Q4 2020 Howard Bancorp Inc Earnings Call
Good morning, and welcome to the Howard Bancorp, Inc, fourth quarter and full year 2020 financial results Conference call. My name is Doug on all of your operator today. Please note. This conference call is being recorded there will be a question and answer session. After the presentation. If anyone should require operator assistance during the conference. Please press star.
On your on your telephone keypad I would now like to turn it over to Robert L. Carpenter Executive Vice President and Chief Finance Officer of Howard Bancorp, Inc. Mr. Carpenter you may begin.
Thank you Doug.
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 would like to simply remind everyone that some of the commentary during this call would be considered forward looking statements.
In the interest of time instead of reading through all those on one of them I.
I have a direct everyone to page two of our earnings presentation. Our form 10-K for the fiscal year 2019, 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 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.
Yeah.
We have to keep in mind, the COVID-19 related challenges.
It is our policy notwithstanding what the markets any earnings margin or balance sheet guidance with that said on that we'd like to introduce Mary Ann Scully, the chairman and CEO of Howard Bancorp.
So thank you Bob and thanks to everybody. That's on this call we know that especially at this time of year you have a lot of competing priorities and appreciate anybody at the table to take the time can share. The story, we obviously will reference on the earnings release that we published last evening as well as the earnings price.
Patient and we'll use that earnings presentation.
Thank God.
We start of course always with the basic index values thesis of the company.
And obviously, we'll then talk for the rest of the presentation about our ability to execute on that unique positioning and that value. We do have a unique positioning in our greater Baltimore market. We're the largest locally owned bank headquartered in Baltimore and as a result of the continuing consolidation in the.
Free, especially in Maryland are the third largest state headquartered bank, we're using that positioning now in the state to continue to attract talent and most notably the portfolios they come without pallet.
Our commercial focus also differentiates us.
We've seen tangible value.
Both driven by core P. P on arm and are very focused on ongoing core P. P on our activities.
Growth in tangible book value combined with recent additions to our allowance and a continuing strong asset quality all of which we'll talk about today are expected to continue to protect the company from the economic uncertainty that Bob just referenced we have had continued.
Participation in each P. P P ground, including the round that is now underway and Rob <unk>, our president and C. O O will tell us about those activities.
It's not only activity that helps us serve a small community build our market positioning on our market share that has directly enhanced our EPS.
We've demonstrated an ability to stabilize our net interest margin despite very competitive environment.
Cash to liquidity throughout the economy loan yield compression, partly true fixed rate loan portfolio and ongoing decreasing funding costs, which is related to the continuous focus we've had on transaction deposits.
Our asset quality remains strong.
On deferrals are now down to two two per cent of loans and we continue to have no significant concentration in either individual customer exposures or highly impacted industries.
We are very focused on capital management, we are above well capitalized and those strong capital levels provide us with numerous opportunities to stabilize our asset quality if need be to foster the loan growth that we believe is imminent and to look at other.
Hansman activities and we continue to have a historically strong liquidity position, both on balance sheet and off balance sheet and as referenced in the earnings release confidence in our ability.
Continue to access that through contingent funding availability.
I'll turn it back over to Bob to go over some of the quarterly financial highlights, but again demonstrates how well we're executing on this value proposition.
Thank you Mary Anne.
Just to touch briefly on some of our quarterly and full year highlights. We did report if everyone on remember on a loss in year 2020, driven largely by the goodwill impairment charge, we recorded earlier this year.
So our EPS is down on a dollar rate of year over year, but keep in mind that $1.84 of that decline was attributable to that that goodwill impairment charge.
We believe that.
Our core earnings is more representative of.
Of our on boarding business activities and we have certain disclosures on page three of our of our investor presentation and various reconciliations of.
A GAAP to non-GAAP measures on pages 35 to 46 of the Investor presentation, but I would like to just mentioned.
I mentioned briefly.
Our core net income.
Which which is down a little over $1 million year over year keep in mind that we had substantial provisions for loan losses during the year, which were up $5 $6 million on a full year basis.
You'll note here on this.
Core quarterly core pre provision revenues have increased not only relative to the prior quarter, but also relative to the fourth quarter of 'twenty 2019.
Okay.
Yes.
Oh, excuse me and like.
Like I just mentioned.
One on one of our key a key challenges is expense management.
And we've we look at our core operating expenses in Q4, we did see some run up in our expenses.
But there were some from some non recurring items.
I'd like to just touch on briefly.
And we did note.
Two what we call non core items in Q4, well one on a very positive note. We did increase our liability related to a litigation accrual or litigation issue that we first disclosed in the second quarter 2020.
The report that we have settled that particular issue.
And so that removes some uncertainty from our future results and.
In addition, we announced the closure from the closure of two branches.
During the fourth quarter, and we have a charge associated with those closures.
Which was partially offset by the reversal of a parcel of partial reversal of a charge related to a closure that we've recorded back in the second quarter of 2019.
So if we look at knowing that the quarter was noisy.
We you know we've had some changes on some accrual methodologies.
We ended up with is a an expense we believe it on expense run rate in the neighborhood of 12 in the quarter to 12 and three quarters a million dollars is representative of where we were we really will operate as we move forward.
In the future.
Some key profitability measures I'd like to just touch on.
On a core basis, our return on average assets, we saw some some some nice growth in that year over your year over year or excuse me a quarter on quarter fourth quarter versus the <unk>.
Versus the previous quarter and the same quarter last year at 87 basis points.
We also you'll note we had an efficiency ratio on a core basis in Q4 of under 60%.
I mean, we certainly have benefited from the PPP program in terms of improving that ratio as we looked at 2021, we certainly would expect that that ratio.
Even absent PPP performance would would be under 60 tenants parking on the secondhand.
I'll turn it over to Rob.
Talking about our PPP program.
Thanks, Bob and good morning, everybody.
Phase one of PPP was highly successful and well regarded by our customers. We continue to receive accolades as we have shifted from the origination phase to the forgiveness phase and as of January 22nd we obtain forgiveness for 232 borrowers totaling $55 million. This accounted for just under 22%.
A borrowers on a little over 27% of dollars Linda.
Good day, we've received 100% forgiveness for those whose applications have been submitted with exception of one borrower who had an idle alone our success in obtaining the forgiveness as a result of the rigorous underwriting criteria, we implemented at the beginning of the program.
We launched <unk> in accordance with the small business Association in an extremely efficient manner. Our PPP one was completely manual and during this round we've automated the process for our clients.
As we anticipated we saw a flurry of activity in the early days of the program and volumes are now starting to trend downward as of January 22nd we received 351 applications totaling $72 million.
It is in line with what we anticipated from the program.
Turning to page and looking at Slide 10, you will see that our loan portfolio remains well diversified with no single loan type accounting for more than a third of the total portfolio.
70% of our loans are tied to commercial which is really indicative of our heavy focus in this area of lending.
We like most banks experienced a lot of pressure on our residential mortgage portfolio due to refinance activity in this low rate environment. We've also seen a steady decline in commercial line utilization as a result of the liquidity in the market from the various stimulus bills disc.
Despite the accelerated pay offs and lower line utilization, we saw strong loan origination activity to help offset this pressure in the fourth quarter.
On the next slide I'll walk you through our quarter over quarter analysis.
On the activity that occurred in terms of new originations versus payoffs.
If the slide appears a bit busy but it paint an accurate picture of our loan origination activity by loan type offset by the previously mentioned pressure on the residential loan book and commercial line usage.
As mentioned in previous calls origination activity in quarter, one pre pandemic was robust and came to a halt.
Various lockdowns were enforced PPP took priority in overall business activity slowed we are fortunate to operate in markets throughout the pandemic that saw the majority of their economy remained open.
In August we began to see business activity begin to pick up and it culminated with a $120 million on originations in the fourth quarter as you can see on the right hand column on the chart origination activity.
It was recognized in each loan category.
It should be noted that our correspondent mortgage operation that we started up in August of 2020 to acquire jumbo mortgages in our market combined with a proactive outreach to clients to modify their existing loans led to positive growth in this loan category for the month of December and month to date January.
Lastly, we did experience higher than normal payoffs from the fourth quarter as a result of borrowers selling their companies and our commercial real estate in anticipation of higher capital gains taxes in the future.
The next slide is a summary of the portfolio balance trends for the year.
The aggregate of the previous chart.
As we entered 2021, we are optimistic based on our current pipeline our expansion into the Washington D. C market. The recent hiring of additional lenders in existing markets and the ramp up of our consumer lending vertical that we will experience strong origination activity throughout the year.
Yeah.
Finally on included a slide in the package that shows the commercial line utilization and the decline that has been previously mentioned.
We anticipate that as excess liquidity from the various stimulus programs begins to dry up that line utilization will return to normal and further enhance our results.
Going to now ask Randy Jones, our Chief Credit Officer to walk you through our deferral on asset quality matrix.
Thank you good morning on.
On slide 14, we run through our potentially highly impacted loans sectors as we have in prior quarters.
Continue to see these as the most impacted segments of our portfolio.
For almost half of our loan deferrals.
Also account for a large part of our migration into criticized assets, which we run through on the various columns here. It also received a representative amount of relief from the PPP and initial fundings and we're seeing this sector.
Pretty well represented in the third round of PPP, as well, which helps offset some of that risk.
The next slide.
We have shown on prior quarters some of the offsetting mid against we believe too some of this portfolio despite being highly.
Highly impacted by the pandemic some of the characteristics, we feel a representative in those portfolios to help offset some of the risk.
Slide 16 runs through our deferral levels, but we've seen our deferrals declined from a high point of last April down to as Maryann mentioned earlier $2 four per cent of our portfolio about $41 million loans remain on deferral there was a slight.
Uptake from.
11, six to 12 31, but we've seen that level dropped down again, so far in January.
We continue to evaluate.
Ongoing request for deferrals very carefully and are measuring our customers' responses deferrals are highly correlated again to some of the migration you see in our criticized assets.
We've added some disclosure about our deferrals on slide 17, which shows again for the last four reporting periods a decline from about four 3% of loans to two 4%.
We've broken out what we consider a full deferrals versus.
Waiving principal payments on we've seen the principal payment deferrals drop more.
More heavily than the full deferrals.
The protocols are accounting for a little more than half of the deferrals in place.
We've also broken out what we consider long term or second deferrals versus our initial deferrals.
We were measured in our doling out of the deferrals on did a lot of three months deferrals.
And second deferrals for another six months, but were making drawing the line here between what we consider higher risk on those are deferrals that have exceeded six months.
Now account for about half of our deferral.
It is a select group of customers that again.
Again fall into highly impacted.
The portfolios and there was what you would expect a couple of hotels catering event Center a restaurant one museum once fitness center.
It is a small number of clients, but highly impacted set of clients.
Slide 18 runs through our asset quality metrics on nonperforming loans continue to remain fairly stable or delinquency is following our normal seasonal patterns and we're not seeing any anomalies. There we are seeing an uptick in our classified loans as I referenced.
That's highly correlated to the deferrals on Mezz loans that are.
Extending out on their deferrals.
On slide 19, we demonstrate our allowance build doesn't has occurred throughout the year coming up too.
One point on the 3%.
<unk>.
Net charge offs have remained fairly anemic throughout the throughout the year, which is good news.
And then two slides on the on the right hand side of the page show our allowance versus non performing slide.
Downtick there related to the inquiries from the nonperforming and our allowance plus the fair value marks on loans.
Yes.
Bob is going to go into more detail on slide 20 are related to some of the components of the allowance.
Thank you Randy Yes, Youll notice.
On what busy graph on page 20, but we were looking at the trend in our allowance.
As a as a percentage of loans within various portfolio category.
And what's your what's the slide demonstrates as is the significant increase in the allowance from from Q4 2019 at Q4 'twenty you saw on the previous page. The overall allowance had increased from from 60 basis points of total loans at the end of 2020.
Once the whole free percentage range, we set a total loans $12 31, 'twenty, but 113 per cent of our portfolio loans again, which we define as total loans less the PPP loans.
What you see here is net.
Not a surprise as categories like CRE non owner occupied.
We see a dramatic increase in the allowance attributable to that portfolio here in 2020.
If you were to look at potentially highly impacted loans that Randy discussed earlier theres, a heavy concentration of CRE commercial real estate non owner occupied within those various potentially highly impacted loan sectors.
You'll see on a fairly large spike here on our in our commercial where C&I allowance and as we mentioned in the earnings release, we did have one specific allocations on your allowance of roughly $900000, which drove that spike in Q4.
As I've mentioned on previous calls our allowance as we built the allowance during the course of 2020. It has been solely with the exception on specific allocations. The allowance I just mentioned to our qualitative factors in fact, our historical loss rates from where we use an eight quarter rolling average have declined throughout the year over 20.
Nine basis points of loans in the fourth quarter of 2019 down to 19 basis points from the fourth quarter of 'twenty.
So again, it's been on all about our qualitative factors, which have been driven primarily by.
State of the economy also the migration trends that Randy alluded to earlier.
While we believe that the loan deferrals and PPP loans reduce their short term risks in the portfolio and.
And we certainly anticipate in the future of the risk of potential.
Additional downgrades and potential increases in actual charge offs.
Yeah.
Talking about capital from Us from 'twenty. One we have we have some graphs showing are some key elements of our capital position again as we have emphasized the bank remains well capitalized well in excess of wealth.
Our tier one ratio at nine 6% was up from the prior quarter.
Common equity tier one and tier one at 11, 83% again up from last quarter. Finally, our total ratio of total capital regulatory capital ratio of $14 three 2%. So again all of those up from the prior quarter.
The graphic on the right there.
The trend in some of the regulatory capital ratios and also the quantum of capital you'll note that we know the goodwill impairment charge reduced total.
GAAP capital in the second quarter 2020.
But most importantly, you'll notice the tangible component of our equity has increased throughout the year.
And that's the result, and the graph on the lower left that's page you see the increase in net tangible book value per share during the year, which is up almost 9% on a year on year basis.
I'd like to now talk a bit about.
Our net interest margin and start to discussion with looking at our loan yields and our deposits from trends again.
This is a graph we've shown for the last couple of quarters. It can be somewhat busy but I think it is very quickly points out some directional trends we've been seeing.
Certainly yields are down we know with the dramatic change in interest rates, we've seen our overall dropped in and.
Portfolio yields we are on.
Also seen of course, we've been very quick and moving our deposit rates downward reaction to market trends as well.
The we expect to on one of the I'll just use as an example, you'll notice.
On the trends the customer Cds.
Excellent example, fourth quarter 2019 per weighted average rate on our customer CD book was one 9% by year end 2000.
2020.
Net is down in Q4 of 1% to 2%.
We expect we have some significant maturing customer Cds as we move into the first part of 2021.
And we certainly expect that that will drive that range down.
To somewhere in the neighborhood of 55 basis points.
By the second quarter of 2021.
Overall, our cost of funds.
Overall, our cost of funds.
It has dropped a during the course of the year and.
When we defined it as including our <unk>.
Demand deposits, our interest bearing liabilities plus demand deposits our cost of funds to 37 basis points Q4 concerns.
Q3, so on the 11 basis point drop we expect as we look again looking at customer Cds in particular is one of the big drivers, we expect our cost of funds, including demand deposits to drop to the range of roughly 25 basis points.
And sometime in the second and third quarter of 2021.
On slide 23, we've talked about our net interest income net interest margin.
On the graph with net interest income and you see the big increase in net eight or excuse me on net interest income in Q4 from $18 3 million to $19 7 million.
So on one of the factors is with the beginning of forgiveness on the PPP loans.
We saw a pretty significant uptick in net interest income due to the acceleration of the net deferred fees on.
Just forgive loans.
That accounted for roughly $700000 of increase.
In the quarter basis.
Overall as we look at as we look at our net interest income on net interest margin.
We've added a table at the bottom on the slide on the left that looks at our reconciles our net interest income as we reported two two net.
Interest net interest margin as we exclude the impact of PPP and the fair value marks.
And so what you see there is on a reported basis, our net interest margin increased by 24 basis points from Q3 to Q4.
But again with the PPP acceleration of fees, we saw a big increase in the contribution of PTP.
We also saw on.
And certainly something we need to be aware of as we move into the future is we've started to see some we saw from heavy paydowns of loans with fair value marks during the fourth quarter of this year and to a lesser extent on that in Q3. So those fair value marks had a had a fairly sizable relative to Q3 impact on our net interest.
Margin.
So if we stripped those out will be seen.
Is net interest margin.
Adjusted for PPP at fair value on Q3 of $3, one 4% of the 321 percentage in.
In Q4.
On one of the big drivers of that was again as I mentioned that cost of funds.
Including the DDA interest bearing liabilities, plus DDA is down 11 basis points quarter over quarter.
Which more than offset the decline in our earning asset yield quarter over quarter, excluding again, PPP and fair value marks which was down roughly five basis points.
With that I will turn the discussion back to Rob great. Thanks, Bob.
The benefit of excess liquidity in the market has led to strong deposit growth. This growth was achieved by those increases to existing customer accounts and by the robust onboarding of new clients as a result of strong loan origination activity.
It's also worth mentioning we saw an uptick following the Pete our successful PPP launch, we saw customers leading existing banks disgruntled over the lack of communication they received.
Throughout that application process.
As of now transaction accounts.
For 45% of total deposits increases in these low or no cost categories pushed our cost of deposits down 13 basis points quarter over quarter at year end.
We expect that the increase in new customers on boarded over the last year will lead to higher utilization of our Treasury management products and services and further enhance our noninterest income generated from these activities.
Okay.
Our path to enhancing shareholder value will be achieved by leveraging our heightened brand awareness and taking advantage of being the local option throughout this down cycle.
We will continue to attract and retain top talent to provide best in class service and products to small to middle market companies and professionals, who operate within our footprint.
A major focus on greater Washington D. C initiative, we launched this initiative and the contiguous market in December with the hire of our team we'd who has operated in this market for over 25 years, we expect to have his team built out substantially by the end of the first quarter in.
In addition to the build out in D. C. We will continue to hire experienced lenders in existing markets. We will continue to add proven revenue producers.
We will continue to focus on attracting low and no cost deposits to preserve our NIM and fund new lending activities efficiently.
We will leverage the growth in transaction accounts to increase Treasury management fees and continuing to explore other noninterest income opportunities such as the launch of our partner shipped with strategy Corp, which will be rolled out at the end of the first quarter we.
We will continue to build our commercial lending or excuse me on consumer lending verticals to enhance loan yield and bring much needed granularity to our loan portfolio.
Most importantly, we will continue to manage our costs and explore ways to enhance operations by adapting to the rapidly changing technology occurring within our industry.
And with that I'd like to ask Mary Ann Scully provider concluding remarks, Thank you Rob.
So let me try to unpack on what's always against net change at the end of the day model like ours commercially focused and leveraging unique positioning in the market and now on a state given the industry consolidation always relies on talent and we have always counted on.
<unk> ability to attract and retain very experienced and sophisticated talent what we've seen in the last few months is an enhanced and accelerated ability to continue to acquire top talent and with top talent comes portfolios. So the 20% plus.
Growth in our business development staff, which is at all levels of small business BDO level, the business banking level, the greater Baltimore in the greater Washington, but with a lot of the notable increases in the very attractive greater Washington market is not only in <unk>.
Affirmation of the positioning that we have but something that will accelerate growth going forward.
We're seeing the early signs tangible signs of that growth as Rob alluded to in the fact that our commercial loan portfolio actually did grow ex PPP, albeit modestly in the fourth quarter and the C&I growth was inhibited only by.
The record low levels of utilization of lines of credit.
So we're not just seeing people and activities, we're seeing tangible signs of loan growth and expect that that will continue to accelerate both because of the market positioning that we have our ability to leverage what happens in a down market business.
Controlled by out of state organizations, but also with this significant increase in very experienced talent.
We've also demonstrated an ability to stabilize the margin and with all of the headwinds that we have today in the country in the world with excess liquidity.
Loan growth needs to be accompanied by an ability to stabilize the margin as Bob has described we continue to see further savings opportunities on the funding cost side and we believe that the ongoing focus we have always had and continue to have on transaction deposits.
We will allow us to continue to stabilize that margin those two factors so loan growth in the stabilized margin will lead to higher revenue growth in 2021.
We've demonstrated a strong ability, especially in the last three years to controlling non interest expenses on the branch optimization front. We saw early in 2018, the radical change in customer behavior, especially small business customer behavior, which really drove the placement of a lot of our.
Ranches and we've gone from a pro forma 28 branches in the beginning of 2018 to our pro forma 13 branches in the first quarter of 2021, those 13 branches cover on 90 mile footprint.
We're also continuing to we allocate expenses and have made some investments in partnerships with some fintech firms on the data management side as Rob alluded to but we're also exploring opportunities on the AI on the RPI side can make our process improvements leading.
Not only better customer interactions to an ability to deploy our staff more effectively.
All of these lead to a stronger and stronger capital position the anticipated on our last couple of earnings releases on tangible book value accretion is intentional and strong capital always gives you more options. It allows us to be assured of an ability to fund the loan growth. It provides us with it.
Insurance net adds there is any uncertainty on asset quality that we have the capital to prepare for that and it allows us to also continuously at a board level explore other capital management techniques.
So we're feeling very good about where we are today feeling even data this quarter show tangible execution on a number of those and continue to see expected improvement in our core return on assets and our core PPA on our return on assets and with that.
I'll turn it over to all of you for any questions that you might have.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question on from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.
One moment, while we poll for questions.
Our first question comes from the line of Daniel Varga with Stephens. Please proceed with your question.
Good morning.
Good morning can you hear me.
We can't have perfect I'm stepping in for Brody This morning and I.
I have a couple of questions about the loan portfolio and specifically.
<unk>.
Question around what drove the higher CRE residential and construction yields this quarter.
Yields.
Yes.
Just to confirm the question is what drove the higher CRE and construction loans yields for the quarter.
Yes.
And the answer is yes.
You have a lot of that a significant amount of that impact.
I apologize I don't have the specific number readily available.
Was was driven by some fair value mark accretion quarter over quarter.
Okay perfect.
Thank you.
On.
Staying with the loan portfolio yield.
Yielding portfolios.
The construction portfolio in particular, but as Bob's, noting some of the lift that you would see on those asset yields this quarter was where the accretion net Bob referenced earlier.
The delta between the <unk> 39 in the $3 21 was in this portfolio.
And just a follow up I, just havent numbers at my now available.
Our CRE portfolio yield quarter over quarter, excluding the fair value marks was actually down four basis points, which is more directionally consistent with what we might expect as as loans maturing loans are replaced.
We had lower current market rates.
Henderson.
Thank you.
The second question is relating to the commercial pipelines and we wanted to see.
What your anticipation is that as compared to <unk> 19 compared.
Compared to three months ago.
Sure commercial pipeline as it sits today, it's the highest it's been since we've combined the two companies.
And Theres a lot of factors driving that one as Mary Ann mentioned, we did increase our lending staff with some pretty highly seasoned.
People that have.
Deep roots within the portfolio.
We're starting to see the fruits of that in addition, we announced the DC initiative.
New hire we've already seen some significant opportunities just from that one person in a short period of time so.
Loan portfolio as it sits today is the pipeline excuse me is very strong.
So we look at the pipeline in a couple of different ways. If you look at the last stages on a pipeline, which is obviously the pipeline that we feel has the highest probability of closing.
Youre looking at it.
Very low.
Six figure seven eight or nine figure on volume and so you are looking at a little over $100 million, it's evenly distributed across portfolios and senior with distributed across asset classes now given what our C&I bank youre going to see probably less than half of that branch.
Great.
We believe in the first quarter or two loan outstandings.
It is still very significant volume and the thing that we're feeling the basketball audience that distribution across asset classes and geography, if you look at the.
The broader stages on a pipeline if you look at the stages of the pipeline net for example, or including a lot of the greater Washington activities. Obviously, it's a well above that 100 million dollar figure from a pipeline perspective, so as Rob noted the pipeline continues to grow to grow our until.
To close on the pipeline is solid we don't see a lot of slippage out of the pipeline.
And the question is really commercial line utilization for that portion of the pipeline with C&I.
Understood. Thank you.
Yes, yes, that's perfect.
One more question about loans, we noticed that there was a pretty significant spike in September in terms of utilization.
And we wanted to get a sense for.
What caused that spike.
So I couldn't hear that.
Utilization.
Oh in the line utilization. So are you looking at slide 13 Samuel.
The non the 930 correct.
Yes.
Which we should add was was only up slightly from the from the from the end of Q2, but you are.
And as we saw a dip in.
And the early parts of that quarter.
Yes that could be a number of factors because we are so focused on the C&I.
It could be seasonality within some of our clients getting ready to prepare for the.
For the holiday season so.
It.
It shouldnt be taken as an anomaly as probably something net reoccurs within this portfolio each year around that time of year.
Okay.
Great.
On.
There are a couple of questions for balance sheet items first I wanted to ask if there's a maturity schedule for the 200 million on <unk> borrowings from.
For 2021.
The 200 <unk> borrowings R. R. R R.
None of those are Scott scheduled maturities in 2021.
Okay.
And they are they are they are our highest cost of funds item.
That's 200 million have on there are there are long term borrowings with a weighted average rate of.
Approximately 89 basis points.
Okay.
Thank you.
One more.
One moment Mr. Varga I thought you were finished so I was moving on to the next one let me reopen up your line Sir.
Your line is open again.
Sure.
Can you hear me again.
Okay, yes, sorry about that.
So we wanted to ask one more question about on liquidity and.
We wanted to get a sense for where you expect to reenter.
On cash flows from the securities book or if you'd like to.
Or would you like to put that going forward.
Well the securities portfolio Sandwich.
This is primarily mortgage backed securities.
Some of the portfolio repositioning on strategy, we did in at the end of the second quarter was to identify those mortgage backed securities with the with with the highest prepayment speeds.
We sold those at <unk>.
Gangs.
And we've replaced at more current coupon mortgage backed with obviously, thus lower expected prepayment speeds in the future.
Yes that portfolio.
Rough numbers, we're looking at looking at cash flow in 2021 in the neighborhood of.
A $40 million to $50 million on that portfolio.
At this point in time.
Whether we replace with right now where our thinking is we'd likely replace right. Now our strategy is is that we replaced monthly run off with new new mortgage backs at current current current rates.
Depending on the loan outlook.
On funding, we may or may not revisit we may revisit that strategy in 'twenty one.
At this point in time, our game plan would be to maintain the portfolio at roughly the same size.
Okay great. Thank.
Thank you and then my final question.
Regarding buybacks.
On to ask it.
You are at a point, where you would consider asking for another authorization.
From the board at some point in 2021.
Sure Sami all lights, I think as I alluded to with.
Pete had referenced this capital management, it's actually something that we're considering.
Fairly consistently in this environment than what we have scanned for the last two or three quarters is that first of all it is a tool that we have deployed in the past. So we have no inherent bias against using buybacks as a capital management tool.
Executed at the end of the last buyback in the very beginning of the first quarter of 2020.
Secondly, we are continuing to look at what our projections are for asset quality migration.
Looking at that that 2% loans that are still on the deferral category. We're comfortable that we understand that asset quality, we're comfortable with our allowance levels.
But it's something that we want to make sure we have clarity on and then finally, we do see these emerging and tangible signs.
Loan growth opportunities, which will only accelerate with a 20% addition in our business development staff across all business sectors, and all geographies, but especially in the Washington market, where there are considerable disruption and consolidation opportunities.
That I know you've heard about from some of your other covered banks. So it's balancing that acknowledgment that we have planning of capital.
With an incomplete clear picture of asset quality and an incomplete clear picture of just how much loan growth with some of these talent hires having said all of that I will tell you. It is a constant point of discussion and something that we will continue to revisit on at least on <unk>.
Big basis.
And determined.
Ask that one.
Is the right time to pull that trigger.
Perfect. Thank you very much and that would be on my questions from swimming. Thank you for your time.
Thank you.
As a reminder, ladies and gentlemen, it is star one to ask a question.
Okay.
Yeah.
Okay.
Okay.
Our next question comes from the line of Ross Haberman with <unk> investments. Please proceed with your question.
Good morning, Mary Ann how are you.
Good Ross how are you doing.
I just got on on a little late could you just go over what your expectations are on on on margin or spread assuming.
Staying about the same and if the long end gets.
Higher.
How much would that significantly.
Affect the net interest income positively.
Let's say for 100 Super 100 basis points at the long end, how does that affect them.
Logging on to that question because he gave the preliminary guidance, taking might've missed on what we think about margin trend.
I am sorry, thank you.
No problem good morning Ross.
And again I'm going to have this I'm going to I'm going to answer your question, excluding the impact of our fair value marks on our PPP portfolio, So, especially with regard on three a PPP becomes a bit of a moving target for 2021.
As we see it right now, though our expectation would be that again, we're going to see some here's how I'd, here's how I would break it down for 2021, we're going to see a continual erosion on loan yields which is really a function I mean again as a function of maturing maturing loans replace that then.
Current lower market rates, so we will see that phenomenon over the course of the year.
On the cost of funds side. My expectation is is that we're going to see continued decline on cost of funds was driven largely by our customer CD portfolio.
It would appear that most of that effect is going to be felt in the first couple of quarters of the year. So that said what up what I'm envisioning is that we're going to see our net interest margin.
Is going to likely be fairly stable early but we'll see a little runoff from the second half of the year.
And right now I would say youll see a margin in the range of three 2% to say $3. One 4% I think it's going to be a fairly tight tight tight range over the course of the year.
Okay.
And just one follow up question on number of Baxter shedding branches.
Yeah.
Have you have you reviewed your branches.
And could we expect any store closures.
Over the next quarter or two or three in terms of.
Cost efficiencies.
Sure sure Ross.
<unk> referenced that in my closing remarks, but since 2018, where we had 2028 pro forma branches.
We've gone down to what will be pro forma 13 branches in March of <unk>.
'twenty 'twenty, one so and over 50% drop in the number of branches. We have done that in stages. We obviously had some closure is upon closure of the merger with Firstmerit or then we had a fairly significant round of branch optimization closures in late 2000.
18.
And then we announced in this quarter I think it is in the press release two additional branches that we have had told customers and announced to the regulators that will be closing and they will close in March of 2021 to 28 down to 13 brings us well above any peer.
Our average is over $100 million per branch and while we are a commercially focused branch where commercially focused branch that services, our market from Maryland, Delaware aligned down now to the greater Washington line, So over a 90 mile territory.
Not that were not constantly reviewing branches for relocation.
Jerry on opportunity to close a larger branch and go to a smaller branch, but I think in terms of the number of branches to have gone from 28% to $13 513 servicing over a 90 mile footprint on.
The opportunities are going to be more in refining where the existing branches are rather than than dragging down further the number of branches, but we weren't we were kind of ahead of the branch optimization game.
In terms of what we did in 2018 in 2019.
Just one follow up regarding that will you have you or will you take some sort of.
Reserves or expenses to close two branches you just referred to.
Yes, we did take that Bob can give you the exact number again in the press release, there was a little over a $500000 charge, which was the net average charge and then on.
On claw back on the liability that we had from the last branch optimization routines. So Bob can give you the detail yes. So the actual charge associated with the two branch closures was $1 $1 million again, we announced and that was recorded in Q4.
And so so again.
And I should add if.
Those branches were already temporarily closed because of the pandemic.
Got it okay guys. The best of luck. Thank you very much.
Character on questions.
As a reminder, ladies and gentlemen, it is star one to ask a question.
Okay.
There are no further questions in the queue I'd like to hand, the call back to Ms. Scully for closing remarks.
So I just wanted to once again, thank everybody we understand that this is a very crazy time.
The year for everybody is you are competing with other earnings releases, we always appreciate the time and the attention from all of our shareholders on our stakeholders.
And always remind everybody that we're extraordinarily accessible management team and if you've got other questions whether they'd be clarifying questions on strategic questions do not hesitate to reach out to Rob.
Bob or myself, but thanks again.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.
Yeah.
Yeah.