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 will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Chris Navratil. Please go ahead.
Good morning, and thank you for joining Equity Bancshares conference call, which will include discussion and presentation of our Q2 2021 results. Presentation slides to accompany our call are available via PDF or download at investor. Equitybank.com by clicking the Presentation tab. You may also click the Event icon for today's call tab. 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 you for joining our call and your interest in Equity Bancshares. Joining me is Eric Newell, our CFO Greg Kossover, our Chief Operating Officer and our President, Craig Anderson. The Equity team's hard work continues to add shareholder value, and it shows in our results. We reported $15,200,000 of net income this quarter, the highest we have experienced as a company.
While Eric will provide more details, I am particularly pleased with the growth we are seeing in fee income. It is 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 seeds 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 with improved efficiency ratios. Eric, let's take everyone through our quarter.
Thank you, Brad, and good morning. Last night, we reported net income of $15,200,000 or $1.03 per diluted share. We calculate core earnings at $0.86 per diluted share, beating street consensus and comparing favorably to core earnings of $0.65 reported in the Q1 this year. Core results this quarter were driven by recognition of origination fee income from TTP loan forgiveness and improvement in fee based drivers across nearly all of our categories. Expense management continued to be a focus as well with salaries and benefits nearly unchanged linked quarter and year over year.
Our GAAP net income includes a release of reserves from the allowance for credit losses totaling 1,700,000 dollars We have budgeted 20 basis points of average loans for provisioning this year, exclusive of credit losses, which would result in a pro form a provision to the ACL of 1,350,000 dollars We are including a normalized provision during the quarter in 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, we have yet to see any notable losses in our loan portfolio since the start of 2020. That said, we recognize the high level of direct fiscal stimulus that exists in the economy. And for that reason, we are uncertain about the direction of the economy over the next 18 months and its potential impact on our customers.
For that reason, we remain conservative in our approach to the level of the ACL. The June 30 coverage of ACL to non TTP loans is 2.04%. Net interest income totaled $34,600,000 in the 2nd quarter, increasing from $31,800,000 in the March 31 quarter, representing a $2,900,000 increase. During the Q2, the weighted coupon in the portfolio, excluding PPP, declined approximately 13 basis points. And looking at our core loan products, commercial, commercial real estate and agriculture, the weighted origination coupons in the 2nd quarter were 4.07%.
Origination fees recognized from forgiven PPP loans increased notably in the in the Q2. We recognized $5,700,000 of fee income and $984,000 of interest income related to PPP loans in the 2nd quarter. Comparing to the Q1, total PPP fee income and interest income totaled $3,100,000 $896,000 respectively. At June 30, 2021, we had $10,700,000 of net unrecognized fee income associated with PPP loans, which totaled $272,000,000 Removing PPP fees and interest income from net interest income in both the second and first quarter results in a pro form a net interest income of $27,900,000 $27,800,000 respectively. Loan yield, earning asset yield and net interest margin in the quarter ending June 30 is 4.41%, 3.55% and 3.13%, respectively.
This compares to the quarter ending March 31 of 4.61%, 3.65% and 3.19%, respectively.
Thanks, Eric. As you likely know, in May, Equity announced a merger with American State Bancshares. We're excited about partnering with the team from ASB and T and admire their discipline and service levels to their customers in the communities they serve. The Equity and ASB and T teams have been working closely through the merger and integration process and are progressing as expected. We're scheduled to close the 1st week of October with the data integration at the same time.
I am excited about the new communities that ASB and T 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 forward to welcoming and services and provide a strong value proposition to ASB and T 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 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. Craig?
Thanks, Brad. Organic loan growth totaled $83,900,000 representing an annualized 15% growth during the quarter. PPP loans declined $143,000,000 due to the forgiveness of our customers are experiencing from the SBA. This is a huge positive 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 $260,600,000 in the 2nd quarter comparing favorably to the $119,000,000 originated in the 1st quarter. Of the total originations in the 2nd quarter, 85% were in commercial, CRE and agricultural loans. Our total pipeline is approximately $600,000,000 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 T and their seasoned bankers, I expect that we will continue to show a growing pipeline. I also want to say how pleased I am with our operating teams on promoting our fee income businesses. We have 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. Exciting for me, our debit interchange income is growing nicely from all the new checking accounts we have opened in 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 is 12 months to 18 months ahead of schedule.
Galyn McGregor has done a great job leading this area and growing revenue each Her pipeline is very strong and will continue to build over time. We have also decided to expand our HSA business. We have hired one of the best in the industry from UMBF in VIN 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 in the quarter showed positive results. Our pipelines have been as large as they ever have been in our history and we are seeing pull through to loan fundings. Our pipeline is the culmination of lots of hard work by the teams to call on our customers and to harvest the new PPP relationships we established. By being open for business the last 18 months, we have won many new relationships with our calling and service efforts.
It should not go unnoticed 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 Lerter, all leading amazing teams of business development personnel. Craig Anderson has also done a great job reworking the Ozark region, and Brad Daniel, Craig Kisner, Elizabeth Kelly, Jay Ertel and Justin Harris are all producing positive results in those 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 in the quarter was 15%.
This strengthens the positive momentum we are seeing from our loan teams. 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. The teams were prepared to assist our customers by automating a big part of the PPP approval origination process, all developed using internal resources. Our team has even developed automation for the forgiveness process, making it easier for our customers to apply for loan forgiveness with the SBA.
Eric?
I want to share some more detail about our fee income success in the quarter. Total fee income was $9,100,000 increasing $2,400,000 from the Q1. When excluding the net gain on acquisition and asset quality improvement on Almena purchased assets from both periods, the increase is $747,000 or about 11% growth. Service charges and fees increased by $573,000 from the Q1. Making up that increase was a realignment of our core DDA products that was put in place in the Q1.
Our marketing team under the direction of John Hanley worked throughout 2020 early 2021 to retool our consumer DDA products to provide a high value proposition for our customers. The result is our customer now benefiting from a high level of service and our product offering with discounts and other types of perks, which provides value and allows us a better ability to charge fees for our product offerings. Due to our product realignment, our fees increased $439,000 in the second quarter. Debit card income increased $329,000 in the quarter attributed to higher purchase activity from the Q1. When combining our trust and wealth management, credit card and treasury fee income, it results in an improvement of $342,000 from the Q1.
Repurchase obligations were previously established for SBA loans acquired through the Almena transaction. Our team has made progress over the last two quarters and partially results concerns that led to the repurchase obligation establishment. As a result, we recognized $917,000 of revenue during the quarter. We continue to show growth in our non interest bearing deposits, increasing $20,200,000 from March 31 this year and $236,000,000 from June 30 last year. And studying the average balance of our most popular consumer DEA account, we saw an average balance that was 5% higher at June 30 this year versus a year ago at the same time and 20% higher than at June 30, 2019.
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 showed DEA growth in the Q2. Greg, why don't you take everyone through your thoughts on credit?
Thanks, Eric. We remain optimistic about where we stand with our customers. The Equity Bank team continues to work hard to position both our customers and the bank for successful outcomes, including proactive communication with borrowers to understand their operating environments and needs. In the 2nd quarter, total non performing loans, including those assets on non accrual or greater than 90 days past due, were down $3,700,000 or 6.1%. Net charge offs during the quarter, exclusive of fully discounted Almena assets were approximately $100,000 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 Kerr, June Presnell, Bart Drogin and Christoph Schlepkowski 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 Alameda State Bank, which resulted in the reclassification of $860,000 from purchase discount to gain on acquisition. This measurement period change for purchase accounting did not drive the reduction in non performing loans, which are disclosed to gross of reserves. Notably, our regulatory classified assets to regulatory capital ratio was down over 200 basis points in the quarter. At year end 2020, we moved one of our large relationships into special mention in our Aerospace segment and associated uncertainties surrounding it have been previously discussed.
Our borrower remains current on its loans at this time and the significant return 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 work with the borrower to ensure the best result for both the business and the bank. We have been in 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 in their market as 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 Q3 and how our Q2 outlook compared to actual results. As is evident, the NIM without PPE has been under pressure due to the government driven fiscal and the 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 in the most efficient manner. Without any change to interest rates, if we were to look back to our pre COVID loan to deposit ratios, our pro form a NIM, excluding PTP loans, would be 28 basis points higher in the 2nd 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 in future periods will help improve that ratio and reduce pressure we are seeing on NIM. Other than NIM, the Q3 and full year outlook does not have any significant departure or adjustments from what we expected and reported on in 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, Missouri market through an agreement with Security Bank of Kansas City to assume the deposits of 3 locations. We're excited to add the St. Joseph community to our Western Missouri region, which equity expanded into in 2,007. 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 Duran. They have grown every part of their business in all the markets they manage, and this will give them another great platform to grow. We expect to close on this transaction in the late Q4 of 2021, and is expected to add approximately $78,000,000 of deposits. Shifting gears, we are 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 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 in 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. Our first question comes from the line of Terry McEvoy with Stephens. Your line is now open.
Hi, guys. Good morning.
Good morning.
Good morning.
Maybe to start off, you guys did extremely well with PPP and I was wondering if you could talk about the new customers to the bank, how you're building on that relationship and maybe where that's showing up in the financials today.
I know you spent a
lot of time on fee income and we saw that in the Q2, but maybe expand on that a bit.
Hey, Terry, this is Craig. As we mentioned, we were very successful in both phases of the PPP loan program. And the biggest part of that strategy was that we asked those customers to open up their depository accounts and relationships with us. 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. I know you talked about the margin contraction, and I think all of us on the call understand why. Maybe just could you talk about the opportunity to lower your cost of deposits in the second half of this year? I think it was about 22 basis points in the Q2.
Do you think that will provide some kind of NIM support over the next two quarters?
I do, Terry. We have been working closely across all the regions to analyze areas where we feel that we could take a couple of basis points or maybe even more than a couple of basis points out of our cost of funds on the transaction accounts, whether it's primarily the money market accounts. So we have been doing that throughout the year. And we've been kind of stepping into it where we'll reduce rates 2 or 3 basis points at a time, and then we analyze customer behavior. Haven't seen any notable or any disintermediation out of the bank.
So we'll continue that exercise through the second half of the year, which should help improve the cost of that 22 basis points in the back half. And then 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. That has been quite helpful for us. I do expect that, that won't contribute as much as it has in the back half of twenty twenty one simply because the average duration of that CD portfolio has come in pretty significantly, which we would expect given the interest rate environment.
So we might see some smaller declines in the cost there, but nothing like we've seen in the first half of this year and last year.
Thanks for that, Eric. And maybe one just quick last question for Brad. Are the larger banks in your markets now open and calling on customers? And then how has that impacted competition overall? Thanks.
Yes, they're still closed, Terry, for the next 60 days. So the majority of our competition, especially now that we're of the size that we are and kind of what we've moved our sweet spot to on commercial credits, we're now competing with branches that are closed and we're competing with bankers that are operating out of their houses or basements. So we still have an advantage for about the next 60 days. They've told their staff they have to be back the first of or after Labor Day weekend. And so we think we still have an advantage.
Craig has done a great job leading his teams and our teams have done a great job of getting out and hustling and converting our pipelines full of opportunities that have been generated strictly from the PPP relationships that we didn't even know these customers in the past. So we're pretty excited about the future of where equity sits and how we're able to attract customers.
Our next question comes from the line of Andrew Liesch with Piper Sandler.
Good
morning.
So, a question on the loan growth here. I mean pipeline up to $600,000,000 great production this last quarter, good production in the Q1. I guess I was kind of then surprised to see the average growth guidance for the year not increased. Is there something else that you guys are seeing that maybe not you don't want to bring your guidance up? It just seems like you guys are positioned well to beat that target right now.
Yes, Andrew, this is Eric. It's simply our conservatism on this. Obviously, seeing 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 to conservatism.
There's nothing, Andrew, that we're seeing fundamentally that would make us think that we're going to be on the lower end of that and that range will likely be on the higher end of that range or even beat it.
Got it. Okay. Thanks. And then on the core margin outlook for this quarter, now certainly with the loan growth that you had in the last quarter and the mortgage purchases, obviously yields are come in and liquidity is still there. But I would think that may be an improved earning asset mix to support the margin rather than result in while the low end of that range would be $2.90 that seems pretty far fetched to me is there are the yield pressures and this liquidity environment just 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 venture to say that we'll be on the higher end of that range. Liquidity, Andrew, is certainly a factor that we are taking into account. We did see a small decline in our origination coupons from the Q1, but it hasn't 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 or we've been very successful in originating new coupons with a 4 handle and even a 5 handle in our ag portfolio. So I think some of that may have been a mix of what we originated in the Q2. So we're keeping an eye on that because we certainly want to be competitive, but we don't want to necessarily give everything away. And if we can continue to build on loan growth, then that helps grow that loan to deposit ratio, which is one of the biggest factors given the amount of liquidity we have on 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 answering the questions. I'll step back.
Thank you. Our next question comes from the line of Jeff Rulis with D. A. Davidson. Your line is now open.
Thanks. Good morning. Good morning, Jeff.
Just looking for a trying to get a sense if you don't have the 3 branches that you're expected to bring on in December, I don't know if you've got a ballpark kind of overhead or cost expense 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 an expense add for those branches?
Jeff, I think it's a little early for me to address that. So unfortunately, I don't have an answer for you on that. But I do think, based on the due diligence that we've done, I don't see any reason why those three branches we're adding would be any different in terms of cost structure from our existing footprint.
So what would that be, Eric, on your existing structure, you had 3 branches?
I don't have that information off the top of
my head.
I don't want to venture it yet. Okay.
Yes. I'd tell you, yes.
Yes, I'd tell you, they'll be immaterial. They're coming over at their book value. So we're not bringing a lot of expense over and operating expense should be light, and we'll continue to evaluate those opportunities as we move forward.
Got you. Looking at the fee income guide, you're kind of bumping on the high watermark here. I guess, again, a conservative stance, but where might that tail off? Are you looking at kind of the mortgage side that could come in or within the line item of fee income, if you come inside 7 point $5,000,000 where would that decline?
I think the downside risks to fee income certainly would be mortgage as you suggest, Jeff, although that has been very surprising to us coming 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 hasn't But that has been a meaningful contributor this year. I can't think of really many other downsides to our fee income view. I think just fundamentally on the positives, a lot of what we've talked about in the prepared commentary is run continues to we expect it will continue to be in our run rate. And as we continue to add new checking growth on the existing franchise, that will also enhance that going forward.
Okay. And last one, just what was the amount of the purchased mortgages in the quarter? And was that included in your in the 15% organic loan growth?
We purchased about $83,000,000 in the quarter, and it was excluded from that 15%.
Okay, got it.
So that 15% is non PPP, non purchased originated loans.
All right. That was it.
Thank you.
Thank you. Our last question comes from the line of Damon DelMonte with KBW. Your line is now open.
For Damon, how are you guys?
Good. How are you?
Good. Good. Just one follow-up question to fee income. You mentioned getting it to 30% of revenues. Do you have a projected time line for that?
If I told you, you'll remember. I would say it's an intermediate goal for us. So I don't want to say it's going to be done here in the next 12 months, but it's a significant factor in all of what we do in our strategic planning and our incentive programs. So I think that accomplishing that over 18 to 24 months should be achievable.
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.