Q3 2022 Equity Bancshares Inc Earnings Call
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good day and thank you for standing by welcome to the third quarter 2022 equity Bancshares earnings conference call at.
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 one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to Christina <unk> with equity Bancshares. Please go ahead.
Yeah.
Good morning, and thank you for joining equity Bancshares conference call, which will include a discussion and presentation of our third quarter 2022 results presentation slides to accompany our call are available for download at Investor Dot equity Bank Dot com by clicking the presentation tab.
You may have liquidity event icon for today's call posted at Investor not equity Bank Dot com to view the webcast player. If you are viewing this webcast on our webcast player. Please note that slides 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.
Barry.
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.
Welcome to our third quarter earnings call.
You for your interest in equity Bancshares.
With me on the call today is our CFO Eric Newell.
So Greg costs over and Chief Credit Officer, John Creek.
Let me start by thanking the equity team for their continued dedication to providing excellent customer service.
The effort of our bankers can be seen as.
As we delivered outstanding core earnings for the third time in 2022.
As we completed the integration of our M&A transactions over recent years.
We have worked to improve the operating team effectiveness.
And bankers sales process.
As we continue to improve on these.
We will see further poultry into our operating results.
Our diluted EPS was <unk> 93.
Versus consensus of <unk> 80.
Net interest income and net interest margin both increased as.
As we continue to realize benefit from upward rate movement.
We were active during the quarter with our buyback completing our 2021.
Authorized plan.
And receiving regulatory non objection.
An additional 1 million shares to be used over the next period.
With further emphasis on shareholder return, we increased our third quarter dividend, 25% to 10 cents per share.
I'll, let Eric talk with you about our financial results.
Thank you Brad and good morning.
Last night, we reported net income of $15 2 million or <unk> 93 per diluted share.
Non interest income excluding the $540000 gain on the branch sale in the second quarter remained flat linked quarter at $9 million.
Just expenses less merger costs increased linked quarter to $32 1 million.
We calculate core EPS of <unk> 94 per diluted share.
To reconcile GAAP earnings to core earnings in the quarter simply remove merger expenses of 115000.
Our GAAP net income includes released through the provision for loan losses of 136000.
The uncertainty of the economic environment and a continued impact on the economy. Our previous stimulus measures are reflected in our qualitative and economic components of our calculation, while the contribution of historical loss to the ACL fell from June 30.
September 30th coverage, so the ACL to loans is 143%.
I'll stop here for a moment and let John talk through our asset quality for the quarter John .
Thanks, Eric.
We had another excellent quarter in credit and production with no measurable negative migration and continued improvement in classified asset as we completed the disposition of an aviation related credit, reducing Oreo and other assets.
<unk> asset ratio continued its downward trend to 11% of regulatory capital versus 13, 1% linked quarter.
Nonperforming assets declined 20% in the quarter to 59 basis points of total assets.
On a linked quarter basis, substandard accruing loans decreased 20% Oreo and other decreased 63% and our year to date net charge offs were $2 1 million.
At the end of the quarter the allowance for credit losses remained two times greater than nonperforming loans.
Despite rising rates and inflation the loan portfolio continues to show strength with low incidents of warning indicators.
We're pleased with our third quarter results.
Equity Bank has two credit officers, Steve Howe, and Christophe slipped koski that helps us maintain high underwriting standards and pricing discipline, our markets in the Midwest remain robust and resilient.
Our balance sheet provides a strong source of both asset and geographic diversity.
Our borrowers continue to carry unprecedented levels of liquidity.
Loan to value and line utilization levels remain low and our AG portfolio.
Our hotel portfolio has recovered well from Covid and shows favorable levels of performance fee.
The income producing real estate portfolio, evidenced solid cash flow performance occupancy and absorption levels were.
We're getting very acceptable levels of cash invested and all new projects finance.
Like earlier production newer loans have solid primary and secondary sources of repayment that are fairly uncorrelated borrower.
Borrowers continue to invest sizable cash ahead of loan dollars across projects of all sizes.
Loan to values on new production remained favorable it's rare that we make an exception to this requirement.
We have been extremely diligent in pursuing pricing discipline, which we think will reward us in the future.
Lastly, we continue to pay close attention to interest rate stress testing to ensure borrowers are able to sustained performance given the current economic environment.
I'll turn it over to Greg for a discussion on production.
Thanks, John loan growth in the quarter was $32 million our year to date loan growth, excluding the branch sale in PPP totals, 7%, including 17, 1% annualized growth in CRE and C&I.
Our pipeline stands at $700 million today, and as John said, we continued to exercise reasonable caution in terms and conditions on new and renewal loans.
Noninterest income of $9 million was essentially flat quarter over quarter, when excluding gain on acquisition realized in the second quarter of $540 service charges and fees were up 7% linked quarter with treasury fees and credit card income showing moderate increases we continue to <unk>.
Besides putting commercial cards in the hands of our clients and driving debit card utilization through marketing campaigns.
We are growing pipeline that our health care services team has developed that will allow us to service their employees HSA and other tax advantaged flexible spending accounts are.
Our bankers have done an excellent job improving the quality of our deposits as average balances for noninterest bearing deposits both for commercial and consumer accounts improved linked quarter Eric.
Net interest income totaled $41 9 million in the third quarter, increasing from $39 $6 million on a linked quarter, representing a $2 4 million increase.
Net interest margin increased 23 basis points to 360% in the quarter, you'll note in our slide deck, we had a 90 basis point contribution for NIM for purchase accounting, which is slightly larger than normal and the result of our successful work from our loan teams on resulting in acquired relationship.
PPP loan fee and interest income are no longer meaningfully contributing to our financial results.
We continue to successfully regime higher interest rate.
Loans, and we're seeing a higher yields as a result of nearly 60% of our loan portfolio, having adjustable rates.
During the third quarter, the coupon yield in the loan portfolio increased approximately 48 basis points to four 7%.
Cost of interest bearing deposits increased 29 basis points to 57 basis points in the quarter.
Two thirds of the increase is attributed to our public equity deposits.
Youll note a linked quarter decline in our demand and money market deposits, primarily due to a decline in public entity deposits heavily influenced by seasonality.
Greg mentioned relationship driven account categories, especially noninterest bearing DDA has seen growth in the number of accounts and in average balances per account.
Noninterest expense was up 800000 linked quarter.
<unk> were impacted by increased costs associated with the resolution of other repossessed assets to John discussed earlier.
Our outlook slide introduces our preliminary view of 2023.
Forecast does not contain any future rate increases.
Ed.
We remain dedicated to expanding current banking relationships and earning new relationships through delivering best in class products and services to all markets.
We continue to practice disciplined and growth.
A high quality credits.
And diversifying non interest income streams.
As we look to deliver strong risk adjusted returns to shareholders.
We continue to have conversations with potential partners.
We are steadfast in our approach to M&A and will not compromise on deal metrics to close a transaction.
Balance sheet capital and credit strength will benefit us as opportunities arise through the cycle.
Our year to date performance and progress towards key strategic goals is a testament to the dynamic team we continue to build at equity.
I'm happy to share that handle the Si has joined.
As our chief risk officer.
Hell began her career with city and has served in risk management leadership positions with JP Morgan Chase.
State Street Corporation.
And Santander.
She is an excellent addition to our leadership team as.
As we ready ourselves to take the next step and continued growth.
And with that we're happy to take your questions.
As a reminder to ask a question you need to press Star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Jeff Lewis with D. A Davidson your line is now open.
Thanks, Good morning.
Good morning, just wanted to comment on that.
Slide 17 on the outlook.
Just look at for Q4.
You've got about $1 billion drop as much as $1 million drop on fee income in it as.
As much as about a $3 billion increase on expenses just wanted to see what areas.
On fees kind of coming out.
And where you pick up in expenses.
Given that guidance.
On fee income.
<unk> forecast the mark to market benefit on derivatives that we have been.
Enjoying throughout the year.
Thats one of the main.
These factors.
If rates do rise again in the fourth quarter.
We are currently not forecasting in fee income.
Noninterest expense.
There is an increase in the fourth quarter and the partnership expense associated with our tax credit.
Which is what has been driving our annual effective tax rate down for the year.
Little bit higher in the fourth quarter then.
In the third quarter.
Also there is more.
Modest there's a modest increase in salaries and benefits for the incentive accruals based on year to date performance.
Okay.
If I look at kind of that.
'twenty three outlook on expenses.
That seems to assume a lower run rate.
In the end of 'twenty three so again, maybe just some year end.
Yes.
Salaries and benefits, but that would be expected to run rate $32 33.
Beginning 'twenty three.
That's the expectation yes.
Okay.
Got it.
Maybe for John I, just wanted to kind of dig into that net charge offs.
The bulk of that was that primarily from the aviation credit.
Okay.
No we had really already marked the aviation credit it was just.
Ed.
Just small minor general charge offs that you would sort of expect.
Okay. So maybe just a little lumpy you had been single digit kind of net charge offs to loans, but.
Again, nothing nothing systemic or anything it just yet.
A grab bag of miscellaneous.
No that's exactly right I guess, what I would say it is.
It still feels like a very below normal.
Number.
All of these credit metrics are really very strong and positive just feels like us.
When you have such a low number for several quarters in a row, you would expect it to be a little lumpy at one point.
Sure.
That makes sense.
And then just a last one.
Got it.
Spit balling on the deposit beta this cycle.
Do you feel like you.
The banks better positioned this time around and or do you have abated that that youre assuming.
Through this cycle, what you think you might get to on a deposit beta.
We do think we're better positioned in this cycle.
Last cycle, we had just closed on a deal.
And there was some deposit outflow in our wholesale funding.
As a percent of total funding.
Higher than where we are today, which obviously has a higher beta in a rising rate environment. Our composition of our funding in terms of the deposits is much more positive or percentage of transaction accounts is higher than the last cycle.
I can.
Could you speak to where we were on the lifecycle on the mix between community deposits in total, but today, we're at 60% community.
<unk> to total and that really has.
Helped us.
Our cost of funds.
What I would tell you Jeff as we were just.
Just in the wrong part of the cycle last time in the transactions that we had just closed.
And so we had.
The bank, we have bought in Tulsa was heavily reliant on wholesale funding and so we are trying to change that mix, which we're good at honestly on originating core deposits.
We just didn't have enough runway to get it under control prior to the cycle moving on US we're going into this cycle with a very.
Normalized honestly for equity bank core deposit ratio and so.
I think we're going to we're going to benefit through this up cycle on interest rate and expansion of margin because of that.
Okay. Thank you.
Thank you.
Our next question comes from Terry Mcevoy with Stephens. Your line is now open.
Alright, Thanks, good morning, Eric Thanks for mentioning that the margin outlook does not reflect a change in rates. However, the forward curve is assuming we get incremental rate hikes could you just talk about kind of the near term rate sensitivity highlighted you highlighted the variable rate loan portfolio, but just to help us there and I guess.
In that margin guidance.
Kind of the accretion that you're expecting within that as well would be helpful. Thank you.
Sure Terry the way we've been looking at if I look back through the.
Through this year on the accumulative changed market rates as well as.
Our cumulative changed.
I would expect that.
For more market rate changes.
So, let's just make it.
More tangible for every 25 basis points of increase in market rates.
You could expect.
Something between four 5%, 6% increase in NIM.
But that's the way I look at it based on our behavior to date.
Behavior.
Asset repricing as well as the deposit rate pricing.
In terms of accretion going forward, that's something that it was a little bit higher this quarter, but given our nature of our amount of assets remain on our balance sheet that have been acquired through mergers.
We're expecting about five basis points.
Five basis points.
Our NIM going forward.
For the foreseeable future.
Great. Thank you for that and then maybe if you could talk about loan growth expectations in 2023.
Market sectors parts of the commercial portfolio that you think are positioned for growth over the next three to five quarters.
Gary This is Greg thanks for the question.
We're still working on the budget for 2023, but I would expect that we will forecast of loan growth in that 7% to 9% or 7% to 10% range, we have lots of opportunities remaining.
Our metro markets in Kansas City, and Tulsa and Wichita.
We have.
A full team of bankers in all of those locations. They are hitting on all cylinders. Craig Anderson is doing a great job of leading the sales teams and commercial lending we also have.
Really nice opportunities in all of our community markets.
With all the people that have.
Then put in place.
And so.
We expect loan growth to continue as John said earlier, we don't think we have to deviate in any way from our credit standards to get that done and I think youll see some continued growth in C&I some opportunities in CRE.
AG might come our way a little bit.
Certainly been bitter sweet bidder in that we've been on.
Lines have been unused suite in that.
<unk> been healthy for our for our AD customers were happy about that.
They get a little bump in 2023 from AG as it settles out.
And people need to borrow money again so.
From where we sit today things look pretty good.
Great I appreciate that thanks, everyone.
Thank you.
Thank you.
Our next question comes from Damon Delmonte with CBW. Your line is now okay.
Good morning, guys hope everybody is doing well today.
Just a couple of quick questions here I guess first on.
The bit of outflows in the deposit this quarter I saw you increased your <unk> advances.
What are your updated thoughts on I'm brilliant bankers have you kind of.
Now I'll turn to that as a source of funding yet.
Are you still kind of not actively promoting that.
So we are actively promoting that and we are getting funding coming through on that.
As we've ramped that up.
We continue to figure out how to do that better honestly Damian and so I think that's going to be a good funding source for us.
As we're opening more accounts every day as we move along.
The learning curve process with that.
Some of the federal home loan bank advances are actually coming from a loan growth.
That we've had and the need for that.
The outflows we had in deposits are really the normalized burn down on what happens with municipal deposits.
And so as those municipal deposits the taxation happens either in December or June .
And then they burn those off during those same periods. So we expect those inflows to happen again in December .
And so but if you look at our core deposits.
They are actually holding in there are actually growing over quarter. So.
Good.
I don't think we have.
Deposit outflow.
Normalized for us.
But getting to add Eric Yes, we looked at our noninterest bearing average balances excluding municipal waste.
Great quarter, as well as year to date and those average balances have actually increased.
Which was a little bit surprising based on cost.
Scott.
Excess liquidity in the market.
Causing those those balances to go down thinking that we're going to go down so.
A nice surprise.
Got it okay. That's good color. Thank you.
Then with regards to the excuse me with regard to credit.
No I think the commentary was very poor.
Positive about.
Correct the current outlook there.
If you think about the reserve level, which came down to like $1 43, this quarter from $1 50.
<unk>.
Where do you where do you kind of see that settling in and are there.
I guess, maybe like in terms of a dollar range.
Quarterly or maybe like as a percentage of loans, how can we kind of think about the go forward provision.
The way I look at provision at least from a budgeting perspective.
It has been this year and likely into next year based on the information. We have today is 20 basis points on average loans on an annualized basis.
So that could get you to a dollar amount of provision.
In terms of the ACO.
Do you believe it's adequate.
At this point.
Just as a reminder.
Hey, Mark.
Model that we run in house here, we have qualitative factors.
Which allows management to address some of the uncertainty.
The economy, and how it may address potentially address or impact our customers and our balance sheet.
Right.
Not seeing any concerning.
As John mentioned in his prepared commentary, which leads to the historical loss factor in our model historical losses.
<unk> been improving so our probability of default loss given default.
How is that improving which offsets to some extent the.
ACO that we have in the qualitative and then we have the economic regression model.
Have some lags in it so there is still some.
Some COVID-19 impacted macroeconomic factors in a regression model so.
When you put all that together and make it.
143 basis points.
Coverage that we're reporting.
And going forward.
For modeling purpose purposes, I would just need.
20 basis points on an annualized basis on average loans.
Got it okay.
That's helpful. That's all I had thank you very much.
Thank you.
Thank you.
Our next question comes from Andrew Liesch with Piper Sandler Your line is now open.
Hey, guys good morning.
I'm just wondering if you can talk to the non interest bearing deposit growth what drove that this quarter.
We have continued to be very focused as an organization.
Sure.
On our sales approach as Greg mentioned in his commentary and really.
Working to grow the number of.
Operating in checking accounts that we have.
Well as cross selling our customers in key products and services, which will help drive fee income.
So.
Daniel it's helpful. Yes.
Yes, the answer Andrew is it's granular.
It's one checking account at a time, it's one treasury relationship at a time.
Our teams are doing a great job honestly being focused on that Craig Anderson has done a great job, leading that charge along with all the other leaders in the organization and.
As we continue to get better at that I think we have more opportunity that we have just started scratching the surface.
Got it yes, it's good to see in this environment.
And then.
Eric I think you mentioned just low rate loans are 60% how much of those are above floors at this point.
Nearly all of them.
More than 90%, 90% of the other metrics that.
It might be helpful is if you look at the total loan portfolio 32, 33% of it adjusts immediately.
Got so that's great.
That's important is that there is still some repricing opportunity in our loan portfolio from previous rate movement.
Gotcha.
And then the last question I have is just on the buyback.
The TCE ratio here below 7% how much do you look at that with gauging how much you want to buy back stock given that you. It sounds like you had some pretty good growth opportunities.
Should we be thinking about share repurchases going forward.
Yes Manny.
<unk> team along with the board of Directors, we look at.
Our payout ratio relative to earnings.
Add back without reactive value of the buyback and the common stock dividend together.
Part of that to earnings if you.
Do that Matt previously, we were approaching 100% payout I think in 2021. This year, we're being more conservative about that we're not going to get close to the 100% payout.
We do.
Keep our eye on that tangible common ratio, but we believe.
With our more conservative approach on the payout ratio.
Wows us too.
Provide room for growth as well.
Got you.
Alright. Thank you that's all the questions I have.
Thank you.
Thank you.
Our next question comes from Jim Macdonald with Factset. Your line is now open.
Great.
Jim Your line is now open.
Okay.
I'm showing no further questions in queue at this time.
This concludes today's conference call.
Thank you for participating you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial one one.
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Okay.
Yes.
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Okay.
[music].
Great.
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Right.
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Yes.
Yes.
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Okay.
Good day and thank you for standing by welcome to the third quarter 2022 equity Bancshares 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 one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to Chris <unk> with equity Bancshares. Please go ahead.
Good morning, and thank you for joining equity Bancshares conference call, which will include a discussion and presentation of our third quarter 2022 results presentation slides to accompany our call are available for download at Investor Dot equity Bank Dot com by clicking the presentation tab you may ask a quick the events icon for today's.
<unk> posted at Investor equity Bank Dot Com to view the webcast player. If you are viewing this webcast on our webcast player. Please note that slides 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 with that I'd like to turn it over to our chairman and CEO Brad Elliott.
Thank you Chris good morning.
Welcome to our third quarter earnings call.
And thank you for your interest in equity Bancshares.
With me on the call today is our CFO Eric Newell.
Hello, Greg costs over and Chief Credit Officer, John Creek.
Let me start by thanking the equity team for their continued dedication to providing excellent customer service.
The effort of our bankers can be seen.
As we delivered outstanding core earnings for the third time in 2022.
As we completed the integration of our M&A transactions over recent years.
We have worked to improve the operating team effectiveness.
And bankers sales process.
As we continue to improve on these wells.
We'll see further poultry into our operating results.
Our diluted EPS was <unk> 93 versus.
<unk> consensus of 80.
Net interest income and net interest margin both increased.
As we continue to realize benefit from upward rate movement.
We were active during the quarter with our buyback completing our 2021.
Authorized plan.
In receiving regulatory non objection.
An additional 1 million shares to be used over the next period.
With further emphasis on shareholder return, we increased our third quarter dividend, 25% to 10 cents per share.
I'll, let Eric talk with you about our financial results.
Thank you Brad and good morning.
Last night, we reported net income of $15 2 million or <unk> 93 per diluted share.
Non interest income excluding the $540000 gain on the branch sale in the second quarter remained flat linked quarter at $9 million noninterest.
Noninterest expenses less merger costs increased linked quarter to $32 1 million.
We calculate core EPS to the 94 per diluted share to.
To reconcile GAAP earnings to core earnings in the quarter simply remove merger expenses of 115000.
Our GAAP net income includes a release to the provision for loan losses of $136000.
The uncertainty of the economic environment and a continued impact on the economy. Our previous stimulus measures are reflected in our qualitative and economic components of our calculation, while the contribution of historical loss to the ACL fell from June 30.
September 30th coverage, so the ACL to loans is 143%.
Stop here for a moment and let John talk through our asset quality for the quarter John .
Thanks, Eric.
We had another excellent quarter in credit and production with no measurable negative migration and continued improvement in classified asset as we completed the disposition of an aviation related credit, reducing Oreo and other assets.
<unk> asset ratio continued its downward trend to 11% of regulatory capital versus 13, 1% linked quarter.
Nonperforming assets declined 20% in the quarter to 59 basis points of total assets on.
On a linked quarter basis, substandard accruing loans decreased 20% Oreo and other decreased 63% and our year to date net charge offs were $2 1 million at.
At the end of the quarter the allowance for credit losses remained two times greater than nonperforming loans.
Despite rising rates and inflation the loan portfolio continues to show strength with low incidents of warning indicators.
We're pleased with our third quarter results.
Equity Bank has two credit officers, Steve Howe, and Christophe slipped koski that helps us maintain high underwriting standards and pricing discipline, our markets in the Midwest remain robust and resilient.
Our balance sheet provides a strong source of both asset and geographic diversity, our borrowers continue to carry unprecedented levels of liquidity.
Loan to value and line utilization levels remain low and our AG portfolio. Our hotel portfolio has recovered well from Covid and shows favorable levels of performance fee income producing real estate portfolio, evidenced solid cash flow performance occupancy and absorption levels.
We're getting very acceptable levels of cash invested and all new projects financed.
Mike earlier production newer loans have solid primary and secondary sources of repayment that are fairly uncorrelated.
Borrowers continue to invest sizable cash ahead of loan dollars across projects of all sizes.
Loan to values on new production remained favorable it's rare that we make an exception to this requirement.
We have been extremely diligent in pursuing pricing discipline, which we think will reward us in the future.
Lastly, we continue to pay close attention to interest rate stress testing to ensure borrowers are able to sustained performance given the <unk>.
Current economic environment.
I will turn it over to Greg for a discussion on production.
Thanks, John loan growth in the quarter was $32 million.
Year to date loan growth, excluding the branch sale in PPP totals, 7%, including 17, 1% annualized growth in CRE and C&I.
Our pipeline stands at $700 million today, and as John said, we continue to exercise reasonable caution in terms and conditions on new and renewal loans.
Noninterest income of $9 million was essentially flat quarter over quarter, when excluding gain on acquisition realized in the second quarter of $540 service charges and fees were up 7% linked quarter with treasury fees and credit card income showing moderate increases we continue.
To emphasize putting commercial cards in the hands of our clients and driving debit card utilization through marketing campaigns.
We have a growing pipeline that our health care services team has developed that will allow us to service their employees HSA and other tax advantaged flexible spending accounts are.
Our bankers have done an excellent job improving the quality of our deposits as average balances for noninterest bearing deposits both for commercial and consumer accounts improved linked quarter Eric.
Net interest income totaled $41 9 million in the third quarter, increasing from $39 $6 million on a linked quarter, representing a $2 4 million increase.
Net interest margin increased 23 basis points to 360% in the quarter, you'll note in our slide deck, we had a 90 basis point contribution for NIM for purchase accounting, which is slightly larger than normal and the result of successful work from our loan teams on resulting in acquired relationship.
PPP loan fee and interest income are no longer meaningfully contributing to our financial results.
We continue to successfully originate higher interest rates on loans, and we're seeing higher yields as a result of nearly 60% of our loan portfolio, having adjustable rates.
During the third quarter, the coupon yield in the loan portfolio increased approximately 48 basis points to four 7%.
Cost of interest bearing deposits increased 29 basis points to 57 basis points in the quarter.
Two thirds of the increase is attributed to our public equity deposits.
Youll note a linked quarter decline in our demand and money market deposits, primarily due to a decline in public entity deposits heavily influenced by seasonality.
Greg mentioned relationship driven account categories, especially noninterest bearing DDA has seen growth in the number of accounts and in average balances per account.
Noninterest expense was up 800000 linked quarter.
<unk> fees were impacted by increased cost associated with the resolution of other repossessed assets that John discussed earlier.
Our outlook slide introduces our preliminary view of 2023.
Forecast does not contain any future rate increases.
Ed.
We remain dedicated to expanding current banking relationships and earning new relationships through delivering best in class products and services to all markets.
We continue to practice disciplined and growth.
A high quality credits.
And diversifying non interest income streams.
As we look to deliver strong risk adjusted returns to shareholders.
We continue to have conversations with potential partners.
We are steadfast in our approach to M&A and will not compromise on deal metrics to close a transaction.
Balance sheet capital and credit strength will benefit us as opportunities arise through the cycle.
Our year to date performance and progress towards key strategic goals is a testament to the dynamic team we continue to build at equity.
I'm happy to share that handle the Si has joined as our chief risk officer.
It all began her career with city and has served in risk management leadership positions with JP Morgan Chase.
State Street Corporation.
And Santander.
She is an excellent addition to our leadership team.
As we ready ourselves to take the next step and continued growth.
And with that we're happy to take your questions.
Yes.
As a reminder to ask a question you need to press Star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Jeff Lewis with D. A Davidson your line is now open.
Thanks, Good morning.
Good morning, just wanted to comment on the slide.
Slide 17 on the outlook.
Just look at for Q4.
<unk> got about $1 million drop as much as the $1 million drop on fee income in it.
As much as about a $3 billion increase on expenses just wanted to see what areas.
<unk> kind of coming out.
You pick up in expenses.
Given that guidance.
On fee income.
Forecast the mark to market benefit on derivatives that we have been.
Julien throughout the year.
That's one of the main factors.
Rates do rise again.
Fourth quarter, you get some benefit that we are currently not forecasting in fee income.
Noninterest expense.
There is an increase in the fourth quarter and the partnership expense associated with our tax credit.
Which is what has been driving our annual effective tax rate down for the year.
Little bit higher in the fourth quarter than in the third quarter.
Also there is.
Modest there's a modest increase in.
Salaries and benefits for the incentive accruals based on year to date performance.
Okay and.
And if I look at kind of that 20.
'twenty three outlook on expenses.
That seems to assume a lower run rate.
India into 'twenty three so again, maybe just some year end.
Yes.
Salaries and benefits, but that would be expected to run rate.
$32 33.
Beginning 'twenty three.
That's the expectation yes.
Okay.
Got it.
Maybe for John I, just wanted to kind of dig into that net charge offs.
The bulk of that was that primarily from the aviation credit.
Okay.
No we had really already marked the aviation credit it was just.
Ed.
Small minor general charge offs that you would sort of expect.
Okay. So maybe just a little lumpy you had been single digit kind of net charge offs to loans, but.
Again, nothing systemic or anything it just yet.
A grab bag of miscellaneous.
No that's exactly right I guess, what I would say it is.
It still feels like a very below normal.
Sort of number.
But all of these credit metrics are really very strong and positive just feels like.
When you have such a low number for several quarters in a row, you would expect it to be a little lumpy at one point.
Sure.
That makes sense.
And then just a last one.
Just got one.
More spit balling on the deposit beta this cycle.
Like.
The banks better positioned this time around and or do you have a beta that you're assuming.
Yes.
Through this cycle, what what you think you might get to on a deposit beta.
We do think we're better positioned in this cycle.
Last cycle, we had just closed on a deal.
There was some deposit outflow in our wholesale funding.
As a percent of total funding.
Higher than where we are today, which obviously has it.
Higher beta.
The rate environment, a composition of our funding in terms of the deposits is much more positive or percentage of transaction accounts is higher than the last cycle.
And I Couldnt speak to where we were on the last cycle on the mix between community deposits in total, but today, we're at 60% community.
Posits that total and that really has.
Helped us again containing our cost of funds.
What I would tell you Jeff as we were just.
Just in the wrong part of the cycle last time in the transactions that we had just closed.
And so we had.
Bank, we have bought and Tulsa was heavily reliant on wholesale funding and so as we are trying to change that mix, which we're good at honestly on originating core deposits. We just didn't have enough runway to get it under control prior to the cycle moving on US we're going into this cycle with.
Very.
Normalized honestly for equity bank core deposit ratio and so.
We're going to we're going to benefit through this up cycle on interest rate and expansion of margin because of that.
Okay.
Okay. Thank you.
Yeah.
Thank you.
Our next question comes from Terry Mcevoy with Stephens. Your line is now open.
Alright, Thanks, good morning, Eric Thanks for mentioning that the margin outlook does not reflect the change in rates. However, the forward curve is assuming we get incremental rate hikes could you just talk about kind of the near term rate sensitivity highlighted you highlighted the variable rate loan portfolio, but just to help us there and I guess within.
Margin guidance.
Kind of the accretion that you're expecting within that as well would be helpful. Thank you.
Sure Terry the way, we we've been looking at if I look back.
Through this year on the cumulative changed market rates as well as.
Our cumulative change to NIM.
I would expect that.
For for more market rate changes, so, let's just make it.
More tangible for every 25 basis points of increase in market rates.
Could expect.
Something between 456% increase in NIM.
But that's the way I look at it based on our behavior to date.
Behavior.
Asset repricing as well as the deposit rate.
<unk>.
In terms of accretion going forward, that's something that it was a little bit higher this quarter, but given our nature of our amount of assets remain on our balance sheet that have been acquired through mergers I think we're expecting about five basis points.
To five basis points.
Our NIM going forward.
For the foreseeable future.
Great. Thank you for that and then maybe we could talk about loan growth expectations in 2023.
Market sectors parts of the commercial portfolio that you think are positioned for growth over the next three to five quarters.
Gary This is Greg thanks for the question.
We're still working on the budget for 2023, but I would expect that we will forecast loan growth in that 7% to 9% or 7% to 10% range, we have lots of opportunities remaining.
Our metro markets in Kansas City, and Tulsa and in Wichita.
We have.
A full team of bankers in all of those locations. They are hitting on all cylinders. Craig Anderson is doing a great job of leading the sales teams and commercial lending we also have.
Really nice opportunities in all of our community markets.
With all the people that have that.
Been put in place.
So.
We expect loan growth to continue as John said earlier, we don't think we have to deviate in any way from our credit standards to get that done and I think youll see some continued growth in C&I some opportunities in CRE.
AG might come our way a little bit.
Certainly been bitter sweet bidder in that we've been on.
Your lines have been unused suite in that.
<unk> been healthy for our for our AG customers were happy about that.
They get a little bump in 2023 from AG as it settles out.
And people need to borrow money again so.
From where we sit today things look pretty good.
Great I appreciate that thanks, everyone.
Thank you.
Thank you.
Our next question comes from Damon Delmonte with Ubw. Your line is now.
Good morning, guys hope everybody is doing well today.
Just a couple of quick questions here I guess first on.
The bit of outflows in the deposit this quarter I saw you had increased your FHA <unk> advances.
What are your updated thoughts on brilliant bankers have you kind of.
Now I'll turn to that as a source of funding yet.
Are you still kind of not actively promoting that.
So we are actively promoting that and we are getting funding coming through on that.
As we've ramped that up.
We continue to figure out how to do that better honestly Damian and so I think that's going to be a good funding source for us.
As we're opening more accounts every day as we move along.
Learning curve process with that.
Some of the federal home loan bank advances are actually coming from the loan growth.
That we've had and the need for that.
Outflows, we had in deposits are really the normalized burn down on what happens with municipal deposits.
And so as those municipal deposits the taxation happens either in December or June .
And then they burn those off during those same periods. So we expect those inflows to happen again in December .
And so but if you look at our core deposits.
They are actually holding in there are actually growing over quarter. So.
I don't think we have a deposit outflow.
That is not normalized for us.
But getting to add Eric Yes, we looked at.
Our noninterest bearing average balances excluding municipal.
Linked quarter as well as year to date and those average balances have actually increased.
Which was a little bit surprising based on cost.
Excess liquidity in the market.
Causing those those balances to go down thinking that we're going to do.
So that's a nice surprise.
Got it okay. That's good color. Thank you.
And then with regards to with regards to the credit.
No I think the commentary was very positive about.
Correct the current outlook there.
If you think about the reserve level, which came down to like $1 43, this quarter from $1 50.
<unk>.
Where do you where do you kind of see that settling in and are there.
Bob.
I guess, maybe like in terms of a $1 range.
Quarterly or maybe like as a percentage of loans, how can we kind of think about the go forward provision.
The way I look at provision at least from a budgeting perspective.
It has been this year and likely into next year based on the information. We have today is 20 basis points on average loans on an annualized basis.
So that could get you to a dollar amount of provision.
In terms of the ACO.
Do you believe it's adequate.
At this point.
Just as a reminder.
As a model that we run in house here.
Qualitative factors.
It allows management to address some of the uncertainty and the.
Economy, and how it may address potentially address or impact our customers and our balance sheet. Despite.
Not seeing any.
Concerning <unk>.
As John mentioned in his prepared commentary.
It leads to the historical loss factor in our model historical losses.
And improving so our probability of default loss given default.
How does that improving which offsets to some extent the.
The PCL that we have in the qualitative and then we have the economic regression model.
Have some lags in it so there is still some.
Some COVID-19 impacted macroeconomic factors in a regression model so.
When you put all that together and make it too.
To that 143 basis points.
Coverage that we're reporting.
And then going forward.
For modeling purpose purposes, I would just use 20.
20 basis points on an annualized basis on average loans.
Got it okay.
That's helpful. That's all I had thank you very much.
Thank you.
Thank you.
Our next question comes from Andrew Liesch with Piper Sandler Your line is now open.
Hey, guys good morning.
Just wondering if you can talk to the noninterest bearing deposit growth what drove that this quarter.
We have continued to be very focused as an organization.
Sure.
On our sales approaches as Greg mentioned in his commentary and really.
Working to grow the number of.
Operating and checking accounts that we have.
Well as cross selling our customers in key products and services, which will help drive fee income.
So.
Daniel a couple yes.
Yes, the answer Andrew is it's granular.
It's one checking account at a time, it's one treasury relationship at a time.
Our teams are doing a great job honestly being focused on that Craig Anderson has done a great job, leading that charge along with all the other leaders in the organization and.
As we continue to get better at that I think we have more opportunity that we have just started scratching the surface at.
Got it yes, it's good to see in this environment.
And then.
Eric I think you mentioned low rate loans are 60% how much of those are above floors at this point.
Nearly all of them.
I've got more than 90%, 90% of the other metrics that.
It might be helpful is if you look at the total loan portfolio 32, 33% of it adjusts immediately.
Got you.
Great.
That's important is that there is there still some repricing opportunity in our loan portfolio from previous rate movement.
Gotcha.
And then the last question I have is just on the buyback.
The TCE ratio here below 7% how much do you look at that with gauging how much do you want to buy back stock given that you. It sounds like you had some pretty good growth opportunities how should we be thinking about share repurchases going forward.
Yes Manny.
<unk> team along with the board of Directors, we look at.
Our payout ratio relative to earnings.
Add back the value, we add to the value of the buyback and the common stock dividend together.
That to earnings if you.
Do that Matt previously, we were approaching 100% payout I think in 2021. This year, we're being more conservative about that we're not going to get closer to a 100% payout.
We do.
Keep our eye on that tangible common ratio, but we believe.
With our more conservative approach on the payout ratio.
Allows us to you.
Provide room for growth as well.
Got you.
Alright. Thank you that's all the questions I have.
Thank you.
Sure.
Thank you.
Our next question comes from Jim Macdonald with that Sir Your line is now open.
Tim Your line is now open.
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