Earnings Call Transcript - SBFG Q4 2020

Operator, Operator

Good day, and welcome to the SB Financial Group Fourth Quarter 2020 Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sarah Mykus. Please go ahead.

Sarah Mykus, Corporate Secretary

Good morning, everyone. I would like to remind you that this conference call is being broadcast live over the Internet and will be archived and available on our website at ir.yourstatebank.com. Joining me today are Mark Klein, Chairman, President and CEO; Tony Cosentino, Chief Financial Officer; and Jon Gathman, Senior Lending Officer. This call may contain forward-looking statements regarding SB Financial's performance, anticipated plans, operational results and objectives. Forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today. We have identified a number of different factors within the forward-looking statements at the end of our earnings release, which you are encouraged to review. SB Financial undertakes no obligation to update any forward-looking statement except as required by law after the date of this call. In addition to the financial results presented in accordance with GAAP, this call will also contain certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. I will now turn the call over to Mr. Klein.

Mark Klein, CEO

Thank you, Sarah, and good morning, everyone. Welcome to our fourth and final conference call and webcast for 2020. At a high level, I am pleased to report that in the midst of this pandemic, we found a way to deliver our strongest performance ever. For the quarter, we continued to see mortgage volume at the top end of our current capacity, welcomed the beginnings of processing PPP forgiveness, and witnessed a greater flexibility by our entire staff to service clients in this new and different environment. Briefly, highlights for the quarter included a $611,000 pre-tax mortgage servicing rates impairment; net income of $5.4 million, up $2 million or 60% over the prior year quarter. When adjusted for the non-GAAP impairment item, net income would have been $5.8 million, or an 87% increase. For the year, GAAP net income was $14.9 million, up $3 million or nearly 25%. Adjusted return on average assets was 1.89%, up from the prior year quarter of 1.26%. Pre-tax pre-provision ROAA for the quarter was 2.41%, up 74 basis points or 44% from the prior year. Net interest income of $9.3 million was up 7.6% from the prior year as our 5.5% reduction in interest income was more than offset by the 49% reduction in interest expense. This coupled with controlled non-interest expense delivered positive operating leverage of five times. Loan balances from the linked quarter declined $13 million, which reduced our year-over-year growth to $47 million, or 5.7%. However, included in those balances were PPP initiative loans and those loans acquired from the Edon acquisition in June. Deposits increased $209 million or 25% year-over-year. Again, Edon balances, retention of PPP funding, business DDAs, and overall consumer liquidity drove that growth. Expenses were up $0.5 million due to higher mortgage commissions and an increase in our title insurance business as well as the Edon acquisition. Mortgage origination volume increased to $169 million, up $31 million or 23% year-over-year. While asset quality metrics remained stable from the prior year, in the linked quarter we elected to set another $800,000 in provision during the quarter, all of which were related to the COVID-19 future reserves. And finally, client loan deferrals were down substantially from the linked quarter, with the number and dollar of loans in forbearance status declining in excess of 50%. The five key initiatives we've referenced in prior quarters and continue to consume us would be revenue diversity, whether organic and/or M&A; more scale; broader footprint; more scope; more services per household; excellence in operation; and more intimacy with current clients and asset quality. First, revenue diversity. This quarter mortgage volume and loan sale gains were up from the prior year, 23% on volume and 136% on gains. Non-interest income increased to $8.9 million from the prior year quarter of $6 million. The current quarter includes a mortgage service impairment of $611,000 as I just mentioned, compared to a recovery of $303,000, in the fourth quarter of 2019. Adjusting for those impacts, non-interest income was up from the prior year by $3.9 million, or 68%. For the year, non-interest income to total revenue increased to 49% and was driven principally by a gain on sale in residential real estate lending volume of nearly $700 million, our largest annual production on record. Peak Title had another strong quarter with revenue up 33% from the prior year quarter and for the year, over 700%. We are especially pleased with the progress made by Peak and that entire team, that doubled the revenue of the operation from the prior year run rate before acquisition. Our Indianapolis residential loan production office continued to gain market share during the year, as we inched a bit closer to the original expectation and originated over $43 million in volume. We not only remained committed to this Central Indiana region, but we will be building another production team in Northeast Indiana this year. We're looking to each of these robust Indiana markets to make a meaningful contribution to our production levels in 2021. As with prior quarters, Wealth Management assets under our care continued to rebound over the prior year-end with an overall market improvement of $48 million and new sales of $21 million, which has led to total assets under management of $558 million at year-end, or a net increase of $51 million. Our bench is stronger than ever before, and we expect to monetize these new resources to identify more opportunities across the entire footprint. Secondly, more scale. Loan growth continued to be under pressure in the quarter, as market activity has been constrained but has begun to slowly recover from the virus shutdown. Our $47 million in growth from the prior year is elevated due to our PPP balances and the loans, as I mentioned, we acquired from the Edon acquisition. As we adjust growth for these items, year-over-year loan balances would decline on a core basis by $45 million. We continue to see higher-performing clients and their companies exit ownership, and our loan balances are on their way out. However, pipelines continue to steadily grow in most of our markets. We do expect success in 2021, much along the lines of our historical loan growth in the middle-single digits. Our deposit base expanded to $1.05 billion, up $209 million or 25%. Included in that growth were Edon deposits and our estimate that approximately 50% of the PPP loan funding remains in our clients' operating accounts. We expect these funds, however, to gradually dissipate as the forgiveness process ramps up here early in 2021. Third, more scope, more services per household. The PPP initiative allowed us to demonstrate not only to existing clients but also to prospects that we are both agile and interested, and have the resources and capacity to service their needs. Our team will again be tested as we begin in earnest the loan forgiveness process of Round one and move on into Round two. To-date, roughly half of our Round one clients have applied for forgiveness, and we expect that percentage again to climb into the first quarter of 2021. We are prepared to handle a similar level of client applications in Round two, and we feel the lessons learned from Round one will make for an even more positive client experience this time around. In fact, to do more with the same, we have acquired software to ensure that our capacity to process requests matches our appetite for balanced growth from existing clients and prospects alike. Operational excellence. The continued transition to a more normal residential purchase market was evident in the fourth quarter as we originated 47% of our volume from purchase transactions or $81 million. Internal refinances were 28% of volume or $48 million with external refinances, the remaining 24% or $24 million. For the full year, $291 million, 42% of our total volume was from new purchases or construction activity, $217 million or 31% from refinancing our own mortgages internally, and the remaining 27% or $187 million from outside competitive refinancings. As a result of these successes, our servicing portfolio now stands at $1.3 billion and over 8,500 loans for an increase of $101 million this year. Expense levels for the quarter were up from the prior year. But as I mentioned, our operating leverage improved for the quarter due to our revenue growth. This growth also provided the path to our best net non-interest expense level in recent times at a negative 0.6%. For the full year, expenses and revenue were impacted by our servicing rights impairment and the Edon merger cost. When we adjust for these non-GAAP items, our operating leverage for the year improved from a reported 1.6 times to 2.5 times. To extend this trend, we continue to examine all of the expense control initiatives that we've put in place earlier this year when COVID-19 arrived. Fifth and final, asset quality. At quarter-end, we had 83 loans in forbearance for a total dollar amount of nearly $40 million, which was down by 121 loans and $41 million from the linked quarter or 51%. Remaining in these totals were $11.7 million of sold mortgage loans, which reduces our on-balance sheet exposure to this $28 million and was down $10.4 million or 27% from the second quarter. Of the $28 million in balances remaining in forbearance, 95% is related to the hotel industry. That said, we continue to feel strongly that our portfolio, and in particular our exposure to the hospitality industry, will continue to weather the COVID-19 storm well due to our prudent underwriting process and the quality of the clients we've embraced over the past decade. However, should unexpected stress surface, we have made provisions to bolster our loss allocation. Back this quarter, we increased our provision, as I mentioned, to $800,000 for the year, now $4.5 million. Our loan loss reserve is now $12.6 million and the reserve ratio was up 38 basis points from the prior year to 1.44%. If we adjust for PPP balances, it increases to 1.5%. Our coverage of non-performing loans now stands at 174% and remains above the median of our peer group. Charge-offs for the quarter were just $18,000, and year-to-date our loan charge-off ratio was slightly above historical levels at just eight basis points, or this year $680,000 from essentially two borrowers. We feel our approach to build our reserve and stay ahead of market stress will bode well for our performance in future quarters. Finally, before I turn it over to our CFO, Tony Cosentino, for some more color on our year and quarter, I do want to make a note of our dividend announcement this past week of $0.105 per share, up 11% over the prior year. We continue to review our capital allocation and not only fund balance sheet growth prudently, but also to return capital to our shareholders via dividends and our current stock buyback program. Tony, if you could give us some more details on our quarterly performance.

Tony Cosentino, CFO

Thanks, Mark. As Mark opened the call, we delivered $0.71 per share this quarter, up from $0.42 for the prior year quarter, a 69% increase, leading to $1.96 in EPS for the full year of 2020. When we adjust 2020 full year EPS for the OMSR merger costs, which we have documented in our release, we were up 51% from 2019. Operating revenue was up 24.7% from the prior year and up 31.7% when we adjust for the impairment. Loan sales again were strong, delivering gains of $7.3 million from mortgage, small business, and some agriculture loans, up $4 million from the prior year. Margin revenue was up 7.6%, as we continue to offset interest income reductions with further reductions in our funding costs. Now, as we break down the fourth quarter income statement, starting with the margin. Net interest income was up from the prior year but level to the linked quarter. Average loan yield for the quarter of 4.42% decreased by 60 basis points in the prior year, and overall earning asset yield was down 114 basis points in the prior year. Loan yields and the earning asset yield were obviously impacted by the 1% PPP portfolio. And while, as Mark mentioned, close to 50% of our Phase 1 PPP portfolio has applied for full forgiveness, we've really yet to receive the bulk of those payoffs from the SBA. As we get more detailed on the PPP Phase 1, we had $83 million in funded loans with total fees expected of $3.2 million. To date, we have realized $1.4 million of those fees and booked an additional $565,000 in interest income. If we exclude the initiative from margin, NIM would have risen by just one basis point for the entire year. On the funding side, as expected, we again reduced the cost of our interest-bearing liabilities from the prior year. For the quarter, the rate on those liabilities was 0.64%, which is down from the prior year by 78 basis points and down from the linked quarter by 11 basis points. Net interest margin at 3.21% was down 49 basis points from the prior year as the impact of PPP, excess cash, and Edon were headwinds to our margin. Interest expense costs are down by 49% from the prior year and down an additional 14% from the linked quarter. We are certainly nearing the bottom on interest expense reductions; however, repricing on our loan and asset portfolio, we expect to continue on into 2021. Total non-interest income of $10.4 million was up $5.1 million, or 94%, from the prior year, reflecting the mortgage origination volume, which overcame the servicing rights impairment. As Mark indicated, our Title Agency had a very strong quarter, closing a large number of transactions and delivering revenue of $500,000, up 31% from the prior year. Our fourth quarter mortgage sales were 85% of our originated volume. We achieved a record level of sales volume for 2020 with our sale percentage exceeding 86% of the $694 million in volume. Yields also continued to be robust in the quarter, which supplemented that sales volume. The shift to purchase volume from refinance continued in the fourth quarter. Total gains on sale came in at $7.2 million, which was 5% on our sold volume of $143 million. For all of 2020, as I indicated, we sold close to $600 million or roughly 86% with total gains on sale yielding 4.2%, yielding $25.4 million in total gains after our hedge. The focus and change we made several years ago to hedge our pipeline and become more aggressive in secondary paved the way for these higher-than-expected gain numbers. Our servicing portfolio provided revenue for the quarter of $857,000. And for the full year, we realized $3.2 million in total servicing revenue. Market value, as we indicated for our servicing rights declined slightly this past quarter. The calculated fair value of 60 basis points was down 39 basis points from the prior year and down six basis points from the linked quarter, which resulted in the $611,000 impairment. At December 31, 2020, our mortgage servicing rights were $7.8 million on the balance sheet, which is down 30% from the fourth quarter of 2019 and down 9% from the linked quarter. Our total remaining impairment is $4.9 million for potential future recapture, which if realized would increase tangible book value by approximately $0.53 per share or an increase of 3%. Operating expense for the quarter was $10.7 million, up $500,000 or 4% from the prior year, but down $700,000 or 5.7% compared to the linked quarter. The higher level of mortgage volume drove compensation higher year-over-year, but contributed to the decline from the linked quarter. For the year, operating expense is up $5.7 million, or 15%. However, if we would normalize for similar mortgage volume in the Edon and merger costs, year-to-date growth is $2.2 million or 10%. As we turn to the balance sheet, loan outstandings at December 31, 2020 stood at $873 million, 69.4% of the total assets of the company. We had loan growth of $47 million, deposit growth of $209 million, and asset growth of $219 million from the prior year. All of these growth levels were unlike those we have experienced in our recent history, as they were impacted by the pandemic, PPP, consumer liquidity, and of course the merger. As we look at our capital position, we finished the year at $142.9 million, up $6.8 million, or 5%, from the prior year with our equity-to-asset ratio standing at 11.4%, which increases to 12% when we exclude the PPP balances. On a per share basis, book value was up $1.86 per share from the fourth quarter of 2019, or 10.6%. We continue to buy back our shares under our buyback authorization. During 2020, we repurchased 435,000 shares at an average price of roughly 90% of book value. Total non-performing assets of $7.3 million, or 58 basis points were up $600,000 from the prior year and flat to the linked quarter. Included in our numbers are $800,000 in accruing restructured credits, which elevate our non-performing level by seven basis points. And absent those restructured accruing credits, our total non-performing asset ratio would reduce to 51 basis points. We continue to monitor the at-risk segments of our loan portfolio. And the improvement in forbearance balances is a positive trend in our asset quality. Finally, as Mark mentioned, provision expense for the quarter was $800,000, up from the prior year but down $1 million from the linked-quarter. Our absolute level of loan loss allowance at $12.6 million was up from the prior year by $3.8 million, or 44%. I'll now turn the call back over to Mark.

Mark Klein, CEO

Thank you, Tony. In summary, clearly delivering record net income was a tremendous accomplishment for us this year, but it’s all about the other milestones and achievements this past year that we’re certainly equally proud. We continue to embrace alternative communication channels to remain connected to our 30,000-plus households and still expand market share through the PPP program and close an M&A transaction with the Edon acquisition. Additionally, this year, we expanded the liquidity of our shareholder base, dealt with significant forbearance requests that we’ve discussed for two quarters, approved nearly 700 PPP applications, and expanded our mortgage operation to provide record lending to over 3,100 homeowners across our entire footprint in 2020. It was certainly unique in many ways, and our team literally stepped up to meet those challenges and delivered one of our strongest earnings in history. As we turn to page 20 and 21, we certainly expect some challenges to subside yet others unknown will certainly emerge. That said, as our markets steadily open, we believe the pent-up demand and liquidity will welcome the partnership of a community bank like ours with a diverse product base delivered through our seven key business lines. Now I'll turn the call back over to Sarah for questions.

Sarah Mykus, Corporate Secretary

Thank you, Mark. We are now ready for our first question. For additional questions, I would like to remind you that today’s call will be accessible on our website at ir.yourstatebank.com.

Operator, Operator

Thank you. Our first question comes from Brian Martin with Janney Montgomery. Please go ahead.

Brian Martin, Analyst

Hey, good morning, guys.

Mark Klein, CEO

Good morning, Brian.

Tony Cosentino, CFO

Hi, Brian. Welcome.

Brian Martin, Analyst

Happy New Year. Just maybe if you could start just on kind of maybe just the mortgage outlook. I appreciate the comments, Mark, on just adding some new geography in the Indiana markets. How should we think about the production levels and pricing that was very robust this year?

Mark Klein, CEO

Yes. Thanks, Brian. As we all know, mortgage has become increasingly important to our operation. As we’ve discussed before, that success certainly has led to some good earnings per share and net income. We look to continue to drive those levels to a comparable level as 2020 had and 2021. We know we're going to have to add some additional reasons and some additional MLOs to make all that happen, particularly if rates move on us. But we're expecting some stability in that arena. We expect similar volume, but I know that our margins might not be as robust, Brian, as they were before. Tony might have some perspective on our hedging process and how we think that's going to keep us to have a pretty robust $100 million to $150 million pipeline.

Tony Cosentino, CFO

Yes. I think, Brian, we had a fairly weak first quarter of 2020. We look to be 30-ish plus percent from that quarter here in 2021. I would think we're on a fairly good pace through the first half of the year and we'll see how things go relative to that on a volume basis. Yes, on pricing, yields were certainly at a premium throughout 2020. Our expectation is that yields will constrict a bit in 2021. I think a lot of banks that have looked at margin pressure have reached out and started to increase their exposure to the mortgage business. The competitive nature of people coming after our employees and high producers means they are not just going to walk away from that. I think there's going to be potentially some stretch on price to maintain volume to manage that infrastructure which I think will constrict yields and pricing a bit in 2021.

Brian Martin, Analyst

Okay. Given where they were in 2019 versus even what you saw in the second half of this year, is it closer to higher in the first half of the year? When does it kind of go back to the levels we saw in 2019? They were closer to the sub-3% type of levels versus where we're at today at north of 5%.

Tony Cosentino, CFO

Yes. I mean we've historically been kind of the excluding 2020, we've been from the 2.3% to kind of the 2.8% range, fairly consistently going back 2016, 2017 to 2019. I would think we're probably trending towards that range. But the first half I think is still going to be above 4%, based upon what I'm seeing right now. And we'll see how long that lasts. But I would think the first half of the year probably 4% and probably returns back to that 2.75% to 3% range for the second half of 2021 would be my best guess as we see it today.

Brian Martin, Analyst

Got you. And just remind me, Mark, the markets you intend to add staff in this year or build out; you mentioned Northeast Indiana, what are the expectations to be adding folks this year?

Mark Klein, CEO

Well, clearly, as we've gone on record, Brian, that Columbus model we’ve built certainly we think we can replicate. We’ve had a slower start than we anticipated in Indianapolis, but we finally caught stride of $50 million in this market. We know the Northeast Indiana is rich with lots of lakes and nice expensive properties. We're committed to getting in the Northeast Indiana. We thought we had a strategy to lift the team out and build a team, but we're going to have to retool a little bit here. We've had a little aberration so to speak of who is going to lead that team. But we're committed to the market, and we like the eastern side of Indiana and lower Michigan. We’re going to continue to push it along and find MLOs as well as the support team to make that $600 million to $700 million happen.

Brian Martin, Analyst

Got you. And then maybe just a little bit of thought on the loan growth outlook. Given the liquidity in the market, what are your pipelines looking like today? What are your customers expecting as things unfold this year?

Mark Klein, CEO

Yes, sure. We've been a custom brand, as we've said a number of times. In these times with real high sensitivity of the clients with regard to interest rates and low GDP, we've got to be very competitive. We’ve developed some fairly aggressive programs to hit some of our target markets with very competitive interest rates, albeit with a little bit of duration risk. Our goal is to get back to that middle to upper range of single-digit growth in the lending arena, and I know our pipelines have been fairly robust of recent.

Jon Gathman, Senior Lending Officer

Yes, I think that's a fair assessment. As Mark said, we’ve developed some programs. We really began thinking, as we enter 2021, that the pie is not getting any bigger with limited GDP growth and liquidity in the market, so we’ve really focused on client acquisition from other competitors. The PPP program has been a nice boost for us. We did a nice job running that program and obtained some good prospects through there in the first round and anticipate doing that in the second round. The pipeline returned to a more robust level in the fourth quarter and we're seeing that again here in the first quarter, up significantly from the second and third quarter, probably like most banks. But we're very optimistic, just talking with some of the lenders about the things we’re working on, primarily coming from client acquisition from other financial institutions but trying to make sure we get our share of any economic growth that's out there as well.

Brian Martin, Analyst

Okay. And it's a headwind; the production and the pipelines are good. Are the payoffs continuing to be a little elevated? Is that any trend you're seeing there as far as those slowing?

Jon Gathman, Senior Lending Officer

I do see it slowing. Our pipeline is fairly robust right now, and we saw in December, a borrower sold some properties to a REIT. I think in Q1, we're going to see just a couple more. The pipeline of those requests has slowed here for the remainder of the first quarter and throughout 2021, as many of those companies have already taken advantage of those opportunities to sell real estate or their operation. So, no, I expect that to slow considerably here later in the first quarter and the remainder of 2021.

Brian Martin, Analyst

Got you, okay. That's helpful. And how about maybe just for Tony or somebody else, I guess, just on the margin outlook? How are you thinking about that given the levels of liquidity and getting the loan growth to deploy it? Would you consider something with the proceeds if the loan growth isn't materializing? How should we think about that?

Tony Cosentino, CFO

Yes. I think that's well put. Liquidity has certainly been significant this year and our alternatives for that liquidity have been somewhat limited. I think we expect to do a decent level of PPP here in Phase 2. I think we've got some loan pipelines that we feel fairly good about. I think we've got kind of a window to see what that looks like to utilize that liquidity, and then if that doesn't come together as we expect, then I think we’ll go into whatever investment market to supplement margin a little bit. We've been extremely aggressive on the funding cost side. We’ve moved a lot of people out of high-cost deposits. We're going to continue to do that. But zero is fast approaching, so we understand we're limited on how much we can reduce costs, we’ve got to do more on the asset side of the balance sheet.

Mark Klein, CEO

And Brian, just one comment. We know that the landscape out there is very competitive, which is why we've developed these low-rate buckets of money with the intent that margin might decrease, but we're always having that conversation that if the margin is going down, we know we have to incrementally add organic growth to replace that margin all in the spirit of increasing total revenue. So, ROA might go down, but net income and EPS and ROE should increase as a result of our approach to a client that is more sensitive to the low rate environment.

Brian Martin, Analyst

Yes, got you. And Tony, just high level on your thought on the margin. If you think this loan growth takes a little bit to come together, in the absence of PPP, how do we think about the current quarter directionally?

Tony Cosentino, CFO

I think, generally, our indication is we're going to be in kind of our fourth quarter range moving forward, absent the moves and shakes of PPP. I think our core is going to be in kind of the 3.20% to 3.30% range for most of 2021. Mortgage volume is always a significant factor in that, because of the fees we deliver, how much liquidity is going to go away, whether the consumer is going to start to spend some of that money, and that’s going to improve just by its nature because we really don't have anything to do with that liquidity right now. So I would think we're kind of at the bottom end, but we'll see how this first quarter plays out.

Brian Martin, Analyst

Got you. And just the size of the balance sheet with the PPP forgiveness, I mean, I guess the forgiveness will just increase your liquidity further, is that your expectation right now as this process begins?

Tony Cosentino, CFO

Yes, absolutely. We've taken about $10 million that we've received to pay down from our original $83 million. I would expect those balances to be sub-$40 million by the time we report on Q1, absent what we do in Phase 2. Thus far, Jon, we've done about $16 million or $17 million of applications for the second part. Our expectation will be between 50% to potentially 75% of the volume we did in the first phase because of the different requirements. So, absent PPP, I do think cash and liquidity will trend down, and our hope is that we're going to put that into more loan categories.

Mark Klein, CEO

And Brian, that said, just a follow-up comment: As Tony indicated and as Jon indicated, we've received 50% of our round one applications for forgiveness. We've only received 25% of the money. With the government’s commitment for a minimum of $2,500 per loan we're in, and we continue to expand not only with our clients, but with prospects. We’ll have some good numbers in subsequent quarters from at least round one of those 260 prospects we brought in. We’re using it as a lever, and we’re turning lemons into lemonade with that.

Brian Martin, Analyst

Right. Got you. And then maybe just the last one or two here. The reserve levels are kind of as high as they've been given the ability to put some aside for COVID. How do we think about the post-COVID economy reopening type of reserve? Should that trend a bit lower as you get more visibility? Is that fair?

Tony Cosentino, CFO

Yes. I think we’ve accounted for five credits that we've adversely rated due to COVID issues at various levels early in the process. We're just keeping a close eye on them but feel pretty good about many of them, if not all of them. I think our strict underwriting standards, and having good secondary and tertiary sources of repayment have led us to a good place. With a little bit of luck and a return to normalcy, we’re optimistic that we’re going to be over-reserved later in the year.

Brian Martin, Analyst

Okay. The thought would be if that plays out, your hope would be to grow into that reserve with loan growth rather than seeing a negative provision, is that fair?

Tony Cosentino, CFO

Yes. That’s our preferred method and thought process, because that yields some positive things in terms of growth and income.

Mark Klein, CEO

And Brian, just a last parting comment on loan growth: The variable is how hard we need to work. It’s not that we make the same number of calls and find credits that don’t have the metrics we want. We’ve conveyed that to our staff. We’ve got to work twice as hard to get the same volume that we've done in prior years, absent this COVID thing. The variable is the number of calls and how we get quality remains constant.

Brian Martin, Analyst

Got you, okay. And just the last one, the buyback is still intact. What are your expectations on that? And just what from an M&A perspective, how is the activity in that area? Has there been more dialogue given the conditions in the market, or has it been steady?

Tony Cosentino, CFO

I think we’ve been fairly aggressive in the buyback. We probably spent about $10 million of our $15 million in earnings on dividend and buyback. I think we continue to think we’ve got plenty of liquidity and capital to manage the types of M&A transactions that we believe are appropriate for us at this time. We’ll continue along the lines of the buyback and see how that goes.

Mark Klein, CEO

With regard to M&A, we continue to poke around the entire landscape. Absent organic growth, we think that organic growth delivers enormous value. M&A is certainly on the platform. We continue to talk to some opportunities. We have the managerial bench, products, and business line. We're just working to ensure that we control what we can, which would be quarterly earnings. Hopefully, that will give us a stronger currency someday.

Brian Martin, Analyst

Right. The remaining authorization out there on the buyback, can you remind me what that is?

Tony Cosentino, CFO

We originally approved $500,000, and we've got about $210,000 roughly left on that. I would think as we go through that, we're doing between $20,000 to $35,000 a month based on volume and availability. When that runs out, likely mid-2021, we’ll look at that again and see what the opportunities lie going forward.

Brian Martin, Analyst

Got you. Okay. Perfect. And then look, the expenses were a bright spot this quarter along with some of the other items you called out, but just your thoughts on expectations on expenses as you think about 2021?

Mark Klein, CEO

Just at a high level, Brian, we know that margins are going to continue to compress. We certainly don't want to allow the robust mortgage business line to overshadow prudent operations in other areas. We’re continuing to evaluate all travel arrangements, meetings, and offices. Can we run them with drive-ins? Do we need as many people? We’re looking at operating new in different ways. We’ve got a keen eye on those because we know the job to be done is going to get more difficult. That said, a broader balance sheet, albeit with thinner margins, is where we’re headed with the competitiveness in the landscape to find more scale. We think we can continue to push profits higher by margin spending but a bigger balance sheet.

Brian Martin, Analyst

Got you. And then just the classified and criticized level, you talked about them earlier. Was there any notable change this quarter?

Mark Klein, CEO

We’re maintaining a solid criticized and classified level. We did have some movement, as I said, in about five credits total but four in the quarter. Many of those are just some preemptive kind of watch, special mention, and one or two substandard. We’re keeping a close eye on a couple of credits. All those credits are performing and doing very well. We haven't had any delinquency or increases there. Just keeping a close eye on their financial shape as we head into the first and second quarter of 2021.

Jon Gathman, Senior Lending Officer

Our expectation is we've got six or seven commercial credits in forbearance as we sit here today. We really expect all but one of them will come off in Q1 based upon their current expectations and where we are. We think it's going to continue to improve.

Brian Martin, Analyst

Okay. Perfect. And Tony, that part about expenses, at high level if your expectation is that the mortgage volume is similar to what it was this year, would the expectation be that expenses from the second half run rate are how we should think about going into next year?

Tony Cosentino, CFO

Yes, I think in general, I would have one caveat there. We’ve certainly put forward in our calls and conversations that we're making some investments in technology in 2021 which will come onboard a new commercial loan origination system in the nCino platform. We’re moving CIP to Salesforce for all our sales teams. So we have some higher levels of year one expenses as we transition which will inflate expenses a bit. But generally yes, mortgage will be the variable on how expenses flow.

Brian Martin, Analyst

Okay. That’s helpful. Thank you. Thanks for taking the questions, guys. I appreciate it. Nice quarter and nice year.

Tony Cosentino, CFO

Thanks, Brian.

Jon Gathman, Senior Lending Officer

Take care, Brian.

Operator, Operator

Showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mark Klein for any closing remarks.

Mark Klein, CEO

Once again, thanks everyone for joining us. We're pleased with the year. We're looking forward to 2021, albeit the challenges we know we’re going to face, but we’ll look forward to joining up with you again in April as we report on our first quarter of 2021. Thanks again and goodbye. Take care.

Operator, Operator

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