margin over the next six months dead.

That's that's the math, right? Yeah, that's the so I mean obviously when we set these we will set up that that 3% fee upfront will amortize off the life of the loan. So, you know, we'll take in, you know, one twenty fourth of that fee every month until it pays off. We're expecting the, you know, a large percentage of those to pay off within six months, but there could be something that extend out beyond that as well.

Okay got it. And then maybe you'll see what you'll see then is when they pay off. Obviously you get you pull all that in the income and you get a pop during that that time frame exactly. Yep. I got it. Thank you. And then maybe just a question on the comments. I think you said in your prepared remarks, you know the dividends steady for now, but you'll gain weight in capital action. Can you elaborate on that? Is that suggesting potential coming to market for capital or shrinking the balance sheet? I mean, can you just talk through what your messaging there wage? Yeah, I think maybe I'll just speak of a high-level comment. Maybe have Jamie just walk you through kind of how we're concluding this. But yeah our view is that we feel we feel good about being able to continue to pay the dividend income based on what we know at this time. Now, we'll get you know later in the year our Outlook. It's always depended upon our Outlook is going forward. But at this point we feel I think we feel pretty good about it making, you know, talk about how long

So Chris when so when we did our stress testing, you know, we looked at several different scenarios of stress test on the loan portfolio. But I mean when I look at kind of a common, you know, look at the D fast severe case.

Yeah, which we think is one of the more severe cases, you know apply those losses to our portfolio. We come up with approximately five hundred million in losses over a 2-year period using that methodology. So, you know when you under that scenario looking at our excess Capital that we have with our pretax pre-provision income even a conservative number over that 2 year period and keeping the dividend flat. We still remained above regulatory, uh, Capital ratios above those regulatory minimums. So that's kind of how we triangulate it.

Okay, so if you were to if that scenario were to play out you'd still feel they wouldn't have to come and do anything inorganic with the capital that the right message.

Yeah, I I think that's right Christmas now having said that you know, I would say that you know, we are in a really uncertain environment and you know Gemini bunches. We're here twelve years ago. And you know when you get that kind of market dynamics in an uncertain time, it is good to have Capital flexibilities. So, you know, we've we've looked at tier 2 off-and-on will continue evaluated in this environment with you know, sixty basis point 10-year low-cost accidental Capital does seem prudent to consider at some point. So I'm not sure what we're going to do or when we will do something if we do it but off with rates this reasonable, it really doesn't seem to have any down side in an environment like this.

Understood. Thanks so much.

Again, if you have a question, please press star then what our next question is from Scott from Piper Sandler. Go ahead.

One guy's it's taking the question. Hey, I guess the first question I wanted to ask is just on the the PPP loans and maybe if you could expand upon the comments page and you know how rapidly something they pay off and and how some might extend I mean, my my understanding is, you know fall kind of goes as planned. They can can pay off in as little as something like a weeks. I'm just curious given the fluidity in in the situation. I guess sort of the the lack of really concrete rules on a lot of them are are known rules, you know under circumstances. Do you guys feel that they would be forgivable versus kind of stick around on the balance sheet for a little while?

Yeah, I mean like I mentioned I think conservatively we are we are expecting, you know between 50 and 75% off to you know, be relatively short but you know, just given the the low rate and you know, just this the unknown there could be something that extend beyond that. So Bill, maybe you want to jump absolutely.

We look at the request and we processing through the system. Obviously one thing that's important is the number of employees to be maintained during the eight-week. How long has this draws on we'll get a better lens than to how many companies are able to maintain that same level that they went into it off as they apply for the loan and that's really going to dictate what with the care is going to be and then based upon the rate of that carry on the interest rate on the on the on the PPP loans in a suspect that would be you know, pay it off within the two-year. But on average, you know, you know straight that back about 12 months or so. I'm just cuz the cost of capital is Logan a bar will probably string that out a little bit.

Yeah, okay, that makes sense. I appreciate the the color there and then separately just as you guys look to the loan modifications, I guess I'm specifically referring to the uh, the business side the roughly $950 million in modifications to date. Can you sort of walk through what the thinking will be as we as we go through those for bearing with kids, you know, I think there's becoming kind of Uncharted ground for a lot of us. Um, and just you know, how will you kind of go through the thought process of okay. It looks like you know, once we get through this month. Then where this guy's going to be going to be fine or this one might have some some stress level that sort of read due diligence process going your guys Minds.

Yeah. Hey Scott, this is Archie. I'll start going to have Bill really walk you through the guts how we're thinking about it. But for the first upper, oh, it was primarily through our conversations. If tomorrow had impact and requested it up earlier. We were going to give them that deferral and in some cases we will in many of those will give them a second to parole for another ninety but under and they'll be certain issues will take maybe a little bit differently or bar or maybe they'll describe what that kind of things. We would think about War II deferral. Yeah, absolutely. And so, you know as we look at the the second deferral it's really about the the time and the individual situation what I mean by that is the longer that that the current shelter and plays lockout continues Thursday more likely that we're going to just going to be necessary for us to Grant additional 90 days on a more systemic or more Global Perspective, but then we'll also dive in, Georgia.

To the individual situations as businesses will take a little bit longer certain business will take a little bit longer to revamp or get back up. It's about a pacing and so, you know, one of the key things we did on the front and was have our customer outreach program so we can kind of get a laugh the first 90 days. We'll we'll we'll we'll kind of remind her and see how it flows. The second 90 days is going to be a little bit more specific in the summer that will start to craft and Taylor credit products and or relief to the individual needs.

Okay, that that's perfect. I appreciate the the description. So thank you guys very much.

Thanks, Scott.

Again, if you have a question, please press star then what?

At this time, we have no questions. So this concludes the question-and-answer session. I would not like to turn the conference back over to Archie Brown for closing remark.

I want to thank everybody for joining us today and just ask you to be safe and healthy through this. Just trying an unprecedented. And we look forward to talking to you again soon. Have a nice day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.