Equity Bancshares (NYSE:EQBK) Q2 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Equity Bancshares, Inc.'s earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this 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, then 0. I would now like to hand the conference over to one of your speakers today, Mr. Chris Navartil. Sir, please go ahead.

0:39 Good morning, and thank you for joining Equity Bankshare's conference call, which will include discussion and presentation of our second quarter 2020 results. Presentation slides to accompany our call are available via PDF to download at investor.equitybank.com by clicking the Presentations tab. You may also click the Events 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 note 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 Equity Bankshare's Chairman and CEO, Brad Elliott.

1:27 Good morning. Thank you for joining the Equity Bankshare's second quarter 2020 earnings call. I'm joined today by Greg Kossover, our Chief Operating Officer, Eric Newell, our Chief Financial Officer, Craig Mayo, our Chief Credit Officer, and our General Counsel, Brett Reber. The CFO transition from Greg to Eric has gone smoothly. Eric has adapted well to our platform and integrated effectively with our teams. While Greg has begun his duties in credit and operations, I'm excited for both of these gentlemen and all the teams at Equity Bank.

2:17 Craig Anderson has continued to provide great leadership to the teams in our regions and each department of the bank, has worked hard and remained focused during one of the busiest periods in our history. Also, Julie Huber has led our successful PPP program and other important strategic initiatives. I want to take this opportunity to once again express my appreciation to the employees of Equity Bank for their dedication to our mission in what continues to be a crazy time. Please continue to be safe and keep your families safe.

3:05 On the call today, Greg will walk us through our second quarter results, and Eric will discuss our balance sheet heading into the second half of the year. Craig Mayo will provide an in-depth look into our loan portfolio, and I will provide thoughts on how we are positioning the company for the future. As you may have read, We closed a $42 million subordinated debt offering in the second quarter. We have used the proceeds to fully pay down our bank stock note, which we utilized in the first quarter by putting $20 million of capital into the bank and also for stock repurchases.

3:57 I view the sub-debt as opportunistic Tier 2 capital allowing us to grow the balance sheet either organically or acquisitively. It also provides some flexibility should we re-engage in purchasing our shares back in future quarters. Greg, please take us through the second quarter.

4:23 We once again had a solid quarter in core earnings, with earnings per share adjusted primarily for normalized loan loss provision and PPP fees of approximately 60 cents per share, essentially on top of our original pre-COVID street expectations of 61 cents per share. Stated EPS for the quarter were 11 cents, and the key pro forma adjustments were, one, the estimated impact of PPP interest income provided a net benefit of $935,000, offset slightly by about $250,000 in direct cost to produce. Two, purchase accounting discount accretion was less than our normalized run rate, hurting earnings by an estimate of $400,000.

5:10 The recognition of PPP loan fees helped earnings approximately $1,036,000. The provision for loan losses was originally forecast at $900,000. However, we provided $12,500,000 in furtherance of our positioning for the possibility of COVID-19 related credit weakness. This represents $11.6 million more provision than anticipated. Compensation expense had a FAS 91 benefit of approximately $900,000 for the deferral of expense to produce PPP loans. The net total of all these is approximately $7.4 million after tax, which is about $0.49 per share. This, added to our stated EPS of $0.11 per share, arrives at the pro forma EPS of $0.60 per share.

6:04 Our net interest margin, as stated, was 3.49%. and adjusted for normalized purchase accounting accretion and to remove PPP impact was about 3.69%. Normalized yield on loans was 5.07% with normalized coupon on loans at 4.71% at June 30th. Yield on securities was 2.18% down from 2.49% in the first quarter, mainly due to bond premium amortization. Overall, normalized yield on assets was 4.24% versus 4.61% in Q1. Cost of deposits was 63 basis points, down from 109 basis points in the first quarter, and cost of federal home loan bank advances was 82 basis points, down from 160 basis points in the first quarter, as we once again took advantage of the lower interest rate environment to reprice liabilities downward.

7:03 Total cost of interest-bearing liabilities was 71 basis points in Q2 as compared to 118 basis points in Q1. Summarizing, the improvement in normalized net interest margin to 3.69% from 3.62% in Q1 is from the benefit of a more significant drop in cost of liabilities than assets in the second quarter. Non-interest income at $5.7 million was $400,000 better than Q1 and better than our expectations of $5.4 million, with service charges and fees down primarily from lower NSF fees, but debit card income and mortgage banking fees were both up. We also had a mark-to-market adjustment on swaps run through other income in Q1, which did not occur in Q2.

7:56 Non-interest expense adjusted $832,000 for a FAS 91 salary benefit, less PPP costs, was $24.8 million for the quarter, better than our expectations by $450,000 and better than Q1 by $100,000. There were no other significant outliers in operating expenses. Our income tax rate was 22.7% for the quarter. Brad?

8:25 Craig Mayle will lead a discussion of our loan portfolio in a few minutes. Given the increase in unemployment and concern for the overall economy, we feel it continues to be important to provide for our loan loss allowance through qualitative measures. Our loan book continues to be stronger than I expected 90 days ago. as our borrowers adjust to their environment. Many of our borrowers are not needing a second 90-day payment deferral and many have successfully utilized the Paycheck Protection Program. As we evaluate requests for the second 90-day payment deferrals, we expect a borrower to be trending in the right direction were able to reasonably project that their future performance merits the relief.

9:27 Eric, please take us through the June 30 balance sheet.

9:32 Our balance sheet remains in excellent shape with excess liquidity, strong capital, low costing liabilities, and a conservative loan to deposit ratio of approximately 82% adjusted for PPP balances. Our total primary and secondary liquidity stands in excess of $2.1 billion, and our capital ratios with PPP balances adjusted out at the bank are 9.81% for Tier 1 leverage and 14.37% in total risk-based capital, with Bancshares Tier 1 leverage at 9.41% and TCE tangible assets at 8.81%. Excluding the outstanding PPP loans of $373 million at June 30th, our loan balances have decreased quarter over quarter by $74 million.

10:26 Of the $2.4 billion outstanding loans, approximately 52% are variable rate and about 77% have reached their floor. The dollar amount of loans left to reprice approximately matches the remaining CDs repricing on the liability side. I expect our net interest margin without PPP to decline slightly in the next two quarters to about 3.5 to 3.55%. As Greg stated, we have been aggressively provisioning for the uncertainty of the COVID-19 recession, and at June 30th, our ALLL plus purchase discounts stand at 1.81% of loans, not including the insured PPP loans.

11:13 We once again ran our probable incurred model and will continue to be ready for CECL implementation. Net year-to-date charge-offs are a low 590,000 or four basis points of loans annualized. Our investment securities portfolio is $840 million at June 30th, down $71 million from December. We have onboarded Ken Hessel, a very experienced portfolio manager and treasury professional as part of the equity bank finance team, and he is helping lead the team in a safe and diligent process to maintain our securities portfolio. Ongoing review of our municipal portfolio, which represents 15% of our investments, continues to show no emerging concerns. Our philosophy of prudent risk management continues to prevail, particularly in this environment, and I do not see us deviating from this approach.

12:05 On the liability side of our balance sheet, our total deposits grew $287 million, with $248 million growth in non-interest-bearing deposits. While PPP contributed to this growth, we improved the mix of our deposits with time deposits representing 21% of the total at June 30th down from 26% length quarter. As mentioned earlier, we closed on $42 million of sub-debt and used the proceeds to pay down our bank stock note, freeing up capacity for opportunities as they present themselves. We anticipate being able to modestly leverage up the balance sheet to utilize these funds. We did not purchase any of our shares in the second quarter, but that remains an option for the company. To date, we have repurchased 716,477 shares with another 383,523 currently authorized to repurchase. Brad? As I discussed on our first quarter call,

13:09 The lending and retail teams here at Equity Bank did a fantastic job utilizing the Paycheck Protection Program to assist our borrowers as the program intended. We have $373 million on our books at June 30, and we had about $182 million pay off after origination. This represents over 3,000 loans and helps to keep employed over 90,000 workers. As I will turn the call over to our Chief Credit Officer, Craig Mayo, to discuss our loan portfolio, I want to mention that Craig Anderson and I have been spending time in our regions visiting our locations and our customers.

14:02 I've been excited by what we have heard and experienced as we visited these locations. As I have traveled to four of the eight distinct regions in the past two weeks, you get a very positive vibe when you're in our communities and you see what business is actually being conducted. We're excited to be operating in places that 120 days ago were considered less glamorous than destination places like New York City. But today are open for business. Greg?

14:41 Like last quarter, we want to provide transparency into our loan portfolio in the dynamics we are experiencing. Many of the indicators we are seeing are better than I would have thought 90 days ago. These include a smaller overall utilization rate of a second 90-day deferral, positive indications from discussions our teams are having with our borrowers on their adaptation to the environment, indications of many borrowers maintaining strong cash positions, and nimble operators who have found new customers and or reduced costs. We have been proactively meeting with our customers and have done a deep dive evaluations of borrowers seeking a second 90-day deferral, and only if we believe the borrower qualifies have we been granting the second deferment period.

15:39 Slide 10 shows our payment deferrals by segment. At June 30, Our loan portfolio totaled $2.8 billion before our $34 million allowance. Of the $2.8 billion, approximately $373 million is in PPP loans, leaving about $2.4 billion in traditional loans. We've included many of the same basic slides for our loan portfolio as we did in the first quarter, and today I will focus on some of the key aspects that remain of primary interest at June 30. The pie chart on slide nine looks very similar to March 31, with one to four family as our largest category.

16:26 Greg will now walk us through our hotel portfolio.

16:31 Hotels on slide 11 represent $273 million, or 11% of our loans. The top 20 loans in the portfolio comprise $211 million or 77% of this segment of our portfolio and have an estimated loan-to-value of 54%. We stated on the Q1 call that our hotel operators are very experienced and skilled at adapting to change. We have discussed with them how they have changed their operations, which includes sourcing new customers, such as medical and governmental workers associated with COVID operations, Changing hours of front desk staffing, reduced maid services, closing off portions of buildings, altering their pricing models, and of course reducing staff. Slide 11 also shows, in the lower right hand corner, revenue per available room, or REVPAR, for a portion of our portfolio, which is the key income statistic for hotels.

17:30 As shown on the slide, we have also indicated an estimated sample break-even revpar under current revised operations. As is indicated, hoteliers are finding ways to achieve break-even, shown by the red line, The key takeaway is proactive management on costs and mining new sales favors the skilled and seasoned operators, which we believe includes our borrowers. Many of our hotel owners elected to take PPP funds and use payment deferrals. We are closely monitoring their operations and many have been able to preserve some cash for when the deferral period sunsets. Craig?

18:17 As discussed in prior quarters, the bank's ag portfolio is well diversified between protein and cash grain and is spread across the bank's four-state footprint of Kansas, Missouri, Arkansas, and Oklahoma. and a majority is secured by real estate. Construction and land development loans are down from Q1 due to the successful completion of multiple projects and the migration to permanent financing. Our restaurant portfolio shown on slide 12 has performed quite well as the majority is in the QSR space which has fared well in the current environment.

19:02 As many dining rooms have closed or been interrupted, carry-out and drive-through have performed well. The bank works with experienced, strong franchisees who have had successful track record owning multiple locations. The majority of these assets are showing positive cash flow and do not need the second 90-day payment deferral. The bank's total retail exposure is $206 million, or 8% of total loans, as shown on slide 12, delineated by segment. The largest segments in the retail portfolio include automobile dealerships, retail strip centers, movie theaters, retail stores, and convenience stores.

19:51 Our automobile dealerships have shown above average sales in the second quarter. The bank's retail strip centers are primarily located in our community markets and are typically anchored by an owner. The theater owners receive PPP funds and are currently on deferment. They are seasoned entrepreneurial operators with diversity in their holdings and the loans are secured by real estate equipment and CDs in the bank. The convenience stores we finance have seen minimal adverse impact from COVID-19. The bank has $135 million, or 6% of the portfolio in manufacturing and machine shops, as indicated on slide 13.

20:38 Aircraft-related manufacturing makes up $63 million and is comprised of seven relationships. The aircraft industry has been adversely impacted, first by the Boeing 737 MAX grounding and compounded by the coronavirus. Our customers are also impacted by these dynamics. We continue to believe these companies have solid, experienced management teams who have proactively addressed the issues and have solid balance sheets, good liquidity, and ownership with access to additional capital if needed. None of these credits has become classified. As stated on prior calls, the bank maintains no direct exposure to oil and gas exploration, limited related exposure to oil and gas, and limited exposure to medical and assisted living.

21:37 Each of these segments represents less than 1% of our portfolio.

21:43 One of my new responsibilities is working with Craig Mayo and Thad Van Hile on the resolution of special assets. These two guys and their teams have consistently kept our special assets very low, and we enter this uncertain phase of the credit cycle in good shape. Our net charge-offs in the quarter were $590,000, representing an annualized rate of four basis points. OREO is flat for the year given the Q1 provision of $900,000 specific to OREO and our ratio of classified assets to total bank regulatory capital is 21.2% flat from 12-31-19. Eric?

22:22 Before we hand the presentation to Brad to close, I'd like to point out several key facets of our financial position. As discussed earlier, our capital remains very strong, even without the recent sub-debt raise, and our pre-provision earnings have been strong. Only because we have been aggressively providing for the A-triple-L have our earnings been below expectations. Our deposit and retail teams have done extremely well to grow non-interest-bearing deposits, helping to reduce cost of funds and drive more customers and associated revenue streams into the bank. Our liquidity is outstanding with significant excess capacity at the FHLB, and we have also tested our Federal Reserve Bank capacity in the second quarter, although none is outstanding at June 30th.

23:10 As Greg discussed, our NIM expanded in the second quarter, and with our remaining loans scheduled to reprice equaling about the same in time deposits, we expect core NIM to be relatively stable in the upcoming quarters, maybe declining mildly depending on fees and coupons on newly originated loans. Brad?

23:32 With all the talk around credit administration and the uncertainty caused by COVID-19, I don't want our origination and retail team's efforts to be overshadowed. Yes, there will be some tough days ahead for everyone in banking and all industries. But we continue to produce high quality loans and as we stated earlier, our non-interest bearing checking accounts are up on both numbers and dollars. We've been fully open and operating since early May We have had very limited inconvenience to our daily operations from the coronavirus.

24:21 We also remain fully prepared to adjust our operations should the environment dictate. I also believe that our credit culture, which has been both entrepreneurial and conservative, performs well in this type of environment. We've been originating loans in the second quarter to some very qualified, healthy customers. I think we're poised to bank new customers through the Main Street Lending Program, which provides high-quality customer opportunities that will help us to continue to grow our balance sheet. We've avoided growth for the sake of growth in recent periods.

25:10 and I think that will serve as well in the upcoming quarters. Our recent capital raise coupled with an excellent team and the growth of our platform to include all treasury, trust and wealth management services alongside our traditional banking offerings makes me very excited for the future. We're happy to entertain questions at this time. Ladies and gentlemen, again, if you have a question at this time, please press star then 1. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Jeff Bowles with DA Davidson. Your line is open. Please go ahead.

25:57 Thanks. Good morning. Good morning, Jeff. Question on the deferral percentage. What is that current percent of loans on deferral?

26:09 So, Jeff, those were all deferred in the second quarter, so they haven't hit their 90-day mark yet, so the number hasn't changed from what's reported. Yeah, 26% as reported and coming down from there.

26:25 Okay, yeah, just some of the discussion on the, you know, as you're approaching extension discussion, sound like you've already had a few, or I just figured maybe you've You've already peaked on deferral, and that's coming in, but maybe that's just the expectation.

26:43 Yeah, no, we've definitely peaked on deferral, and so we've had discussions. Our lenders have had discussions with all of their borrowers that are on deferral, and so the discussions are coming in that many of them are not in a position any longer that they would want or need to have a deferral.

27:05 If What's the average deferral timeline of that group? Is that a 90 or greater?

27:18 We went out with offering a 90-day deferral. We had a group of them that we did interest only for that we had that we did interest only for them for six months, which was about $108 million. $95 million that we did interest only on them. They were paying the interest but not the principal payments. So in that bucket, there is that group. But the rest of them were offered no more than 90 days. Okay.

27:54 Got it. Switching gears a bit, in the service charge line item, just interested in how that trended in the quarter. My guess is early on that was disrupted and given some of your commentary about sort of branches all open. Has that come back later in the quarter? And I guess expectations for that line item as that was north of $2 million a quarter not too long ago, just wanted to see how That's restoring from your perspective.

28:31 Yeah, your thoughts are correct, Jeff. NSF, first of all, transactions were much slower at the beginning of Q2, and then the dynamic was NSF fees went down substantially. by about half, I think, given the amount of liquidity in customer accounts from unemployment and things like that. It has come back, starting to come back to normal. Those declines were offset by more debit card income as people were continuing to spend with their debit cards. So although NSFs are down, debit card transactions are up, an interesting dynamic.

29:16 And the guidance for overall non-interest income for Q3 is going to be about $6.1 million, I think, for Q3 is a good number to use for total non-interest income. Great. Thanks, Greg.

29:38 Yeah, we actually saw a 70% decline at the low point on overdraft fee income. Got it.

29:49 Okay. And then just on the outstanding sort of pizza franchise entertainment credit, I want to wrap my hands around the process. Sounds like you've had franchise sales and momentum continues to be positive. I guess... Just trying to clarify how that comes out of non-accrual. Is it accruing a portion of that, and what needs to occur? What's the tipping point for that to come off of non-accrual?

30:23 So currently it's listed as a TDR, so it is not accruing interest. And sort of once a TDR, it stays a TDR until it leaves the bank. And so even though the asset itself is performing pretty well in this environment with great carryout and delivery, I mean, pizza's done well in this whole COVID thing. The credit itself is reducing principal without accruing interest.

30:57 I see. Okay. And the expectation on lost content continues to be modest for that?

31:06 It does. Yep. The expectation, Jeff, is still to have that company sell. You want to say anything, Brett?

31:15 Yeah, I've been... Moving forward well under the circumstances, cut staff and then utilize the PPP program. They have nearly 70 franchisees and have sold more, mostly in the delivery and carryout type stores, which you'd expect. There's just been a lot of volatility in the southern states where they're located with all the COVID fits and starts. They've reopened and the rules change. Basically, it's kind of business as usual. I think that at last discussion, they were at about 50% of their prior year's sales, which is mostly delivery and carryout, although some of their entertainment stores have opened back up with restrictions.

32:09 Okay. Thanks, guys. Appreciate it. Thank you. And our next question comes from the line of Terri. McEvoy with Stevens. Your line is open. Please go ahead.

32:20 Thanks. Good morning, everyone. Hi, Gary.

32:22 Good morning, Gary.

32:24 I think it was Brad. You mentioned $182 million of PPP loans paid off after origination. I'm just wondering, how did that impact? Was that the forgivable component? And if so, I don't think the systems are open yet to kind of submit that to Treasury. Did a piece of that then run through net interest income and Yeah, it's a follow-up question there. What was the yield on the PPP loans last quarter?

32:52 So I'll take the first. There's three questions there, I think. The first one is we had several groups that didn't want the scrutiny that was coming from the political side and were private equity owned and some of their ownership in the private equity didn't want to be front page news in the Wall Street Journal. So they elected to pay those off. A borrower can pay off those loans at any time, even with the SBA not accepting repayment applications from forgiveness. None of those loans were forgiven. Those were just paid off by the customer on those loans. The only income we received was the 1% interest income.

33:37 We did not receive the fee income on those originations. and then the second part of that question, Greg, is what's the impact on yield, right?

33:49 Yeah, so it's an interesting question, Terry. The yield components, as you know, are the 1% coupon plus the origination fee. And as you know, the origination fee is getting deferred over the life of the loans. And so our... Thank you very much. Thank you.

34:39 Just looking at hotel, restaurant, retail, the three portfolios you call out, they all have called 70 basis points of deferral rates. Out of those three, what do you have the largest reserve for? If you have an allocated reserve against those three, and I guess directly I'm trying to figure out in your minds, where do you see the greatest loss content today?

35:02 Well, we're still principally reserving on a general basis, Terry, as opposed to an allocated basis for the credits. It's all going into general reserve. That's a tough question to answer. We feel pretty good about our hotel portfolio. As you know, we've banked really sophisticated and well-seasoned hoteliers. and as we have shown on slide 11, I think it is, they're working hard to get back to break even, doing lots of good things. So is there a risk there? Yes. But we haven't identified any material significant risk at the credit level. And the same is true on restaurant and retail.

35:49 Our restaurant portfolio is very much QSR. They're doing pretty well in this environment. So we're still, you know, cautiously optimistic that things are going to turn out okay.

36:09 I'd answer that question, Terry, a little more in depth in that We could be dead wrong three years from now, but I don't think we're going to be. Our hotels are performing and are going to continue to perform because we have really good operators. On top of that, we finance people that had low leverage. So if you remember... Majority of that portfolio has an average leverage balance of about 54%. So they've got working capital room in those, and they also, we also have verified in many conversations with them, are sitting on large sums of cash that we're going to, they're going to help them operate as they try to re-ramp those hotels back open again. So we don't, in the restaurant portfolio, you know, We're lucky, better than good, honestly, from the standpoint of we don't have a lot of full-service restaurants, like almost none that we can think of. But the quick-service restaurants with the drive-thrus in the markets that we've been in are up 20% to 30% in sales, and a lot of them are up more than that in net profit.

37:25 Thank you both. A lot of those went on deferral early on because they didn't know how they were going to make their payments because everything just shut down immediately. A lot of those are not going to go, you know, they're not needing a deferral for the second period, and they're actually doing extremely well.

37:44 Understood. Thank you both. Appreciate it. Thank you, Terry. Thank you. And again, ladies and gentlemen, if you wish to ask a question at this time, please press star then 1. Our next question comes from the line of Michael Pertro with KBW. Your line is open. Please go ahead.

38:07 Close enough, I guess. How are you guys doing?

38:08 We're good, Mr. Perito.

38:13 A couple questions on expenses. Greg, sorry if I missed it, but you mentioned the $900,000 of deferred origination costs related to PPP. Just wanted to clarify, so with no new loans originating, that will not impact the run rate going forward. And is there anything else we should consider as we kind of think of a launch spot for third quarter non-interest expense as you see it today?

38:39 Yeah, right on. And we've done a scrub of normalized expenses. Coming out of June, and I think that non-interest expense is going to be in that 24.7 to 25.0 range, all in non-interest expense Q3.

39:01 Okay. As we think about the cost of the bank longer term, obviously challenging margin environment, it sounds like your markets have fared a bit better, but Thank you for joining us. in a lower rate environment. Is that a conversation you guys are starting to have, or is it still a little early, just given some of the credit uncertainty that's demanding a lot of your time, I'm sure?

39:47 Yeah, it's a conversation that we always have. Michael, we're down year over year, same period, we're down 35 FTEs from last year at this time. So it's something that we always look at and evaluate and always try to be more efficient From a branch location standpoint, we just closed three branches in May. All those costs will be out in this quarter. So on a go-forward basis, those three won't be impacting our numbers. So we're continuing evaluating those types of things. I would tell you that we're also up a net, this year we're up a net 1,500 retail checking accounts.

40:32 and the driver on that is that our folks in our markets have actually been doing a good job of attracting business from other financial institutions. One is because of our launch of the Q2 product. So we've got a really good digital platform and that's really helped us. And then the other aspect is we've just done a really good job on a marketing side and are really pushing that marketing. And I think we're going to be able to grow the branch facilities that we currently have in almost every market that we have.

41:08 That's helpful, Brad. And has the process of, you know, work with maybe some of your employees working remotely or some more, you know, the PPP program putting a lot of stress on your systems. I mean, have you guys seen anything, you know, during this kind of forced experiment here over the last three months that that has kind of left you to believe that, you know, or led you to believe, rather, that there could be some updates or things you want to add to your digital infrastructure? Or do you guys feel like the path you were on is very adequate and kind of the experience of the pandemic thus far has validated that for you?

41:47 Yeah, the investment we made last spring has really played out for us. It has forced us to push forward some things on electronic count opening and those types of products that we weren't fully utilizing yet. They were being rolled out, but not as fast as we rolled them out over the last 90 days. So that sped up some things. So there's some efficiencies that come from that. from a process standpoint. And I think there will be some learnings from all of this, Michael, and some customer expectation differences from this that we'll all learn as an industry on how to be more efficient. But at this point, it's a tad early, but we're always one that digs in and tries to figure out how we can maximize the revenue and make sure that we're looking at both ends of the spectrum on both revenue and cost side.

42:45 And then just lastly, in your prepared remarks, you guys mentioned on the subject that, you know, longer term, you know, maybe it could be used for shareholder purchases. And I'm not going to ask you when that is, but what I do want to ask is, you know, what needs to happen, do you think, to get there? Is it just simply more clarity on the credit or is it more complicated than that? You know, what kind of are some of the key things we should think about that could make you guys more comfortable in deploying more capital externally?

43:14 Well, Mike, we suspended the repurchase at the end of Q1, believing it was absolutely the right thing to do to preserve capital. But part of it's credit, but part of it's also, if we think we have excess capital and we don't see a lot of, say, merger opportunities, We've got to put that capital to work somehow. And as you know, repurchasing shares is one of the safest ways to do that. And so Brad and I and Eric will be examining that in Q3 and Q4. And at the moment in time that we feel we need to deploy capital with board approval, we'll begin repurchasing shares.

44:02 And I can tell you, Michael, it'll be a standing white item on our board agenda for every board meeting.

44:12 Listen, guys, really appreciate the caller. Thank you and stay well. Thanks. Thank you. And our next question comes from the line of Andrew Leash with Piper Sandler. Your line is open. Please go ahead.

44:25 Thanks. Good morning, everyone. Hi, just a few follow-up questions for me. The pizza franchise loan that's on TDF, can you remind us what's the dollar amount on that credit right now?

44:41 13.8. Okay, thanks. And then the non-performers went up about 10 million or so. Is there any detail you can provide regarding that change?

44:55 Yeah, we had one credit in the C&I space where the owner had a really significant medical issue. He had a stroke in his hotel bed. got pinned between the bed and the nightstand for a long time, I think 24 hours. He survived, but doesn't have full capacity necessarily to run the business the way that he was running it before. So he is cooperating with us as the business liquidates. and we put it on non-accrual and when a business is in liquidation, it moves to eight substandard which is classified.

45:41 It's not an adversarial situation. It's a liquidation situation and that's what you're seeing in those numbers.

45:50 The type of collateral that it is, it should be self-liquidating. And so, you know, it will self-liquidate over an 18-month period, and so it'll just wind down over that time frame. But should do it ratably as the deposits come in through ACHs, so the deposits directly hit their account, and then we sweep and pay down the line.

46:19 Gotcha, so it sounds like you're pretty well-reserved for this credit. And then just related to the PVP loans that are still outstanding, how long do you expect them to remain on the balance sheet? Do you think they're all going to be all fully paid down by the end of the year, or do you need some customers that may retain them for the full length of the term?

46:45 So we will have a few customers that aren't able to get their franchises back open again. These were not our, these are customers that we originated that were not currently our customers, a couple of them, and they have had some protraction in being able to get Their restaurants, honestly, back open again in the markets they operate. So I think it'll take them at least this year to be able to utilize the PPP funds. And so there'll be a few of them carrying over into next year. So let's think, I think it's less than 20% that will carry over into next year and not be paid off this year.

47:32 Great. That covers all my questions. I'll step back.

47:36 Thank you, Andrew. Thank you, and I'm showing no further questions at this time, and I would like to turn the conference back over to Mr. Brad Elliott for any further remarks.

47:48 Yeah, so one of the things that we probably missed in some of our remarks is on the deferrals. We took a proactive approach with our customers. We did not defer a customer that we felt like wasn't going to make it. We talked about the customer that's in liquidation mode. We didn't put them in deferral. We evaluated that and said it was time to move forward with that liquidation process. So customers we've put in deferral are what we consider very good operators, and we looked at the deferral as a way to help them utilize their cash and to save cash so that they could re-ramp after the markets open back up again. We look at our deferred loans as some of our stronger customers and ones that we think are going to do well after the markets open back up again.

48:35 So although we have a strong percentage in that bucket, we think that percentage actually is customers that are going to do well through this period and after this period. So we appreciate everybody's interest. If you have questions, please give us a call. Thanks for your time today. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.