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spk18: Thank you for standing by. Welcome to the Great Southern Bank Corp, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Kelly Polonis, Investor Relations. Please go ahead.
spk17: Thank you, Gigi. Good afternoon and welcome. The purpose of this call is to discuss the company's results for the quarter ending March 31st, 2021. Before we begin, I need to remind you that during this call, we may make forward-looking statements about future events and financial performance. You should not place undue reliance on any forward-looking statements which speak only as of the date they are made. Please see our disclosure in our first quarter 2021 earnings release for more information. President and CEO Joe Turner and Chief Financial Officer Rex Copeland are on the call with me today. I'll now turn the call over to Joe.
spk10: Thanks, Kelly. Good afternoon, everybody. I also want to thank you for joining us today. I am pleased to report that we began 2021 with strong operating results in the first quarter. As is typical, I'll provide preliminary remarks about the company's performance and then turn it over to our CFO, Rex Copeland, who will go into more detail about our financial results. Hopefully, you've had a chance to at least glance at the earnings release. If you have, you've seen that we earned $18.9 million or $1.36 in the first quarter per share compared to $14.9 million or $1.04 for the same period a year ago. The primary drivers of our earnings increase this year were higher net gains on mortgage loan sales. Of course, that's the result of the very robust mortgage market we're in, lower credit cost provision, and generally well-contained expenses. That was partially offset by slightly lower net interest income that was really almost exclusively driven by lower levels of FDIC accretion income. I think our net interest income was down about $850,000 for the quarter, and our accretion income was down like $1.1 or $1.2 million for the quarter. So that's really the culprit there, but generally a pretty good level of net interest income. And then higher income tax rate, I think just as a result of higher levels of income result generally in a higher income tax rate for us because our tax credits have a lower impact on our ultimate tax expense. Our performance metrics for the quarter were good. Annualized return on common equity was 12.18% and that's return on robust levels of common equity, I think we ended the quarter at 10.8%. Our annualized return on average assets was 138. Our efficiency ratio was 56.33%. During the first quarter, we did adopt CECL, which resulted in an increase in our allowance for loan losses of 11.6 million. We also established an allowance for losses on unfunded commitments of $8.7 million. So essentially $20.3 million of additional allowance that we now have on our balance sheet. That resulted in a $14 million debit to retained earnings net of tax. As far as loans go, since the end of 2020, our loan growth has been relatively flat. We've had good levels of origination, but loan payoffs have been pretty robust as well. So our gross loan portfolio, including our levels of our unfunded loans, decreased by $2.7 million. Our net loans decreased by about $11.1 million. Both of those decreases from the end of 2020. As I said, origination activity continues to be strong. If you look at the pipeline chart and our earnings release, our pipeline continues to be relatively stable at $1.3 billion. A little bit of information about Paycheck Protection, the Paycheck Protection Program. We were pleased to again participate in that. Our loan officers are proud to be helping our commercial customers deal with the effects of the pandemic. In addition to originating second-round loans, we're also knee-deep in forgiveness on the first-round loans, and that's going extremely well. To refresh you, we originate 1,600 loans for $121 million about this time last year during the first round of PPP funding. Currently, we have received full forgiveness on more than 1,100 of those loans, totaling about $66 million, and we have more in the pipeline awaiting SBA approval. I think from our perspective, we would say that the process has gone well, and we've had not a ton of pushback from the SBA on our forgiveness applications. As far as the second round goes, we have received nearly 1,500 applications totaling $55 million. We funded about 1,400 of those applications totaling $53 million. Those have been roughly split 50-50 between customers who participated in the program before and those that were seeking a first draw under the program this time. I would remind you for more information about our loan portfolio, we did file our loan portfolio presentation last night. That should be on our website as well as the SEC's website. Asset quality continues to be extremely strong. At March 31, 2021, excluding FDIC acquired assets, non-performing assets for $6.7 million about a $2.9 million increase from the end of 2020. That's really just two loans, I think, customers that have been around the bank for quite some time, including FDIC-acquired assets, non-performing assets worth $10.9 million, resulting in a percentage of total assets, non-performing assets, the total assets of 0.19%. Our pandemic-related loan modifications dropped to $146 million at the end of March compared to $251 million at the end of December 2020. Of the remaining loan modifications, 19 loans totaling $141 million were commercial, and 93 loans totaling $5 million were in the consumer and mortgage categories. Our capital continues to be very strong. From the end of 2020, it did decrease by about $18 million to $611 million, principally as a result of the additional allowance that I spoke about before, which reduced capital by $14 million, and also the drop in the value of our available for sales securities portfolio. That concludes my prepared remarks. At this time, I'll turn the call over to our CFO, Rex Copeland. Rex?
spk11: Thank you, Joe, and thank you, everybody, for joining us again today. I'll talk a little bit first about net interest income and margin. Joe mentioned earlier that our first quarter net interest income was down about $849,000 from a year ago to a total of $44.1 million this year's quarter. One component of that I'll make note of, we mentioned in our earnings release, is the net deferred fees on the PPP loans. Joe was talking about the number of loans earlier. We recorded interest income of about $1.2 million related to the net deferred fees accretion in the first quarter this year. Reminds you that we defer fees and costs related to that and accrete that to income over the expected life of the loans. If the loans pay off, then anything remaining gets taken to income at that point. We'll expect to see some more of that probably here in the second quarter. As Joe mentioned, we're still working with some of the first round stuff to get forgiveness and repayment on some of those PPP loans. At the end of March, the net deferred fees related to those loans, the PPP loans, for both of the groups of loans that we've originated was about $3.9 million. So that will be taking the income over the upcoming quarters. The net interest margin was 3.41% in the first quarter this year. That compared to 3.84% in the first quarter of 2020, which was a decrease of 43 basis points. The net interest margin was also 3.41% in the fourth quarter of 2020. So no change between fourth quarter 2020 and first quarter this year. In comparing the first quarter of 21 and 2020, The average yield on loans decreased about 76 basis points, while the average rate on deposits declined about 80. Most of that margin compression resulted from a change in asset mix. We kind of talked about that previously, and it's been kind of the thing that's been going on for most of 2020 and into 2021 for us. Our average cash equivalents increased about $329 million, and average investments increased about $30 million. And the average yield on those cash equivalents decreased about 106 basis points first quarter this year versus first quarter last year. So that change in asset mix that I mentioned a minute ago was about 24 basis points of the decrease. With the addition of your call last year in June, we issued some subordinated debt, and that was about eight basis points of additional cost or reduction in our margins. The additional yield accretion from our FDIC loans was down about 11 basis points from the first quarter last year. So those three components make up really the whole difference of the decrease in our margin from 384 to 341. Compared to December's quarter, the average yield on loans decreased about three basis points, while the average rate on deposits declined 15 basis points. However, the net interest margin, as I said, was unchanged, and that's really got to do mostly with asset mix again, where we had decrease in average loans, increase in average cash equivalents in Q1 this year versus Q4 last year. I mentioned the increase in income on FDIC acquired loans. What we have left to take to income is about $1.3 million at the end of March, and we'll have about $800,000 to $900,000 of that will go into income in the remainder of 2021. I'll shift over to non-interest income now. For the first quarter this year, non-interest income increased $2.4 million to $9.7 million when you compare it to the first quarter of 2020. The increases there were primarily net gains on loan sales. As Joe mentioned earlier, significant activity, origination activity in our mortgage business. And a lot of that's longer-term fixed rate, which we sell in the secondary market. So the profit on loan sales was up about $2.1 million Q1 this year versus Q1 2020. We also had an increase in income on our derivative interest rate products. So the net effect of that, we have derivatives that are going both directions. They're back-to-back swaps with our customers and loan counterparties. And as rates have moved a little bit higher, The net impact of that to us is we did recognize about $474,000 increase in that fair value. So that flows through our income statement in the non-interest income category. Last year's first quarter, I think we had net reduction in the market value. So that flipped around for us in the first quarter this year. Other income was actually down about $600,000 compared to the first quarter of 2020. In that 2020 period, we had about $486,000 of income related to newly originated interest rate swaps with our customers. And we also had some income recognized on the exit of certain tax credit partnership deals. Non-interest expense, as Joe said, fairly well contained this year versus last. Our non-interest expense decreased about $494,000 when compared to the first quarter last year to a total of $30.3 million. in the first quarter this year. Salary employee benefits was down about a million dollars. The impact of that really was, as you may recall, we paid out a special bonus to our employees last year, and there was about $1.1 million of expense that was recorded in the first quarter of 2020 related to that. Also, insurance expense increased about $378,000 this year compared to last year quarter. That's really in the FDIC deposit insurance premiums. A year ago, we had credits where we did not have to pay the insurance premiums due to overpayment into the fund. This year, we're paying the full amount and expensing the full amount. The last thing was expense on other real estate owned. Our repossession totals and real estate owned totals are down. The expenses on those decreased about $211,000 compared to the first quarter a year ago. The efficiency ratio for the first quarter of 2021 was 56.33% and that compared to 58.91% for the first quarter of 2020. The improvement in the efficiency ratio this year was really due to the increase in non-interest income and also a little bit to the decrease in non-interest expense. Joe mentioned just briefly our income tax expenses, our rate was higher. So that rate was, the effective rate was 21% in the first quarter this year. It was a little less than 16% in the first quarter last year. The drivers of that, as Joe said, are primarily the higher overall level of income that we achieved this year, and then a little bit lower levels of utilization of low-income housing tax credits this year compared to the previous year, and also lower levels of tax-exempt interest income municipal securities and some of our loans and then another factor that plays into it is our state income taxes and how the income is allocated between the various taxing jurisdictions where we have to pay tax and you know some of that some of those jurisdictions have higher tax rates and others and so that plays into a little bit of the tax rate as well we think though that going forward, our effective tax rate is going to be somewhere around 19.5% to 20.5% as we move forward this year. That concludes our prepared remarks at this time, so we'll entertain questions, and let me ask our operator to once again remind the attendees how to queue in for questions now.
spk18: As a reminder to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Andrew Leisch from Piper Sandler. Your line is now open.
spk12: Good afternoon, everyone.
spk05: Hi. Sorry if I missed it, but what is the balance of PPP loans at the end of the quarter?
spk11: It's around $150. 20 or so million, I believe. I don't have that exact number.
spk10: Well, yeah, I mean, I think it would be, Andrew, because I think we funded 53 million and we received forgiveness on 55. So I would think off of 120, I would think it would be 118, 19, something like that.
spk05: Got it. Yeah, that makes sense. If I take the 3.9 that's yet to be realized, fee income that's yet to be realized and back into a 3% yield or so on. It's right around $120 million. Okay, thank you. And then it sounds like forgiveness on that is going pretty smoothly. Is there any timing you can provide on how you think that's going to be forgiven? It'll be more weighted towards the second quarter or third quarter. What are your thoughts there?
spk10: It would be a total guess from my perspective. I would think The second quarter would be bigger than the third quarter, wouldn't you?
spk11: I would think so. I know a lot of our lenders are working with their customers. We've got several things in the pipeline, and I know they're doing some outreach to talk to the customers too. So I would think that they're going to try to get more of this done in the second quarter. But, I mean, I'm going to guess some of it's going to spill into the third. And that's with the original grouping. And then the more recent –
spk05: originations here that happened since the beginning or since mid-january i mean i'm going to guess we're not going to see those forgiveness items until maybe fourth quarter to start probably right right got it got it um and then just rolling in those fees and all the different dynamics that are play here on on the margin like how do you think the margin should perform from this 341 level i mean so you have the benefit from the fees but it seems like the the core trend with although liquidity coming on might be a detractor from that.
spk11: Well, I mean, certainly the liquidity that we have, and as I said, the mix has dropped us a little bit. So that's really been a lot of the story if you look back to where our margin was in the first quarter of 2020 before the pandemic, sort of a little more normalized time. You know, we... Probably, like I said, half of that drop or so is really related to the mix. Just having a lot more liquidity, we probably have maybe $400 million more of liquidity now than we had then probably. And so the other part of it, as I mentioned, the sub-debt that we issued, that was another eight basis points. And then the income that we're going to derive from... The FDIC loans, obviously, it's five basis points, I think, in the first quarter this year, and I believe it was 16 basis points in the first quarter last year. So there's not going to be a whole lot more of that income coming on the books. As I mentioned, 800 or so thousand the rest of this year. So in the next three quarters, it's going to be, you know, that 800,000 is going to get spread in there.
spk10: Yeah, sort of if you exclude the FDIC income, Yeah, Andrew, I think there's still some remaining pickup as a result of primarily time deposits continuing to reprice. But I don't think anybody thinks there's meaningful increase in our margin from here. until we see higher interest rates.
spk11: Would you agree with that, Rex? Yeah, I mean, what we're probably going to see is, like Joe said, our time deposits are going to reprice down over the next two or three quarters. We might see a little bit further reduction of rates on the non-time deposit balances, but I think those are like 19 basis points or something now, so there's going to be a limit to how much lower they can go. And what we're seeing on the loan side is, you know, a little bit of a reduction in loan balance rates really because of the things that are repaying. Like Joe said, we've booked a lot of new loans. We've generated a lot of loans. We just have a lot of repayments going on too. And a lot of those loans that are repaying are maybe going to be, you know, 4.5% kind of rates. and the new loans going on are maybe closer to 4% or something like that. So we're seeing a little bit of headwind from that as well that's offsetting the good that we have from CD rates continuing to go down.
spk04: Got it. Okay. Thank you so much for taking the questions.
spk21: Thanks, Andrew.
spk18: Thank you. Our next question comes from the line of Damon Del Monte from KBW. Your line is now open.
spk07: Good afternoon, guys. Hope everybody's doing well today. Hi, David. So my first question, just on the, and I apologize if you covered this in your prepared remarks, I was jumping between conference calls, but just in terms of how we should think about the reserve level and the provision going forward. I mean, obviously the adoption of CECL was quite a big boost and just given the strong underlying credit trends of the portfolio, you know, is it, Is there a way you can kind of frame out what a range for the provision could look like in the upcoming quarters?
spk10: I think a lot is going to depend on loan growth, really, frankly. I would think if you assumed a flat loan portfolio, we sort of believe with our loan portfolio at the level it's at right now, we've got the right reserve level. So if you have a flattish loan portfolio and no charge-offs, you wouldn't think provision expense would be too high. If you have a little bit of charge-offs, then you're going to have to probably not replace your charge-offs, but you would generally think you're going to have to have some provision expense if you have... a level of charge-offs.
spk11: The other piece of it that you'd have to think through, too, is what your forecast is for the economy moving forward as well.
spk06: Yeah, that's right.
spk11: How you see that looking in the next 12 to 18 months, that kind of thing.
spk06: Right.
spk11: If there's drastic changes there. And the other piece of that, too, is the unfunded. As we mentioned earlier, the unfunded commitments have to have a reserve against them. They're not part of the allowance for credit loss. They're a different thing. They're Same kind of concept. So as that pipeline grows or declines, you know, there's going to be differences that you're going to reflect there too.
spk10: Yeah, I mean, that's a good point. You know, if you had, I mean, we have about $1.3 billion in unfunded. If that went up 10%, you know, it would be reasonable to assume that that allowance for the unfunded commitments might go up 10% as well. And, you know, that's $800,000.
spk07: Okay. But from like a pure loan loss reserve perspective, so you're at like 159 excluding PPP, you don't think it needs to go higher than that, right? If anything, there should be a bias for some reserve release going forward?
spk10: Well, I mean, I think we think we're appropriately reserved at this point. So, you know, yeah, I mean, I guess I agree with what you're saying.
spk07: Okay. Fair enough. That's helpful. Thank you. And I guess my other question on expenses, again, I apologize, Rex, if maybe you called out some one-time items that weren't repeatable, but can you help us think a little bit about a good core run rate going forward to go off of?
spk11: I don't think really in the first quarter of this year we really had too much that was not fairly standard. Our expenses... are going to be a little higher related to the mortgage business because as long as the mortgage business is still robust, we're going to generate a lot of fee income from the profit on the loan sales probably, but we're also having to do some compensation to our producers and things like that. So those expenses, all things being equal, should be fairly consistent, I would think, as we move forward. I don't really think there was...
spk10: We didn't call out anything on the expense line as being sort of unusual, no.
spk07: Okay. Okay. That's all that I had. Thank you very much. Appreciate it.
spk10: Thanks, Damon.
spk18: Thank you. Our next question comes from the line of John Rodas from Jannie. Your line is now open.
spk09: Good afternoon, guys. Hope you're doing well. Hi, John. Just, I guess, just a question on capital, obviously. So you adopted CECL, but, you know, Joe, I think as you alluded to, your capital levels remain pretty strong, TCEs north of 10%. Can you maybe just remind us again your sort of bias towards uses of capital going forward? And, you know, I know you bought back some stock during the quarter, but just sort of give us an update.
spk10: You know, I think what we've said before is, Obviously, if there was something really opportunistic on the acquisition side, we would be interested in that. But to remind you, the way we view acquisitions is we're going to have conservative assumptions and based on very conservative assumptions, particularly with respect to growth, with the target company. Based on those assumptions, we want the thing to be a good deal to our existing shareholders. And generally, we don't find those kind of deals out there. We did 10 years ago when we were buying banks from the FDIC, but we really haven't to any big extent since. So as between stock buybacks and dividends, we would probably prefer stock buyback, especially given where we were able to buy our stock back in 2020 at close to book value. It's spread out from book value now, and so stock buybacks are not quite as attractive as they were. It's not to say that we wouldn't buy back some stock at these levels, but it's not as attractive as it was back in 2020. And so that would leave special dividends or an increase in the current dividends, possibly.
spk08: Okay. Sounds good. Thank you, Joe.
spk10: Okay. Okay.
spk18: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Joe Turner, President and CEO, for closing remarks.
spk10: Okay. Well, again, we appreciate everybody for taking the time to be with us on our call today, and we look forward to talking to you in about three months. Thank you.
spk18: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you. you Good day and thank you for standing by. Welcome to the Great Southern Bank Corp, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Kelly Polonis, Investor Relations. Please go ahead.
spk17: Thank you, Gigi. Good afternoon and welcome. The purpose of this call is to discuss the company's results for the quarter ending March 31, 2021. Before we begin, I need to remind you that during this call, we may make forward-looking statements about future events and financial performance. You should not place undue reliance on any forward-looking statements which speak only as of the date they are made. Please see our disclosure in our first quarter 2021 earnings release for more information. President and CEO Joe Turner and Chief Financial Officer Rex Copeland are on the call with me today. I'll now turn the call over to Joe.
spk10: Thanks, Kelly. Good afternoon, everybody. I also want to thank you for joining us today. I am pleased to report that we began 2021 with strong operating results in the first quarter. As is typical, I'll provide preliminary remarks about the company's performance and then turn it over to our CFO, Rex Copeland, who will go into more detail about our financial results. Hopefully, you've had a chance to at least glance at the earnings release. If you have, you've seen that we earned $18.9 million, or $1.36 in the first quarter per share. compared to $14.9 million or $1.04 for the same period a year ago. The primary drivers of our earnings increase this year were higher net gains on mortgage loan sales. Of course, that's the result of the very robust mortgage market we're in, lower credit cost provision, and generally well-contained expenses. That was partially offset by slightly lower net interest income that was really almost exclusively driven by lower levels of FDIC accretion income. I think our net interest income was down about $850,000 for the quarter, and our accretion income was down like $1.1 or $1.2 million for the quarter. So that's really the culprit there, but generally a pretty good level of net interest income. And then higher income tax rates, I think just as a result of higher levels of income result generally in a higher income tax rate for us because our tax credits have a lower impact on our ultimate tax expense. Our performance metrics for the quarter were good. Annualized return on common equity was 12.18% and that's return on robust levels of common equity, I think we ended the quarter at 10.8%. Our annualized return on average assets was 138. Our efficiency ratio was 56.33%. During the first quarter, we did adopt CECL, which resulted in an increase in our allowance for loan losses of $11.6 million. We also established an allowance for losses on unfunded commitments of $8.7 million, so essentially $20.3 million of additional allowance that we now have on our balance sheet. That resulted in a $14 million debit to retained earnings net of tax. As far as loans go, since the end of 2020, our loan growth has been relatively flat. We've had good levels of origination, but loan payoffs have been pretty robust as well. So our gross loan portfolio, including our unfunded loans, decreased by $2.7 million. Our net loans decreased by about $11.1 million. Both of those decreases from the end of 2020. As I said, origination activity continues to be strong. If you look at the pipeline chart and our earnings release, our pipeline continues to be relatively stable at $1.3 billion. A little bit of information about Paycheck Protection, the Paycheck Protection Program. We were pleased to again participate in that. Our loan officers are proud to be helping our commercial customers deal with the effects of the pandemic. In addition to originating second-round loans, we're also knee-deep in forgiveness on the first-round loans, and that's going extremely well. To refresh you, we originate 1,600 loans for $121 million about this time last year during the first round of PPP funding. Currently, we have received full forgiveness on more than 1,100 of those loans. It's only about $66 million, and we have more in the pipeline awaiting SBA approval. I think from our perspective, we would say that the process has gone well, and we've had not a ton of pushback from the SBA on our forgiveness applications. As far as the second round goes, we have received nearly 1,500 applications totaling $55 million. We funded about 1,400 of those applications totaling $53 million. Those have been roughly split 50-50 between customers who participated in the program before and those that were seeking a first draw under the program this time. I would remind you for more information about our loan portfolio, we did file our loan portfolio presentation. Last night, that should be on our website as well as the SEC's website. Asset quality continues to be extremely strong. At March 31, 2021, excluding FDIC acquired assets, non-performing assets for $6.7 million, about a $2.9 million increase from the end of 2020. That's really just two loans, I think, customers that have been around the bank for quite some time. including FDIC-acquired assets, non-performing assets worth $10.9 million, resulting in a percentage of total assets, non-performing assets, the total assets of 0.19%. Our pandemic-related loan modifications dropped to $146 million at the end of March, compared to $251 million at the end of December 2020. Of the remaining loan modifications, 19% loans totaling $141 million were commercial, and 93 loans totaling $5 million were in the consumer and mortgage categories. Our capital continues to be very strong. From the end of 2020, it did decrease by about $18 million to $611 million, principally as a result of the additional allowance that I spoke about before, which reduced capital by $14 million. And Also, the drop in the value of our available for sale securities portfolio. That concludes my prepared remarks. At this time, I'll turn the call over to our CFO, Rex Copeland. Rex?
spk11: Thank you, Joe, and thank you, everybody, for joining us again today. I'll talk a little bit first about net interest income and margin. Joe mentioned earlier that our first quarter net interest income was down about $849,000 from a year ago. to a total of $44.1 million this year's quarter. One component of that I'll make note of, we mentioned in our earnings release, is the net deferred fees on the PPP loans. Joe was talking about the number of loans earlier. We recorded interest income of about $1.2 million related to the net deferred fees accretion in the first quarter this year. I'll remind you that we defer fees and costs related to that and accrete that to income over the expected life of the loans. If the loans pay off, then anything remaining gets taken to income at that point. So we'll expect to see some more of that probably here in the second quarter. As Joe mentioned, we're still working with some of the first round stuff to get forgiveness and repayment on some of those PPP loans. At the end of March, the net deferred fees related to those loans, the PPP loans, for both of the groups of loans that we've originated was about $3.9 million. So that will be taking the income over the upcoming quarters. The net interest margin was 3.41% in the first quarter this year. That compared to 3.84% in the first quarter of 2020, which was a decrease of 43 basis points. The net interest margin was also 3.41% in the fourth quarter of 2020. So no change between fourth quarter 2020, and first quarter this year. In comparing the first quarter of 21 and 2020, the average yield on loans decreased about 76 basis points, while the average rate on deposits declined about 80. Most of that margin compression resulted from a change in asset mix. We kind of talked about that previously and it's been kind of the thing that's been going on for most of 2020 and into 2021 for us. Our average cash equivalents increased about $329 million and average investments increased about $30 million. And the average yield on those cash equivalents decreased about 106 basis points first quarter this year versus first quarter last year. So that change in asset mix that I mentioned a minute ago was about 24 basis points of the decrease. With the addition, if you recall, last year in June, we issued some subordinated debt And that was about eight basis points of additional cost or reduction in our margin. The additional yield accretion from our FDIC loans was down about 11 basis points from the first quarter last year. So those three components make up really the whole difference of the decrease in our margin from 384 to 341. The average compared to December's quarter The average yield on loans decreased about three basis points, while the average rate on deposits declined 15 basis points. However, the net interest margin, as I said, was unchanged, and that's really got to do mostly with asset mix again, where we had decrease in average loans, increase in average cash equivalents in Q1 this year versus Q4 last year. I mentioned the increase in income on FDIC-acquired loans. What we have left to take to income is about $1.3 million. at the end of March, and we'll have about $800,000 to $900,000 of that will go into income in the remainder of 2021. I'll shift over to non-interest income now. For the first quarter this year, non-interest income increased $2.4 million to $9.7 million when you compare it to the first quarter of 2020. The increases there were primarily net gains on loan sales, as Joe mentioned earlier, significant activity, origination activity in our mortgage business, and a lot of that's called return fixed rate, which we sell in the secondary market. So the profit on loan sales was up about $2.1 million Q1 this year versus Q1 2020. We also had an increase in income on our derivative interest rate products. The net effect of that, we have derivatives that are going both directions. They're back-to-back swaps with our customers and loan counterparties, and as rates have moved a little bit higher, the net impact of that to us is we did recognize about $474,000 increase in that fair value, so that flows through our income statement in the non-interest income category. Last year's first quarter, I think we had net reduction in the market value So that flipped around for us in the first quarter this year. Other income was actually down about $600,000 compared to the first quarter of 2020. In that 2020 period, we had about $486,000 of income related to newly originated interest rate swaps with our customers. And we also had some income recognized on the exit of certain tax credit partnership deals. Non-interest expense, as Joe said, fairly well contained this year versus last. Our non-interest expense decreased about $494,000 when compared to the first quarter last year to a total of $30.3 million in the first quarter this year. Salary employee benefits was down about $1 million. The impact of that really was, as you may recall, we paid out a special bonus to our employees last year. And there was about $1.1 million of expense that was recorded in the first quarter of 2020 related to that. Also, insurance expense increased about $378,000 this year compared to last year quarter. That's really in the FDIC deposit insurance premiums. A year ago, we had credits where we did not have to pay the insurance premiums due to overpayment into the fund. This year, we're paying the full amount and expensing the full amount The last thing was expense on other real estate owned. Our repossession totals and real estate owned totals are down. The expenses on those decreased about $211,000 compared to the first quarter a year ago. The efficiency ratio for first quarter 2021 was 56.33%, and that compared to 58.91% for the first quarter of 2020. You know, the improvement in the efficiency ratio this year was really due to the increase in non-interest income and also a little bit to the decrease in non-interest expense. Joe mentioned just briefly our income tax expenses, our rate was higher. So that rate was, the effective rate was 21% in the first quarter this year. It was a little less than 16% in the first quarter last year. The drivers of that, as Joe said, are primarily the higher overall level of income that we achieved this year and then a little bit lower levels of utilization of low income housing tax credits this year compared to the previous year and also lower levels of tax exempt interest income on municipal securities and some of our loans. And then another factor that plays into it is our state income taxes and how the income is allocated between the various taxing jurisdictions where we have to pay tax. and some of those jurisdictions have higher tax rates than others, and so that plays into a little bit of the tax rate as well. We think, though, that going forward, our effective tax rate is going to be somewhere around 19.5% to 20.5% as we move forward this year. That concludes our prepared remarks at this time, so we'll entertain questions, and let me ask our operator to once again remind the attendees how to queue in for questions now.
spk18: As a reminder to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Andrew Lysch from Piper Sandler. Your line is now open.
spk12: Good afternoon, everyone. Hi. Hi.
spk05: You know, sorry if I missed it, but what is the balance of PPP loans at the end of the quarter?
spk11: It's around $120 or so million, I believe. I don't have that exact number.
spk10: Yeah, I mean, I think it would be, Andrew, because I think we funded $53 million and we received forgiveness on $55. So I would think off of $120, I would think it would be $118, $119, something like that.
spk05: Got it. Yeah, that makes sense. If I take the 3.9 of fee income that's yet to be realized and back into a 3% yield or so on, it's right around $120 million. Okay, thank you. And then it sounds like forgiveness on that is going pretty smoothly. Is there any timing you can provide on how you think that's going to be forgiven? It will be more weighted towards the second quarter or third quarter. What are your thoughts there?
spk10: It would be a total guess from my perspective. I would think the second quarter would be bigger than the third quarter.
spk11: I would think so. I know a lot of our lenders are working with their customers. We've got several things in the pipeline and I know they're doing some outreach to talk to the customers too. I would think that they're going to try to get more of this done in the second quarter, but I'm going to guess some of it's going to spill into the third. That's with the original grouping and then the the more recent originations here that happened since the beginning or since mid January, I mean, I'm going to guess we're not going to see those forgiveness items until maybe fourth quarter to start probably. Right.
spk05: Got it. Got it. And then just rolling in those fees and all the different dynamics that are play here on, on the margin. Like how do you think the margin should perform from this three 41 level? I mean, so you have the benefit from the fees, but it seems like the core trend with, although liquidity coming on might be a detractor from that.
spk11: Well, I mean, certainly the liquidity that we have, and as I said, the mix has dropped us a little bit. So that's really been a lot of the story if you look back to where our margin was in the first quarter of 2020 before the pandemic, sort of a little more normalized time. You know, we... Probably, like I said, half of that drop or so is really related to the mix. Just having a lot more liquidity, we probably have maybe $400 million more of liquidity now than we had then probably. And so the other part of it, as I mentioned, the sub-debt that we issued, that was another eight basis points. And then the income that we're going to derive from... The FDIC loans, obviously, it's five basis points, I think, in the first quarter of this year, and I believe it was 16 basis points in the first quarter of last year. So there's not going to be a whole lot more of that income coming on the books. As I mentioned, 800 or so thousand the rest of this year. So in the next three quarters, it's going to be, you know, that 800,000 is going to get spread in there.
spk10: Yeah, sort of if you exclude the FDIC income, Yeah, Andrew, I think there's still some remaining pickup as a result of primarily time deposits continuing to reprice. But I don't think anybody thinks there's meaningful increase in our margin from here. until we see higher interest rates.
spk11: Would you agree with that, Rex? Yeah, I mean, what we're probably going to see is, like Joe said, our time deposits are going to reprice down over the next two or three quarters. We might see a little bit further reduction of rates on the non-time deposit balances, but I think those are like 19 basis points or something now, so there's going to be a limit to how much lower they can go. And what we're seeing on the loan side is a little bit of a reduction in loan balance rates really because of the things that are repaying. Like Joe said, we've booked a lot of new loans. We've generated a lot of loans. We just have a lot of repayments going on too. And a lot of those loans that are repaying are maybe going to be 4.5% kind of rates. and the new loans going on are maybe closer to 4% or something like that. So we're seeing a little bit of headwind from that as well that's offsetting the good that we have from CD rates continuing to go down.
spk04: Got it. Okay. Thank you so much for taking the questions.
spk21: Thanks, Andrew.
spk18: Thank you. Our next question comes from the line of Damon Del Monte from KBW. Your line is now open.
spk07: Good afternoon, guys. Hope everybody's doing well today. Hi, David. So my first question, just on the, and I apologize if you covered this in your prepared remarks, I was jumping between conference calls, but just in terms of how we should think about the reserve level and the provision going forward. I mean, obviously the adoption of CECL was quite a big boost and just given the strong underlying credit trends of the portfolio, you know, is it, Is there a way you can kind of frame out what a range for the provision could look like in the upcoming quarters?
spk10: I think a lot is going to depend on loan growth, really, frankly. I would think if you assumed a flat loan portfolio, we sort of believe with our loan portfolio at the level it's at right now, we've got the right reserve level. So if you have a flattish loan portfolio and no charge-offs, you wouldn't think provision expense would be too high. If you have a little bit of charge-offs, then you're going to have to probably not replace your charge-offs, but you would generally think you're going to have to have some provision expense if you have... a level of charge-offs.
spk11: The other piece of it that you'd have to think through, too, is what your forecast is for the economy moving forward as well.
spk06: Yeah, that's right.
spk11: How you see that looking in the next 12 to 18 months, that kind of thing.
spk06: Right.
spk11: If there's drastic changes there. And the other piece of that, too, is the unfunded. As we mentioned earlier, the unfunded commitments have to have a reserve against them. They're not part of the allowance for credit loss. They're a different thing. They're Same kind of concept, so as that pipeline grows or declines, there's going to be differences that you're going to reflect there, too.
spk10: Yeah, I mean, that's a good point. If you had, I mean, we have about $1.3 billion in unfunded. If that went up 10%, it would be reasonable to assume that that allowance for the unfunded commitments might go up 10% as well. And, you know, that's $800,000. Okay.
spk07: But from like a pure loan loss reserve perspective, so you're at like 159 excluding PPP, you don't think it needs to go higher than that, right? If anything, there should be a bias for some reserve release going forward?
spk10: Well, I mean, I think we think we're appropriately reserved at this point. So, you know, yeah, I mean, I guess I agree with what you're saying.
spk07: Okay, fair enough. That's helpful. Thank you. And I guess my other question on expenses, again, I apologize, Rex, if maybe you called out some one-time items that weren't repeatable, but can you help us think a little bit about a good core run rate going forward to go off of?
spk11: I don't think really in the first quarter of this year we really had too much that was not fairly standard. Our expenses... are going to be a little higher related to the mortgage business because as long as the mortgage business is still robust, we're going to generate a lot of fee income from the profit on the loan sales probably, but we're also having to do some compensation to our producers and things like that. So those expenses, all things being equal, should be fairly consistent, I would think, as we move forward. I don't really think there was...
spk10: We didn't call out anything on the expense line as being sort of unusual, no.
spk07: Okay. Okay. That's all that I had. Thank you very much. Appreciate it.
spk10: Thanks, Damon.
spk18: Thank you. Our next question comes from the line of John Rodas from Janney. Your line is now open.
spk09: Good afternoon, guys. Hope you're doing well. Hi, John. Just, I guess, just a question on capital, obviously, so you adopted CECL, but, you know, Joe, I think as you alluded to, your capital levels remain pretty strong, TCEs north of 10%. Can you maybe just remind us again your sort of bias towards uses of capital going forward? And, you know, I know you bought back some stock during the quarter, but just sort of give us an update.
spk10: You know, I think what we've said before Obviously, if there was something really opportunistic on the acquisition side, we would be interested in that. But to remind you, the way we view acquisitions is we're going to have conservative assumptions and based on very conservative assumptions, particularly with respect to growth, with the target company. Based on those assumptions, we want the thing to be a good deal to our existing shareholders. And generally, we don't find those kind of deals out there. We did 10 years ago when we were buying banks from the SDSP, but we really haven't to any big extent since. So as between stock buybacks and dividends, We would probably prefer stock buyback, you know, especially given where we were able to buy our stock back, you know, in 2020 at close to book value. It's, you know, it's spread out from book value now, you know, and so, you know, stock buybacks are not quite as attractive as they were. It's not to say that we wouldn't buy back some stock at these levels, but it's not as attractive as it was back in 2020. And so that would leave special dividends or an increase in the current dividends, possibly.
spk08: Okay. Sounds good. Thank you, Joe.
spk18: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Joe Turner, President and CEO, for closing remarks.
spk10: Okay. Well, again, we appreciate everybody for taking the time to be with us on our call today, and we look forward to talking to you in about three months. Thank you.
spk18: This concludes today's conference call. Thank you for participating. You may now disconnect.
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