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spk01: Good day, and thank you for standing by. Welcome to the third quarter 2022 Equity Bank Shares 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'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Chris Navratil with Equity Bank Shares. Please go ahead.
spk04: Good morning, and thank you for joining Equity Bank Shares conference call, which will include a discussion and presentation of our third quarter 2022 results. Presentation slides to accompany our call are available 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 webcast 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. Good morning. Welcome to our third quarter earnings call. And thank you for your interest in equity bank shares. With me on the call today is our CFO, Eric Newell, COO, Greg Kosover, and Chief Credit Officer, John Creech. Let me start by thanking the equity team for their continued dedication to providing excellent customer service. The effort of our bankers can be seen as we delivered outstanding core earnings for the third time in 2022. As we completed the integration of our M&A transactions over recent years, we have worked to improve the operating team effectiveness and banker sales process. As we continue to improve on these, we will see further pull-through into our operating results. Our diluted EPS was 93 cents versus consensus of 80 cents. Net interest income and net interest margin both increased as we continue to realize benefit from upward rate movement. We are active during the quarter with our buyback, completing our 2021 authorized plan and receiving regulatory non-objection for an additional million shares to be used over the next period. With further emphasis on shareholder return, we increased our third quarter dividend 25% to $0.10 per share. I'll let Eric talk with you about our financial results.
spk09: Thank you, Brad, and good morning. Last night we reported net income of $15.2 million, or $0.93 per diluted share. Non-interest income, excluding the $540,000 gain on the branch sale in the second quarter, remained flat linked quarter at $9 million. Non-interest expenses, less merger costs, increased linked quarter to $32.1 million. We calculate core EPS to be $0.94 per diluted share. To reconcile gap earnings to core earnings in the quarter, simply remove merger expenses of $115,000. Our GAAP net income includes a release through the provision for loan losses of $136,000. The uncertainty of the economic environment and the continued impact on the economy of previous stimulus measures are reflected in the qualitative and economic components of our calculation, while the contribution of historical loss to the ACL fell from June 30th. The September 30th coverage of ACL to loans is 1.43%. I'll stop here for a moment and let John talk through our asset quality for the quarter. John?
spk10: Thanks, Eric. We had another excellent quarter in credit and production with no measurable negative migration and continued improvement in classified assets as we completed the disposition of an aviation-related credit, reducing Oreo and other assets. The classified asset ratio continued its downward trend to 11 percent of regulatory capital versus 13.1 percent linked quarter. Non-performing assets declined 20 percent in a quarter to 59 basis points of total assets. On a linked quarter basis, substandard accruing loans decreased 20 percent, Oreo and other decreased 63 percent, and our year-to-date net charge-offs were 2.1 million. At the end of the quarter, the allowance for credit losses remain two times greater than non-performing loans. Despite rising rates and inflation, the loan portfolio continues to show strength with low incidence of warning indicators. We are pleased with our third quarter results. Equity Bank has two credit officers, Steve Howland and Christoph Slutkowski, that help us maintain high underwriting standards and pricing discipline. Our markets in the Midwest remain robust and resilient. Our balance sheet provides a strong source of both asset and geographic diversity. Our borrowers continue to carry unprecedented levels of liquidity. Loan-to-value and line utilization levels remain low on our ag portfolio. Our hotel portfolio has recovered well from COVID and shows favorable levels of performance. The income-producing real estate portfolio evidence solid cash flow performance, occupancy, and absorption levels. We're getting very acceptable levels of cash invested in all new projects financed. Like earlier production, newer loans have solid primary and secondary sources of repayment that are fairly uncorrelated. Borrowers continue to invest sizable cash ahead of loan dollars across projects of all size. Loan devalues on new production remain favorable. It's rare that we make an exception to this requirement. We have been extremely diligent in pursuing pricing discipline, which we think will reward us in the future. Lastly, we continue to pay close attention to interest rate stress testing to ensure borrowers are able to sustain performance given the current economic environment. I'll turn it over to Greg for a discussion on production.
spk02: Thanks, John. Loan growth in the quarter was $32 million. Our year-to-date loan growth, excluding the branch sale and PPP, totals 7%, including 17.1% annualized growth in CRE and CNI. Our pipeline stands at $700 million today, and as John said, we continue to exercise reasonable caution in terms and conditions on new and renewal loans. Non-interest income of $9 million was essentially flat quarter over quarter when excluding gain on acquisition realized in the second quarter of $540,000. Service charges and fees were up 7% linked quarter with Treasury fees and credit card income showing moderate increases. We continue to emphasize putting commercial cards in the hands of our clients and driving debit card utilization through marketing campaigns. We have growing pipelines that our healthcare services team has developed that will allow us to service their employees' HSAs and other tax-advantaged flexible spending accounts. Our bankers have done an excellent job improving the quality of our deposits as average balances for non-interest-bearing deposits, both for commercial and consumer accounts, improved linked quarter. Eric?
spk09: Net interest income totaled $41.9 million in the third quarter, increasing from $39.6 million in the length quarter, representing a $2.4 million increase. Net interest margin increased 23 basis points to 3.62% in the quarter. You'll note in our slide deck we had a nine basis point contribution to NIM from purchase accounting, which is slightly larger than normal, and the result of successful work from our loan teams on resolving an acquired relationship. PPP loan fee and interest income are no longer meaningfully contributing to our financial results. We continue to successfully originate higher interest rates on loans, and we're seeing higher yields as a result of nearly 60% of our loan portfolio having adjustable rates. During the third quarter, the coupon yield in the loan portfolio increased approximately 48 basis points to 4.87%. Cost of interest-bearing deposits increased 29 basis points to 57 basis points in the quarters. two-thirds of the increases attributed to our public entity deposits. You'll note a late quarter decline in our demand and money market deposits, primarily due to a decline in public entity deposits, heavily influenced by seasonality. As Greg mentioned, relationship-driven account categories, especially non-interest-bearing DBA, have seen growth in the number of accounts and in average balances for accounts. Non-interest expense was up 800,000 late quarter, Professional fees were impacted by increased costs associated with the resolution of other repossessed assets that John discussed earlier. Our outlook slide introduces our preliminary view of 2023. The forecast does not contain any future rate increases.
spk05: Fred? We remain dedicated to expanding current banking relationships and earning new relationships through delivering best-in-class products and services to all markets. We continue to practice discipline in growth, originating high-quality credits, and diversifying non-interest income streams as we look to deliver strong risk-adjusted returns to shareholders. We continue to have conversations with potential partners. We are steadfast in our approach to M&A and will not compromise on deal metrics to close a transaction. Balance sheet capital, and credit strength will benefit us as opportunities arise through the cycle. Our year-to-date performance and progress towards key strategic goals is a testament to the dynamic team we continue to build at Equity. I'm happy to share that Hedl Desai has joined as our Chief Risk Officer. Hedl began her career with Citi, and has served in risk management leadership positions with JPMorgan Chase, State Street Corporation, and Santander. She is an excellent addition to our leadership team as we ready ourselves to take the next step in continued growth. And with that, we're happy to take your questions.
spk01: As a reminder, to ask a question, you need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jeff Rulis with DA Davidson. Your line is now open.
spk06: Thanks. Good morning.
spk00: Good morning, Jeff.
spk06: Just wanted to comment on the slide 17 on the outlooks. Just looking for Q4, you've got about a million-dollar drop as much as a million-dollar drop on fee income and as much as about a $3 million increase on expenses. Just wanted to see what areas, you know, on fees kind of coming out and where you pick up in expenses of giving that guidance.
spk09: On fee income, we don't forecast the mark-to-market benefit on derivatives that we've been enjoying throughout the year. So that's one of the main factors. So if rates do rise again in the fourth quarter, get some benefit that we're currently not forecasting in fee income. On non-interest expense, there is an increase in the fourth quarter in the partnership expense associated with our tax credit, which is what has been driving our annual effective tax rate down for the year. That's a little bit higher in the fourth quarter than in the third quarter. Also, there's a modest increase in salaries and benefits for the incentive accrual based on year-to-day performance.
spk06: Okay. And if I look at kind of the 23 outlook on expenses, that seems to assume a lower run rate into 23. So, again, maybe just some year-end savings. salary and benefits, but that would be expected to run rate, you know, 32, 33, beginning 23.
spk09: That's the expectation, yes.
spk06: Okay. Got it. Maybe for John, I just wanted to kind of dig into the net charge offs. Was the bulk of that, was that primarily from the aviation credit?
spk10: Yeah. No, we had really already marked the aviation credit. It was just, you know, just small, minor, general charge-offs that you would sort of expect.
spk06: Okay, so maybe just a little lumpy. You had been single-digit kind of net charge-offs to loans. But, again, nothing systemic or anything. It just was a grab bag of miscellaneous loans.
spk10: No, that's exactly right. I guess what I would say is, you know, it still feels like a very below normal sort of number that, you know, all these credit metrics are really very strong and positive. It just feels like a, you know, when you have such a low number for several quarters in a row, you would expect it to be a little lumpy at one point.
spk06: Sure. Okay. Makes sense. And then just the last one, just on more spitballing on the deposit beta, this cycle, do you feel like the bank's better positioned this time around and or do you have a beta that you're assuming through this cycle what you think you might get to on a deposit beta?
spk09: We do think we're better positioned this cycle. Last cycle, we had just closed on a deal and there was some deposit outflow and our wholesale funding as a percent of total funding was higher than where we are today, which obviously has a higher beta and a rising rate environment. The composition of our funding in terms of the deposits is much more positive. Our percentage of transaction accounts is higher than the last cycle, and I couldn't speak to you where we were on the last cycle on the mix between community deposits in total, but today we're at 60% community deposits to total, and that really has helped us in containing our cost of funds.
spk05: What I tell you Jeff is we were just just in the wrong part of the cycle last time in the transactions that we had just closed and so we we had the bank we had bought in Tulsa was heavily reliant on wholesale funding and so as we were trying to change that mix which we're good at honestly and originating core deposits and We just didn't have enough runway to get it under control prior to the cycle moving on us. We're going into this cycle with a very normalized, honestly, for equity bank core deposit ratio. And so I think we're going to benefit through this up cycle on interest rate and expansion of margin because of that.
spk06: Okay. Thank you.
spk01: Thank you. Our next question comes from Terry McAvoy with Stevens. Your line is now open.
spk08: Hi, thanks. Good morning. Eric, thanks for mentioning that the margin outlook does not reflect a change in rates. However, the forward curve is assuming we get incremental rate hikes. Could you just talk about kind of the near-term rate sensitivity? You highlighted the variable rate loan portfolio, but just to help us there and I guess within that margin guidance, kind of the accretion that you're expecting within that as well would be helpful. Thank you.
spk09: Sure, Terry. The way we've been looking at, or if I look back through this year on the cumulative change to market rates as well as our cumulative change to NIM, I would expect that You know, for more market rate changes, so let's just make it more tangible. For every 25 basis points of increase in market rates, you could expect something between, you know, 4, 5, 6 percent increase in NIM. But that's the way I look at it based on our behavior to date and the behavior of the asset repricing as well as the deposit repricing. In terms of accretion going forward, that's something that was a little bit higher this quarter, but given our nature or the amount of assets that remain on our balance sheet that have been acquired through mergers, I think we're expecting about five basis points, four to five basis points in our NIM going forward for the foreseeable future.
spk08: Great. Thank you for that. And then Maybe we could talk about loan growth expectations in 2023, markets, sectors, parts of the commercial portfolio that you think are positioned for growth over the next three to five quarters.
spk02: Gary, this is Greg. Thanks for the question. We're still working on the budget for 2023, but I would expect that we will forecast loan growth in that seven to nine or seven to ten percent range. We have lots of opportunities remaining in our metro markets in Kansas City and Tulsa and in Wichita. We have a full team of bankers in all of those locations. They're hitting on all cylinders. Craig Anderson's doing a great job of leading the sales teams and commercial lending. We also have really nice opportunities in all of our community markets with all the people that have been put in place. And so we expect loan growth to continue. As John said earlier, we don't think we have to deviate in any way from our credit standards to get that done. And I think you'll see some continued growth in CNI, some opportunities in CRE. Ag might come our way a little bit. It's certainly been bittersweet, bitter in that the lines have been unused, sweet in that it's been healthy for our ag customers. We're happy about that. We may get a little bump in 2023 from ag as it settles out and people need to borrow money again. So from where we sit today, things look pretty good.
spk08: Great. I appreciate that. Thanks, everyone.
spk00: Thank you.
spk01: Thank you. Our next question comes from Damon Del Monte with KBW. Your line is now open.
spk03: Hey. Good morning, guys. Hope everybody's doing well today. Just a couple quick questions here. I guess first on, you know, the bit of outflows in the deposits this quarter. I saw you had increased your FHLB advances. What are your updated thoughts on Brilliant Bank? Have you kind of turn to that as a source of funding yet, or are you still kind of not actively promoting that?
spk05: So we are actively promoting that, and we are getting funding coming through on that. As we've ramped that up, we continue to figure out how to do that better, honestly, Damon, and so I think that's going to be a good funding source for us as we're opening more accounts every day as we move along the the learning curve process with that. You know, some of the federal home loan bank advances are actually coming from the loan growth that we've had and the need for that. The outflows we had in deposits are really the normalized burndown on what happens with municipal deposits. And so as those municipal deposits, the taxation happens either in December or June, and then they burn those off. during those same periods, so we expect those inflows to happen again in December. But if you look at our core deposits, they're actually, holding in there, are actually growing over quarter. So I don't think we have a deposit outflow that's not normalized for us. Do you have anything to add, Eric?
spk09: Yeah, we looked at our non-interest-bearing average balances excluding municipal linked quarter as well as year-to-date, and those average balances have actually increased, which was a little bit surprising based on some of the thoughts of excess liquidity in the market causing those balances to go down, thinking that they were going to go down. So that's a nice surprise.
spk03: Got it. Okay. That's a good call. Thank you. Um, and then, you know, with it, with regards to, excuse me, with regards to credit, um, no, I think the commentary was, was very positive about, um, the current outlook there. So if you think about the reserve level, which came down to like one 43 this quarter from one 50, um, you know, where do you, where do you kind of see that settling in? And, you know, are there, um, I guess, you know, maybe like in terms of our dollar range, uh, quarterly. or maybe as a percentage of loans? How can we kind of think about the go-forward provision?
spk09: The way I look at provision, at least from a budgeting perspective, it has been this year and likely into next year, based on the information we have today, is 20 basis points on average loans on an annualized basis. So that could get you to a dollar amount of provision. In terms of the ACLs, We do believe it's adequate at this point. Just as a reminder, it is a model that we run in-house here. We have qualitative factors, which allows management to address some of the uncertainty in the economy and how it may address, potentially address or impact our customers and our balance sheet, despite us not seeing any concerning impact. segments as John mentioned in his prepared commentary, which leads to a historical loss factor in the model. Historical losses have been improving, so our probability of defaults, loss given defaults, have been improving, which offsets to some extent the ACL that we have in the qualitative, and then we have the economic regression model that has some lags in it, so there's still some some COVID impacted macroeconomic factors in our regression model. So when you put all that together and bake it, it gets us to that 143 basis points of coverage that we're reporting. And then going forward, you know, for modeling purposes, I would just use 20 basis points on an annual basis on average loans.
spk03: Got it. Okay. That's helpful. That's all that I had. Thank you very much.
spk09: Thank you.
spk01: Thank you. Our next question comes from Andrew Leash with Piper Sandler. Your line is now open.
spk07: Hey, guys. Good morning. Just wondering if you can talk to the non-interest-bearing deposit growth. What drove that this quarter?
spk09: We have continued to be very focused as an organization on our sales approach, as Greg mentioned in his commentary, and really working to grow the number of operating and checking accounts that we have, as well as cross-selling our customers into products and services, which will help drive fee income.
spk05: So it's a granular. Yeah, the answer, Andrew, is it's granular. I mean, it's one checking account at a time. It's one treasury relationship at a time. Our teams are doing a great job, honestly, being focused on that. Craig Anderson has done a great job leading that charge along with all the other leaders in the organization. And as we continue to get better at that, I think we have more opportunity that we have just started scratching the surface at.
spk07: Got it. Yeah, it's good to see this environment. And then, Eric, I think you mentioned adjustable rate loans are 60%. How much of those are above floors at this point?
spk09: Nearly all of them.
spk07: Gotcha.
spk09: More than 90% of them. The other metric that might be helpful is if you look at the total loan portfolio, 32, 33% of it adjusts immediately. Gotcha.
spk07: That's great.
spk09: The reason that that's important is that there's, there's still some repricing opportunity in our loan portfolio from previous rate movement.
spk07: Gotcha. And then the last question I have is just on the buyback, the PCE ratio here below 7%. How much do you look at that with gauging how much you want to buy back stock, given that you sound like you have some pretty good growth opportunities? How should we be thinking about share purchases going forward?
spk09: Yeah, the management team, along with the board of directors, we look at a payout ratio relative to earnings So we add the value of the buyback and the common stock dividend together, compare that to earnings. If you do that math, previously we were approaching 100% payout, I think in 2021. This year we're being more conservative about that. We're not gonna get close to the 100% payout. We do keep our eye on that tangible common ratio, but we believe, that with our more conservative approach on the payout ratio, that allows us to provide room for growth as well.
spk07: Gotcha. All right, thank you. That's all the questions I have.
spk09: Thank you.
spk01: Thank you. Our next question comes from Jem Masaga with FactSet. Your line is now open. Jem, your line is now open. I'm showing no further questions in queue at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.
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