Q4 2022 Equity Bancshares Inc Earnings Call
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Yeah.
Good day, and thank you for standing by and welcome to the fourth quarter 2022 equity Bancshares, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.
A question. During this session you will need to press star one one on your telephone.
And then here an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, 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 fourth quarter 2022 results.
Presentation slides to accompany our call are available via PDF.
For download at Investor equity Bank Dot com by clicking the presentation that you May also quickly event icon for today's call posted at Investor got equity Bank Dot com.
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Please reference slide two including important information regarding forward looking statements from time to time, we may make forward looking statements within today's call.
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.
Our fourth quarter earnings call.
And thank you for your interest in equity Bancshares.
With me on the call today, our CFO Eric Newell.
Oh great.
President Greg Anderson.
Chief Credit Officer John Creek.
I want to start by celebrating two accomplishments.
First net income for 2022 was a company record totaling $57 $7 million.
Second.
Had a record revenue totaling $197 8 million.
Those achievements show the strength of our franchise.
Our success in serving our customers.
And showcase our talented group of employees.
A year ago.
We have expectations of rising interest rates.
But no one was forecasting 400 basis points of increases from the federal reserve.
Our teams work to prepare for this.
Rising rate environment.
'twenty.
2021 by keeping our loan pricing short.
The results speak for themselves.
In the fourth quarter of this year were 123 basis points higher than last year.
Anticipating a challenging environment for raising and.
And maintaining deposits.
The teams to refine our sales approach.
Ways, we could do better.
We took the opportunity to focus on operational efficiencies.
To better serve our customers.
Better products and services that contribute to their success.
I am confident.
For better performance in 2023.
Looking forward.
A lot of economic uncertainty.
But rather than dwelling on the uncertainty.
Our team is focused on what we can control.
By deeper relationships with our customers asking prospective.
Prospective customers for their business.
Being prudent with our capital.
And not varying from our underwriting philosophy to achieve loan growth.
I am proud of the honor of Newsweek Best Bank in Kansas.
$10 billion category for 2023.
We were also recognized for the <unk>.
Third year in a row by the once you got business Journal as one of the best places to work based on employee survey data.
I'll, let Eric talk you through our financial results.
Thank you Brad and good morning last night, we reported net income of $11 6 million or 72 cents per diluted share.
Non interest income excluding the 422000 gain on the branch sale in the fourth quarter was $7 9 million down $1 $1 million linked quarter.
Noninterest expenses less merger costs increased linked quarter to $35 2 million.
We calculate core EPS to be 70 cents per diluted share are reconciled GAAP earnings to core earnings this quarter remove merger expenses of 68000.
Gain on branch sales of 422000.
On page six of the Investor deck, we added a new visual to show the impact of our solar tax program.
For the total year, we added 811000 to net income.
The timing of the benefit in tax provision in the cost of partnership expense.
Determined by when we entered into the tax investment versus when the project was placed into service.
Importantly, we expect to adopt accounting for investments in tax credit structures, using the proportional amortization method, which moves the tax credit expense currently and noninterest expense to the tax line and rooms in this noise.
Late in December we learned of a tax credit.
We have invested in May 2022 would be delayed not being placed into service in the calendar year of 2022 as we originally forecasted.
The effective adversely impacting the tax provision in the fourth quarter, which is a true up for the full year.
We expect this project to be placed into service early in 2023.
Our GAAP net income includes a release of provision for credit loss of 151000.
We expect softening in the broader economy in 2023, we have not seen economic trends in our markets and our specific concern and more importantly, we have not seen any declining asset quality trends in our portfolio.
While we continue to have qualitative reserves set aside for this uncertainty.
Modest release represents improvement in our asset quality and reserves. We had previously set aside for specific credits that our special assets team I fully resolved and the credits are no longer on our balance sheet.
At December 31 coverage of ACL for loans is 138%.
Stop here for a moment and let John talk us through asset quality for the quarter John .
Thanks, Eric.
Credit performance for the quarter was again strong seeing improvement across all categories.
Special mention loans declined from $35 million at the beginning of the year for 8 million at quarter end.
Special mentioned loans improved $1 million for the quarter.
Delinquencies over 30 days past due were $1 $3 million lower ending the quarter at $6 million.
Non accrual loans declined $5 $5 million, finishing the quarter at five 3% of total loans.
Most proud of Sri Sri Peterson, and Brent <unk>, our general counsel for working together to reduce Oreo to 600000, excluding branches our lowest level in a decade.
Nonperforming assets declined $11 5 million to $18 million on December 31.
Majority of our non accrual loans were acquired via bank acquisitions.
Net charge offs for the quarter were 501.
Rising rates inflation and economic uncertainty continues to be a concern.
At the same time consumer liquidity levels and employment have not yet returned to historically normal levels.
Credit card portfolio is relatively new enhanced has not yet produced consumer losses that one would expect in a downturn.
We continue to have relatively low rates of overdrafts and overdraft related charge offs.
Unemployment rates in our largest two markets were less than 3% at year end.
At the end of the quarter loans to homebuilders only $28 million.
Most of our homebuilders continue to have strong liquidity a good secondary sources of repayment.
Declining commodity prices and dryer conditions are a concern for farmers.
The war in Ukraine is providing a floor for green producers.
Panel prices have pushed upward with a favorable outlook for 2023.
Our.
<unk> portfolio has performed well following the pandemic travel.
Travel resurgence is providing a good tailwind for the lodging sector.
About seven 5% of our loan portfolio is income producing office and commercial properties all newer commercial <unk> loans have been financed with comfortable loan to values and debt yields.
The Midwest appears to have less issues getting employees into the office and the rest of the country.
Equity Bank for example, never went to a remote or hybrid environment is all employees remain in the office throughout the pandemic.
Since fiscal year end 2019, our Texas ratio has declined from a high of 14% to 3% at year end, while regulatory capital increased from $348 million to $588 million.
During the same period, our ACL has increased from a low of 12 million to $46 million.
And covers nonaccrual loans by 260%.
Our bankers remain vigilant on the credit front and we have been successful with our loan pricing strategy.
While the Midwest economy remained strong we anticipate and are prepared for more difficult conditions.
Turn it over to Craig for a discussion on production.
Thanks, John loan growth in the quarter, excluding PPP and branch sales was $56 8 million or six 9% annualized loan growth in the commercial and commercial real estate portfolios was 92, 5% annualized.
We continue to successfully originate loans at higher interest rates and we are seeing higher yields as a result of nearly 60% of our loan portfolio, having adjustable rates during the fourth quarter the yield in the loan portfolio increased 50 basis points to 559%.
Cost of interest bearing deposits increased 45 basis points to 105 basis points in the quarter.
Our pipeline stands at $600 million today, and as John said, we continue to exercise reasonable caution in terms and conditions on new and renewal loans.
Noninterest income of $8 3 million was down $1 1 million quarter over quarter, when excluding gain on sale of the branch realized in the fourth quarter of 422000.
Service revenue with the exception of mortgage banking held relatively consistent during the quarter, while the benefit of previous acquisitions to noninterest income as well as the declining mortgage production environment drove the quarterly decline.
We are seeing positive momentum in our health savings and trust and wealth management divisions and expect further positive contribution to noninterest income in 2023, Eric.
Net interest income totaled $42 million in the fourth quarter, increasing from $41 $9 million in the linked quarter we.
We continue to benefit from the rising interest rate environment with net interest margin increased five basis points linked quarter to 367%.
Turning to page eight of our slide deck, you can see the composition of the change in net interest income, which benefited from an increase in the yields on earning assets offset by the increase in our cost of interest bearing liabilities.
We benefited 10 basis points from purchase accounting in the fourth quarter up one basis point linked quarter, but above our expectation going forward.
Non interest expense categories, increasing from the third quarter included salaries and benefits advertising and other expenses.
Salaries and benefits increased three 5% linked quarter attributable to lower job vacancy rates, which will incrementally improve our service and sales to our customers.
Advertising expenses increased from the third quarter, mainly attributed to our direct banking platform.
As a reminder, our direct bank strategy is designed to meet our deposit needs, while helping keep our deposit beta is lower than our non direct channels.
Other expenses include our tax credit partnership amortization in the fourth quarter totaling $1 9 million compared to $1 4 million in the third quarter.
Our outlook slides includes an updated view for 2023.
We do not include future rate hikes, our forecast still includes the effects of lagging deposit rates.
Moderating the impact of higher deposit rates will be an emphasis on relationships to drive noninterest bearing accounts.
Our forecasted 1 billion of loan portfolio cash flows in 2023 with a weighted average yield of 675%, which is 63 basis points below our current origination yields.
As well as a successful deployment of cash flows off the investment portfolio until a loan portfolio, which has about a 500 basis points spread.
In the fourth quarter noninterest bearing deposits declined.
Due to expected seasonality from our commercial and municipal portfolios and further reduction in customers' excess liquidity as Brad mentioned, our sales teams have renewed efforts to focus on building and acquiring new relationships, which would have the effect of increasing noninterest bearing deposits to total funding.
Our provision is forecasted to be 20 basis points of average loans. This is a more optimistic view than the consensus current consensus mainly because of our existing coverage level to loans the lack of recognized losses in <unk>.
Previous qualitative reserve build for recognizing economic uncertainty.
We expect a higher level of advertising expense of 2023 to support our deposit acquisition efforts efforts are under way to introduce products and services that we anticipate will reduce the cost of customer acquisition.
Opportunities that potentially result in positive operating leverage include technology products and services. We've been working on through 2022 that will allow for a better experience for our customers improved revenue and incrementally reduce expenses through improved efficiencies.
Correct.
Our exceptional employees are focused on our core banking services in 2023.
Developing relationships with prospective clients and broadening relationships with current customers.
Checking account growth and high quality credit origination remains top of mind.
We met with several banks in the fourth quarter and the beginning of this year as well discussing their options are whether it's a good time and having low liquidity and high rate interest environment.
The equity bank would be a good upstream merger partner for them.
Those discussions will continue.
Our performance through 2022 sets us up for success in 2023.
And we're excited for the future.
And with that we're happy to take your questions.
Thank you.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Our first question comes from Jeff <unk> with D. A Davidson you May proceed.
Thanks, Good morning all.
Uh huh.
Question on the loan growth side.
Bit of a softball, I guess, you guys are sort of pointing to kind of mid single digit.
Three.
Just interested in kind of the constraints there is.
I bet, it's a bit of a mix.
Demand youre seeing appetite for risk on your own side and the ability to fund that growth, but kind of the pressure points would be interested in.
How do you characterize loan growth in the coming year.
Looking for there.
Yes so.
There's a lot of loan opportunities out there Jeff.
And.
So we're just trying to make sure that we're balancing the ability to put on things that make sense from an interest rate standpoint.
We haven't we don't need to or haven't stretched our credit underwriting.
So there's lots of opportunities out there you can grow a lot faster. The question is is can we get that type of loan growth and keep a.
Interest rate that we want for our balance sheet, because we have a viewpoint that we think that right rates might continue to keep rising and so we can't be locking in rates now.
The asset side that arent going to reprice in a very near term and so.
We're just being a moderate on that from the standpoint that we want to make sure. We can originate things that fit our interest rate bucket.
And then the same sense.
Prudent for us to do but there is there is lots of there's lots of lending opportunities out there that's not the issue.
Jeff This is Eric.
The period.
Period to period, so year after year end.
Loan growth, where we're forecasting around 7% to 8% it might seem a little softer in the forecast slide because that's average balance.
That's helpful. Thanks, Eric.
And maybe while I've got you Eric on that on.
On the margin.
Do you have the average for the month of December just trying to figure out what that how that compares to the full quarter average.
I don't have that December .
Average in front of me I would say December probably its a little softer than within the quarter.
Just do too.
The deposit beta that we experienced in the month of December which you can actually see on slide nine of our deck.
Newer disclosure for us, where we broke down the components of yield and cost and added the cumulative betas.
Loans in.
Deposits total deposits interest bearing <unk>.
You can see.
As for deposits, we would expect cumulative beta of 60% in Q4, and then 20% beta and.
In December .
Got you.
Yes.
Looking at the outlook on margin to its kind of range bound in Q1, maybe the downside a little bit but.
And then for the full year, a little lower so I appreciate it maybe one last one Brad I just wanted to circle back to your commentary on on having discussions with with partnerships with other banks that gasoline that.
Picked up a bit.
Trying to get a sense for relative.
More banks coming out of the weeds to say, let's partner up.
Just interested in a little more color there. Thanks.
Yes, I think we are.
<unk>.
I think it's been fairly quiet period, and so the conversations we've had have been.
The request has been more more prevalent in the last.
60 days and they were in the prior.
90, or 120 days, so I would say those conversations are actually picking up.
This time of year always picks up steam a little bit because people get their year end numbers done.
And so.
<unk> get their package together to come to market. So.
It'll be an interesting.
Spring for US I think because I think theres going to be some opportunities there.
And so.
What do we want to do and how do we skin those things.
And we've got some creative ways that we can deal I think with <unk> and <unk>.
So.
Yes.
We're ready to start having those conversations.
Okay. Appreciate it thank you.
Thank you one moment for questions.
Our next question comes from Andrew Liesch with Piper Sandler You May proceed.
Hey, guys good morning.
Wanted to touch on I guess.
Margin guide that having.
Any rate hikes built into there it just seems like with some of the repricing of the.
The beta on the deposit side that there is still an upward bias, even with a 25 basis point rate hike.
The case or has it gotten to the point where.
It should be pretty neutral now.
I would say with 25 basis points movement, we're probably looking between zero and two basis points of expansion on them.
Got it alright, that's helpful.
Yes.
Then.
On the mortgage front, obviously that that line items, then under pressure here for a couple.
For a few quarters.
If I look at where it's been the last couple of quarters is that a good place to build out for for 2023 outlook or do you think maybe the markets youre in a quite a bit stronger.
Yes, we what we did Andrew as we looked at the second half of 2022.
Actual and will use if you annualize that thats pretty close to our expectation for full year 2023.
Got you.
Let's see I think.
That covers all the questions I have everything else had been answered thanks.
Thank you one moment for questions.
Our next question comes from Damon Delmonte with <unk> you May proceed.
Hey, good morning, guys How's it going today.
Good evening.
Great. So just a quick question on credit and the outlook great commentary and color that was provided in the prepared remarks.
On the reserve I think its pretty healthy around $1 38.
And just kind of wondering what your thoughts are on maintaining that level as we go through 2023.
Kind of what you would expect for net charge offs and kind of how we can kind of use that to triangulate into a loan loss provision as we look out over the next few quarters.
I'll, let John talk about.
Environment and I can bring it back to the financials.
Great.
Yes.
The environment for us from a credit quality standpoint.
It.
It's kind of difficult to characterize because you know what the headwinds look like but our two largest markets.
On the call have 3% unemployment still.
If you look at <unk> office and commercial people in the Midwest or in the office and working.
It doesn't have those headwinds to the degree that the rest of the country you look at.
What we're seeing in our portfolio and how we're monitoring it.
Past dues remained low overdrafts remain.
Hello, there almost abnormally low.
The borrowing base compliance, we look at borrowing basis to compliance with borrowing basis is good.
Our loan covenant compliance and monitoring we're not providing a lot of waivers we've got favorable compliant with our borrowing basis.
Borrower levels of liquidity remains strong.
Continuing to see borrowers have.
Strong level of liquidity.
What I hear when I look at the economy and listen to other earnings calls, particularly from.
The larger banks is that expectation is kind of muted so from a credit cost standpoint.
<unk>.
<unk>.
It seems odd that we sort of see the continuance of the trend we've had for the last year.
Yeah.
So David when you put all that together.
From a budgeting perspective, we still look at 20 basis points on average loans for provisioning, but.
But when you listen to Jon in.
Okay.
Okay.
I could see us coming in lower than that.
On what we're seeing today in the economic environment and what we're seeing in our portfolio that certainly could change over the year, but.
Based on our current coverage.
And our current credit quality.
From ACL point of view.
Sure.
Qualitative aspects.
The ACL take into account that uncertainty.
But the quantity of really shopping.
Lack of loss that we have.
Flowing through our model.
Got it okay. That's helpful. I appreciate that color.
And then.
With regard to just kind of a technical question here, but with regards to that the impact of the tax rate this quarter because of the timing was really related to the solar credit. So we anticipate like the low end of your 14% to 16% range in the first quarter, because you get a bigger benefit or is that just embedded in the overall guidance.
That's embedded in the overall forecast.
Got it okay.
Alright, Thats all that I had for now thank you very much.
Thank you one moment for questions.
Our next question comes from Terry Mcevoy with Stephens you May proceed.
Hey, good morning, everyone.
Good morning, Gary.
I guess, we've talked about the deposit betas were below the industry last year and that was the playbook that you talked about I guess my question is what deposit betas are using in your margin outlook and if we do get a couple of rate hikes.
How would that impact.
The beta assumption.
Right now, we're using a terminal beta of 40%.
And our budgeting.
For 2023.
I don't.
No.
<unk> rate hikes would alter.
That assumption.
At this point that is something that.
We talk about in our asset liability Committee every month.
We'll continue to monitor that.
Thanks, Ed.
As a follow up maybe could you discuss how you are using the digital bank as an overall funding tool.
Yes.
Digital Bank are also really impact our direct bank channel.
As a vehicle for us to raise.
<unk> deposits.
And that is a.
Market rate.
And it helps us focus our efforts in raising deposits in that channel versus our core markets where.
We do have conversations with our customers on rate.
It reduces the.
Potential cannibalization of deposits and repricing of deposits there.
Okay.
Maybe one last one on capital management.
Was it 18 talks about the TCE targeted eight and a half it was 7% at the end of the year.
How does that come into play as you think about additional or further buyback activity.
Thank you.
Management and the board talk about that the buyback each time, we meet.
We take into account our.
Our current expectation for.
Coming year.
What we're seeing in the economic and operating environment.
And then in the most recent quarter we did.
We did buy back some shares but.
That we had earlier.
Quarters, and I think that was due to us wanting to gain some more certainty around our view of 2023 now that we.
Have that I think youll see us back in.
Hi.
The market here in the beginning of the year in Arkansas.
Our constraining factor right now is to.
Our retained earnings so we want to make sure that we are within a.
Certain percentage call it 60% 70%.
Payout and not higher than that.
So said differently Terry we look at TCE, but TCE, we look at it minus Aoc.
When we're doing our analysis.
We are very comfortable that the OCI is going to come back.
And we know it's going to come back mostly.
Almost always going to come back by 2020 at the end of 2025, So we look at it minus that.
And so that's.
That's not going to be a restraining factor for us in buying back shares.
Okay understood. Thanks for taking my questions and appreciate all the details in the prepared remarks. Thank you.
Sure.
Thank you and I'm not showing any further questions. At this time. This concludes today's conference call. Thank you for participating you may now disconnect.
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