Q1 2023 Equity Bancshares Inc Earnings Call
Yes.
Good day, and thank you for standing by walking through the Q1 2023 equity Bancshares earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the special need to press Star one on your telephone you will then hear an automated message advising her hand this race to withdraw your quest.
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Personally I'm sure all you may begin.
Good morning, and thank you for joining equity Bancshares conference call, which will include a discussion and presentation of our first quarter 2023 results presence.
Presentation slides to accompany our call are available via PDF for download at Investor not equity bank Dot com by clicking the presentation tab.
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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 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.
Thanks, Chris.
I want to start today's call by addressing the events that took place in the banking system during the first quarter.
First and foremost equity bancshares has never been stronger.
The issues that caused the failure of two.
Two banks and the voluntary liquidation of a third are not present in the equity story.
The communities, we serve provide us with a granular deposit base.
Diversified across industry and geography.
We are not taking outsize risk through leveraging.
Or chasing yield along the curve.
We do not have meaningful HTM portfolio.
And we believe we will not see further extension in our.
Portfolio in fact.
We are reinvesting cash flows off the portfolio into the loan book.
This probably delivers an increased a net interest margin.
Equity is well positioned to take advantage of opportunities through any potential economic downturn.
We have excellent regulatory capital ratios.
Low nonperforming asset balances and an expertise in M&A.
We will continue our goal to be the partner of choice.
For smaller community banks in our operating footprint.
Equity will continue to invest in our people our most important asset.
We will use technology to streamline previously high cash.
Shared service activities.
Evaluating the customer experience through innovation.
Dedication to exceptional service remains the highest priority at equity.
We are a Midwest community bank.
Offering financial expertise.
Like minded entrepreneurs.
I have with me today, our CFO Eric Newell.
Chief Credit Officer John Creek.
And our President Greg Anderson.
I'll, let Eric talk you through our financial results.
Thank you Brad and good morning.
Last night, we reported net income of $12 3 million or <unk> 77 per diluted share.
Non interest income was $9 1 million up 759000 linked quarter.
Noninterest expenses decreased $1 5 million linked quarter to $33 7 million, we calculate core EPS to be 73 per diluted share to reconcile GAAP earnings to core earnings this quarter removed 834000 of onetime bully benefit.
Our GAAP net income included a release provision for credit loss of.
366000.
While 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, our realized loss trends in our portfolio.
While we continue to have qualitative reserves satisfactory if uncertainty a modest release represents improvement in our asset quality and reserves. We had previously set aside for specific credits.
At March 31 coverage of ACL to loans at 135 basis points.
I'll stop here for a moment and let John talk through our asset quality for the quarter John .
Thanks, Eric.
We continue to see credit performance improved in most categories, including non accrual loans and Oreo.
Nonperforming assets improved $1 2 million ending the quarter at three 3% of total assets.
First of all non paas categories are less than half the balance is shown at the end of 2019.
Loans past due over 30 days were $5 4 million the.
The lowest dollar amount since 2019, while loans are 30% greater over the same period.
Equity bank's credit policy and alone decision, making.
Our secured lending with uncorrelated sources of repayment.
The bank is very intentional to operate from a position of strength and quality we.
We are mindful of the broader recessionary chatter and continue to underwrite with the same careful and conservative terms with strong customers like we always have.
We take very good care of our customers and remain prepared to grow our balance sheet and a safe profitable manner.
Ed.
Starting in 2022, we anticipated higher rates and the impact it would have on deposits.
We work diligently on our sales approaches and focused our teams to drive transaction deposit growth.
And uncover new opportunities and our communities.
We've trained our teams to ask more questions to better understand the financial goals of our customer and then provide financial expertise to help achieve those goals.
With products and services we offer.
Jonathan Group, our Chief deposit Officer has led this effort with local leadership.
We've been carrying an open position as Eric work to streamline and realign the operation staff.
We recently added Dan <unk> to lead our operations area as the Chief Services Officer.
He brings a great deal of experience and has hit the ground running.
We continue to fine tune products and services and recently hired a digital channel President.
Carlton Laird.
Charlton.
Responsible for driving our digital strategy.
Which in turn will drive loan deposit and fee income growth.
And expand our footprint without having to expand our physical branches.
We're continually accessing.
How to better interact with our customers and believe having a leader dedicated to our digital channel well more effectively drive our strategy and success in that area.
We are proud of and committed to our local decision, making allowing regional leaders to make decisions for their customers with the support of centralized shared services teams.
During the quarter, we expanded the current responsibilities and realigned three individuals to take on regional leadership as regional Ceos.
Mark Behrman leads our Metro markets, which you talk Kansas City and Tulsa.
Brad Daniel leads our southwest Western and Central Kansas regions, along with the Ozark region.
Josh means lead Western Missouri, Southeast, Kansas and Northern Oklahoma.
As regional Ceos, Mark Bratt, and Josh are responsible for driving deposits.
Lon.
The income growth.
And on the P&L for these areas.
Each partner with the rest of the executive team to ensure our customers receive best in class service in their respective communities Eric.
Eric.
Thanks, Brad loan growth in the quarter was $19 1 million or two 3% annualized loan.
Loan growth in the commercial and commercial real estate portfolios was six 4% annualized.
We originated $143 million of loans in the quarter with a weighted average coupon of 771%.
Most of our originations were in C&I and Craig.
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 first quarter the yield in our loan portfolio increased 35 basis points to 594%.
Cost of interest bearing deposits increased 68 basis points to 173% in the quarter.
We continue to use our direct bank as a source of liquidity is higher costs in our core bank.
As a higher beta than other deposit portfolios.
Public entity deposits, which represent $538 million at March 31 are also relatively high beta deposit source, but provide stability to our overall deposit franchise.
Net interest income totaled $39 1 million in the first quarter down from $42 million in the linked quarter.
Following the events that took place in the bank space during the quarter, we took steps to further bolster our liquidity position increasing on our balance sheet debt.
In early March we took on $300 million of FH Ob borrowings over the weekend after SBB and signature bank failures, we looked at our top 100, non collateralized deposit customers looked at what a 60% reduction of all of their deposits would be and borrowed on Monday morning.
We saw no discernible outflows in that week and in fact heard more from our customers wanting to move deposits to equity bank.
Once the Federal Reserve Bank term funding program was announced and we understood. Its terms, we opted to move a portion of our enhanced liquidity to dock program as it is a more favorable source of funding compared to the FHA.
Our loan to deposit ratio remained flat at 77, 7%, while we increased cash of $140 million in the quarter.
Actions had a notable effect on NIM as we reported 344% for the first quarter versus 367% linked quarter.
Turning to page 10 on the slide deck, you can see the composition of the change in net interest income, which benefited from an increase in yields on earning assets offset by the increase in the cost of interest bearing liabilities.
We benefited four basis points from purchase accounting in the first quarter down six basis points linked quarter and on top of the expectation going forward.
Noninterest income of $9 1 million was up $1 2 million linked quarter when excluding the $420000 gain on the branch sale in the fourth quarter, primarily driven by a onetime fully benefit of 834000.
Service charges and fees were down slightly linked quarter, while debit card income remained stable.
We continue to see pressure on mortgage banking income.
Salaries and benefits increased three 6% linked quarter offset by meaningful decreases in data processing and advertising and business development.
Other expenses include our tax credit partnership amortization in the first quarter totaled $1 1 million compared to $1 9 million in the fourth quarter.
Our outlook Slide includes an updated view of 2023, we do not include future rate changes in our forecast still includes the effects of lagging deposit rates.
Our provision is forecasted to be 20 basis points.
Average loans this is a more.
More optimistic view of the industry, mainly because of our existing coverage level to loans. The lack of recognized losses in our previous qualitative reserve build for recognizing economic uncertainty.
Our effective tax rate of 17% for the quarter differ slightly from our forecast, which was meant to represent an annual rate were still forecasting an effective tax rate for 2023% to 14%, which reflects Q tax credit investments that have been internally approved but we have not closed on.
Craig do you want to talk more about our lending efforts.
Thanks, Eric I want to give you color on the lending landscape.
We've seen many of our peers pull back on lending.
This is an opportunity for equity bank as it gives us a window to have more relative pricing power is.
As Eric previously mentioned, we've been successful in originating loans with eight to nine handles over the last quarter.
We've added some more granularity to our pipeline process.
In the last quarter, we mentioned our pipeline stood at $600 million.
We now break it down by a comparability are 75% probability are higher pipeline stands at $400 million.
This represents deals that are underwritten fully approved and further along in the funding process.
Our 50% profitability, which are loans submitted to underwriting is $185 million and our opportunity pipeline, which we placed 25% probability on stands at $330 million.
Our trust and wealth management team have been booking new business during the quarter, new business experienced 18% periodic growth when compared to December 31, 2022 assets under management.
The team led by Andrew must Great and John Jones has developed a robust pipeline, which if realized will drive growth of fee income from our trust and wealth team Fred.
I am proud of the work our exceptional bankers did in the first quarter.
I believe banks are the bedrock on which our communities are built.
Equity will continue to execute on our strategy.
Affectively growing core earnings through increasing operating leverage and prudent underwriting.
All while looking to build our franchise through selective and opportunistic M&A.
The execution of our mission increases the value of our organization for all stakeholders.
And with that we're happy to take your questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone.
To withdraw your question. Please press star one again, we will pause for a moment, while we compile our Q&A roster.
Our first question comes from Jeff <unk> with D. A Davidson your line is open.
Thanks, Good morning.
Just wanted to first just wanted to get into the margin a little bit.
You guys you've mentioned you've got some excess liquidity.
Impacting that reported.
Great.
With me.
The reported margin of $3 44 in your guide in Q2.
Could you what was the basis point.
And sort of weighing on the margin that you assigned to the excess liquidity that's excluded in perhaps that outlook.
Jeff This is Eric.
If we were to continue to hold excess liquidity on our balance sheet.
5% to 7% cash.
We expect there to be about 10 basis points impact on NIM.
Maybe 10 to 12, but importantly.
That does not impact NII.
Got it.
Alright, focusing on that.
The number and I guess.
We shall see but I guess the expectation that if you can are you over the course of the year you wean off that cash balance.
The idea is that I guess reported margin more closely matches actual margin.
Is that is that fair to assume.
I believe.
We will continually assess our cash position relative to what we're seeing in the.
Industry.
And having conversations with constituents, including regulators.
Something that we'll continually assess we're not seeing anything of concern from our customer behavior from a capacity perspective. So.
So from that point.
Sure.
Could be reducing our liquidity excess liquidity.
I think it's a little too soon for us to make a prediction on how and when the excess liquidity will come off our balance sheet.
Okay got it makes sense.
Just on that on the buyback.
Do you have the number of shares repurchased in the quarter.
Yes.
Yes.
Let us look that up Jeff why would go on to other questions, Yes, and we'll make sure. We answer that question for everyone by the end of the call how about that.
I guess just the amount that you stated in the release of $9 6 million that was was that solely in the first quarter.
Yes.
Yes.
Let me.
Again, I'll get the dollar amount and the number.
Number two for the quarter, but in the deck it would be in a quarter.
Okay, and maybe just one for my last one for Craig I think I missed that.
The loan pipeline could you repeat what that was at the end of Q1 versus end of year end of the calendar year.
Yes, Jeff.
The 12, 31, 'twenty, two our pipeline with $600 million.
Currently it's running at $915 million and what we said was that we assigned probability to three different categories over 75%, which we feel very very confident that we'll actually book and fund is $400 million are 50% profit.
<unk> is $185 million and then just kind of our opportunity pipeline, which we have signed a 25% rating is $330 million.
Perfect. Okay, I will step back. Thank you, Jeff Jeff I have your number so we repurchased 320000 shares in the first quarter and that dollar amount and then Dr represents the amount that was.
Total cost of that repurchase in the quarter.
Got it thanks.
One moment for our next question.
Our next question comes from Andrew Liesch with Piper Sandler Your line is open.
Hey, guys good morning.
Good morning, Andrew just wanted to talk on the on the margin guide so excluding that build it on balance sheet liquidity. It looks like it's going to be pretty stable from here I guess, what are the drivers behind that I mean, it sounds like maybe there's a little bit of asset remix and funding.
Funding costs, moving quite a bit higher so what are some of the puts and takes on that margin guidance.
Yeah, so starting on the asset side.
The loan book yield of 594.
At $3 31 for the quarter, we expect that to continue to increase.
Looking at the originations in the quarter the weighted coupon there was 771%.
We're seeing.
Loans go through our loan approval committees with eight to nine handles.
On them.
Oftentimes a spree.
Had to prime.
So we expect that even with just the new originations occurring on a loan portfolio, that's going to be a benefit also 60% of the loan book is adjustable.
So theres still some some loans that.
Or have not readjusted to higher interest rates, so that should be a benefit.
And Furthermore, as Brad mentioned in his prepared comments.
We're not reinvesting cash flows and the impact of our portfolio.
We're reinvesting that into the loan portfolio showed that loan portfolio yields have call. It two 5% actually it's probably lower than that now.
So there is obviously a pretty significant increase.
By reinvesting those cash flows.
So from that from the asset side, I think there's a lot more opportunity for upward momentum.
As we previously mentioned.
Current expectations for.
Cumulative cycle beta on the.
Deposit side around 35% to 40%.
Right now, we're showing ourselves at 25%. So we do expect that there will be some further pressure on the deposit side, but our focus on.
Growing and adding transaction accounts.
We will also help.
Managing the cost of the.
Total deposit portfolio.
So when you put all that together.
That's kind of where we land on that stability on them.
Gotcha and then.
The deposit growth guide it looks like maybe stabilized throughout the year as well.
The growth here in this quarter in PV, I guess whats whats holding I guess, if you look at the mix of deposit growth going forward is it going to be more CCD. I mean, you mentioned just now.
The emphasis on transaction accounts, how should we look at the mix of deposit growth trends there.
Yes.
I believe youre going to continue to see a meaningful growth in Cds, that's not a product that we're right right.
And actually.
While our retail deposits in the quarter were flat, we did have some brokered and there I believe.
What youre seeing on that growth, so youll, probably actually ccd's potentially fall back.
In the second quarter, but in our direct bank channel.
Brilliant top banks.
We have been emphasizing money markets on that channel just because of the upward sloping curve funding curve for Cvs.
Not necessarily.
Most ideal in terms of managing interest rate risk.
On money market.
Okay got it.
Thanks for taking the questions I'll step back.
One moment for our next question.
Our next question comes from Brett Robinson with top the group your line is open.
Hey, guys good morning.
Wanted to just to follow up back up on the on the margin question is is.
As it relates to the repricing and the opportunities on the asset side.
The duration on the Securities portfolio I think is four two years how much in the securities portfolio do you have I didn't quite catch that number if you gave it.
How much do you have it.
Maturing here in the next few quarters.
We estimate.
Youre getting around 100 million this year of cash flows off the portfolio and then it ramps up.
So in 2021, when we were investing excess liquidity into the investment portfolio, while we were using a lot of structure.
So what we're trying to protect against prepayment risk at that point and.
And extension risk. So when you look at the forecast of cash flows off the portfolio.
A lot of it back in 2024 and 2025.
Did we produce a graph on that that we published last quarter.
I'm not sure Bryan.
That's helpful.
Okay. Okay.
Yes.
And then wanted to wanted to ask about the digital channel.
In terms of that strategy.
Obviously, that's going to be higher cost.
No.
Big of that.
Balance sheet do you expect that bank to.
To become or to fund sort of the.
Core bank over the next year or two.
So the real value and that strategy is we don't we don't see it funding a huge portion of our of our balance sheet.
From a.
Hi price cost we are working with that strategy on how do we continue to grow it. So how do we continue to market around our current.
Locations and the digital platform, how do we continue to expand that we're attracting deposits nationally not just on the high cost deposits, but how do we do it on a money market base around our checking account base. So.
Now that we Havent launched and it's working.
That's really the long term strategy, but what it really gives us the ability to lower fund. So if we need to raise some deposits.
Instead of having to raise all the pricing across our entire footprint.
We can just raised deposits in that one branch and so.
And then we can bring in those deposits and what it really does is it keeps our beta down on our other.
Deposits in it and it's worked over the last nine months really well.
From time to time, we needed deposits, we went out and raised $350 million in deposits.
It didn't affect any of the other branch deposit pricing and so it's really helping us keep our betas down long term. So you kind of have to look at it as just one lever or one tool in a tool kit.
And and that's really what.
It's designed for and it's working really well doing that.
Okay, so more and more AD hoc on core strategy of growth.
Yes.
It's not a core strategy of growth it's really.
The ability to keep your betas down on your entire portfolio.
Yes that makes sense.
And then wanted to just lastly to make sure I understand the body language around some customers potentially moving to you and your optimism around the loan pipeline doesn't quite square up with the.
The average loan guidance.
Particularly at the lower end of the of the range any any.
Thoughts on.
The optimism on.
Get that a lot of people are pulling back so maybe that's some of it but it sounded like you guys are.
Little more optimistic maybe.
In the environment on growth, but the guidance is fairly to date any any thoughts on that.
Yes.
We are excited to see how this quarter plays out.
Because.
We left the guidance the same but we are we are definitely getting more opportunities at credit.
And higher and higher quality credit as other banks for a different reasons arent.
<unk> focused on credit because they have higher deposit ratios.
With our 75% loan to deposit ratio gives us the ability to pick and choose and.
And by the way that's at higher pricing.
As well, so we're getting a chance to pick deals at higher pricing and better quality.
And the number of deals has gone up as well so at the end of this quarter I think we'll have a better viewpoint on whether it's long term guidance needs to be adjusted.
And can we pull these things through to the finish line.
Fair, we are seeing that Greg yes. It is.
Okay.
That's helpful. Thanks for all the color.
One of them are for our next question.
Our next question comes from Damon Delmonte with <unk>. Your line is open.
Hey, good morning, guys. Thanks for taking my questions.
To kind of follow up on that last topic, there with the with the loan growth you guys had mentioned that.
The loan committee seeing some some loans with the 8% or 9% handle on them could you just talk a little bit about what types of loans those are and kind of like what the commercial real estate C&I kind of what are some of the underlying projects or collateral that would be involved in that.
Yes. This is Craig and what we've seen in the first quarter, primarily our COO.
Commercial and industrial activity and also commercial real estate those are probably our two biggest categories that we're seeing some opportunities in and as Brad mentioned is just due to the fact that we've seen a lot of our.
Community and regional competitors pull back.
Due to the kind of the liquidity crunch and we're getting opportunities at high quality credits and it's also based on the fact over the last year or so we've been very aggressive in our sales approach, making calls in our territories and thats starting to pay off for us.
And the competitors that are kind of pulling.
Pulling back in the market are those larger regional banks are those small community banks.
I would say the bulk of what we've seen and what we're hearing from our competition and from our customer base is more in the regional bank category.
Got it okay.
Helpful. Thanks, and then with regards to brilliant bank, how big is that currently and what would have been the trends the last couple of quarters for the size of that.
David Eric.
Less than 100 million in funding now.
I would say the trend.
<unk> has been.
Down to steady to down and.
And that's intentional.
It was just over $100 million, yes. It was over 100 million at one point, but frankly.
The pricing in the direct space direct banking space.
With a little irrational for us.
And we found alternative sources of funding that were much cheaper.
Got it and you said youre, primarily focusing thats a money market product.
Online money market product.
And do you happen to have the current rate on that on that book.
I can yes, I can get it for you.
Okay.
Then I guess, just lastly on the expense front.
Is there anything that you guys are considering or any opportunities you see interim.
Internally, where you could.
And maybe get some efficiencies in the overall expense structure.
Yes, Damon on the expense side.
We're constantly.
Evaluating ways to use technology.
Two.
Provide positive operating leverage.
There is several projects in place.
Whether it's delivering.
Our product or service.
Through an interactive teller machine.
It allows us to.
They are optimized.
That that delivery of a service through.
Sure.
A cheaper.
Way than maybe somebody going into a branch.
Or.
Providing.
Using technology for the underwriting for small business loans.
Being able to deliver products more quickly to our customer more efficiently. So I think it really comes down to.
Finding positive operating leverage.
On the expense side, which will then drive revenue.
Then.
Our efficiency ratio would improve from there.
Got it okay.
That's all I had thank you very much.
Good morning.
Just a follow up on Damon's question. The current cost of that portfolio, we're showing is four 3%.
Great. Thank you.
One moment for our next question.
Our next question comes from Terry Mcevoy with Stephens. Your line is open.
Thanks, Good morning, everyone.
Maybe Eric Eric Another margin question for you could you just talk about your outlook for noninterest bearing DDA accounts and balances as it relates to your margin outlook and maybe just a follow up if we get a rate hike next month in May is that good bad neutral for the margin and their trajectory for NII.
There is a lot better.
Yes.
If we get a increase in.
Fed funds rates and May I would say that.
A small net benefit to us.
In terms of our expectation.
On margin for the remainder of the two.
'twenty three.
<unk> two.
Transaction accounts noninterest bearing accounts, we do continue to.
I expect there to be a small decline there we actually have analyzed if you looked at our total noninterest bearing accounts year over year, we looked at the decline there and.
Sure.
Probably.
So commercial I looked at it from a commercial perspective, and I looked at it from a consumer perspective, so of the total decline of $200 million of it was commercial and 80% of that decline was in average balance decline within the account.
So what that tells US is that the business had excess liquidity.
From likely from government support programs in Covid, and Theyre spending down spending down those excess funds. So that 80% of that decline and then the remainder which was consumer we've identified 60% of that decline in the consumer accounts with spend down.
A decline in average balances.
<unk>.
Just like everyone else in the industry average balances are transaction accounts exploded in 2000 22021.
Even.
Maintaining a little bit in 2022.
But we're starting to see those.
Our excess funds be spec and so when we do our analysis and our budget.
We were reverting back to.
I think a 125% of where we are.
Average balances were pre Covid so call at 12 31 2019.
So thats, how we how we budgeted that Terry so hopefully that was helpful.
I don't I think there was a third question, but im forgetting yeah. No no. There was there was only two there you got them both.
Alright.
Brad.
A question for you equity has been opportunistic from a bank M&A standpoint.
Industry activity has been quiet here this year, what does the what does your Crystal ball tell you about bank M&A in and how do you think equity is positioned to benefit should should activity accelerate.
So I think we're positioned well I think we have a good balance sheet got good ratios.
And.
We've got a good relationship with the regulators.
I actually think Terry and the conversations I've been having the last three weeks I actually think that M&A is going to pick up.
The second half of this year I think the conversations are picking up today.
We've had several conversations in the last three weeks and there is a complete different tone than they were prior to that I think is.
We've got banks in our marketplace that have zero percent tangible common equity both at the bank and holding company and I think as regulators do examinations I think they'll start putting pressure on them to fix that.
And.
Theres not a lot of ways to fix that except to raise capital or to find a merger partner and so I think as we look at those opportunities.
I think those will accelerate.
And.
I think we're the benefactor in that whole thing I'm excited about what the next six months to two years brings in the M&A space.
Great. Thanks, everyone have a good day.
And I'm not showing any further questions at this time. So this does also conclude today's presentation. You may all disconnect and have a wonderful day.
Okay.
[music].
Okay.