Good day, and welcome to the First Bank First Quarter 2021 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Patrick Ryan. Please go ahead.

Thank you. I'd like to welcome everyone today to First Bank's First Quarter 2021 Earnings Call. I'm joined today by Steve Carman, our Chief Financial Officer; Peter Cahill, our Chief Lending Officer; and Emilio Cooper, our Chief Deposits Officer. Before we begin, however, Steve will read the safe harbor statement.

The following discussion may contain forward-looking statements concerning the financial condition, results of operations and business of First Bank. We caution that such statements are subject to a number of uncertainties and actual results could differ materially, and therefore, you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties are described under Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2020, filed with the FDIC. Pat, back to you.

Thank you, Steve. I'll plan to hit on a few of the highlights and then turn it back to you, Peter and Emilio, to provide some additional detail. Overall, I think it was a very strong start to 2021. Here are a few highlights. Our cost of deposits continue to move lower, pushing our net interest margin higher. Our noninterest income categories all came in above budget for the first quarter. Expenses looked a little higher than our guidance from last quarter, but those numbers also included over $300,000 in accelerated expense tied to the consolidation of some of our back office space. Our asset quality metrics continued to improve. Delinquencies declined. Deferrals declined, and we saw net recoveries during the quarter. PPP production in 2021 has been stronger than expected. We have funded over $100 million in new PPP loans so far this year. PPP income of $1.6 million did help during the quarter, and we expect approximately $6 million in additional PPP fees going forward. We did not use the lowering of our allowance ratio to support earnings in Q1. While our provision was negative, that was based on lower loan balances at the end of the quarter. If economic conditions continue to improve, we may see opportunities to actually lower our ALLL ratio as we move forward throughout 2021. So to misquote Tom Cruise in Jerry Maguire, investors have been saying to us for some time, "Show us the earnings." That is exactly what we're trying to do. With our evolution from an early stage growth to profit-focused entity, we are starting to show the true earnings power of the franchise, and we think there's more to come. We can continue to move deposit costs lower. Our fee income efforts are bearing fruit. Our expense savings initiatives will keep a tight lid on costs going forward, and our loan pipeline remains very healthy. And above and beyond the core earnings strength, PPP fees and lower credit costs could also support earnings as we move through 2021. At this time, I'd like to turn it over to Steve Carman, our CFO, to discuss additional financial details for the first quarter 2021 results. Steve?

Thanks, Pat. For the three months ended March 31, 2021, we earned $9.7 million in net income or $0.49 per diluted share. That compares to $3.2 million or $0.16 per diluted share for the first quarter of 2020. The factors contributing to our record profitability included a credit to the provision for loan losses, increased noninterest income, an increasing net interest margin and controlled noninterest expense growth, which contributed to an efficiency ratio of below 50% for the first quarter of 2021. After finishing 2020 with strong growth, our loan portfolio in the first quarter, excluding PPP loans, declined approximately $82 million due primarily to loan prepayments. As a result, in the first quarter of 2021, there was a credit to the provision for loan losses of about $1.1 million due specifically to the reduction in the loan portfolio, excluding PPP loans. Supporting our allowance for loan losses for the quarter were strong asset quality metrics. For example, nonperforming assets as a percentage of assets was just 0.47%, and our allowance for loan losses as a percentage of nonperforming loans was 214.74%, a strong coverage ratio. In the first quarter of 2021, total noninterest income totaled $2.3 million compared to $1.2 million for the same quarter in 2020, an increase of $1.1 million or 89.5%. Three areas of notable increases were loan fees, gains on sale of loans and gains on recovery of acquired loans. Loan fees, primarily loan swap fees, increased $415,000 for the comparable quarters. Gains on sale of loans, primarily from SBA loan sales, showed a $436,000 improvement in Q1 2021 to Q1 2020. Lastly, there was a $189,000 increase in gains on recovery of acquired loans. Over the last several quarters, we've discussed our efforts in enhancing and strengthening our core profitability. We focused on moving…

Thanks, Steve. As outlined in the earnings release, total loans in the first quarter were down $25 million or 1.2%. We did experience the reduction in commercial loans that we talked about in the last earnings call for 2020 fourth quarter. You might recall that we finished 2020 with a very strong quarter. For the fourth quarter alone, we reported loan growth of around $97 million, exclusive of any impact from PPP. That was a big quarter for us, and it came from a combination of both C&I loans and investor real estate loans. We knew at the time, however, that we had a number of loans where our customers notified us of upcoming payoffs, primarily in the investor real estate area. I noted back in January that we'd see some first quarter prepayments offset by normal loan generation plus the addition of new PPP loans that we had in process, and that's what we had. New loans funded in the first quarter, exclusive of PPP, approximated $70 million. Unfortunately, but again, as expected, prepayments of investor real estate loans were a little over $100 million. When you add to that some large reductions under lines of credit, and the normal amortization of term loans, the result was the negative loan growth that Steve described. We did earn some prepayment penalty income on many of the commercial loan payoffs. Also adding to the payoffs I mentioned was the sale of the guarantee portion of 4 SBA loans, 7(a) loans, which totaled around $5 million. Fee income related to these sales was mentioned in the release. SBA lending is an area I've talked about on previous calls. We have a small team focused solely on SBA loans and concentrating mainly on 7(a) loans. They're off to a great start, and I…

Thanks, Peter. I'm happy to report we are off to an extremely positive start in our deposit side of the business. For 2021, our focus remains consistent and intentional: grow low-cost core deposit, improve the mix, lower cost of funds, deliver best-in-class service and grow fee income. Thanks to great collaboration between the lending, cash management and deposit teams, we are very pleased with the results we have seen for the first quarter. We did a fantastic job in the first round of PPP in 2020, so it is no surprise that the team stepped up big time and is doing an even better job in the second round of PPP. This round of funding certainly had a positive impact on our deposit growth in Q1. Key highlights of our deposit performance for the quarter are as follows: noninterest-bearing deposits are up $76 million or 18% from the end of 2020. Interest-bearing checking is up $6.5 million. Money market and savings are up $14 million. Time deposits are down $30 million. Total deposits have grown nearly $67 million from Q4. Our growth goal for the year is $97.6 million, so we are off to a very strong start compared to goal. It is important to mention that we do expect to see some reduction in deposit growth as we progress through the year as customers who received PPP or other stimulus funds put that money to use in the economy. As it relates to our focus on adjusting our mix, we achieved a huge milestone for the bank in Q1. Noninterest-bearing balances now represent 25.4% of deposits, and time deposits represent just 25.1%. This marks a major milestone as our noninterest-bearing balances now represent a greater percentage of deposits than our time deposit balances. Over the course of the last…

Great. Thanks, Emilio. Thanks, Steve and Peter. At this point, I'd like to turn it back to the operator to open things up for the question-and-answer session.

[Operator Instructions]. Our first question today will come from Nick Cucharale with Piper Sandler.

So I wanted to start with expenses. I heard your comments on the accelerated expense in the quarter. But can you help us quantify the impact of the branch consolidations and the reduced corporate office space on the occupancy line going forward?

Yes. I mean some of that was baked in, Nick, when we provided guidance last time around. As I mentioned, there was a specific cost in the first quarter related to some accelerated depreciation and some other things we had to write down as part of a termination of the lease we had for some back office space. And the impact of the savings from the 2 branches that we closed won't sort of fully funnel in until later this year, I think in one case, the lease, runs through August, although we have been able to reallocate the personnel. The other one is an owned location, so there won't be a rent savings. But depending on how we're able to either redeploy that space or potentially even look at sale of property, there may be some impact going forward. But I think the biggest piece of it was the lease that we didn't renew, which was roughly $300,000 in annual rental cost plus additional depreciation, maintenance, et cetera. So I think there'll be some nice savings for us as we move forward. That lease expired at the end of March. And just one of several areas that we continue to look at on the cost side.

Great. That's very helpful. So I appreciate the positive commentary on loan demand in the coming periods and the big increase in the pipeline since year-end. Have the prepayments normalized in April? Or have they remained elevated?

Well, I mean we're obviously -- or, I guess, through April, but that only gets us a month into the quarter. So to try to estimate a trend out of 3 or 4 weeks is a little tricky in the loan prepayment world. I'll turn it over to Peter if he's seen anything specific so far at the beginning of Q2. But those are things that kind of come in bunches. You have a couple and then you don't have any for a while, and then you have a couple more. But Peter, anything you'd add to that in terms of trends you're seeing so far?

No, I would say we hope that normalized. I mentioned our loan funding projections we do for our finance team. And we're projecting for April and May. We look out -- I would look out more than 60 days, but you're projecting payoffs. So these are prepayments basically of $22 million. And we haven't seen anything exceed that number that comes to mind. So I think that's probably a more normalized number, and that's kind of where we are, as Pat said, 3 weeks in.

Okay. So it's fair to say you expect the net growth to be pretty healthy in the second quarter outside of any kind of un-normal activity.

Yes. I mean we hope so. Our -- I think our plan for the year was to grow loans 6%. And we had planned basically a fairly flat first quarter, knowing what we're facing. So yes, we plan on making up the small hole we're in and achieving plan for the year.

Okay. Very helpful. And then in terms of funding costs, a really significant reduction year-over-year. Where do you think that eventually stabilizes?

Yes. I don't know, Nick, it sort of depends on the rate environment and maybe more importantly, that's the competitive environment. But with short-term rates seem to be staying low for the foreseeable future. And perhaps more importantly, banks dealing with excess liquidity, I don't see there in the short run being a real impetus to drive competitive pressures on the deposit side. I don't see the Fed moving short-term rates. And so as we continue to have term deposits mature, we'll continue to reprice and lower. And Emilio and his team have done a great job looking at our standard rates on deposit products. And I think over the course of the first quarter, he moved those lower once or twice as well. So I think it's a little bit here, a little bit there. The magnitude of the impact will start to shrink, but I think we'll continue to see those costs trickle lower over the next couple of quarters.

Your next question will come from Bryce Rowe, Hovde.

I wanted to ask about the SBA business. Obviously, a nice hit here this quarter with fee income. Just curious how consistent those loan sales will be. I mean it sounds like you've put a little more -- more off behind that effort.

Yes. I mean, listen, I think it's something that won't be as smooth on a quarterly basis as some other lines of business. But as Peter mentioned, having a dedicated centralized team has made a significant difference. And our ability to now funnel those opportunities that we were seeing in the past to a group that is knowledgeable in the process can keep things moving quickly, get things done faster, make sure all the administrative Is are dotted and Ts are crossed. I mean all of those, I think, give us optimism for continued good results in that area as we move forward. But Peter, anything you'd want to add there?

Well, just that their pipeline is very strong. I mean the SBA has an attractive product out there, now, as you may know, on the 7(a) side guarantees up to 90%. And they're waiving application fees from the borrowers. So that's a selling point that we've been trying to utilize whenever possible. So yes, I mean, having the team there can process these things and get them across the finish line, it's great. Previously, we had your average commercial RM trying to respond to SBA needs. And it's got just kind of cumbersome. Deals were spread out all over 20-odd RMs. And now they're focused where the RMs make the referral to this team, and they do the underwriting and processing and sale of the guarantee portion. So it's much more efficient, I think. And the RMs are more apt to make a referral than get bogged down trying to drag a deal through to approval.

I would just add to that, and this is, I think, probably speculation at this point. But if you think about what's going to be happening in the small business world over the next 12 to 24 months, right, a lot of companies that obviously had challenges in 2020 are going to be looking for financing this year -- next year based on historical results that won't look great, balance sheets that probably get damaged a little bit. And so I think the SBA may be a good place for some folks that were able to survive the storm, but certainly took some advantage and probably need a year or 2 of better results to get back to a point where maybe they don't need SBA support. So I do think you're going to see a higher percentage of small business financing happening through the SBA, partly because of the financial results they're going to be trying to use to get financing. And the fact that the fees have been late make it a much more attractive option for them as well. So I just think that's going to be a bigger area of focus across banking over the next year or 2. And I think we should be well positioned to benefit from that as well.

That's good insight. Pat, I appreciate it. I wanted to kind of move on to capital and use of capital. Maybe you can provide us an update on buyback activity for the first quarter. It looked to be a little lighter than maybe we saw in the first half of last year. And so any commentary around kind of appetite to buy back the stock, especially with it now below tangible book value?

Yes. I think there certainly is appetite. As I'm sure you're aware, when you set up these 10b-5 programs, you don't always have as much discretion as you like in terms of periods of blackout and instructions you provide that can't be changed during the period of blackout and all sorts of rules about their inability to buy, to start off the trading day or to close out the trading day. So sometimes, execution can be a little bit more challenging than you'd like. But as it relates, I think, generally to your question, do we think it's an attractive investment to buy our stock back at or below book value? The answer is absolutely yes. It's just sometimes the execution doesn't go as quickly as you might like. So...

Okay. That's fair. And then one kind of nitpicky model question. You guys have called out some level of prepayment activity here. In the second quarter, any kind of guidance in terms of what prepayment fees look like tied to that or just generally for the second quarter as we think about margin?

Yes. And I would say, Steve alluded to it in his remarks, we kind of budgeted $330,000 a quarter. And that number is pretty significant standard deviation, right? Some quarters, it's $100,000 and some quarters like first quarter, it was $670,000. But that number probably will end up doing better than that this year just because of how strong the first quarter was. But prepayment income isn't the kind of thing where if you have a good first quarter and prepayment income went good might be the wrong word there. But if you have a lot of prepayment income in the first quarter, that doesn't mean you'll have a lot in the second and third. Chances are it probably means it will be down in the second and third quarter. But over the course of the year, I don't see any reason why the average of $330,000 wouldn't still be the number we'd be looking at, at this point.

Next question will come from Erik Zwick with Boenning and Scattergood.

Maybe I'll just follow up a kind of a follow-on question to Bryce's last question there about the margin. And thinking about kind of the core margin first, I think last quarter, you mentioned, excluding the impact of PPP, the core margin was about 3.4%. The fees from PPP this quarter were $1.6 million. So if I back that out, get to around 3.3% or so. So you've mentioned the opportunities to continue bringing down the deposit cost of the CD portfolio specifically presenting an ongoing opportunity. Just curious about the trajectory of the core margin from here at this point.

Well, I think the trajectory of the core margin will improve. I think you hit on one of the variables in the margin, right, the PPP impact. We also had elevated prepayment fees that flow through the margin. So that bumped it up a little bit in Q1 as well. But if you kind of strip all that out, I think loan yields will hopefully stay where they are, maybe come down a little bit. Obviously, what happens in the long-term section of the rate market will impact that to some degree. But if anything, I think we can continue to move deposit costs down. So I think if you kind of stripped out prepayment penalty income, PPP income, I think that core margin would be relatively stable, maybe get a little bit better.

Erik, this is Steve. I think our margin -- core margin is probably closer to 3.40%. I mean just to make sure for modeling purposes, you're also -- I'm sure you're backing out the PPP average balances. And so we see our margin just a little bit higher than that core 3.30% after we back out the average balance of PPP loans.

Got it. That makes sense. And then just in terms of thinking about the kind of the all-in and reported margin going forward, I know you mentioned about $4.8 million in remaining unamortized fees. Curious if you could break that out into what is kind of related to the 2020 PPP originations in '21 as I think about kind of the timing as those flow through.

Steve, if you have that breakout -- I could take a guess or if you have the numbers handy.

I don't have the numbers directly in front of me. But clearly, it's all obviously predicated, I guess, on some of forgiveness. Our -- if you take a look at the amortization of round 1, it's been close to $500,000 a month or about $1.5 million a quarter. And then it's just impacted by level forgiveness. Obviously, round 2 with the $101 million, as we're still getting our traction there, it's a less type of run rate based on a 5-year type of payout as opposed to 2 with round 1.

Yes. And I would just add to that, Erik. I think if you looked at where we were at year-end, I think we had about $3 million in unamortized PPP fees from the 2020 loans, and we had $1.6 million come into income during Q1. That was almost exclusively tied to that portfolio. So call it, $1.5 million left from that group. But then there's some loans that we've made that we haven't applied for forgiveness or for the fee yet. So I think the total of remaining PPP fees is probably closer to $6 million. And I'd say 3/4 of that is going to come from loans we've made this year in 2021 and 1/4 is the remainder of last year's loans.

Okay. Great. That's helpful. And then last one for me. Switching gears to credit. You mentioned in the prepared remarks that most of the provision -- the kind of negative provision this quarter was driven due to lower balances and really haven't had any release for an improved economic outlook or any other kind of factors improving in your loan portfolio. So as we think about the opportunity for additional reserve releases going forward, how do you feel -- or where do you feel kind of the equilibrium level for the reserve might be if we get back to a more normal economy with kind of steady growth and minimal credit risk looking forward?

Yes. It's a good question. It's a little hard to speculate because you don't really know what that new normal economy looks like. But I'd say one way to think about it as you look at what we set aside last year in provisions, it's probably $5.5 million, $6 million more than what we would have done in a typical year. Now is all of that going to come back out again? I don't know, right? I mean our allowance model is going to dictate our overall level of the allowance, which will ultimately drive provisioning together with net charge-offs or recoveries. But there obviously was a lot of additional provisioning last year that so far hasn't translated into significant additional credit problems. So is it fair to think that some of that, if the economy continues to improve, would come out? I think that seems like a potential scenario that could play out, but we're just going to have to see what the data tells us and what the [indiscernible] tells us.

[Operator Instructions]. Our next question today will come from Christopher Keith with D.A. Davidson.

So just looking at the C&I portfolio, what portion of the portfolio is related to lines of credit? And can you share where about the utilization rates are today?

Yes. That's a good question. I don't know, Peter, is that data you have handy or might be something we'll need to break out for next time? But...

It's really not something I have handy, utilization rates. That's something we have to break out for next time, I think.

That's okay. No worries. And can I...

C&I -- yes, just as a number show, C&I is about 20% to 22% of the portfolio. And that includes PPP, don't forget. So the number is probably a little higher than it may normally be. But utilization rates, I just don't have right now.

I mean I would say, anecdotally, we haven't seen, Chris, a significant change, but we'll get some data to support that.

Okay. Appreciate it. And then can I just confirm that the guidance for 6% for the year, is that excluding PPP loans?

Yes. I guess you have to clarify 6 -- the 6%, I think of it more -- and we -- what did we say, Peter, $120 million in net non-PPP loan growth for the year?

Yes, yes. That does exclude PPP. Yes. We said $120 million over, what was it roughly $2 billion at year-end. So that's about 6%.

Got it. That's helpful. And then I guess just turning to the margin. You made some commentary around the yields, which I appreciate. I guess I'm just curious, overall, where loan yields -- where the average loan yield is coming on today for new loans?

Yes. It really depends on the type of loan. I think given the investor real estate segment, you're probably seeing things plus or minus really strong credits, you're probably 3.5 or a little less. And good credits, but maybe not -- as for senior, probably closer to 4%. And we're probably getting better than that on the C&I in terms of the term loans and things. But Peter, I know you track for the monthly Board meetings the weighted average yield on new loans. So I don't know if that data you have handy or not.

No. Those numbers relate to, yes, new loans getting put on for the month. I don't have it with me right now. But the numbers you described are what we're seeing, roughly mid-3s to 4 on average.

Got it. That's helpful. And then just last one for me. I noticed that average securities had declined. And is that just a product of payoffs kind of overweighing the ability to find new paper? Or is that more of a deliberate reduction?

Maybe ask that question again, Chris. I'm not sure I was following you there.

Just looking at average securities, I noticed that it had declined. And I'm curious if paydowns in the securities portfolio drove that or if it was a deliberate reduction in the securities portfolio. And I guess what I'm really getting at is, if we can maybe kind of get an understanding of what direction the average securities portfolio might go over the next few quarters.

Yes. I mean I think we've been trying to put some excess cash to work in the securities portfolio over the last month or so. But I would also say we're doing it cautiously, right? I mean there's obviously concern about inflation and what that might do to the long end of the yield curve and what that could do to the market value of secured is purchased today. So I'd say we're taking a cautious approach. But obviously, in an environment where you're not earning much on your cash, it's -- there's a cost to sitting on the sidelines, too. So we're trying to strike the right balance. I think at the end of the day, if our excess cash position remains elevated, we'll be a net buyer here and there, but we're not looking to put hundreds of millions to work in the bond market right now. So...

[Operator Instructions]. There being no further questions, this will conclude our question-and-answer session. I'd like to turn the conference back over to Patrick Ryan for any closing remarks.

Great. Thanks. So I'd just like to thank everybody that took the time to listen in today, and we look forward to reconnecting with folks after the second quarter. So thanks, everyone.

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