Equity Bancshares, Inc. (NASDAQ:EQBK) Q4 2022 Earnings Call Transcript - InvestingChannel

Equity Bancshares, Inc. (NASDAQ:EQBK) Q4 2022 Earnings Call Transcript

Equity Bancshares, Inc. (NASDAQ:EQBK) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Good day and thank you for standing by. And welcome to the Fourth Quarter 2022 Equity Bancshares, Inc. Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Navratil with Equity Bancshares. Please go ahead.

Chris Navratil: Good morning. And thank you for joining Equity Bancshares conference call, which will include discussion and presentation of our fourth quarter 2022 results. Presentation slides to accompany our call are available via PDF for download at investor.equitybank.com by clicking the presentation deck. 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 reference 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.

Brad Elliott: Thank you, Chris. Good morning. Welcome to our fourth quarter earnings call, and thank you for your interest in Equity Bancshares. With me on the call today are CFO, Eric Newell; COO, Greg Kossover; President, Craig Anderson; and Chief Credit Officer, John Creech. I want to start by celebrating two accomplishments. First, net income for 2022 was a company record totaling $57.7 million. Second, we had a record revenue totaling $197.8 million. Both achievements show the strength of our franchise, our success in serving our customers and showcase our talented group of employees. A year ago, we had expectations of rising interest rates, but no one was forecasting 400 basis points of increases from the Federal Reserve.

Our team’s work to prepare for this inevitable rising rate environment in 2020 and 2021 by keeping our loan pricing short. The results speak for themselves. Loan yields in the fourth quarter of this year were 123 basis points higher than last year, anticipating a challenging environment for raising and maintaining deposits. I mobilized the teams to refine our sales approach to find incremental ways we could do better. We took the opportunity to focus on operational efficiencies to better serve our customers with better products and services that contribute to their success. I am confident that this sets us up for better performance in 2023. Looking forward, there is a lot of economic uncertainty. But rather than dwelling on the uncertainty, our team is focused on what we can control by deeper relationships with our customers, asking prospective customers for their business, being prudent with our capital and not varying from our underwriting philosophy to achieve loan growth.

I’m proud of the honor of Newsweek’s Best Bank in Kansas in the under $10 billion category for 2023. We were also recognized for the third year in a row by the Wichita Business Journal as one of the best places to work based on employee survey data. I’ll let Eric talk you through our financial results.

Eric Newell: Thank you, Brad. And good morning. Last night, we reported net income of $11.6 million or $0.72 per diluted share. Noninterest income, excluding the $422,000 gain on the branch sale in the fourth quarter was $7.9 million, down $1.1 million linked quarter. Noninterest expenses less merger costs increased linked quarter to $35.2 million. We calculate core EPS to be $0.70 per diluted share. To reconcile GAAP earnings to core earnings this quarter removed merger expenses of $68,000 and gain on branch sale of $420,000. On Page 6 of the investor deck, we added a new visual to show the impact of our solar tax program. For the total year, we added $811,000 to net income. The timing of the benefit in tax provision and the cost of partnership expense is determined by when we entered into the tax investment versus when the project is placed in this service.

Importantly, we expect to adopt accounting for investments and tax credit structures using the proportional amortization method which moves the tax credit expense currently and noninterest expense to the tax line and removes this noise. Late in December, we learned of a tax credit that we had invested in May 2022 would be delayed, not being placed into service in the calendar year of 2022 as we originally forecasted. That had the effect of adversely impacting the tax provision in the fourth quarter, which is a true-up for the full year. We expect this project to be placed into service early in 2023. Our GAAP net income includes a release through provision for credit loss of $151,000. While we expect softening in the broader economy in 2023, we have not seen economic trends in our markets that are of specific concern and more importantly, we have not seen any decline in asset quality 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 that our special assets team have fully resolved and the credits are no longer on our balance sheet. The December 31 coverage of ACL to loans is 1.38%. I’ll stop here for a moment and let John talk us through asset quality for the quarter. John?

John Creech: Thanks, Eric. Credit performance for the quarter was again strong, seeing improvement across all categories. Special mention loans declined from $35 million at the beginning of the year to $8 million at quarter end. Special mention loans improved $1 million for the quarter. Delinquencies over 30 days past due were $1.3 million lower, ending the quarter at $6 million. Nonaccrual loans declined $5.5 million, finishing the quarter at 0.53% of total loans. I’m most proud of and Brett Reber, our General Counsel, for working together to reduce OREO to $600,000, excluding branches, our lowest level in a decade. Nonperforming assets declined $11.5 million to $18 million on December 31. The majority of our nonaccrual loans were acquired via bank acquisitions.

Net charge-offs for the quarter were $501,000. Rising rates inflation and economic uncertainty continue to be a concern. At the same time, consumer liquidity levels and employment have not yet returned to historically normal levels. The credit card portfolio is relatively new and has not yet produced consumer losses that one would expect in a downturn. We continue to have relatively low rates of overdrafts and overdraft-related charge-offs. Unemployment rates in our largest two markets were less than 3% at year-end. At the end of the quarter, loans to homebuilders were only $28 million. Most of our homebuilders continue to have strong liquidity or good secondary sources of repayment. Declining commodity prices and drier conditions are a concern for farmers.

The war in Ukraine is providing a floor for green producers. Cattle prices have pushed upward with a favorable outlook for 2023. Our hotel portfolio has performed well following the pandemic. Travel resurgence is providing a good tailwind for the lodging sector. About 7.5% of our loan portfolio is income-producing office and commercial properties. All newer commercial IPRE loans have been financed with comfortable loan values and debt yields. The Midwest appears to have less issues getting employees into the office than the rest of the country. Equity Bank, for example, never went to a remote or hybrid environment as all employees remained in the office throughout the pandemic. Since fiscal year-end 2019, our Texas ratio has declined from a high of 14% and to 3% at year-end while regulatory capital increased from $348 million to $588 million.

During the same period, our ACL has increased from a low of $12 million to $46 million and covers nonaccrual loans by 260%. Our bankers remain vigilant on the credit front, and we have been successful with our loan pricing strategy. While the Midwest economy remains strong, we anticipate and are prepared for more difficult conditions. I’ll turn it over to Craig for a discussion on production.

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Craig Anderson: Thanks, John. Loan growth in the quarter, excluding PPP and branch sales was $56.8 million or 6.9% annualized. Loan growth in the commercial and commercial real estate portfolios was 9.25% annualized. We continue to successfully originate loans at higher interest rates, and we are seeing higher yields as a result of nearly 60% of our loan portfolio having adjustable rates. During the fourth quarter, the yield in the loan portfolio increased 50 basis points to 5.59%. Cost of interest-bearing deposits increased 45 basis points to 105 basis points in the quarter. Our pipeline stands at $600 million today. And as John said, we continue to exercise reasonable caution in terms and conditions on new and renewal loans.

Noninterest income of $8.3 million was down $1.1 million quarter-over-quarter when excluding gain on sale of the branch realized in the fourth quarter of $422,000. Service revenue with the exception of mortgage banking held relatively consistent during the quarter, while the benefit of previous acquisitions to noninterest income as well as the declining mortgage production environment drove the quarterly decline. We are seeing positive momentum in our health savings and trust and wealth management divisions and expect further positive contribution to noninterest income in 2023. Eric?

Eric Newell: Net interest income totaled $42 million in the fourth quarter, increasing from $41.9 million in the linked quarter. We continue to benefit from the rising interest rate environment, with net interest margin increasing five basis points linked quarter to 3.67%. Turning to Page 8 of the slide deck, you can see the composition of the change in net interest income, which benefited from an increase in the yield on earning assets, offset by the increase in the cost of interest-bearing liabilities. We benefited 10 basis points from purchase accounting in the fourth quarter, up one basis point linked quarter but above our expectation going forward. Noninterest expense categories increasing from the third quarter included salaries and benefits, advertising and other expenses.

Salaries and benefits increased 3.5% linked quarter attributable to lower job vacancy rates, which will incrementally improve our service and sales to our customers. Advertising expenses increased from the third quarter, mainly attributed to our direct banking platform. As a reminder, our direct bank strategy is designed to meet our deposit needs while helping keep our deposit betas lower in our nondirect channels. Other expenses include our tax credit partnership amortization in the fourth quarter totaling $1.9 million compared to $1.4 million in the third quarter. Our outlook slide includes an updated view for 2023. We do not include future rate hikes. Our forecast still includes the effects of lagging deposit rates. Moderating the impact of higher deposit rates will be an emphasis on relationships to drive noninterest-bearing accounts.

Before taxed $1 billion of loan portfolio cash flows in 2023, with a weighted average yield of 6.75%, which is 63 basis points below our current origination yields, as well as a successful deployment of cash flows of the investment portfolio into the loan portfolio, which has about a 500 basis point spread. In the fourth quarter, noninterest-bearing deposits declined due to expected seasonality from our commercial and municipal portfolios and further reduction in customers’ excess liquidity. As Brad mentioned, our sales teams have renewed efforts to focus on building and acquiring new relationships, which would have the effect of increasing noninterest-bearing deposits for total funding. Our provision is forecasted to be 20 basis points to average loans.

This is a more optimistic view than the current consensus, mainly because of our existing coverage level to loans, the lack of recognized losses and a previous qualitative reserve build for recognizing economic uncertainty. We expect a higher level of advertising expense in 2023 to support our deposit acquisition efforts. Though efforts are underway to introduce products and services that we anticipate will reduce the cost of customer acquisition. Opportunities that potentially result in positive operating leverage includes technology products and services we’ve been working on through 2022 that will allow for better experience for our customers, improved revenue and incrementally reduce expenses through improved efficiencies. Brad?

Brad Elliott: Our exceptional employees are focused on core banking services in 2023. Developing relationships with prospective clients and broadening relationships with current customers. Checking account growth and high-quality credit origination remains top of mind. We met with several banks in the fourth quarter at the beginning of this year as well, discussing their options of whether it’s a good time and having low liquidity and in a high rate interest environment, that Equity Bank would be a good upstream merger partner for them. Those discussions will continue. Our performance through 2022 sets us up for success in 2023. We and we are excited for the future. And with that, we’re happy to take your questions.

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