Q2 2023 Equity Bancshares Inc Earnings Call
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Okay.
Good day, and thank you for standing by and welcome to the second quarter 2023 equity Bancshares, Inc. 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 this session you will need to pay.
Thats Star one one on your telephone you will then hear 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>.
Good morning, and thank you for joining equity Bancshares conference call, which will include a discussion and presentation of our second quarter 2023 results presentation slides to accompany our call are available via PDF.
Equity bank Dot com by clicking the presentation tab.
You May also correct.
Equity Bank Dot com to view the webcast player.
During this call on our webcast player. Please note that slides will not automatically advance. 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.
Good morning, and thank you.
For your interest in equity Bancshares.
Please introduce Rick Sims.
Our new President who joined us in May.
Rick has a strong banking background with 30 years of experience.
He's been a leader in the industry and technology delivery in.
In regional bank operating structures.
We are confident he will help us drive efficiency.
And our delivery channels.
You'll hear more from him later in the call.
Yeah.
Let's look back at the second quarter, our balance sheet strength strong capital high levels of liquidity and interest rate risk management.
Stability in a dynamic and challenging operating environment.
With Rick joining the team, it's a perfect time to reassess.
<unk> is strategic.
I am proud of the equity bank team and their commitment to delivering products and services to our customers.
One of our values is entrepreneurship.
Evaluating how we do things and finding better ways to respond to our customers' reflects on our entrepreneurial approach.
As a team we've been focusing on the drivers of value creation.
We know, creating shareholder value starts with generating and delivering value to our customers.
To deliver customer value.
Voice has to be in.
And developed.
These elements complete a solid three legged stool.
Our customers.
Shareholders.
Always.
Adapting to changing environment and delivering to our customers the products and services. They need is crucial for equities long term growth.
And ability and competitive advantage.
<unk>.
Directly linked to customer satisfaction and loyalty.
We must understand and meet the needs and expectations of our customers to differentiate ourselves from our competition.
Being there for our customers through good and bad times builds trust.
Through all these relationships our customers become advocates for equity bank.
And assure future business growth.
Our entire executive management team is working to build a culture and environment that fosters the behaviors necessary to deliver a superior customer experience.
Also joining me today is Eric Newell our CFO .
And Chief Credit Officer, John Creek.
I'll, let Eric walk you through our financial results.
Thank you Brad and good morning.
Last night, we reported net income of $11 5 million or <unk> 74 per diluted share during.
During the quarter, we completed our repositioning of $51 million from our investment portfolio.
Yielding assets, resulting in a reduction of income of $1 3 million pre tax.
The repositioning of an earn back of about 10 months at current interest rates.
Without the loss net income would have been $12 4 million or <unk> 80 per diluted share.
We reported 77 cents per diluted share in the first quarter.
When removing the securities loss non interest income was $8 3 million down 300000 linked quarter. However, during the first quarter, we had $834000 one time benefit.
Excluding onetime items from both quarters, we have an improvement of fee income totaling approximately 500000.
Non interest expenses totaled $33 1 million and were relatively flat from the linked quarter.
Our GAAP net income included a provision for credit loss of 298000.
To understand the attribution of the inputs you can reference our earnings deck, which shows the calculation.
We've yet to see economic trends in our markets. There are specific concerns 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 market uncertainty our asset quality has remained stable.
June 30 coverage of ACL for loans is 134%.
I'll stop here for a moment and let John talk through our asset quality for the quarter.
Thanks, Eric.
As of the end of the second quarter non nonperforming assets as a percentage of total assets hit its lowest level since our company went public in 2015.
Net charge offs remain low with second quarter net charge offs totaling 857000 as credit quality continues to improve.
The balances of all non pass categories improved declining to $47 1 million at June 30 from $59 9 million at March 31.
Non owner occupied office is an ongoing area of concern for the banking industry.
Equity bank's office portfolio totaling $91 3 million and represented just two 7% of the total loan portfolio.
Average loan size is $1 seven Nick.
$77 million or 85% of our loans secured by office properties are located in Kansas City, and Wichita, our two largest markets.
The unemployment rates are favorable in Kansas City, and Wichita at three five and three <unk> and 3% respectively.
The Midwest is not yet experienced the same level of remote or hybrid work as some of the larger metro markets in the U S.
All loans in the office portfolio remain pass rates.
The average loan to value was 47% and the average weighted loan to value is 54%.
88% of the office portfolio has an LTV of less than 70%.
The average debt service coverage is two points.
Yes.
The average occupancy in the portfolio is 91%.
95% of the office loans have recourse to individuals with favorable levels of liquidity and network.
Thanks, John .
End of period loans declined modestly in the quarter during the quarter management made the decision to exit our remaining shared national credit exposures and we have some customers that had asset dispositions that resulted in payoffs.
Loan originations in the second quarter were $153 million with a weighted average coupon of seven 8%. This compares to a $143 million with a weighted average coupon of 771% in the first quarter and $330 million with a weighted average coupon of 5.04% in the second quarter two.
<unk> thousand 22.
We continue to successfully originate loans at higher interest rates and we're seeing higher yields.
With an analysis completed at May 31, 2023 over the last 12 months.
Re priced $1 2 billion of our loan book and originated $676 million of new loans at market rates, which has driven an increase a coupon of 240 basis points.
The average change in rate by the repricing was 360 basis points.
We have $1 2 billion of our portfolio is either floating or adjust monthly.
Over the next four quarters, we have $407 7 million of loans, where the contractual repricing with a weighted average coupon of six 5% 6%.
Making a simple assumption that this re prices to prime.
As an annual $7 million of revenue.
During the second quarter, our yield on our loan portfolio increased 40 basis points to 634%.
Cost of interest bearing deposits increased 41 basis points to 214% in the quarter.
This slowed from the first quarter, where we experienced a 68 basis point increase.
Net interest income totaled $39 4 million in the second quarter up from up $318000 from the first quarter driven by an increase in average earning assets.
We continue to have enhanced liquidity on our balance sheet from actions, we took to respond to market dislocation in the first quarter.
Average fed funds sold increased to $185 million from $120 million in the first quarter.
While we continue to have $140 million outstanding at the Federal Reserve banks.
Funding program.
Currently, earning a positive spread on that borrowing though it does have the effect of reducing margin.
We calculate that the excess liquidity has the effect of reducing margin by seven basis points.
Salaries and benefits decreased $1 5 million in the quarter.
The decline about 730000 of it is onetime in nature with a reduction in expense of forfeited unvested restricted stock.
Data processing increases are due to higher volumes on both credit and debit card platforms repricing of contracts exhibiting some inflationary pressures and a new deposit processing system that will provide an enhanced customer experience.
Professional services are driven by some legal expenses that we anticipate will be covered by insurance in future period.
Marketing is higher due to advertising to continue to attract deposits.
Our outlook slide includes a forecast for the third quarter. We do not include future rate changes, though our forecast still includes the effect of lagging deposit rates.
Our provisioning is forecasted to be closer to 10 basis points to average loans on an annualized basis.
This is more optimistic view of industry, mainly because of our existing coverage level to loans. The lack of recognized losses in our previous qualitative reserve bill for recognizing economic uncertainty.
Rick.
I'm excited to have joined the equity Bank team I've spent my first months visiting our regions and meeting with our teams I've seen abundance of opportunities to leverage the experience and relationships. Our sales teams exhibit and continuing to drive organic growth while meeting the needs of our customers. My goal over the next several months will be to better understand the behaviors of our <unk>.
<unk> team members and then adapt in ways that will improve our execution approach. The NGO will be to ensure that we provide information to the sales channels.
That help guide behaviors to ensure higher yields while holding ourselves accountable successful execution will allow us to deepen our existing relationships acquire new relationships and continue to improve the customer experience, all while being mindful of spread and expense management during.
During the quarter non brokered deposits increased $46 million or four 7% annually as our bankers continue to emphasize customer service, while serving as a resource to our communities and turbulent times.
As Eric previously mentioned, we've been successful in originating higher yielding loans and the repricing characters characteristics of the loan book are favorable our pipeline continues to hold our 75% probability are higher pipeline stands at $366 million. This represents deals that are fully approved in.
Underwriting are 50% probability, which are loans submitted to underwriting is $376 million and the opportunity pipeline, which we placed 25% probability on stands at $367 million, Our trust and wealth management team has been booking new business year to date assets under management have grown by 12 21 person.
<unk>.
The team has developed a strong pipeline as we look forward to continuing to expand their contribution to fee income in future periods.
Thanks, Rick.
Our company is well positioned in this uncertain environment, our asset quality metrics.
Are the best they have ever been.
We have limited exposure to commercial office concerns our balance sheet structure is solid.
And we have a granular deposit base and a strong capital base.
We continue to augment our leadership team, which will support continued growth.
We've recently hired and can knutson.
As our chief Human Resource Officer this spring.
He is an innovator with over 20 years of human resource leadership experience and just last week, we added David passed to the team as our new Chief Information Officer, David has over 20 years of technology leadership experience.
Most previously at <unk>.
Our regional leadership teams are led by Josh means Brad Daniel and Mark permit.
And they give us the foundation for growth in all our markets.
Equity will continue to execute on our strategy.
<unk> growing core earnings through increasing operating leverage and prudent underwriting.
All while looking to build our franchise through selective and opportunistic M&A.
We are seeing more activity on the M&A front.
And we expect that to pick up over the next several quarters.
Okay.
The execution of our mission increases the value of our organization for all stakeholders.
And with that we're happy to take your questions.
Thank you.
Mind or 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.
One moment for questions.
Our first question comes from Jetblue. This with da Davidson You May proceed.
Thanks, and good morning.
Just a question on your loan growth guidance, it looks like sort of tilted to the downside next quarter, but for the full year average suggests maybe <unk>.
And every year, a little stronger if you could just kind of walk us through your expectations for that for the second half.
And this is Rex thanks for your question so.
We're seeing a potential uptick on this really.
First purpose prizes borrowers settling into.
Kind of the new rate environment. So we see that we think that there'll be a little bit more demand from them that way in the second part of it is our Tulsa market led by Ryan Morris, We see that looking really strong right now for the second half of the year. In addition, we will see some some upticks probably on the consumer side from both.
Private private banking.
As we are moving at a little bit more into that area and then also on the on the mortgage side.
And then finally, we think that within the market, where we are we have the capacity to.
And as we get more into the second half of the year and with our strong start.
Our deposit franchise and strong deposit potential for growth there will be able to continue that consistency and lending where maybe some of our competitors will struggle a little bit more so that's really kind of why we are why we're seeing that uptick.
Okay. Thanks, Rick just I guess, just a follow up.
Sounds rather customer driven in terms of that behavior anything got it.
In house in terms of are you is the <unk>.
Bank somewhat guarded on on further originations whether that be credit concerns or.
Funding concerns it sounds I mean, it sounds like it's led by the customer, but I just wanted to kind of get a sense for in house your willingness to come out.
No in fact, I mean, John right here, we're looking at each other.
To continue to lend consistently and we don't really see a.
Anything stopping us from being able to do in the second half of the year.
Okay. Thanks.
I'll be hopping back to the expense line.
Eric I think you mentioned in the <unk>.
Top line.
Some.
Benefit this quarter on some departures.
One I guess do you expect kind of that to come back that benefit to pop back into expenses closer to $16 million on the top line and then two are those given those departures or are you looking to hire there is some openings of areas that you're looking to backfill.
Adjusted I agree that the $16 million number is probably a good run rate there.
One time benefit that we recognized in the quarter was about 700000 Btu forfeited unvested restricted performance shares.
No.
We are not.
Looking to backfill those areas.
If you could just kind of what areas were that was it just redundancies or back office or what was the area of <unk>.
Where those folks left.
So.
The.
Those are some of the restructuring we announced in May with Greg and Craig.
Departing.
And.
As hiring Rick Sims to replace them.
Okay.
Got it I'll step back thank you.
Okay.
Thank you one moment for questions.
Our next question comes from Terry Mcevoy with Stephens you May proceed.
Hi, good morning, everyone.
Thanks Terry.
Maybe just start the 40% of the portfolio CRE.
Been in the news a lot about an area of stress. So I don't know John or somebody can you just talk about or provide maybe more insight into the portfolio in terms of what youre seeing as interest rates rise in any segments, you're watching closely today.
Appreciate all the details in the prepared remarks on the office portfolio.
Yes, Thanks Terry.
It's just an interesting time right you would think that you are most concerned about homebuilder and hotels and things like that we've come off of this <unk> cycle and we got our rail travel Reemergence Senate has seem to cure a lot of concerns about hotel.
And then we don't have we have a very small homebuilder portfolio and when you look across that portfolio.
Housing conditions.
Supply of housing is very constrained and there's still high demand.
So the traditional things that you would look at are still pretty strong.
And we just finished a credit exam.
Really well on the credit exam, we have just completed our updated our rate stress testing and that stress testing. The rates have continued to move up the performance of our stress testing has continued to tell us that our customers are keeping up with the rate environment in terms of how they are able to.
Manage their business.
The cash flow that they are able to produce.
The one thing you do see in it.
Lower favorable I think is that.
The real estate credits that we are able to put on.
<unk> have extremely strong levels cash going into the projects, which would.
I would tell you that those developers and investors and folks that finance those kind of projects are optimistic about their ability to overcome this environment that we're in so.
<unk>.
And the levels of cash.
We see going into new projects or 40% and 50%.
The credit book is very strong we have net migration improvement net improvement across all categories.
We just finished examples favorable.
It's hard to find weakness in the credit book, but there are things that you would traditionally be concerned about.
And we have our eyes wide open for those things, we just arent seeing this weaknesses materialized at this point and even with those types of Paydowns were still booking new originations and improving the originations and I would say, 75% to 90% of our floating and they are in the eights and nines.
Great. That's great color. Thank you and then maybe as a follow up for Eric What do you think deposit betas go from here and what type of assumptions on the deposit side do you have within your NIM outlook for the second half of the year.
Yes.
In our earnings deck on Slide 12, we do show our cumulative beta so we're showing 30% cumulative beta for deposits.
From a modeling perspective, Chris what's our terminal data okay.
It's a little bit north of 40 still rolling it out over the next.
About 12 months locked in runway in terms of when we think the potential for the peak of that beta would be.
In terms of how we're modeling it yeah. So so we when we do our forecasting and modeling. We're currently using our terminal beta 40 unit fixed ratable in nature, probably another 12 months out.
So.
Said another way there's still some.
Expect in our forecast slide there, even though we do model and increased market rates.
And I know there is a growing expectation that the fed is going to move here.
And our next meeting, but we do modeling.
Cumulative beta increasing rapidly up to 40, probably call. It June 30 <unk>.
24.
Great.
I appreciate that thank you.
Thank you.
One moment for questions.
Sure.
Our next question comes from Andrew Liesch with Piper Sandler You May proceed.
Hey, everyone. Good morning.
Quest than on the shared national credits and the larger loans that paid off do you have the aggregate dollar amount of all of those payoffs.
Yes, I don't have it.
Having an aggregate dollar amount I would say.
From the number I do have is on the originations we originated $153 million in the quarter.
So there was a little bit of a lumpiness.
Larger credit paying off it was a shared national credits contributed to it but I would say the larger part of it was some of our customers having liquidity events, where they were selling the underlying asset paying us off.
Yes, what I would say Andrew is we had a book of business we bought.
24% to 36 months ago.
But we've been reinvesting back into was never large it was never $50 million, but it was south of that and.
And we just took a stance over the last several years that we just don't meet that book of business any longer.
It had a low yield on it think in the fives.
Ed.
Core to us and so we.
We do have some shared national credits and relationships that we understand that are in our market and our customers.
But not when we think of traditional snacks, we think of brokerage snacks better.
Big Big credits that trade openly and we are out of all of those now.
Got it.
Alright thats helpful. There.
Shifting gears over to the margin.
The mid point here suggests.
A little bit of the midpoint of your guidance range for this quarter suggests a little bit of expansion I guess, what gives you that confidence is it really just where the new loans are being added and the re pricing that you see ahead.
Yes.
Definitely our new originations are.
As eight nine year old bottlenecks.
I mentioned earlier.
Pricing characteristics of the loan portfolio.
And.
Even without rates moving up.
Continued expectation of redeploying our cash flows out of the investment portfolio into the loan portfolio.
Got it so we'll see some more of that remix and continue that.
Yes, Sir and then I guess.
One last question there I mean, how would you how is the balance sheet sensitivity right now to further rate changes by the fed.
Yes.
I think if you book.
I was kind of looking at this myself looking back a year relative to where we stand today.
We haven't seen much change in margin when you look back a year on a margin basis. So.
Our stance has been to be close to neutral.
So on interest rate risk management as possible.
There's going to be pockets.
Of our balance sheet.
Exhibit some asset sensitivity our liability sensitivity.
I look at it is if the fed moves.
This quarter, we will.
Probably see one or two basis points.
NIM expansion right away and then it's really going to come down to characterize the behaviors of our deposit.
Portfolio in terms of repricing.
Thank you.
What we're proud of what we saw.
I can speak to others, but what we saw this most recent quarter is a slowing of repricing our deposit portfolio you can see that in the.
Cumulative beta change from fourth quarter to first quarter in this first quarter or second quarter anecdotally not seeing we're not having many conversations with our customers on exception deposit pricing.
My view is that when the fed stops moving.
Larger calypso to 75% 70 basis points.
Doesn't create as much.
Inflection point for our customer.
Contactor banker here at equity and talk about the rate so I expect that to continue to be.
Helpful facts.
<unk> for us.
Half of 2023.
Got it.
That's really helpful. Thanks for taking the questions I'll step back.
Thank you and as a reminder to ask a question you will need to press star one on your telephone.
Our next question comes from Damon Delmonte with <unk> you May proceed.
Hey, good morning, guys. Thanks for taking my question just a couple of points of clarification here. So the margin guide that's in the outlook slide that that takes into account the seven basis points of liquidity drag is that correct Eric.
Actually exclude it.
Sorry, that's what I meant.
Sorry, Im asking you to add back in the seven basis points to the $3 38. So our starting point is $3 45 for the quarter correct, yes, Okay, alright, great and then the.
The guide on provision that was 10 basis points was that of average loans or is that.
How are you kind of modeling a 10 basis point net charge off rate.
Average loans on an annualized basis.
Okay.
Great.
And then lastly.
You mentioned about M&A can you just give a little bit more color and perspective on that.
Have you been having more conversations are you optimistic that you could find the transaction.
In the back half of this year or do you think thats more of a 2024 event.
Yes, we are having more conversations we have active conversations today.
With institutions.
They are being driven by.
<unk> been putting off or.
Just trying to get deals done.
Over the last couple of years, they have management issues our ownership issues.
So I think there'll be some deals announced in our area.
This year.
Were the successful bidder on those we'll announce those as us if we're not successful.
Wirer there'll be announced if someone else. So I think there will be deals announced this year in our market area.
And I think we have a good chance.
Being in that mix I know, we have a good chance of being in the mix.
So we're opportunistic on that.
Very disciplined on it.
I always have been on pricing.
So.
It's going to have to fit within our box that.
I think there's opportunities there.
Excited about is our organic growth we have a really good leadership team.
Our regional <unk>.
And then underneath them.
The guys. They have put in place over the last several years are doing a great job on the origination side. So im most actually excited about the organic possibilities at equity bank, but if you add the M&A opportunities on top of that.
I think we have some really good opportunity.
This year and going into next year.
Great. Okay. That's all I had thank you very much.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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Okay.
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