Earnings Call Transcript - HBNC Q1 2021

Operator, Operator

Good morning, everyone, and welcome to the Horizon Bancorp Conference Call to discuss financial results for the three months ended March 31, 2021. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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. 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 filings. 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. Representing Horizon today are Chairman and Chief Executive Officer, Craig Dwight; and Executive Vice President and Chief Financial Officer, Mark Secor. 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.

Craig Dwight, CEO

Thank you, Debbie, and good morning. Thank you for participating in Horizon Bancorp's first quarter earnings conference call. Our comments today will follow the investor presentation we published yesterday, April 28. Starting on Slide 4, company highlights: Horizon completed the first quarter with over $6 billion in total assets, strong profitability as evidenced by a return on average assets of 1.4% and return on average equity of 1.8%. Key drivers for the quarter were good expense control, modest provision expense, further reductions in deposit costs, and continued improvements in key asset quality metrics. Given the size of our balance sheet, highly efficient operations and talented workforce, we believe Horizon is well positioned to capitalize on significant organic and strategic growth opportunities in our attractive Midwestern markets. As you see on Slide 6, we've completed 12 new organic market expansions and 14 mergers and acquisitions during this time period. 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 succession planning, low interest rates in the challenging operating environment, we’re seeing a pickup in merger and acquisition discussions. Slide 7 clearly demonstrates Horizon’s track record for achieving our well-established long-term goals. They include meaningfully outpacing GDP and industry growth and achieving balanced growth with approximately 50% organic and 50% through mergers and acquisitions. In 2020, Horizon grew the balance sheet by 8%, excluding PPP loans. As we've shared with you since last fall, our expectations for the full-year 2021 is that total assets will remain relatively stable compared to the prior year, with significant opportunities for mergers and acquisitions and organic growth starting in late 2021 and continuing through 2022 as the economy continues to recover. On Slide 8, we remind you that Horizon’s expansion in 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. Coming off a record year in residential lending, we’re very pleased with mortgage activity and fee income, and what has historically been our seasonally lightest volume during the first quarter. In addition, our commercial pipeline of approved and unfunded loans and lines of credit, coupled with the disposition of the businesses and communities we’re serving in growing Indiana and Michigan markets, leads us to anticipate improving demand from customer investments in plant and equipment, logistics and distribution, infrastructure and other financing needs in a recovering economy. Horizon's footprint is also well positioned to take advantage of the outbound migration from Illinois, which continues to increase as consumers and businesses exit dense living spaces, high taxes, and high cost of living. Both Indiana and Michigan continue to show improving economies as evidenced by reductions in unemployment rates. As of March, Indiana's unemployment rate of 3.9% was well below the nationwide rate of unemployment of 6%, while Michigan's overall unemployment rate was 5.2%, a considerable decrease from December 31st rate of 6.7%. Many of the regions we serve in the western and central parts of the State of Michigan are reporting even lower levels, including 4.3% in Ann Arbor, 4.7% in Grand Rapids, and 5% in Lansing, all well below the U.S. national unemployment rate for the same time period. Horizon’s diverse footprint helps to geographically disperse credit risk, with 61% of our loans in Indiana and 39% in Michigan. Slide 9 highlights the primary markets where we’re engaged in some exciting economic events taking place, which we believe will provide improved opportunities for Horizon’s growth. Moving onto digital transformation, Horizon’s average monthly transactions have shifted away from branches to our digital and virtual channels. As of last month, 74% of all transactions took place through our digital channels compared to 57% in 2019, and in March 2021, 77% of all checking accounts for active online banking users increased from 68% at year-end. Since we reopened our lobbies for walk-in traffic in the first quarter, the digital transaction counts have remained stable. As a result of our investments made in technology over the previous years, Horizon was well prepared for this increase in digital banking activity. Now for the financial update, let me turn it over to our Chief Financial Officer and Executive Vice President Mark Secor. Mark?

Mark Secor, CFO

Thank you, Craig. Horizon’s first quarter results demonstrated our ability to realize strong operating results in earnings, positioning us for opportunities that we might see become available in the recovering economy. Starting with Slide 12, the company's strong first quarter results were supported by stable core earnings. Several activities during the first quarter impacted these results compared to the fourth quarter of 2020. We recorded lower PPP income from fewer loans forgiven, lower purchase accounting income, and a reduction in average loans primarily attributed to the mortgage warehouse lending. Non-interest income reflected record first quarter mortgage gain on sale income, which nonetheless declined from historic levels recorded at the end of 2020. First quarter results benefited from lower credit expense due to continued strong credit performance in low charge-offs. We continue to believe we’re appropriately reserved given the current state of our portfolio, the recovering economy, additional government stimulus, and our CECL modeling. On Slide 13, the 27 basis point decrease in the adjusted margin during the quarter was positively impacted by 10 basis points from the PPP income as net deferred fees were recognized for loan forgiveness. This compares to the positive impact of 18 basis points in the fourth quarter. In addition, excess liquidity compressed the margin an additional 16 basis points compared to seven basis points in the fourth quarter. We also saw lower rates on the investment portfolio as well as more competitive loan pricing. This was expected and will continue to negatively impact the margin as we focus on maximizing net interest income with liquidity we continue to see increasing by continuing to invest the excess funding while creating adequate cash flows for future loan demand and reinvestment. Moving on to Slide 14, in the first quarter, loan yield was positively impacted from PPP loan fees recognized during the quarter, adding six basis points to the yield compared to a positive 15 basis points in the fourth quarter. Lower purchase accounting income recognized and lower loan fee income in the first quarter compared to the fourth also negatively impacted the loan yield. The change in the mix of loans with the decrease in mortgage warehouse lending and pricing pressure has also contributed to lower loan yields. As loans continue to reprice and new products are originated at lower rates, additional downward pressure on asset yield is expected resulting in additional margin pressure during 2021 as the opportunities to lower funding costs are realized. Slide 15, margin compression was tempered by our continued improvement in funding costs, which reflect Horizon’s valuable core deposit franchise. The CD portfolio's 2 basis point decrease in pricing reduced total funding costs as high-cost term deposits matured during the quarter. $359 million of CDs with an average cost of 90 basis points will mature during 2021 and continue to reduce our cost of funds. We're also strategically pricing deposits to manage liquidity and inflows from transactional or transit sources. This, of course, is balanced against our commitment to stand by our longstanding customer relationships and high-potential new opportunities in our growth markets in Indiana and Michigan. The 2% growth in non-interest bearing deposits and one basis point drop in interest-bearing deposit costs also contributed to lower funding costs in the first quarter. Slide 16, mortgage revenue from the gain on sale and mortgage-related income continued to support non-interest income as we also started to see some recovery of non-cash impairment charges in the quarter. The continued high level of mortgage production and strong percentage gains are the primary contributors to our non-interest income for the first quarter. Based on local and national refinancing activity, we expect strong top-line contributions to continue from the mortgage business in 2021, though not at the historic levels we saw last year. Slide 17, during the first quarter, we saw operating expenses decrease from the fourth quarter as salary and benefits costs reflected more normalized accruals for performance-based compensation. As you may recall, in the first and second quarters of 2020, we recorded nominal bonus accruals given uncertainty at the outset of the pandemic. Ultimately, we rebounded with record results for the year, and the bonus accrual is catching up in the fourth quarter. For 2021, we expect performance-based compensation expense to be more evenly distributed throughout the year. We continue to review branch rationalization as customer habits have changed as more digital channels are being used. Any action that might be planned is being reviewed along with all other potential opportunities the company may have to ensure we properly manage the capacity of our teams for successful execution. 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 18 with stable credit losses and improving economic trends, the $159,000 reserve built in the first quarter was primarily driven by allocations for sectors of loans with potentially higher risk due to the nature and characteristics of these portfolios. The percentage of allowance to total loans was 1.56% at March 31, or 1.67% when you exclude PPP loans, with a balance of $11.3 million remaining for discounts on acquired loans. Overall, we’re very pleased with our financial performance for the first quarter in this environment. We believe we’re well positioned from a credit, liquidity, and capital perspective and look forward to refining our operating model to further improve our results in the quarters ahead. For some additional comments on the loan portfolios, I'm going to turn it back over to Craig.

Craig Dwight, CEO

Thank you, Mark. Looking at the chart on Slide 20, Horizon’s $3.7 billion in total loans are well diversified, with 59% in commercial and 41% in residential mortgage and consumer loans. At Horizon, we like this loan mix as it diversifies our credit risk and provides advantages to managing our net interest margin. The table on the right provides the granularity within our commercial loan portfolio, which itself is well diversified and our single largest sector is in residential multifamily housing loans at 6% of total loans, and this segment continues to perform well. Other key points to Horizon’s risk profile: Horizon manages capital at risk by maintaining an in-house lending limit at $30 million, which is well below our legal lending limit of approximately $80 million. Our granularity is further enhanced by the fact that Horizon’s average commercial loan is less than $400,000, excluding PPP loans. As of March 31, Horizon’s loan deferrals continued to decline to 2.5% of total loans, primarily in our commercial loan portfolio. Total consumer and mortgage loan deferrals remain low at less than 1% of total loans. The number of commercial loans on payment deferral as of March 31 totaled only 36, down from year-end total of 55. Horizon’s commercial lending team has been diligent in meeting with our business customers to update their financial plans and to place loans back on a regularly scheduled payment. Of the commercial loans in deferral, 93% of the dollars are making interest-only payments and only three loans, or 7% of the total modified loans, are making principal and deferred principal interest. The three principal interest deferrals include two hotels, with the same sponsor, and one restaurant. The two hotels are in various stages of construction or remodeling with strong sponsors, and we expect they will resume full payments during the second quarter. The restaurant loan is with a strong liquid sponsor, and is expected to resume full payments in the second quarter. Horizon is a traditional regional bank that offers 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. We’re primarily an in-market lender requiring recourse on most of our loans from the principal business owners. In addition, commercial loan asset quality metrics continue to be favorable at quarter-end, with non-performing commercial loans declining to 59 basis points of total commercial loans, down from 65 basis points at year-end. Commercial delinquency in the first quarter continued to remain low at 11 basis points. Horizon continues its elevated monitoring in those loan segments with higher payment deferrals over the past year. At the end of the first quarter, the majority of Horizon’s payment deferrals were made to hotels, with the other non-essential businesses showing considerable improvement. The portfolio segments that we continue to monitor include hotels, non-owner occupied retail, restaurants, and leisure and hospitality. On Slide 24, you'll see a map that exhibits the locations of Horizon’s loans secured by hotels. As you can see, the vast majority of the hotels that we financed are located along an Interstate Highway or in resort communities. Hotels located along interstate highways are rebounding faster than those hotels located in metropolitan areas. Hotel payment modifications continue to be the highest percentage of any sector, at 57% of the total hotel loan portfolio as of March 31, down from 72% at year-end. This decline is due to a considerable improvement in occupancy and average daily room rates during the first quarter. Specifically, our Indianapolis hotels benefited considerably from the NCAA College Basketball Tournament, and we expect continued improvement in the second quarter from the running of the Indianapolis 500. Overall, this portfolio's strong sponsors capitalize on the utilization of the Paycheck Protection Program to bridge lower occupancy rates, and the smart service highway property sector is exhibiting the most improvement nationwide. All hotel loans in our portfolio are open for business, with average occupancy rates improving from December at 34% to average occupancy rates for the month of March at 58%. The low occupancy rates at year-end were due to the second wave of COVID-19 and the considerable improvements at the end of the first quarter, a result of the increased retail travel and entertainment venues starting to reopen and expand services. Horizon continues to report strong asset quality metrics in the first quarter. We reported low total net charge-offs with the last five quarters of less than five basis points. Credit loss provision expense declined in the first quarter 2021 as a result of improved econometrics, low historical charge-offs, and reduced allocation to the restaurant and non-owner occupied loan sectors due to improved financial results by our borrowers. Horizon’s total non-performing loans to total loan ratio improved as well for the second consecutive quarter to a low and manageable 68 basis points at March 31. We expect non-performing loans to continue to reduce in the second quarter. Our allowance for credit loss is 1.56% of total loans, which is in line with other community banks that have adopted CECL. If we exclude PPP loans, the allowance for credit loss to total loans was 1.67%. To summarize, Horizon Bancorp’s key highlights: we’re a seasoned management team that has managed through multiple economic cycles and has a history of delivering growth exceeding the banking industry's average growth rates. Excellent geographic diversification, strong credit culture, high quality and well-diversified balance sheet, robust capital position, and excess cash of the holding company with an improving outlook to deploy said capital and cash through a merger or acquisition. Solid historical earnings run rate, 30 years of uninterrupted dividends paid on common stock, and a dividend increase for the last quarter. This concludes today's first quarter earnings presentation. Operator, please open the lines for questions; we will now take questions.

Operator, Operator

We’ll now begin the question-and-answer session. The first question comes from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race, Analyst

Yes, hi guys. Good morning.

Craig Dwight, CEO

Good morning.

Nathan Race, Analyst

Craig, I was maybe hoping to expand on your outlook for the back half of this year, from a loan growth perspective ex-PPP in the warehouse. So it sounds like there's some optimism and you guys are seeing an increased activity across your footprint lately, so just hoping you can kind of frame up your expectations as to kind of the low single-digit range. If we exclude those items that are more volatile in nature, and obviously transitory in the case of PPP?

Craig Dwight, CEO

Nathan, first of all, thanks for the question. Indiana and Michigan are in the top three or four manufacturing states in the country, and manufacturing is doing extremely well across our footprint. Their challenge right now is hiring employees as most of our customers are doing. Our pipelines are very strong. I'm going to turn that comment over to our Executive Vice President, Senior Commercial Lending Officer, Dennis Kuhn, to give you some more detail. But we also had some paydowns from substandard and non-performing assets in the first quarter that were pretty high, which we were glad to see paid off that did slow growth rates in the first quarter. So Dennis, you want to add to that?

Dennis Kuhn, Chief Commercial Banking Officer

Sure, thank you, Craig. Again, as Craig mentioned, our second quarter pipeline outlook is very positive and increased quite significantly from the first quarter when we originated $92 million in commercial, funded about $54 million of that, that's pretty consistent from a percentage standpoint of closed versus funded if you look over prior periods. Again, we see a second quarter outlook as favorable with an approved pipeline pending closing of about $115 million. So again, activity generally is picking up; certainly in the first quarter, a couple of items of note as Craig mentioned, elevated payoffs, but a significant portion of that was watch list credits, both substandard and watch. We continue to see in the first quarter a reduction in revolving line of credit usage down another $12 million. If you look at first quarter ‘21 versus first quarter ’20, revolving line usage is down by $48 million. So again, customers have benefited from PPP; their balance sheets are in good order, and certainly that's showing on our deposit side as well.

Craig Dwight, CEO

Nathan, just on the consumer and mortgage side, we’re still having robust mortgage production activity. Although the Mortgage Bankers Association is predicting that to fall off later this year, we're about 65% refinance and 35% purchases. The consumer activity, we actually had record volume in home equity lines last year; the challenge has been the payoffs due to first mortgage refinancing cash out to reduce the line balances and the stimulus money coming in. But with that said, we're seeing a pickup in remodeling projects and Do It Yourself projects; we’re hopeful for a fallback into the usage of those lines of credit. So thank you for your question.

Nathan Race, Analyst

Got it, that's great color and encouraging commentary, particularly on the commercial side going forward. Just changing gears a little bit, as my follow-up question. You guys put up a pretty strong profitability quarter, excess capital levels are continuing to build and I expect that will persist over the next few quarters here. Any updated thoughts on capital priorities? It sounds like you guys are having an increase in M&A discussions. Just curious if your increased optimism for an acquisition, perhaps later this year, would preclude you guys from being more active on share repurchases in the near-term or other capital deployment options in terms of returning capital to shareholders?

Craig Dwight, CEO

Nathan, again, thanks for the question. As you are aware, we have a repurchase plan in place. We have not used it for 2021. Some of our thought process is one, it's better to deploy our capital through mergers and acquisitions at the current time versus the price of our stock is not hitting some of our hurdle rates of the stock buyback. With that said, if we cannot deploy the capital through mergers and acquisitions, we will use our excess cash of the holding company for some stock buybacks.

Nathan Race, Analyst

Okay, great. I appreciate you guys for taking the questions and all the color. Thank you.

Craig Dwight, CEO

Thank you.

Operator, Operator

The next question comes from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy, Analyst

Good morning, everyone.

Craig Dwight, CEO

Good morning, Terry.

Terry McEvoy, Analyst

I guess first of all, thanks for providing the online kind of active users and the digital data. I guess my question is, Mark, I think you hinted at this call. As you look at the branch footprint, do you think there's opportunities to reduce the number of locations and any cost savings? Would that fall to the bottom line? Or do you think you would invest it in other areas, particularly on the technology side?

Mark Secor, CFO

Yes, thanks, Terry. Yes, we definitely think there's some opportunity on the branch side to reduce branches and also redeploy some of the technology that we have in ATMs to better utilize and be more efficient. With those savings, as we might see, we would expect part of that to drop to the bottom line, but we do look to reinvest, and we might look to reinvest in some of the growth markets where there's more opportunity coming. So that is a plan. As I said, we're managing what our capacity is from our team's perspective to make sure we execute on all of these properly and ensure we're successful.

Terry McEvoy, Analyst

Thanks. And then just as a follow-up, the increase in the reserve for the commercial portfolio. I didn't quite follow you, Mark, in terms of what was behind that. Are those, call it, COVID-impacted portfolios that you just felt the need to add a bit to reserve? Or was it something different? I was hoping you can clear that up for me.

Mark Secor, CFO

Yes, any increase that we saw in the reserves on the commercial side would be related to those companies impacted through COVID, specifically the hotel industry, where we want to make sure that we’re adequately reserved for any losses.

Terry McEvoy, Analyst

That's great. Thank you very much. Appreciate it.

Operator, Operator

The next question comes from Brian Martin with Janney. Please go ahead.

Brian Martin, Analyst

Hey, good morning.

Mark Secor, CFO

Good morning, Brian.

Craig Dwight, CEO

Good morning, Brian.

Brian Martin, Analyst

Hey, Mark, could you just give a little more color surrounding kind of just A the margin and just kind of the deployment? I know you talked about the asset yield last year, just in the cost of funds, not having much more room, but just the excess liquidity and the deployment of that and just kind of how you're thinking about that and then the margin over the balance of the year?

Craig Dwight, CEO

Yes, thanks, Brian. The margin has so much noise in it, as we all know, whereas we have movement in PPP fees and our purchase accounting. The growth will be in the investment portfolio in the short run and we continue to analyze, regarding our thoughts on the surge in deposits and how long we want to invest them to increase net interest income. That is our focus: net interest income. The margin is going to continue to have pressure, not only from pricing pressures out there and lower interest rates, but also just the mix as we grow the investment portfolio. We deployed $200 million in the fourth and into the first quarter of investments, and we're currently working on another $300 million and $350 million, as we've seen these deposits grow and expect those to remain. We're also making a strategy so that we will have cash flows coming off of the portfolio to help fund loan growth and also make sure we can reinvest as we anticipate that rates will go up someday.

Brian Martin, Analyst

Got you. Perfect. And then just one other follow-up, Mark, to PPP, what was the round two originations and just kind of what rate are you expecting on those?

Mark Secor, CFO

Round two year-to-date is $128 million originated.

Brian Martin, Analyst

Okay. And do you have an idea of what the rate is on that or no? If not, I can follow-up?

Mark Secor, CFO

You mean the fees, Brian, or?

Brian Martin, Analyst

Because the yield you're expecting on that?

Mark Secor, CFO

Well, I think all of it when we look at the yield on those, it's as amortization of the fees. It's always been in the 2.6% to 2.7% range.

Brian Martin, Analyst

Okay. All right, thank you, Mark.

Mark Secor, CFO

As we amortize until they pay off, and then we get the rest of the fee.

Brian Martin, Analyst

Take care. Got you. Okay, thanks for taking the question.

Mark Secor, CFO

Thanks, Brian.

Operator, Operator

Next, we have a follow-up question from Nathan Race with Piper Sandler.

Nathan Race, Analyst

Yes, hi guys. Thank you for taking the follow-up question. Just a question on fee income; mortgage resolved a little over 30% on a gain on sale basis in the first quarter. That's a little higher than we’ve seen in some others so far in the first quarter. So just curious to kind of get your outlook on just mortgage on sale revenue over the next couple of quarters? Or was it maybe some unique driver that kind of brought down that margin in the first quarter? And just kind of what are your expectations for mortgage income in 2021 relative to expectations for a 15% to 20% drop-off in volumes in Horizon’s share?

Craig Dwight, CEO

Nathan, thanks for the question. We expect a strong second quarter in mortgage; the third and fourth quarters, I think the industry is expecting to drop off. As far as the gain on sale decline as a percent, what took place there if you recall in the first quarter, there were some rising rates in the mortgage portfolio before they fell back down again. That does impact our pipeline and gain on sale which had come back down in the second quarter.

Nathan Race, Analyst

Okay, great. And then just following-up on the margin discussion, Mark, excluding PPP revenue, if you have any kind of margin estimate in the first quarter here?

Mark Secor, CFO

Excluding PPP, and I exclude to try to get to the core excluding this excess liquidity sitting there, I would say it would have been about 3.23 as a core margin, which is down from the fourth quarter. The same relationship in the fourth quarter would have been 3.33, so that is 10 basis points.

Nathan Race, Analyst

And if you include the excess liquidity, ex-PPP, any sense where that would shake out?

Mark Secor, CFO

Yes, the excess liquidity was put in a drag of about 16 basis points, so you'd add that back or take that back from 3.23 and there's been the fourth quarter was 7%.

Nathan Race, Analyst

Okay. And it sounds like the expectations released from what you guys are seeing today; that the excess liquidity levels are building, perhaps not at the rate that we saw over the course of last year. But as with everything that you're seeing today, those excess liquidity levels are likely to persist at least over the next quarter or two as well?

Mark Secor, CFO

Yes, definitely, and then there's going to be additional stimulus coming into the municipalities through the last CARES Act. So we anticipate even seeing more dollars coming in from that sector, which we really haven't seen to this point. We anticipate elevated liquidity for a good portion of this year.

Nathan Race, Analyst

And it sounds like you got a focus on redeploying some of them to securities, and to the earlier discussion, just in terms of a pickup in commercial loan growth expectations as well entering Q2 and into the back half of 2021 as well it sounds like.

Mark Secor, CFO

Correct, correct.

Operator, Operator

The next is a follow-up question from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy, Analyst

Hi, thanks, I really like Slide 7 in terms of just the asset growth going back 20 years. Your outlook this year is for flat, and I'm just wondering how does that impact your view of M&A? Do you think you'd be targeting maybe larger opportunities to fill that void given the lack of organic growth? And maybe just remind me what's your sweet spot in terms of potential M&A targets? Thanks, Craig.

Craig Dwight, CEO

Thank you, Terry, for the question. We have certain hurdle rates that EPS is meaningful to complete an M&A, so it does move our current assets up to $500 million and above. The lower or smaller banks of $500 million or less, we're seeing an increase in credit union acquisition activity, which has picked up considerably over the last three years in both Indiana and Michigan, which has taken, I think, the small deals out of the market for most acquirers; but we have moved our target up.

Terry McEvoy, Analyst

Great, thanks again.

Craig Dwight, CEO

You’re welcome.

Operator, Operator

Next is a follow-up question from Brian Martin with Janney. Please go ahead.

Brian Martin, Analyst

Hey, thanks guys for taking the follow-up. Just one on Terry’s and then my question, but just Craig, back to the M&A geography-wise. I think you said last quarter or the quarter before that you were no longer looking at Illinois. Is that, I guess, primarily Indiana and Michigan today? Is that kind of the focus on that?

Craig Dwight, CEO

Brian, yes, that's correct. Indiana, Michigan, and Northwest Ohio.

Brian Martin, Analyst

Northwest Ohio, okay. And then maybe just my follow-up was really just on the reserve outlook, given the improvement you guys talked about in the deposit side, the positive trends you're seeing, and maybe some muted growth here picking up now. But how should we think about that reserve over time? I mean, should we start to see a trend back toward pre-pandemic levels given the improving economic conditions and your really strong credit?

Craig Dwight, CEO

Yes, Brian, the outlook for the econometrics continues to be strong, so that holds our historical loan loss rates are low as well. The unknown factor is there going to be another COVID-19 wave? So until we get through and settle down, it's really hard to predict due to the uncertainty, but if we get through that uncertainty, yes, you're right, there would be a release of the credit loss reserve at some point in time. But I'm a little cautious about the pandemic right now.

Brian Martin, Analyst

Okay, thank you very much.

Craig Dwight, CEO

Thank you, Brian.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dwight for any closing remarks.

Craig Dwight, CEO

Yes, thank you for participating in today's earnings call. We look forward to speaking with you again in the near future, hopefully in person as we get through the end of this pandemic. Thanks for your questions today. Have a good day. Bye now.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.