Equity Bancshares, Inc.

Q4 2021 Earnings Conference Call

1/27/2022

spk19: We'll begin momentarily. Thank you for your patience. Thank you. Good day, ladies and gentlemen, and thank you for standing by. Welcome to the fourth quarter 2021 Equity Bank Shares Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone keypad. If you require any further assistance, please press star then zero. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to your host, Mr. Chris Navratil. Sir, you may begin.
spk20: good morning and thank you for joining equity bank shares conference call which will include a discussion and presentation of our fourth quarter 2021 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 reference slide one, 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.
spk05: Thank you, Chris, and good morning. Thank you for joining our call and your interest in equity bank shares. Joining me is Eric Newell, our CFO, Greg Kossover, our Chief Operating Officer, and our President, Craig Anderson. In reflecting back on 2021, it is rewarding to review all the things we have accomplished in light of all the obstacles that we had to navigate. I can't tell you how proud I am of our team for what we've accomplished this year. Let me run through a few of the highlights. We negotiated and closed on the merger of American State Bank and Trust, the largest merger in the history of equity bank shares, as well as the state of Kansas. We completed the conversion of Almena State Bank in January of 2021 and finished the year by purchasing and converting three branches in the St. Joseph, Missouri market from Security Bank. We successfully executed a second round of PPP program for our customers, adding 20.8 million of fee and interest income in 2021. We saw the benefits of our approach to remain open for our customers throughout the pandemic in our DDA account growth. While some of our competitors took an approach of closing their branches to customers throughout portions of 2021, notably we have continued to open three times the amount of DDA accounts we did pre-pandemic. We hired a new leader and expanded our ability to offer SBA loans to customers. For most of 2021, we were the number one lender in Kansas for SBA loans and in the top of all of our regions. This is an area we will continue to grow our fee-based businesses have accelerated after several years of focus on improving and introducing new products and services. We'll continue to keep an eye on our expenses and find ways to accelerate positive operating leverage. Our commercial credit card program has continued to expand as expected and brings new income to us each month. We've added a new division to offer HSA cards and hired seasoned team to lead this initiative. We think this business will start generating revenues in 2022 and accelerate dramatically in 2023. We're committed to our capital management measures. We have maintained our share repurchase program and initiated a common stock dividend in the third quarter. With so many other items we could hit on as well. but I will leave some of those for Greg and Eric to talk about later. What an exciting year. We are ready for 2022. I'll let Eric take you through the numbers, and then we'll walk through some of our areas of focus for 2022.
spk23: Thank you, Brad, and good morning. Last night we reported net income of $10.5 million, or 61 cents per diluted share. Our average diluted share count includes the consideration paid to American State Bank shareholders when we closed the merger on October 1. Core results this quarter include a full quarter contribution of American State Bank and were driven by continued, albeit at a lower rate, recognition of origination fee income from PPP loan forgiveness. Contribution to non-interest income by activity from American State Bank customers will pick up in the first quarter of 2022. Our standard practice is to provide a fee grace period to customers for mergers to help them fully understand equity bank products. Non-merger related expenses increased to linked quarters, driven by salaries and benefits from a full quarter of American State Bank team members coming on our payroll. as well as $1.4 million partnership expense related to tax credit activity from assets placed into service. Reconciling GAAP earnings to core earnings this quarter is simply removing the $4.6 million of merger expenses from the quarter. Our GAAP net income includes a net release of ACL through the provision to the allowance for credit losses totaling $2.1 million. Factors influencing the provision this quarter related to a $2 million recovery of a specific reserve for an asset that we discussed in the third quarter, which Greg will expand on in a moment. The uncertainty of the economic environment and continued impact on the economy of previous stimulus measures are reflected in our qualitative and economic components of the calculation. Our December 31 coverage of ACL to non-TPP loans is 1.55%. down from 2.04% from the previous quarter. The decline of the coverage is entirely driven by ACL that was being held against specifically analyzed loans. I'll stop here for a moment and let Greg talk through our asset quality for the quarter.
spk08: Greg? Thanks, Eric. We had an outstanding quarter and an outstanding year in the management and reduction of non-performing assets. Specifically in the quarter, Brett Reaver led our special assets team in the resolution of the restaurant credit that we had been carrying on non-accrual. This asset was paid off completely and resulted in a reduction of $12.3 million in non-accrual loans, a recovery of $2 million, and a carryback of preferred equity on the borrower's company, which may result in further future recoveries. We also spoke of an aviation-related credit in prior quarters, And as of two weeks ago, the largest portion of this credit representing 95% of our relationship with the borrower has paid off. And although there was a charge off, it was much less than the specific reserve we had been carrying on it as the asset sold at a price higher than we anticipated. Other foreclosed property will decline $13.7 million in the first quarter of 22 because of this credit. Brett did a fantastic job shepherding these credits to resolution. Overall, non-accrual loans declined $35.6 million quarter over quarter and now stand at just 93 basis points to total loans, the lowest level since 2016. Our special assets teams, led by June Presnell, once again did excellent work reducing special assets across all categories. Specifically, OREO declined another $1.6 million in the quarter, and without bank-owned property that was not foreclosed on, such as previous branch closures, which are carried as OREO, our OREO balance stands at just $1.9 million, our lowest level since we went public in 2015. And the majority of the remaining assets are smaller and more primarily acquired in mergers. For the year 2021, OREO is down over 30%. Overall during 2021, we worked out and moved a significant amount of the Almena merger non-performers to accrual while minimizing losses on the entire Almena portfolio. We reduced OREO as just discussed. We reduced our non-accruals significantly by $35.6 million. The ACL is 1.55% of non-PPP loans, as Eric has discussed. Net charge-offs, notwithstanding the specific reserves we were carrying on aforementioned assets, are muted, and we entered 2022 in very good shape relative to non-performers, classifies, and the teams reducing them. We also take a moment to introduce John Creech, our new Chief Credit Officer, who began working with us in late December. John comes to the equity team from Synovus where he was a senior credit officer and he brings decades of credit experience to Equity Bank. We are excited to have John and his leadership in credit and as a member of the executive team. Eric?
spk23: Net interest income totaled $37.2 million in the fourth quarter, decreasing from $39 million in the late quarter, representing a $1.8 million decrease. During the fourth quarter, the weighted coupon in a loan portfolio, excluding PPP, decreased approximately 33 basis points. As a reminder, we had a $1.35 million benefit to interest income in the third quarter from loans previously non-accrual being moved to accrual. When excluding the one-time benefit and PPP impacts in both comparable periods, NIM in the fourth quarter declined four basis points to 3.01%. Origination fees recognized from forgiven PPP loans decreased notably in the fourth quarter. We recognized $1.7 million of fee income and $171,000 of interest income related to PPP loans in the fourth quarter, down $6.3 million from the third quarter. At year end, we had $1.3 million of net unrecognized fee income associated with PPP loans, which totaled $44.8 million. Removing PPP fees and interest income from net interest income in both the fourth and third quarters results in a pro forma net interest income of $35.3 million and $30.8 million, respectively. Loan yield, earning asset yield, and net interest margin in the quarter ending December 31 is 4.21%, 3.32%, and 3.01%, respectively. This compares to the quarter ending September 30th of 4.54%, 3.55%, and 3.19% respectively. Link's quarter loan growth at December 31 was $470 million. Of that total growth, $400 million was related to ASB&T in our year-end balances. When excluding the change in our PPP loan balances, loan growth in the quarter was 121 million or 18.6% annualized. Organic originated loans totaled 221 million in the fourth quarter. Of the total originations in the quarter, 85% were commercial, CRE, and agricultural loans.
spk04: Brad? I'd like to talk about our strategic goals for 2022.
spk05: We are focused on continued improvement of operating performance. Our goal is to make continued progress to return on tangible equity in the mid-teens. To do that, we will reduce excess liquidity on our balance sheet by driving loan growth, increasing fee income in our revenue mix, and remaining focused on operational efficiency. As I mentioned earlier, we've made great strides in our fee income categories in 2021. and we will build on increasing fee incomes, contribution to our revenue mix in 2022. Our trust and wealth management group has made significant progress since it started in 2019, and we expect it to grow that business organically and through acquisition. Expense management remains a high priority. We always look for ways to utilize technology to drive positive operating leverage. For example, this year we will start to roll out interactive teller machines, or IPMs, to select markets. This achieves several objectives. It will permit us to increase hours where necessary to better serve our customers. We can also leverage staffing in our centralized customer care team to assist our customers throughout the ITM footprint. This will reduce our need to augment our branches with additional teller staff, a group of employees that has experienced a lot of disruption and workload over the last 18 months.
spk23: I wanted to turn your attention to the forecast slide on the earnings deck, which will put some specifics on our expectations for 2022 and supports what Brad was just discussing. We previously disclosed our thoughts for 2022, and we introduced a forecast for the first quarter. As Brad mentioned, our long-term goals remain unchanged, improving our revenue mix, increasing fee contribution to that mix, driving positive operational leverage off of our expense base, and driving our loan-to-deposit ratio to levels that we saw pre-COVID. This last goal is dependent in part on economic factors in the markets we serve. Supply chain, labor market, and inflation each add a level of uncertainty to our customers and in turn to loan demand. Successfully shifting excess liquidity to the loan portfolio from cash and investments is critical to improving our pre-tax, pre-provision return on assets. Barring any new stimulus programs, we do not expect TPP income to influence our 2022 results. Brad?
spk05: Thanks, Eric. We're in active conversations with several different companies about partnering. Equity continues to be ready and willing to act as a partner to banks that fit and complement our organization if they can assist equity in making progress to our stated financial profitability goals. As I regularly emphasize, we will stay true to our requirements on earn-back, cultural fit, and geographic strategic fit. We will maintain our focus on organic growth efforts. Craig Anderson has made a lot of progress with our regional teams in 2021 and will continue to leverage those successes in 2022 to develop and deepen relationships with customers and drive organic growth. We have great teams on our newly expanded footprint that gives us all the pieces needed to dominate our community markets. With the improvement that Greg and Brett have made to our MPAs and focusing on our customers with the best and brightest team to service those customers, equity will continue to be a trusted and valued partner to our communities. This is our value proposition. And in turn, we build shareholder value. We are excited to start the year with a lot of momentum and enthusiasm. And with that, we're happy to take your questions.
spk19: Ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our first question or comment comes from the line of Terry McEvoy from Stevens. Your line is open.
spk16: Good morning, everyone.
spk24: Good morning, Terry.
spk16: Maybe just start with a question on your fee outlook. And, Brad, I think you talked about some of the kind of businesses you feel optimistic about, but maybe just talk about that 10% to 20% loan growth, where you see kind of the upside coming from and maybe where some of the strategic investments you've made can show up in that revenue line this year.
spk05: I don't think we talked about 10% to 20% loan growth, did we, Terry?
spk16: I'm sorry, not interest income growth.
spk05: My apologies. Fee growth. You were scaring me there. Sorry.
spk23: In terms of the fee income growth for the year, first off, we haven't had much contribution from the American state customers yet on our deposit fees. we give a grace period for 90 days to customers that come in through merger to better understand our products and services. So that will start to contribute here in 2022. And then I think it's just a continued focus on those business lines that we've made some progress on over the last couple of years. Treasury management services, wealth and trust management, credit card, debit card utilization. I think all of those will continue to be significant contributors to growth, organic growth here in 2022.
spk05: Yeah, I think with the addition of ASB and T, Terry, you'll see interchange income grow. You'll see service charge income grow just because of the size of that acquisition for us. But then on top of that are We're growing our credit card income and credit card interchange income nicely, and I think we'll continue to see growth in our wealth management business as well.
spk16: Great. Thank you. And then as a follow-up, Greg kind of talked about all the success last quarter in lowering non-accrual loans. So I guess my question is, do you have any thoughts on a longer-term or through-the-cycle net charge-off target for the company? Sure.
spk08: Well, we did get a lot of stuff in the rearview mirror, Terry, which was very nice. And so what are we budgeting next year for net charge-offs? Ten basis points. Yeah. So I'm going to tell you, I think we're going to be annualized between five and ten basis points of net charge-offs, Terry. We don't see anything on the horizon that should disrupt that based on what we know today.
spk15: Perfect. Thanks again, guys.
spk08: Thank you, Terry.
spk19: Thank you. Our next question or comment comes from the line of Andrew Gorzica from DA Davidson. Your line is open.
spk03: Andrew, I'm not sure we can hear you. Are you on mute?
spk19: Mr. Gorziko, I dropped from the queue. Could you please re-queue up? Press star 1 again, please. Okay, your line is open, sir.
spk18: Awesome. Thank you. Sorry about that. I am on for Jeff Ruiz at DA Davidson. Eric, maybe a question for you. I see that average earning assets seem a bit high this period. I was wondering what the balance is for earning assets.
spk23: Yeah, I don't have the ending average earning assets, Andrew. I can follow up with you on that. Or we can get it for you.
spk18: And then just to follow up, with PPP running off, should we expect to see growth and spread income on a quarter-over-quarter basis?
spk23: Yeah, I think in looking at 2022, when we budget, we do budget flat rate. I do want to put that out there, and I know there's expectation in the market of rate movement. So putting that aside for a moment, we do have some spread improvement expected more in the back half of the year, and a lot of that driven by some of where we expect to be originating loans you know, ag, for example, which has higher yield. You know, we're hoping to see a little bit better utilization of lines there. So it's somewhat mixed of average earning asset growth throughout the year. It was in loans and then within the earning assets themselves. So looking at our average earning assets right now, We're well overweight where we want to be on cash in the investment portfolio. So the idea is with loan demand, moving a portion of those lower yielding earning assets into the loan portfolio, which will help with spread as you asked, Andrew, and will also help us with our loan to deposit ratio. One of our goals is to make some progress getting to where we were pre-COVID. on the loan-to-deposit ratio, which was in the low 80s. And right now, we're close to 70%. And that will help not only with spread, because I estimate that the excess liquidity on our balance sheet is probably depressing NIM by almost 20 basis points. So it will be helpful there. But it will also help us with our pre-tax, pre-provision ROA and getting us closer to our goal of exceeding 150 basis points.
spk18: Okay. That's very helpful. I will step away. Thank you.
spk22: Thank you.
spk19: Thank you. Our next question or comment comes from the line of Damon Del Monte from KBW. Your line is open.
spk13: Hey, good morning, guys. Hope everybody's doing well today. First question probably for Eric. Could you help us think about the asset sensitivity on the balance sheet and how the margin would react with a 25 basis point move and then future 25 basis point moves?
spk23: Yeah, Damon, at the moment we're pretty well balanced. We're not sensitive either way to rates going up or down. Obviously, yield curve shape steepening will help us, but a parallel shift right now with 25 basis points or even 50 basis points is not a significant detriment or benefit to NII.
spk13: Okay. So movement on the margin would probably be more dictated through like earning asset rotation.
spk23: Yes. Now the team is looking at steps, you know, obviously the market's priced in some of these, these, uh, rate moves at the moment, but I think, you know, Given my experience, expectations always shift and change. So the team is looking at ways where we can opportunistically look to extend the duration on the liability side when it makes sense, where there's some relative value to get some modest exposure to rising rates. But I'm of the opinion that we don't really get paid a lot to make a rate bet. So I'd rather us get paid to, you know, move earning assets out of the investment portfolio into loans.
spk13: Got it. Okay.
spk11: Thank you.
spk13: And then could you just remind us on the outlook for M&A, the geographic focus and some of the areas where you think you have the best opportunity?
spk05: Yeah. So we are focused in Oklahoma, Kansas. Western Missouri, and Central Arkansas. We've got opportunities, I would tell you, in Oklahoma, Kansas, and Western Missouri that we've been looking at or talking to. And so, you know, those conversations are still happening, and it just depends on whether they work into what happens with our ability to do them within an earn back that makes sense for us. And so we'll stay true to that discipline that we have, Damon. And so we also are looking at a couple fee income businesses that could fit into our current platform pretty easily. And so we're also looking at those types of acquisitions as well.
spk14: Great. That's all that I had. Appreciate the call, Eric. Thank you.
spk19: Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our next question or comment comes from the line of Andrew Leash from Piper Sandler. Your line is open.
spk10: Hey, good morning, guys. Good morning, Andrew. A clarification question on the charge ops in the quarter. Were those just from that aerospace relationship, or was there anything else in there worth noting?
spk08: There were some smaller credits in there, too, Andrew, that were resolved during the quarter. Primarily, though, the aviation-related credit.
spk10: Gotcha. Okay. And what is the appetite for share purchases here with the stock around 130 or so tangible? And I want to deploy some capital into M&A, but what are you thinking here about the buyback?
spk23: Yeah, Andrew, we have an analysis that we look at periodically, at least quarterly, where we look at buying our shares back similarly to M&A. We need to have a three-year earn back on that, and that's the recommendation that we've made to the board when talking about where we'll buy our shares back. So everyone would love to know what that exact number is, but... You know, that's the logic we use is that we're currently constrained at buying shares back where it's lower than a three-year earn back.
spk10: Got it. Got it. And then lastly, organic loan growth pretty solid in the quarter. Where does the pipeline stand? Did this pull through a lot of the pipeline? So you're working off a lower base here to start the year? Just curious on where that stands right now.
spk06: Yep. I'll have Craig Anderson take that.
spk07: Yes, good morning. Pipeline is very, very strong. Currently, we're up over $700 million in regards to our pipeline. It's really kind of across the board in all of our various markets. I think it's being led primarily by Wichita and Kansas City, but we're also seeing some nice opportunities in our community markets. We've had a strong start to 2022 in January with some very nice fundings of some new relationships. And we expect that to continue in February. We know a couple of large deals that we'll be booking then. And our teams are very focused on small business markets and then also in the middle market space in C&I. And very optimistic about our pipeline through the first quarter.
spk10: Got it. That's great. Obviously, some pretty strong loan growth here in the fourth quarter. Slower pace is embedded in the guidance with just some conservatism because this summit is pretty optimistic to me.
spk05: Yeah, you know, I think we want to make sure that we can hit those numbers, Andrew. We don't get out over our skis. And, you know, we don't see any big payoffs coming, but you always have, you know, Those things could loom. I think rates rising actually help us protect that because you don't look at guys refinancing then. So, you know, I think we have a chance to have a really good organic loan growth year. You know, really the last two years, our teams have been mostly focused on government programs in Main Street Lending and PPP. We actually have some opportunity to refinance some Main Street Lending deals that we did back onto normal terms into balance sheets. So I think those are going to be great opportunities for us as well, but we want to make sure we can hit the numbers and accomplish the things that we've got out there.
spk10: Got it. All right, thanks for taking the questions. I'll step back.
spk23: Andrew, this is Eric. One last thing I think is worth saying on the share repurchase question. We were active in the fourth quarter, and we have been buying shares back selectively here in January as well.
spk09: Okay, helpful. Thank you.
spk19: Thank you. Ladies and gentlemen, at this time I'm showing no further questions. This concludes our Equity Bank Shares results call and presentation. Thank you for joining, and please have a great day. Thank you. Thank you. you Thank you. Thank you.
spk00: Thank you. you
spk19: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the fourth quarter 2021 Equity Bank Shares Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone keypad. If you require any further assistance, please press star then 0. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to your host, Mr. Chris Navratil.
spk12: Sir, you may begin.
spk20: Good morning, and thank you for joining Equity Bank Shares Conference Call, which will include a discussion and presentation of our fourth quarter 2021 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 reference slide one, 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.
spk05: Thank you, Chris, and good morning. Thank you for joining our call and your interest in equity bank shares. Joining me is Eric Newell, our CFO, Greg Kossover, our Chief Operating Officer, and our President, Craig Anderson. In reflecting back on 2021, it is rewarding to review all the things we have accomplished in light of all the obstacles that we had to navigate. I can't tell you how proud I am of our team for what we've accomplished this year. Let me run through a few of the highlights. We negotiated and closed on the merger of American State Bank and Trust, the largest merger in the history of equity bank shares, as well as the state of Kansas. We completed the conversion of Almena State Bank in January of 2021 and finished the year by purchasing and converting three branches in the St. Joseph, Missouri market from security bank. We successfully executed a second round of PPP program for our customers, adding 20.8 million of fee and interest income in 2021. We saw the benefits of our approach to remain open for our customers throughout the pandemic in our DDA account growth. While some of our competitors took an approach of closing their branches to customers throughout portions of 2021, notably we have continued to open three times the amount of DDA accounts we did pre-pandemic. We hired a new leader and expanded our ability to offer SBA loans to customers. For most of 2021, we were the number one lender in Kansas for SBA loans and in the top of all of our regions. This is an area we will continue to grow Our fee-based businesses have accelerated after several years of focus on improving and introducing new products and services. We'll continue to keep an eye on our expenses and find ways to accelerate positive operating leverage. Our commercial credit card program has continued to expand as expected and brings new income to us each month. We've added a new division to offer HSA cards and hired seasoned team to lead this initiative. We think this business will start generating revenues in 2022 and accelerate dramatically in 2023. We are committed to our capital management measures. We have maintained our share repurchase program and initiated a common stock dividend in the third quarter. With so many other items we could hit on as well, but I will leave some of those for Greg and Eric to talk about later. What an exciting year. We are ready for 2022. I'll let Eric take you through the numbers and then we'll walk through some of our areas of focus for 2022.
spk23: Thank you, Brad. And good morning. Last night we reported net income of 10.5 million or 61 cents per diluted share. Our average diluted share count includes the consideration paid to American State Bank shareholders when we closed the merger on October 1. Core results this quarter include a full quarter contribution of American State Bank and were driven by continued, albeit at a lower rate, recognition of origination fee income from PPP loan forgiveness. Contribution to non-interest income by activity from American State Bank customers will pick up in the first quarter of 2022. Our standard practice is to provide a fee grace period to customers for mergers to help them fully understand equity bank products. Non-merger related expenses increased to linked quarters, driven by salaries and benefits from a full quarter of American State Bank team members coming on our payroll. as well as $1.4 million partnership expense related to tax credit activity from assets placed into service. Reconciling GAAP earnings to core earnings this quarter is simply removing the $4.6 million of merger expenses from the quarter. Our GAAP net income includes a net release of ACL through the provision to the allowance for credit losses totaling $2.1 million. Factors influencing the provision this quarter related to a $2 million recovery of a specific reserve for an asset that we discussed in the third quarter, which Greg will expand on in a moment. The uncertainty of the economic environment and continued impact on the economy of previous stimulus measures are reflected in our qualitative and economic components of the calculation. Our December 31 coverage of ACL to non-TPP loans is 1.55%. down from 2.04% from the previous quarter. The decline of the coverage is entirely driven by ACL that was being held against specifically analyzed loans. I'll stop here for a moment and let Greg talk through our asset quality for the quarter.
spk08: Greg? Thanks, Eric. We had an outstanding quarter and an outstanding year in the management and reduction of non-performing assets. Specifically in the quarter, Brett Reaver led our special assets team in the resolution of the restaurant credit that we had been carrying on non-accrual. This asset was paid off completely and resulted in a reduction of $12.3 million in non-accrual loans, a recovery of $2 million, and a carryback of preferred equity on the borrower's company, which may result in further future recoveries. We also spoke of an aviation-related credit in prior quarters, And as of two weeks ago, the largest portion of this credit representing 95% of our relationship with the borrower has paid off. And although there was a charge off, it was much less than the specific reserve we had been carrying on it as the asset sold at a price higher than we anticipated. Other foreclosed property will decline $13.7 million in the first quarter of 22 because of this credit. Brett did a fantastic job shepherding these credits to resolution. Overall, non-accrual loans declined $35.6 million quarter over quarter and now stand at just 93 basis points to total loans, the lowest level since 2016. Our special assets teams, led by June Presnell, once again did excellent work reducing special assets across all categories. Specifically, OREO declined another $1.6 million in the quarter, and without bank-owned property that was not foreclosed on, such as previous branch closures, which are carried as OREO, our OREO balance stands at just $1.9 million, our lowest level since we went public in 2015. And the majority of the remaining assets are smaller and more primarily acquired in mergers. For the year 2021, OREO is down over 30%. Overall during 2021, we worked out and moved a significant amount of the Almena merger non-performers to accrual while minimizing losses on the entire Almena portfolio. We reduced OREO as just discussed. We reduced our non-accruals significantly by $35.6 million. The ACL is 1.55% of non-PPP loans, as Eric has discussed. Net charge-offs, notwithstanding the specific reserves we were carrying on aforementioned assets, are muted, and we entered 2022 in very good shape relative to non-performers, classifies, and the teams reducing them. We also take a moment to introduce John Creech, our new Chief Credit Officer, who began working with us in late December. John comes to the equity team from Synovus where he was a senior credit officer and he brings decades of credit experience to Equity Bank. We are excited to have John and his leadership in credit and as a member of the executive team. Eric?
spk23: Net interest income totaled $37.2 million in the fourth quarter, decreasing from $39 million in the late quarter, representing a $1.8 million decrease. During the fourth quarter, the weighted coupon in a loan portfolio, excluding PPP, decreased approximately 33 basis points. As a reminder, we had a $1.35 million benefit to interest income in the third quarter from loans previously non-accrual being moved to accrual. When excluding the one-time benefit and PPP impacts in both comparable periods, NIM in the fourth quarter declined four basis points to 3.01%. Origination fees recognized from forgiven PPP loans decreased notably in the fourth quarter. We recognized $1.7 million of fee income and $171,000 of interest income related to PPP loans in the fourth quarter, down $6.3 million from the third quarter. At year end, we had $1.3 million of net unrecognized fee income associated with PPP loans, which totaled $44.8 million. Removing PPP fees and interest income from net interest income in both the fourth and third quarters results in a pro forma net interest income of $35.3 million and $30.8 million respectively. Loan yield, earning asset yield, and net interest margin in the quarter ending December 31 is 4.21%, 3.32%, and 3.01% respectively. This compares to the quarter ending September 30th of 4.54%, 3.55%, and 3.19% respectively. Link's quarter loan growth at December 31 was $470 million. Of that total growth, $400 million was related to ASB&T in our year-end balances. When excluding the change in our PPP loan balances, loan growth in the quarter was 121 million or 18.6% annualized. Organic originated loans totaled 221 million in the fourth quarter. Of the total originations in the quarter, 85% were commercial, CRE, and agricultural loans.
spk04: Brad? I'd like to talk about our strategic goals for 2022.
spk05: We are focused on continued improvement of operating performance. Our goal is to make continued progress to return on tangible equity in the mid-teens. To do that, we will reduce excess liquidity on our balance sheet by driving loan growth, increasing fee income in our revenue mix, and remaining focused on operational efficiency. As I mentioned earlier, we've made great strides in our fee income categories in 2021. and we will build on increasing fee incomes, contribution to our revenue mix in 2022. Our trust and wealth management group has made significant progress since it started in 2019, and we expect it to grow that business organically and through acquisition. Expense management remains a high priority. We always look for ways to utilize technology to drive positive operating leverage. For example, this year we will start to roll out interactive teller machines, or ITMs, to select markets. This achieves several objectives. It will permit us to increase hours where necessary to better serve our customers. We can also leverage staffing in our centralized customer care team to assist our customers throughout the ITM footprint. This will reduce our need to augment our branches with additional teller staff, a group of employees that has experienced a lot of disruption and workload over the last 18 months.
spk23: I wanted to turn your attention to the forecast slide on the earnings deck, which will put some specifics on our expectations for 2022 and supports what Brad was just discussing. We previously disclosed our thoughts for 2022, and we introduced a forecast for the first quarter. As Brad mentioned, our long-term goals remain unchanged, improving our revenue mix, increasing fee contribution to that mix, driving positive operational leverage off of our expense base, and driving our loan-to-deposit ratio to levels that we saw pre-COVID. This last goal is dependent in part on economic factors in the markets we serve. Supply chain, labor market, and inflation each add a level of uncertainty to our customers and in turn to loan demand. Successfully shifting excess liquidity to the loan portfolio from cash and investments is critical to improving our pre-tax, pre-provision return on assets. Barring any new stimulus programs, we do not expect TPP income to influence our 2022 results. Brad?
spk05: Thanks, Eric. We're in active conversations with several different companies about partnering. Equity continues to be ready and willing to act as a partner to banks that fit and complement our organization if they can assist equity in making progress to our stated financial profitability goals. As I regularly emphasize, we will stay true to our requirements on earn back, cultural fit, and geographic strategic fit. We will maintain our focus on organic growth efforts. Craig Anderson has made a lot of progress with our regional teams in 2021 and will continue to leverage those successes in 2022 to develop and deepen relationships with customers and drive organic growth. We have great teams on our newly expanded footprint that gives us all the pieces needed to dominate our community markets. With the improvement that Greg and Brett have made to our MPAs and focusing on our customers with the best and brightest team to service those customers. Equity will continue to be a trusted and valued partner to our communities. This is our value proposition. And in turn, we build shareholder value. We are excited to start the year with a lot of momentum and enthusiasm. And with that, we're happy to take your questions.
spk19: Ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our first question or comment comes from the line of Terry McEvoy from Stevens. Your line is open.
spk16: Good morning, everyone.
spk24: Good morning, Terry.
spk16: maybe just start with a question on your fee outlook. And, Brad, I think you talked about some of the kind of businesses you feel optimistic about, but maybe just talk about that 10% to 20% loan growth, where you see kind of the upside coming from and maybe where some of the strategic investments you've made can show up in that revenue line this year.
spk05: I don't think we talked about 10% to 20% loan growth, did we, Terry?
spk16: I'm sorry, not interest income growth.
spk05: My apologies. Fee growth. You were scaring me there.
spk16: Sorry.
spk15: You want to take something?
spk23: Yeah, in terms of the fee, this is Eric, Terry. In terms of the fee income growth for the year, first off, we haven't had much contribution from the American state customers yet on our deposit fees. we give a grace period for 90 days to customers that come in through merger to better understand our products and services. So that will start to contribute here in 2022. And then I think it's just a continued focus on those business lines that we've made some progress on over the last couple of years. Treasury management services, wealth and trust management, credit card, debit card utilization. I think all of those will continue to be significant contributors to growth, organic growth here in 2022.
spk05: Yeah, I think with the addition of ASB and T, Terry, you'll see interchange income grow. You'll see service charge income grow just because of the size of that acquisition for us. But then on top of that are We're growing our credit card income and credit card interchange income nicely, and I think we'll continue to see growth in our wealth management business as well.
spk16: Great. Thank you. And then as a follow-up, Greg kind of talked about all the success last quarter in lowering non-accrual loans. So I guess my question is, do you have any thoughts on a longer term or through the cycle net charge-off target for the company? Sure.
spk08: Well, we did get a lot of stuff in the rearview mirror, Terry, which was very nice. And so what are we budgeting next year for net charge-offs? Ten basis points. Yeah, so I'm going to tell you, I think we're going to be annualized between five and ten basis points of net charge-offs, Terry. We don't see anything on the horizon that should disrupt that based on what we know today.
spk15: Perfect. Thanks again, guys.
spk08: Thank you, Terry.
spk19: Thank you. Our next question or comment comes from the line of Andrew Gorzica from DA Davidson. Your line is open.
spk03: Andrew, I'm not sure we can hear you. Are you on mute?
spk19: Mr. Gorziko, I dropped from the queue. Could you please re-queue up for a star one again, please? Okay, your line is open, sir.
spk18: Awesome. Thank you. Sorry about that. I am on for Jeff Ruiz at DA Davidson. Eric, maybe a question for you. I see that average earning assets seem a bit high this period. I was wondering what the balance is for earning assets.
spk23: Yeah, I don't have that ending average earning assets, Andrew. I can follow up with you on that. Or we can get it for you.
spk18: And then just to follow up, with PPP running off, should we expect to see growth and spread income on a quarter-over-quarter basis?
spk23: Yeah, I think in looking at 2022, when we budget, we do budget flat rate. I do want to put that out there, and I know there's expectation in the market of rate movement. So putting that aside for a moment, we do have some spread improvement expected more in the back half of the year, and a lot of that's driven by some of where we expect to be originating loans you know, ag, for example, which has higher yield. You know, we're hoping to see a little bit better utilization of lines there. So it's somewhat mixed of average earning asset growth throughout the year, within loans, and then within the earning assets themselves. So, you know, looking at our average earning assets right now, We're well overweight where we want to be on cash in the investment portfolio. So the idea is with loan demand moving a portion of those lower yielding earning assets into the loan portfolio, which will help with spread as you asked, Andrew, and will also help us with our loan to deposit ratio. One of our goals is to make some progress getting to where we were pre-COVID. on the loan-to-deposit ratio, which was in the low 80s. And right now, we're close to 70%. And that will help not only with spread, because I estimate that the excess liquidity on our balance sheet is probably depressing them by almost 20 basis points. So it will be helpful there. But it will also help us with our pre-tax, pre-provision ROA in getting us closer to our goal of exceeding 150 basis points.
spk18: Okay. That's very helpful. I will step away. Thank you.
spk22: Thank you.
spk19: Thank you. Our next question or comment comes from the line of Damon Del Monte from KBW. Your line is open.
spk13: Hey, good morning, guys. Hope everybody's doing well today. First question probably for Eric. You know, could you help us think about the asset sensitivity on the balance sheet and, you know, how the margin would react with a 25 basis point move and then future 25 basis point moves?
spk23: Yeah, Damon, at the moment we're pretty well balanced. You know, we're not sensitive either way to rates going up or down. Obviously, yield curve shape steepening will help us, but a parallel shift right now with 25 basis points or even 50 basis points is not a significant detriment or benefit to NII.
spk13: Okay. So movement on the margin would probably be more dictated through like earning asset rotation.
spk23: Yes. Now the team is looking at steps, you know, obviously the market's priced in some of these, these, uh, rate moves at the moment, but I think, you know, given some of my, my experience, expectations always shift and change. Uh, so the team is looking at ways where we can opportunity opportunistically look to extend, the duration on the liability side when it makes sense, where there's some relative value to get some modest exposure to rising rates. But I'm of the opinion that we don't really get paid a lot to make a rate bet. So I'd rather us get paid to move earning assets out of the investment portfolio into loans.
spk13: Got it. Okay.
spk11: Thank you.
spk13: And then could you just remind us on the outlook for M&A, the geographic focus and some of the areas where you think you have the best opportunity?
spk05: Yeah. So we are focused in Oklahoma, Kansas, western Missouri, and central Arkansas. We've got opportunities, I would tell you, in Oklahoma, Kansas, and Western Missouri that we've been looking at or talking to. And so, you know, those conversations are still happening, and it just depends on whether they work into what happens with our ability to do them within an earn-back that makes sense for us. And so we'll stay true to that discipline that we have, Damon, And so we also are looking at a couple fee income businesses that could fit into our current platform pretty easily. And so we're also looking at those types of acquisitions as well.
spk14: Great. That's all that I had. Appreciate the call, Eric. Thank you.
spk19: Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star then one on your telephone keypad. Our next question or comment comes from the line of Andrew Leash from Piper Sandler. Your line is open.
spk10: Hey, good morning, guys. Good morning, Andrew. A clarification question on the charge ops in the quarter. Were those just from that aerospace relationship, or was there anything else in there worth noting?
spk08: There were some smaller credits in there, too, Andrew, that were resolved during the quarter. Primarily, though, the aviation-related credit.
spk10: Gotcha. Okay. And what is the appetite for share purchases here with the stock around 130 or so tangible? And I want to deploy some capital into M&A, but what are you thinking about the buyback?
spk23: Yeah, Andrew, we have an analysis that we look at periodically, at least quarterly, where we look at buying our shares back similarly to M&A. We need to have a three-year earn back on that, and that's the recommendation that we've made to the board when talking about where we'll buy our shares back. So, you know, everyone would love to know what that exact number is. But, you know, that's the logic we use is that we're currently constrained at buying shares back where it's lower than a three-year earn back.
spk10: Got it. Got it. And then lastly, organic loan growth pretty solid in the quarter. Where does the pipeline stand? Did this pull through a lot of the pipeline? So you're working off a lower base here to start the year? Just curious on where that stands right now.
spk06: Yep, I'll have Craig Anderson take that.
spk07: Yes, good morning. Pipeline is very, very strong. Currently, we're up over $700 million in regards to our pipeline. It's really kind of across the board in all of our various markets. I think it's being led primarily by Wichita and Kansas City, but we're also seeing some nice opportunities in our community markets. We've had a strong start to 2022 in January with some very nice fundings of some new relationships. And we expect that to continue in February. We know a couple of large deals that we'll be booking then. And our teams are very focused on small business markets and then also in the middle market space in C&I. And very optimistic about our pipeline through the first quarter.
spk10: Got it. That's great. Obviously, some pretty strong loan growth here in the fourth quarter. Slower pace is embedded in the guidance with just some conservatism, because this sounded pretty optimistic to me.
spk05: Yeah, you know, I think we want to make sure that we can hit those numbers, Andrew. We don't get out over our skis. And, you know, we don't see any big payoffs coming, but you always have, you know, Those things could loom. I think rates rising actually help us protect that because you don't look at guys refinancing then. So, you know, I think we have a chance to have a really good organic loan growth year. You know, really the last two years, our teams have been mostly focused on government programs in Main Street Lending and PPP. We actually have some opportunity to refinance some Main Street Lending deals that we did back onto normal terms into balance sheets. So I think those are going to be great opportunities for us as well, but we want to make sure we can hit the numbers and accomplish the things that we've got out there.
spk10: Got it. All right, thanks for taking the questions. I'll step back.
spk23: Andrew, this is Eric. One last thing I think is worth saying on the share repurchase question. We were active in the fourth quarter, and we have been buying shares back selectively here in January as well.
spk09: Okay, helpful. Thank you.
spk19: Thank you. Ladies and gentlemen, at this time I'm showing no further questions. This concludes our Equity Bank Shares results call and presentation. Thank you for joining, and please have a great day.
Disclaimer

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