Q1 2020 Earnings Call
Good morning, and welcome to the first bank first quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal, specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask the questions. You may press * then 1 month telephone keypad to withdraw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to Pat Ryan president and CEO, please go ahead. Thank you. I'd like to welcome everyone to First Banks first quarter 2020 earnings call and joined today by our Chief Financial Officer Steve Carmen Archie Fleming officer Peter Cahill and our chief deposits officer Emilio Cooper before we begin however, Steve will read the Safe Harbor statement.
The following discussion may contain forward-looking statements concerning the financial condition results of operations and business of FirstBank. We close in age that such statements are subject to a number of uncertainties and actual results could differ materially and therefore you should not Place undue Reliance on any forward-looking statements. We make half. We may not update any forward-looking statements. We make today for future events or developments information about risks and uncertainties are described under item 1A risk factors off our annual report on form 10-K for the year ended December thirty first, two thousand and nineteen filed with the FDIC Pat. Thank you Steve. I just like to give a brief overview of the structure for today's call. We're going to start with an Abridged version of discussion in summary of the phone number.
Quarter results Steve and I will walk through some prepared remarks. We have specifically related to the first quarter. And then we also sent out as part of our press release a presentation with some important updates related to covid-19. And so after we're done with the discussion of first-quarter, the group will walk through the slides that went out as part of that press release and at the end of the slide presentation, we will open it up for questions. So to start with the first part regarding the first quarter results, I would say absent the significant increase in the provision in the allowance from a core operating standpoint. I think it was a pretty decent quarter. I did see some margin compression re-emerge in March as a result of the actions that the FED took during the first quarter and as I'm sure you noticed our birth
provision in the quarter was
Significantly above almost three times above kind of our average quarterly provision in 2019, and it's important to note and you may have seen the with the credit metrics actually improved during the quarter and so you can certainly tell that the increase in the provision in the allowance was related to both qualitative factors in our allowance model related to what we're all seeing in terms of deteriorating economic statistics, and we thought it would be prudent to put additional emphasis on those qualitative factors in this first quarter allowance calculation regarding the specific credit quality metrics at the end of the first quarter non-performing loans or down to 0.79% compared to 1.32% at year end and non-performing assets as a percentage of total assets were down to, Georgia.
.72% compared to 1.20% at year end. We did see some nice loan growth in the quarter as well as the very strong deposit growth driven by commercial deposit acquisition. Our loan deposit ratio came down closer to 101 102 and the deposit growth as I mentioned came from a commercial categories. We did lower deposit rates twice during the quarter which helped offset some of the impact of the lower loan and the asset yields that resulted from a repricing of our floating-rate assets on our balance sheet. Our cost of interest bearing deposits declined 12 basis points from 1.68% to 1.56% off the net interest margin held in pretty well with a Ford basis point decline from 3.34 to 3.30 commercial deposits increased as a percentage of our total dead.
From 27% at the end of 2019 up to 33% at the end of the first quarter are ancillary income sources were down a little bit compared to Q4 life. But Q4 was a particularly High quarter in terms of our actual sources of income prepayment penalty income was $464,000 and a quarter which was a fair bit above the quarterly average from last year of $214,000 loan swap. The income was 234,000 in the quarter compared to pack an average of $114 per quarter and 2019 games on sale of SBA Loans or 79,000 during the first quarter, which was just a little bit above the average from last month of $57,000 per quarter and the games on recovery required loans or 181,000 in the quarter compared to last year's quarterly average of $190 off.
mm so you can see all
All or ancillary income sources held up. Well during q1 quarterly expenses came in a little bit higher than we had originally anticipated. If you recall in our last phone call, we had laid out an estimate of 9.6 to 9.7 million in quarterly non interest expense. Our quarterly not fenced in this quarter was 9.9 which is obviously a little bit higher. I think it's important to note that that 10% the non-interest expenses were up 10% year-over-year when you compare first quarter of 2018 first quarter of nineteen, but that 10% growth is actually lower than our Revenue growth during the same time period of 16% the expense items that came in a little higher in the first quarter or legal fees insurance and Oreo we have several action items under consideration that will allow us to contain expenses going forward dead.
The trajectory of timing of the recovery from covid-19 will dictate how far we need to go with these cost-cutting plans looking forward to the remainder of twenty-twenty. I think it's fair to say that previous guidance is is on hold or or off the table at this point very hard to predict what we what we'll see from a loan growth perspective certainly in the short run. We'll see a temporary blip or increase related to s b a p p p loans, but if you take that out of the discussion, I think it really is a difficult Market to predict I think as you look at the overall market for Lending they'll be I suspect they'll be lower demand overall as well as more stringent under underwriting Banks across the board, which I suspect would lead to lower overall low growth. Although there are some new opportunities emerging and I think Community Bank in particular that wage
With the successfully navigate round one of the PPP process. I know we have and I suspect other Community Banks have had a number of conversations with unhappy commercial customers that were not able to get PPP loans in round one from their primary bank and I suspect that some of the potential weakness in life on demand could be offset by some market share gain opportunities for not only for us but for Community Banks across the board again talking about looking forward. In fact, I suspect we should be able to continue to drive down deposit costs. We remain liability sensitive and we continue to look for opportunities to lower our funding costs off of deposit pipeline remains very active. We've been able to successfully continue to convert new commercial customers despite the fact that the Lion's Share of our back office is now wage.
From home working remotely and we suspect that.
And we'll be able to continue to convert and bring over new commercial customers during the remainder of twenty-twenty. And as I mentioned before we believe there are opportunities for additional expense mayonnaise before I turn it over to Steve. I just wanted to hit a couple other observations and highlights a first of all I'd like to commend our team on the lending side that did an amazing job dealing with really huge volume of PPP loans. As you may have seen from our press release, you know, a bank that historically did five or six SBA Loans a year off was able to get 577 processed closed and funded and the estimated processing fee income from round one is about four point seven million. We were able to get over ninety percent of the applications. We received approved not only internally but approved by the FDA and as of a game
Saturday all of those loans had been closed and funded I think this is important for a number of reasons. Not just the potential short term fee income opportunity, but perhaps more importantly this will create some great long-term benefits for us. We're going forward specifically we've reinforced the need will with our existing customers, but I think it will also prove to be a huge opportunity to attract and bring in small and medium-sized businesses locally that were very unhappy with the way the process played out for them. And I think fundamentally what we're seeing is a reinforcement of the Community Bank value proposition. We're having a real relationship with your Banker is not something that is a nice to have it's a need to have and I think a lot of business owners are getting re-educated on that importance and I believe this could become a get a bit of a game-changing moment wage.
Even the number of quality conversations with new commercial prospects that we've had over the last several weeks. We have more detailed information regarding a response to covid-19, which we will share in the presentation shortly after we finished the review of the first quarter results at this point. I'd like to turn it over to our CFO Steve Carmen to get into a little more detail regarding those results in q1 Steve. Thanks Pat during the second half of 2019. We continued our efforts to attract and acquire non interest-bearing deposit in lower-cost commercial deposits. Our goal was to move our cost of funds closer to peer levels stabilize and improve or net interest margin and drive profitability higher.
As we enter twenty-twenty we believed our efforts would be successful and put us in a position to deliver sound first first quarter results.
I took the impact of covid-19 won't growth for the first quarter was almost $35 million modestly above our projector projected moderate growth projections.
Asset quality metrics for better prior to compared to Prior quarters. Our cost of funds was moving lower and higher cost time deposits r e price lower in addition to Spring deposits rep 16.2 million or almost 6% reflective of our strong efforts to bring in lower-cost funds.
In early March. However, it became clear the impact of the pandemic was having a negative impact to the economy as a result. The FED moves had targeted fed funds rate hundred fifty basis points lower negatively impacting floating-rate loan yields and subsequent interest income. This was coupled with the corresponding significant drop in treasury yields. We in turn significantly lower divorce rates to help offset the negative impact in that interest income. So let's take a look at results for the first quarter.
Net income for the quarter was 3.2 million or 16 cents per diluted share compared to 4.3 million or 23 cents per diluted share for the first quarter of 2019.
Net interest income the primary driver of our profitability was 15.9 Million for $220 an increase of one point eight million or 13.1% wage to $14 for the first quarter of 2019.
As Pat mentioned the major factor impacting first quarter 2020 results was our higher provision for loan losses are provisioned in the first quarter was 2.9 Million compared to a provision of $365,000 for the same period in 2019 primarily due to a qualitative assessment of deteriorating economic conditions due to the health pandemic.
Or tax equivalent net interest margin for the first quarter of 2020 was 3.30% compared to $345 for q1 2019 that declined to Fifteen basis points off the yield on interest-earning assets to find 27 basis points due in part to a lower interest rate environment including the recent actions taken by the FED conversely. The cost of interest rate has declined 11 basis points.
What a link quarter basis our tax equivalent net interest. Margin for the 3 months ended March 31st. 2020 was 4 basis points lower than our margin for the fourth quarter of 2019 or second quarter margin will reflect the full impact of the fed's actions in March initially. We are projecting about a 10 to 15 basis-point to find in the margin for the second quarter.
So let's take a look at the margin over the next couple of quarters in addition to significantly decreasing non maturity deposit rates. We have approximately $385 million dollars in time deposits that will mature or reprice lower based on current rates were offering at an average rate of approximately 130 basis points lower during that six-month period which will help stabilize the Morgan.
Depending on the level of future loan growth other factors potentially affecting the margin will be the current treasury yield curve and its impact on fixed rate loan pricing.
Additional prepayment penalty in this environment are also a possibility. There are many factors in this uncertain economic environment some beyond our control that may affect our margin results. We hope to have additional Clarity over the next few quarters based on covid-19, and it's further impact to our results.
A couple of other notes for the quarter. We continue to manage the level of non-interest expense growth or efficiency ratio for the first quarter was 58.65% below are targeted goal of 60%
lastly from a tax perspective after a year of changing New Jersey state tax laws and interpretations. We believe our overall effective tax rate for 2020 will be in the 24 to 25% range next. I'll turn it back to Pat to begin our covid-19 presentation Pat.
Okay, thank you Steve. Sorry about the delay there. I will turn folks attention to the presentation that well as part of our press release and we will move through those slides at this time. So I will move past the Safe Harbor statement as p.m. The the bread that already if you look at page three of the presentation you can see the agenda is going to cover for areas. It's a detailed information regarding the loan portfolio and 38 including segmentation and a little bit of a detailed discussion around the allowance will get into some additional information regarding Community Support Will Smith talk about liquidity and Capital Management plans as well as an overall operational update moving to slide for
This is a high-level overview of our loan portfolio. I think the important thing to remember about First Bank as the title says we are a commercially focused Community Bank long as you can see that means almost 90% of our loans are commercial loans and you know over three-quarters if you include the real estate on the commercial side as well as the change in the consumer side and you know, well over three-quarters of our loans have quality real estate collateral now slide 5 has a lot of information. We wanted to include a lot of information here. One of the things that we've noticed is we've been paying attention to releases across the industry is a lot of folks are providing information in different ways, and we thought it might be most helpful to our shareholders and those folks that follow us to see what the detailed information looks like wage.
folks can know exactly
We buy industry as well as by type of asset where we have loans and and where we have exposure. I think what you can see on a high level on page five or is it is a fairly. Well Diversified portfolio across a variety of Industries as well as across a variety of asset classes and when you look up the larger segments as a percentage of total loans and as a percentage of risk-based capital, you don't see any one area that is a outside concentration risk moving to page six. I'll turn this over to Peter Taylor Chief learning officer to talk a little bit about some of the exposure we may have in the higher-risk areas as perceived by the virus Peter started to you.
Okay. Thanks Scott. It's not just mentioned slides fixed pulls out of the previous slide data, but we see is the higher-risk segments in our portfolio. And those are you know, clearly if you look along the bottom of the slide there. It's restaurants Hospitality non-essential retail and a couple of other small ones off and you know, the points to pull out of this total exposure is 231 million about 13% of total loans restaurants at 5% of total owns the largest segment. They're virtually all exposure is secured and the majority by far is secured by real estate, you know with loans loan to values of 75% or less. So, you know based upon these factories think this higher risk segment is is very manageable slides seven, you know after Todd
About you know, the the high-risk segments we have with this slide simply does is lay out some of the higher-risk segments nationally and I'm more or less confirms that we don't have any exposure here these you know, these high risks if you don't have the slide back open the higher-risk Satan's here, uh one such as oil and gas cards Airlines cruise ships things like that. We have no risk for these for these segments.
This point when I flipped the presentation back to that slide eight. Thanks Peter. We did want to provide a little bit of additional information on the allowance given the increase in both provision and allowance during the quarter as mentioned earlier. Basically on asset quality metrics. You wouldn't have expected to see an increase in the provisional allowance. Ugh non-performing asset ratios came down delinquency numbers improved, but despite that given some of the storm clouds that we saw in the back, data. We did increase the provision almost three times what the quarterly average was last year as a result of that increase in the provision of the allowance per ounce to Total loans increased from 1% at the end of last year. It's a 1.1% and we also take a look at our allowance as a percentage of our performs.
non acquired loan
Because the way the incredible loss model looks at calculating the allowance the acquired loans are looked at a little bit differently off and what you can see when you take the total allowance as a percentage of Performing non acquired loans, you get a ratio of 1.30% which I'm almost 13% from where we were a year end and we thought it was also worth noting when you looked at the overall portfolio. We have 291 million in performing acquired life, which have a 5.3 million General Credit Mark against them which equates to about 1.83% of that portfolio at this point. I would now like to turn it over to me Leo kupar are cheap deposits officer to talk a little bit about Community Support.
Great. Thanks. Pat through this crisis First Bank has been actively supporting the community. We've made donations and provided assistance to local organizations including the Trenton Rescue Mission. We modified our website to serve more as a helpful tool and resource to our customers in the community. We included important links to state and federal agencies for up-to-date information related to covid-19 as Pat and Peter mentioned our team pulled together to deliver relief quickly to small businesses through the paycheck Protection Program. We process the applications for existing customers and non-customers in need of assistance.
We modified our approach to fees and loan payment deferrals to assist small business customers and personal lending customers as is appropriate in the time like this may continue to support our local chamber in business industry associations as a resource for PPP loan referrals and Technical guidance regarding covid-19 related support team will now take us through some additional details related to our approach to providing payment relief to our customers.
Text Emilio slide eleven follow up on Emilio's comments. This slide outlines the short-term payment relief program we have in place as a result of life covid-19. Our strategy here is the limit the ferals at this point to 90 days over the next few months will stay in close contact with clients and get a sense of how they're doing. You know, what else they may need, you know over that time frame. That's the slideshows. We agreed to make deferrals three different ways. We defer interest-only payment. We would defer principal payments and we also would defer principal and interest payments as you can see from the chart. That was the largest segment of what we've done thus far off right at 80% of total deferrals. We provided the Frozen Consumer loans as well as commercial and the split among those two are kind of right at that night club.
Blitz attack pointed out
Earlier that we have in our overall loan portfolio.
The 271 noted on slide eleven makes up about 15% of our total loan portfolio customer requests for the pros have slowed significantly. There's still trickling in however and I anticipate will provide an update in the tank you if you flip this slide twelve this slide show me a breakdown of deferred loans versus on deferred which I just mentioned it also demonstrates diversity in the request both in terms of Industry segments and the left side of the flight and Loan type on the right.
slide 13
finishing up our slides on loan payment deferrals this breaks down the Deferred loans by collateral type as well as loan-to-value. We think these loans are well secured 85% or secured by real estate and more than half or an LTV of 65% or less 514 path it earlier mentioned our participation in the paycheck Protection Program or PPP.
Oh while we're very much still in the middle of it the slide outlines where we were as of a few days ago.
Vast majority of our PPP loans are to existing customers those that aren't customers are prospects from quality referral sources, and we hope to convert them into good customers vested in a slide fourteen shows are average PPP loan has been in the amount of $234,000 more recent round two loans are smaller wage.
We have only a handful of ATP loans over two million dollars in size. We've made no PPP loans to public companies or other industry types that have been receiving bad press of League.
That's really it for the TPP summary that I'd like to turn things over to Steve Harmon for the next couple of slides. Thanks Peter initially. I've moved to slide 16 to discuss Capital Management as a coded crisis unfolds. No one really knows the ultimate impact to the economy working with the Invictus group. We thought it was important to update your stress test results for 12:31 2019 for additional shocks related to covid-19 to understand which segments of our loan portfolio will be most affected by the impact the capital from potential lawsuits.
Our Capital ratio drop under the covid-19 severely adverse case when compared to the seat parts severely adverse case that said we remained well capitalized as an elected in the results presented in addition We performed our own internal stress test with even higher loss rates than the Invictus covid-19 stress test with capital ratios above appropriate level an independent stress test analysis was also performed by an investment banking firm with similar results.
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Slide Seventeen to discuss liquidity or according be levels and liquidity profile remains strong strong deposit growth of $85 million for the first quarter has helped build excess liquidity off even with almost 35 million dollars in loan growth and continued activity on Commercial lines of credit.
Commercial deposits increased to 33% of total deposits with non-interest-bearing deposits up 6% for q1.
Also, we have ample secondary liquidity sources which include Federal Home Loan Bank borrowing capacity in broker deposit if needed.
As Peter mentioned we are actively involved with the PPP small business loan program and we have access to the fed's P PP l. F boarding facility. We also perform quarterly stress test which shows sufficient contingent funding sources available even in the most severely stressed scenarios at this time a million will provide in operation update Familia. Thanks Steve. We are proud of the team and all of our colleagues who responded quickly to execute on our pandemic response plan. Thanks to the support of Our IT team we were able to get from 50% of our team capable to work remotely up to 90% within a matter of days. We now have over 95% of our back office working from home effectively and we continue to enhance their work from home experience armed with information from our internal surveys and feedback mechanisms are branches are open and meeting wage.
Customer needs all the two branches remain open and we are serving our customers to the drive-through and by appointment and compliance with local applicable executive orders are capabilities for customers to bank electronically are operating effectively and we've experienced no degradation to our risk management procedures to recognize the support our employees. We initiate need a Rewards program where we are providing a bonus PTO day per pay period to all of our teammates who cannot work from home. We are also keeping their pay intact despite a slight reduction in our operating hours. We continue to follow the guidance of local officials and CDC recommendations and have taken several actions to protect the health of our employees and customers who are cleaning our branches through electrostatic sanitation on a regular schedule and all employees and customers are required to wear a mask on premises.
And we are keeping the team engaged and informed through our internet frequent Town Hall meetings and special engagement web events.
Back to you that great. Thank you and me Leo and that basically wraps up the prepared remarks we have for the phone call today. And I think at this point we can turn it back to the operator who can open it up for our question-and-answer session.
We will now begin the question-and-answer session 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 keys to withdraw your question, please press * then two at this time will pause momentarily to assemble the roster.
The first question comes from Nick was a rally of hyper Sandler, please. Go ahead. Good morning guys. Thanks for the detailed presentation additional disclosure was very helpful. So appreciate that first in terms of the expenses. You mentioned some potential efficiencies at what point. Do you implement that plan off? Yeah. It's a good question, you know, some of it quite honestly ties into what happens when you know, when do we start to come back online in New Jersey and Pennsylvania and based on that, you know taking a look at our footprint and trying to figure out you know, if there are opportunities within the footprint too long to save some some dollars and you know, some of it obviously is going to tie back to you know, what we're seeing in terms of the overall economy and birth
You know, what's the shape of the recovery start to look like but I don't think it's it's a binary equation Nick. I think it's one where we've got a number of different levers we can pull and you know, some of them we we may pull even if it's a v-shaped recovery just because we've decided in the in the post covid-19 that we can operate a little more patiently and you know, others might be uh, a phase two or phase three approaches where you know, we may just have to do a little more if it looks like our economy isn't going to bounce back to the levels. We were at before
Okay, great. And then I I appreciate your commentary on the margin after the anticipated decline next quarter just given the opportunity on the funding side you foresee the divorce and funding costs out running asset yield erosion and leader course.
Yeah, actually when you when you know, as I mentioned, you know, we're liability sensitive. So when you run run our models over at 12 and 24 month. We actually do a little bit better off but it obviously takes a little time to catch up to ultimately get to the point where you're doing better and we were seeing that start to play out prior to the feds more recent moves and now it's sort of we gotta do it all over again, but I do think as you look out towards the end of the year and and in the next year all else equal which is obviously a loaded statement cuz there's a lot of things that can change between now and then but, you know, just running the models and running the numbers it does start to show the benefit of the liability reduction offer leasing the The Upfront reduction and asset yield so we would expect to see some improvement later this year or early next year. But the other thing that is a little bit of an unknown is dead.
You know, what's going to happen to the overall?
Lemming environment. I think what you're seeing right now is even though Benchmark rates treasury Federal Home Loan Bank, you know, whatever you use as your benchmark are are obviously very low. We're seeing spreads widened a bit and you know part of that is some uncertainty from the credit underwriting side and and part of it quite honestly is what seems to be the a retrenchment at least at a time being from some of the non-bank lenders namely the insurance companies in the cmbs providers that um, you know may create an opportunity where the benchmarks are lower but it spreads wide and we may not see quite the reduction in assets that you might see in a robust credit environment associated with the types of drops that the FED just witnessed. So I think Steve's right Q2 probably is not an improvement in margin phone number.
And potentially declined but if if things stabilized I think we can start to see things improve later in the year. Okay, that's great color and then Thursday lastly on the on the loan growth front certainly an uncertain in fluid environment. But where does your pipeline stand it, March 31st, and how does that compare to previous quarters?
Well, I think our pipeline numbers on a dollar basis look pretty consistent. But you know, I think a lot of stuff is just getting getting stretched or delayed. So, you know, if you looked at our throughput in a typical quarter based on the pipeline in a more normal environment compared to throughput that we might expect over the next, you know, ninety to 120 days. I just think everything's getting slowed down and pushed back. You know, I think new projects are getting put on hold certainly I suspect that there will be a continuation of refinancing activity. But I also suspect that that will be slower than normal as life takes all of us a little bit longer to really effectively under a credit right now. So I just think in general when you have uncertainty that creates a Slowdown in at
Activity and I suspect that that slowed down an activity translate into a slow down and overall loan growth and demand within the banking sector off. So, you know, that's kind of the point one and point too is I think part of the offsets going to be some really nice new opportunities on the commercial side that have been emerging as a result of the way the p p p program has played out.
Good. Thanks for taking my question. Sure. Thank you.
As a reminder. If you have a question, please press * 1.
There are no further questions that will turn a call back over to mr. Ryan foreclosure or Mark.
Great. Well, thanks again to everybody that took the time to listen in obviously a lot going on right now. We hope the information we provided today was healthful and obviously we'll have a lot more to report on 90 days from now when we're taking a look at second-quarter results, and we look forward to regrouping with everybody then. Thank you a conference now concluded thank you for attending today's presentation. You made ounces connect.