Good day. Thank you for standing by. Welcome to the Q1 2023 Equity Bancshares Earnings Conference Call. At this time, all participants are on a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press 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-one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today. Chris Navratil, you may begin.
Good morning, and thank you for joining Equity Bancshares conference call, which will include a discussion and presentation of our first quarter 2023 results. 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 in 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 Elliott.
Thanks, Chris. I want to start today's call by addressing the events that took place in the banking system during the first quarter. First and foremost, Equity Bancshares has never been stronger. The issues that caused the failure of two 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 net 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 expenses 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 that are of specific concern, and more importantly, we have not seen any declining asset quality or realized loss 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 improve 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-past 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 worked diligently on our sales approaches and focused 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 operation 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 Laird.
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 provide stability to our overall deposit franchise. Net interest income totaled $39.1 million in the first quarter, down from $42 million in the linked quarter. Following the events that took place in the bank space during the quarter, we took steps to further bolster our liquidity position, increasing on-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 Bank. Once the Federal Reserve's 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 4 basis points from purchase accounting in the first quarter, down 6 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 in the fourth quarter, primarily driven by a one-time BOLI benefit of $834,000.
Service charges and fees were down slightly in 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, it 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 forecast 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 of 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 to 14%, which reflects two tax credit investments that have been internally approved, but we have not closed on. Craig, do you wanna talk more about our lending efforts?
Thanks, Eric. I want to give you color on the lending landscape. We've seen many of our peers pull back on lending. This is an opportunity for Equity Bank as it gives us a window to have more relative pricing power. 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 are 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 31st, 2022 assets under management. The team led by Andrew Musgrave and John Jones have developed a robust pipeline, which, if realized, will drive growth of fee income from our trust and wealth team. Fred?
I am proud of the work our exceptional bankers did in the first quarter. I believe banks are the bedrock on which our communities are built. Equity will continue to execute on our strategy, effectively growing core earnings through increasing operating leverage and prudent underwriting, all while looking to build our franchise through selective and opportunistic M&A. The execution of our mission increases the value of our organization for all stakeholders. With that, we're happy to take your questions.
Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. To withdraw your question, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Jeff Rulis with D.A. Davidson. Your line is open.
Thanks. Good morning.
Good morning, Jeff.
Wanted to get into the margin a little bit. As you've mentioned, you've got some excess liquidity sort of impacting that reported, excuse me, the reported margin of 3.44% and your guide in Q2. What was the basis point sort of 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, think 5%-7% cash, we expect there to be about 10 basis points impact on NIM, maybe to 10-12. Importantly, that does not impact NII dollars.
Got it. Just trying to focus in on the NIM number. I guess, you know, 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, 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 from a depository perspective. From that point, you know, we could be reducing our excess liquidity. I think it's a little too soon for us to make a prediction on how and when that excess liquidity will come off the balance sheet.
Okay. Got it. Makes sense. Just on the buyback, do you have the number of shares repurchased in the quarter?
Yes. Let us look that up, Jeff, while we go on with other questions maybe.
Yes. Yeah.
We'll make sure we answer that question for everyone by the end of the call. How about that, Eric?
Thank you. The, I guess just the amount that you stated in the release of $9.6 million, was that solely in the first quarter?
Let me, again, I'll get the dollar amount and the, and the number, to you for the quarter.
Okay.
If it's in the deck, it would be the quarter.
Okay. Maybe just a 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 year, end of the calendar year?
Yes, Jeff. At the 12/31/2022, our pipeline was $600 million. Currently, it's running at $915 million. What we said was that we've assigned probability to three different categories. Over 75%, which we feel very confident that we'll actually book and fund, is $400 million. Our 50% probability is $185 million. 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. We repurchased 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.
One moment for our next question. Our next question comes from Andrew Liesch at Piper Sandler. Your line is open.
Hey, guys. Good morning.
Morning, Andrew.
Just want to talk on the margin guide. 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? I mean, it sounds like maybe there's a little bit of asset remixing, but funding costs are moving quite a bit higher. Just what are some of the puts and takes on that margin guide?
Yeah. Starting on the asset side, you know, with the loan book yield of 5.94 at 3/31 for the quarter, we expect that to continue to increase. You know, 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 8 and 9 handles on them, oftentimes a spread to prime. 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. There's still some loans that have not readjusted to higher interest rates, so that should be a benefit.
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. The loan portfolio yields have, you know, call it 2.5%. Actually, it's probably lower than that now. There's obviously a pretty significant increase by reinvesting those cash flows. From the asset side, I think there's a lot more opportunity for upward momentum. As we previously mentioned, you know, our current expectation for cumulative cycle beta on the deposit side is around 35%-40%. Right now we're showing ourselves at 25%. We do expect that there will be some further pressure on the deposit side.
Our focus on growing and adding transaction accounts will also help in managing the cost of the total deposit portfolio. When you put all that together.
Got it.
That's kind of where we land on that stability on them.
Gotcha. Then, you know, the deposit growth guide looks like maybe stable-ish throughout the year as well. You had the growth here in this quarter in CDs. I guess, what's holding? I guess, if you look at the mix of deposit growth going forward, is it going to be mostly CDs? I mean, you mentioned just now, some emphasis on transaction accounts, but how should we look at the mix of deposit growth in 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.
Right. Right.
You know, actually, while our retail deposits in the quarter were flat, you know, we did have some brokered in there, I believe that's what you're seeing on that growth. You'll probably actually see CDs potentially fall back in the second quarter. In our direct bank channel.
Brilliant.Bank. You know, we have been emphasizing money markets on that channel, just because of the upward sloping curve, funding curve for CDs. You know, it's not necessarily the most ideal in terms of managing rate and interest rate risk. We've been focusing on money market.
Okay, got it. Thanks for taking the question. I'll step back.
One moment for our next question. Our next question comes from Brett Rabatin with Hovde Group. Your line is open.
Hey, guys. Good morning. Wanted just to follow back up on the, on the margin question as in, as it relates to the repricing and the opportunities on the asset side. The duration on a 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 $100 million in this year of cash flows off the portfolio and then it ramps up. In 2021, when we were investing excess liquidity into the investment portfolio, we were using a lot of structure. What we're trying to do is protect against prepayment risk at that point and extension risk. 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 we published last quarter?
I'm not sure, Brett.
No, that's helpful.
Okay, good.
Wanted to ask about the digital channel. You know, in terms of that strategy, you know, obviously, that's gonna be higher cost. You know, how big of that, of a balance sheet do you expect that bank to become or to fund, you know, sort of the core bank over the next year or two?
The real value in that strategy is, we don't see it funding a huge portion of our balance sheet, from a high price cost. I mean, we are working with that strategy on how do we continue to grow it. How do we continue to market 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? Now that we have it launched and it's working, you know, that's really the long-term strategy. What it really gives us is the ability to lower funds.
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. Then we can bring in those deposits. What it really does is it keeps our betas down on our other, deposits. It's worked over the last nine months, really well. From time to time, we needed deposits. We went out and raised, you know, $30 million-$50 million in deposits, and it didn't affect any of the other branch, deposit pricing. It's really helping us keep our betas down long term. You kind of have to look at it as just one lever or one tool in a toolkit.
that's really what, you know, it's designed for, and it's working really well doing that.
Okay, more ad hoc than core strategy of growth. That's helpful.
Yeah, 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, you know, the body language around, you know, some customers potentially moving to you and your optimism around the loan pipeline doesn't quite square up with the average loan guidance, particularly at the lower end of the, of the range. Any thoughts on, you know, the optimism 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, you know, we've left the guidance the same, but we are definitely getting more opportunities at credit, 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, you know, it gives us the ability to pick and choose. By the way, that's at higher pricing as well. We're getting the chance to pick deals at higher pricing and better quality. The number of deals has gone up as well.
At the end of this quarter, I think we'll have a better viewpoint on whether it's, you know, 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, Greg?
Yes, it is.
Okay. That's helpful. Thanks for all the color.
One moment for our next question.
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 is seeing some loans with a 8% or 9% handle on them. Could you just talk a little bit about what types of loans those are and kind of like what 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. 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. As Brad mentioned, it's just due to the fact that we've seen a lot of our community and regional competitors, you know, pull back due to the kind of the liquidity crunch. We're getting opportunities at high quality credits. 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, that's starting to pay off for us.
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. With regards to Brilliant Bank, how big is that currently? What have been the trends the last couple of quarters for the size of that?
Damon, it's Eric. It's less than $100 million in funding now. I would say the trend has been steady to down. That's intentional.
Got it.
It was over $100 million.
Over-
Yeah, it was over $100 million at one point. Frankly, the pricing in the direct space, direct banking space, was a little irrational for us. We found alternative sources of funding that were much cheaper.
Got it. You said you're primarily focusing, that's a money market product? An online money market product.
Yeah.
Do you happen to have the current rate on that book?
Yeah, I can get it for you.
Okay. I guess just lastly, you know, on the expense front, is there anything that you guys are considering or any opportunities you see, internally where you could, maybe get some efficiencies in the overall expense structure?
Yeah, Damon. On the expense side, you know, 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 products more quickly to our customer and more efficiently. 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. That's all that I had. Thank you very much.
One moment.
Damon, me. Just a follow-up on Damon's question. The current cost of that portfolio we're showing is 4.3%.
Great. Thank you.
One moment for our next question. Our next question comes from Terry McEvoy with Stephens. Your line is open.
Thanks. Good morning, everyone.
Morning.
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? 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?
Well, there's a lot there. If we get an 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 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 analyzed. If you look at our total non-interest-bearing accounts year-over-year, we looked at the decline there. Well, I looked at it from a commercial perspective, and I looked at it from a consumer perspective. Of the total decline, $a few hundred million of it was commercial, and 80% of that decline was an average balance decline within the account.
What that tells us is that the business had excess liquidity, likely from government support programs in COVID. They're spending down those excess funds. That's 80% of that decline. 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. Just like everyone else in the industry, average balances on transaction accounts exploded in 2020, 2021. Even, you know, maintained a little bit in 2022. We're, you know, starting to see those excess funds be spent.
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. You know, call it 12/31/2019. That's how we budgeted that, Terry. Hopefully that was helpful. I think there was a third question, but I'm forgetting.
Yeah. No, no. There was only two there. You got them both. Thank you, Eric.
All right.
Brad, a question for you. You know, Equity's been opportunistic from a bank M&A standpoint. Industry activity's been quiet here this year. What does your crystal ball tell you about bank M&A, and how do you think Equity is positioned to benefit should activity accelerate?
I think we're positioned well. I think we have a good balance sheet. We've got good ratios. We've got a good relationship with the regulators. I actually think, Terry, in the conversations I've been having in the last 3 weeks, I actually think that M&A is gonna pick up the second half of this year. I think the conversations are picking up today. We've had several conversations in the last 3 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. I think as regulators do examinations, I think they'll start putting pressure on them to fix that.
You know, there's not a lot of ways to fix that except raise capital or to find a merger partner. I think as we look at those opportunities, I think those will accelerate. You know, 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.
I'm not showing any further questions at this time. This does also conclude today's presentation. You may all disconnect and have a wonderful day.