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spk01: Ladies and gentlemen, thank you for standing by, and welcome to the Equity Bank Shares' fourth quarter 2020 earnings conference call. At this time, all participant lines are in listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Chris Navratil. Thank you. Please go ahead, sir.
spk06: Good morning, and thank you for joining Equity Bank Shares Conference Call, which will include discussion and presentation of our fourth quarter 2020 results. Presentation slides to accompany our call are available via PDF for download at investor.equitybank.com by clicking the presentation tab. You may also click the event icon for today's call posted at investor.equitybank.com to view the webcast player. If you are viewing this call on our webcast player, please note that slides will not automatically advance. Please reference slide one, including important information regarding forward-looking statements. From time to time, we may make forward-looking statements within today's call, and actual results may vary. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us. With that, I'd like to turn it over to Brad Elliott.
spk11: Thank you, Chris, and good morning. Thank you for joining our call and your interest in equity bank shares. Joining me is Eric Newell, our CFO, Greg Kosover, our Chief Operating Officer, and our President, Craig Anderson. The entire equity team entered 2020 optimistic that we would build on our momentum from 2019. I can look back on 2020 and say that we exceeded our expectations just a little differently than we planned. While we had a branch-like model for three weeks when the pandemic hit, we were quickly fully open in our branches to serve our customers in a safe manner. and have never looked back. This has proved to be a differentiator in our markets. We still have major competitors that have dark branches and put their needs ahead of their customers and duty to be an essential business. This is not lost on our customers or theirs. Many of these customers are business owners and struggle to understand how to safely get their employees back to work. to serve their own customers and communities. We approached it the same way. Those customers now know that they can depend on Equity Bank to be there when they need us most. By way of example, Galen McGregor and Glen Malan in our Trust and Wealth Management Group continue to safely meet with their clients and prospects. to give advice for decisions that can't wait for the pandemic to end. Many of our competitors cannot or will not do the same. Our commercial lenders, treasury sales, and bank managers are out making calls to prospects which they have a relationship with but happen to bank elsewhere. Why? Because their current banker will not meet with them. We've had more customers than I can count call us because their current banker was unable or unwilling to help them get a PPP loan, process a simple request, or talk about their current needs. Julie Huber has masterfully led a team of over 150 individuals at Equity through the PPP 2020 program, Main Street Lending, and the current PPP program. Our credit administration, loan servicing, commercial lenders, and customer care departments have worked day and night to meet our customers' needs and to get the government programs delivered to help them be able to run their businesses. I'm honored to be a part of this team that over and over again have shown entrepreneurship, through a challenging and uncertain time. I wanted to spend time on this because our team and our customers are what make up the value proposition of Equity Bank, and in turn, supports and builds franchise value. We will talk about the financial aspects of our business, and they are very important. But without our employees and our customers, we would not be able to achieve our financial results. Highlighting how our team has performed in one of the most uncertain environments many of us have ever experienced was something I wanted to share with you. We started the year with $20.75 per share of tangible book value and grew it $3.93 to $24.68 per share. nearly a 20% annual return on tangible book value. This is the highest level we have reported as a company. Our asset quality metrics have remained stable and improved, which Greg will discuss in a moment. We raised $75 million of offensive capital in the summer and have also prudently managed capital in this moment of uncertainty. We returned a portion of our capital to shareholders through a stock repurchase program we completed in the summer and are now executing a second repurchase program implemented by the board in the fall. We added $24 million of reserves to our allowance for loan losses, as Eric will speak more about. We are ready for the adoption of CECL. We successfully closed on a deal to acquire all the assets and deposits of Almena State Bank from the FDIC. We completed the core conversion over the recent three-day holiday weekend. We are thrilled to have welcomed the members of the former Almena team to equity and have high hopes for growth in Norton and Almena Kansas markets. Under the leadership of our Western Kansas Regional President, Levi Goetz, We anticipate this will be a good financial transaction for our shareholders. I feel great about our prospects in 2021. The operating environment is not easy, but this is where our team can win new business and showcase our value proposition to our new and current customers. Eric, let's take everyone through our quarter.
spk10: Thank you, Brad, and good morning. We had a busy fourth quarter resulting in a net income of $12.5 million or $0.84 per diluted share. There are several items in the quarter that had some impact. First, we successfully closed on a deal to acquire the assets and deposits of Almena State Bank, adding two branches to our western Kansas region. As a result, we recognized a gain of $2.1 million in the quarter as opposed to what we normally see in whole bank acquisitions where goodwill may be added. We also recognized 299,000 of merger-related expenses during the quarter. Lastly, in OREO expense, we recognized a valuation adjustment to two branches we closed earlier in the year, which was 947,000 of the 1.6 million of expense in the quarter. When taking into consideration these items, non-GAAP pre-tax earnings come out to 13.7 million. This compares to third quarter non-GAAP pre-tax earnings of $11.8 million, which excludes the impact of goodwill impairment. Our non-GAAP net income in the fourth and third quarters is $10.6 million and $9.1 million, respectively, representing $0.71 per diluted share compared to $0.61 per diluted share in the third quarter. Net interest income increased to $35.6 million in the fourth quarter from $32.1 million in the third quarter. Our 2020 PPP customers have had great success in obtaining forgiveness from the SBA on their loans, totaling $123 million of loans forgiven in the quarter. This represents 33% of PPP loan dollars forgiven and 61% of our total PPP loans. When the loan is forgiven, the unrecognized net fee income we received is pulled forward and recognized. During the quarter, we recognized 3.75 million of fee income, bringing the total of SBA-related fee income recognized for the full year to 6.09 million. For reference, in the third quarter, where we had no forgiveness of PPP loans, we recognized 1.3 million. PPP interest income totaled $777,000 and $946,000 respectively. Removing PPP fee and interest income from net interest income in both the fourth and third quarters results in pro forma net interest income of $31 million and $29.9 million respectively. The driver of the increase of NII was a reduced cost of interest bearing liabilities. With PPP impacts removed, loan yield, earning asset yield, and net interest margin in the quarter ending December 31 is 5.15%, 4.23%, and 3.7% respectively. This compares to the quarter ending September 30th of 5.01%, 4.2%, and 3.6% respectively. We had 4.5 million of net deferred fees that we have yet to recognize related to the 253.7 million of PPP loans outstanding at year end. A quick comment on our Main Street lending program originations. We originated 282 million of loans under that program in the fourth quarter. We expect to recognize the net origination fee ratably over the contractual five-year life of the loan. Craig, do you want to touch upon our origination activity for the quarter?
spk08: Thanks, Eric. During the fourth quarter, we had a significant amount of paydowns, much of which was strategic in nature due to perceived or actual credit weaknesses. However, I'm happy to report that we had our strongest quarter of originations this year when excluding PPP loans from the second quarter. During the fourth quarter, we originated $563 million, of which $282 million was Main Street Living Program loans, $268 million of which was sold to the Federal Reserve, resulting in a net $295 million originated for our balance sheet. Of total fourth quarter originations, 141 million was CNI and 71 million was commercial real estate. The weighted average coupon of our originations in the quarter was 4.31%, comparing favorably to third quarter weighted average coupon of 4.19%. Our total pipeline is approximately 400 million, a level that is higher than what we saw for much of 2020. Our focus is to ensure that we are assisting our customers in the best way possible, whether it's providing them options under the various government assistance programs, such as the 2021 PPP program. We have teams working hard at all hours and days of the week to get loans approved by the SBA. Through end of business on Sunday, January 24th, We have had over 1,800 customers submit loans, totaling approximately $219 million, of which 900 have been approved. We continue to see a high level of interest in the SBA program. Our teams are also hard at work ensuring growth from our new and current customers from traditional sales activities, Main Street lending program, and PPP, and deepening their relationships with equity beyond lending products. Most all of our lending relationships bring their deposits to us, helping to increase our demand accounts 310 million in 2020, which is an astonishing 64% growth year over year. Late in 2020, we analyzed our deposits for PPP loan proceeds impact and estimated insignificant amounts remained from the 2020 PPP program. We had great success with establishing deposits with our Main Street lending program relationships, which will boost future treasury management income. We have seen successes in our consumer checking accounts. We improved by nearly three times the net new checking account growth in 2020 versus 2019. Average balances of established accounts were higher due to elevated liquidity from pandemic programs such as federal unemployment insurance and stimulus payments made to individuals. From what we can see, many customers have been saving those funds. We are optimistic that we can continue our progress in achieving our goal of 30% to 35% ratio of demand deposits to total deposits. With that, I will turn it back to Eric.
spk10: Thanks, Craig. I want to highlight the 15 basis point reduction in the cost of interest-bearing liabilities. The cost of time deposits declined 23 basis points linked quarter, as I mentioned would happen during our third quarter earnings call. It may be counterintuitive to see our cost of FHLV advances increasing, but that is due to fixed rate advances that remain. All of our short term and overnight funding has been paid off at year end. Average non-interest bearing DDAs totaled $738 million in the fourth quarter of 2020, increasing $23 million from $750 million in the third quarter, which is also a factor in NIM preservation. Entering the fourth quarter, our team was prepared to adopt CECL on December 31, 2020, with our earlier election to defer adoption to 1231 under the CARES Act. With the appropriations bill signed by the President on December 27, there was language in the bill that modified the deferral date to January 1, 2022. After conferring with our advisors, we are opting to adopt on January 1, 2021, and not deferring another year as the law permits. The reason for the January 1 versus December 31 adoption is due to the relative ease of disclosure with the January 1 adoption date, as the December 31 adoption was effective January 1, 2020, a complexity we wanted to avoid. With that in mind, at year end, we continue to use the incurred loss method for calculating the provision and allowance for loan losses. The total provision of $1 million in the quarter is fairly consistent with the third quarter provision, and there were minimal changes to management's qualitative factors in the fourth quarter. At December 31, we had $17.7 million of credit marks on acquired loans, of which $12.6 million is from the Almina transaction. When included in the A-triple-L, the pro forma coverage ratio rises to 2.36% when excluding the ending balance of PPP loans from the denominator. As a reminder, with the adoption of CECL on January 1, the effect will run through capital and not current period earnings.
spk09: Craig? Thanks, Eric. Looking back on 2020 and the uncertain environment, I am cautiously optimistic about where we stand with many of our customers. I have worked closely with Craig Mayo and personally met with many of our customers to better understand business conditions and how it may impact our prospective credit picture. And importantly, it allows our team to work to proactively make sure our customers are in the best position possible to weather the uncertain operating environment and in turn minimizes any potential credit issues. In the fourth quarter, total non-performing assets declined to $54.6 million from $61.7 million in the previous quarter. This includes $7.5 million from the Amina transaction, all of which we believe is marked appropriately. And when this $7.5 million is removed, the quarter-over-quarter decline is approximately $15 million. Overall, delinquencies are flat quarter-over-quarter. As Craig Anderson previously mentioned, through hard work we were successful in moving some credits off our books to improve our credit picture. On our last call, I mentioned a shared national credit that totaled $6.2 million, which we previously reserved for and had contracted to sell. We closed on that deal, as expected in the fourth quarter, at the level that we anticipated, and that contributed to a decline in our non-performing assets from September 30th. We have not originated any new SNICs in the fourth quarter and our balance in that portfolio is currently $38.4 million. In addition to this SNIC, OREO is down about $3.1 million in the quarter and about $6 million in loans improved to watch or better to account for the decline in NPAs. At year end, we moved one of our large relationships into special mention. This relationship is in our aerospace segment, and we have previously discussed the uncertainties around this relationship. During the second half of 2020, the entity principal injected $50 million of capital into the borrower, dramatically improving the credit picture. However, regrettably, a major customer of theirs canceled its contract late in 2020. While our borrower is still selling its product to this customer due to it being the sole manufacturer for this part, management felt it was prudent to place the relationship into special mention until there was more clarity on the relationship between our borrower and their customer and a better understanding of their financial plans in replacing the lost revenue with alternative sources. Our borrower remains current on its loans at this time and we believe we are adequately collateralized. Management will continue to closely monitor this relationship and overall portfolio and proactively work with our borrowers to ensure the best results for both the businesses and the bank. We also use the extension provided to us under the appropriations bill signed in late December to provide some relief to customers that continue to be directly impacted by COVID by deferring a portion of their payments for varying terms as permitted under the CARES Act. The total of loan relationships under some form of relief generally in the form of deferral at December 31st is 10 for $63 million or about 2.5% of loans. We prudently structured the deferrals so that in the event the borrower met certain financial performance metrics, the deferral would end and contractual payments would resume. We have appropriately risk graded these loans and assessed them for accrual status as required by GAAP and regulatory standards. We also believe the majority of these borrowers have secondary sources of capital to repay should the primary source become insufficient. About 60% of the balance is to very strong theater operators and about 20% are to very strong hoteliers. Other real estate owned screens up from the previous quarter. We had a borrower that we are currently liquidating deed to us properties as part of an executed forbearance agreement. This totals $6.1 million and better positions us to limit our exposure. Removing these performing OREO assets, the balance quarter over quarter declined approximately $3.1 million on the back of several successful sales of OREO. OREO expense totaled $1.6 million during the quarter, and as Eric mentioned, we had two closed branches that we revalued in the quarter, which totaled $947,000. Before I give an update on our hotel portfolio, I want to share with you that our overall credit metrics are trending positively in the fourth quarter and in 2020. Without Almena, our non-recruits are down $17 million in the fourth quarter and down from year end 2019. Non-performing OREO is down $3.1 million in the fourth quarter and also down from year end 2019. Assets internally rated substandard are down $5 million in the fourth quarter and our capital is up leading to these metrics all being much lower in relation to capital at December 31st, 2020 compared to 1231.19. I want to briefly talk about our hotel portfolio. We have been in frequent communications with our large hotel operators and although the environment continues to be unfavorable for this industry generally, Our conservative underwriting standard for these assets, when combined with the owner's quick and prudent reactions to the COVID environment, leads us to believe that any upset will be minimized. Many have injected the operating capital necessary to date and have reserves for 2021. They have already significantly adjusted operations and have been forthcoming with us about their revised operating models. These borrowers are seasoned and represent many of the best in the industry and are in the hotel industry as their core business and for the long run. We also continue to work through some smaller hotel credits purchased through mergers and believe they are adequately marked should they become stressed. As I said in our last call, the prospect of future issues due to COVID-19 are still possible. We believe we have the resources on our special assets team to address in a proactive way any perceived or actual issues as they arise. Eric? Thanks, Greg.
spk10: Our non-interest income totaled $8.5 million a quarter, an increase from $6.5 million in the third quarter. The main driver in the period was the $2.1 million bargain purchase gain recognized as part of our transaction with FDIC as receiver of Almena State Bank. Associated with this transaction, there is no loss-sharing agreement between the FDIC and equity. We experienced relative stability in all of our other fee income lines in the fourth quarter. We are excited about the growth we're seeing in our Trust and Wealth Management team. From its launch just about two years ago, on December 31, 2020, the assets under management just exceeded $200 million, a huge success story for the team, and fee income will become a more meaningful contributor to total fee income in future periods. One of our long-term goals is to increase our fee-income mix to total net revenue closer to 30%. It will take several years to achieve this, and the trust and wealth management line of business will be an important part of achieving that goal. Total non-interest expenses for the quarter ending December 31 is $28.5 million, compared to a pro forma $26 million in the linked quarter when excluding the goodwill impairment, which represents a $2.5 million increase. The most notable contributor to the increase was $1.5 million in other real estate owned, which Greg just discussed. $300,000 is attributed to the merger expenses from Almena State Bank. Our FTIC insurance premium increased $437,000 in the fourth quarter, and we expect this higher run rate through the quarter ending June 30th, 2021. This is due to the goodwill impairment and its impact on the net income ratio, which is an input into the calculation of the FDIC premium. With the removal of extraordinary items concept in 2016 from the definition of net income, the goodwill charge will unfortunately drive a higher premium until it falls off in the third quarter. When removing these items on a pro forma basis, fourth quarter non-interest expense would have been flat to the third quarter. Brad?
spk11: Before Eric takes you through our forecast for 2021, I want to say the entire executive team is working hard to lead the company and prudently manage our balance sheet and capital in this uncertain time. There are a lot of opportunities to make mistakes in an effort to reach for asset growth or ease up our credit standards in an effort to book earning assets. We know we would live with those mistakes for a long time. We are willing to be patient when we need to and not sacrifice our credit and our risk culture for a short-term earnings boost. We will continue to work hard on our prospecting and selling efforts led by Craig Anderson and building the team's pipeline to continue our loan growth. Eric?
spk10: We've added a couple slides in our earnings deck, and on slides 22 and 23, you can see our forecast for 2021. We are cautious about loan growth in the upcoming year, as you can tell by the fairly wide range we are providing. To Brad's comment about prudent risk management, we are not going to stretch to grab loan growth just for the sake of growth. We do expect that the benefits of the declining cost of funds will start to become less impactful in 2021 versus what we experienced last year. There is likely one more quarter of benefit in time deposits, and we have studied carefully our competitive posture on deposit pricing for our non-maturity products and believe there may be some benefits realized. As you heard from Craig, we've been successful in maintaining origination coupons in excess of 4%. If that success continues, our NIM compression would be more muted and we'd land in a higher end of our forecasted range. We believe fee income will benefit from aforementioned contribution from our trust and wealth management group, as well as the normalization of overdraft fees and a focus on our treasury management and debit card interchange fee income lines in 2021. Non-interest expenses will be flat to modestly down in 2021 versus 2020. Brad?
spk11: Thanks, Eric. Before we open it up for questions, I wanted to thank each of you for your continued interest in equity. We had quite a year and I believe we are well positioned for 2021 and the future. Our sales teams have the tools in place to be successful in serving our customers and winning new business. And we are continually looking at ways to make their lives easier and build leverage into what we do. We have learned a lot as a team this year. And we look forward to continuing serving our customers and helping them be successful and supporting our communities. And with that, we are happy to take your questions now.
spk04: Ladies and gentlemen, as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question will come from Terry McEvoy with Stevens. Please go ahead.
spk02: Hi, good morning, everyone. Hi, Terry. Maybe just a question for Eric. I'm just curious, the quarter-over-quarter increase in certain loan yields, the resi real estate and the ag real estate, could you just talk about what was behind the jump there in the fourth quarter and if that's sustainable? Thank you.
spk10: Yeah, Terry, I would say I don't have specific information on the ag. I don't know if
spk09: Greg or Craig? Terry, I'm going to venture to say that ag would have gone up because we had a large credit improve in our western Kansas market and grabbed the balance of the accretable yield as it was moving back to performing.
spk02: Eric, any comments on the move to 490 on the resi real estate?
spk10: I don't know why that occurred in the quarter, but I would venture to say that that's not sustainable going forward.
spk11: I think, Terry, that's also a large credit coming back on accrual.
spk10: Oh, yeah. We did have one credit that came back onto accrual in the quarter that was in that portfolio. They had some deferred interest that they owed us and paid us back in the quarter. That's a temporary increase in the yield, Terry, and I would think we're going to fall back to what we saw in the third quarter.
spk02: Okay. Thanks. And then, Greg, thanks for reviewing the hotel portfolio. I was wondering if you could just update us on the aerospace portfolio. I believe in the past it's been included in your presentations, and the reason I ask is the one specific credit that you highlighted in your prepared remarks.
spk09: Yeah, the one specific credit, Terry, is really the only one that we're seeing stress in. The balance of the portfolio is doing well. In fact, we had one borrower successfully sell his business in Q4. And so other than what we've disclosed, everything else is in good order. And that credit, while we're on it, Terry, as I said, is current, great operator. It really is, in my opinion, an abundance of caution that it's in special mentioned. And at this point, they're not delinquent, and I don't forecast loss based on an estimate of the collateral that we have today. And so we'll see what 2021 brings. Perfect. Thank you.
spk02: And then maybe, Brad, just to finish up with you, your thoughts on bank M&A in 2021 as it relates to equity. And while your stock price is higher, it's still just a touch below tangible book value. And how do you think about M&A relative to your valuation today? Thanks. Thanks.
spk11: Yeah. Well, Terry, we raised capital, so we would have some aggressive or offensive capital. So I think we might have some opportunities to do some things that would be cash, which would be creative to earnings and probably priced right, would be something we would want to do with the cash versus with stock. I know there are conversations that we're having with people about stock. It's actually a great time to take our shares from a valuation standpoint. And so I think we, you know, I think there are good conversations going on. As you know, banks are sold and not bought. So the seller has to decide that it's the right time. But as we go through this year and come out with some certainty on where credit looks like in their portfolio, I think we'll be more confident about moving forward and executing on some of those transactions.
spk02: Great. Thanks, everyone.
spk04: Thank you. Our next question will come from Michael Perito with KBW. Please go ahead.
spk05: Hey, good morning. Thanks for taking my questions. I wanted to ask, clarify a couple things in the outlook for 2021, if that's all right. I wanted to first just start on the non-interest income side. I was wondering if you could break out a little bit more of where you expect to see the drivers at the 10% to 20% in 2021 and And just a quick follow-up, if we look at the one Q21 outlook of $6.2 to $6.8 million, to get to that 10% to 20% year-on-year growth, it would seem to suggest quite a ramp over the course of the year. Is that accurate? Is that how you guys are seeing it? And any color on what the drivers of that growth would be would be helpful.
spk10: Yeah, I would look at three things as driving the fee income, non-interest income growth in the year. It would be our trust and wealth management group contributing more on the fee income side, given their success in growing AUM through James Rattling Leafs, 2020 and largely in the fourth quarter there some several wins and I know they have a pretty strong pipeline, so we should start seeing some benefit with the trust and wealth management group so that's expected we're also looking to. Debit card interchange income, trust management or commercial customer, treasury management, I'm sorry, treasury management fee income from our commercial customers, debit card interchange income. and non-sufficient funds or overdraft fee income. Some of that is seasonal in nature. So you don't see that in the first quarter, but you'll see some pickup as the year comes on. And I think those are the four areas that we're looking to relative to 2020 to see some growth.
spk11: And that growth is relative to 2020, Terry, or Michael. So we... If we just have normalization back on deposit accounts, that will substantially cover a lot of it. But we actually have had really great treasury fee income growth that's been building for the whole year. And I think it will continue to build for this next coming year, along with trust and wealth management.
spk10: Yeah, and to that point, Michael, we were very successful in collecting treasury management or deposits from our Main Street customers late in the fourth quarter. And so as those relationships start to incur activity, we'll be able to realize some fee income there as well that was not in our run rate pretty much at all in 2020.
spk11: Yeah, we know it's already booked, and we already know what the revenue is going to be on some of that stuff.
spk05: And that's all for the lift point of 26 million for 2020, right? So that would mean you expect non-interest income to be like 28.5 to 29.5 million based on the 10-20% growth rate, maybe even a little higher in 2021. Is that the right lift point or are there other adjustments you guys are including in that?
spk10: No, there's no other adjustments.
spk05: Okay. Great. And then on the average earning assets, I think you guys said $3.4 to $3.6 billion in the first quarter. you know, relative to just over $3.6 billion, I believe, in the fourth quarter. A little bit of a wide range. I was curious, is that really related to kind of the loan growth and pace of PPP balance degradation? Or can you maybe talk about that dynamic a little bit more and maybe what drivers can put you at the higher or lower end of that range for the first quarter as we think about the size of the balance sheet for next year?
spk10: Yeah, so from the average earning asset side, one of the things that we're considering is that we have this cash sitting on our balance sheet at year end. We don't want to grow loans just for the sake of growing loans. And PPP activities actually generate their own liquidity because when we originate a PPP loan for our customer, as we're doing right now as we speak, we put those proceeds into a deposit account here at equity. And oftentimes that customer, that liquidity stays. So it's actually kind of a self, it creates more liquidity rather than a using liquidity. So from the average earning asset side, we're likely going to see a modest increase in the investment portfolio as a percentage of average earning assets. And what we're doing there is we're trying to be very careful in not adding too much duration there. It's almost a cash substitute. And then once we start booking and continuing to book and seeing pull through on the loan pipeline on non-government programs, we would deploy that liquidity and cash flow into the loan portfolio. So there is a little uncertainty, Michael, as to the loans versus the average earning assets. I think the idea is that, you know, come March 30th of this year, you're probably going to see a higher percentage of investments to average earning assets than what you saw at year end. That's why we added that, because there is that kind of interplay of uncertainty.
spk05: Got it. That's really helpful. And then just lastly, I apologize if I missed this in the, uh, the prepared remarks, I was jumping back and forth in a couple of calls, but the, um, I think you guys on the third quarter call provided some, some broad strokes around Cecil adoption and what those numbers could look like. Did you update that? And if so, do you mind just repeating or if not, do you mind just commenting on, on where you think the, um, the Cecil reserve when you adopt next quarter will go? I mean, it would seem like maybe there was some room for some improvement relative to third quarter as, the economic outlook got a little better, but curious, any updates there would be helpful.
spk10: Michael, are you, are you talking about provisioning expectations in 2021?
spk05: No, I'm just kind of talking about where the overall allowance coverage will go once you guys adopt. Um, understanding that that not won't all impact earnings, you know, reported earnings, but just, um, where I think you guys provided a broad range for that last quarter, if I remember correctly.
spk10: Yeah, and actually it won't impact the current period earnings in the first quarter at all because with the January 1 adoption, it will go through capital. So the way we're looking at it is we have $17 million of purchase credit impaired that will flow into the ACL. That's just a, that will not go through capital. That's already on our balance sheet, so it's just a presentation change. And then once you add that 17 million to our year end A triple L, we're expecting that you'll add another 20 to 30% on top of that to get to our ACL at March 31. So that 20 or 30% on top of the pro forma A-triple-L at 1231 plus the 17 million that does not go through capital, that 20 or 30% on top of it will be a retained earnings adjustment in the first quarter.
spk05: So you guys, I mean, that would, you know, really rough math here, but that would suggest that the ACL will be all in just about double the $33.7 million allowance, LLR, you guys had in the fourth quarter. Is that in the ballpark?
spk10: Yes, sir.
spk05: Okay. Excellent. Thank you guys for taking my questions. Appreciate it. Thank you.
spk04: Thank you. Our next question will come from Jeff Rulis with DA Davidson. Please go ahead.
spk03: Thanks. Good morning. Appreciate this slide on 22. Don't want to beat it up too much. I appreciate the effort to kind of show the expectations. But a couple questions, other questions. On the margin, you know, it's a, I guess, at the midpoint of, was that a 30 basis point decline? You mentioned, Eric, that the maybe increasing the mix of investment securities, your limited effort or limited further room on lowering, you know, deposit costs, I get maybe some of the pressures there. But what else is – and I guess we kind of outlined some of the one-off, you know, collection of interest that may be juiced, loan yields in the quarter. I guess the settling of all that, is that why, I guess, core – goes down 30 basis points, link quarter.
spk10: Yeah, I mean, the collection of deferred interest certainly is a factor in the 3.7 net interest margin in the third quarter. So what we attempted to do in the outlook for the range of the 3.35 to 3.45 is to strip out the effect of PPP in that quarter as well as we're not taking into consideration any level of purchase accounting. We have a level of it every quarter based on all of the acquisitions that we've realized, and then we'll have some of it with Almena as well, but it's hard for us to really make an estimate on that. You know, I would say, Jeff, your characterization of a kind of a settle or, you know, some of the one-offs in the third quarter is really what's driving that reduction in the range. I would point out, though, there's a couple things. First off, you know, in Craig's prepared comments, just in case if folks missed it, you know, the weighted average coupon that we originated in the fourth quarter was 4.31%, comparing favorably to 4.19% in the third quarter. So we've had some really good success in originating meaningful dollars for our balance sheet with a four handle on it. If we continue that success, that will help mitigate NIM compression. And I'm sure that some of our peers probably are doing a lot more with three handles. We're certainly seeing it in deals that we miss on rate. Folks across the street are using a three handle on their originations. So we're seeing it. So we're working to preserve that. And the other item that I want to just highlight is on the interest-bearing liabilities side. We've had some great success in reducing our time deposit costs. I expect that we'll get a little bit more benefit in the first quarter here in 2021. I don't think it's something that we're going to be able to continue to drive down throughout 2021 just based on the duration of that portfolio. However, in 2020, we were very aggressive and early in reducing our non-maturity deposit rates. And I think a lot of our competition has caught up to us. And so we've been studying whether there's opportunities for us to, not meaningfully, but on the margin, one, two, three basis points here and there throughout the year. Reducing our non maturity deposits and we're going to work on that as well, based on what we're seeing in a competitive landscape so that you know can add the effective. You know that's pooled money that we're reducing essentially overnight so that can be quite helpful and then one last item on on margin that you know I don't want folks to miss is that on the. Non interest bearing. as a percentage of total funding. I don't have the numbers right in front of me, but I know that that's become a more meaningful, in the fourth quarter, meaningful percentage of total funding than earlier periods. And we believe that a lot of that's sticky. There's certainly higher levels of liquidity in the consumer side, but we've been seeing that our customers are saving that and largely saving it. from the commercial side, we don't believe PPP is really meaningfully contributing to that number, and those Main Street funds, those aren't short-term relationships, and we expect that we're going to be able to maintain that, so we're pretty constructive on that number going forward in total funding.
spk03: Just to follow up, the margin, so the 370 reported includes some accretion, whereas your Q1, 21 outlook excludes accretion. Is that correct? Or maybe it was modest in Q4. Okay. And then just to jump off point, your preliminary 21 outlook where you say contraction, are you saying we adjusted Q1 down and from there it's further contraction or that represents the contraction and then it's maybe a flat line from there?
spk10: It's definitely, I'm not, Good question, Jeff, and I appreciate it. It's not a trajectory, meaning that you're going to see another 15 basis points compression. I would say it's more of a flat line. Obviously, the competitive pressures of everything I just mentioned will have an impact on that on a we'll call it a core basis, even though we're kind of considering PPP core. I mean, there's some noise as part of that, but this is sans PPP and other items of government programs, but I would call it more flat, flat line beyond there.
spk03: Got it. So core steps down and then it's kind of a battle from there, but not necessarily further compression, including the puts and takes. Okay. Okay. Okay, sorry. So the last one I have is just to jump to the expenses. You know, you've got a $3.5 million decline run rate and obviously OREO merger costs. Is there some cost savings coming there? Because it's sort of a lower figure, particularly at the $24 million level. What else is coming out or what line item can we see relative to the fourth quarter that's going to Say you get to that $24 million, where would that come from?
spk10: So until the SBA program, we've historically been booking loan fees as we've been incurring them because we've been doing an analysis basically saying that's not material to defer. But with SBA program that came in place, we are now effective January 1 this year. We're deferring both the loan fees that we earned as well as the expenses of originating those. So you're going to see the effect of us starting to defer the expense side of originating those loans and then recognizing it through a yield adjustment over the expected life of those loans. So it's going to come out of the salaries and benefits line, the effect there. Okay.
spk03: Okay. Contra. Okay. That's it for me. Thanks. Thanks, sir.
spk04: Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star, then 1. Our next question will come from Andrew Leash with Piper Sandler. Please go ahead.
spk07: Hey, good morning, everyone. Andrew. A question on the $400 million pipeline you guys referenced. How much of that is from PVP or the Main Street Lending Program versus just traditional core bank commercial loans?
spk08: Andrew, this is Craig. That pipeline is all of our traditional pipeline. That does not include PPP at all. So it's a cross-section of opportunities in manufacturing, distribution, agribusiness, franchise lending, and it's very strong across our three metro markets, Kansas City, Wichita, and Tulsa. And then we've got a couple of our community markets, western Kansas and western Missouri, that also have very strong pipelines.
spk07: Got it. So with that optimism, they're probably coupled with some and you only get to keep 5% of the Main Street lending, but maybe some growth there. And obviously some some volatility around PVP should be a pretty strong year for loan growth. We need on an average balance is to get 3%. I mean, that could be double digit on an end of period basis. Am I looking at that correctly?
spk10: You are. But again, we're cautious because that's one side. We also have the other side of, you know, keeping our customers or, you know, keeping them from refinancing somewhere else because of rate. And we're certainly, you know, we appreciate a good customer and we're going to work with them in the event that those conversations come to us. But You know, we are cautiously optimistic on loan growth. That's why you see the fairly wide range there on the preliminary outlook for the year.
spk07: Got it. And then just referencing some of the strategic actions that took place in moving some of these borrowers out or helping them find financing elsewhere. Is there more of that to go or... Have we seen the bulk of that? How does the state of the current portfolio look right now?
spk09: Yeah, I think, Andrew, the bulk of it has occurred. There may be some one-off credits that move out in the next couple of quarters. But by and large, we got all that taken care of in Q3, Q4.
spk07: Okay, got it. You've covered all my other questions. Thanks for including that slide 22. Thanks, Andrew.
spk04: Thank you. And we do have a follow-up question from Terry McEvoy with Stevens. Please go ahead.
spk02: Hi, thanks. Just one quick question on slide 22. Within average loans, the fourth quarter 20 results, the 2382, that excludes the $310 million of PPP loans. Is that correct, Terry?
spk10: Yes.
spk02: Perfect. Okay. That's it. Thank you.
spk04: Ladies and gentlemen, this does conclude today's question and answer session as well as today's conference call. Thank you for your participation. You may now disconnect and have a wonderful day.
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