Q4 2020 Equity Bancshares Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the equity Bancshares fourth quarter 2020 earnings Conference call.
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I would now like to hand, the conference on the Chi to speak of a day, Chris never channel. Thank you. Please go ahead Sir.
Good morning, and thank you for joining equity Bancshares 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 Day at equity Bank Dot com by clicking the presentation tab you may also click the event icon for today's call posted at Investor Day.
The bank Dot 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.
Thank you, Chris and good morning.
Thank you for joining our call and your interest in equity Bancshares.
Joining me is Eric Newell our CFO.
Great Costumer, our chief operating officer, and our President Greg 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 light 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 is 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 struggled to understand how to safely get their employees back to work day.
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 Glen mainland in our trust and wealth management group continued to safely meet with their clients and prospects.
To give advice for decisions they can't wait for the pandemic to end.
Many of them from our competitors.
Can not or will not do the same.
Our commercial lenders treasury sales and think managers are out making calls to prospects.
Which they have a relationship with <unk>.
It happened to bank elsewhere.
Hi.
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.
Unwilling to help them get a PPP loan process is 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 loans.
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 build 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 and one of the most uncertain environment. 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 at $3 93 to.
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 small.
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 seasonal.
We successfully closed on a deal to acquire all the assets and deposits as a mean of state bank from the FDIC.
We completed the core conversion over the recent three day holiday weekend.
We are thrilled to have welcome the members of the former <unk> team to equity.
We have high hopes for growth and Norton and on Mena, Kansas markets.
Under the leadership of our Western Kansas Regional President leave I guess.
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.
Thank you Brad and good morning.
We had a busy fourth quarter, resulting in a net income of $12 5 million or <unk> 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 Illumina State bank, adding two branches to our western Kansas region.
As a result, we recognized a gain of $2 $1 million on a quarter as opposed to what we normally see.
<unk> and whole bank acquisitions, where goodwill may be on it.
We also recognized 299000 of merger related expenses during the quarter.
Lastly, in Oreo expense, we recognized the valuation adjustment.
Q2 branches, we closed earlier in the year, which was 947000 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 71 per diluted share compared to 61 per diluted share in the third quarter.
Net interest income increased to $35 6 million in the quarter and 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 loans forgiven the unrecognized net fee income we received is pulled forward and recognize.
During the quarter, we recognized $3 $75 million of fee income, bringing the total of SBA relief related to fee income recognized for the full year to $6 9 million.
For reference in the third quarter, where we had no forgiveness of PPP loans, we recognized $1 3 million.
PTP interest income totaled 777000 and 946000, respectively.
Removing PPP fee and interest income from net interest income in both the fourth and third quarters results and pro forma net interest income of $31 million and $29 9 million respectively. The.
The driver of the increase of NII was a reduced cost of interest bearing liabilities.
With PPP impacts remove loan yield, earning asset yield and net interest margin in the quarter ending December 31 is five one and 5% for two 3% and 3.7% respectively.
This compares to the quarter ending September 35.01%, four 2% and three 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 loans.
Craig do you want to touch upon our origination activity for the quarter.
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 am happy to report that we had our strongest quarter for 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 lending program loans.
$268 million of which was sold to the federal reserve, resulting in a net $295 million originated for our balance sheet.
Total fourth quarter originations of $141 million with C&I and $71 million was commercial real estate.
The weighted average coupon of our originations in the quarter was 431%.
Comparing favorably to third quarter weighted average coupon of $4 one 9%.
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 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 had 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 there.
Thanks, Craig.
I want to highlight the 15 basis point reduction in net cost of interest bearing liabilities. The cost of time deposits declined 23 basis points linked quarter as I mentioned, what happened during our third quarter earnings call in.
It may be counterintuitive to see our cost of <unk> 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 DDA 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 Cecil on December 31, 2020 weighs on our earlier election to defer adoption at 12 31 under the cares Act.
With the appropriations Bill signed by the President on December 27.
There was language on the bill that modifies a deferral date to January one 2022.
After conferring with our advisors, we are opting to adopt on January one 2021, and not deferring another year as the law permits.
The reason for the January one versus December 31 adoption is due to a relative ease of disclosure with the January one adoption day as of December 31 adoption was effective January one 2020, a complexity 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 from the <unk> transaction.
When included in the eight triple out the pro forma coverage ratio rising to 236% when excluding the ending balance of PPP loans from the denominator.
As a reminder, with the adoption of <unk> on January one the effect will run through capital and not current period earnings Craig.
Thanks, Eric looking back on 2020, and the uncertain environment I am cautiously optimistic about where we stand with many of our customers.
Were 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 whether the uncertain operating environment and in turn minimizes any potential credit issues in the fourth quarter total nonperforming assets declined to $54 6 million from <unk>.
$61 $7 million on the previous quarter. This includes seven $5 million from the on Mena transaction all of which we believe just marked appropriately and win and win this $7 $5 million is removed to quarter over decline quarter over quarter decline is approximately $15 million or.
They're all delinquencies are flat quarter over quarter.
As Craig Anderson previously mentioned through hard work, we were successful on moving some credits off our books to improve our credit picture.
On our last call I mentioned are shared national credits 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 nonperforming assets from September 30th.
Have not originated any new snacks in the fourth quarter and our balance in that portfolio is currently $38 4 million.
In addition to this snick Oreo was down about $3 $1 million in the quarter and about $6 million in loans improved to watch where better to account for the decline in npa's.
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.
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 borrowers still selling its products 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 and replacing the lost revenue with alternative sort.
<unk>.
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 of 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-19 by deferring a portion of their payments for bearing 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 pin for $63 million or about two 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 rated these loans and assess them for accrual status as required by GAAP and regulatory standards. We also believe the majority of these borrowers have secondary.
These sources of capital to repay should the primary source become insufficient.
60% of the balance is to very strong theatre operators and about 20% are to very strong hoteliers.
Other real estate on screens up from the previous quarter, we had a borrower that we're currently liquidating deed to us properties as.
As part of an executed forbearance agreement.
This total $6 $1 million and better positions us to limit our exposure.
Removing these performing Oreo assets to balance quarter over quarter decline approximately $3 1 million on the back of several successful sales of Oreo.
Oreo expense total of one $6 million during the quarter and as Eric mentioned, we had to close branches that we revalued in the quarter, which totaled $947000.
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 on Mena, our non accruals are down $17 million in the fourth quarter and down from year end 2019 nonperforming.
Oreo is down $3 $1 million in the fourth quarter and also down from year end 2019.
Assets internally rated sub standard 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 31, 2020, compared to 12 31 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 are a conservative underwriting standard for these assets when combined with the owners 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 day.
<unk> 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 on 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.
<unk>.
Thanks, Greg.
Our non interest income totaled $8 $5 million on quarter, an increase from $6 $5 million on the third quarter.
Main driver in the period was the $2 1 million bargain purchase gain recognized as part of our transaction with the FDIC as receiver of state Bank.
Associated with this transaction there is no loss sharing agreement between the FDIC in 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 on our trust and wealth management team.
From its launched 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 in the trust and wealth management line of business will be an important part of achieving that goal.
Total noninterest 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.
Most notable contributor to the increase was.
$1 5 million.
Other real estate owned which Greg just discussed.
300000 is attributed to the merger expenses from Amina State Bank on.
Our FDIC insurance premium increased 437000 in the fourth quarter and we expect this higher run rate through the quarter ending June 32021.
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 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.
Before Eric takes you through our forecast for 2021 on one.
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.
Work to reach for asset growth.
He's 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.
Not sacrifice our credit.
And our risk culture for a short term earnings boost.
We will continue to work hard.
On on our prospecting and selling efforts led by Craig Anderson.
And building the teams pipeline to continue our loan growth Eric.
We've added a couple of slides on 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 a 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 from <unk>.
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.
<unk> 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 and the higher end of our forecasted range.
We believe fee income will benefit from after mentioned 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 line in 2021.
Noninterest expenses will be flat to modestly down in 2021 versus 2020.
Net.
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're happy to take your questions now.
Ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please.
Please standby, while we compile the Q&A roster.
Our first question will come from Terry Mcevoy with Stephens. Please go ahead.
Hi, good morning, everyone.
Hi, Gary.
Maybe just a question for Eric.
Just curious the quarter over quarter increase in certain loan yields the resi real estate in the AG real estate could you just talk about what was what was behind the jump there in the fourth quarter and is that sustainable. Thank you.
Yes, Terry I would say I don't have specific information on the egg.
No.
Greg or Craig you, Mike Terry eminent ventured to say that AG would have gone up because we had.
A large credit improve in our western Kansas market, and then grabbed the balance of the Accretable yield as it was moving back to performing.
Eric any comments on the other the move to 490 on the resi real estate.
I don't know why that occurred in the quarter by I would venture to say that that's not sustainable and going forward I think Terry Thats also.
I think that's also a large credit coming back on accrual Oh, Yeah. Yes, we did have one credit that came back onto accrual in the quarter that was in that portfolio.
They had some deferred interest that day.
Owed us and paid us back in the quarter. So.
That's a temporary increase in the yield Perry and I would take it.
We're going to fall back to what we saw in the third quarter.
Okay.
And then Gregg 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.
Yes.
One specific credit Terry is really the only one that we're seeing stress in.
The balance of the portfolio is doing well and in fact, we had one borrower successfully sell his business in Q4.
And so other than what we've disclosed everything else is in that order.
And that credit while we're on that credit while we're on it Terry.
Terry as I said is current.
Great operator, and it really is in my opinion on abundance of caution than its in special mentioned.
At this point.
Theyre not delinquent and I don't forecast losses based on an estimate of the collateral that we have today and so we'll see what 2021 brings.
Perfect and then maybe Brad just to finish up with you.
That's 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 in and how do you think about M&A relative to your valuation today. Thanks.
Yes, Terry we raised capital so we would have.
From.
Aggressive are offensive capital. So I think we we might have some opportunities to do some things that would be cash.
And.
Which would be accretive to earnings and <unk>.
Price strike will be something we would want to do with the cash versus with stock.
There are some conversation I know there are conversations that we're having with people about stock is actually a great time to take our shares.
From a valuation standpoint, and so I think we I think.
There are good conversations going on.
As you know banks are sold in not part so the seller has to decide that it's the right time.
But as we go through this year.
Come out with some certainty on where credit looks like in their portfolio I think we'll be more confident about moving forward in executing on some of those transactions.
Great. Thanks, everyone.
Thank you. Our next question will come from Michael Perito with <unk>. Please go ahead.
Hey, good morning, Thanks for taking my questions I wanted to ask.
On.
I'll clarify a couple of things in the outlook for 2021, if that's all right I wanted to first just start on the noninterest income side.
Net.
I was wondering if you could break out a little bit more.
Where you expect to see the drivers at the 10% to 20% in 2021 and just.
Quick follow up if we look at the <unk> 'twenty, one outlook of six 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 or is that how you guys are seeing it and any color on what the drivers of that growth would be would be helpful.
Yes, I would look at three things is driving the fee income noninterest 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 our growing <unk> through <unk>.
2020, and largely in the fourth quarter.
From several wins and I know they have a pretty strong pipeline. So we should start seeing some benefit with the trucks from wealth management group.
So that's expected.
We're also looking to you.
Debit card interchange income.
Trust.
Management or commercial customer Treasury Treasury management, I'm, sorry Treasury management.
Fee income from our commercial customers.
On a card interchange.
Non sufficient funds or overdraft fee income some of that is seasonal in nature. So you don't see that from the first quarter, but youll see some pick up as the year comes on.
I think those are the four areas that we're looking to relative to 2020 to see some growth.
Net growth and that growth is relative to 2020.
2020.
Terry Michael.
Michael So we.
If we just have normalization back on 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 growth for the.
A whole year.
And so and I think it will continue to build for this next coming year, along with trust and wealth management.
To that point Michael.
We were very successful on collecting.
Treasury management deposits from our main street.
Customers late in the fourth quarter and so as those relationships start to incur activity, we will be able to realize some fee income there as well that was not in our run rate pretty much at all on 2020, Yes. We know what we know it's already booked and we already know what the revenue is going to be on some of that stuff.
And Thats all from point of 26 million from 2020, right. So I mean that would mean you expect noninterest income to be like 28, and $29 5 million based on line, 10% to 20% growth rate, maybe even a little higher in 2021 is that the right lift pointer or are there other adjustments you guys are including that.
No there's no other adjustments.
Okay.
Great and then on the average earning assets I think you guys said three four to $3 6 billion in the first quarter.
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 on maybe what drivers can put you at the higher or lower end of that range from them for the first quarter as we think about the size of the balance sheet for next year.
Yeah, so from the average earning asset side one of the things that I would we are considering is that we have this this cash sitting on our balance sheet year Ed.
Don't want to grow loans, just for the sake of growing loans.
And TPP activities actually generate their own liquidity because when.
When our customer when we originate a PPP loan for our customer as we're doing right now as we speak we put those proceeds into deposit accounts here in equity and oftentimes that customer that liquidity stays so it's actually kind of a self it creates more liquidity rather than 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.
Our cash substitute.
And then once we start booking and things continue well continuing to book it.
Seeing pull through on the loan pipeline on nongovernment programs, we would deploy that liquidity.
And cash flow into the loan portfolio. So there is a little uncertainty Michael as to the the loans versus the average earning assets I think the idea is that come March 30 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.
And that's why we added that because there is that kind of interplay of uncertainty.
Got it.
That's really helpful. And then just lastly, I apologize if I missed this in the.
The prepared remarks.
Back on what's been a couple of calls but.
I think you guys on the third quarter call provided some broad strokes around T cell adoption on 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 where you think the seasonal reserve when you adopt next quarter. We'll go I mean, it would seem like maybe there was some room from improvement relative to the third quarter as the economic outlook on a little better but curious.
Any updates there would be helpful.
Mike.
Are you talking about provisioning expectations in 'twenty 'twenty one.
I'm, just kind of talk about where the overall allowance coverage will go once you guys adopt.
Understanding that that won't all impact earnings reported earnings but just.
Whereas I think you guys provided a broad range for that last quarter, if I remember correctly.
Yes, and that actually it won't impact current period earnings in the first quarter at all because with the January one adoption.
We'll go through capital so the way we're looking at it is.
We have 17 million of purchase.
Purchase credit impaired that will flow into the.
The ACL, that's just that will not go through capital that's already on our balance sheet. So its just a presentation change and then once you add that $17 million to you our year end a triple L. We're expecting that you'll add another 20% to 30% on top of that.
Net to get to our ACL at March 31.
So that 20 or 30% on top of the pro forma a triple O L. At 12, 31, plus a $17 million that does not go through capital that 20 or 30% on top of it will be.
Retained earnings adjustment in the first quarter.
Thank you guys.
Bob.
Really rough math here, but that would suggest that the ACL will be all in just about double the $33 7 million allowance MLR you guys had on the fourth quarter or is that.
In the ballpark.
Yes, Sir.
Okay excellent.
Excellent. Thank you guys for taking my questions I appreciate it.
Thank you.
Thank you. Our next question will come from Jeff <unk> with D. A Davidson. Please go ahead.
Thanks. Good morning appreciate the slide on 22 don't want to beat it up too much I appreciate the effort to kind of <unk>.
So the expectations, but a couple of questions.
Other questions.
On the on the margin.
Yes.
I guess at the midpoint.
<unk>.
Is that a 30 basis point decline you mentioned.
Eric.
Maybe increasing the mix of investment Securities Youre limited for limited further room on lowering deposit costs I get <unk>.
Some of the pressures there, but what else is in.
I guess, we kind of outlined some of the one off.
Collection of interest maybe joost loan yields in the quarter I guess, the settling of all that is that why.
I guess core.
Goes down 30 basis points linked quarter.
Yes, I mean that the collection of deferred interest certainly is a factor in the three seven.
Net interest margin in the third quarter.
So what.
What we attempted to do.
On the outlook for the range of $3 35 to $3 45 is to strip out the effect of PPP.
And in that quarter as well as we.
We're not taking into consideration any.
The level of purchase accounting.
So because that's pretty on.
Sure.
I mean, we have a level of it every quarter based on all of the acquisitions that we have.
Realized and then we'll have some of it with al Mena as well, but hard for us to really make a small on that so.
I would say, Jeff your characterization of kind of settle on.
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 of things.
First off.
And Craig's prepared comments just in case folks missed it.
The weighted average.
Coupon that we originated in the fourth quarter.
Was $4 31 per se comparing favorably to a $4 one 9% in the third quarter. So we've had some really good success in originating.
<unk> dollars on our for our balance sheet with a four handle on it we continue that success that will help mid.
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 on re folks across the street or using a three handle on their originations.
So we're seeing it so we're working that preserve that and the other item that I wanted to just highlight is on the interest bearing liabilities.
Syed.
We've had some great success in reducing our time.
Cost 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 in early and 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 theres opportunities for us to not meaningfully but on the margin you know one to 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 on the competitive landscape. So that has the effect of that's poured money that we're reducing essentially.
Alright, so that can be quite helpful. And then one last item on margin that you know I don't want folks to miss that on the.
Noninterest bearing.
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, a meaningful percentage of total funding than earlier periods, and we believe that that a lot of that sticky, they're certainly higher levels of liquidity in the consumer side.
But we've been seeing that our customers are saving that.
And.
Largely saving and from the consumer or a commercial side. We don't believe PPP is really meaningfully contributing to that number and those main street funds. Those are those are short term relationships and we expect that we're going to be able to maintain that so we're pretty.
Constructive on on on.
On that number going forward.
In total funding.
Okay, just to follow up the <unk>.
So the $3 70 reported includes some accretion, whereas your Q1 'twenty one outlook excludes accretion is that correct.
It was modest in Q4, Okay, and then just the jump off point.
Preliminary 'twenty, one outlook, where you say contraction are you are you, saying, we adjusted Q1 down and from there. It's further contraction or that represents the contraction.
Maybe a flat line from from there.
Yes.
It's definitely I'm not good question, Jeff and I appreciate it it's not a.
On a trajectory, meaning that you're going to see another 15 basis points compression.
I would say, it's more of a flat y.
Obviously, the competitive pressures of everything I just mentioned.
Have an impact on that.
On.
On a we'll call it a.
Core basis, EBITDA were kind of considering PTP core I mean that theres some noise.
Part of that but this is <unk>.
Sales PPP and other items on government programs, but I would call it more flat flat line cut beyond there.
Got it so core steps down and then it kind of a battle from there, but not necessarily further.
Russian.
The puts and takes.
Okay, sorry last one I have is just to jump to the expenses you got to.
Net of $3 $5 billion decline run rate and it obviously.
Oh merger costs.
Is there some cost savings coming there because it's sort of a.
Lower figures, particularly at the $24 million level.
What else is coming out or what line item can we see relative to the fourth quarter that going on.
You get to that $24 million, where would that come from.
So we've until the SBA program, we've historically been.
Looking.
Loans these ads.
We've been incurring them.
And with because we have been doing an analysis basically saying that's not material too.
To differ but with SBA program that came in place.
The net are now effective.
January one this year were deferring both the loan fees that we earn as well as the expenses of originating those so youre 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.
It's going to come out of the salaries and benefits line the effect there.
Okay.
Sure.
Got you okay.
That's it from makes sense.
Thanks, Jeff.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press Star then one our next question will come from Andrew Liesch with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Alright.
A question on the $400 million pipeline you guys referenced how much of that is from Pvp. The main street lending program versus.
Traditional core bank commercial loans.
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.
It's very strong across our three metro markets, Kansas City Wichita in Tulsa, and then we've got a couple of our community markets Western Kansas and Western Missouri that also have very strong pipelines.
Got it.
With that optimism there probably coupled with some early on we have to.
Keep 5% on main street lending, but.
Maybe some growth there.
And obviously from some volatility around Pvp should be.
Pretty strong year for loan growth on an average balance to get 3% I mean that could be double digit on an end of period basis.
Looking at that correctly.
You are.
But again, we're cautious because that's one side. We also have the other side of it.
Keeping our customers or keeping them from refinancing somewhere else because we're right on.
And we're certainly.
We appreciate a good customer and what we're going to work with them.
Those conversations come to us but.
We are we're cautiously optimistic on loan growth. That's why you see the fairly wide range there on the preliminary outlook for the year.
Got it and then just.
Referencing some of the strategic.
Alright accident that took place in moving some of these borrowers out of helping them find financing elsewhere is that is there more of that to go or have we seen the bulk of that.
The current portfolio right now.
Yes, I think Andrew.
The bulk of it has occurred there may be some one on credits that move out in the next couple of quarters.
But by and large we got got all of that taken care of in Q3 Q4.
Okay got it.
Covered all my other questions, thanks for including that Slide 22.
Thanks, Andrew.
Thank you and we do have a follow up question from Terry Mcevoy with Stephens. Please go ahead.
Hi, Thanks, just one quick question on slide 22 that within average loans for the fourth quarter 'twenty results to 382 that excludes the $310 million of PPP loans is that correct Sir.
Yes, perfect Okay.
Thank you. Thank you.
Yes.
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.
Okay.
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Okay.
Okay.