Howard Bancorp (HBMD) Q1 2021 Earnings Call Transcript

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Howard Bancorp (HBMD)
Q1 2021 Earnings Call
Apr 22, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Howard Bancorp, Incorporated First Quarter 2021 Financial Results Conference Call. My name is Robert, and I'll be your operator for today. [Operator Instructions]

I would now like to turn the call over to your host Robert L. Carpenter, Executive Vice President and Chief Financial Officer of Howard Bancorp, Incorporated. Mr. Carpenter, you may begin.

Robert L. Carpenter -- Executive Vice President, Chief Financial Officer

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'd 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 those warnings, I would direct everyone to Page 2 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 identify 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 a 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 not to establish with the markets any earnings, margin or balance sheet guidance.

With that said, I will now introduce Mary Ann Scully, Chairman and Chief Executive Officer of Howard Bancorp.

Mary Ann Scully -- Chairman and Chief Executive Officer

Thank you, Bob. And thanks to all of you who are on the call. We know what a busy earnings season this is for all of you, and we appreciate the fact that you've prioritized our information today, so thank you.

I'll begin as I usually do with a strategic view of the Company and our investment value thesis. This is relevant because it does guide most of our strategic decisions and also serves as a benchmark against which we measure our progress on a monthly and a quarterly basis. I start 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. This has a very tangible impact on our ability to attract capital, and then the portfolios that come with human capital, and that in turn translates into loan growth and revenue improvements.

We've recently made a number of successful talent acquisitions. Rob Kunisch, our COO and President will discuss a number of those. We have always maintained a higher-than-normal commercial focus, focusing on the small and medium-sized businesses that dominate both Baltimore and Washington market place. And while the industry is awash with liquidity right now, we still maintain and believe that a high-quality core deposit franchise will provide us with enormous opportunities that again 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 environments, loan yield compression, high liquidity rates. And it's helped not only by the deposit portfolio, but by the fixed-rate loan portfolio that we have.

We have maintained disciplined expense management, very conscientious resource allocation. And as a result, we're showing strong EPS and PPNR growth, while we're also able to add to our allowance and maintain strong asset quality trends. Randy Jones, our Chief Credit Officer, will go into more detail on those today.

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 a 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, a map. And I think that there has been perhaps some neglected the fact that two of the most vibrant counties within the Greater Baltimore marketplace, Howard and Anne Arundel County are very close to the Greater Washington/DC marketplace. The familiarity that we have with these markets as the bank actually started in one of these markets 16 years ago. The physical proximity to the market means that the Greater Washington move is not a wild extension of our strategy, but rather represents a movement into a contiguous markets, where the opportunities are 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 DC. 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 some positioning that would show what a natural extension this is for us.

And with that, I'll turn it back to Bob to talk about some of the financial highlights.

Robert L. Carpenter -- Executive Vice President, Chief Financial Officer

Thank you, Mary Ann. So we had a strong quarter with $0.33 earnings per share, and what we see is a nice growth rate over the fourth quarter of 2020 at 38% and 83% growth in EPS over the same quarter a year ago. Certainly, our results were benefited -- continued to benefit from the PPP program. And again, we expect that -- we'll talk about PPP later, but we expect some continued quarters as we see more and more forgiveness of the PPP portfolio.

One of the items I'd note on Page 6 of our deck was the fact that our book value per share and our tangible book value per share, both actually declined from the fourth quarter, although our earnings per share were $0.33 a share. And what we saw is with the rise in intermediate and long-term treasury rates that had an adverse impact on the market value of our mortgage-backed securities portfolio, and that impact on our accumulated other comprehensive income was $0.45 per share reduction in both book value and tangible book value.

Our -- again, our earnings at $0.33 a share, $6.2 million, 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 cost -- in our expenses in Q1 related to our expansion into the Greater -- our expansion in the Greater Washington marketplace. But again, expenses at $12.3 million were within our expected range. And most importantly, relative to Q4 on a core basis where we exclude certain non-recurring items, we were down about $700,000.

When we look at some of our profitability measures, a couple of important takeaways that I would like to mention is, you'll note that in the Q1 we did achieve on a -- 10% plus return on tangible equity, and as well as excess of 1% tangible return on average tangible assets. 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 our PPNR to our average assets was 1.5% for the quarter. So again, we're benefiting from the PPP performance, but our challenges in the organization is as we move through time and PPP moves away, that 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 Rob.

Robert D. Kunisch -- President and Chief Operating Officer

Thanks, Bob, and good morning, everybody. Slide 9 outlines our PPP efforts, both in Phase 1 and Phase 3 of that. The note at the top, those are our 2020 originations. A couple of things that I'll highlight here. About 45% of the total dollars had been forgiven to date. I think that's a little bit slower than what we anticipated, but it's largely driven by the customer and their timeliness and completeness of their application, and by the SBAs timing on reviews of the loans that were over $2 million. We're seeing a very slow process on those loans, and actually stretching beyond the 90 days that they originally indicated they would be complete by. As of yesterday, we still have about 337 borrowers, who have not made application. A 105 of those are at various stages of completing their application within our portal today. So we expect to see the PPP forgiveness from one -- the first phase continue to accelerate here in the second quarter.

The bottom half of this slide summarizes what we've done in round three. 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. Customers making application for this program or in highly impacted industries, are benefiting from the program. And I would state that given the slower pace of this program, combined with our ability to automated internally, it's really seamless for our customers and it's a pretty limited distraction for our employees internally.

I'm turning to Page 10, 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 these loan types account for about 35% of our total loan portfolio, excluding PPP. Our residential portfolio was flat for the quarter. This was achieved by increasing our corresponding activity, and by proactively making outbound calls to borrowers who may be considering a refinance. Our goal here is to maintain this portfolio at a consistent percent of our total overall portfolio. Our CRE portfolio as a 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 in their 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.

On Page 11, we 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 than the fourth quarter due to elevated payoff activity. The payoffs were largely due to people selling companies or properties ahead of a change in the administration in anticipation of a 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, and 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. And as 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 grow pretty significantly. As mentioned previously, we did close 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, 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 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 are very happy with the quarter. We are excited about our move into the Greater Washington area. We are seeing a strong pipeline growth throughout all of our lending divisions, which include the business lines that can give [Phonetic] the granularity to our portfolio, such as our business banking, our broker marine and correspondent banking. So overall, strong quarter and we expect more of the same going forward.

With that, I'll ask Randy to talk about our deferral activity.

Thomas (Randy) Jones -- Executive Vice President, Chief Credit Officer

Sure. Good morning, everybody. This is Randy Jones. Slide 12, we disclose -- we continue to show our potentially highly impacted loan sectors. We began tracking and reporting this last year during the pandemic. These are kind of universally accepted as some of the more impacted businesses. I think the takeaway from this is, majority of our deferrals remain in these sectors. Also, the majority of our criticized assets and our asset quality migration trends are reflected from these potentially highly impacted loan sectors. On the positive side, we've been able to direct as you see over on the right hand side, a significant amount of relief to some of these sectors through the PPP program, which has been highly beneficial.

Slide 13 just reiterate some of the characteristics of the exposures we do have in these sectors. I think on a positive note, we do, as we say, have a very minimal exposure in travel and other sectors that could be problematic and are problematic for others. We don't share in that with our exposures. Loan deferral trends, you can see the long-term trend here over several months. Clearly, they're down significantly, but remained at about the level we saw at the year-end. I would say a couple of comments on the deferrals. Again, they're concentrated with those highly impacted sectors. We're also trying to migrate the mix of these deferrals from maybe a full deferral to now paying interest, and as these businesses climb back. So we're seeing the severity of the deferral abate a bit, and we'll be continuing to try to nurse those customers that remain on deferral kind of back to life in the next coming quarters.

That can be evident somewhat on the Slide 15 where you see our breakout of the type of deferrals. We are seeing a decline in full payment deferrals, increasing the principal-only deferrals. And a couple of our principal-only deferrals were projects we may have extended the leasing periods for. They -- I consider those are deferral and a COVID-related deferral, but I think in situations outside the pandemic as possible, we would be working with people to give them a little bit more time to lease up a project. During this time frame, we're throwing those in the category of loan deferrals.

Our asset quality trends, I believe, remain fairly strong. Our non-performers are down this quarter, largely to a couple of a resolutions we took in the first quarter. That does translate into some charges, which we'll talk about in a minute. Delinquency is following our normal seasonal patterns. We traditionally see Q4s and -- first and -- fourth and first quarters higher delinquency than second and thirds, and we're seeing this follow our very traditional kind of pattern there. Classified loans increased slightly from fourth quarter to first quarter. If you're tracking this note though about special mention, you realize that while there is some migration from special mention into our criticized categories, there are also correspondingly had to be some migration upwards into better-rated categories. So about half our special mention 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 the ones that move down further, comprised of a hotel or res -- and two restaurants. So clearly, again, we're talking about those highly impacted sectors.

Our allowance on Page 17 ticked down a bit. This is related to the charges. The charges you see in the first quarter. We're really concentrated with three credits. I'll say, one of those credits is directly pandemic-related, comprised about half of charges that we set up a reserve for that in the fourth quarter. We're still working on the resolution with our company. It's still operating. But we did take a large charge on that. The other half of these charges were two other credits that has really nothing to do with the pandemic. They've been in workout for extended period of time. One of those was a large single-family home and the last piece relationship that we were working through. We kept getting the foreclosure sale bond. We decided to sell the note, because we had large carrying costs. So again, that workout goes back to 2007. So that's a very long-term issue we've been working through.

With that, I'll turn it back to Bob, I believe, to talk about the capital position.

Robert L. Carpenter -- Executive Vice President, Chief Financial Officer

Well, before I -- thanks, Randy. And before I just get into capital, just a follow-up comments on the allowance. As those on the call saw, we did reduce our allowance by $800,000 over the year-end level. The allowance as a percentage of our portfolio loans, which we -- which excludes our PPP loans, we ended at 1.05% for the quarter, compared to 1.13% at year-end. One thing I just want to really emphasize is that we had, again, a specific allocation attributable to one credit, which then converted to charge-off in Q1. Our general allocation, the allowance at year end was 1.08%. So think of it that way, it's a minimal reduction in the allowance percentage.

One of the things I'd -- 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 on our allowance. I've made this comment on our previous calls. Our allowance build through the course of 2020 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, we're cautiously optimistic that there may be opportunities for that allowance to trickle down even further over the course of the year.

On Page 19 of our deck we talked about capital. There's not really a 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 tangible book value and our book value per share. So let's get into some of the interesting areas like yields and rates and net interest margin.

So for instance, on Page 20 of our deck, we talked about our loan yields, which were down pretty dramatic 55 basis points from Q4 2019, just the impact of the rate environment, which is, again, pretty dramatic. If we look at a couple of the metrics here, we see big ramp-up in the 10-year treasury from its bottom in August of 2020. That's turned a little bit here since quarter-end. We think that certainly has -- that run-up in the treasury rates likely has had some positive impact on some of our new loan rates, 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 customer CD weighted average rate continues to work its way down. We've had some high rate CDs maturing. The run-off rates have been in line with our expectations, and we expect to see that cost of liabilities continue to trickle downward. We're 78 basis points for the quarter. We expect that to be in the low-50s in Q2 and dropping even more later in the year. Our overall thinking on our cost of funds, which we define as our interest-bearing liabilities plus our DDA balances, we were 28 basis points for Q1 of this year. And we still believe that there is -- while there is less opportunity, we still believe that there is a little bit of opportunity for that to drop more in the 25 basis point range through the remainder of the year.

One comment I want to make in terms 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. The impact they have on our earnings because, for instance, we've had some high payoffs with some sizable fair value marks. That mark accretion hits interest income in the period of those payoffs. So I'd like to look at our loan yields excluding that effect, and to put that in perspective, our 4.15% portfolio loan yield, excluding those impacts is 3.98%. So what we've -- what we saw was about a 6 basis point drop in that, what I call that clean loan yield. That again, excludes PPP, excludes fair value. About 6 basis point decline from Q4 to Q1. Certainly, that was in line with our expectations. And we -- again, we expect some of that loan yield compression to continue through the 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 NIM. Again, our operating net interest margin, we exclude the impact of PPP and the fair value adjustment accretion. So what you see -- and this is a fairly steady trend. We were 3.21% on an operating margin basis at -- in Q4. We're at 3.20% here in Q1. We're -- again, we're cautiously optimistic that we can maintain that margin in a fairly tight band of maybe within 5 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 on the prior pages. We have seen, as we looked at our first quarter activity, again a strong quarter in loan growth. And what we found 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 our loan yields over the course of the year. On the other hand, what we also saw was that high prepayment activity we saw in that residential mortgage portfolio, well, certainly had an adverse impact on the residential mortgage yield relative to our expectations.

Deposits is a story that we know the industry is awash in lots of deposits. And ours -- we're no exception. So for instance, our non-maturity deposits increased by $118 million from our year-end levels. And again, we saw more stimulus hitting our accounts. It's called the PPP funding, some of that money is still in 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 were up over $430 million, with $300 plus million of that in the form of transaction accounts.

With that I will turn the discussion back to Mary Ann.

Mary Ann Scully -- Chairman and Chief Executive Officer

Okay. Thanks, Bob. So I'm going to sum up with, again, a focus on all of the tangible steps that we're taking to enhance long-term shareholder value, which is always been our mantra. First of all, is the opportunity to acquire top talent. An organization that's focused on small and medium-sized businesses is inordinately devoted to acquiring the talent that allows us to provide top level advice to our customers. We do have a locally unique brand position. And for a company focused on small and medium-size businesses, those 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.

I'll note, in a prior slide, we showed that 80% of our market share is dominated by out-of-market and large regional players. We're continuing to leverage, therefore, the heightened brand awareness of Howard Bank as the local option. And the talent increase is a tangibly 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 a contiguous market, 25% of our loans and deposits are now in Howard and Anne Arundel County, and 30% of our bankers are in Howard, Anne Arundel and the Greater Washington marketplace. So there is a very real investment in some of the most demographically attractive sectors of our marketplace.

We are, as a result, therefore, 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 the transaction account strengths that a bank that's very focused on C&I as well as CRE is able to naturally assume with the relationship approach. Our 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 us to continue to naturally even after this liquidity rush passes to leverage transaction account strength and leverage a very strong deposit franchise.

The new hires in a Greater Washington market really give us a compelling opportunity. And again, they're partnering with very talented staff in Howard and Anne Arundel County, and in very talented staff in Baltimore County, Harford County, and in our Delaware marketplaces. So we're continuing to utilize all of that to stabilize our margins.

We're very comfortable with our asset quality. As Randy indicated, we take a very conservative approach to how we define deferrals. And there have been instances where certain normal commercial construction projects that are naturally a little bit slow to lease up and where we would normally be making attempts to extend an interest-only period, we are treating those as deferrals, even though those are natural dynamics of the commercial construction marketplace. We're also continuing to take a very long-term approach to how we view asset quality. So some of our additions to charge-offs this year, as Randy noted, represent very long-standing, challenged assets going back to pre-recapitalization First Mariner days, and that has tangibly allowed us to show one of the highest allowance to non-performing loan ratios that we have ever had. So we continue to believe that conservative and long-term approach to asset quality will serve us 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 industrial and 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 in the Greater Washington marketplace, we've been keeping those costs flat. And we're continuing to explore FinTech relationships, primarily to allow us to achieve certain processing improvement, including some modest early attempted AI and RPA implementations. So we're clearly feeling very, very positive about how all of these strategic initiatives have positioned us in terms of our ability to continue to have revenue-led PPNR growth and continue to show the operating leverage that we've talked about in the past is being the key to improving our returns over the long term.

And with that, I'll open the floor up to questions.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Casey Whitman with Piper Sandler. Please proceed with your question.

Charles Boyd Hough -- Piper Sandler -- Analyst

Hi, good morning everyone. This is Charlie on for Casey today.

Mary Ann Scully -- Chairman and Chief Executive Officer

Hi, Charlie, how are you?

Charles Boyd Hough -- Piper Sandler -- Analyst

I'm doing well, thanks. How are you Mary Ann?

Mary Ann Scully -- Chairman and Chief Executive Officer

Good, good.

Charles Boyd Hough -- Piper Sandler -- Analyst

So, Bob. I had one, just modeling-related question on expenses this quarter. So I noticed in the release that you mentioned $578,000 in deferred origination costs related to PPP. Did those come this quarter as a reduction in salaries and benefits or am I thinking about that incorrectly?

Robert L. Carpenter -- Executive Vice President, Chief Financial Officer

The total deferrals were -- Charlie, thanks for the question, just to clarify, the total deferrals were that $578,000 number. But a large portion of those deferrals under this what we call around three, the 2021 originations are external cost we've engaged with third-party for a front-end in terms of lot of the heavy lifting, whereas last year's program was pretty much exclusively all internal costs. So the internal cost for the quarter are more in the range of $70,000. The real internal cost deferral is only about $70,000.

Charles Boyd Hough -- Piper Sandler -- Analyst

I see, that makes perfect sense. Thanks, Bob. Then just moving on to Rob, I know you gave some really good color on the loan growth this quarter and the Greater Washington expansion. I was just wondering if you could maybe give us a ballpark for how big you want to get that Washington team to over time, and then how, what percentage of the pipelines at this stage are coming out of that Greater Washington market?

Robert D. Kunisch -- President and Chief Operating Officer

Sure. I think the answer to the first part of the question about how big we wanted 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 producers who have been in that market for a long time. It's similar to the people we just brought on board who have spent their entire careers down there 20-plus years, that will really drive 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 DC market.

Charles Boyd Hough -- Piper Sandler -- Analyst

Great. And then, where would you like to get that -- do you have an idea of where you'd like to get that split to over time?

Robert D. Kunisch -- President and Chief Operating Officer

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 not". Given the dynamics in that market, I do think it will outgrow the Baltimore market just naturally but we're not sitting down trying to budget exactly where we want to take that.

Charles Boyd Hough -- Piper Sandler -- Analyst

All right. Okay, thank you everybody for taking my questions.

Mary Ann Scully -- Chairman and Chief Executive Officer

Thanks, Charlie.

Operator

Our next question comes from the line of Catherine Mealor with KBW. Please proceed with your question.

Catherine Mealor -- KBW -- Analyst

Hi, good morning.

Mary Ann Scully -- Chairman and Chief Executive Officer

Good morning, Catherine.

Catherine Mealor -- KBW -- Analyst

I just wanted to follow-up on the expense conversation. You may have mentioned this earlier, but I jumped on a little late. Can you just talk to us about what your expectations are for the expense growth from this kind of $12 million or $12.3 million level. And if you think we'll see more expenses coming from the DC initiative or is most of that in this quarter's run rate?

Robert D. Kunisch -- President and Chief Operating Officer

Catherine, thanks for the question. My expectation would be that, some of the new hires in the Greater Washington expansion project were mid-quarter. So my rough estimate is, we'll see probably a $100,000 -- I think is a reasonable estimate of a full quarter lift. So all else equal. I would expect a $100,000 of additional expenses in Q2 just from that initiative. Did that answer that question?

Mary Ann Scully -- Chairman and Chief Executive Officer

So Catherine, other way to say that is, we've been pretty consistently saying we think that market could could lead to about $1 million in additional compensation costs all-in, and rather than having $250,000 at that cost in the first quarter, we probably had more like a $150,000 of it in the first quarter because we did have a couple of those high-risk come on mid-quarter. So if you think about an additional $250 million higher run rate per quarter but with $150 million of that already being reflected in Q1.

Catherine Mealor -- KBW -- Analyst

Got it. Okay that makes sense. And then if you think about the reserve levels from here, you're not a CECL adopter. So, you didn't have as big of a reserve as some of your larger peers who are really releasing reserves a lot more heavily today. So -- do you feel like just kind of $105 million [Phonetic] range is a good base, and will just kind of grow into it or do you see substantial reserve release from here?

Robert D. Kunisch -- President and Chief Operating Officer

Catherine, from my perspective, I think it will be difficult to -- assuming asset quality trends remain as they seem to be at this point in time. I think it'll be very challenging for us when we start thinking about 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 will be difficult for us to maintain the qualitative factor, especially the COVID-related impacts we've incorporated at their current level. So my expectation would be that assuming this economy does in fact improve. I would expect the allowance as a percentage of loans, assuming we don't see further any deterioration in terms of any higher levels of classifieds or anything of that nature. I would expect the allowance as a percentage of loans to continue downward over the course of the year. To what level? It's hard to say. But as I keep saying, it will never go back to where it was pre-COVID. We certainly know that levels 60 basis points -- it will never go back to anything remotely close to that.

Catherine Mealor -- KBW -- Analyst

Okay, that's helpful. And then, one more if I could just with PPP and the timing. What is your, I know it's kind of moving target, depending on how the SBA processes a lot of this. But how do you foresee your best guess regarding the timing of PPP fees and forgiveness coming into the next couple of quarters and do you think it will slip into next year?

Robert D. Kunisch -- President and Chief Operating Officer

So I can start on the SBA side, what we're finding there is for the loans that are below $2 million, they're processing those very quickly. For the loans over $2 million, they're reviewing every single one of those and to-date we have not received forgiveness on loan over $2 million. So that's going to be -- we're at the mercy of them on those loans. And I told you, about a third of our customers have not applied yet, but about a third of those non-applications have started their applications. We're encouraging them, we've given them an 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 that forgiveness to commence.

Robert L. Carpenter -- Executive Vice President, Chief Financial Officer

I would just add, I think we would all be of the mind though that -- here we are, it's the second half of April. We still have eight months. So my expectation certainly would be the 2020 originations would be forgiven by the end of this year. And again, we've seen, we're not, the $2 million and above our potential risk -- some portion of those won't be forgiven. What we found thus far though as a general rule, the portions that we've had very minimal amounts unforgiven and several of those cases the borrowers and paid off the loan as opposed to keeping it out there is a 1% loan for two years or five years or whatever is the case. Now the 2021 ones are a little more problematic. I still personally I'm of the mind that given they tend to be smaller, we should expect, substantially all of those, if not all of them forgiven by the end of the year, but it could well be for that $95 million or say $100 million of it that we ended up originating. A lot of those may be in Q4.

Catherine Mealor -- KBW -- Analyst

Great. It's very helpful. Thank you.

Mary Ann Scully -- Chairman and Chief Executive Officer

And Catherine, certainly one of the reasons why we've attempted to be very transparent about the PPP impact 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.

Operator

Our next question comes from the line of Brody Preston with Stephens. Please proceed with your question.

Brody Preston -- Stephens -- Analyst

Hi, good morning, everybody.

Robert D. Kunisch -- President and Chief Operating Officer

Good morning, Brody.

Brody Preston -- Stephens -- Analyst

Just to circle back on loan growth. On a core basis, this is probably the strongest quarter you all have had, almost two years and came during a time when the industry is struggling to grow loans. And so I appreciate the detail that you've put on Slide 11. And so I guess I wanted to drill down on a couple of things. One, on the C&I portfolio, it was up 30% annualized this quarter. What was the dollar amount that was related to the uptick you saw in line utilization this quarter? And then secondarily, is there any specific industries that you're making inroads into -- that are helping drive some of the performance you saw this quarter?

Robert D. Kunisch -- President and Chief Operating Officer

Brody, one comment I would make about line utilization, our line utilization was up from year-end. As we analyze that further, it was largely the fact that, I think we mentioned in the note here, yes, that we, some of that new business that we generated in Q1 on the C&I side, that was a higher initial -- the initial utilization in Q1 was higher than 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 its utilization, we pretty much were unchanged. It was a very minimal amount -- very, very minimal. 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 booked that we saw at higher utilization in the 44% range.

Robert L. Carpenter -- Executive Vice President, Chief Financial Officer

In Brody in terms of the latter part of that question about whether it being in certain industries, I would say, no, it's really across the board. We expanded our business banking group, which added a lot of granularity into our portfolio that focused on loans between $0.5 million and $2 million and had very strong quarter -- really across our entire platform we saw some strong growth.

Brody Preston -- Stephens -- Analyst

Okay. Currently what percent of the loan portfolio is floating rate?

Robert D. Kunisch -- President and Chief Operating Officer

True floating rate is around 35%.

Brody Preston -- Stephens -- Analyst

Okay. All right. And then, I just wanted to ask -- the core margin held up nicely in the deposits -- the deposit cost decline -- it was nice to see. Just wanted to get a sense for how much more deposit repricing is left in the pipeline for them where you could see that cost go throughout the course of the year?

Robert D. Kunisch -- President and Chief Operating Officer

We've done about as much as we can do on the non-maturity side. So it's really the customer CD book of business. And again, this is trending down in line with our expectations. We had this high rate -- hot money CDs that were out there -- maturing, 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 we go from 78 basis points on customer CDs for Q2 to say, 55 basis points in Q2 and probably end the year in the low 40 basis point range. That's my current projection on that.

Brody Preston -- Stephens -- Analyst

Okay. And then I just wanted to ask, maybe Mary Ann or Rob, just wanted to talk through the subscription model that you all rolled out for your deposit accounts to start the year? Wanted to ask why does it make sense to make the shift to that sort of model now and what's the tangible impact been since you rolled that out?

Mary Ann Scully -- Chairman and Chief Executive Officer

Sure, thanks for asking that Brody, it's something we're pretty excited about. And I'll let Rob talk to you about -- what that's doing...

Robert D. Kunisch -- President and Chief Operating Officer

So the launch was in March. So the tangible impact hasn't been immediately seen. What we have experienced is, no run off in the portfolio, and interestingly enough new customers coming in are all opting to go into into that program. It was a couple of things, one is, it gives us a fee income opportunities, number one, foremost and most important. Number two, it took a class of accounts set, what I'd classify as inactive, there wasn't a lot of usage within those accounts and either encourages them to use their accounts more, keep larger balances or maybe consider another bank. So those were really the primary drivers along with providing additional services for our customers that do enter into those programs because they are all real tangible products and services that come along with being in those products. So we do expect that for this year 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.

Mary Ann Scully -- Chairman and Chief Executive Officer

Brody, it's interesting that you call it out for what it is, which is a 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 that change in customer behavior. But as Rob said, financially, we believe it's going to have a positive fee impact. It's also going to 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 to those, but most importantly strategically with the subscription-based model does is it achieves a higher level with 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.

Brody Preston -- Stephens -- Analyst

Got it. It's exciting and innovative stuff. Who did you all partner with kind of help implement that on the technology side?

Robert D. Kunisch -- President and Chief Operating Officer

It's a company called Strategy Corp.

Brody Preston -- Stephens -- Analyst

Got it. Thank you all for taking my questions. I appreciate it.

Operator

Our next question comes from William Wallace with Raymond James. Please proceed with your question.

William Wallace -- Raymond James -- Analyst

Yes, thanks, good morning. So the following up on Brody's question about the loan growth and the higher utilization levels, I thought it was interesting that the new originations were coming in at such higher originations. Can you -- such higher utilization -- can you talk about any rationale that you think might be the reason for that?

Robert D. Kunisch -- President and Chief Operating Officer

Number one reason is, what typically happens when clients move their accounts over is, they're gonna leave a certain amount of dollars at their old bank to 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.

William Wallace -- Raymond James -- Analyst

And then does that become a drag or do you think that they kind of flat line a little bit?

Robert D. Kunisch -- President and Chief Operating Officer

I think they flat line a little bit.

William Wallace -- Raymond James -- Analyst

Okay. So to Brody's point, if you look at your loan growth excluding PPP, it was a pretty strong quarter. You've got the new hires out of the DC market. I don't know how much of that was from those guys. That would be pretty quick. But low-double-digits ex-PPP, is that sustainable this year do you think or was one year -- was 1Q maybe just to catch up with some stuff that had been the way...

Mary Ann Scully -- Chairman and Chief Executive Officer

[Speech Overlap] We still think this is going to be a strong core loan growth year. And again, we're working very hard to try to tell that core loan growth story so that all of you can make the distinction between PPP activity and core loan growth. I would say that our official position is that we still think that this is going to be a high-single-digit growth year.

Robert D. Kunisch -- President and Chief Operating Officer

Okay.

William Wallace -- Raymond James -- Analyst

And have pipelines continued to build through April or they stabilize?

Robert D. Kunisch -- President and Chief Operating Officer

Pipelines have continued to build through April as have 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 and the first quarter of this year. As those developer start to move forward with those projects, we would expect to see commiserating outstandings with that as well.

Mary Ann Scully -- Chairman and Chief Executive Officer

And Wally, to clarify as well also, while the pipeline going forward clearly reflects that greater Washington activity, the originations that we saw in this quarter largely did not yet reflect that activity. So that's all upside coming in the later quarters of the year. And as those people just come on board, commercial loans don't happen automatically or instantly.

William Wallace -- Raymond James -- Analyst

All right. Okay, great. Thank you for that. My last question is, if the proposed 28% corporate tax rate is passed into law with the Biden administration, what is the impact to your DTA?

Robert D. Kunisch -- President and Chief Operating Officer

That's what I -- I haven't really given a lot of thought to. I would expect that it would -- it certainly -- like actually -- it's going to increase the DTA as we have to rerevalue those based on that higher corporate tax rate. So I don't -- I'm trying to think rough numbers, but that might be, probably, [Speech Overlap].

Mary Ann Scully -- Chairman and Chief Executive Officer

It's obviously a drag on your net income. But ironically and Wally, 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 we combined with First Mariner back in 2018. It takes us back to that starting point or closer to that starting point.

William Wallace -- Raymond James -- Analyst

Right. Okay. That's all I had. Thanks guys.

Mary Ann Scully -- Chairman and Chief Executive Officer

Thank you.

Operator

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.

Mary Ann Scully -- Chairman and Chief Executive Officer

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 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'll be happy to spend some time with you flushing out the story, but we remain very optimistic about what we're seeing.

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

Duration: 54 minutes

Call participants:

Robert L. Carpenter -- Executive Vice President, Chief Financial Officer

Mary Ann Scully -- Chairman and Chief Executive Officer

Robert D. Kunisch -- President and Chief Operating Officer

Thomas (Randy) Jones -- Executive Vice President, Chief Credit Officer

Charles Boyd Hough -- Piper Sandler -- Analyst

Catherine Mealor -- KBW -- Analyst

Brody Preston -- Stephens -- Analyst

William Wallace -- Raymond James -- Analyst

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