Equity Bancshares Inc
NYSE:EQBK
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Good day and thank you for standing by. Welcome to the Q1 2023 Equity Bancshares Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I'd now like to hand the conference over to your speaker today, Chris Navratil. You may begin.
Chris Navratil
Good morning and thank you for joining Equity Bancshares conference call, which will include discussion and presentation of our first quarter 2023 results. Presentation slides to accompany our call are available via PDF for download at investor.equitybank.com by clicking the presentation tab. You may also click the event icon for today's call posted at investor.equitybank.com to view the webcast player. If you are viewing this call on our webcast player, please note that slides will not automatically advance.
Please refer Slide 2, 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 Elliot.
Thanks, Chris. I'll 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 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 have not taken outsized 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 AFS portfolio. In fact, we are reinvesting cash flows off the portfolio into the loan book. This probably delivers an increase in net interest margin.
Equity is well positioned to take advantage of opportunities through any potential economic downturn. We have excellent regulatory capital ratios, low non-performing asset balances, and an expertise in M&A. We'll 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 touch shared service activities. Evaluating the customer experience through innovation and dedication to exceptional service remains the highest priority at Equity. We are a Midwest community bank offering financial expertise to like-minded entrepreneurs.
I have with me today our CFO, Eric Newell; Chief Credit Officer, John Creech; and our President, Craig Anderson. I'll let Eric talk you through our financial results.
Thank you, Brad, and good morning. Last night, we reported that income of $12.3 million or $0.77 per diluted share. Non-interest income was $9.1 million up $759,000 linked quarter. Non-interest express decreased $1.5 million linked quarter to $33.7 million. We calculate core EPS to be $0.73 per diluted share to reconcile GAAP earnings to core earnings this quarter, remove $834,000 of one-time BOLI benefit.
Our GAAP net income included a release through provision for credit loss of $366,000. While we expect softening in the broader economy in 2023, we have not seen economic trends in our markets, there are specific concern and more importantly, we have not seen any declining quality or realized last trends in our portfolio.
While we continue to have qualitative reserves set aside for this uncertainty, the 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 is 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. Non-performing assets improved $1.2 million, ending the quarter at 0.33% of total assets. The balances of all non-pass categories are less than half the balances shown at the end of 2019. Loans past due over 30 days were $5.4 million, the lowest dollar amount since 2019, while loans are 30% greater over the same period.
Equity bank's credit policy and loan decision making favor secured lending with uncorrelated sources of repayment. The bank is very intentional to operate from a position of strength and quality. 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 in a safe, profitable manner. Brad?
Starting in 2022, we anticipated higher rates and the impact it would have on deposits. We work diligently on our sales approaches and focus our teams to drive transaction deposit growth and uncover new opportunities in 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 Roop, our Chief Deposit Officer has led this effort with local leadership.
We've been carrying an open position as Eric worked to streamline and realign the operations staff. We recently added Dan Duchnowski 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. Charlton [ph]. Charlton is 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 will more effectively drive our strategy and success in that area. We are proud and committed to our local decision making, allowing regional leaders to make decisions for their customers with the support of centralized shared service teams.
During the quarter, we expanded the current responsibilities and realigned three individuals to take on regional leadership as regional CEOs. Mark Parman leads our metro markets, Wichita, Kansas City, and Tulsa. Brad Daniel leads our Southwest, Western and Central Kansas regions along with the Ozark region. Josh Means leads Western Missouri, Southeast Kansas, and Northern Oklahoma. As regional CEOs, Mark, Brad and Josh are responsible for driving deposits, loan, fee income, growth and own 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?
Thanks Brad. Loan growth in the quarter was $19.1 million or 2.3% annualized. Loan growth in the commercial and commercial real estate portfolios was 6.4% annualized. We originated $143 million of loans in the quarter with a weighted average coupon of 7.71%. Most of our originations were in C&I and CRE.
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 the loan portfolio increased 35 basis points to 5.94%. Cost of interest-bearing deposits increased 68 basis points to 1.73% in the quarter. We continue to use our direct bank as a source of liquidity that is higher cost than our core bank and has a higher beta than other deposit portfolios. Public entity deposits, which represent $538 million at March 31, are also a relatively high beta deposit source, but provides stability to our overall deposit franchise.
Net interest income totalled $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 the balance sheet debt. In early March, we took on $300 million of FHLB borrowings. Over the weekend after SVB 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 it 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 Banc.
Once the Federal Reserves' bank term funding program was announced and we understood its terms, we opted to move a portion of our enhanced liquidity to that program as it is a more favorable source of funding compared to the FHLB. Our loan to deposit ratio remained flat at 77.7% while we increased cash $140 million in the quarter. These actions had a notable effect on NIM as we reported 3.44% for the first quarter versus 3.67% 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.
Non-interest income of $9.1 million was up $1.2 million linked quarter when excluding the $422,000 gain on the branch sale and the fourth quarter, primarily driven by a one-time BOLI benefit of $834,000. Service charges and fees were down slight linked quarter, while debit card income remained stable. We continue to see pressure on mortgage banking income.
Salaries and benefits increased 3.6% 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, though our forecasts still includes the effects of lagging deposit rates.
Our provision is forecasted to be 20 basis points to average loans. This is a more optimistic view than the street, mainly because of our existing coverage level to loans, the lack of recognized losses and our previous qualitative reserve build for recognizing economic uncertainty. Our effective tax rate is 17% for the quarter, differs slightly from our forecast, which was meant to represent an annual rate. We're still forecasting an effective tax rate for 2023 of 14%, which reflects two 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 on the lending landscape. We've seen many of our peers pull back on lending. This is an opportunity for Equity Banc as it gives us a window to have more relative pricing power.
As Eric previously mentioned, we've been successful in originating loans with eight and nine handles over the last quarter. We have 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 probability. Our 75% probability or higher pipeline stands at $400 million. This represents deals that are underwritten, fully approved and further along in the funding process.
Our 50% probability, which our loans submitted to underwriting is $185 million, and our opportunity pipeline, which we place 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 Musgrave and John Jones has developed a robust pipeline, which if realized will drive growth of fee income from our trust and wealth team. Brad?
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, effectively grow in 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.
[Operator instructions] Our first question comes from Jeff Rulis at D.A. Davidson. Your line is open.
Thanks. Good morning. Just wanted to get into the margin a little bit. As you've mentioned, you've got some excess liquidity sort of impacting that report, excuse me, the reported margin of 3.44% and your guiding Q2. Could you -- what was the basis point weighing on the margin that you'd 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, so think 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 dollars.
Got it. Just trying to focus in on the NIM number and I guess, we shall see, but I guess the expectation that if you can or 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 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, that's something that we'll continually assess. We're not seeing anything of concern from our customer behavior apart from the depository perspective. So from that point, we could be reducing our liquidity -- excess liquidity, but I think it's a little too soon for us to make a prediction on how and when that excess liquidity would come up the balance sheet.
Okay. Got it. Makes sense. And just on the buyback, do you have the number of shares repurchased in the quarter?
Yes. Let us look that up, Jeff, while we're go on with other questions and we'll make sure we answer that question and we'll make sure we answer that question for everyone by the end of the call. How about that Eric?
And I guess just the amount that you’ve stated in the release of $9.6 million. That was -- was that solely in the first quarter?
Let me -- again, I'll get that dollar amount in the number to you for the quarter, but in the deck, it would be a quarter.
Okay. And maybe just one for -- the last one for Craig, I think I missed the loan pipeline. Could you repeat what that was at the end of Q1 versus end of the year end of the calendar year?
Yes Jeff. At the 12/31/22, our pipeline was $600 million and currently it's running at $915 million and what we said was that, we've assigned probability to three different categories over 75%, which we feel very, very confident that we'll actually book and fund is $400 million. Our 50% probability is $185 million and then just kind of our opportunity pipeline, which we assigned a 25% rating, is $330 million.
Perfect. Okay. I will step back. Thank you,
Jeff, I have your number. So we repurchase 320,000 shares in the first quarter. And that dollar amount in the deck represents the amount that was the total cost of that repurchase in the quarter.
Got it. Thanks.
Our next question comes from Andrew Liesch at Piper Sandler. Your line is open.
Just want to talk on the margin guide. So excluding that building on balance sheet liquidity, looks like it's going to be pretty stable from here. I guess, what are the drivers behind that? It sounds like maybe there's a little bit of asset remixing, but funding costs are moving quite a bit higher. So what are some of the puts and takes on that margin guide?
Yeah, so starting on the asset side, with the loan book yield of 5.94% 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 7.71%. We're seeing loans go through our loan approval committees with eight and nine handles on them, oftentimes a spread to prime.
So we expect that even with just the new originations occurring on the loan portfolio, that's going to be a benefit. Also, 60% of the loan book is adjustable. So there's still some loans that 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 in the investment portfolio. We're reinvesting that into the loan portfolio.
So, the loan portfolio yields have, call it 2.5%, actually, it's probably lower than that now. So there's obviously a pretty significant increase by reinvesting those cash flows. So from the -- from the asset side, I think there's a lot more opportunity for upward momentum. As we previously mentioned, our current expectation for cumulative cycle beta on the deposit side is 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 will also help in 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.
Got you. And then, the deposit growth guide looks like maybe stable throughout the year as well. Yet the growth here in this quarter in CDs, I guess, what's holding, I guess, look at the mix of deposit growth going forward? Is it going to be more these CDs? You mentioned just now some emphasis on transaction accounts, but how should we look at the mix of deposit growth and trends there?
Yeah. I don't believe you're going to continue to see a meaningful growth in CDs. That's not a product that we're emphasizing, and actually, while our retail deposits in the quarter were flat, we did have some brokered in there, and I believe that's what you're seeing on that growth. So you'll probably actually see CDs potentially fall back in the second quarter.
But in our direct bank channel, Brilliant Bank, we have been emphasizing money markets on that channel just because of the upward loping curve funding curve for CDs. It's not necessarily the most ideal in terms of managing rate and interest rate risk and we've been focusing on money marketing.
Okay. Got it. Thanks for taking the questions. I'll step back
Our next question comes from [indiscernible]. Your line is open.
Hey guys, good morning. Wanted just to follow up back up on the margin question, and as it relates to the repricing and the opportunities on the asset side. The duration on the securities portfolio, I think is 4.2 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 that's maturing here in the next few quarters?
We estimate that you're getting around a $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, we were using a lot of structure. So we were -- what we were trying to do is protect against prepayment risk at that point and extension risk. So when you look at the forecast of cash flows off the portfolio, we get 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 Brad.
No, that's helpful. And then wanted to -- wanted to ask about the digital channel. How much, in terms of that strategy obviously that's going to be higher cost, how big of that -- of a balance sheet do you expect that bank to become or to fund the core bank over the next year or two?
So, the real value in that strategy is we don't -- we don't see it funding a huge portion of our balance sheet from a high price cost. We are working with that strategy on how do we continue to grow it. So how do we continue to mark around our current locations in the digital platform, how do we continue to expand that so that we're attracting deposits nationally, not just on the high cost deposits, but how do we do it on a money market base or on a checking account base?
So now that we have it launched and it's working, that's really the long term strategy, but what it really gives us is the ability to lower funds. So if we need to raise some deposits instead of having to raise all the pricing across our entire footprint, we can just raise deposits in that one branch.
And so -- and then we can bring in those deposits and what it really does is it keeps our betas down on our other deposits and it's worked over the last nine months really well. From time to time, we needed deposits. We went out and raised, $30 million, $50 million in deposits and 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 toolkit and that's really what, it's designed for and it's working really well doing that.
Okay. So more ad hoc and core strategy of growth. So helpful.
Yeah, it's not -- it's not a core strategy of growth. It's really the ability to keep your betas down on your entire portfolio.
Yeah, that makes sense. And then wanted, 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 average loan guidance particularly on the lower end of the range. Any thoughts on the optimism on, and I get that a lot of people are pulling back, so maybe that's some of it, but sounded like you guys were a little more optimistic maybe in the environment on growth, but the guidance is fairly sedate. Any thoughts on that?
Yeah, we're excited to see how this quarter plays out because, we've left the guidance the same, but we are definitely getting more opportunities at credit and higher -- and higher quality credit as other banks for different reasons aren't 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 by the way, that's at higher pricing as well. So we're getting the 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. Is that a fair way of saying that, Craig?
Yes, it is.
Okay. That's helpful. Thanks for all the color.
Our next question comes from Damon DelMonte with KBW. Your line is open.
Hey, good morning guys. Thanks for taking my questions. Just to kind of follow up on that, the last topic there with the loan growth. You guys had mentioned that the loan committee seeing some loans with the 8% or 9% handle on them. Could you just talk a little bit about what types of loans those are in kind of like what, like 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 are 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, it's 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 that's starting to pay off for us.
And the competitors that are kind of pulling back in the market, are those larger regional banks, or 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. That's helpful. Thanks. And then with regards to Brilliant Bank, how big is that currently and what have been the trends the last couple quarters for the size of that?
Damon, it's Eric? It's less than a $100 million in funding now. And I would say the trend has been down to -- steady the down. And that's intentional. It was over a $100 million at one point, but frankly the pricing in the direct space, direct banking space was a little irrational for us and we found alternative sources of funding that were much cheaper.
Got it. And you said you're primarily focusing, that's a money market product on online money market product,
Yeah.
And do you have happen to have the current rate on that book?
I can, yeah, I can get it for you.
Okay. And then I guess just lastly, on the expense front, is there anything that you guys are considering or any opportunities you see internally where you could and maybe get some efficiencies in the overall expense structure?
Yeah, Damon, on the expense side, we're constantly evaluating ways to use technology to provide positive operating leverage. There's several projects in place whether it's delivering a product or service through an interactive teller machine that allows us to optimize that delivery of a service through a cheaper way than maybe somebody going into a branch or providing or using technology for the underwriting for small business loans and being able to deliver our products more quickly to our customer and more efficiently.
So I think it really comes down to finding positive operating leverage on the expense side, which will then drive revenue and then our efficiency ratio would improve from there.
Got it. Okay. I'll all that I had. Thank you very much.
Just a follow-up on Damon's question. The current cost of that portfolio we're showing is 4.3%.
Great. Thank you.
Our next question comes from Terry McEvoy with Stephens. Your line is open.
Thanks. Good morning, everyone. Maybe Eric, another margin question for you. Could you just talk about your outlook for non-interest 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 the trajectory for NII?
Oh, there's a lot there. If we get increase in fed funds rates in May, I would say that's a small net benefit to us. In terms of our expectation on margin for the remainder of the 2023 in relation to transaction accounts, non-interest bearing accounts, we do continue to expect there to be a small decline there.
We actually have analysed, if you look at our total non-interest bearing accounts year-over-year, we looked at the decline there and probably, oh, well, so commercial, I looked at it from a commercial perspective, and I looked at it from a consumer perspective. So of the total decline, $200 million of it was commercial, and 80% of that decline was an 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 they're spending down to -- 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 was a spend down or a decline in average balances. So just like everyone else in the industry, average balances on transaction accounts exploded in 2020, 2021 and even maintained a little bit in 2022. But we're, starting to see those excess funds be spent and so when we do our analysis in the budget, we were reverting back to I think 125% of where we -- our average balances were pre-COVID. So, call it 12/31/2019. So that's how we -- how we budgeted that, Terry. So hopefully that was helpful. I don't, I think there was a third question, but I'm forgetting.
Yeah, no. There was -- there was only two there. You got them both. Thank you, Eric. Brad, a question for you, equity's 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 what bank M&A and how do you think Equity is positioned to benefit should activity accelerate?
So I think we're positioned well. I think we have a good balance sheet. We've got good ratios and we've got a good relationship with the regulators. I actually think Terry and the conversations I've been having in the last three weeks, I actually think that M&A is going to pick up the second half of this year.
I think that conversations are picking up today. We've had several conversations in the last three weeks, and they're a complete different tone than they were prior to that. I think as you know, we've got banks in our marketplace that have 0% 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, there's not a lot of ways to fix that except 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 now disconnect and have a wonderful day.