Q2 2022 Equity Bancshares Inc Earnings Call
Speaker 3: Hi and good day. Welcome to the second quarter 2022.
Speaker 3: Equity Bankshare Inc. earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one in your telephone. Please be advised that today's conference is being recorded. I would now like to hand a conference over to your speaker today. Chris Navratil, please go ahead.
Speaker 4: Good morning and thank you for joining Equity Bank Shares Conference Call, which will include a discussion and presentation of our second quarter of 2022 results. Presentation 5 to a company are called are available by a PDF for download at investor.equitybank.com by clicking the presentation tab. You may also click the event.con for today's call, post it at investor.equitybank.com to view the webcast player. If you are viewing this call on our webcast player, you know that the slides will not automatically end down.
Speaker 4: Please reference slide one, including important information regarding forward-looking statements. From time to time, we may make forward-looking statements within today's call on actual results may vary. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us. I'd like to turn it over to our chairman and CEO Brad Elliott.
Speaker 4: Thank you, Chris. Good morning, and welcome to our second quarter earning call. And thank you for your interest in equity bank shares. Thank you, Chris. Thank you. Thank you.
Speaker 4: I'm pleased to report the bank had a very successful second quarter.
Speaker 4: continuing to build our momentum from our strong start to the year.
Speaker 4: We successfully completed the sale of three branches in the second quarter, which included $53 million of deposits and $26 million of loans, and resulted in a gain of $540,000 in non-interest income.
Speaker 5: Our EPS was 94 cents versus consensus of 75 cents.
Speaker 5: That interest income and that interest margin both increase moderately quarter over quarter.
Speaker 5: but expanded significantly
Speaker 5: On an adjusted basis.
Speaker 5: which Eric will walk you through.
Speaker 5: We continue to see the benefit of the hard work performed by our special assets and credit teams.
Speaker 5: with not a cruel loans down quarter over quarter.
Speaker 5: The improvement of existing and introduction of new products and services continue to positively impact our earnings composition.
Speaker 5: We were active during the quarter with our Vivec.
Speaker 5: We'll continue to keep our eye on tangible equity as it relates to our ViVAC activities.
Speaker 5: I'll let Eric take you through the numbers and then we'll walk you through some of our areas of focus for 2022.
Speaker 4: Thank you, Brad, and good morning. Last night we reported net income of 15.3 million or 94 cents per diluted share. runners.
Speaker 4: Non-interest income increased linked quarter to $9.6 million and non-interest expenses plus merger costs increased $2.2 million linked quarter to $31.3 million.
Speaker 4: We calculate the score EPSV 91 cents per diluted share.
Speaker 4: To reconcile gap earnings to court earnings is quartered, removed merger expenses of $38,000 and a gain on branch sales of $540,000. $38,000 and a gain on branch sales of $540,000.
Speaker 6: I'd note in the second quarter we recognize 400 and 2,000 of PPPB and interesting income compared to a peak of 8.2 million recognized in the third quarter of 2021.
Speaker 6: We haven't been excluding TPP from our core numbers given its contribution to our financial results in our last few quarters.
Speaker 6: But its contribution is now to the minimum and we are pleased about the improved quality of our second quarter earnings.
Speaker 6: Our Gap Net Income includes a provision for low- and loss of 824,000.
Speaker 6: The uncertainty of the economic environment and continued impact on the economy from previous stimulus measures are reflected in our qualitative and economic components of this calculation.
Speaker 6: The June 30th coverage of ACL to non-PTP loans is 150 basis points, up from 148 basis points to the previous quarter.
Speaker 6: I'll stop here for a moment and let Greg talk to you through at the quality foot of quarter. Right?
Speaker 7: Thanks, Eric. We had another excellent quarter in credit and special assets with no measurable migration into our classified assets and continued improvement in legacy balances of the same with many of those assets approximately 70% acquired in mergers. And the trends in non-accruals and net charge are very positive as well.
Speaker 7: From the analysts on the call today, I believe most have met John Creech, our new chief credit officer. John has now been with Equity Bank for two full quarters, and he and his team in credit have continued to do great work, and we are excited about the future in credit under John's leadership. John , will you take us through your thoughts on our credit culture and credit production, as well as your details on credit and special assets?
Speaker 6: Thanks, Greg. I too am excited about the future of Equity Bank and how my team can contribute to our success. I will begin with some highlights on special assets.
Speaker 6: Under June Presnell's leadership, and a lot of hard work by the lenders and our credit specialists, our classified assets have declined to their lowest level in many years. As Greg mentioned, inflows are minimal and improvements are plenty, specifically in several assets acquired in mergers whose operating performance has increased measurable.
Speaker 6: Our classified asset ratio continued its downward trend to 13.1% at June 30th versus 17.1% at length quarter.
Speaker 6: In addition, our portion of the aviation-related credit discussed in previous quarters is currently on our books for less than $1 million with a disposition expected to close in the third quarter.
Speaker 6: Non-approval loans decline 9% in the quarter as well, and are just 59 basis points of total loans. Our lowest level is a public company.
Speaker 6: Our credit culture is what I expected.
Speaker 6: Strong underwriting across a wide range of asset classes, and it takes advantage of the diversity in our footprint. We have ample opportunities to bank credits in Western Missouri, which is a different market than Kansas City, and the same is true for Western Kansas and Wichita, and Northern Oklahoma and Tulsa, and Northern Arkansas. We can maintain a safe and conservative credit posture and still meet our production goals because our markets are each different.
Speaker 6: The bank has done a really good job from the beginning of understanding diversification in managing concentrations of credit.
Speaker 6: All regions adhere to the same underwriting standards but have flexibility to work with customers to responsibly grow their banks, which allows us to bank a variety of industries and segments well. For more information, visit www.fema.gov
Speaker 6: In the quarter, Department ran a stress test on one-third of our portfolio with no projected exposure given the current rate environment. We will continue to do this in future quarters and adjust concentrations and underwriting on a dynamic basis. In the quarter, Department ran a stress test on one-third of our portfolio with no projected exposure given the current rate environment. In the quarter, Department ran a stress test on one-third of our portfolio
Speaker 5: I'd like to add that our sales culture under Craig Anderson continues to generate a healthy pipeline.
Speaker 5: which stands at about $550 million today.
Speaker 5: Each of our loan officers and all our regents utilize an intentional sales process.
Speaker 5: We cultivate relationships through identification of products that meet the needs of our customers.
Speaker 5: As we look to build relationships in future quarters, our platform will be our advantage.
Speaker 6: Thanks, Fred. I do think it's worth commenting about our general reserve. This is the second consecutive quarter of general reserve bills due to the economic environment, including market rate increases leading to extension within the portfolio.
Speaker 6: These reserve bills were offset in the broader ACL by specific credit adjustments as facts and circumstances surrounding previously acquired assets continue to improve.
Speaker 6: Uncertainty surrounding the impact of inflation, supply chain disruption, and input cost escalation that our customers are starting to experience are sets.
Speaker 6: To be clear, we've yet to see our customers experience any specific difficulties from these concerns. But in assessing the landscape, we believe the risk of an economic slowdown coupled with inflationary pressures presents uncertainty that supports our General Reserve Bill during the quarter.
Speaker 4: Craig, why don't you take everyone through your thoughts on the quarter?
Speaker 7: Pantheiric, organic originator loans, total 288 million in the second quarter, of the total originations 90% were commercial, DRE and agricultural loans.
Speaker 7: When excluding the change in our PPP loan balances and the branch sale, long growth in the quarter was $20 million.
Speaker 7: We note commercial loans declined during the quarter. We had two of our top customers pay down their lines driven by business cyclicality in their specific businesses.
Speaker 7: Agricultural loans also continue to decline, driven by excellent cash flow and balance sheet positions of our agricultural customers.
Speaker 7: Line utilization in our agritultural segment is 38% compared to 43% at 630 2021.
Speaker 7: Our year-to-date loan growth, excluding the branch sale and PPP, totals 8.5% in line with the forecast. For more information, visit www.fema.gov
Speaker 7: Our non-interest income, excluding the game related to the branch sale, saw improvement from the first quarter.
Commercial credit card and debit card interchange both saw large increases quarter over quarter, with debit card income up 7% and credit card income up 20%.
We continue to emphasize putting commercial cards in the hands of our clients and driving debit card utilization through marketing campaigns.
Mortgage banking revenue continued to face industry headwinds and was down 130,000 for the quarter.
The build-out of our HSA platform is complete.
We have growing pipelines that our healthcare services team has developed that will allow us to service their employees HSAs and other tax advantage flexible spinning accounts. HSAs and other tax advantage flexible spinning accounts.
This business will contribute new low cost deposits and D income through interchange and brokerage. This business will contribute new low cost deposits
That interesting come total 39.6 million in the second quarter, increasing from 39.3 million in the late quarter, representing a $600,000 increase.
During the second quarter, the coupade yield in a loan portfolio increased to approximately 16 basis points.
to 4.42%.
We had a $631,000 derivative benefit to interest the income in the quarter.
When excluding the derivative benefit, the one-time benefit of the shift on previously not accrual loans in the first quarter and TPP impacts in both comparable periods, NIM and the second quarter increase 11 basis points to 3.31%. The second quarter increase 11 basis points
Origination fees recognized from forgiven PPP loans continued to decrease. NIM was benefited by PPP loan fees in the second quarter by two basis points as compared to five basis points in the previous quarter.
We recognize 374,000 of fee income and 28,000 of interest income related to PPP loans in the second quarter, down 425,000 from the previous quarter.
At quarter end, we had 125,000 of net unrecognized income associated with DPP loans, which totaled $7.4 million.
Non-interested expense with up 2.2 million link quarter led primarily through a quarter increase in reserve are unfunded commitments.
March 31 results included a release of $1 million during the quarter versus a reserve of $300,000 in the quarter ending June 30.
Deposit, excluding the branch sale to $36 million.
We saw a $48 million reduction in a single deposit relationship as a school district in our Kansas City region deployed project funds.
Our outlook slide continues to show a moderate view on dim expansion to the remainder of 2022. Primarily due to the uncertainty would cost a fund.
The forecast does not contain any future rate hikes.
The competitive landscape in our community markets remains rational despite the Fed funds 50 basis point increase in May and 75 basis point increase in June .
However, with the current market expectations of a 75-100 basis point increase next week, I potentially, an additional 100 basis point increase through the remainder of the year, the environment in which we operate this dynamic.
On the opposite side, we're seeing improvement in origination and renewal yields.
CNI origination yields increased 91 basis points in the second quarter.
representing 24% of the quarter's origination volume. And CRE origination yields increased 59 basis points, representing 37% of the quarter's origination volume.
We expect premium memorization in the investment portfolio to remain slower, which should assist in yields from that portfolio. As I have said previously, we're working to move earning assets away from the investment to the loan portfolio, which should assist in the higher asset yields.
Brad?
I'd like to point out our progress on our strategic goals for 2022.
We're focused on the continued improvement of operating performance.
We're excited about the buildout of our HSA business, which provides cross-selling opportunities to our commercial and municipal clients. We're excited about the buildout of our HSA business, which provides cross-selling opportunities to our commercial and our business. We're excited about the buildout of our HSA business, But the
as well as a state of the art platform are existing agency client base.
Our commercial credit card product continues its positive momentum in contributing to fee income.
We're looking at several new services and products for customers that will support our goal of increasing fee income as a part of our revenue mix.
We continue to have conversations with potential partners.
We believe prudence around deal underwriting is key in the face of the current economic uncertainty.
Balance sheet.
capital, and credit strength will benefit us as opportunities arise through the cycle.
We will maintain our focus on organic growth efforts.
And as always, we'll look for opportunities to rationalize our branch footprint while improving the digital experience for our customers.
And with that, we're happy to take your questions.
Thank you. As a reminder, simply press star one on your telephone to ask a question. One moment please.
Our first question is from Terry McAvoy with Seafens. Please go ahead.
Good morning, everyone.
Morning, Terry, maybe just start given the. Big picture concerns about the future direction of the economy. Can you just talk about any industries you're watching closely and and a little bit more sensitive to and and would you expect in the 2nd, after this year, based on your outlook today? Incremental reserve building.
So, you know, the things we're watching most closely, Terry, are one to four family construction. We don't have a ton of that, but we're watching it very closely. It's something that we continue to evaluate. Multi-family, we continue to evaluate and watch it as well. We don't see any stress yet in those areas, but we are monitoring that more closely than...
We have in the past and making sure that we have all the processes in place to jump on that if there's any need to do that.
Is there anything else, John , that you're looking at? No, there's not. We sort of think that this is an environment where the smaller customers are generally wind up being challenged more than the bigger customers and we don't have a lot of that in our portfolio.
And then as a follow up, maybe a question for Eric. Within your outlook for the third quarter, and I guess the rest of the year, if you just talk about your view on deposit costs, deposit betas, and maybe if there's any noticeable differences between your community and metro markets as it relates to deposit costs.
Yeah, I mean, looking back on the second quarter, I think we did a really good job in controlling costs. And I think that a couple of the drivers of that will continue to help us hearing the third quarter and fourth quarter. A lot of our deposit generation is in our community markets. And the community markets have not, as of yet shown any irrational pricing.
from our competitors. And frankly, we haven't been having a lot of conversations about what our customers about rate. We're more focused on a product and service that we can offer them. So I think given that, that'll be helpful for us here in the back half of the year, even with the Fed moving rates. Certainly, I do expect that there will probably be pressure on the cost of the funding, but I think having.
having our teams focus on the product and service that we can offer and not leading with rate will help us in controlling that.
Great, thank you for taking my questions.
Thank you. I'm going to move on to the next question.
Our next question is from Jeff Ruley's with the A. David's on. Please go ahead.
Thanks, good morning.
Done.
First question, maybe for Craig, just wanted to get a sense for how that, I think you mentioned the pipeline at 550 million. How does that compare with?
and how you entered the second quarter. That's kind of first part and then second just. That's kind of first part and then second just.
I think you've noted that some residential kind of headwinds in that portfolio, maybe some Ag tailwinds to go. And as you look at the outlook for the second half of Lone Growth is...
It's pretty guarded. I think you guys have been pretty consistent with the macro environment, some concerns there, but just think about.
your elements of growth that, you know, what could play out in the second half that maybe exceeds your expectations.
You bet Jeff, our pipeline at $550 million is very consistent to what we've seen over the last couple of quarters. You know, it might be off by $25 or $50 million, but the teams are very focused on making calls and all of our different markets. In the second quarter, we really focused on some of the smaller CNI opportunities in the $1 to $5 million space.
and had made significant progress with winning some of those customer relationships and we'll continue to do that in the third and fourth quarter. You know, right now the pipeline looks strong. Going into third quarter, we feel like we have very strong momentum, but you know, with rates rising probably again next week. You know, softness may happen at some point if we have some of our customers.
and prospects and their CEOs decide that they will put off expansion projects or new acquisitions or whatever the case may be. Off for a while do the fact that interest rates have risen, you know, 200 basis points in a very short period of time. But today it feels very good about where we are heading into the third quarter.
Okay, wanted to jump to the fee income kind of outlook and you know, you got to afford just over 9 million if you back out the gain. I think expectations to kind of maybe decrease or drift a little lower than that in the next quarter. I think, you know, components of that, I would assume mortgage stays fairly soft. But is there something else in fees? I mean, you've had some good growth in service and debit.
line there with the 2.5 million in there includes a loan repurchase obligation. It's actually footnoted on slide 19 of the earnings deck. That was related to our Almena acquisition in late 2020. So there is some benefit there for the reversal of that repurchase obligation. So that won't repeat.
But fundamentally, we're seeing good growth in service charges and fees, debit card income. Commercial credit cards has been an area of focus on our teams in selling those cards to our commercial customers, and that's in the service charges and fees line. That's been showing, I think we're showing about 20% increase there. So it's not spiked out, but its contribution is becoming more meaningful.
So we actually from a core fee income perspective, we're quite optimistic that we'll continue to show progress there. It's just some of these one-off items that are driving that forecast to be.
Pretty flat from where we're at today.
Got it. Okay. Appreciate that. And Eric, while I've got you maybe one last one, just to the tax rate was pretty low and it looks like the expectations to stay near this level. What did anything to catch on that?
expecting that rate.
You know, we had entered into a, and this wasn't budgeted, but we had entered into a new tax credit here in the second quarter, upon a portion of that benefit was recognized here in the second quarter, and because effective tax rates are analyzed. So it shows that it was an outside benefit in the second quarter, but going forward, we'll get the benefit of. So, we'll get the benefit of.
of that tax credit investment that we've made, as well as another one that we, another solar tax credit that we completed late last year, as well as other planning efforts around the rate. So we're expecting that the ETR to be between 14 and 16 percent for the remainder of the year..
Okay, thank you.
Thank you and as a reminder to ask a question simply press star 1 on your telephone.
Our next question is from Andrew Leach with a Piper Sandler. Please go ahead.
Thanks. Hey, good morning, everyone. Just one follow-up question on the margin here.
So I heard that your guidance does not assume any more rate hikes.
It does look like the acid beta is a performing well and it's either being rational on deposit costs or can eventually rise. So maybe we don't see the similar magnitude of margin expansion in the next couple quarters that we saw here on a core basis. But I guess at what level do you think the margin will stabilize this given that we do expect to see another 75 to 100 bits next week and maybe another 100 bits of rate high x pi a year on it?
If I could, if I could answer that question, I want to be a great actress, I would say.
probably being another job.
You know, I think a lot of it.
You kind of pretty much answered the question for me. I think that will continue to be able to show benefits in higher yields on the asset originations side. And I do think that we're experiencing a little bit of a lag effect on the positive repricing. So as we mark forward with another 75 basis points.
If you look at the behavior of spread and margin in the second quarter, is that going to be repeatable in the third quarter? I'm not quite sure because we're going to be experiencing some of that lag effect from earlier re-pricing in the year. But where does it stabilize? I don't have a great crystal ball to help answer that question for you, Andrew. I'm going to try it.
Okay, thanks focused on we're focused on preserving margin and.
You know, the way we do that is by, again, you know, getting the coupon that we can get on the assets origination, moving earning assets away from the investment portfolio into loans, selling deposit products to our customers, not, you know, operating accounts and checking accounts because that helps drive our preserve our cost of funds as well as drive fee income. So, you know, the way we do that is by, you know, you know, you know, you know, you know, you know,
Got it. All right. That's helpful. And I guess.
I mean maybe this is more of a question for Greg and Brad then on the margin. It seems like the deposit base is much better position for Ray Hikes than the last tightening cycle. This one makes sure that you guys agree with that comment.
I think this dates me, but obviously we talk a lot about it. I think the last rate cycle, if you looked at the behavior of the cost of funds, there was an acquisition involved there. Yeah. What I would tell you is we did the acquisition of Tulsa, which was short deposits. And so we were in the need for liquidity at the top.
This rate cycle, we are not in the need for liquidity. We haven't put ourselves in that same position. Matter of fact, we've worked really hard to make sure we're not ever in that position again. And so, and we also have some tools this time around, brilliant bank, that should help offset that. So I don't think it's going to be at all the same as what the last rate cycle looks like for us.
Got it. Very helpful. Thanks for taking the question.
Thank you, one moment for our next question.
Our next question is from Brett Rabetin with HOV-D group.
Hey, good morning, actually it's Taylor on for Brett. Thanks for the color on the line utilization regarding AG. I may might have missed this, but do we see maybe that retracing back to where it was a year ago, and maybe some other commentary about maybe the other commercial segments and their utilization?
Yeah, I would say on the egg side, I would not expect significant lift in Q3 or Q4 based on kind of what our customers are telling us. We've got very strong balance sheets with that customer base, and we're just not hearing any sense that they're going to be utilizing their lines more actively in Q3 or Q4.
I would say on the CNI side, you know usage on lines is still probably not where it was pre-COVID just because of all the you know PPP money, Main Street lending, etc. So I wouldn't expect significant rise in our CNI line of credit either in Q3 or Q4.
Great, thanks. And then one question on M&A, I know you've talked about, you know, your season requires, but have talked about the AOCI overhang and didn't know how much of that is baked into expectations, which would maybe level set what the urn back could be. Just kind of curious for some more commentary on this.
Thank you.
Yeah, I don't think it's level set the expectations because if you take a bank that's heavy in bonds, they've lost
You know.
20% 25% of their tangible equity. And so when you're doing the modeling, it really stretches out the earn back for the same price. And so I don't think the owners or directors of those other institutions yet have come to realize that the two ways to resolve that one is either take less for your institution today. And so I think the other way is either take less for your institution today.
or wait three years until that AOC comes back into their balance sheet. It will work until the small, round, round line.
So I don't think those expectations have level set yet.
Thanks Brad. That's it for me. Thanks.
Thank you, one moment for our next question.
Our next question is from Daymondell Monty with KBW. Please go ahead.
Hey, good morning guys, hope everybody's doing well today. So first question, just wanted to touch on capital management. You guys have been pretty active the first half of the year with buybacks and kind of just given the impact from AOTI and the activeness with the buyback, kind of what your thoughts are here in the back half of the year.
We still have an active buyback, and we'll continue to have an active program available to us. We are exhibiting a little more caution relative to probably what we're doing earlier this year in terms of the pace of how we're utilizing the authorization from the board. We're focused on keeping an eye on that. We're focused on keeping an eye on that.
But, you know, we're not suspending the by-back or anything along those lines.
We are focused on keeping our eye on that region.
And how much do you have left in the current authorization?
I believe there's around 130,000 shares left in the meeting.
authorized by the board.
Got it, okay. And then Eric, did you say before that the margin in this quarter included a derivative benefit of like 630,000? Was that related to this quarter or previous quarter?
We entered into a flow to fix for two years on a portion of our, I think that a no-channel was around 150, 100, 75 million. And the reason we did that is if you looked at the two-year rate, it just shot up so quickly, we saw some value in actually taking some floating rate and fixed it for two years.
Are you working to come?
trying to keep it at this 150 level, having come down from the ramp up during COVID to now to this 150 level. Do you think you try to hold it there? Do you think you need to bring it higher? Just trying to get a little perspective on how we think about reserve bills going forward over the next couple quarters.
Yeah, well, how about this? So from a budgeting perspective, I still feel comfortable with how we look at it, which is a 20 basis points on annualized basis on average loans. That's how we look at it from a budget perspective. We don't have a target in mind when we look at the adequacy of the ACL.
We focus in on historical losses, which have been improving. And then we look at the economic environment through our regression modeling, which obviously has some lags in it. So we're seeing some benefit there because COVID is now kind of even in our regression modeling is in the history and then qualitative part of the analysis. And that's where...
Some of our conservatism as to the economy and uncertainty with that is where we drive some of the provisioning for the ACL.
Right now it results in about 150 basis point coverage.
I don't see that changing dramatically based on the information that we have, but that's not how we...
look at it when we meet during the quarter.
Got it. Okay, that's helpful. That's all that I had. Everything else was asked and answered. Thanks a lot. Thank you. Thank you. Thank you.
Thanks, David.
Ladies and gentlemen, seeing no further questions, this will conclude our Equity Bank Shares presentation and conference call. Thank you for joining and have a great day.
The conference will begin shortly. To raise your hand during Q&A you can dial Star One.
you
Thank you for standing by in the day. Welcome to the second quarter of 2022.
Equity Bankshare Inc. earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one in your telephone. Please be advised that today's conference is being recorded. I would now like to hand a conference over to your speaker today. Chris Navratil, please go ahead.
Good morning and thank you for joining equity bank shares conference call which will include a discussion and presentation of our second quarter of 2022 results. Presentation 5 to a company are called are available by a PDF for download at investor.equitybank.com by clicking the presentation tab. You may also click the event I confer today's call posted at investor.equitybank.com to view the webcast player. If you are viewing this call in our webcast player, please note that flies will not automatically advance.
Please reference slide one, including important information regarding forward-looking statements. From time to time, we may make forward-looking statements within today's call and actual results may vary. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us. I'd like to turn it over to our chairman and CEO Brad Elliott.
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 our Chairman and CEO , Brad Elliott. Thank you, Chris.
Good morning and welcome to our second quarter Ernie Skull. And thank you for your interest in equity bank shares. On please report the bank had a very successful second quarter. On please report the bank had a very successful second quarter.
continuing to build our momentum from our strong start to the year.
We successfully completed the sale of three branches in the second quarter, which included $53 million of deposits and $26 million of loans and resulted in a gain of $540,000 in noninterest income.
Our EPS was 94 cents versus consensus of 75 cents.
Net interest income and net interest margin both increased moderately quarter over quarter.
but expanded significantly.
on an adjusted basis.
which Eric will walk you through.
We continue to see the benefit of the hard work performed by our special assets and credit teams.
with non-accrual loans down quarter over quarter.
The improvement of existing and introduction of new products and services continue to positively impact our earnings composition.
We were active during the quarter with our Vivec.
We'll continue to keep our eye on tangible equity as it relates to our ViVAC activities.
I'll let Eric take you through the numbers and then we'll walk you through some of our areas of focus for 2022. Thank you. Thank you.
Thank you, Brad, and good morning. Last night we reported net income of 15.3 million or 94 cents per diluted share. This was
Non-interest income increased length quarter to 9.6 million and non-interest expenses less merger costs increased 2.2 million length quarter to 31.3 million. increased 2.2 million length quarter to 31.3 million.
We talk to you before EPS-3-91 fence for the literature.
To reconcile GAAP earnings to core earnings this quarter, remove merger expenses of $88,000 and a gain on branch sale of $540,000.
I'd note in the second quarter we recognize 400 and 2000 of PPPB and interesting compared to a peak of 8.2 million recognized in the third quarter of 2021.
We haven't been excluding CPP from our core numbers given its contribution to our financial results in the last eight quarters.
But its contribution is now to the minimum and we are pleased about the improved quality of our second quarter earnings.
Our Gap Net Income includes a provision for a loan loss of 824,000.
The uncertainty of the economic environment and continued impact on the economy from previous stimulus measures are reflected in our qualitative and economic components of this calculation.
The June 30th coverage of ACL to non-PTP loans is 150 basis points, up from 148 basis points to the previous quarter.
I'll stop here for a moment and let Greg talk to you through at the quality foot of quarter. Right?
Thanks, Eric. We had another excellent quarter in credit and special assets with no measurable migration into our classified assets and continued improvement in legacy balances of the same with many of those assets approximately 70% acquired in mergers. And the trends in monocruels and net charge are very positive as well.
From the analysts on the call today, I believe most have met John Creech, our new chief credit officer. John has now been with Equity Bank for two full quarters, and he and his team in credit have continued to do great work, and we are excited about the future in credit under John's leadership. John , will you take us through your thoughts on our credit culture and credit production, as well as your details on credit and special assets?
Thanks, Greg. I too am excited about the future of Equity Bank and how my team can contribute to our success. I will begin with some highlights on special assets.
Under June press knows leadership and a lot of hard work by the lenders and our credit specialists. Our classified assets have declined to their lowest level in many years. As Greg mentioned, inflows are minimal and improvements are flinting, specifically in several assets acquired in mergers, whose operating performance has increased measurable.
Our classified asset ratio continued its downward trend to 13.1% at June 30th versus 17.1% linked quarter.
In addition, our portion of the aviation-related credit discussed in previous quarters is currently on our books for less than $1 million with a disposition expected to cause in the third quarter.
Non-approval loans decline 9% in the quarter as well, and are just 59 basis points of total loans. Our lowest levels are public company.
Our credit culture is what I expected, strong underwriting across a wide range of asset classes, and it takes advantage of the diversity in our footprint. We have ample opportunities to bank credits in western Missouri, which is a different market than Kansas City, and the same is true for western Kansas and Wichita and northern Oklahoma and Tulsa and northern Arkansas. We can maintain a safe and conservative credit posture and still meet our production goals.
because our markets are each different. The bank has done a really good job from the beginning of understanding diversification and managing concentrations of credit. and managing concentrations of credit.
All regions adhere to the same underwriting standards, but have flexibility to work with customers to responsibly grow their banks, which allows us to bank a variety of industries and segments well. The
In the quarter, our department ran a stress test on one-third of our portfolio with no projected exposure given the current rate environment. We will continue to do this in future quarters and adjust concentrations and underwriting one dynamic basis.
I'd like to add that our sales culture under Craig Anderson continues to generate a healthy pipeline.
which stands at about $550 million today.
Each of our loan officers and all our regions utilize an intentional sales process.
We cultivate relationships through identification of products that meet the needs of our customers.
As we look to build relationships in future quarters, our platform will be our advantage.
Thanks, Fred. I do think it's worth commenting about our general reserve. This is the second consecutive quarter of general reserve bill due to the economic environment, including market rate increases, leading to extension within the portfolio.
These reserve bills were offset in the broader ACL by specific credit adjustments as facts and circumstances surrounding previously acquired assets continued to improve. Uncertainty surrounding the impacts of inflation, supply chain disruption, and input cost escalation that our customers are starting to experience persists. To be clear, we've yet to see our customers experience any specific difficulties from these concerns, but in assessing the landscape, we believe the risk of an economic slowdown
Coupled with inflationary pressures present uncertainty that supports our general reserve goal during the quarter.
Craig, why don't you take everyone through your thoughts on the quarter.
Thanks, Eric. Organic originated loans totaled $288 million in the second quarter. Of the total originations, 90% were in commercial, CRE, and agricultural loans. When excluding the change in our PPP loan balances and the branch sale, loan growth in the quarter was $20 million. We note commercial loans declined during the quarter. We had two of our top customers pay down their lines driven by business cyclicality in their specific businesses.
Agricultural loans also continue to decline driven by excellent cash flow and balance sheet positions of our agricultural customers. Line utilization in our agricultural segment is 38% compared to 43% at 630 2021.
Our year-to-date loan growth, excluding the branch sale and PPP, is a total of 8.5% in line with the forecast. The loan growth is a total of 8.5% in line with the forecast.
Our non-interest income, excluding the gain related to the branch sale, saw improvement from the first quarter. Commercial credit card and debit card interchange both saw large increases quarter over quarter with debit card income up 7% and credit card income up 20%.
We continue to emphasize putting commercial cards in the hands of our clients and driving debit card utilization through marketing campaigns.
Mortgage banking revenue continued to face industry headwinds and was down 130,000 for the quarter.
The build-out of our HSA platform is complete. We have growing pipelines that our health care services team has developed that will allow us to service their employees' HSAs and other tax-advantaged flexible spinning accounts.
This business will contribute new low cost deposits and D income through interchange and brokerage. Thank you.
That interesting income total of 39.6 million in the second quarter, increasing from 39.3 million in the late quarters, representing a $600,000 increase.
During the second quarter, the coupade yield in a loan portfolio increased approximately 16 basis points.
to 4.42%.
We had a $631,000 derivative benefit to interest the income in the quarter.
When excluding the derivative benefit, the one-time benefit of the shift on previously non-accrual loans in the first quarter and PPP impacts in both comparable periods, NIM and the second quarter increase 11 basis points to 3.31%. The value medical effects for SEE for the committed you
Origination fees recognized from forgiven PPP loans continued to decrease. NIM was benefited by PPP loan fees in the second quarter by two basis points as compared to five basis points in the previous quarter.
We recognize 374,000 of B-income and 28,000 of interesting cover related to PPP loans in the second quarter, down 425,000 from the previous quarter.
At quarter end, we had 125,000 of net unrecognized income associated with DPP loans, which totaled 7.4 million. We're million. We're million.
Non-interest expense was up 2.2 million linked quarter, led primarily through a quarter-over-quarter increase in reserve for unfunded commitments.
March 31 results included a release of $1 million during the quarter versus a reserve of $300,000 in the quarter ending June 30.
Deposits, excluding the branch sale, declined 36 million.
We saw a 48 million reduction in a single deposit relationship as a school district in our Kansas City region deployed project funds.
Our outlook slide continues to show a moderate view on dim expansion to the remainder of 2022. Primarily due to the uncertainty would cost a fund. Primarily due to the uncertainty would cost a fund.
The forecast does not contain any future rate heights. The competitive landscape in our community markets remains rational despite the Fed fund's 50 basis point increase in June .
However, with the current market expectations of a 75 to 100 basis point increase next week and potentially an additional 100 basis point increase through the remainder of the year, the environment in which we operate is dynamic. On the asset side, we're seeing improvement in origination and renewal yields.
CNI origination yields increased 91 basis points in the second quarter.
representing 24% of the quarter's origination volume. And CRE origination yields increased 59 basis points, representing 37% of the quarter's origination volume.
We expect premium memorization in the investment portfolio to remain slower, which should assist in yields from that portfolio, as I have said previously, we're working to move earning assets away from the investment to the loan portfolio, which is assist in the higher asset yield.
in the investment portfolio to remain slower, which should assist in yields from that portfolio. As I have said previously, we're working to move earning assets away from the investment to the loan portfolio, which is assisting the higher asset yield. All right.
I'd like to point out our progress on our strategic goals for 2022.
We're focused on the continued improvement of operating performance.
We're excited about the build out of our HSA business, which provides cross-selling opportunities to our commercial and municipal clients. We're excited about the build out of our HSA business, which provides cross-selling opportunities to our commercial and municipal clients. We're excited about the build out of our HSA business, which provides cross-selling opportunities to our commercial and municipal clients. We're excited about the build out of our HSA business, which provides cross-selling opportunities to our commercial and municipal clients.
as well as a state of the art platform to our existing HSA client base.
Our commercial credit card product continues its positive momentum in contributing to fee income.
We're looking at several new services and products for customers that will support our goal of increasing fee income as a part of our revenue mix.
We continue to have conversations with potential partners.
We believe prudent around deal underwriting is key in the face of the current economic uncertainty.
around deal underwriting is key in the face of the current economic uncertainty. balance sheet
Capital and credit strength will benefit us as opportunities arise through the cycle.
We will maintain our focus on organic growth efforts.
And as always, we'll look for opportunities to rationalize our branch footprint while improving the digital experience for our customers.
And with that, we're happy to take your questions.
Thank you. As a reminder, simply press star one on your telephone to ask a question. One moment please.
Our first question is from Terry McAvoy with Stevens. Please go ahead.
Good morning everyone.
Morning, Terry. Maybe just start giving the big picture concerns about the future direction of the economy. Can you just talk about any industries you're watching closely and a little bit more sensitive to and would you expect in the second half of this year based on your outlook today incremental reserve building? I think you urged everybody to make sure this thing is much more than you think. You just always acknowledge that you're based in your outlook today incremental reserve building. You just groundwater bill in what's in on the enterprise lineup, just basically the okay, shrimps line for research. And if you pay closely attention to other unconventional major operations, if you're focused on research on infrastructure you
So, you know, the things we're watching most closely, Terry, are one to four family construction. We don't have a ton of that, but we're watching it very closely. Something that we continue to evaluate, multi-family, we continue to evaluate and watch it as well. We don't see any stress yet in those areas, but we are...
you know, monitoring that more closely than we have in the past and making sure that we have all the processes in place to jump on that if there's any need to do that.
Is there anything else Joe that you're looking at? No, there's not. We sort of think that, you know, this is an environment where the smaller customers are generally wind up being challenged more than the bigger customers and we don't have a lot of that in our portfolio.
And then as a follow up, maybe a question for Eric. Within your outlook for the third quarter, and I guess the rest of the year, you can just talk about your view on deposit costs, deposit betas, and maybe if there's any noticeable differences between your community and metro markets as it relates to deposit costs.
Yeah, I mean, looking back on the second quarter, I think we did a really good job in controlling costs. And I think that a couple of the drivers of that will continue to help us here in the third quarter and fourth quarter. A lot of our deposit generation is in our community markets. And the community markets have not, as of yet shown any irrational pricing from our competitors.
And frankly, we haven't been having a lot of conversations with our customers about rate. We're more focused on a product and service that we can offer them. So I think given that, that will be helpful for us here in the back half of the year, even with the Fed moving rates. Certainly, I do expect that there will probably be pressure on the cost of funding. But I think having...
Having our teams focus on the product and the service that we can offer and not leading with rate will help us in controlling that. Useful
Thank you for taking my questions.
Thank you. We will move on to the next question.
Our next question is from Jeff Rullis with the A. David's on. Please go ahead.
Thanks, good morning.
First question, maybe for Craig, just wanted to get a sense for how that, I think you mentioned the pipeline at 550 million. How does that compare with.
and how you entered the second quarter. That's kind of first part and then second just
I think you've noted that some residential kind of headwinds in that portfolio, maybe some Ag tailwinds to go. And as you look at the outlook for the second half of long growth is...
It's pretty guarded. I think you guys have been pretty consistent with the macro environment some some concerns there, but just think about
your elements of growth that, you know, what could play out in the second half that maybe exceeds your expectations? That maybe exceeds your expectations?
You bet Jeff, our pipeline at 550 million is very consistent to what we've seen over the last couple of quarters. You know, it might be off by 25 or 50 million, but the teams are very focused on making calls in all of our different markets. The second quarter, we really focused on some of the smaller CNI opportunities in the $1 to $5 million in our space and had made significant progress.
with winning some of those customer relationships, and we'll continue to do that in the third and fourth quarter. Right now the pipeline looks strong, going into third quarter. We feel like we have very strong momentum, but with rates rising probably again next week, softness may happen at some point if we have some of our customers and prospects and their CEOs decide that they will put off expansion projects or new acquisitions or whatever the case may be.
a little lower than that in the next quarter. I think component to that, I would assume mortgage stays fairly soft, but is there something else in fees? I mean, you've had some good growth in service and debit areas. Is there another component that...
would be lead to that kind of decline with a low 8 million on a quarterly basis. level 10.
No, probably a little bit of conservatism there. Mortgage banking has obviously been sliding a little bit, given what we're seeing in the economy. And other...
On the other line there, the $2.5 million in there includes a loan repurchase obligation. It's actually footnoted on slide 19 of the earnings deck. That was related to our Elmina acquisition in late 2020. So there is some benefit there for the reversal of that repurchase obligation.
So that won't repeat. But fundamentally, we're seeing good growth in service charges and fees, debit card income. Commercial credit cards has been an area of focus on our teams in selling those cards to our commercial customers, and that's in the service charges and fees line, and that's been showing, I think we're showing about 20% increase there. So it's not spiked out, but its contribution is becoming.
So we actually, from a core, the income perspective, we're quite optimistic that we'll continue to show progress there. It's just some of these more and more off items that are driving that forecast to be pretty flat from lower up today. That's from lower up today. That's from lower up today.
Got it. Okay. Appreciate that. And Eric, while I've got you maybe one last one, just the tax rate was pretty low and it looked like the expectations to stay near this level. What could anything to catch on that?
Expecting that rate we, we had entered into a. Uh, and this wasn't budgeted, but we had entered into a new tax credit here in the 2nd quarter. A portion of that benefit was recognized.
here in the second quarter and because effective tax rates are annualized. It shows the size, status, and the second quarter. But going forward, we'll get the benefit of that tax credit investment that we've made as well as another one that we, another solar tax credit that we completed late last year as well as other planning efforts around the rate. So we're expecting that the ETR to be between 14 and 16% for a remainder earlier.
in the second quarter because effective tax rates are annualized. So it shows a lot of outsized benefit in the second quarter. But going forward, we'll get the benefit of that tax credit investment that we've made as well as another one that we – another solar tax credit that we completed late last year as well as other planning efforts around the rate. So we're expecting that the ETR to be between 14 and 16 percent for the remainder of the year..
Thank you, and as a reminder, to ask questions, simply press star one on your telephone.
Our next question is from Andrew Leach with a Piper Sandler. Please go ahead.
Thanks. Hey, good morning, everyone. Just one follow-up question on the margin here.
So I heard that your guidance is not as as many more rate hikes. It does look like the asset betas are performing well and it's like it being rational on the positive cost are going to eventually rise. So maybe we don't see the similar magnitude of margin expansion in the next couple of quarters that we saw here on a core basis. But I guess at what level do you think the margin will stabilize this given that we do expect to see another 75 to 100 bet.
the next week and maybe another 100 bits of rate hikes by year-round. If I could answer that question with great accuracy.
and maybe another hundred reps of rate hike by year on it. If I could, if I could answer that question one of the great actors, I would.
probably being another job. I think a lot of it.
You kind of pretty much answered the question for me. I think that we'll continue to be able to show benefits in higher yields on the asset origination side. I do think that we're experiencing a little bit of a lag effect on the positive re-pricing. So as we march forward with another 75 basis points, if you look at the...
behavior of the of spread and margin in the second quarter is that going to be repeatable in the third quarter I'm not quite sure because we're going to be experiencing some of the you know that lag is set from earlier repricing in the year But we're stabilized Yeah, I don't have a great Crystal ball that helped into that question for you under
But, thanks. We're focused on preserving margin and the way we do that is by getting the coupon that we can get on the assets origination, moving earning assets away from the investment portfolio into loans, selling deposit products to our customers, not operating in accounts and checking in accounts.
because that helps drive our, preserve our cost of funds as well as drive the income. Got it. All right. That's helpful. And I guess.
Maybe this is more of a question for Greg and Brad on the margin. It seems like the deposit base is much better positioned for rate hikes than the last tightening cycle. I'm not sure if you agree with that comment.
I think this dates me, but obviously we talk a lot about it. I think the last rate cycle, if you look at the behavior of the cost of funds, there was an acquisition involved there. Yeah. What I would tell you is we did the acquisition of Tulsa, which was short deposits. And so we were in the need for liquidity at the top.
this rate cycle, we are not in the need for liquidity. We haven't put ourselves in that same position. Matter of fact, we've worked really hard to make sure we're not ever in that position again. And so, you know, and we also have some tools this time around, Brilliant Bank, that should help offset that. So I don't think it's gonna be at all the same as what the last rate cycle looks like for us.
Got it. Very helpful. Thanks for taking the question.
Thank you. We have one moment for our next question.
Our next question is from Brett Rabatim with HuffD Group.
Hey, good morning. Actually, it's Taylor on for Brett. Thanks for the color on the line utilization regarding ag. I may might have missed this, but do we see maybe that retracing back to where it was a year ago and maybe some other commentary about. Maybe the other commercial segments and their utilization trajectory.
Yeah, I would say on the egg side, I would not expect significant lift in Q3 or Q4 based on kind of what our customers are telling us. We've got very strong balance sheets with that customer base, and we're just not hearing any sense that they're going to be utilizing their lines more actively in Q3 or Q4.
I would say on the CNI side, usage on lines is still probably not where it was pre-COVID just because of all the PPP money, Main Street lending, et cetera. So I wouldn't expect significant rise in our CNI line of credit either in Q3 or Q4.
Great, thanks. And then one question on M&A, I know you've talked about, you know, you guys are seasoned requires, but have talked about the AOCI overhang and didn't know how much of that is baked into expectations, which would maybe level set what the urn back could be. Just kind of curious for some more commentary on this.
Thanks. Yeah, I don't think it's level set the expectations. Because if you take a bank that's heavy in bonds, they've lost.
Thank you. Yeah, I don't think it's level set the expectations, because if you take a bank that's heavy and bonds, they've lost. You know. You know.
20%, 25% of their tangible equity. And so when you're doing the modeling, it really stretches out the earnback for the same price. And so I don't think the owners or directors of those other institutions yet have come to realize that there are two ways to resolve that. One is either take less for your institution today.
or wait three years until that AOCI comes back into their balance sheet.
So I don't think those expectations have level set yet.
Okay. Thanks, Brad. That's it for me. Thanks.
Thank you. We will take one moment for our next question.
Our next question is from Daimondel Monty with KBW. Please go ahead.
Hey, good morning guys hope everybody's doing well today. So 1st question just wanted to touch on capital management. You know, you guys have been pretty active the 1st, half of the year with buybacks and kind of just given the. You know, the impact from and the, the active this with the buyback kind of what your thoughts are here in the back half of the year.
We're, I mean, we still have an active buyback and we'll continue to have an active program available to us. We are exhibiting a little more caution relative to...
earlier this year in terms of the pace of how we're utilizing the authorization from the board, you know, we're focused on keeping an eye on that. But that is, you know, we're not suspending the buyback or anything along those lines. We are focused on keeping an eye on that.
And how much do you have left in the current authorization? I believe there's around 130,000 shares left in the next...
authorized by the board in October of last year. Got it. Okay. And then, Eric, did you say before that the margin this quarter included a derivative benefit of like $630,000? Was that related to this quarter or previous quarter? We entered into a, um,
Got it. Okay. And then, Eric, did you say before that the margin in this quarter included a derivative benefit of like 630,000? Was that related to this quarter or previous quarter? We entered into a flow test fixed for two.
years on a portion of our, I think that a no-chal was around 150, 150, 55 million. And the reason we did that is if you looked at the two-year rate, it just shot up so quickly, we saw some value in actually taking some floating rate and fix it for two years and pull some economic forward. So that's what that derivative benefit pertains to. Got it. Okay. And then I guess just lastly.
you know, regard kind of circling back to the commentary on the provision and, you know, being conservative with your outlook for, you know, potential for some sort of recession. Do you have any type of like targeted reserve level in mind? Are you looking to kind of keep it at this 150 level? Having come down from, you know, the ramp up during COVID to, to now to this like 150 level? Do you think you try to hold it there? Do you think you need to bring it? Do you think you need to bring it?
higher just trying to get a perspective on how we think about reserve bill going forward over the next couple quarters Yeah, well, how about this? So from a budgeting perspective, I still feel comfortable with how we look at it, which is a 20 basis points on annualized base on average loans, that's how we look at it from a budget perspective.
We don't have a target in mind when we look at the adequacy of the ACL. We focus in on historical losses which have been improving and then we look at the economic environment through our regression modeling which obviously has some lags in it. So we're seeing some benefit there because COVID is now kind of even in our regression modeling in history and then we have the qualitative.
part of the analysis and that's where some of our conservatism has to the economy and uncertainty with that is where we drive some of the provisioning for the ACL. So...
Right now it results in about 150 basis point coverage.
I don't see that changing dramatically based on the information that we have, but that's not how we...
when we meet during the quarter. Got it. Okay, that's helpful. That's all that I had. Everything else was asked and answered. Thanks a lot. Thanks, Davis. Ladies and gentlemen, seeing no further questions, this will conclude our equity bank shares presentation and conference call. Thank you for joining and have a great day.