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Howard Bancorp (NASDAQ:HBMD)
Q4 2020 Earnings Call
Jan 28, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Howard Bancorp, Inc. Fourth Quarter and Full Year 2020 Financial Results Conference Call. My name is Doug, and I'll be your operator today. Please note, this conference call is being recorded. [Operator Instructions] I would now like to turn it over to Robert L. Carpenter, Executive Vice President and Chief Financial Officer of Howard Bancorp, Inc. Mr. Carpenter, you may begin.

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

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'd like to simply remind everyone that some of the comments made during this call would be considered forward-looking statements. In the interest of time, instead of reading through all those warnings, I would direct everyone to page 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, and we -- we have to keep in mind that COVID-19-related challenges. It is our policy not to establish with the markets any earnings, margin or balance sheet guidance. With that said, I now would like to introduce Mary Ann Scully, the Chairman and CEO of Howard Bancorp.

Mary Ann Scully -- Chairman and Chief Executive Officer

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 that's able to take the time to hear the story. We obviously will reference the earnings release that we published last evening as well as the earnings presentation, and we'll use that earnings presentation as a guide. We start, of course, always with the basic investment value 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 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 industry, 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 that come with that talent. Our commercial focus also differentiates us. We've seen tangible value growth driven by core PPNR and are very focused on ongoing core PPNR activities. Debt 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 PPP round, including the round that is now under way.

And Rob Kunisch, our President and COO, will tell us about those activities. It's not only activity that helps us service our community, build our market positioning and our market share that has directly enhanced our EPS. We've demonstrated an ability to stabilize our net interest margin despite very competitive environment, a rush to liquidity throughout the economy, loan yield compression, partly through 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. Loan deferrals are now down to 2.2% of loans. And we continue to have no significant concentrations in either individual customer exposures for highly impacted industries. We are very focused on capital management. We're 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 enhancement 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 to continue to access that to contingent funding availability. I'll turn it back over to Bob to go over some of the quarterly financial highlights that again demonstrates how well we're executing on this value proposition.

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

Thank you, Mary Ann. And just to touch briefly on some of our quarterly and full year highlights, we did report, if everyone remember, on a loss in year 2020, driven largely by the goodwill impairment charge we recorded earlier this year. So our EPS is down $1.80 year-over-year, but keep in mind that $1.84 of that decline was attributable to that goodwill impairment charge. We believe that our core earnings is more representative of our ongoing business activities. And we have certain disclosures on page three of our investor presentation and various reconciliations of GAAP to non-GAAP measures on pages 35 to 46 of the investor presentation. But I would like to just mention briefly, our core net income, 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 that our core quarterly core pre-provision revenues have increased, not only relative to the prior quarter, but also relative to the fourth quarter of 2019. And I'd like to just mention one of our key challenges is expense management. And we've -- as we look at our core operating expenses in Q4, we did see some run-up in our expenses, but there were some nonrecurring items that I'd like to just touch on briefly. And we did note 2, what we call noncore items in Q4. One, on a very positive note, we did increase a liability related to litigation accrual or a litigation issue that we first disclosed in the second quarter of 2020. We're pleased to report that we have settled that particular issue. And so that removes some uncertainty from our future results.

In addition, we announced the closure -- permanent 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 partial reversal of a charge related to a closure that we recorded back in the second quarter of 2019. So if we look at -- knowing that the quarter was noisy, we've had some changes in some accrual methodologies. Where we ended up with is an expense -- we believe an expense run rate in the neighborhood of $12.25 million to $12.75 million is representative of where 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 nice growth in that year-over-year -- or, excuse me, quarter by quarter -- fourth quarter 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%. And we certainly had benefited from the PPP program in terms of improving that ratio. As we look to 2021, we certainly would expect that, that ratio, even absent PPP performance, would be under 60% impact in the second half. I'll turn it over to Rob to talk about our PPP program.

Robert D. Kunisch Jr., -- President and Chief Operating Officer

Thanks, Bob, and good morning, everybody. Our 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. As of January 22, we obtained forgiveness for 232 borrowers, totaling $55 million, which accounted for just under 22% of borrowers and a little over 27% of dollars length. To date, we've received 100% forgiveness for those whose applications have been submitted, with exception of one borrower who had an idle loan. Our success in obtaining the forgiveness is a result of the rigorous underwriting criteria we implemented at the beginning of the program. We launched PP3 in accordance with the Small Business Association in an extremely efficient manner. Our PPP1 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 22, we've received 351 applications totaling $72 million, which is in line with what we anticipated from the program. Turning the page and looking at slide 10. We'll see that our loan portfolio remains well diversified with no single loan type accounting for more than 1/3 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 lo- rate environment. We've also seen a steady decline in commercial line utilization as a result of the liquidity and markets from the various stimulus bills. Despite the accelerated payoffs 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 of the activity that occurred in terms of new originations versus payoff. I apologize if this slide appears a bit busy, but it paints an accurate picture of our loan origination activity by loan type, offset by the previously mentioned precedent on the residential loan book and commercial line usage. As mentioned in previous calls, origination activity in quarter 1, pre-pandemic was robust and came to a halt as various lockdowns were enforced. PPP took priority, and overall business activity slowed. We are fortunate to operate in markets throughout the pandemic that saw a majority of their economy remain open. In August, we began to see business activity begin to pick up and it culminated with $120 million in originations in the fourth quarter. As you can see in the right-hand column of the chart, origination activity was recognized in each loan category. It should be noted that our correspondent mortgage operation that we started up in August 2020 to acquire jumbo mortgages in our market, combined with the 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 in the fourth quarter as a result of borrowers selling their companies and/or 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 as an aggregate of the previous chart.

As we enter 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. Finally, I've 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. I'm going to now ask Randy Jones, our Chief Credit Officer, to walk you through our deferral and asset quality matrix.

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

Thank you. Good morning. On slide 14, we run through our potentially highly impacted loan sectors as we have in the prior quarters. We continue to see these as the most impacted segments of our portfolio. They account for almost half of our loan deferrals. Also account for a large part of our migration into criticized assets, which we went through in the various columns here. They also received a representative amount of relief in 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, which we have shown in prior quarters, some of the offsetting mitigants, we believe, to some of this portfolio despite being highly impacted by the pandemic. Some of the characteristics we feel are representative in those portfolios that help offset some of the risk. slide 16 runs through our deferral levels. We've seen our deferrals decline from a high point last April down to, as Mary Ann mentioned earlier, 2.4% of our portfolio, about $41 million loans remain on deferral. There was a slight uptick from 11 six to 12 31. We've seen that level drop down again so far in January. But we continue to evaluate ongoing requests 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 4.3% of loans to 2.4%. We've broken out what we consider full deferrals versus waiving principal payments.

We've seen the principal payment deferrals drop more heavily than the full deferrals. Now the full deferrals 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 initial deferrals. We were measured in our going out of the deferrals, did a lot of three-month deferrals and second deferrals for another six months. But we're making -- drawing the line here between what we consider higher risk, and those are deferrals that have exceeded six months. They now account for about half of our deferral. It is a select group of customers that, again, fall into that highly impacted -- portfolios. And it was what you would expect, a couple of hotels, a catering, event center, a restaurant, one museum and one fitness center. So it is a small number of clients, but highly impacted set of clients. slide 18 runs through our asset quality metrics. Nonperforming loans continue to remain fairly stable. Our delinquency is following our normal seasonal patterns. 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 and those loans that are extending out on the deferrals. On slide 19, we demonstrate our allowance build that has occurred throughout the year, coming up to 1.03%. Net charge-offs have remained fairly anemic throughout the year, which is good news. And then two slides on the right-hand side of the page show our allowance versus nonperforming, slight downtick there related to the increase in the nonperforming and our allowance plus the fair value marks of loans. Bob is going to go into more detail on slide 20 related to some of the components of the allowance.

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

Thank you, Randy. Yes. You'll notice it's a somewhat busy graph on page 20, but we're looking at the trend in our allowance as a percentage of loans within various portfolio of categories. And what you -- what this slide demonstrates is the significant increase in the allowance from Q4 2019 to Q4 '20. You saw on the previous page the overall allowance that increased from -- from 60 basis points of total loans at the end of 2020 to 1.03%, as Randy said, of total loans 12/31/20, but 1.13% of our portfolio loans, again, which we define as total loans less the PPP loans. What you see here is, not a surprise, is categories like CRE nonowner occupied. We see a dramatic increase in the allowance attributable to that portfolio here in 2020. If you were to look at the potentially highly impacted loans that Randy discussed earlier, there's a heavy concentration of CRE, commercial real estate nonowner-occupied within those various potentially highly impacted loan sectors. You'll see a fairly large spike here in our commercial or C&I allowance. And as we mentioned in the earnings release, we did have one specific allocation allowance of roughly $900,000, which withdrew 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 of specific allocation allowance I just mentioned, due our qualitative factors. In fact, our historical loss rates, and we use an 8-quarter rolling average, have declined throughout the year. There were 29 basis points of loans in the fourth quarter of 2019 down to 19 basis points in the fourth quarter of '20. So again, it's been a little about our qualitative factors, which have been driven primarily by the 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 risk in the portfolio, and we certainly anticipate in the future, the risk of potential additional downgrades and potential increases in actual charge-offs. Talk about capital for a moment. page 21, we have some graphs showing our -- some key elements of our capital position.

Again, as we have emphasized, the bank remains well capitalized, well in excess of well capitalized. Our Tier one ratio at 9.26% was up from the prior quarter to us. Common equity Tier one and Tier one at 11.83%, again, up from the prior quarter. And finally, our total ratio -- total capital -- regulatory capital ratio of 14.32%. So again, all those up from the prior quarter. The graphic on the right there, we look at the trend in some of the regulatory capital ratios and also the quantum of capital. You'll note that we know that 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 a result in the graph on the lower left of this page, you see the increase in the tangible book value per share during the year, which is up almost 9% on a year-over-year basis. I'd like to now talk a bit about our net interest margin and start the discussion with -- looking at our loan yields and our deposit trends. Again, this is a graph we've shown for the last couple quarters. It can be somewhat busy, but I think it very quickly points out some directional trends we've been seeing. Certainly, the yields are down. We know with the dramatic change in interest rates, we've seen an overall drop in portfolio yields. We've also seen -- of course, we've been very quick in moving our deposit rates downward with reaction to market trends as well. We expect one of the -- I'll just use this as an example, you'll notice on the deposit trends, the customer CDs is an excellent example.

Fourth quarter 2019, weighted average rate on our customer CD book was 1.90%. By year-end 2020, that is down in Q4 of 1.22%. 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 rate down to somewhere in the neighborhood of 55 basis points by second quarter of 2021. Overall, our cost of funds -- overall, our cost of funds has dropped during the course of the year. And when we define it as including our demand deposits -- our interest-bearing liabilities plus demand deposits, our cost of funds was 37 basis points in Q4 compared to Q3. So an 11 basis point drop. We expect, as we look again, looking at customer CDs in particular as one of the big drivers, we expect our cost of funds, including demand deposits, to drop to the range of roughly 25 basis points in -- sometime in the second, third quarter of 2021. On slide 23, we talked about our net interest income, net interest margin. On the left, the net interest income. You see the big increase in net -- or excuse me, the net interest income in Q4 from $18.3 million to $19.7 million. So a lot 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 those forgiven loans. That accounted for roughly $700,000 of increase on a quarter-over-quarter basis.

Overall, as we look at net interest income and net interest margin, we've added a table at the bottom of this slide on the left that looks at and reconciles our net interest income as we reported to our 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 PPP. We also saw -- and certainly something we need to be aware of this as we move into the future is we've started to see some -- we saw some heavy paydowns of loans with fair value marks during the fourth quarter of this year and to a lesser extent in Q3. So those fair value marks had a fairly sizable, relative to Q3, impact on our net interest margin. So if we strip both those out, what we see is net interest margin adjusted for PPP and fair value in Q3 of 3.14%, up to 3.21% in Q4. One of the big drivers of that was, again, as I mentioned, that cost of funds, including the DDA effect, interest-bearing liabilities plus DDA, 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 discussion back to Rob.

Robert D. Kunisch Jr., -- President and Chief Operating Officer

Great. Thanks, Bob. The benefit of excess liquidity in the market has led to strong deposit growth. The growth was achieved by both 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 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 account for 45% of total deposits. Increases in these low and no cost categories pushed our cost of deposits down 13 basis points quarter-over-quarter at year-end. We expect that the increase of new customers onboarded 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. 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 product to small or middle market companies and professionals who operate within our footprint. A major focus on Greater Washington, D.C. initiative, we launched this initiative in the continuous market in December with the hire of our team lead. We have 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 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'll continue to focus on attracting low and no cost deposits to preserve our NIM and fund new lending activities efficiently, we'll leverage the growth in transaction accounts to increase treasury management fees and continue to explore other noninterest income opportunities such as the launch of our partnership with Strategy Corp., which will be rolled out at the end of the first quarter. We'll continue to build our commercial lending -- excuse me, our consumer lending verticals to enhance loan yield and bring much needed granularity to our loan portfolio. Most importantly, we'll 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 to provide her concluding remarks.

Mary Ann Scully -- Chairman and Chief Executive Officer

So thank you, Rob. So let me try to unpack what's always a dense message. At the end of the day, a model like ours, commercially focused and leveraging unique positioning in the market and now in a state given the industry consolidation, always relies on talent. And we've always touted our 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, the small business BDO level, the business banking level, the Greater Baltimore and the Greater Washington, but with a lot of the notable increases in the very attractive Greater Washington market is not only an affirmation of the positioning that we have, but something that will accelerate growth going forward. We are 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 in 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 that is controlled by our 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 and 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 class side. And we believe that the ongoing focus we have always had and continue to have on transaction deposits will allow us to continue to stabilize that margin. Those two factors, the loan growth and the stabilized margin, will lead to higher revenue growth in 2021. We've demonstrated a strong ability, especially in the last three years to control noninterest expenses. On the branch optimization front, we saw rolling in 2018, the radical change in customer behavior, especially small business customer behavior, which really drove the placement of a lot of our branches. And we've gone from a pro forma 28 branches in the beginning of 2018 to a pro forma 13 branches in the first quarter of 2021. Those 13 branches cover a 90-mile footprint. We're also continuing to reallocate expenses and have made some investments in partnerships with some fintech firms on the data management side, as Rob alluded to, but are also exploring opportunities on the AI and the RPA side to make our process improvements leading to not only better customer interactions, but to an ability to deploy our staff more effectively. All of these lead to a stronger and stronger capital position. The emphasis in 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 an assurance that as 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 better that this quarter showed tangible execution on a number of those and continue to see expected improvement in our core return on assets and our core PPNR return on assets. And with that, I'll turn it over to all of you for any questions that you might have.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Samuel Varga with Stephens. Please proceed with your question.

Unidentified Participant

Good morning. I'm stepping in for Brody this morning. And I have a couple of questions about the loan portfolio. And specifically, question around what drove the higher CRE and eventually construction yields this quarter?

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

Just to confirm, the question is, what drove the higher CRE and construction loan yields for the quarter?

Unidentified Participant

Yes.

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

And the answer is, you have a lot of that -- a significant amount of that impact, and my apologies, I don't have the specific number readily available, was driven by some fair value market accretion quarter-over-quarter.

Unidentified Participant

Okay, perfect. Thank you.

Mary Ann Scully -- Chairman and Chief Executive Officer

Staying with no higher yielding portfolios. The construction portfolio in particular. But as Bob's noting, some of the lift that you would see in those asset yields this quarter was where the accretion that Bob referenced earlier. The delta between the 339 and the 321 was in those portfolios.

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

Yes. And just a follow-up, I just have the numbers of my -- are 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 loans maturing, loans are replaced at lower current market rates.

Unidentified Participant

Understood. Okay. The second question is relating to the commercial pipelines. And we wanted to see what your anticipation of that is compared to 4Q '19 and compared to three months ago?

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

So our commercial pipeline, as it sits today, it's the highest it's been since we've combined the two companies. And there's a lot of factors driving that. One is, as Mary Ann mentioned, we did increase our lending staff with some pretty highly seasoned people that have deep roots within the portfolio and we're starting to see the fruits of that. In addition, we announced the DC initiative a 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.

Mary Ann Scully -- Chairman and Chief Executive Officer

So Samuel, we look at the pipeline in a couple of different ways. If you look at the last stages of the pipeline, which is obviously the pipeline that we feel have the highest probability of closing, you're looking at very low 6-figure, 7-, 8-figure, 9-figure loan volumes. So you're looking at a little over $100 million. It's evenly distributed across portfolios, it's evenly distributed across asset classes. Now given that we're a C&I bank, you're going to see probably less than half of that translate, we believe, in the first quarter to loan outstandings. But it's still very significant volume. And the thing that we're feeling the best about is the distribution across asset classes and geography. If you look at the broader stages of the pipeline, if you look at the stages of the pipeline that, for example, are including a lot of the Greater Washington activities, obviously, it's well above that $100 million figure from a pipeline perspective. So as Rob noted, the pipeline continues to grow. Our ability 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, that C&I. Is that your question?

Unidentified Participant

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.

Robert D. Kunisch Jr., -- President and Chief Operating Officer

What was the question?

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

Utilization. So in the line utilization?

Mary Ann Scully -- Chairman and Chief Executive Officer

So, you're looking at slide 14, Samuel? The 930 utilization?

Unidentified Participant

Yes.

Robert D. Kunisch Jr., -- President and Chief Operating Officer

Which we should add was only up slightly from the end of Q2, but your point is, as we saw a dip in the early parts of that quarter.

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

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 holiday season. So it shouldn't be taken as an anomaly. It's probably something that reoccurs within this portfolio each year around that time of year.

Unidentified Participant

Okay. Great. I have a couple of questions for balance sheet items. First, I wanted to ask if there's a maturity schedule for the $200 million of FHLB borrowings for 2021.

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

The $200 million of FHLB borrowings are calm. None of those are scheduled maturities in 2021.

Unidentified Participant

Okay.

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

And they are our highest cost of funds item. The $200 million -- they're long-term borrowings with a weighted average rate of approximately 89 basis points.

Unidentified Participant

Okay, perfect. Thank you.

Operator

One more one moment. Mr Vardaga, I thought you were finished. So I was moving onto the next one, let me reopen up your lines, sir. Your line is open.

Unidentified Participant

Again since hearing in. Yes, Yes. Okay. Yes, sorry about that. So we wanted to ask one more question about liquidity and we wanted to get a sense for where you expect to reinvest cash flows from the security book. Or if you'd like to -- where you'd like to put that going forward.

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

Well, the securities portfolio, Sam, is primarily mortgage-backed securities. We -- some of the portfolio repositioning and strategy we did at the end of the second quarter was to identify those mortgage-backed securities with the highest prepayment fees. We sold those at gains. And we replaced at more current coupon mortgage back with obviously, thus, lower expected prepayment fees in the future. That portfolio, rough numbers, I'm looking at cash flow in 2021 in the neighborhood of -- of $40 million to $50 million in that portfolio. At this point in time, whether we replace with -- right now, our thinking is we'd like to replace. Right now, our strategy is, is that we replace monthly runoff with new mortgage backs at current rates. Depending on the loan outlook and you have pressures on funding, we may or may not revisit, and we may revisit that strategy in '21. But at this point in time, our game plan would be to maintain the portfolio at roughly the same size.

Unidentified Participant

Okay. Great. And then my final question is regarding buybacks. I just wanted to ask if you're at a point where you would consider asking for another authorization from your Board at some point in 2021?

Mary Ann Scully -- Chairman and Chief Executive Officer

Sure, Samuel. I think as I alluded to with the repeated references to capital management, it's actually something that we're considering fairly consistently in this environment. And what we have said 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. We executed 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 2% loans that are still in 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 of 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 plenty 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 a monthly basis and determine not if but when is the right time to pull a trigger. Thank you very much.

Unidentified Participant

And that will be all my questions for this morning. Thank you for your time.

Operator

[Operator Instructions] Our next question comes from the line of Ross Haberman with RLH Investments. Please proceed with your question.

Ross Haberman -- RLH Investments -- Analyst

Good morning Marianne are you incurred loss going. I got on -- I just got on a little late. Could you just go over what your expectations are on margin or spread, assuming rates stay about the same? And if the long end gets higher, how much would that significantly affect the net interest income positively, say, for 100 -- say for 100 basis points at the long end, how does that...

Mary Ann Scully -- Chairman and Chief Executive Officer

Sure. Let me ask Rob to answer that question because he gave the preliminary guidance that you might have missed on what we think about margin trends.

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

And again, I'm going to have -- I'm going to answer your question, excluding the impact of our fair value marks and our PPP portfolio. So especially with the last 3, the 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 break it down for 2021. We're going to see a continual erosion of loan yields, which is really a function -- I mean, again, is a function of maturing loans replaced at then current lower market rates. So we'll see that phenomenon over the course of the year. On the cost of fund side, my expectation is we're going to see continued decline in cost of funds, driven largely by our customer CD portfolio. But it would appear that most of that effect is going to be felt in the first couple quarters of the year. So that said, 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 in the second half of the year. And right now, I would say you'll see a margin in the range of 3.22% to, say, 3.14%. I think it's going to be a fairly tight range over the course of the year.

Ross Haberman -- RLH Investments -- Analyst

And just one follow-up question. A number of banks are shedding branches. Have you reviewed your branches? And could we expect any sort of closures over the next quarter, two or three in terms of cost efficiencies?

Mary Ann Scully -- Chairman and Chief Executive Officer

Sure, Ross. I referenced that in my closing remarks. But since 2018, where we had 28 pro forma branches, we have gone down to what will be pro forma 13 branches in March 2021. So an over 50% drop in the number of branches. We've done that in stages. We obviously had some closures upon the closure of the merger with First Mariner. Then we had a fairly significant round of branch optimization closures in late 2018. And then we announced in this quarter, I think it is in the press release, two additional branches that we have told customers and announced to the regulators that we'll be closing, and they will close in March 2021. So 28 down to 13 brings us well above any peer averages of over $100 million per branch. And while we are a commercially focused branch, we're a commercially focused branch that services a market from the Maryland-Delaware line down now to the Greater Washington line. So over a 90-mile territory. So we're -- not that we're not constantly reviewing branches for relocation. Is there an 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, and have 13 servicing over a 90-mile footprint, the opportunities are going to be more in refining where the existing branches are rather than dragging down further the number of branches. But we were kind of ahead of the branch optimization game in terms of what we did in 2018 and 2019.

Ross Haberman -- RLH Investments -- Analyst

Just one follow-up regarding that. Will you -- have you or will you take some sort of reserves or expenses to close the two branches you just referred to?

Mary Ann Scully -- Chairman and Chief Executive Officer

Yes, we did take that. Bob can give you the exact number. Again, in the press release, there was a little over a $500,000 charge, which was the net of a charge and then a clawback of a liability that we had from the last branch optimization routine. So Bob can give you the details.

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

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 again, and those -- I should add, those branches were already temporarily closed because of the pandemic.

Operator

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to Ms. Scully for closing remarks.

Mary Ann Scully -- Chairman and Chief Executive Officer

So I just want to once again thank everybody. We understand that this is a very crazy time of the year for everybody as you're competing with other earnings releases. We always appreciate the time and the attention from all of our shareholders and our stakeholders. And always remind everybody that we're an extraordinarily accessible management team. And if you've got other questions, whether they clarifying questions or strategic questions, do not hesitate to reach out to Rob, Bob or myself. But thanks again.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

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

Mary Ann Scully -- Chairman and Chief Executive Officer

Robert D. Kunisch Jr., -- President and Chief Operating Officer

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

Unidentified Participant

Ross Haberman -- RLH Investments -- Analyst

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