Q2 2021 Equity Bancshares Inc Earnings Call
Good day and thank you for standing by welcome to the equity Bancshares second quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
And I ask a question during the session you will need to press star 1 of your telephone.
Please be advised that today's conference is being recorded and your plenty furthest assistance. Please press star zero.
I would now like to hand, the conference over to your speaker today, Chris and I have a Chao. Please go ahead.
Good morning, and thank you for joining equity Bancshares conference call, which will include discussion and presentation of our second quarter 2020.1 results from.
Slides to accompany our call are available via PDF.
And for download at Investor Day equity Bank Dot com by clicking the presentation tab and you may also click the event icon for today's call posted at Investor Day equity Bank Dot Com to view the webcast player. If you are viewing this call and 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 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 our chairman and CEO Brad Elliott.
Thank you, Chris and good morning. Thank.
Thank you for joining our call and your interest and equity Bancshares.
Joining me is Eric Newell, our CFO, Greg crossover, our Chief operating officer, and our President and Craig Anderson.
And the equity teams hard work continues to add shareholder value and it shows and our results.
We reported $15.2 million of net income this quarter.
We have experienced as a company.
Well, Eric will provide more details I am, particularly pleased with the growth we are seeing and fee income.
And it's awesome to see the positive operating results from the years of hard work executing on our fee income strategies.
We've only begun to see the seed sprouting.
I remain confident we will continue to watch these strategies grow as we make progress towards our goal of 30% total revenue tied to fee income business versus traditional spread business.
Improved efficiency ratios.
Eric let's take everyone through our quarter.
Thank you Brad and good morning last night for reported net income of $15.2 million or $1.
And 3 cents per diluted share.
We calculate core earnings for 86 per diluted share, beating street consensus and comparing favorably to core earnings growth.
5.
And the first quarter this year.
Core results this quarter and were driven by recognition of origination fee income from TTP and loan forgiveness and improvement and fee based drivers across nearly all of our categories.
Expense management continues to be a focus as well with salaries and benefits.
Change linked quarter and year over year.
Our GAAP net income includes and release of reserves from the allowance for credit losses totaling $1.7 million.
We have budgeted 20 basis points of average loans for provisioning. This year exclusive of credit losses, which would result in a pro forma provision to the ACO of 135 billion.
We are including from normalized provision during the quarter and the calculation of core earnings and backing out the release.
During the quarter. The release was primarily driven by improvement in asset quality and related specific reserves.
As Greg will address in more detail favorably and we have yet to see any notable losses and our loan portfolio and since the start of 2020.
That said, we recognize the high level of direct fiscal stimulus that exists and the economy and for that reason, we are uncertain about the direction and the economy over the next 18 months and its potential impact on our customers.
For that reason, we remain conservative and our approach to the level of the ACO.
The June 30 coverage of ACL for non PPP loans is 2.0 for per se.
Net interest income totaled $34.6 million and our second quarter, increasing from $31.8 million and the March 31 quarter, representing our $2.9 million increase.
During the second quarter, the weighted coupon from our portfolio, excluding PPP declined approximately 13 basis points.
And looking at our core loan products and commercial commercial real estate and agriculture, So weighted origination coupon from our second quarter or for point of 7%.
Origination fees recognized from forgiven PPP loans increased notably in the second quarter, we recognized $5.7 million for fee income and 984000 net interest income related to PPP loans, and the second quarter and preparing for the first quarter total PPP fee income and interest income totaled $3.
$1 million and 896000, respectively.
At June 32021, we had $10.7 million of net unrecognized fee income associated with PPP loans, which totaled $272 million.
Removing PTP fees and interest income from net interest income and both the second and first quarter results and our pro forma net interest income of $27.9 million and $27.8 million, respectively loan yield, earning asset yields and net interest margin and the quarter ending June 30.
And as for 4.1%, 355% and 313% respectively. This compares to the quarter ending March 31 of 461%, 365% and 319% respectively.
Thanks, Eric.
As you likely know in May.
And when you announced the merger with American State Bank shares.
We're excited about partnering with the team from ASB and tea and.
And I admire their discipline and service levels to their customers and the communities they serve.
For equity and ASB and <unk> teams have been working closely through the merger and integration process and are progressing as expected.
We're scheduled to close the first week of October with the data integration at the same time.
I am excited about the new communities and <unk> partnership will bring to the combined company.
And have been impressed with the professionalism and integrity of their team, while serving their customers and communities.
We look for new welcoming ASB and T customers to equity and believe that we can build upon their existing products and services and provide a strong value proposition to ASB and <unk> customers.
We continue to have active conversations with several different companies about partnering.
Equity continues to be ready and willing to act as a partner to banks that fit and complement our organization.
As I have regularly emphasized we will stay true to our requirements on earn back.
Cultural fit and geographic fit.
We will also remain committed to our organic growth efforts, Craig Anderson will continue to work with each of our regional teams to develop and deepen relationships with customers to drive organic growth Greg.
Thanks, Brad organic loan growth totaled $83.9 million, representing an annualized 15% growth during the quarter.
PPP loans declined $143 million due to forgiveness of our customers are experiencing from the SBA.
This is a huge positive and as we can recognize the fee income sooner and it shows we have active engagement with our borrowers.
We are using this process to work with our borrowers on their total relationship picture.
It has helped us to originate new business.
Organic originated loans totaled $266 million and the second quarter, comparing favorably to the 119 million and originated and the first quarter.
Of the total originations in the second quarter, 85% were in commercial and CRE and agricultural loans.
Our total pipeline is approximately $600 million, which is above what we have been reporting over the last several quarters. Our sales efforts have been keeping our pipeline constant.
With the addition of ASB and tea and their seasoned bankers I expect that we will continue to show our growing pipeline.
I also want to say, how pleased I am with our operating teams on promoting our fee income businesses.
We've continued growing our commercial credit card business revenue through more focused efforts by our commercial bankers and Treasury management teams to put credit cards in the hands of our customers.
The exciting for me our debit interchange income is growing nicely from all the new checking accounts, we have opened and the last 18 months due to our sales efforts.
I would be remiss, if I did not mention that our trust and wealth management team is making positive contributions to earnings and as 12 to 18 months ahead of schedule.
Gail and Mcgregor has done a great job, leading this area and growing revenue each quarter for pipeline is very strong and will continue to build overtime.
We have also decided to expand our HSA business, we have hired 1 of the best in the industry from UBS and did Morris.
He has been working the last 6 months to put the platform in place and we expect to see results from that team very soon.
I can't tell you how excited I am to watch these strategies grow over the next several quarters.
I want to congratulate Craig for all the hard work he and his teams have exerted.
Our non PPP loan growth and the quarter showed positive results our pipelines have been as large as they ever have been and our history.
And we're seeing pull through to loan fundings.
Our pipeline is the.
Culmination of lots of hard work by the teams to call and our customers and to harvest the new PPP relationships we established.
By being open for business and the last 18 months, we have won many new relationships with our calling and service efforts.
It should not go and noticed that our teams are in great shape because of coaching and recruiting that has been done over the last 24 months.
Mark Parman has the metro market leadership, hitting on all cylinders with David King, Brian Chamberlain, Jeff Keyes, and Rick Lerner, all leading amazing teams or business development personnel.
Craig Anderson has also done a great job reworking, the Ozark region, and Brad Daniel Greg Kitchener, Elizabeth Kelly, J, Airtel, and just and Harris are all producing positive results and those markets.
On top of Great organic growth. We also had the opportunity to purchase some traditional mortgages as we have done in the past.
This augment our portfolio.
Which has been a part of our balance sheet management strategy.
Annualized organic loan growth and the quarter was 15%.
The strength and the positive momentum we are seeing from our loan teams.
And our PPP strategy is another example of adding value not just our shareholders, but being a valued partner to our customers.
By nearly all measures our 2021 PPP program was more successful than our 2020 program.
And the teams we're prepared to assist our customers by automating a big part of the PPP approval origination process.
And all developed using internal resources, our team has even developed automation for the forgiveness process, making it easier for our customers to apply for and loan forgiveness with the SBA.
Right.
I want to share some more detail about our fee income success from the quarter total fee income was $9.1 million, increasing $2.4 million from the first quarter when excluding the net gain on acquisition and asset quality improvement on El Nino purchased assets from both periods the increase of 747000 or about 11% growth.
Service charges and fees increased by 573000 from the first quarter, making up for that increase was a realignment of our core DDA products that was put in place from the first quarter, our marketing team under the direction of John Hanley worked throughout 2020, and early 2021 to retool our consumer DDA products.
To provide a high value proposition for our customers.
The result is our customer now and benefiting from a high level of service and our product offering with discounts and other types of perks, which provides value and allow.
<unk> us a better ability to charge fees for our product offer offerings.
Due to our product realignment, our fees increased 439000, and the second quarter.
Debit card income increased 329000, and the quarter attributed to higher purchase activity from the first quarter.
When combining our trust and wealth management credit card and Treasury fee income and results and an improvement of 342000 and from the first quarter.
Repurchase obligations were previously established for SBA loans acquired through the Op unit transactions.
Our team has made progress over the last 2 quarters and partially results concern that led to a repurchase obligation establishment as a result, we recognized 917000 of revenue during the quarter.
We continue to show growth and our non interest bearing deposits, increasing $20.2 million for March 31, this year and $236 million from June 30 of last year.
And sorry, and the average balance of our most popular consumer DDA accounts, we saw an average balance that was 5% higher at June 30 of this year versus a year ago at the same time and 20% higher and at June 32019, and.
And interestingly the average balance declined 14% from March 31, this year, which is a testament to the net checking growth. We continue to experience given that we show DDA growth and our second quarter.
Greg why don't you take everyone through your thoughts on credit.
And Eric we remain optimistic about where we stand with our customers.
And the equity bank team continues to work hard to position and both our customers and the bank for successful outcomes, including proactive communication with borrowers to understand their operating environments and needs.
And the second quarter total non performing loans, including those assets on non accrual were greater than 90 days past due were down $3.7 million or 6.1% net charge offs during the quarter exclusive of fully discounted al <unk> net assets were approximately $100000.
All categories of special assets watch special mention and substandard rated loans Oreo and non accruals were down quarter over quarter. These reductions coupled with the lack of loss experience is a testament to the efforts of our credit team led by Tim curve.
Non presnell bark drove and and Christophe koski to facilitate positive outcomes for the bank and our customers.
During the quarter as new information became available and additional analysis was completed.
We also updated the valuation of certain assets from our purchase of <unk> State Bank, which resulted in the reclassification of $860000 from purchase discount to gain on acquisition.
This measurement period change for purchase accounting did not drive the redemption and nonperforming loans, which are disclosed gross reserves.
Notably, our regulatory classify and assets to regulatory capital ratio was down over 200 basis points in the quarter.
At year end 2020, we moved 1 of our large relationships into special mention and our aerospace segment and associated uncertainties surrounding it had been previously discussed.
Our borrower remains current on its loans at this time and the significant returned to air travel is beneficial to this borrower. We believe we are adequately collateralized and amicable discussions continue with the borrower management will continue to closely monitor this relationship and overall portfolio and proactively worked with the borrower.
To ensure the best result for both the business and the bank.
We have been and communications with our large hospitality operators and the environment is continuing to improve we believe this improving environment, our conservative underwriting standards for these assets and quick and prudent actions taken by our borrowers has helped them return to improved operations faster than anticipated.
The balance of our portfolio also continues to perform well with local economies working their way out of pandemic conditions continued adoption of the vaccine and commodity and real property prices maintaining strong positions.
The credit teams are excited to work with ASB and T lenders and underwriters and their market is we have similar philosophies and believe we can deliver enhanced products and services for our borrowers.
Thanks, Greg before turning the call over to Brad I wanted to again highlight our forecast slide on page 26.
Here you can see our thoughts on the forecast for the third quarter and how our second quarter outlook compared to actual results.
As is evident the NIM without PTC has been under pressure due to the government driven physical.
And monetary stimulus, which is driving a portion of our deposit growth.
Resulting in a lower loan to deposit ratio and excess cash that is not deployed and the most efficient manner without any change to interest rates. If we were to look back to our pre COVID-19 loan and deposit ratios, our pro forma NIM, excluding PPP loans would be 28 basis points higher and the second quarter.
This shows the impact of additional liquidity on our balance sheet.
Improving our loan to deposit ratio is critical for NIM and building on this quarter's loan growth and future periods will help improve that ratio and reduced reduced pressure, we're seeing on them.
Other than them for third quarter and full year outlook does not have any significant departure or adjustments from what we expected and reported on and our January conference call Brad.
Before opening it up to your questions I wanted to highlight the exciting news, we released with earnings last night that equity bank will expand into the St. Joseph <unk>.
Missouri market through the <unk> through an agreement with security Bank of Kansas City to assume the deposits of 3 locations.
We're excited to add the Saint Joseph community to our Western Missouri region, which equity expanded into in 2007.
Over the last 3 years, we have grown the western Missouri region by 25%.
And we are excited about welcoming these new customers to the equity platform.
We have a great team led by Josh means and Greg Doran.
They have grown every part of their business and all of the markets they manage.
And this will give them another great platform to grow.
We expect to close on this transaction in the late fourth quarter of 2021.
And is it expected to add approximately $78 million of deposits.
Shifting gears.
We're closing in on a recommendation to our board of directors for establishing a common stock dividend.
The dividend when established seems to be a natural progression as our market capitalization grows and our stock develops and higher levels of liquidity.
It will broaden our institutional and retail investor base.
And it will be a tool for capital management when the stock repurchase program does not meet our earn back requirements.
The common stock dividend under consideration will not inhibit our continued acquisitive and organic growth.
I want to thank our equity bank teams and our markets for their focus on our customers.
And demonstrating that we are dependable and responsive to their needs.
It provides value to our customers and allows us to build deeper and longer lasting relationships.
Which in turn builds shareholder value.
And with that we're happy to take your questions.
Thank you.
As a reminder to ask a question you will need to press Star then 1 on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Terry Mcevoy with Stephens. Your line is now open.
Hi, guys good morning.
Good morning.
Maybe start off you guys did extremely well with PPP and I was wondering if you could talk about the new customers for the bank, how you're building on that relationship and maybe where that's showing up and the financials today and I know you spent a lot of time on.
On fee income and we saw that and the second quarter, but maybe and maybe expand on that a bit.
And Kerry this is Craig.
As we mentioned we were very successful and both phases of the PPP loan program and the biggest part of that strategy was that we ask those customers to open up their deposits and depository accounts and relationships with us and.
And that has benefited us greatly from a deposit standpoint, and then we've used that list over the last 6 to 9 months to go out and make additional calls on that customer base and we've been able to expand those relationships with conventional loans Treasury management credit card products.
And so it's just been a significant cross sell of our suite of products to those various customers.
Yes, that's great to see Craig maybe Eric a question for you.
And I know you talked about the margin contraction and I think of all of US on the call understand why maybe just could you talk about the opportunities to lower your cost of deposits and the second half of this year I think it.
And it was about 22 basis points and the second quarter do you think that will provide some kind of NIM support over the next 2 quarters.
Terry.
We have been working closely.
Across all the regions to analyze areas, where and we feel that and we could take a couple of basis points or maybe even more than a couple of basis points out of our cost of funds and the RSC transaction accounts, whether it's.
Primarily for money market accounts.
So we have and we have been doing that throughout the year.
And we've been kind of stepping into it where it will.
Reduce rates 2 or 3 basis points at a time and we analyzed customer behavior.
We haven't seen any.
Notable interest for any disintermediation out of the bank. So we will continue that exercise.
And through the second half of the year, which should help.
Improve the cost of that 20 basis points from the back half.
And you didn't ask the question, but I'll say it anyways on the time deposits.
We continue to obviously see a little improvement there quarter over quarter and certainly year over year.
<unk> has been quite helpful for us.
Do expect to bat and all.
Contribute as much as it has and the back half of 2021 simply because.
The average duration of that CD portfolio.
And has come in pretty significantly, which we would expect given the interest rate environment. So we might see some smaller declines and the cost there, but not not nothing like we've seen from our first half of this year and.
Last year.
Thanks for that Eric and and maybe 1 just last question for Brad or.
For the larger banks in your markets now open and calling on customers and.
And then how has that impacted competition overall thanks.
Yes, they are still closed Terry for the next 60 days so the majority of our competition.
Especially now that were of the size that we are and kind of what we've moved our sweet spot to 1 commercial credit.
And we're now competing with branches that are closed and we're competing with bankers that are operating out of other their houses our basement. So we.
We still have an advantage for about the next 60 days they've told their staff they have to be back.
The first of.
Our after labor day weekend and so.
We think we still have an advantage craigs done a great job, leading his teams and our teams have done a great job of getting out and hustling.
And converting our pipeline is full of opportunities that have been.
Generated strictly from the PPP relationships that we didn't even know these customers and the past so.
And we're pretty excited about.
The future of where equity sets and how we're able to attract customers.
Great. Thank you for taking my questions.
Thank you.
Our next question comes from the line of Andrew Liesch with Piper Sandler Your line is now open.
Hey, good morning, everyone.
Yeah.
Doug's commentary from a quick question on the on the loan growth here I mean pipeline up to 600 million great products from this last quarter.
Good production and the first quarter.
I guess I was kind of surprised to see the average growth guidance for the year not increased is there something else that.
That you guys are seeing that maybe don't want to bring your guidance up it just seems like you guys.
And this is while there could beat that target right now.
Yes, Andrew this is Eric it's simply our conservatism on this.
Honestly see.
Industry trends with loan growth have been challenging we certainly experienced some great successes based on the work that our teams have.
Undertaken as Brad and Craig mentioned.
And it really comes down for you.
Conservatism.
And Theres nothing Andrew that we're seeing fundamentally that would make us think that were and maybe on the lower end of that and.
That range and will likely be on the higher end of that range or even beat it.
Got it okay. Thanks, and then.
And the core margin outlook for this quarter and now certainly with the loan growth that you had last quarter and the mortgage purchases, obviously yields are come in and liquidity is still there but.
I would think that maybe and improve.
Asset mix and support the margin rather than.
Result, and well below and of that range would be $2.90, but that seems pretty far fetched to me is there.
Are the yield pressures and this liquidity environment just that.
And that meaningful to offset the improved earning asset mix.
If we continue to build on the success of loan growth that we experienced in the first half of the year.
Certainly I would I would venture to say that will be on the higher end of that range liquidity. Andrew is certainly a factor that we're taking into account we.
And we do see a small decline.
And our origination coupons.
And from the first quarter.
It Hasnt really set a trend yet.
So that's a factor that I was considering when we put this together as well.
I think that we've done pretty success are we've been very successful and are originating new coupons for the.
For handle and even a 5 handle and our AG portfolio. So I think some of it may have been a mix of what we originated and the second quarter.
And we're keeping and a high on that because we certainly want to be competitive, but we don't want to.
Necessarily.
And everything away.
And if we can continue to build on loan growth and that helps grow that loan to deposit ratio, which.
And there is 1 of the biggest factors given the amount of liquidity, we have and our balance sheet that low loan to deposit ratio is really depressing our core NIM.
Got it.
Okay. Thank you for all the color and answer.
And the question and I'll step back.
Thank you.
As a reminder to ask a question you will need to press Star then 1 on your telephone.
Our next question comes from the line of Jeff Lewis with D. A Davidson your line is now open.
Thanks, Good morning.
And I'm just looking for a.
Trying to get a sense if you don't have that.
And the 3 branches that you expected to bring on in December and if you've.
<unk> got a ballpark.
And kind of overhead or cough expenses associated with that and if you didn't.
Maybe it's just your average branch that you operate.
And that's a good proxy for maybe and expense pad for for.
And for those branches.
And Jeff I think it's a little early part for me to address that.
So unfortunately I don't have an answer for you on that.
I do think.
And based on that day.
Diligence that we've done I don't see any reason why arent those 3 branches, we're adding would be any different in terms of cost structure from our existing.
Great.
So what would that be Eric.
How do your existing structure.
Yeah 3 branches.
I don't have that information.
And the top of my head I don't Wanna et cetera, and yes, Okay, Yes, I would tell you the bedroom.
Yes, I would tell you that there'll be immaterial.
They're coming over it.
Their book value.
We're.
We're not bringing a lot of.
Expense over and operating expense should be line will continue to evaluate those opportunities as we move forward.
And you look at it the fee income guide.
Youre kind of bump and all of the high watermark here I guess.
Again, a conservative stance, but where might that tail off and you're looking at kind of the mortgage side that could come in or within the line items fee income.
If you come inside 7.5 million where would that.
For that decline.
Yes.
And I think the downside risks to fee income and certainly would be mortgage Angie as you suggest Jeff.
Although that has been very equipped for hiseq to us.
Going into this year I think.
The management team here as well as probably many of our peers expected mortgage income to be down and it hasnt.
But that has been a meaningful contributor this year.
Yes.
I cant think of really and many other downsides to our fee income view I think just fundamentally on the positives and a lot of what we've talked about and our prepared commentary.
As Ron and his continues we expect it will continue to be and our run rate and as we continue to add and checking.
Growth on the existing franchise that will also enhance that going forward.
Yes.
Okay and last 1 just the.
What was the amount of the purchased mortgages.
Quarter and was that included in your <unk>.
The 15% organic loan growth.
We purchased about 83 million and the quarter and it was excluded from that 15%.
Okay.
Got it so at 50 and that 15% is non PPP.
Non purchased.
Originated loan.
Alright, and that was it thank you.
Thank you.
Last question comes from the line of Damon Delmonte with <unk>. Your line is now open.
For Dan and then how are you guys.
Good how are you.
Good day, just 1 follow up question to fee income you mentioned getting it to 30% of revenue do you ever projected timeline for that.
And if I told you remember.
Yes.
I would say.
It's an intermediate goal for us.
So I don't want to say, it's going to be done here and the next 12 months, but it's a significant factor and all of what we do and our strategic planning and hiring.
And incentive programs so.
I think that accomplishing that over.
18, and 24 months should be achievable.
Yes.
Thank you.
There are no further questions at this time.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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