Hey, thank you, Frank, and good morning, everyone.
As Frank mentioned, we released strong first quarter financial results today. I will now walk through our investor presentation and provide additional detail and commentary on the more significant components of our financial results during the first quarter. Starting on Page 4, net income totaled $147.3 million, a 158% increase over the first quarter of 2020 and an increase of 6.7% over the linked quarter. Earnings translated into a return on average assets of 1.16% and a return on average equity of 14.7%. Net income per common share totaled $14.53, up $9.07 over the first quarter of 2020, driven primarily by increases in pre-provision net revenue, a release of provision due to lower net charge-offs, strong credit performance and improving macroeconomic conditions and 2020 share repurchase activity. Compared to a year ago, pre-provision net revenue increased by $77.9 million or about 76.1%. The largest driver behind this increase was a $67.4 million favorable change in the fair value adjustment on our marketable equity securities portfolio, but we also benefited from core noninterest income growth in our fee-based lines of business. Credit quality remained strong with net charge-offs near historic low of 4 basis points compared to 10 basis points a year ago and 7 basis points in the linked quarter. Nonperforming assets remained stable during the quarter. Pages 5 and 6 cover trends in net interest income and net interest margin. Net interest income declined by $19.1 million from the linked quarter. Most of the decline was due to a $21.7 million decline in loan interest income. Of the $21.7 million decline, $12.2 million related to a decline in fee and interest income on SBA-PPP loans due primarily to a decline in forgiveness activity during the quarter. Net interest income was fairly stable when compared to the first quarter of 2020, as loan growth including both PPP loans and commercial lines and a decline in interest expense due to lower deposit rates offset the impact of lower earning asset yields.
During the first quarter, we experienced a 22 basis points decline in net interest margin from the linked quarter.
As we stated last quarter, we have maintained a conservative posture with respect to excess liquidity given our impending merger with CIT. This factor contributed to 10 basis points of the margin decline during the quarter.
In addition, the decline in the SBA-PPP loan yield I mentioned earlier, contributed to 7 basis points of the decline. The remainder of the decline was primarily due to a decline in the ex-PPP loan yields, all only partially offset by a decline in deposit costs as most of the benefit from lower rates has been realized.
While the recent steepening of the yield curve has increased new loan rates, we do expect continued pressure on margin as higher-yielding loans mature or are refinanced.
While there will be continued noise in the margin from excess liquidity and PPP, we expect a decline in margin to moderate over the remaining quarters in 2021.
If you turn to Page 7, we'll take a look at noninterest income, which totaled $136.6 million for the first quarter, up almost $10 million over the linked quarter and by approximately $73 million over the comparable quarter a year ago. Noninterest income compared to the linked quarter primarily benefited from a strong quarter in the wealth management and merchant services lines of business. Mortgage banking revenue remained strong during the quarter but did benefit from a $3.1 million reversal of previously recorded MSR impairment.
As mentioned earlier, the $73 million increase in noninterest income over the comparable quarter a year ago was due to a $67.4 million favorable change in the fair market value adjustment on our marketable equity securities portfolio. The remaining increase was primarily due to an increase in mortgage and wealth management revenues, partially offset by a decline in service charges driven by elevated deposit balances.
We expect noninterest income to continue to benefit from merchant services and wealth management income, all reflecting continued improvement in the economic conditions.
While we expect that mortgage production will remain strong, we expect originations to moderate in the coming quarters as higher mortgage rates slow refinance activity. In the near-term, despite organic deposit growth, we expect deposit service charges to remain below pre-COVID levels due to elevated deposit balances.
If you'll turn to Page 8, we will take a look at noninterest expense. We noted last quarter that we did not expect fourth quarter expenses to be reflective of our go-forward run rate.
We are pleased to report that expenses declined by $9.4 million from the fourth quarter. The decline was primarily due to lower OREO losses, occupancy expense and other core noninterest expenses. These favorable changes were partially offset by slightly higher personnel costs during the quarter due to annual FHA contributions and the reset of social security and 401(k) limits. All in all, we remain pleased with our expense management and the level of our efficiency ratio, especially given the pressure on our net interest margin that I discussed earlier.
We expect core noninterest expense ex-merger-related costs to remain stable and in line with the recent run rate.
Turning to Page 9, we provide balance sheet highlights and key ratios. I'll cover the significant components of the balance sheet on the subsequent slides. Page 10 provides information about trends in our loan portfolio.
During the first quarter, loans increased $389 million, or by 4.8% on an annualized basis. Of this growth, we experienced a $364 million net increase in SBA-PPP loans. Ex-PPP loan growth was modest during the quarter, which was consistent with our expectations entering the year. We do anticipate that annualized growth ex-PPP will pick up during the year to mid-single-digits as the economic recovery continues, but this will be dependent upon continued economic expansion and positive reopening trends in our market.
Turning to Page 11, we provide information on our PPP loans.
As Frank mentioned in his comments, we remained active in the program during the first quarter, funding an additional $1.1 billion in loans, bringing our total originations in rounds 1 and 2 of the program to $4.3 billion.
As of the end of the first quarter, PPP loans net of fees totaled $2.8 billion and have contributed $121 million in additional interest and fee income since inception. We've received applications for forgiveness on 69.2% of our round 1 loan amount and have received funds from the SBA on $43.9 million of the original loan amount. We made enhancements to our application and forgiveness portal during the quarter, which have been well received by our customers.
Forgiveness activity has recently accelerated and we expect this to continue into the second half of the year.
Turning to Page 12, we summarize our rolling 5-quarter credit quality trends. The net charge-off ratio for the first quarter was 4 basis points continuing the trend of low net charge-offs.
Our nonperforming assets ratio held stable at 0.8%, consistent with the prior 2 linked quarters and down from 0.86% from the second quarter of last year.
First quarter 2020 results included a $21.5 million reserve build related to the uncertainty surrounding COVID-19.
Given improving macroeconomic factors, continued strong credit quality trends and low net charge-offs, provision for loan losses was an $11 million credit during the quarter.
We continue to stay in touch with our customers and monitor our portfolios to understand the potential impact of the pandemic on our credit losses but we are pleased with our credit quality.
Moving forward, absent an unexpected external shock to the economy, we expect to benefit from strong credit quality to continue as our allowance moves toward pre-pandemic level.
Turning to Page 13.
Our allowance for credit losses ratio was 0.69% ex-PPP loans at the end of the first quarter, which was down from 0.74% at the end of the fourth quarter. We remain comfortable with our ACL level, which represented 17.25 times annual net charge-off at the end of the first quarter, and this compares to a loan book with an average life of approximately 4 years.
While we do not expect that the net charge-off level will remain constant at 4 basis points, we have seen no indication that charge-offs going forward will have a significant impact on the level of our allowance.
Moving on to Pages 14 and 15, I will cover deposit trends and our funding mix. Deposit growth remains a bright spot.
During the first quarter, deposits grew by $3.9 billion or at an annualized rate of 36.4%. On a year-over-year basis, deposits were up by $12 billion or by 34%.
While we acknowledge that our deposit growth during the first quarter continued to be positively impacted by government stimulus and PPP loan fundings, we experienced strong organic growth on both a linked quarter and year-over-year basis. We attribute this organic growth to 3 broad factors, including: 1, our day-to-day go-to-market strategy, which emphasizes deposit gathering; 2, low consumer spending; and 3, broad market uncertainty leading our commercial and business customers to hold more cash in their deposit accounts. At March 31, deposits represented 96.1% of our total funding base, largely changed - largely unchanged from the linked quarter.
We are pleased that noninterest-bearing deposits accounted for 43.3% of total deposits at the end of the first quarter. Total deposit costs declined to 8 basis points in the first quarter from 10 basis points in the linked quarter, driven by a decline in time deposit and money market rates as well as an increase in noninterest-bearing demand deposits.
Looking forward, we expect deposit growth to continue to be a strong part of our financial performance.
However, deposit growth could begin to moderate as business and commercial customers put their cash to use and/or consumer spending pick up.
Turning to Page 16.
Our capital position remains strong and within both internal and regulatory guidelines. The majority of the growth in all of our risk-based capital ratios is attributable to strong earnings during the first quarter.
As we noted last quarter, our Tier 1 leverage ratio continues to be impacted by significant asset growth both from government stimulus and organic deposit growth, but it remains above internal thresholds, and we are comfortable with the current level.
Turning to Page 17. I will close by providing our outlook for the remainder of 2021.
We expect that net interest margin will remain a headwind due to lower yields on interest-earning assets driven by excess liquidity and low interest rates, only partially offset by nominal improvements in new loan yields, lower deposit rates and PPP income.
We expect deposits to continue to provide low-cost funding, but the drop in deposit rates moving forward will not have a significant positive impact on margin, given that they don't have much further to fall. With respect to our fee income producing lines of business, we remain positive about merchant services and wealth management due to improving macroeconomic conditions.
While we believe that mortgage production will remain strong due to the absolute low level of interest rates, we believe that it will moderate as higher mortgage rates slow refinance activity.
Our net charge-off ratio is projected to remain low, but we may see some slight increase given the low absolute level of net charge-off and as the impact of economic stimulus subside. We do not expect credit quality trends to change significantly and believe they will continue to be a source of strength. Further reserve build is not expected and additional releases may be possible as the ACL moves closer to pre-pandemic levels, depending on portfolio and overall macroeconomic trend. Noninterest expense, ex-merger-related cost, is expected to remain stable as we remain focused on operational efficiency.
We expect loan growth ex-PPP to be low- to mid-single digits, and we expect to see deposit growth in the same range. To close, our focus in the second quarter will be on: 1, the integration of First Citizens and CIT; 2, continued organic growth and profitability; 3, maintaining discipline on credit quality, customer selection and retention; and finally, 4, prudent expense control. Thank you all for joining us today.
We will now open it up for Q&A.