Q4 2020 Horizon Bancorp Inc Earnings Call
[music].
Good morning, everyone and welcome to the Horizon Bancorp Conference call and took us to discuss financial results for the third month ending December 31st 2020.
All participants are in a listen only mode should you need assistance. Please signal a conference specialist high pressure and the Starkey followed by zero.
After todays presentation, there will be and opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please limit yourself to one question and one follow up if you have further questions you may reenter the question queue. Please.
Please note this event and recorded.
Before turning the call over to management and please remember that today's call may contain statements that are forward looking in nature.
These statements are subject to risks uncertainties and other factors that could cause actual results to differ materially from those discussed including those factors noted in the slide presentation.
Additional information about factors that could cause actual results to differ materially is contained and horizon current 10-K and later filings.
In addition, and management may refer to certain non-GAAP financial measures that are intended to help investors understand horizon business. Reconciliations for these measures are maintained and the presentation.
The company assumes no obligation to update any forward looking statements made during the call.
If anyone does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, you can accident access and at the company's website W. W. Dot Horizon Bank dotcom.
Representing horizon, and say, our chairman and Chief Executive Officer, Craig Dwight and Executive Vice President and Chief Financial Officer, Mark SCOR.
I'll be joined by Executive Vice President and Chief.
Commercial banking officer, Dennis Kuhn for the question and answer session.
At this time I'd like to turn the call over to Ray Horizon's, Chairman and CEO Craig's White. Please go ahead.
Thank you Anita and good morning, and thank you for participating and Horizon Bancorp fourth quarter earnings Conference call. Our comments today will follow the Investor presentation, We published yesterday January 27.
Starting on slide four you'll find highlights that summarize horizon excellent year as evidenced by net income for 2020 increased by 3% over the prior year.
Given all the obstacles that we had to confront it was an impressive year and a true testament to the quality of our employees.
Key drivers during the year were record wonder for family mortgage loan production and mortgage warehouse volume good expense control and our ability to maintain a stable net interest margin and.
In addition, we maintain solid asset quality as evidenced by low and P. A's to total assets at 49 basis points and net charge offs at five basis points of total loans.
We're also proud to state that for over 30 years, we have made uninterrupted dividend payments to our shareholders and we have approximately 18 quarters of cash on hand at the holding company to cover fixed costs, including future dividends.
Next slide five titled season Management team you will observe that we are a seasoned leadership team.
We have managed through multiple recessions and they've always seen history of strong financial performance over the past 18 years.
A special note and December 2020, we promoted senior commercial credit Administration Officer, Lynn Kerber and.
And our general counsel, Todd Etzler and as our newest executive Vice Presidents.
And you'll see on slide six we've completed 11, new organic market expansions and 14 mergers and acquisitions during this time continuum.
We are a company on the move and we continue to look for new opportunities and our current and adjacent Indiana, and Michigan markets with our proven track record as a successful consolidator.
And the pressures that other banks are facing related to low interest rates in the challenging operating environment. We believe M&A opportunities will once again be available in 2021.
Slide seven clearly demonstrates horizons track record for achieving our well established long term low goals, which include meaningful mean and meaningfully outpacing GDP and industry growth and.
And achieving balanced growth with 50% organic and 50 per cent through mergers and acquisitions.
And 2020 horizon grew the balance sheet by 8% excluding PPP loans.
On slide eight we highlighted our primary market area and dark Brown, and dark Green Horizon's markets represent diversified economies and excellent and growth opportunities.
Horizon expansion and growth has occurred primarily in college and University towns and state or county government seats, and therefore, a majority of our footprint and has an economic base that is traditionally more stable and other areas of Indiana and Michigan.
And as footprint is positioned well to take advantage of the outbound migration from Illinois, which continues to increase as consumers and businesses exit and dense living spaces high taxes, and the high cost of living.
And with Indiana, and Michigan and continue to show improving economies and as evidenced by a reduction and unemployment rates.
And the December 31st Indiana's unemployment rate was four 3%, which is below the U S national unemployment rate of six seven.
While Michigan's overall unemployment rate was 7.5 per cent a slight increase from November 30th.
The regions, we serve and the western and central parts of the state are reporting levels, ranging from $3 seven per cent and Grand Rapids to four 9% and Bay City Midland area.
Horizon's footprint helps to geographically dispersed credit risk with 60 per cent of our loans, and Indiana, and 40% and Michigan.
Slide nine highlights the primary markets, where we are engaged and some exciting economic events that are taking place and will continue to enhance our markets.
Now moving to slide 10, titled COVID-19 response, we continue to closely monitor for the impacts of COVID-19, pandemic and the communities customers and businesses, where we operate.
India and its numbers for daily reported positive COVID-19 cases were elevated and November and December and have started to return to trend downwards in January.
Indians cured restrictions are comparable with the prior quarters and are driven by county by County, Color-code risk system.
Michigan's positivity rates continue to trend downward and their protocols are still more restrictive than Indiana.
And the safety and wellbeing of our employees is our first priority and therefore, we continue to adhere to strict safety protocols as we navigate the reopening stages and our markets. Currently all offices are open by appointment only.
Prior to COVID-19, horizon was well on its way to transform and its customer base to our digital platform.
Though the impact of the pandemic due to limited branch axis has a silhouette and the use of digital banking.
And slide 11, and looking at the chart on the right Horizons average monthly transactions have shifted away from taking place and branches to the majority being processed through our digital and virtual channels.
In December 2000, 2073 per cent of all transactions took place toward digital channels compared to 57 per cent one year ago.
And you'll see and the chart on the left and December 2020, 75% of all checking accounts for active online banking users and increase from 66 per cent one year ago.
Horizon was well prepared for this increase and digital activity.
Other technology investments made in 2020 day focused on enhancing the customers' experience included.
Adding a fourth call center locations increased service capacity and shorten wait times and expanding our interactive teller machines to allow virtual teller interactions at or two over 27 locations with expanded virtual teller hours from six a M to eight P. M six days a week.
And the addition of chat and online account opening and to improve customer experience and.
And as a month and December are over 85 per cent of frightens online chats are answered by box.
Now for the financial highlights it is my privilege to introduce two horizon Bank's Chief Financial Officer, and Executive Vice President Mark Seaport Mark. Thank.
Thank you Craig.
Horizon fourth quarter results continued to demonstrate our ability to realize strong operating results and dropped record, earning to the bottom line as we navigate the current environment.
Starting with slide 13, the company's fourth quarter results were the highest stated and adjusted net income net interest income pretax pre provision income noninterest income and earnings per share and the company's history.
Several activities during the fourth quarter impacted these record results, we incurred prepayment expense on the retirement of high cost long term debt and recognize P. P. P forgiveness fees through net interest income and recorded tax benefits from solar tax credit investments we.
We continued to build allowance with additional credit expenses, primarily for distressed loans sectors that we that have been identified we believe we are appropriately reserved given the current state of our portfolio additional government stimulus and our seasonal modeling.
Slide 14.
And the 17 basis point increase and the adjusted margin during the quarter was positively impacted by 18 basis points for P. P. P lending as net fee income was recognized for loan forgiveness compared to four basis points of margin contraction and the third quarter.
In addition, excess liquidity compress the margin and additional seven basis points compared to three basis points and the third quarter.
Slide 15.
The loan yield was also positively impacted from P. P. P. Net loan fees recognized during the quarter, adding 15 basis points to the yield compared to a 13 basis point reduction and the third quarter.
Higher purchase accounting income recognized in the fourth quarter compared to the third also positively impacted the loan yield.
As loans continue to reprice and new product is originated at lower rates. Some additional downward pressure on asset yields as expected along with a mix of additional investments, resulting in some margin pressure during 'twenty 'twenty, one and the opportunities to lower funding costs are realized.
Slide 16, our strong core deposits continue to help reduce our funding costs.
C D portfolios and 30 basis point decrease and pricing led to reduction in total funding cost is high cost term deposits matured during the quarter.
445 million of Cds with an average cost of 93 basis points will mature during 2021 and continue to reduce our cost of funds.
And 4% growth and noninterest bearing deposits and two pace basis point and drop in interest bearing deposit costs also contributed to margin stabilization and the fourth quarter.
Slide 17.
Since the first quarter of 'twenty and 'twenty, we've maintained a conservative and strong liquidity position.
We also expect additional liquidity from PPP loan forgiveness, and and the longer term warehouse loan balances returning to normal levels when long term interest rates start to escalate.
To help utilize a portion of the liquidity building up and cash.
We increased the investment portfolio over $100 million during the fourth quarter.
Also we prepaid 83 million that they shall be advances with a weighted average cost of 2.61% utilizing $62 million and cash and selling $21 million and investments.
While our fourth quarter results reflected a net one time pre tax loss of $1 2 million on the prepayment and there'll be less and a one year payback from the interest expense savings.
Looking ahead, we anticipate additional growth and the investment portfolio and are currently working on adding $200 million to the portfolio. We will continue to look for additional opportunities as we see the need to utilize our liquidity and increased earning assets.
Slide 18.
Record mortgage revenue from the gain on sale and the mortgage related income drove our record noninterest income as we saw and noncash impairment charges to the mortgage servicing right assets slow and the quarter.
The continued high level of mortgage production and strong percentage gains are the primary contributors to our solid noninterest income for the quarter. We also saw all other fee based income increase over the third quarter.
Based on local and national refinancing activity, we expect strong strong top line contributions to continue from the mortgage business going into 'twenty 'twenty one.
Slide 19 during the fourth quarter, we saw an increase in operating expenses, but and prove the adjusted efficiency ratio to 56, 5%.
Increased salary and benefit costs for the primary driver of the increased expenses as our very strong fourth quarter and full year results Meredith for higher performance based compensation payments and accruals.
There were also increases and other operating lines.
Line items as investments were made for future efficiency efforts.
And our increase in customer activity and the one time write downs to reduce the company's and bank owned real estate assets.
As many of you know part of Horizon and normal operating process includes a rigorous annual branch evaluations, which has lead to consolidation of 25 retail locations over the last five years. We're currently and the process of another rigorous branch review as customer habits and change as more digital channels are being used.
Looking ahead, we intend to continue our record and maximizing the efficiency and scalability of our retail franchise, while further leveraging the investments we've already made and digital mobile and remote banking as well as our call centers.
Slide 20.
Discussed we did it obviously you saw it on the start of 'twenty and 'twenty and the $708000 reserve build and the fourth quarter was primarily driven by allocations for sectors as loans with potentially higher risk of loss due to the nature and characteristics of these portfolios and the percentage of allowance to loans total loans was <unk>.
One point for seven at December 31st for 155, when excluding P. P P loans and a balanced and an $11 5 million remains for discounts on acquired loans.
Slide 21 horizon continues to maintain a strong capital position and in these uncertain times supplemented by our $60 million subordinated debt raise in June.
Accordingly, and December 31st the holding company had just over $127 million and cash representing approximately 18 quarters and fixed costs, which included interest on all that operating expenses at the holding company and the current shareholder dividend level, which we are committed to maintaining.
Overall, we are very pleased with our financial performance for 'twenty and 'twenty and this very challenging year. We believe we are well positioned for it from a credit liquidity and capital perspective, and look forward to refining our operating model to further improve our results and the quarters ahead.
For some additional comments on our loan portfolio and I'll turn it back over to Craig.
Thank you Mark.
And looking at the chart on the left and slide 23 horizon $3 $8 billion and total loans are well diversified with 50 per cent and commercial loans, and 43% and residential and consumer loans at horizon, and we like this loan mix as it diversifies, our credit risk and provides advantages to manage our net interest margin.
And the right provides the granularity within our commercial loan portfolio, which itself is well diversified our thing is single largest sector is in the residential multifamily housing loans at 6% of total commercial loans and this segment continues to perform well.
Other key points to make horizon manages capital at risk by maintaining and in house lending limit at $30 million.
Which is well below our legal lending limit of approximately $78 million or.
Our granularity is further enhanced by the fact that horizon average commercial loans and there's only 304000, excluding PPP loans.
Now moving to slide 24, and the December 31st Horizon's loan deferrals declined to three 3% down from its peak of 14, 3% and June 30th.
Majority of our dollars under our loan deferment or still and the commercial loan portfolio with the consumer and mortgage loan deferrals remaining low at less than 1%.
Overall horizon deferral rates are in line with peer banks.
The number of commercial loans and payment deferrals as of December 31st totaled 55 down significantly from the June 30th totaled 670 for.
Horizon and commercial lending team has been diligent and meeting with our business customers to update their financial plans into place and loans back and regularly scheduled payments.
But the commercial loans on deferral 95 per cent of the dollars are making interest only payments and only two or fibers and of those loans and deferral are making are deferred for principal and interest.
The two loans and principal and interest deferrals are the same sponsor.
And represent two hotels in various stages of construction and remodeling the book.
<unk> and guarantors have and excess of $20 million and cash and their balance sheets. So this deferral has minimal credit risk and reflects more retention strategy.
Interest payments on these loans are scheduled to resume in April this year.
Slide 25 reviews, our diversified commercial loan portfolio.
And as a traditional regional bank offer and a standard lineup of commercial loan products through an experienced and seasoned team of lenders and credit administration and staff.
We have a history and culture and prudent commercial loan underwriting.
And the commercial loan and asset quality metrics continue to be favorable favorable at quarter end.
Moving to slide 26, titled sectors with escalated monitoring.
Horizon continues its elevated monitoring and those loan segments.
But the most duress as evidenced by high payment deferral rates and through the year and the majority of the horizon payment deferrals for major hotels with the other non essential business has seen considerable improvement and the fourth quarter.
The portfolio of segments that we are continuing to monitor include hotels restaurants leisure and hospitality.
Hotel payment modifications continue to be the highest percentage of any sector and increased from 58% of total loans outstanding as of September 30th 272% as of December 31st.
This increase is due to the second COVID-19 waves starting in October and the resulting drop in occupancy rates and 19 to 20 hotel loans that are modified and are making interest only payments and two are on principal and interest deferrals.
The comfort we have with this portfolio that our borrowers are longtime operators have managed through multiple economic cycles.
And 71 per cent of the total dollars and our hotel portfolio $101 million.
The sponsors have access to liquid assets in excess of $10 billion per relationship.
I'll touch more and hotels and just a minute.
Our next the restaurants. This portfolio continues to perform well with only $2 7 million and to affirm and with all borrowers, making it and minimum interest payments and no loans, having principal and interest payment deferrals.
Our comfort and this portfolio was due to the fact that the average loan amount is low at 365000. Good current performance long term owner operators and good franchises.
Next leisure and hospitality overall this segment is performing well with only one loan and the amount of 130000 and being under a month monthly interest only payment modification. This industry segment consists of a diverse group of borrowers, including golf courses and bowling centers moving movie theaters and fitness establishment since.
<unk> Xu.
All entities are open with the exception of one Indianapolis business that went into non accrual during the third quarter due to the closing related to COVID-19 restrictions.
And generally a strong and cooperative borrowers with small average loan balances of 529000 and low loan to value ratios on our largest segment and this portfolio consisting of golf courses. Most golf courses actually saw an increased number of rounds played and 2020.
Slide 27, titled Hotel sector locations, you'll see and the map that exhibits the locations of horizons loans secured by hotels and as you can see the vast majority of the hotels that we finance are located along and Interstate highway or resort communities.
Hotels, located along Interstate and highway waves are rebounding faster than those located in metropolitan areas, where they are dependent upon supporting their convention venues.
Our hotel loans and our portfolio are open for business with occupancy rates drop it in October and November is resolved and the COVID-19 second wave. The average decline from October November was 50 per cent 238 per cent for occupancy.
Even with the stress of COVID-19 Horizon continues to report strong asset quality metrics and the fourth quarter, which you can see and slide 28.
The chart and the upper left corner exhibit low total net charge offs over the last five quarters of less than two basis points.
And the upper right corner credit loss provision expense was low throughout 2019 and for 2020 horizon provision expense was hired to build reserves due to the early adoption of Cecil and primary related to the.
And kind of metrics and the general allocation for the nature and characteristics of our loan portfolios. During this pandemic.
Chart, and the lower left exhibits horizon's total nonperforming loans to total loans, which is still low and manageable as of December 31st at 69 basis points. During the fourth quarter, we experienced a slight decline and nonperforming assets primary resulting for payoffs received and distressed commercial loans.
The chart and the lower right corner allowance for credit loss.
Whats ryzen and at one point for percent of total loans, which is in line with other community banks that have adopted seasonal for.
Horizon kept credit loss reserve to total loans, excluding PPP loans was at 1.51%.
On slide 19, you'll see key franchise highlights we are a seasoned management team has managed through multiple economic cycles excellent geographic diversity and diversification and good quality markets strong credit culture high quality and well diversified balance sheet robust capital position historical earnings run rate.
Even during the great recession.
30 years of uninterrupted dividend payments and our common shares.
Overall.
Goodyear.
This concludes today's fourth quarter earnings presentation, and operator, please open the lines now for questions. Thank you.
Thank you we will now begin the question and answer session for asking the question My first day.
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The first question today comes from Terry Mcevoy with Stephens. Please go ahead.
Good morning, guys how are you.
Good morning, John and good morning Gerry.
Maybe mark a question for you and how should we think about expenses and in 2021 I.
And I appreciate all the data on active bank users and transaction volume and you kind of hinted at and maybe some opportunities to consolidate some branches with more news to come so with all that said what should expenses kind of trend and and look like this year.
Well the fourth quarter was it was heavily loaded on the AR and the.
Salary and benefits side as we expected and the first part of the year, we didn't foresee a where we were gonna be Oh, we saw where we were going and didn't have accruals, where they should be.
So I think I think the year looking at the full year of the salary and benefits expenses as low as a good picture of where we should have been for the entire year and moving into two.
2021.
We had some other elevated expenses here in the fourth quarter, which we alluded to.
And and some of the onetime items that are normal operating but are in the other expense category, where we had some write downs on bank owned properties and we're trying to get those take care of those.
Out of.
Out of them off the balance sheet, and then there was higher customer activity, which that can and it alone expense and so forth could continue through next year.
But we are looking at the branch rationalization and there will be more to come on that as we get into this year.
And.
We are looking for ways and we also are looking to where we need to reinvest some of that must be as we look at that branch rationalization.
Invested into a into future a future earnings.
So you know and like you know Terry we never give exactly forward looking statements, but I think the full year of expense is a pretty good basis to start with and then we're going to do what we can't and maintain the level. Although there are sometimes in the low inflationary or not.
And pressure two or needing to move up for salary benefits and so forth for for increases and going into 'twenty and 'twenty one.
Thanks, and then just as a follow up it sounds like over the near term mortgage business should remain pretty healthy, though the industry is industry kind of.
Folks are suggesting it declines throughout the course of 2021.
What are your thoughts on kind of full year mortgage revenue.
And as well as just the mortgage warehouse, which ended the year almost $400 million.
Yeah, and I think it is as we look at it we follow the the mortgage banking direction that they were looking for about a 30% decline.
Based on this year, obviously coming into the first quarter here, we still are elevated levels.
And both refinancing and purchase them, but I think following the guidance that we're seeing from our from the national and our industry is probably a pretty good.
Look at what we're anticipating which will also impact the warehousing as we get into the rest of the year. If it is as it slows.
Slows.
Yes, Terry this is Craig and we our direction and align with the refinance indexes that are published so whatever trend. They're taking is the same trend that will be taken and just been historical norms.
Thank you.
Thank you thanks.
The next question comes from Damon Delmonte with <unk>. Please go ahead.
Hey, good morning, guys How's it going today.
And Dave and good morning, Jamie.
Great. So first question just on the margin Mark could you just elaborate a little bit more on your and your outlook. There I think you were saying that the core margin should probably trend a little bit lower during the course of the year and then you kind of you talked about some of the puts and takes around that and and walk through some of those factors could you just kind of go back over that please.
Yeah, Dave and.
Our focus is is since we have the liquidity and we had a lot of excess cash and even as we continue to try to find ways to to utilize it.
The excess cash again at the yearend so I.
And there there is going to be some natural pressure on the loan yield just from some refinancing or the new product that comes on and rates are down.
But our I think the I think the loan yields are and we're seeing that starting to stabilize.
And then the repricing is working its way through I think the pressure is going to be more and the mix of the assets and.
And you know we've stated that we're looking to put 200 million more and do the investment portfolio lower yields and so I think that you know that's going to put the pressure on the asset yield. We have you know some of the benefits yet of the CD portfolio rolling off and they're not and the funding side.
So, we'll we'll see some pick up there and but.
But I think I think the mix of the assets is probably going to have the biggest impact for them to the margin and.
So we're focused on growing net interest income so we want to get our cash to work and we wanted to look for ways to increase net interest income and continue to grow that and and the margin will end up where it is depending on the mix of those assets.
Got it okay. That's helpful. Thank you.
And then I guess, just maybe a broader question for you.
Craig.
You mentioned that you thought that M&A opportunities could be a rising hearing in 'twenty and 'twenty one.
Could you just give us a little refresher on and your your geographies and some of the characteristics you look for and then also could you comment on you know.
Market disruption and maybe fallout opportunity from the H band Tcf transaction and that's with recently announced thank you.
Yes, Thank you Damon.
And you might somebody who might be surprised that are our primary focuses Michigan, Indiana and northwest, Ohio, We are not looking at Illinois anymore, primarily because the COVID-19.
Pandemic has a vast verbatim.
Issues and problems and Illinois that I think will be a long term and duration and so we're avoiding the opportunities and that state, but and Mindy.
And in Indiana, and Michigan Northwest, Ohio, We were you know hearing discussions taking place again people are at least talking about possible M&A and we saw some recent announcements come out that I think are encouraging.
So, yes, I think 'twenty 'twenty, one, we'll see a reemergence of M&A and our target footprint regarding the Huntington Tcf acquisition and whenever there is market disruption we pursue it vigorously we pursue a not only talent we pursue customers through increased advertising dollars and go to.
This will be Tcf's third.
Systems change and three or four years I can't remember the time period, and that's a lot of disruption for their customers and go through so we think theres opportunity to pick up not only talent, but as well as customers going forward.
Thank you for the question.
Great. Thank you.
Yeah.
Again, if you have a question. Please press Star then one and next question comes from Nathan race with Piper Sandler.
Thanks.
Yeah, Hi, guys good morning.
And good morning.
I was hoping to just kind of expand on just the loan growth outlook ex triple.
P. This year.
Obviously, there are some opportunities with the M&A related disruption and some.
Your geography, so just curious if there's an update for them I think it was kind of a flattish outlook.
PPP last quarter are you guys, feeling and kind of more less constructive just in terms of organic.
Loan growth for 2021.
Yeah.
Yeah, I'll take a stab at it and then we'll have dinner SKU, maybe give us some insight and the commercial side as well.
Our objective is to maintain our loan outstandings for the year, which would be commendable considering PPP forgiveness. That's forthcoming that said, we don't see that taking place to a third and fourth quarters and what's interesting is our.
Commercial line of credit so they actually had a considerable decline because of the PPP proceeds and the permanent working capital that's going into some healthy businesses. So until they burn through that cash are we don't see that our line of credit usage and picking up. Unlike what we really saw it might happen where there'd be a higher utilization.
No commercial should rebound in the third and fourth quarter, we plan to invest and commercial lenders and try to take advantage of the Tcf Huntington transaction and so how long would take for them to build that pipelines.
That said, we had growth and some of our key markets you're on the Michigan market had a very good year last year, we had some payoffs and Indianapolis. So these at least slowed down and pipelines are starting to rebuild so our growth markets. I think we will return and be prompts and again going forward and we have historically, taking our profits from the mortgage business during the good years.
And reinvested them and commercial lenders for future growth and that's what we plan to do and this year did you want to add to that at all.
Well I think that was an excellent response and you know again as Craig Craig said, the performance and are our key growth markets, including the the metrics you're hearing today on unemployment and such.
Bode well for those markets, where active are and our sense. At this point is that over the fourth quarter and early 'twenty. One here, we're seeing some growth and pipelines and so there are opportunities that are starting to come to the front it.
It is of course very competitive.
And.
But we will be again looking for opportunities with regard to the Huntington Tcf.
Our people as well so.
Yeah.
Got it that's great color and then just changing gears, a little bit and thinking about capital deployment.
Obviously I appreciate your comments, just with M&A over me and ongoing.
Consideration these days and with the stock up and bounce back a little bit I'm, just curious on your kind of updated thoughts on.
And going back to <unk>.
Sure.
Repurchases and just the overall uptick there and what's your remaining authorization as is well along those lines.
Well Nathan as we continued to grow earning assets faster than capital.
Sorry, the price versus a capital is growing faster than earning assets. We do have to do something with that excess capital. So we are.
Seriously looking at our dividend as well and stock repurchases in 2021.
I'm not sure when those will start but.
But it's definitely on our table and the third thing is the are the acquisitions would also.
Take a part of that capital.
And he's going to say, we had about <unk> and our current the repurchase.
Repurchase play and we have about 1.8 million shares left.
And that plan.
Gotcha and just.
As a.
Follow up Craig just curious you know what you know the credit picture and becoming a little more clear these days.
Is there a payout ratio that you guys are targeting this year in terms of book.
Buybacks and common.
And.
Common dividends relative to historical periods I think it's been in the 30 per cent range or so.
Any updated thoughts along those lines.
And we try to keep our payout ratio in line with peers into increased dividends and Directionally with earnings improvement and we've done that historically and so and we'll see.
See that change and we're in the past we were very low and payout ratio. We were at 25 per cent or below where more and language peers now 30 to 35 per cent and.
And I don't see that going backwards, we've kind of.
What's the order book.
We're a mature company versus five six years ago, we had rapid growth with all the mergers and acquisitions, we needed to retain the capital.
And that is less of an issue today is we are a much larger company.
Alright got it.
I appreciate all the color thanks, guys.
Thank you for the questions.
The next question comes from Brian Martin with Janney Montgomery. Please go ahead.
Hey, good morning.
Good morning, Brian.
Hey, just one follow up Mark on the on the margin question and the dollars of net interest income I guess, if I can you just talk about maybe how you think about the dollars and net interest income if that's more of a focus.
And the growth perspective, this year and the PPP kind of muddy that up and just how youre thinking about.
Expectations for 'twenty, one versus 'twenty and and the dollars of net interest income given the fluctuations and the size of the balance sheet here.
Yeah, I think it's just general direction, Brian and I can't give you a amount obviously, but.
I think because when you talk to the margin I think as we hopefully see the loan margin loan yields.
Stabilized through the year as we continued as we've repriced a portion.
I think there's a there's still a slight pressure, but they are stabilizing and under the current scenario right now and now we have different economic indicators and economic issues that could change throughout the year.
So I think the biggest impact to be able to see what would be the net net interest income would be putting and the additional liquidity and to the investment portfolio and.
No we already said and we're working on 200 million, but we also have additional.
Coming from PTP forgiveness, as we get through the year and through this a lot and this current round.
That's gonna help help put on more assets for awhile, but those will come back and.
And the last round and we picked up quite a bit of the cash through that process as that money was sitting in our AR and our transaction accounts.
And along with the warehousing who create liquidity.
And so you know I think it's gonna be I think it's our goal to grow net interest income but.
But I think theres going to be pressures.
And because the getting rid of the warehousing and PPP loans and the fees and.
Those are can be higher yielding than what we can put on with investment.
And as part of the driving factor will also be where our deposits go if we start to see deposit outflow and then we will be able to reduce some of the the balance sheet.
But really the deposits flow is driving and the deposit levels are driving the need to put the cash and earnings into earning assets.
Got you Okay, that's helpful and.
Yes, Brian It's go ahead Craig.
This is Craig good morning, if we just maintain the dollars and margin or have a some modest increase we're going to be doing very well give and I anticipate the credit provision expense should not be anywhere near that it was in 2020 and then we built up adequate reserves. So you know the strategy is to bridge.
This year to get to 2022, where you're going to see a return of pretty good growth numbers and the stronger net interest margin that we shrink the investment portfolio and put it back into higher earning assets. So that's that's our plan and we've done that before and other recessions and other mortgage boom times I think it's worked pretty well.
Yeah, Okay, Thanks, Craig and and maybe just for you guys. Next question was just on that comment Craig on the reserve build and just kind of where things are Adam and that credit quality was obviously very strong here, but you guys had some build and the quarter and just kind of how to think about the the reserve kind of post COVID-19 here and kind of where we may trend to or how how to think about that.
Yeah first of all I think seasonal is working as intended and we could do I'll talk about the mechanics of it and it's different and each bank.
But you know that's how we managed our reserves back and the eighties, we set aside.
Earnings during great years for future losses, and that's what's taking place now so I think seasonal is working.
But what I'm I'm and encouraged about is that we are the number of our loans are smaller our hotel sector was actually doing very well this summer and through October with higher occupancy rates because they are primarily hotels located along highways and resort communities and.
For the Chicago and influx of people coming over to the resort communities.
And then the second round of P. P. P is going to get them through this next summer.
Will they have the occupancy rates and and average daily room rates. They had two years ago, probably not but they're gonna cash flow have decent and <unk>.
Modest returns to their investors, but nothing like they had previously they were having what I would consider egregious returns to their investors given the demand.
We're not and conventional properties I feel pretty comfortable that that that segment going forward from additional allocations are in and the stimulus money coming out and that's true of all of our other and not a central businesses. The P. P. P per room has worked to bridge that gap, so from a credit quality standpoint, and get us through and the other side, which you know we're hearing the summertime I.
There is pent up demand for the retail consumer sectors, probably not the business side who's sitting on all this cash but definitely on the retail consumer side I'm not sure about you, but I can't wait to travel again.
Yeah helped for sure and and maybe just the just given your comments on the hotel. The the level of criticized assets. I think you guys gave the classifieds and the and the release, but just how does the criticized levels trend this quarter.
Yeah, I'll, I'll make and a broadcom and what Dennis talked about it as well to two things that I want to state a number one when we gave our modification we downgrade of the credit and I'm not sure all banks for doing that and number two our.
Third Party independent loan review company recommended to the board, which we accepted to do a deep dive into our troubled sectors and they looked at.
A lot of loans over 100 loans and came back to the board at our meeting in December and said basically that we were perhaps one of the best banks, they've seen and how we addressed and attacked the the distressed sectors. So that gives me a lot of confidence and home.
Our team manage their accounts went out and talked about their plans to cut cost and look for capital alternatives to help them get to the other side. So very proud of what we've done but with that we did have an increase and sub standard loans for fourth quarter and I'll, let Dennis talk with and Dennis.
Sure.
We saw an uptick of about 11 million or 12% during the fourth quarter and that's.
Centered and commercial of course, seven relationships largest was about $8 million, that's the agribusiness business.
Seed distributor who's working on a recapitalization and potential pay off.
Here during the first quarter second quarter latest.
Several other credits so a couple of manufacturers couple of CRE deal. So nothing you know really.
It really just.
Things that we see and as Craig said you know, we're we're we're actively watching our our loans of course, managing those and putting together work out plans that we have.
Worked and as you saw with the decrease and nonperforming.
During the fourth quarter.
Two loans in particular and paid off and that those were favorable results for the bank, we didnt take additional losses on those so.
Again, it's just repeating our history of identifying working our plan and.
And limiting our charge offs.
Price me and in the quarter and our and this has been true all year, our asset based loans have primarily been and formula throughout the year. We've had a couple and all that have gone out of formula, but its because of growth the formula day asset base Formula. It has less dependence on inventory and their inventories building is there and they haven't book to sell yet.
They are building inventory and.
And we think they're gonna be back and form of here and the first quarter. So even though we've downgrades and the credits and the manufacturing side, they're actually performed pretty well.
Got you and just to be clear Dennis the comment on the 11 million and this was that the classified level or was that the level and credit back.
Sites, including special mention or did you mention and special mentioned.
That was in the sub standard so sub standard category.
Corey.
And how did they I guess inclusive of it the special mention and I said the criticized number how it was that directionally, the same way or how did that trend and the quarter.
There was significant impact as Craig Craig has mentioned, we when we modified loans, we took a one step downgrade. So there was certainly additional movement early in the year within the special mention but as we've progressed and where.
Getting the opportunity to review those credits again, we are seeing again, they are stable, they're making payments.
And we are starting to actually see some some reversal of that and we will over time, we expect that special mentioned will actually reduce.
So there'll be of course, some level of migration, but but again, what we're seeing at this point has been favorable.
Yeah, Brian by example, most for our hotels went into special mention.
And someone as a sub standard.
71 per cent of our hotel dollars outstanding have sponsors with the 10 million plus.
And liquid assets.
And well heeled sponsors.
That can support the portfolio going forward.
Yeah.
Got you okay. Thanks for taking the questions guys.
Yeah. Thanks for the question Bryan Good day.
Yep.
This concludes our question and answer session I would now like to turn the conference back over to Kuwait Dwight for any closing remarks.
Thank you Anita and thank you for participating in todays earnings call and we look forward to speaking to you again, hopefully in person and the near future, let's get to the other side of this pandemic. Thank you and have a great day.
Yeah.
This conference has now concluded. Thank you for attending today's presentation you may now.