Earnings Call Transcript - EQBK Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Equity Bancshares, Inc.'s Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to one of your speakers today, Mr. Chris Navratil. Sir, please go ahead.

Chris Navratil, Speaker

Good morning, and thank you for joining Equity Bancshares' 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 '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 note, slide one includes 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 Bancshares' Chairman and CEO, Brad Elliott.

Brad Elliott, Chairman and CEO

Good morning. Thank you for joining the Equity Bancshares' 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 change at Equity Bank. 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. 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. I view the sub-debt as opportunistic Tier 2 capital allowing us to grow the balance sheet either organically or equitably. 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.

Greg Kossover, Chief Operating Officer

We once again had a solid quarter with earnings per share adjusted primarily for normalized loan loss provision and PPP fees of approximately $0.60 per share, essentially on top of our original pre-COVID Street expectations of $0.61 per share. Stated EPS for the quarter were $0.11, and the key pro forma adjustments were: (1) 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. (2) Purchase accounting discount accretion was less than our normalized run rate by an estimate of $400,000. The recognition of PPP loan fees helped earnings approximately $136,000. The provision for loan losses was originally forecast at $900,000. However, we provided $1,250,000 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. Our net interest margin as stated was 3.49%, and adjusted for normalized purchased accounting accretion and to remove PPP impact was about 3.69%. Normalized yield on loans was 5.07% with a normalized coupon on loans at 4.71% at June 30. 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 to 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 environment to re-price liabilities downward. 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, 47 basis points, than assets 36 basis points 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. 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 Elliott, Chairman and CEO

Craig Mayo 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 the borrower to be trending in the right direction, or able to reasonably project that their future performance warrants a release. Eric, please take us through the June 30 balance sheet.

Eric Newell, Chief Financial Officer

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 PPP tangible assets at 8.81%. Excluding the outstanding PPP loans of $373 million at June 30, our loan balances have decreased quarter-over-quarter by $74 million. 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 re-price approximately matches the remaining CDs re-pricing 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 30, our ALLL plus purchase discounts stand at 1.81% of loans, not including the insurance PPP loans. We once again ran our probable incurred model and will continue to be ready for CECL implementation. Net year-to-date charge-offs are low $590,000 or four basis points of loans annualized. Our investment securities portfolio is $840 million at June 30, 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. 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 30 down from 26% linked quarter. As mentioned earlier, we closed on $42 million on 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.

Brett Reber, General Counsel

As I discussed on our first quarter call, 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 had $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 wanted to mention that Craig Anderson and I have been spending time in our regions visiting our locations and our customers. 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.

Craig Mayo, Chief Credit Officer

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 and the 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've been proactively meeting with our customers and have done 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. At June 30, our loan portfolio totaled $2.8 billion, before $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 1-4 family as our largest category. Greg will now walk us through our hotel portfolio.

Greg Kossover, Chief Operating Officer

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 had 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 half 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. 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 breakeven, shown by the red line in a very short recovery period by reducing costs and hustling to grow revenue in the grey line. The key takeaway is proactive management on costs and finding 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 Mayo, Chief Credit Officer

As discussed in prior quarters, the Bank's Ag portfolio is well-diversified between protein and cash grain spread across the bank's four states footprint of Kansas, Missouri, Arkansas, and Oklahoma, and the majority is secured by real estate. Construction and land development loans are down from Q1 due to the successful completion of multiple projects in the migration to permanent financing. The 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. As many dining rooms have closed or been interrupted, carry-out and drive-thru have performed well. The bank works with experienced strong franchisees who have had a 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. 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 received PPP funds and are currently on deferment. They're 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. 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 proactively address 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 and related exposure to oil and gas, and limited exposure to medical and assisted living. Each of these segments represents less than 1% of our portfolio.

Greg Kossover, Chief Operating Officer

One of my new responsibilities is working with Craig Mayo and Pat to resolve 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 was flat for the year, given the Q1 provision of $900,000 specific to OREO in our ratio of classified assets to total bank regulatory capital is 21.2%, flat from December 31, 2019.

Eric Newell, Chief Financial Officer

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 raised, and our pre-provision earnings have been strong, only because we haven't been aggressively providing for the ALLL of our earnings then below expectations. Our deposit and retail team have done extremely well to grow non-interest bearing deposits, helping to reduce the cost of funds and drive more customers and associate 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 30. As Greg discussed, our NIM expanded in the second quarter, and with our remaining loans scheduled to reprice, equaling about the same as 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?

Brad Elliott, Chairman and CEO

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 at all our locations, and we have had very limited inconvenience to our daily operations from the coronavirus. 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 made originating loans in the second quarter to some very qualified healthy customers. I think we're poised to create 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, and I think that will serve us 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.

Operator, Operator

Our first question comes from Jeff Rulis with D.A. Davidson. Your line is open. Please go ahead.

Jeff Rulis, Analyst

Thanks. Good morning.

Brad Elliott, Chairman and CEO

Hey Jeff, how are you?

Eric Newell, Chief Financial Officer

Good morning, Jeff.

Jeff Rulis, Analyst

A question on the deferral percentage, what is that current percent of loans on deferral?

Brad Elliott, Chairman and CEO

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.

Eric Newell, Chief Financial Officer

Yes, 26% as reported, and coming down from there.

Jeff Rulis, Analyst

Okay. It seems like as you approach the discussions about extensions, you might have already had a few conversations, and perhaps you've reached a peak on deferral that's now coming in, or maybe that's just what you expect?

Brad Elliott, Chairman and CEO

Yes, 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, and that many of them are not in a position any longer they would warrant or need to have a deferral.

Jeff Rulis, Analyst

I guess what's the average deferral timeline of that group? Is that a 90 or greater?

Brad Elliott, Chairman and CEO

So, we went out with offering a 90-day deferral. So, we had a group event that we did interest only for that we had, that we did interest only for them for six months, which was about $108 million.

Eric Newell, Chief Financial Officer

$95 million.

Brad Elliott, Chairman and CEO

$95 million that we did interest only on NIM, 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.

Jeff Rulis, Analyst

Okay, switching gears a bit, I'm curious about the service charge line item and how it trended this quarter. My assumption is that it saw some disruption early on, but given your comments about branches being fully operational, has it recovered later in the quarter? I'm also interested in the expectations for that line item, as it was previously over $2 million a quarter. How do you see its recovery from your perspective?

Greg Kossover, Chief Operating Officer

Yes, your thoughts are correct, Jeff. NSF fee, 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, and the guidance for overall non-interest income for Q3, that's going to be about $6.1 million I think for Q3, is a good number to use for total non-interest income.

Jeff Rulis, Analyst

Thanks, Greg. We actually saw a 70% decline at the low point on overdraft fee income. Got it, okay. Regarding the outstanding pizza franchise entertainment credit, I'd like to better understand the process. It appears that franchise sales are showing positive momentum, but I'm trying to clarify how it transitions from non-accrual status. Is a portion of it accruing, and what must happen for it to be removed from non-accrual?

Greg Kossover, Chief Operating Officer

So, currently, it's listed as a TDR. So, it is not accruing interest, and sort of once a TDR stays at 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 has done well in this whole COVID thing. The credit itself is reducing principal without accruing interest.

Jeff Rulis, Analyst

I see. Okay. And the expectation on loss content, it continues to be modest for that?

Brad Elliott, Chairman and CEO

It does.

Greg Kossover, Chief Operating Officer

Yes, the expectation, Jeff, is still to have that company sell. You want to say anything, Brad?

Brad Elliott, Chairman and CEO

Yes, moving forward, under the circumstances, we reduced staff and utilized the PPP program. They have nearly 70 franchisees, primarily focusing on delivery and carryout stores. There remains significant volatility in the southern states where they operate due to the ongoing changes brought about by COVID. They have reopened but with changing rules; however, the business is operating as usual. In our last discussion, they were at about 50% of their prior year's sales, mainly from delivery and carryout, although some of their entertainment stores have reopened with restrictions.

Jeff Rulis, Analyst

Okay. Thanks, guys. Appreciate it.

Operator, Operator

Thank you. And our next question comes from the line of Terry McEvoy with Stephens. Your line is open, please go ahead.

Terry McEvoy, Analyst

Thanks. Good morning, everyone.

Brad Elliott, Chairman and CEO

Good morning, Terry.

Terry McEvoy, Analyst

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 as a follow-up question there, what was the yield on the PPP loans last quarter?

Brad Elliott, Chairman and CEO

I’ll address the first part of your question. There are three questions involved. Firstly, several groups preferred to avoid the political scrutiny they faced, especially those owned by private equity, as they didn’t want to attract media attention like being featured on the front page of the Wall Street Journal. As a result, they chose to pay off those loans. A borrower has the ability to pay off these loans at any time, even while the SBA is not accepting repayment applications for forgiveness. Therefore, none of those loans were forgiven; the customers simply paid them off. The only income we earned from that was the 1% interest. We did not receive any fee income on those originations. Now, regarding the second part of your question, what is the impact on yield?

Greg Kossover, Chief Operating Officer

Yes, 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 coupon was 1%. We did recognize into net interest income fees of about 1,036,000 according to our FAS 91 accretion. So, the impact on margin was somewhere around in total probably 15 basis points.

Terry McEvoy, Analyst

Got you. And I guess, just looking at hotel, restaurant, retail, the three portfolios you call out, they all have got 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? I guess directly I'm trying to figure out in your mind, where do you see the greatest loss concern today?

Brad Elliott, Chairman and CEO

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 breakeven, 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, our restaurant portfolio is very much QSR. They're doing pretty well in this environment. So, we're still cautiously optimistic that things are going to turn out okay.

Greg Kossover, Chief Operating Officer

I can provide a more detailed answer to that question. While there is always a possibility that we could be mistaken about our outlook in three years, I don't believe that will be the case. Our hotels are performing well and will continue to do so because we have strong operators in place. Additionally, we have finance partners with low leverage, as most of our portfolio has an average leverage balance of around 54%. This means they have working capital available, and through numerous discussions, we've confirmed that they hold considerable cash reserves that will aid them in reopening their hotels. Regarding the restaurant sector, we are in a fortunate position, primarily because we have very few full-service restaurants, and instead, most are quick-service with drive-thrus in the regions we operate. They are seeing sales increases of 20% to 30%, with many also experiencing higher net profits. Early on, many of them opted for payment deferrals due to uncertainty about payments during immediate shutdowns, but many of them no longer require deferrals and are actually performing very well.

Terry McEvoy, Analyst

Understood. Thank you, both. Appreciate it.

Brad Elliott, Chairman and CEO

Thank you, Terry.

Operator, Operator

Thank you. Our next question comes from Michael Perito with KBW. Your line is open. Please go ahead.

Michael Perito, Analyst

How are you guys doing?

Brad Elliott, Chairman and CEO

We are good, Mr. Perito.

Michael Perito, Analyst

A couple of questions on expenses; Greg, sorry if I missed it, but you mentioned that the $900,000 of deferred origination costs related to PPP, just want to clarify, so with no new loan originating, that will not impact the run rates going forward, and is there anything else we should consider as we kind of think of the launch spot for third quarter non-interest expense as you sit today?

Greg Kossover, Chief Operating Officer

Yes, 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 million range all in non-interest expense Q3.

Michael Perito, Analyst

As we consider the long-term costs of the bank, it's clear that we're facing a challenging margin environment. While it seems your markets have performed somewhat better, I suspect there might still be a shift in consumer behavior away from certain branches, even if it's less pronounced in other regions of the country. Are you beginning to evaluate your overall franchise expense base and identify potential opportunities to enhance profitability in a lower rate environment? Is this a discussion you're starting to have, or is it too early to address given the current credit uncertainties that are likely taking up much of your attention?

Brad Elliott, Chairman and CEO

Yes, we consistently discuss this, Michael. We are down compared to last year, with a reduction of 35 full-time equivalents from the same period. This is something we routinely assess to improve our efficiency regarding branch locations. We closed three branches in May, so those costs will be eliminated this quarter, and moving forward, they won't affect our numbers. We're constantly reviewing these aspects. Additionally, we're pleased to report a net increase of 1,500 retail checking accounts this year, driven by our team's success in attracting business from other financial institutions, particularly due to the launch of our Q2 product. Our digital platform has significantly contributed to this success, and we have also executed effective marketing strategies that we believe will enable us to grow our branch facilities in nearly every market we operate in.

Michael Perito, Analyst

That's helpful, Brad, and has the process of working with maybe some of your employees working remotely or some more the PPP programs putting a lot of stress on your systems, have you guys seen anything during this kind of forced experiment here in the last three months that kind of left you to believe that or legibly rather that there could be some updates or things you want to add into 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?

Brad Elliott, Chairman and CEO

Yes, the investment we made last spring has really paid off for us. It has pushed us to accelerate some initiatives on electronic account opening and similar products that we weren't fully maximizing. Although they were being rolled out, the pace has increased significantly over the last 90 days. This has brought about some efficiencies in our processes. I believe we will gain valuable insights from this experience and notice some differences in customer expectations that will benefit the industry in becoming more efficient. While it might be a bit early to draw conclusions, we are committed to exploring ways to optimize revenue while balancing both revenue generation and cost management.

Michael Perito, Analyst

Thank you. Lastly, in your prepared remarks, you mentioned that the sub-debt might be used for share repurchases in the future. While I'm not inquiring about the timing, I'm curious about what conditions you believe need to be met to achieve that. Do you think it requires more clarity on credit, or is it more complex? What are the key factors we should consider that could make you more confident in investing more capital externally?

Greg Kossover, Chief Operating Officer

We suspended the repurchase at the end of the first quarter because we believed it was the right decision to preserve capital. Part of this decision relates to credit considerations, but we also recognize that if we have excess capital and do not foresee many merger opportunities, we need to utilize that capital effectively. Repurchasing shares is one of the most reliable ways to do that. Therefore, Brad, Eric, and I will be reviewing this in the third and fourth quarters, and when we determine that we need to deploy capital with Board approval, we will initiate share repurchases.

Brad Elliott, Chairman and CEO

And I can tell you, Michael, it'll be a standing line item on our Board agenda for every Board meeting.

Michael Perito, Analyst

Got it. Thank you guys, really appreciate the color. Thank you, and stay well.

Brad Elliott, Chairman and CEO

Thanks.

Operator, Operator

Thank you, and our next question comes from the line of Andrew Liesch with Piper Sandler. Your line is open. Please go ahead.

Andrew Liesch, Analyst

Thanks. Good morning, everyone.

Brad Elliott, Chairman and CEO

Hi, Andrew.

Andrew Liesch, Analyst

Just a few follow-up questions for me, could you remind us what the dollar amount is on the pizza franchise loan that's currently on non-accrual?

Brad Elliott, Chairman and CEO

$13.8 million.

Andrew Liesch, Analyst

Okay, thanks. And then, the total non-performers went up about $10 million or so, is there any detail you can provide regarding that change?

Eric Newell, Chief Financial Officer

Yes, 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, like, I think 24 hours, and 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. It's not an adversarial situation. It's a liquidation situation, and that's what you're seeing in those numbers.

Craig Mayo, Chief Credit Officer

The type of collateral that it is, it should be self-liquidating, and so, it will self-liquidate over an 18-month period, and so, it'll just wind down over that timeframe, but should do it ratably as deposits come in through ACH. So, the deposits directly hit our account, and then we sweep and pay down the line.

Andrew Liesch, Analyst

Got you. So, it sounds like a pretty well-reserved for this credit. And then, just related to the PPP loans that are still outstanding, how long do you expect them to remain on the balance sheet, it's either going to be all fully paid down by the end of the year, or you need some customers that may retain them for the full length of the term?

Greg Kossover, Chief Operating Officer

We will have a few customers who are able to reopen their franchises. These are customers that we originally worked with but were not active with us previously. They have made some adjustments and managed to reopen their restaurants in their respective markets. I believe it will take them at least this year to fully utilize the PPP funds, so there will be a few of them that are significant in the next year. I would estimate that less than 20% will carry over into next year and remain unpaid by the end of this year.

Andrew Liesch, Analyst

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

Greg Kossover, Chief Operating Officer

Thank you, Andrew.

Operator, Operator

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.

Brad Elliott, Chairman and CEO

Yes. So, one of the things that we probably missed in some of our remarks is on the deferrals. You know, 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, but we didn't put them in deferral. We evaluated that and said it was time to move forward with that liquidation process. So, the customers we put in deferral are what we consider, "Very good operators," and we look at the deferral as a way to help them utilize their cash and to save cash so that they could revamp after the markets open back up again. So, we look at our deferred loans as some of our stronger customers, and one that we think 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. Thank you for your time today.

Operator, Operator

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.