Equity Bancshares Inc (EQBK) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Equity Bancshares Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that the conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Chris Navratil. 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.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 1, 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, Greg Kossover, 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-light model for 3 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, Gaylyn McGregor and Glen Malan, in our Trust and Wealth Management group continue to safely meet with our 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 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 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 3-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 Getz. 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 $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 2 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 2 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 pretax earnings come out to $13.7 million. This compares to third quarter non-GAAP pretax 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 quarter -- 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 30 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 5-year life of the loan.

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 pay downs, 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 Lending 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 C&I 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 24, we have had over 1,800 customers submit loans totaling approximately $219 million, of which $900 million 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 remain 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 3x 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.

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, what happened during our third quarter earnings call. It may be counterintuitive to see our cost of FHLB 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 noninterest-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 12/31 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 advisers, 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 a 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 Almena transaction. When included in the ALLL, 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.

Greg?

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 nonperforming assets declined to $54.6 million from $61.7 million in the previous quarter. This includes $7.5 million from the Almena transaction, all of which we believe is marked appropriately. And when the $7.5 million is removed, the quarter over decline -- 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 nonperforming assets from September 30. We have not originated any new SNCs in the fourth quarter, and our balance in that portfolio is currently $38.4 million.

In addition to this SNC, OREO was 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 through 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 used 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 31 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-rated 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 to 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 2 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 nonaccruals 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 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 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, our 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 than 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. Our noninterest income totaled $8.5 million in the 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 the 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 2 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 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. 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 FDIC insurance premium increased $437,000 in the fourth quarter, and we expect this higher run rate through the quarter ending June 30, 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 noninterest expense would have been flat to the third quarter.

Brad?

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?

We've added a couple of 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 nonmaturity 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 lend in the 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. Noninterest expenses will be flat to modestly down in 2021 versus 2020.

Brad?

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.

(Operator Instructions) Our first question will come from Terry McEvoy with Stephens.

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?

Yes, Terry. I would say, I don't have specific information on the ag. I don't know if Greg or Craig, you have?

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.

And Eric, any comments on the other, the move to 4.90% on the resi real estate?

I don't know why that occurred in the quarter, but I would venture to say that, that's not sustainable going forward.

I think, Terry, that's also -- I think that's also a large credit coming back on accrual.

Oh, yes. Yes, we did have one credit that came back on to 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. So 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.

Okay. 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.

Yes. It's -- the 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 good order. And that credit, while we're on it, Terry, as I said, is current grain operator. It really is, in my opinion, an abundance of caution that it's in special mention. 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. And then maybe, Brad, just to finish up with you. Your thoughts on bank M&A and 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?

Yes. 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. And -- which would be accretive to earnings and probably priced right would be something we would want to do with the cash versus with stock. I think there are some conversations -- 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 -- 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.

Our next question will come from Michael Perito with KBW.

I wanted to ask -- I'll clarify a couple of things in the outlook for 2021, if that's right. I want to first just start on the noninterest income side. I was wondering if you could break out a little bit more of where you expect to see the drivers of the 10% to 20% in 2021. And just a quick follow-up. If we look at the 1Q '21 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 helpful.

Yes. I would look at 3 things that's 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 growing AUM through 2020 and largely in the fourth quarter, there are 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 and nonsufficient 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 4 areas that we're looking to relative to 2020 to see some growth.

And that growth is relative to 2020, Terry -- 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 so -- and I think it will continue to build for this next coming year along with Trust and Wealth Management.

Yes. 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.

Yes. We know it's already booked. And we already know what the revenue is going to be on some of that stuff.

And that's off a lift point of $26 million for 2020, right? So I mean, that would mean you expect noninterest 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?

No, there's no other adjustments.

Okay. Great. And then on the average earning assets, I think you guys said $3.4 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 and maybe what drivers could 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?

Yes. We -- so from the average earning asset side, one of the things that I was -- we are 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 our -- 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 -- that 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. It's almost a cash substitute. And then once we start booking and seeing -- continuing to book and 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 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 prepared remarks. I was jumping back and forth in a couple of calls. But the -- I think you guys, on the third quarter call, provided some broad strokes around CECL 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 where you think the CECL reserve when you adopt next quarter will go? I mean, it would seem like maybe there's some room for some improvement relative to the third quarter as the economic outlook got a little better, but curious, any updates there would be helpful.

Michael, are you talking about provisioning expectations in 2021?

No, I'm just kind of talking about where the overall allowance coverage will go once you guys adopt. Understanding that, that not -- won't all impact earnings -- reported earnings, but just where I think you guys provided a broad range for that last quarter, if I remember correctly.

Yes. And actually, it won't impact 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 -- 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 ALLL, 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% to 30% on top of the pro forma ALLL at 12/31 plus the $17 million, that does not go through capital. That 20% to 30% on top of it will be a retained earnings adjustment in the first quarter.

So you guys -- I mean, that would -- really rough math here, but that would suggest that the ACL will be all in just about double the $33.7 million allowance to LOR you guys had in the fourth quarter. Is that in the ballpark?

Yes, sir.

Our next question will come from Jeff Rulis with D.A. Davidson.

Appreciate the slide on 22. I don't want to beat it up too much. I appreciate the effort to kind of show the expectations. But a couple of questions -- other questions. On the margin, that's, I guess, at the midpoint of -- was that a 30 basis point decline, you mentioned, Eric, the -- maybe increasing the mix of investment securities, your limited further room on lowering 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 collection of interest maybe juiced 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 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. So -- because that's pretty -- I mean 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. So I would say, Jeff, your characterization of kind of a settle -- or 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, in Craig's prepared comments, just in case if folks missed it, 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 on our -- for our balance sheet. We have a 4 handle on it. We continue that success that will help mitigate NIM compression. I'm sure that some of our peers probably are doing a lot more with 3 handles. We're certainly seeing it in deals that we miss on rate. Folks across the street are using a 3 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 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, we -- in 2020, we are very aggressive and early in reducing our nonmaturity 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, 1, 2, 3 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 the competitive landscape. So that can add the effect of -- that's pooled money that we're reducing essentially overnight. So that can be quite helpful.

And then one last item on margin that I don't want folks to miss that on the noninterest-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, a 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 are largely saving it. And from consumers -- or our 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.

Okay. Just a follow-up, the margin -- so the 3.70% reported includes some accretion, whereas your Q1 '21 outlook excludes accretion. Is that correct? Or maybe it was modest in Q4?

Correct.

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?

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 line beyond there.

Okay. Got it. So core steps down and then it's kind of a battle from there, but not necessarily further compression excluding the puts and takes.

Right.

Okay. Okay, sorry. So last one I have is just to jump to the expenses. You got a what 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 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's going to -- say you get to that $24 million, where would that come from?

So we've -- until the SBA program, we've historically been booking loan fees as we've been incurring them. And with -- because we've been doing an analysis, basically saying that's not material to defer. But with SBA program that came in place, we -- or 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 you're -- it's going to come out of the salaries and benefits line, the effect there.

(Operator Instructions) Our next question will come from Andrew Liesch with Piper Sandler.

Just a question on the $400 million pipeline you guys referenced. How much of that is from PPP or the Main Street lending program versus just 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, and it's very strong across our 3 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.

Got it. So with that optimism there, plus probably coupled with some and I know you only had to keep 5% of the Main Street lending, but maybe some growth there and obviously some volatility around PPP, should be a pretty strong year for loan growth. On an average balance just to get 3%, I mean that could be double-digit on an end-of-period basis. Am I looking at that correctly?

You are. But again, we're cautious because that's one side. We also have the other side of keeping our customers or keeping them from refinancing somewhere else because of rate. And we're certainly -- we appreciate a good customer, and we're going to work with them in the event that those conversations come to us. But 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 actions that took place, moving some of these borrowers out or helping them find financing elsewhere. Is that -- is there more of that to go? Or have we seen the bulk of that? How the state of the current portfolio looks right now?

Yes. 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.

Thanks for including that Slide 22.

And we do have a follow-up question from Terry McEvoy with Stephens.

Just one quick question on Slide 22. That within average loans, the fourth quarter '20 results, the $2,382 million that excludes the $310 million of PPP loans. Is that correct there?

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.