Q1 2021 Howard Bancorp Inc Earnings Call
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Yeah.
Good morning, and welcome to the Howard Bancorp incorporated first quarter 'twenty 'twenty, One financial results Conference call. My name is Robert and I'll be your operator for today.
Please note this conference call is being recorded.
A question and answer session after the presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
I would now like to turn the call over to your host Robert El Carpenter Executive Vice President and Chief Financial Officer of Howard Bancorp incorporated Mr. Carpenter you may begin.
Thank you Robert Good morning, I would like to begin by thanking everyone for joining the call. This morning.
Again, my name is Bob Carpenter, and I am the Chief Financial Officer here at Howard Bancorp.
Before we begin the presentation I would like to simply remind everyone that some of the comments made during this call would be considered forward looking statements.
In the interest of time instead of reading through all of those warnings I would direct everyone to page two of our earnings presentation.
Our form 10-K for the fiscal year 2020, our quarterly earnings reports on form 10-Q, and our current reports on form 8-K, all of identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made this morning.
The company does not undertake the process to update any forward looking statements and as a result of new information as the result of new information or future events or recent developments.
Our periodic reports are available from the company either on our website or via the SEC's website.
I would like to remind everyone that while we think our prospects for continued growth and performance are good we have to keep in mind, the continuing COVID-19 related challenges.
It is our policy notwithstanding what the markets any earnings margin or balance sheet guidance.
With that said I will now have to introduce Mary Ann Scully, Chairman and Chief Executive Officer of Howard Bancorp. Thank you, Bob and thanks to all of the if we're on the call we know where the busy earning season. This just for all of you and we appreciate the fact that you've prioritized.
The information today. So thank you I'll begin as I, usually do with the strategic view of the company on our index been value of these spaces. This is relevant because it does guide most of our strategic decisions and also serves as the benchmark against which we measure our progress on a monthly on a quarter.
And the basis.
Art with the fact that we have truly unique positioning in the greater Washington, and Baltimore Metropolitan market. We are the largest locally owned bank headquartered in Baltimore and are now the third largest bank headquartered in Maryland, just has a very tangible impact on our ability to attract capital and then.
On the <unk>.
Portfolios, the come with human capital and that in terms of translates into loan growth and revenue improvements. We've recently made a number of successful talent acquisitions, Rob Cooney share of C. L O and president will discuss the number of those.
We have always maintained a higher than normal commercial focus focusing on the small and medium sized businesses. The dominate both the Baltimore and Washington marketplace and while the industry is awash with liquidity right now, we still maintain and believe that of high quality core.
The deposit franchise will provide us with enormous opportunities, but again, we will have tangible income results going forward and that's been reflected in this quarter in our ability to stabilize the net interest margin, despite very competitive loan environment loan yield compression.
High liquidity range and it helped not only by the deposit portfolio led by the fixed rate loan portfolio that we have.
We have maintained discipline expense management very conscientious resource allocation and as a result, we're showing strong E. P. S. N P. P. On all of our growth while we're also able to add to our allowance.
<unk> maintained strong asset quality trends, Randy Jones, our Chief Credit Officer will go into more detail on those to die.
I'll also tee up the question of why greater Washington. Since this has been a focus of our last few quarterly earnings reports and it is providing us with the tailwind right now that's helping us to offset some of the industry pressures. If you looked at the earnings presentation that we shared last night.
You will see first of all on the map and I think that there has been.
Perhaps some neglected the fact, the two of the most vibrant counties within the greater Baltimore marketplace, Howard and Anne Arundel County are very close to the greater Washington, Slash D C marketplace.
Familiarity that we have with these markets as the bank actually started in one of these markets 16 years ago the <unk>.
Physical proximity to the market means that the greater Washington move is not a wild extension of our strategy, but rather represents of movement into a contiguous market where the opportunities are of high as we've always suggested the move into greater Washington would be opportunistic. So if you.
Look at the map you can see the fact that Howard County is almost equidistant between Baltimore City, and Washington D. C and you'll also see on the right hand of that chart. The very attractive demographics in those marketplaces again, Rob will talk about what we're doing to tangibly.
Execute on the opportunities that we see in this marketplace, but we did want to help provide sort of positioning that would show what of natural extension. This is for us.
And with that I'll turn it back to Bob to talk about some of the financial highlights. Thank you Maryann.
So we had a we had a strong quarter with 33 cents earnings per share are and and what we see as a nice growth rate over the fourth quarter of of 2020 at the at 38% on 83% growth in EPS over the same quarter a year ago.
Yes, certainly our results were a benefit of our continued to benefit from from the PPP program.
And again, we expect that we'll talk about P. P. P. Later, but we expect some continued quarters as we see more and more forgiveness of the PPP portfolio.
On one of the one of the items I would note on page six of our deck was the fact that our book value per share on of tangible book value per share both actually declined from the fourth quarter.
Although our earnings per share were <unk> 33, a share and what we saw is with the rise in the intermediate long term treasury rates that had an adverse impact on the market value of our mortgage backed securities portfolio and in net impact on our accumulated other comprehensive income of was was <unk> 45 per share reduction both book value and tangible.
Book value.
Our again, our earnings of 33 cents, a share of $6 $2 million and and again, we've talked about the growth rates a couple of comments I would make about our results.
Noninterest expense, we continue to focus on noninterest expense management reallocation of resources, we did have some uplift in our in our expenses in Q1 related to our expansion into the greater our expansion in the greater Washington marketplace.
But again expenses at non $12 $3 million were within our ex our expected range and most importantly relative to Q4.
On a on a core basis, where we exclude certain non recurring items.
We were down about $700000.
Yeah.
When we look at some of our profitability measures you know a couple of important takeaways that I would like to mention is as you'll note that in the Q1, we did achieve on a on a clinic.
The 10% plus return on tangible equity.
And as well as the.
Excess of 1% tangible return on average tangible assets. So so again, we're excited about the progress we're making there we maintain a strong noninterest expense to average assets ratio, which continues to decline we're below 2%.
And R. P PNR to our average assets was one five per cent for the quarter.
So again, we're benefiting from the P. P P.
Performance, but are you know our challenges in the organization is as we move through time on PPP.
Moves away it will replace with strong.
Loan growth, which we'll talk about later in the presentation.
So with that I'd like to turn the conversation over to Tara.
Thanks, Bob and good morning, everybody on the slide nine outlines of our our PPP efforts both in phase, one and phase III of that the narrowed at the top of our 2020 originations on a.
A couple of things of that I'll highlight here about 45 per cent of the total dollars.
Had been forgiven to date.
That's a little bit slower than what we anticipated.
But it's largely driven by the customer and their timeliness completeness of their application and by the SBA is timing on reviews of the loans that were over $2 million.
We're seeing a very slow process on on those loans and actually stretching beyond the 90 days that the originally indicated they would be complete by.
As of yesterday, we still have about 337 borrowers who have not made application of 105 of those are at various stages of completing the application, but then our portal today. So we expect to see the PPP forgiveness from one of the first phase continued to accelerate here in the second quarter.
The bottom half of the slide.
Summarizing what we've done it in round three of the dollar amount is trending slightly higher than what we anticipated, but it's very much in line with the 50% of volume that we expected that we did in round one customer.
Customers, making application for this program on highly impacted industries and are are benefiting from the program and I would state the given the slower pace of this program combined with our ability to automate it internally, it's really seamless for our customers and it's a pretty limited distraction for our employees internally.
Now turning the page to page 10 of our loan composition. We continue to have a highly diversified loan portfolio with a heavy weight on C&I loans and owner occupied CRE relating to these operating companies together of these loan types account for about 35% of our total loan portfolio excluding <unk>.
P P of.
Our residential portfolio was flat for the quarter. This was achieved by increasing our of corresponding activity and by proactively making outbound calls to borrowers who may be considering of refinanced. Our goal here is to maintain this portfolio at a consistent percent of our total total overall portfolio.
Our CRE portfolios of percentage of capital is well within regulatory guidelines, which allows us to continue to grow this lending activity I should note that in the fourth quarter.
Last year as well as the first quarter of this year, we closed several construction loans, which are still on the early stages of funding as these projects begin to develop we expect to see a meaningful increase in loan outstandings relating to this loan type.
Okay.
On page 11 of and summarize our loan growth for the past two quarters, it's been very strong on the origination front.
We did not see quite the benefit that we saw in the first quarter of this year in the fourth quarter due to.
Elevated payoff activity of the payoffs were largely due to people selling companies or properties ahead of the change in the administration of anticipation of the change in tax code.
In Q1, we saw a return to normal payoff activity. Thus the originations contributed to about 12, 4% annual growth rate on commercial.
The growth was largely driven by C&I growth was experienced throughout our geographic footprint and our lending teams. We are starting to see the benefits from our move into the greater Washington market in terms of both closed loan activity and pipelines.
Noted previously we've hired three C&I lenders and have one dedicated CRE lender in those markets and we're starting to see those pipelines growth.
Pretty pretty significantly.
As mentioned previously we do closed several construction loans over the last two quarters, we expect to see the impact from funding. These loans throughout the rest of the year on the right side of the page of the graph shows our commercial line utilization ticking up slightly the increase is largely attributed to new customer activity as the customers. The C&I customers that we are bringing.
On board.
I'll just have a higher percentage of their lines outstanding at this current time as things continue to return to normal we expect to see line utilization track closer to normal levels, which will further enhance our loan growth.
We're very happy with the quarter, we are excited about our move into the greater Washington area. We're seeing the strong pipeline growth throughout all of our lending divisions, which include the business lines.
Through the granularity to our portfolio such as our business banking broker marine and corresponded banking, so overall strong quarter and we expect the.
More of the same going forward.
That I'll ask Randy to talk about.
Yeah.
Her deferral activity.
Sure.
Morning, everybody on this is Randy Jones.
Slide 12, we disclose we continue to show our potentially highly impacted loans sectors, we began tracking and reporting this.
Last year during the pandemic on these are kind of universally accepted as some of the more impacted businesses I think the takeaway from this is the majority of our deferrals remain in the sectors also of the majority of our criticized assets.
Uh huh.
Asset quality of migration trends are reflected from these potentially highly impacted sectors on the on the positive side, we've been able the direct as you see over on the right hand side, a significant amount of relief.
Some of these sectors through the PPP program, which has been highly beneficial.
Slide 13, just reiterate some of the characteristics of the world of exposures, we do have the niche sectors I think on the positive the Wii.
Do as we say half of the.
The minimal ex.
Bowser and travel and other sectors that could be problematic and are problematic for others.
We don't we don't share that with our with our exposures.
Loan deferral trends you can see the long term trend here over several several months clearly there are down significantly but remain.
That's about the level, we saw the year end.
I would say a couple of comments on the deferrals again, they're concentrated all of those highly impacted sectors. We're also trying to.
Great. The mix of these deferrals from maybe a full deferrals are now paying interest and theirs.
As these business has climbed back so we're seeing the severity of the deferral of <unk>.
<unk> a bit and we will be continuing to try to nurses customers that were made on deferral of kind of.
Back to the life in the next coming quarters.
That's it can be evidenced somewhat on the slide 15, where you see our of breakout of the type of deferrals. We are seeing a decline in full payment deferrals of increasing the.
The principal only deferrals on a couple of our principal only deferrals were.
The projects, we may have extended the leasing periods for.
The I consider those of deferral in of Covid related deferral, but.
In the situations outside of the pandemic as possible, we would be working with people to give them all of them more time to lease up of projects. During this timeframe or Troy knows in the category of <unk>.
Loan deferrals.
Our <expletive>et quality trends.
I believe remain fairly strong on.
The non performers are down this quarter of largely to two of couple of level of resolutions, we took in the first quarter.
It does translate into some charges, which we'll talk about on a minute.
The delinquency is following our normal seasonal patterns, we traditionally see Q4's first in fourth and first quarters higher delinquency in the second and third and we're seeing this fall or are very traditional kind of pattern there classified loans increased.
Slightly from fourth quarter to first quarter, if you're tracking this note the about special mentioned, you'll realize that while there was some migration from special mention of into our criticized categories. They're also correspondingly had to be some migration upwards in the better rated category. So about half of our special mentioned credits we saw.
Market improvement and we're able to move those up to better rated categories.
About half we move down further I will say, there's ones that move down further comprised of a hotel arrest and two restaurants.
Clearly again, we're talking about the highly impacted sectors.
Our allowance on page 17, ticked down a bit this is related to the charges.
On the charges you see in the first quarter of really concentrated with three credits I'll say one of those credits is directly pandemic related comprised of about half of the charges that we set up a reserve for that from the fourth quarter. We're still working on the resolution where the company is still is still operating but we did.
Take care of of large charge on that day.
The other half of these charges were two other credits that had really nothing to do with the pandemic they've been in workout for.
And the period of time, one of those was the large single family.
The home was last piece of the relationship that we were working through the kept getting the foreclosure sales bump we decided to sell the note because we have large carrying cost. So again that worked out it goes back to 2007. So that's a very long term issue with the working through.
With that I'll turn it back to Bob I believe the talk about the capital position.
Well I'll just before I, thanks, Randy and before I get into the capital just to make a few follow up comments on the allowance.
As most of those on the call. So we did reduce our allowance by $800000 over the year end level, the allowances of percentage of our portfolio of loans, which we which excludes our PPP loans.
We ended at 1.15 per cent of for the quarter compared to 1.13% at year end. The one thing I just want to really emphasize is that we had again of specific allocation attributable the one credit, which which then converted to charge off in Q1, our general allocation of the allowance at year end was one point of weight per se.
So think of it that way.
It's a minimal reduction on the allowance percentage.
One of the things.
The one comment I'd make is the fact that we continue to see our historical loss rates are moving downward.
And that has an impact of one of our allowance I've made this comment on our previous calls our allowance build through the course of 2020 was was almost exclusively in the form of our qualitative factors. We're certainly optimistic as we move forward later in the year with some positive developments with vaccines and improvement in the economy.
Yeah.
So the optimistic that there may be we may be opportunities for that allow us to trickle down even further over the course of the EBITDA.
Yeah.
On page 19 of our deck, we talk about capital Theres not really of story here, we continue to be well in excess of well capitalized I already mentioned the impact of the accumulated other comprehensive income on our on our tangible book value on our book value per share.
So let's get into some of the interesting areas like yields and rates.
Net interest margin. So for instance on page 20 of our deck, we talk about our loan yields the which are down.
The dramatic 55 basis points from from Q4 of 2019, just the impact of the the rate environment.
Which is again pretty dramatic.
If we look at a couple of the metrics here, we see a big ramp up in the 10 year Treasury from it's from its bottom in in August of 2020.
<unk> turned a little bit here since since quarter end.
But that certainly is there.
Run up in the treasure rates likely has had some positive impact on some of our new loan rates, which which I'll touch on briefly in a minute.
A couple of positive takeaways here, we continue as we've said in previous calls our customers see the weighted average rate continues to work its way down we've had some high rate Cds maturing.
The runoff rates have been in line with our expectations and we expect to see that cost of of liabilities continued triple downward were 78 basis points for the quarter, we expect that the b in the low fifties in Q2.
And dropping even more later in the year.
Of our overall thinking on on our cost of funds, which we define as our interest bearing liabilities plus our DDA balances.
We were 28 basis points for Q Q1 of this year.
And we still believe that there is while there's less opportunity. We still believe that there is there's a little bit of opportunity for that the dropped more in the 25 basis point range through.
Through the remainder of the year.
One comment I wanted to make in terms of of loan yields.
And one of the things we try to look at internally is we take the noise of fair value adjustments because we have.
Somewhat limited control over there is that the.
The impact they have on our earnings because for instance, we've had some high pay offs with with some sizable fair value marks that debt that mark accretion hits interest income in the period of those payoffs.
I like to look at our loan yields excluding that effect and to put that in perspective our.
For the $4 one five per cent portfolio loan yield excluding those impacts is 398%. So what we've what we saw was about a six basis point drop in that what I call that clean loan yield debt again excludes PPP excludes fair value of about six basis point decline from Q4 to Q1, certainly that was in line with our expectations.
And we again, we expect some some of that loan yield compression to continue through the course of of course of 2021.
On page 21 of our deck, we have our net interest income net interest margin.
And our what we call our operating now on our operating net interest margin, we exclude the impact of PPP on the fair value adjustment of accretion.
So what you see on this as a fairly steady trend we were $3 two 1% on an operating margin basis at.
In Q4 were $3 two O per cent here in Q1.
We're again, we're cautiously optimistic that we can maintain that margin in a fairly tight band of <unk>.
Maybe within five basis points over the course of the year.
And.
One of the comments I was going to make in terms of and I should maybe say maybe on the.
On the prior pages, we are we.
We have seen as we looked at our first quarter activity again, a strong quarter on loan growth and what we found that.
Was the fact that the weighted average yields on the new business was slightly higher than what we were projecting so that may bode well for for our loan yields over the course of the year on the other hand, what we also saw was that that high prepayment activity. We saw on the residential mortgage portfolio.
What what certainly had an adverse impact on the residential mortgage yield relative to our expectations.
Deposits is a it is a story that we know the industry is awash in lots of lots of deposits and ours were no exception. So for instance, our non maturity deposits increased by $118 million from our year end level.
Against we saw more stimulus hitting our accounts, we saw the PTP of PPP funding some of that money is still on the accounts.
And 78 million of that growth was in the form of our transaction accounts.
Just to put it in perspective from a year ago year over year, our non maturity deposits are up over $430 million with 300 plus million dollars of that in the form of.
Of transaction accounts.
Okay.
With that I will turn the discussion back to maryann. Thanks, Bob So I'm going to sum up with again the focus on all of the tangible steps that we're taking to enhance long term shareholder value, which has always been our mantra first of all is the opportunity to acquire of top talent in the.
Organizationally, it's focused on small and medium sized business is in ordinary way devoted to acquiring the talent that allows us to provide top level of advice to our customers. We do have a locally unique brand position and for our company is focused on small and medium sized businesses those on.
Opportunities are often greater in a down cycle because of the approach of some larger out of state organizations to small and medium sized businesses on.
In the prior slide we show the 80% of our market share is dominated by out of market and large regional players, we're continuing to leverage their four of the heightened brand awareness of Howard bank as the local option and the talent increase is a tangible.
Lee measured increase we've had a 20% increase in business development staff in the last four months approximately 20% of our commercial bankers are now focused in the greater Washington market and to leverage on that theme of this being a very logical extension of of contiguous market.
25% of our loans and deposits are now in Howard and Anne Arundel County, and 30% of our bankers are in Howard and of Randall and the greater Washington marketplace. So there is a very real investment and some of the most demographically attractive sectors of our marketplace.
We are as a result, they were four tangibly growing loans and revenues have offset some of this pay off and pay down momentum that has plagued us for the last few quarters, but we're able to continue to leverage of the transaction accounts strength that a bank that's very focused on C&I as well as CRE.
It is able to naturally <expletive>umed with the relationship approach or 31% focus on C&I, which is the combination of our traditional C&I balances and owner occupied commercial real estate makes us one of the most dominant and focused C&I players and that will allow.
To us to continue to naturally even after this liquidity rush p<expletive>es to leverage transaction accounts strength and leverage the very strong deposit franchise.
The new hires in the greater Washington market really give us the compelling opportunity and again they are partnering with very talented staff and Howard, Indiana, Rondo County, and in very talented staff in Baltimore County, Hertford County.
In our Delaware marketplaces. So we're continuing to you the ice all of that to stabilize our margin, we're very comfortable with our <expletive>et quality as Randy indicated we take a very conservative approach to how we define deferrals and there have been instances where certain normal commercial.
Instructions projects, there are naturally a little bit slow the lease up and where we would normally be making attempts to extend in the interest only period. We are treating those as deferrals, even those of us or natural dynamics of of commercial construction marketplace. We're also continuing to take us.
A long term approach to how we view <expletive>et quality. So some of our additions to charge offs. This year as Randy noted referenced at the very long standing challenged <expletive>ets going back to pre recapitalization firstmerit or days and that has tangibly allowed us to show one of them.
The highest allowance to nonperforming loan ratios that we have ever had so we continue to believe that conservative and long term approach to <expletive>et quality will service well, we are continuing to focus on lowering funding costs, we're continuing to mitigate headwinds through.
The selected niche portfolios that we've talked about before marine lending home improvement lending and are doing those through partnerships that allow us to do them efficiently, which continues to take the approach of very very careful and disciplined resource allocation.
We've been able to offset the residential mortgage run off in a very challenging refinance market with the addition of the industrial correspondent banking partnerships again, a highly efficient way to acquire portfolios.
We had a three year track record of aggressively managing costs.
With the exception of the additions on the greater Washington marketplace, we've been keeping those costs flat and we're continuing to explore the fintech relationships primarily to allow us to achieve certain processing improvements, including some modest early attempts to AI and RPI implementations.
So we're clearly feeling very very positive about how all of these strategic initiatives has positioned us in terms of our ability to continue to have revenue lad PPE on our growth and continue to show the operating leverage that we've talked about in the past of being the key.
The two improving our returns over the long term and with that I'll open the floor up to questions.
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Our first question comes from Casey Whitman with Piper Sandler. Please proceed with your question.
Hey, good morning, everyone. On this is Charlie on the on for Casey of today.
So they charge the already here.
I'm doing well thanks, how are you maryann.
Good good.
So Bob I had one just modeling related question on expenses this quarter. So I noticed in the release that you mentioned 578000 in deferred origination costs related to the P. P. P.
Did those come this quarter as a reduction in salaries and benefits.
Or am I thinking about that incorrectly.
The total of deferrals, where the.
And Charlie Thanks for the question.
Just to clarify the total deferrals were of that $5 78 number but a large portion of those deferrals under this what we call round three of the 2021 originations our external cost we've engaged a third party for a front end in terms of lot of the heavy lifting whereas last years program was was pretty much exclusively all an internal cost.
So the internal cost for the for the quarter are more in the range of $70000. The actual the real internal cost deferral is only about $70000.
I see that that makes perfect sense. Thanks, Bob.
Then just moving on to Rob.
No you you gave some really good color on the on the loan growth this quarter and the greater Washington expansion I was just wondering if.
If you could maybe give us a ballpark for how big of.
You want to get that Washington team to overtime and then how what do you what percentage of the of the pipelines at this stage are coming out of that greater Washington market.
Sure Yes.
I think the answer to the to the first part of the question about how big we want it to get that always depends on the quality of the people that we can find so to the extent we can continue to find proven.
The producers who have been in that market for a long time and it's similar to the to the people. We just brought on board who have spent their entire careers down there 20 plus years.
That will really drive that that number. So we're actively continuing to look to add to that group as we are our other lending groups.
And I would say today, if we just look at it from a pipeline standpoint.
Pipeline is about 25%.
Skewed down to the D C market.
Yeah.
Great.
And then where would you like to get that do you have an idea of where you'd like to get that split too overtime.
Yes.
It's the.
I mean, the answer is we'd like to see all of our pipelines continue to grow.
So we don't have any target to say hey, we want this to be 50% of our business or or not given given the dynamics in that market I do think it will outgrow the Baltimore market just naturally.
Hum.
But we're not sitting down trying to budget exactly where we want to take that.
Alright, Okay. Thank you everybody for taking my questions.
Sure.
Our next question comes on the line of Catherine Mealor with K B W. Please proceed with your question.
Hi, good morning.
Awesome.
I just wanted to follow up on the ex on just the expense conversation you may have mentioned this is the only about Ah I jumped on all of the late can you.
Just talk to us about what your expectations are for the expense growth from this kind of $12 million or 12 points of a million dollar level and if you think we'll see more expense is coming from the D. C initiative of richness of that in this quarter's run rate.
Catherine Thanks for the question the Ah.
My expectation would be that we there is some of the some of the hires in the some of the new hires on the greater Washington. The expansion project were were mid quarter. So some of my rough estimate is we'll see probably.
$100000 I think it's a reasonable estimate of of a full quarter empty on a full quarter lift. So so all else equal I would I would expect of $100000 of additional expenses in Q2, just from that initiative.
Does that answer that question.
So Catherine the other way to say that as we've been we've been pretty consistently saying, we think that that market could could.
Lead to about $1 million in additional compensation costs.
And rather than having 250000 of that cost in the first quarter, we probably had more of like 150 Thompson of at the end of first quarter. Because we did have a couple of those high risk come on mid quarter. So if you think about an additional $2 50.
Higher run rate per quarter, but with $1 50 of that already being reflected in Q1.
Got it okay that makes sense.
And then how do you think about the reserve levels from here I mean, you're not of Stifel. Adopter. So you didn't have as big of a reserve as some of your larger peers, who are really releasing reserves of lot more heavily today. So do you feel like this kind of one of five range is a good day and we'll just kind of grow into it or do you see substantial reserve.
The only from here.
Well Catherine from my perspective.
It will be difficult to maintain.
Assuming <expletive>et quality trends are remain as they as they seem to be at this point in time.
I think it'll be very challenging for us when we start thinking about the qualitative factors. If in fact this economy really takes off in the second half of the year and we start seeing positive improvements in terms of consumer spending unemployment some of the other measures I think it would be difficult for us the maintain the qualitative factor, especially the COVID-19 related.
The impacts we've that we've we've incorporated at their current level. So my expectation would be that <expletive>uming the economy does in fact improve I would expect the allowances of percentage of loans, <expletive>uming we don't see further any deterioration in terms of any higher levels of cl<expletive>ifieds or anything of that nature I would expect.
The allowances of percentage of loans to two two.
Two continued downward over the course of the year to what level, it's hard to say, but yeah as I keep saying it will never go back to where it was pre COVID-19.
Yes, we certainly know that the levels of 60 basis points, where it will never go back to anything remotely close to that.
Okay. That's helpful.
And then.
One more if I, if I could just with PPP and the timing.
What is your I know its attempt moving target depending on on how the FDA process is a lot of the state how do you both of your best guess for kind of the timing of PPP fees and forgiveness coming on to the next couple of quarters and do you think it'll slip into next year.
So I can start on the SBA side, what we're finding there is for the loans that are below 2 million, they're prosecuting those very quickly.
For the loans over 2 million of reviewing every single one of those and to date, we have not received forgiveness on alone over $2 million. So.
That's going to be we're at the mercy of them on those loans in total.
You're about a third of our of our customers have not applied yet, but about a third of those non applications of started their applications. So.
We're encouraging them, we've given them more on automated portal to use.
We're trying to push it through as quickly as possible, but it's really out of our hands in terms of when we would expect debt forgiveness to come in.
I would just add I think we would all be of the mind, though that tier we are it's the second half of April we still have we still have still have eight months. So my expectation certainly would be the the 2020 originations.
Would be forgiven by the by the end of this year and again, we've seen it.
We're not you know again, the 2 million of above or the potential risk that some portion of those won't be forgiven what.
What we found thus far though as a general rule of the portions of it we've had very minimal amounts on forgiven and several of those cases, the borrowers and paid off the loan.
As opposed to keeping it out there as of 1% loans for two years or five years of whatever the case now the 2021 on ones are a little more problematic.
Personally I'm of the ops of the mind that given the tend to be smaller debt, we should expect of.
Substantially all of those if not all of them forgiven by the end of the year, but it could well be for the for that 95 of say 100 million of it.
We ended up originating it may be a lot of those maybe in Q4.
Great Super helpful. Thank you.
Sure.
Catherine certainly one of the reasons why we've attempted to be very transparent about the PPP impact on.
On net interest income and margin is because it is a noise factor. If you will that is somewhat out of our control and so we will continue to try to be very transparent about that so that people can see the impact that's having on the bottom line.
Our next question comes from the line of Brody Preston with Stephens. Please proceed with your question.
Hey, good morning, everybody.
Morning Brody.
Hey, so just to circle back on loan growth. So on a core basis. This is probably the strongest quarter you all of that in.
Almost two years and.
When it came during the time when the industry is struggling to grow loans and so I. Appreciate the detail of that you put on slide 11, and so I guess I wanted to drill down on a couple of things won on the C&I portfolio. As you know it was up 30% annualized this quarter what was the dollar amount that was related to the uptick you saw in line utilization.
<unk> this quarter and then secondarily is there any specific industries that you are making inroads into that are helping drive some of the performance you saw on this quarter.
Well I'd just make.
One comment I would make about line utilization of our line utilization was up from year end, but as we analyze that further it was largely the fact that I think we mentioned on the note here, yes that we some of that new business that we generated in Q1 on the C&I side. The was a higher initial the.
The initial utilization in Q1 was higher than our our what I'll call our portfolio at year end and when we look at that portfolio that was there at year end and looked at it utilization, we pretty much were unchanged. It was a very minimal amount of it.
Very very many of I think it was like went from 34, 2% to 34, 5% so very minimal on the what I'll call. The year end book of business.
And again it was that new business, we book that we saw that higher utilization in the 44% range.
In terms of the latter part of that question about whether it being in certain industries I would say no. It was really across the board.
We expanded our business banking group, which which added a lot of granularity into our portfolio of they are focused on loans between the 5 million and 2 million had a very strong quarter.
Really across our entire platform we saw.
Some some strong growth.
Okay.
Currently what percentage of the loan portfolio is floating rate.
We're a true true floating true floating rate is is around 35%.
This is Mike.
Okay.
Alright, and then.
Just wanted to ask you know the core margin held up nicely in the deposits of course.
Posit costs decline it was nice to see just wanted to get a sense for how much more deposit repricing.
To the left in the pipeline for this year on where you can see that the cost go throughout the course of the year.
One of the mine that debt we've done about we've done about as much as we can do on the on the non maturity side. So it's really the customer CD book of business.
And again. This is this is trending down in line with our expectations, we had those high high rate.
I'll call them Hot money Cds that were out there that were maturing.
The maturing as we saw some of those in Q1, we'll see a little more in Q2 and Q3. So again I think we've got downside the opportunity. There is that debt. We go from 78 basis points on customer Cds from Q2 of the safe at the 55 basis points in Q and Q2.
And probably in the year in the in the low 40 basis point range. That's my that's my current projection on that.
Okay, and then I just wanted to ask.
You know, maybe Mary Anne or Rob you know I just wanted to talk through the subscription model that you all rolled out for you or the deposit accounts to start the year I wanted to ask why does it make sense to make the shift.
To that sort of.
The model now and whats the tangible impact then cinched since you rolled that out.
Sure. Thanks for asking that priority, it's something we're pretty excited about it and I'll, let Rob talk to you about what that's doing.
The launch was in March so the tangible impact hasn't been immediately.
While we have experienced is no runoff in the portfolio and interestingly enough any new customers coming in are all opting to go into into that program.
And it was really it was a couple of things one is it gives us a fee income opportunities number one for most of the most important.
Number two it took a cl<expletive> of accounts that we would cl<expletive>ify as enacted there wasn't a lot of usage within those accounts.
Either encourages them to user accounts more keep larger balances or may be considered on another bank. So.
Those were really the primary drivers along with providing additional services for our customers that do enter into those programs because there.
There are real tangible.
The products and services that come along with being in those products. So.
We do expect that debt for this year it will contribute a sizable amount of noninterest income for us and we are starting to see that now is the first billing cycle went out the.
Brady, it's interesting that you call it out for what it is which is of subscription based approach and we've been looking at the subscription based behavior. If you will of our customer base for some period of time and trying to find the right applications to leverage of that change in customer behavior, but as Rob said financially we believe it.
It's going to have a positive fee impact. It's also going day candidly allow us to see some customers that don't have great activity or large balances, perhaps opt out and therefore not have a net cost of those that most importantly strategically with the subscription based model as it achieves a higher.
The level of engagement on the part of our customers and that we believe will be reflected in ongoing balance levels and ongoing fee income. So again, a long term solution.
Got it yeah, that's it.
The exciting and innovative stuff of who did you all partner with the kind of help implement that on the on the technology side.
The call it strength strategy court.
Got it. Thank you all for taking my questions I appreciate it.
Thank you.
Our next question comes from William Wallace with Raymond James. Please proceed with your question.
Yeah. Thanks, good morning.
So the the following up on British Brody's question about the loan growth in the the higher utilization levels.
I thought it was interesting that the new originations are coming in at such high originations can you.
Alright.
The utilization can you talk about any rationale that you think might be the reason for that.
Yeah. The number one reason is what typically happens when clients move their accounts over or is there going to leave a certain amount of dollars at their old bank, the clear payrolls to clear outstanding invoices and things of that nature. So.
That's just going to drive the higher utilization in the earlier part of the relationship.
And then does that become a drag or what do you think the day kind of flatline, a little bit I think the flatline a little bit.
Okay. So so to Barry's point of if you look at your loan growth excluding PPP. It was a pretty strong quarter, you've got the the new hires out of the D. C market I don't know how much of that was from those guys that'd be pretty quick but.
Low double digits ex PPP is that is that sustainable. This year do you think or was one of your most once you may be just to catch up with some some stuff that had been so all the let me answer that one we still think this is going to be a strong core loan growth year on again, we're working very hard to try to call the quarter loans.
The story, so that all of you can make the distinction between PPP activity in core loan growth I would say that our official position is that we still think that this is going to be of high single digit growth year.
Okay.
And have pipelines continued to build.
Through April or stabilize.
<unk> lines of continued to build through through April of originations.
And then the other thing I would note there is our construction lending activity. We did close a number of large construction loans in the fourth quarter of last year. The first quarter of this year.
As those developers start to.
To move forward with those projects, we would expect to see.
The commiserate outstandings with that as well.
And Huawei to clarify as well also while the pipeline going forward clearly reflects debt greater Washington activity the.
The originations that we saw in this quarter largely did not yet reflect that activity. So that's all upside.
Coming into later quarters of the year. It says people just come on board commercial loans don't happen automatically or instantly.
Alright.
Right, Okay, great. Thank you for that.
On my last question is.
Yes, if the proposed 28% corporate tax rate is p<expletive>ed into law.
The vitamin Australian what is the impact to your DTA.
Okay.
Alright, that's what I.
I haven't really given a lot of thought to.
I would expect that it would.
Certainly well, yes, actually it's going to increase the DTA is we have to re re re value of those based on that higher corporate tax rate. So I don't know I'm trying to think rough numbers what that might be.
Probably.
Yeah, it's really all of it offline rather than just price.
The big money.
It's obviously a drag on your net income, but ironically in Raleigh, you can appreciate this having followed us for so long.
It would have a positive effect on the DTA and brings us back closer to the position that we anticipated for the DTA at the time that we combined with Firstmerit or back in 2018. It takes us back to that starting point and are closer to that starting point.
Alright, okay.
That's all I had thanks guys.
Thank you thanks.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Mary Ann Scully for closing comments.
So again I, thank everybody I know the conflicts and the prioritization that you have to go through at this time of year. We appreciate everybody being on the call and we will just remind everybody that we pride ourselves on being an exceptionally accessible management team. So if people have other questions as they begin to get into the numbers in more.
Detail just reach out to any of us and we will be happy to spend some time with you on.
Fleshing out the story in fact, we remain very optimistic about what we're saying.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.