Horizon Bancorp (NASDAQ:HBNC) Q4 2020 Earnings Call

0:00 Good morning, everyone, and welcome to the Horizon Bancorp conference call to discuss financial results for the third month ending December 31, 2020. All participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an 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 re-enter the question queue. Please note this event is being recorded. Before turning the call over to management, please remember that today's call may contain statements that are forward-looking in nature.

0:49 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 in Horizon's current 10-K and later foulings. In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in 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 access it at the company's website, www.horizonbank.com.

1:44 Representing Horizon today are Chairman and Chief Executive Officer Craig Dwight and Executive Vice President and Chief Financial Officer Mark Secorre. They will 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 Horizon's Chairman and CEO, Craig Dwight. Please go ahead. Thank you, Anita, and good morning, and thank you for participating in Horizon Bancorp's fourth quarter earnings conference call. Our comments today will follow the investor presentation we published yesterday, January 27th. Starting on slide four, you'll find highlights that summarize Horizon's excellent year as evidenced by net income for 2020 increased by 3% over the prior year.

2:34 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 one to four family mortgage loan production and mortgage warehouse volume, good expense control, and our ability to maintain a stable net interest margin. In addition, we maintain solid asset quality as evidenced by low NPAs to total assets at 49 basis points and net charge-offs at five basis points of total loans. We are 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.

3:19 Next slide, five, titled Season Management Team. You will observe that we are a seasoned leadership team. We have managed through multiple recessions and have overseen history of strong financial performance over the past 18 years. Of special note, in December 2020, we promoted Senior Commercial Credit Administration Officer Lynn Kerber and our General Counsel Todd Etzler as our newest Executive Vice Presidents. As you'll see on slide six, we've completed 11 new organic market expansions and 14 mergers and acquisitions during this time continuum. We're a company on the move, and we continue to look for new opportunities in 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 7 clearly demonstrates Horizon's track record for achieving our well-established long-term goals, which include meaningfully outpacing GDB and industry growth and achieving balanced growth with 50% organic and 50% through mergers and acquisitions.

4:38 In 2020, Horizon grew the balance sheet by 8% excluding PPP loans. On slide 8, we highlighted our primary market area in dark brown and dark green. Horizon's markets represent diversified economies and excellent growth opportunities. Horizon's expansion and growth has occurred primarily in college and university towns and state or county government seats. Therefore, a majority of our footprint has an economic base that is traditionally more stable than other areas of Indiana and Michigan. Verizon's footprint is positioned well to take advantage of the outbound migration from Illinois, which continues to increase as consumers and businesses exit dense living spaces, high taxes, and the high cost of living. Both Indiana and Michigan continue to show improving economies, as evidenced by a reduction in unemployment rates. As of December 31st, Indiana's unemployment rate was 4.3%, which is below the U.S. national unemployment rate of 6.7.

5:37 While Michigan's overall unemployment rate was 7.5%, a slight increase from November 30th, the regions we serve in the western and central parts of the state are reporting levels ranging from 3.7% in Grand Rapids to 4.9% in Bay City Midland area. Horizon's footprint helps to geographically disperse credit risk with 60% of our loans in Indiana and 40% in Michigan. Slide 9 highlights the primary markets where we are engaged in some exciting economic events that are taking place that will continue to enhance our markets. Now moving to slide 10 titled COVID-19 Response. We continue to closely monitor the impacts of COVID-19 pandemic on the communities, customers, and businesses where we operate. Indiana's numbers of daily reported positive COVID-19 cases were elevated in November and December and have started to trend downwards in January.

6:38 Indiana's current restrictions are comparable to 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. The safety and well-being of our employees is our first priority, and therefore we continue to adhere to safety protocols as we navigate the reopening stages in our markets. Currently, all offices are open by appointment only. Prior to COVID-19, Horizon was well on its way to transforming its customer base to our digital platform. though the impact of the pandemic due to limited branch access has accelerated the use of digital banking.

7:23 In slide 11, looking at the chart on the right, Horizon's average monthly transactions have shifted away from taking place in branches to the majority being processed through our digital and virtual channels. In December 2020, 73% of all transactions took place through our digital channels compared to 57% one year ago. As you'll see in the chart on the left, In December 2020, 75% of all checked accounts were active online banking users, an increase from 66% one year ago. Horizon was well prepared for this increase in digital activity. Other technology investments made in 2020 that focused on enhancing the customer's experience included adding a fourth call center location to increase service capacity and shorten wait times. Expanding our interactive teller machines to allow virtual teller interactions at over 27 locations with expanded virtual teller hours from 6 a.m. to 8 p.m. six days a week. The addition of chat and online account opening to improve customer experience.

8:28 As of month end December, over 85% of Verizon's online chats are answered by bots. Now for the financial highlights, it's my privilege to introduce to you Horizons Bank's Chief Financial Officer and Executive Vice President, Mark Secor. Mark? Thank you, Craig. Horizons' fourth quarter results continue to demonstrate our ability to realize strong operating results and drop record earnings to the bottom line as we navigate the current environment. Starting with slide 13, the company's fourth quarter results were the highest stated in and adjusted net income, net interest income, pre-tax pre-provision income, non-interest income and earnings per share in the company's history. Several activities during the fourth quarter impacted these record results.

9:14 We incurred prepayment expense on the retirement of high-cost long-term debt, recognized PPP forgiveness fees through net interest income and recorded tax benefits from solar tax credit investments. We continued to build allowance with additional credit expense primarily for the stress loan sectors that have been identified. We believe we are appropriately reserved given the current state of our portfolio, additional government stimulus, and our CECL modeling. Slide 14, the 17 basis point increase in the adjusted margin during the quarter was positively impacted by 18 basis points from PPP lending as net fee income was recognized for loan forgiveness. compared to four basis points of margin contraction in the third quarter. In addition, excess liquidity compressed the margin an additional seven basis points compared to three basis points in the third quarter.

10:09 Slide 15. The loan yield was also positively impacted from PPP net loan fees recognized during the quarter, adding 15 basis points to the yield compared to a 13 basis point reduction in 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 yield is expected, along with a mix of additional investments, resulting in some margin pressure during 2021 as the opportunities to lower funding costs are realized. Slide 16, our strong core deposits continue to help reduce our funding costs. The CD portfolio's 30 basis point decrease in pricing led the reduction in total funding costs as high-cost term deposits matured during the quarter.

11:11 445 million of CDs with an average cost of 93 basis points will mature during 2021 and continue to reduce our cost of funds. The 4% growth in noninterest-bearing deposits and two basis point drop in interest-bearing deposit costs also contributed to margin stabilization in the fourth quarter. Slide 17. Since the first quarter of 2020, we've maintained a conservative and strong liquidity position. We also expect additional liquidity from PPP loan forgiveness and, in 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 in cash, we increased the investment portfolio over $100 million during the fourth quarter. Also, we prepaid $83 million of FHLB advances with a weighted average cost of 2.61%, utilizing $62 million of cash and selling $21 million of investments.

12:14 While our fourth quarter results reflected a net one-time pre-tax loss of $1.2 million on the prepayment Thank you. Thank you. Record mortgage revenue from the gain on sale and the mortgage-related income drove our record non-interest income as we saw non-cash impairment charges to the mortgage servicing right asset flow in the quarter. The continued high level of mortgage production and strong percentage gains are the primary contributors to our solid non-interest income for the quarter.

13:05 We also saw all other fee-based income increase over the third quarter. Based on local and national refinancing activity, we expect strong top-line contributions to continue from the mortgage business going into 2021. Slide 19, during the fourth quarter, we saw an increase in operating expenses, but improved the adjusted efficiency ratio to 56.5%. Increased salary and benefit costs were the primary driver of the increased expenses as our very strong fourth quarter and full year results merited higher performance-based compensation payments and accruals. There were also increases in other operating line items as investments were made for future efficiency efforts.

13:52 As our increase in customer activity and the one-time write-downs to reduce the company's bank-owned real estate assets. As many of you know, part of Horizon's normal operating process includes a rigorous annual branch evaluation, which has led to consolidation of 25 retail locations over the last five years. We are currently in the process of another rigorous branch review as customer habits have changed as more digital channels are being used. Looking ahead, we intend to continue our record of maximizing the efficiency and scalability of our retail franchise while further leveraging the investments we have already made in digital, mobile, and remote banking, as well as our call centers. Slide 20, as we have discussed, we did adopt CECL on the start of 2020, and the $708,000 reserve bill in the fourth quarter was primarily driven by allocations for sectors of loans with potentially higher risk are all eligible for a PPP loan. The percentage of allowance to total loans was 1.47 at December 31, or 1.55 when excluding PPP loans. A balance of $11.5 million remains for discounts on acquired loans.

15:10 Slide 21, Horizon continues to maintain a strong capital position in these uncertain times, supplemented by our $60 million subordinated debt raise in June. Accordingly, at December 31st, the holding company had just over $127 million in cash, representing approximately 18 quarters of fixed costs, which included interest on all debt, 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 2020 in this very challenging year. We believe we are well positioned from a credit, liquidity, and capital perspective to and look forward to refining our operating model to further improve our results in the quarters ahead. For some additional comments on our loan portfolios, I'll turn it back over to Craig.

16:00 Thank you, Mark. Looking at the chart on the left on slide 23, Horizon's $3.8 billion in total loans are well diversified, with 50% in commercial loans and 43% in residential and consumer loans. At Horizon, we like this loan mix as it diversifies our credit risk and provides advantages to manage our net interest margin. The chart on the right provides the granularity within our commercial loan portfolio, which itself is well diversified. Our 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? Horizons manages capital at risk by maintaining an in-house lending limit at $30 million, which is well below our legal lending limit of approximately $78 million. Our granularity is further enhanced by the fact that Horizons' average commercial loan is only $304,000, excluding PPP loans.

17:01 Now moving to slide 24, as of December 31st, Horizons' loan deferrals declined to 3.3%, down from its peak of 14.3% on June 30th. The majority of our dollars under a loan deferment are still in the commercial loan portfolio, with the consumer and mortgage loan deferrals remaining low at less than 1%. Overall, Horizon's 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 total of 670. Horizon's commercial lending team has been diligent and meeting with our business customers to update their financial plans and to place the loans back on regularly scheduled payments. Of the commercial loans on deferral, 95% of the dollars are making interest-only payments and only two or 5% of those loans in deferral are deferred for principal and interest.

17:58 The two loans on principal and interest deferrals are the same sponsor and represent two hotels in various stages of construction or remodeling. The borrower and guarantors have in excess of $20 million in cash on their balance sheets, so this deferral has minimal credit risk and reflects more of a retention strategy. Interest payments on these loans are scheduled to resume in April of this year. Slide 25 reviews our diversified commercial loan portfolio. Horizon is a traditional regional bank offering a standard lineup of commercial loan products through an experienced and seasoned team of lenders and credit administration staff. We have a history and culture of prudent commercial loan underwriting, and commercial loan asset quality metrics continue to be favorable at quarter end.

18:47 Moving to slide 26, titled Sectors with Effective Monitoring, the RISD continues its elevated monitoring in those loan segments that exhibit the most arrest as evidenced by high deferral rates. As of the year end, the majority of the Horizons payment deferrals were made to hotels, with the other non-essential businesses seeing considerable improvement in the fourth quarter. The portfolio 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 increase from 58% of total loans outstanding as of September 30th to 72% as of December 31st. This increase is due to the second COVID-19 wave starting in October and the resulting drop in occupancy rates. 19 of the 20 hotel loans that are modified are making interest-only payments, and two are on principal and interest deferrals.

19:43 The comfort we have with this portfolio is that our borrowers are long-time operators, have managed through multiple economic cycles, and 71% of the total dollars in our hotel portfolio, $101 million, The sponsors have access to liquid assets in excess of $10 million per relationship. I'll touch more on hotels in just a minute. Next, the restaurants. This portfolio continues to perform well with only $2.7 million in deferment, with all borrowers making at minimum interest payments and no loans having principal and interest payment deferrals. Our comfort in this portfolio is due to the fact that the average loan amount is low at $365,000. Good current performance, long-term owner-operators, and good franchises.

20:29 Next, leisure and hospitality. Overall, this segment is performing well with only one loan and the amount of $130,000 being under a monthly interest-only payment modification. This industry segment consists of a diverse group of borrowers, including golf courses, bowling centers, movie theaters, fitness establishments, and one zoo. All entities are open with the exception of one Indianapolis business that went into non-accrual during the third quarter due to the closing of COVID-19 restrictions. In general, we have strong and cooperative borrowers with small average loan balances of $529,000 and low loan-to-value ratios on our largest segment in this portfolio consisting of golf courses. Most golf courses actually saw an increase in the number of rounds played in 2020.

21:17 Slide 27, titled Hotel Sector Locations, you'll see on 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 an interstate highway or resort communities. Hotels located along interstate highways are rebounding faster than those located in metropolitan areas where they are dependent upon sporting or convention venues. All hotel loans in our portfolio are open for business, with occupancy rates dropping in October and November as a result of the COVID-19 second wave. The average decline from October to November was 50% to 38% per occupancy. Even with the stress of COVID-19, Horizon continues to report strong asset quality metrics in the fourth quarter, which you can see on slide 28.

22:10 The chart in the upper left corner exhibits low total net charge-offs over the last five quarters of less than two basis points. The chart in the upper right corner, credit loss provision expense was low throughout 2019, and for 2020, Horizon's provision expense was higher to build reserves due to the early adoption of CECL and primarily related to the econometrics and the general allocation for the nature and characteristics of our loan portfolios during this pandemic. The chart in the lower left exhibits Horizon's total non-performing 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 in non-performing assets, primarily resulting from payoffs received on distressed commercial loans.

22:56 The chart in the lower right corner, allowance for credit loss, exhibits Horizon at 1.4% of total loans, which is in line with other community banks that have adopted CECL. Verizon's 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 who has managed through multiple economic cycles, excellent geographic diversification in 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 on our common shares. Overall, good year. This concludes today's fourth quarter earnings presentation.

23:45 And operator, please open the lines now for questions. Thank you. Thank you. We will now begin the question and answer session. To ask the question, may press star then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. 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 queue. The first question today comes from Terry McEvoy with Stevens. Please go ahead. Good morning, guys. How are you? Good. Good morning, Terry. Good morning, Jerry. Maybe, Mark, a question for you. How should we think about expenses in 2021?

24:30 Thank you for joining us. The fourth quarter was heavily loaded on the salary and benefits side as we expected. In the first part of the year, we didn't foresee where we were going to be or we saw where we were going and didn't have the accruals where they should be. So I think the year, looking at the full year of the salary and benefits expense is a good picture of where we should have been for the entire year and moving into 2021.

25:21 We had some other elevated expenses here in the fourth quarter, which we alluded to, and some of the one-time items that are normal operating, but in the other expense category, we had some write-downs on bank-owned properties. We're trying to get those out of the balance sheet. And then there was higher customer activity, which the loan expense and so forth could continue through next year. But we are looking at the branch rationalization. There will be more to come on that as we get into this year. And we are looking for ways. We also are looking to where we need to reinvest some of that as we look at that branch rationalization to reinvest it into future earnings.

26:09 So 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 are going to do what we can to maintain the level, although there are sometimes inflationary or pressure or needing to move up for salary benefits and so forth for increases and going into 2021. Thanks. And then just as a follow-up, it sounds like over the near term, mortgage business should remain pretty healthy, though the industry kind of folks are suggesting it declines throughout the course of 2021.

26:58 What are your thoughts on kind of full-year mortgage revenue as well as just the mortgage warehouse, which ended the year almost with $400 million? Yeah, I think as As we look at it, we follow 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 at elevated levels, both refinancing and purchasing. But I think following the guidance that we're seeing from the national 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 as it slows.

27:47 Yeah, Terry, this is Craig. We are directionally aligned with the refinance indexes that are published, so whatever trend they're taking is the same trend that we'll be taking. It's just been historical norms. Thank you. Thank you. Thanks. The next question comes from Damon Del Monte with KBW. Please go ahead. Hey, good morning, guys. How's it going today? Good morning, Damon. Good morning, Damon. Great. So first question, just on the margin, Mark, could you just elaborate a little bit more on 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 talked about some of the puts and takes around that and what could be some of those factors. Could you just kind of go back over that, please?

28:37 Yeah, Damon. Our focus is, since we have this liquidity and we had a lot of excess cash, even as we continue to try to find ways to utilize it, we had excess cash again at the year end. So 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 I think the loan yields, we're seeing those starting to stabilize, and the repricing is working its way through. I think the pressure is going to be more on the mix of the assets, and we're stated that we're looking to put $200 million more into the investment portfolio to lower yields.

29:25 So I think that's going to put the pressure on the asset yield. We have some of the benefits yet of the CD portfolio rolling off on the funding side. So we'll see some pickup there. But I think the mix of the assets is probably going to have the biggest impact to the margin. So we're focused on growing net interest income. So we want to get our cash to work. We want to look for ways to increase net interest income and continue to grow that. and the margin will end up where it is depending on the mix of those assets. Got it. OK, that's helpful. Thank you. And then I guess just maybe a broader question for Craig. You know, you mentioned that you thought that M&A opportunities could be arising here in 2021. Could you just give us a little refresher on your Thank you. Yes, thank you, Damon.

30:20 Some of you might be surprised that our primary focus is Michigan, Indiana, and Northwest Ohio. We are not looking at Illinois anymore, primarily because the COVID-19 pandemic has Thank you for joining us. So, yes, I think 2021 will see a reemergence of M&A in our target footprint.

31:20 Regarding the Huntington TCF acquisition, whenever there's market disruption, we pursue it vigorously. We pursue not only talent, we pursue customers through increased advertising dollars. This will be TCF's third systems change in three or four years. I can't remember the time period. That's a lot of disruption for their customers to go through, so we think there's an opportunity to pick up not only talent, but as well as customers going forward. Thank you for the question. Great. Thank you. Again, if you have a question, please press star, then one. The next question comes from Nathan Race with Piper Sandler. Please go ahead. Hi, guys. Good morning. Good morning. Good morning. I was hoping to just kind of expand on just the Loan Growth Outlook X PPP this year. Obviously, there's some opportunities with the M&A-related disruption in some of your geography. So just curious if there's an update from I think it was kind of a flattish Outlook X PPP last quarter. Are you guys feeling kind of more less constructive just in terms of organic loan growth for 2021?

32:37 Yeah, I'll take a stab at it, and then we'll have Dennis Kuhn maybe give us some insight on the commercial side as well. Our objective is to maintain loan outstandings for the year, which will be commendable considering PPP forgiveness that's forthcoming. That said, we don't see that taking place until third and fourth quarters. And what's interesting is our – Thank you for joining us. We'll be right back. Transaction, and so how long will it take to build that pipelines.

33:33 With that said, we had growth in some of our key markets. The Michigan market had a very good year last year. We had some payoffs in Indianapolis, so they slowed down, but the pipelines are starting to rebuild. So our growth markets, I think, will return and be promising again going forward. And we have historically taken our profits from the mortgage business during the good years and and reinvested them in commercial lenders for future growth. And that's what we plan to do this year. Des, you want to add to that at all? I think that was an excellent response. And, you know, again, as Craig said, the performance in our key growth markets, including the metrics you're hearing today on unemployment and such, you know, bode well for those markets. We're active. And our sense at this point is that over the fourth quarter and early We're seeing some growth in pipelines. So there are opportunities that are starting to come to the front.

34:32 It is, of course, very competitive. But we will be, again, looking for opportunities with regard to the Huntington TCF upheaval as well. Got it. That's great, Tyler. And just changing gears a little bit and thinking about capital deployment. Obviously, I appreciate your comments just with M&A remaining an ongoing consideration these days. And, you know, with the stock having bounced back a little bit, just curious on your kind of updated thoughts on going back to repurchases and just your overall appetite there and what your remaining authorization is as well along those lines.

35:18 Well, Nathan, as we continue to grow earning assets faster than capital, I'm sorry, the vice versa. Capital is growing faster than earning assets. We do have to do something about excess capital, so we are seriously looking at our dividend as well as stock repurchases in 2021. I'm not sure when those will start, but it's definitely on our table. The third thing is the acquisitions would also take a part of that capital. I was going to say, in our current repurchase plan, we have about 1.8 million shares left in that plan. Gotcha. And just as a follow-up, Craig, just curious, with the credit picture becoming a little more clear these days, is there a payout ratio that you guys are targeting this year in terms of both buybacks and common common dividends relative to historical periods.

36:18 I think it's been the 30% range or so. Any updated thoughts along those lines? Yeah, Nathan, we try to keep our payout ratio in line with peers and to increase dividends directionally with earnings improvement. And we've done that historically, and so I don't see that changing. Where in the past we were very low on payout ratios. We were at 25% or below. We're more in line with peers now, 30% to 35%. I don't see that going backwards. 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. That is less of an issue today as we are a much larger company. Right. Got it. I appreciate all the color.

37:06 Thanks, guys. Thank you for the questions. The next question comes from Brian Martin with Jannie Montgomery. Please go ahead. Hey, good morning. Good morning, Brian. Just one follow-up, Mark, on the margin question of the dollars of net interest income. Can you talk about maybe how you think about the dollars of net interest income, if that's more the focus, just from a growth perspective this year? I mean, the PPP kind of muddies that up, but just how you're thinking about expectations for 21 versus 20 on the dollars of net interest income, given the fluctuations in the size of the balance sheet here. Yeah, I think it's just general direction, Brian.

37:51 I can't give you amounts, obviously. But I think as we talk about the margin, I think as we hopefully see the loan yields stabilize through the year as we continue, as we've repriced the portion, I think there's still a slight pressure, but they are stabilizing under the current scenario right now. Now, if we have different economic indicators or economic issues, that could change throughout the year. So I think the biggest impact to be able to see what would be the net interest income would be putting in that additional liquidity into the investment portfolio. And, you know, we already said we're working on $200 million, but We also have additional liquidity coming from PPP forgiveness as we get through the year and through this current round.

38:43 That's going to help put on more assets for a while, but those will come back. And last round, we picked up quite a bit of cash through that process as that money was sitting in our transaction accounts. And along with the warehousing, we'll create liquidity. So, you know, I think it's going to be, I think it's our goal to grow net interest income, but I think there's going to be pressures because getting rid of the warehousing and PPP loans and the fees, those are going to be higher yielding than what we can put on with investments. And part of the driving factor will also be where our deposits go. If we start to see deposit outflow, then we will be able to reduce some of the balance sheet. But really the deposit flow is driving, the deposit levels are driving the need to put the cash into earning assets.

39:42 Gotcha. Okay. That's helpful. Go ahead, Craig. This is Craig. Good morning. You know, if we just maintain the dollars in margin or have a modest increase, we're going to be doing very well given I anticipate the credit Provision expense should not be anywhere near that it was in 2020 and that we've 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 stronger net interest margins that we shrink the investment portfolio and put it back into higher earning assets. So that's our plan. We've done that before in other recessions and other mortgage boom times. I think it's worked pretty well.

40:27 Yeah, okay. Thanks, Craig. And maybe just my next question was just on that comment, Craig, on the reserve build and just kind of, you know, where things are at. I mean, the credit quality was, you know, obviously very strong here, but you guys had some build in the quarter. Just kind of how to think about the, you know, the reserve, you know, kind of post-COVID here, kind of where we may trend to or how to think about that. Yeah, first of all, I think CECL is working as intended. We could all talk about the mechanics of it. It's different in each bank. That's how we managed our reserves back in the 80s. We set aside earnings during great years for future losses, and that's what's taking place now. So I think CECL is working. But what I'm encouraged about is that the number of loans are smaller. Our hotel sector was actually doing very well this summer and through October with higher occupancy rates because there are primarily hotels located along highways and resort communities.

41:24 Thanks to the Chicago influx of people coming over to the resort communities. And then the second round of PPP is going to get them through the next summer. Will they have the accuracy rates and average daily room rates they had two years ago? Probably not. But they're going to cash flow, have decent and 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 in convention properties. I feel pretty comfortable with that segment going forward from additional allocations in the stimulus money coming out. And that's true of all our other non-essential businesses. The PPP program has worked to bridge that gap. So from a credit quality standpoint, get us through to the other side, which, you know, we're here in the summertime.

42:12 I believe there is pent-up demand for the retail consumer sectors, probably not the business side who's sitting out 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, no, for sure. And maybe just given your comments on the hotel, the level of criticized assets, I think you guys gave the classifieds in the release, but just how did the criticized levels trend this quarter? Yeah, I'll make a broad comment and let Dennis talk about it as well. Two things that I want to state. Number one, when we gave modifications, we downgraded the credit. I'm not sure all banks are doing that. 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.

43:01 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'd seen in how we addressed and attacked the distressed sector. So that gives me a lot of confidence in how Our team managed their accounts, went out, talked about their plans to cut costs, 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 in substandard loans in the fourth quarter. I'll let Dennis talk about that. Dennis? Sure. Yeah, we saw an uptick of about 11 million or 12% during the fourth quarter, and that's Centered in commercial, of course. Seven relationships.

43:48 Largest was about $8 million. That's an agribusiness seed distributor who's working on a recapitalization and potential payoff here during the first quarter, second quarter latest. Several other credits, a couple of manufacturers, a couple of CREDs. So nothing, you know, really just a prototype. Thank you for joining us. Thank you for joining us.

45:05 Thank you for joining us. substandard category. And how did the, it gets inclusive of the special mention, so the criticized number, was that directionally the same way, or how did that trend in the quarter? There was significant impact. As Craig has mentioned, when we modified loans, we took a one-step downgrade, so there was certainly additional movement early in the year within the special mention.

46:05 But as we've progressed and we're getting the opportunity to review those credits again, we are seeing, again, they're stable, they're making payments, and we are starting to actually see some reversal of that, and over time we expect that special mention will actually reduce. So there'll be, of course, some level of migration, but, again, what we're seeing at this point has been favorable. Yeah, Brian, by example, most of our hotels went into special mention. Some went into substandard. But 71% of our hotel dollars outstanding have sponsors with $10 million-plus sponsors. and Liquid Assets.

46:53 Very well-heeled sponsors that can support the portfolio going forward. Gotcha. Okay. Thanks for taking the questions, guys. Yeah, thanks for the questions, Brent. Good depth. This concludes our question and answer session. I would now like to turn the conference back over to Craig Dwight for any closing remarks. Thank you, Anita, and thank you for participating in today's earnings call. And we look forward to speaking to you again, hopefully in person in the near future. Let's get to the other side of this pandemic. Thank you. Have a great day. This conference has not concluded. Thank you for attending today's presentation. You may now disconnect.