Equity Bancshares Inc
NYSE:EQBK
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Good day and thank you for standing by. 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 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.
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.
Good morning, and thank you for your interest in Equity Bancshares. I am pleased to introduce Ric Sems, 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 on technology delivery in regional bank operating structures. We are confident he will help us drive efficiency in our delivery channels. You will hear more from him later in the call.
Let's look back at the second quarter. Our balance sheet strength, strong capital, high levels of liquidity, and interest rate risk management all have contributed to stability in a dynamic and challenging operating environment. With Ric joining the team, it's a perfect time to reassess our operating and strategic stance.
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, our employees have to be engaged and developed. These elements complete a solid three-legged stool of customers, shareholders and employees.
Adapting to changing environment and delivering to our customers the products and services they need is crucial for Equity's long-term growth, sustainability and competitive advantage. Value creation is 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 those 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 Creech.
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 $0.74 per diluted share. During the quarter, we completed a repositioning of $51 million from our investment portfolio into higher-yielding assets, resulting in a reduction of income of $1.3 million pre-tax. The repositioning has an earn-back of about 10 months at current interest rates. Without the loss, net income would have been $12.4 million, or $0.80 per diluted share. We reported $0.77 per diluted share in the first quarter.
When removing the securities loss, non-interest income was $8.3 million, down $300,000 linked quarter. However, during the first quarter, we had an $834,000 one-time bully benefit. When excluding one-time items from both quarters, we have an improvement of fee income totalling approximately $500,000. Non-interest expenses totalled $33.1 million and were relatively flat from the linked quarter.
Our GAAP net income included a provision for credit loss of $298,000. 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 that are part of 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 market uncertainty, our asset quality has remained stable. The June 30th coverage of ACL to loans is 1.34%.
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-performing 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 totalling $857,000 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 totals $91.3 million and represents just 2.7% of the total loan portfolio. The average loan size is $1.7 million. $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 favourable in Kansas City and Wichita at 3.5% and 3% respectively.
The Midwest has not yet experienced the same level of remote or hybrid work as some of the larger metro markets in the US. All loans in the office portfolio remain pass rated. The average loan-to-value is 47% and the average weighted loan-to-value is 54%. 88% of the office portfolio has an LTV less than 70%. The average debt service coverage is 2.09 times. The average occupancy in the portfolio is 91%. 95% of the office loans have recourse to individuals with favourable levels of liquidity and net worth.
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 had some customers that had asset dispositions that resulted in payoffs. Total loan originations in the second quarter were $153 million with a weighted average coupon of 7.8%. This compares to $143 million with a weighted average coupon of 7.71% in the first quarter and $330 million with a weighted average coupon of 5.04% in the second quarter of 2022.
We continue to successfully originate loans at higher interest rates, and we are seeing higher yields. With an analysis completed at May 31, 2023, over the last 12 months, we repriced $1.2 billion of our loan book and originated $676 million of new loans at market rates, which has driven an increase of coupon of 204 basis points. The average change in rate for the repricing was 360 basis points. We have $1.2 billion of our portfolio that is either floating or adjusts monthly.
Over the next four quarters, we have $407.7 million of loans with a contractual repricing with a weighted average coupon of 6.56%. Making a simple assumption that this reprices to prime, that adds an annual $7 million of revenue.
During the second quarter, the yield on the loan portfolio increased 40 basis points to 6.34%. Cost of interest-bearing deposits increased 41 basis points to 2.14% in the quarter. This slowed from the first quarter, where we experienced a 68 basis point increase.
Net interest income totalled $39.4 million in the second quarter, up $318,000 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 Bank's term funding program, we are 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. Of this decline, about $730,000 of it is one-time in nature, with a reduction in expense of forfeited, unvested, restrictive stocks. 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 periods. 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 provision is forecasted to be closer to 10 basis points to average loans on an annualized basis. This is 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 bill for recognizing economic uncertainty. Ric?
I'm excited to have joined the Equity Bank team. I've spent my first month 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 continue 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 frontline team members and then adapt in ways that will improve our execution approach. The end goal 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 the quarter, non-broker deposits increased $46 million or 4.7% annually as our bankers continue to emphasize customer service while serving as a resource to our communities in turbulent times. As Eric previously mentioned, we've been successful in originating higher-yielding loans and the repricing characteristics of the loan book are favorable. Our pipeline continues to hold. Our 75% probability or higher pipeline stands at $366 million. This represents deals that are fully approved and underwritten.
Our 50% probability, which are loans submitted to underwriting, is $376 million, and the opportunity pipeline, which we place 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 21%. The team has developed a strong pipeline as we look forward to continuing to expand their contribution to fee income in future periods.
Thanks, Ric. 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 Ann Knutson as our Chief Human Resource Officer this spring. She is an innovator with over 20 years of human resource leadership experience. And just last week, we added David Pass to the team as our new Chief Information Officer. David has over 20 years of technology leadership experience, most previously at UMBF. Our regional leadership teams are led by Josh Means, Brad Daniel, and Mark Parman, and they give us the foundation for growth in all our markets.
Equity will continue to execute on our strategy, efficiently 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. 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 with D.A. 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 ending the year a little stronger. If you could just kind of walk us through your expectations for the second half.
Hey, this is Ric Sems. Thanks for your question. So we're seeing a potential uptick on this, really. The first part is probably just 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.
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'll see some upticks probably on the consumer side from both private banking, as we're moving a little bit more into that area, and then also on the mortgage side.
And then finally, we think that within the market where we are, we have the capacity to lend. And as we get more into the second half of the year with our strong deposit franchise and strong deposit potential for growth, that we'll be able to continue that consistency in lending where maybe some of our competitors will struggle a little bit more. So that's really kind of why we're seeing that uptick.
Okay. Thanks, Ric. I guess just to follow up. So it sounds rather customer-driven in terms of that behaviour. Anything kind of in-house in terms of is the bank somewhat guarded on further originations, whether that be credit concerns or funding concerns? It sounds like it's led by the customer, but just wanted to kind of get a sense for in-house, you're willing list to lend.
No, in fact, John right here, we're looking at each other. We want to continue to lend consistently, and we don't really see anything stopping us from being able to do that the second half of the year.
Okay. Thanks. Maybe hopping just back to the expense line; Eric, I think you mentioned in the comp 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 comp line?
And then two, are those -- given those departures, are you looking to hire? Are there some openings of areas that you're looking to backfill?
Yeah, Jeff, I agree that the $16 million number is probably a good run rate there. The one-time benefit that we recognized in the quarter was about $700,000 due to forfeited, unvested, restricted performance shares. And no, we are not looking to backfill those areas.
If you could, just kind of what areas were that -- was it just redundancies or the back office, or what was the area of where those folks left?
So, those are some of the restructurings we announced in May with Greg and Craig departing and us hiring Ric Sems to replace him.
Okay. Got it. I'll step back. Thank you.
Our next question comes from Terry McEvoy with Stephens. You may proceed.
Maybe just start with the 40% of the portfolio CRE; it's 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 you're seeing as interest rates rise and in any segments you're watching closely today? And I do appreciate all the details and the prepared remarks on the office portfolio.
Yeah, thanks, Terry. It's just an interesting time, right? You would think that you were most concerned about home builder and hotels and things like that. And we come off of this COVID cycle and we've got a real travel reemergence and it has seemed to cure a lot of concerns about hotel.
And then we don't we have -- we have a very small home builder portfolio. And when you look across that portfolio, the 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 and did really well in the credit exam. We have just completed or updated our rate stress testing. And that stress testing, though rates have continued to move up, the performance of the stress testing has continued to tell us that our customers are keeping up with the rate environment in terms of how they're able to manage their business and the cash flow that they're able to produce.
The one thing you do see, and it's a little favorable, I think, is that the real estate credits that we are able to put on have extremely strong levels of cash going into the projects, which tells you -- 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, and the levels of cash that we see going into new projects are 40% and 50%.
So, the credit book is very strong. We have net migration improvement, net improvement across all categories. We just finished the exam. It was favorable. It's just 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 aren't seeing those weaknesses materialize at this point. And even with those types of paydowns, we're still booking new originations and approving new originations. And I'd say 75% to 90% of them are floating, and they're in the eights and nines.
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?
Yeah, we, in our earnings deck on Slide 12, we do show our cumulative betas. So, we're showing 30% cumulative beta for deposits. I think we, from a modelling perspective, Chris, what's our terminal beta? Is it 40%?
It's a little bit north of 40%, still rolling it in over the next, about 12 months left in runway in terms of when we think the potential for the peak of that beta would be, in terms of how we're modelling it.
Yeah, so we, when we do our forecasting and modeling, we're currently using a terminal beta of 40%, and it's ratable in nature probably another 12 months out. So, that said, in another way, there's still some expect in our forecast slide there, even though we don't model in increased market rates.
And I know there's a growing expectation that the Fed's going to move here at their next meeting, but we do model in the cumulative beta increasing ratably up to 40%, probably I'd call it June 30th of 2024.
Great. Appreciate that. Thank you.
Our next question comes from Andrew Liesch with Piper Sandler. You may proceed.
Hey, everyone. Good morning. Question on the shared national credits and the larger loans that paid off. Do you have the aggregate dollar amount of all those payoffs?
Yeah, I don't have 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 on larger credits paying off. Shared national credits contributed to it, but I would say that the larger part of it was some of our customers having liquidity events where they were selling the underlying asset and paying us off.
What I would say, Andrew, is we had a book of business we bought 24 months to 36 months ago that we had been reinvesting back into. It was never large. It was never $50 million, but it was south of that. And we just took a stance over the last several years that we just don't need that book of business any longer.
It had a low yield on it, I think, in the fives, and it wasn't core to us. And so, we do have some shared national credits in relationships that we understand that are in our market and our customers, but not when we think of traditional SNICS [ph]. We think of brokered SNICS that are big credits that trade openly, and we are out of all of those now.
Got it. All right. That's helpful there. Then shifting gears over to the margin, the midpoint 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 repricing that you see ahead?
Yeah. Definitely, our new originations have eight and nine hills on them, as we mentioned earlier. The repricing characteristics of the loan portfolio and even with outbreaks moving up, and continued expectation of redeploying cash flows out of the investment portfolio into the loan portfolio.
Got it. So, we'll see some more of that remixing continue then.
Yes, sir.
And then, I guess, one last question there. How was the balance sheet sensitivity right now to further rate changes by the Fed?
I think if you look -- I was kind of looking at this myself, looking back a year relative to where we stand today, and 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 as close to neutral or balanced on interest rate risk management as possible.
And yeah, there's going to be pockets of our balance sheet that are going to exhibit some asset sensitivity or liability sensitivity. The way I look at it is if the Fed moves this quarter, we'll probably see one or two basis points of NIM expansion right away. And then, it's really going to come down to the behaviors of our deposit portfolio in terms of repricing.
I think what we saw -- I shouldn't speak to others, but what we saw this most recent quarter is a slowing of repricing on our deposit portfolio. You can see that in the cumulative beta change from fourth quarter to first quarter, and then first quarter to second quarter. Anecdotally, we're not seeing or we're not having many conversations with our customers on exception deposit pricing.
And my view is that when the Fed stops moving at larger clips of 75 basis points and 50 basis points, it just doesn't create as much of an inflection point for our customer to contact their banker here at Equity and talk about the rate. So, I expect that to continue to be a helpful factor for us in the second half of 2023.
Got it. That's really helpful. Thanks for taking the question. We'll step back.
[Operator instructions] Our next question comes from Damon DelMonte with KBW. 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 takes into account the seven basis points of liquidity drag. Is that correct, Eric?
It actually excludes.
I'm sorry. That's what I meant. That's what I meant. So, you'd add back in the seven basis points to the 3.38. So, our starting point is like 3.45 for the quarter.
Correct. Yeah.
Okay. All right. Great. And then the guide on provision, that was 10 basis points. Was that of average loans or is that -- are you kind of modelling 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 a transaction in the back half of this year? Or do you think that's more of a 2024 event?
Yeah. We're having more conversations. We have active conversations today with institutions. They're being driven by -- they've been putting off or trying to get deals done over the last couple of years. They have management issues or ownership issues. And so, I think there'll be some deals announced in our area this year.
And if we're the successful bidder on those, we'll announce those as us. If we're not the successful acquirer, they'll be announced as someone else. So, I think there will be deals announced this year in our market area. And I think we have a good chance of being in that mix. I know we have a good chance of being in the mix. And so, we're opportunistic on that. We're very disciplined and always have been on pricing. And so, it's going to have to fit within our box. But I think there's opportunities there.
What I'm most excited about is our organic growth. We have a really good leadership team in our regional CEOs. 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, I'm 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 that I had. Thank you very much.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.