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spk14: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.
spk17: Good day and thank you for standing by and welcome to the fourth quarter 2022 Equity Bank Shares, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Navratil with Equity Bank Shares. Please go ahead.
spk20: Good morning, and thank you for joining Equity Bank Shares conference call, which will include a discussion and presentation of our fourth quarter 2022 results. Presentation slides to accompany our call are available via PDF for download at investor.equitybank.com by clicking the presentation 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 two 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.
spk18: Thank you, Chris. Good morning. Welcome to our fourth quarter earnings call. And thank you for your interest in equity bank shares. With me on the call today are CFO Eric Newell, COO Greg Kosover, President Craig Anderson, and Chief Credit Officer John Creech. I want to start by celebrating two accomplishments. First, net income for 2022 was a company record totaling $57.7 million. Second, we had a record revenue totaling $197.8 million. Both achievements show the strength of our franchise our success in serving our customers and showcase our talented group of employees. A year ago, we had expectations of rising interest rates, but no one was forecasting 400 basis points of increases from the Federal Reserve. Our teams worked to prepare for this inevitable rising rate environment in 2020 and 2021 by keeping our loan pricing short. The results speak for themselves. Loan yields in the fourth quarter of this year were 123 basis points higher than last year. Anticipating a challenging environment for raising and maintaining deposits, I mobilized the teams to refine our sales approach to find incremental ways we could do better. We took the opportunity to focus on operational efficiencies to better serve our customers with better products and services that contribute to their success. I am confident that this sets us up for better performance in 2023. Looking forward, there is a lot of economic uncertainty. But rather than dwelling on the uncertainty, Our team is focused on what we can control, like deeper relationships with our customers, asking prospective customers for their business, being prudent with our capital, and not veering from our underwriting philosophy to achieve loan growth. I am proud of the honor of Newsweek's best bank in Kansas in the under 10 billion category for 2023. We were also recognized for the third year in a row by the Wichita Business Journal as one of the best places to work based on employee survey data. I'll let Eric talk you through our financial results.
spk13: Thank you, Brad, and good morning. Last night we reported net income of $11.6 million, or 72 cents per diluted share. Non-interest income excluding the $422,000 gain on the branch sale in the fourth quarter was $7.9 million down $1.1 million length quarter. Non-interest expenses less merger costs increased length quarter to $35.2 million. We calculate core EPS to be $0.70 for diluted share. To reconcile GAAP earnings to core earnings this quarter, remove merger expenses of $68,000 and gain on branch sale of $422,000. On page six of the investor deck, we added a new visual to show the impact of our solar tax program. For the total year, we added $811,000 to net income. The timing of the benefit and tax provision and the cost of partnership expense is determined by when we entered into the tax investment versus when the project is placed in the service. Importantly, we expect to adopt accounting for investments and tax credit structures using the proportional amortization method. which moves the tax credit expense currently and non-interest expense to the tax line and removes this noise. Late in December, we learned of a tax credit that we had invested in May 2022 would be delayed, not being placed in the service in the calendar year of 2022, as we originally forecasted. This had the effect of adversely impacting the tax provision in the fourth quarter, which is a true-up for the full year. we expect this project to be placed into service early in 2023. Our GAAP net income includes a release through provision for credit loss of $151,000. While we expect softening in the broader economy in 2023, we have not seen economic trends in our markets that are of specific concern, and more importantly, we have not seen any declining asset quality trends in our portfolio. While we continue to have qualitative reserves set aside for this uncertainty, The modest release represents improvement in our asset quality and reserves we had previously set aside for specific credits that our special assets team had fully resolved and the credits are no longer on our balance sheet. The December 31 coverage of HDL to loans is 1.38%. I'll stop here for a moment and let John talk us through asset quality for the quarter. John? Thanks, Eric.
spk10: Credit performance for the quarter was again strong, seeing improvement across all categories. Special mention loans declined from $35 million at the beginning of the year to $8 million at quarter end. Special mention loans improved $1 million for the quarter. Delinquencies over 30 days past due were $1.3 million lower, ending the quarter at $6 million. Non-accrual loans declined $5.5 million finishing the quarter at 0.53% of total loans. I'm most proud of Cherie Peterson and Brett Reber, our general counsel, for working together to reduce OREO to 600,000, excluding branches, our lowest level in a decade. Non-performing assets declined $11.5 million to $18 million on December 31st. The majority of our non-accrual loans were acquired via bank acquisitions. Net charge-offs for the quarter were $501,000. Rising rates, inflation, and economic uncertainty continue to be a concern. At the same time, consumer liquidity levels and employment have not yet returned to historically normal levels. The credit card portfolio is relatively new and has not yet produced consumer losses that one would expect in a downturn. We continue to have relatively low rates of overdrafts and overdraft-related charge-offs. Unemployment rates in our largest two markets were less than 3% at year-end. At the end of the quarter, loans to homebuilders were only $28 million. Most of our homebuilders continue to have strong liquidity or good secondary sources of repayment. Declining commodity prices and drier conditions are a concern for farmers. The war in Ukraine is providing a floor for grain producers. Cattle prices have pushed upward with a favorable outlook for 2023. Our hotel portfolio has performed well following the pandemic. Travel resurgence is providing a good tailwind for the lodging sector. About 7.5% of our loan portfolio is income producing office and commercial properties. All newer commercial IPRE loans have been financed with comfortable loan to values and debt yields. the Midwest appears to have less issues getting employees into the office than the rest of the country. Equity Bank, for example, never went to a remote or hybrid environment as all employees remained in the office throughout the pandemic. Since fiscal year end 2019, our Texas ratio has declined from a high of 14% to 3% at year end, while regulatory capital increased from $348 million to $588 million. During this same period, our ACL has increased from a low of $12 million to $46 million and covers non-accrual loans by 260%. Our bankers remain vigilant on the credit front, and we have been successful with our loan pricing strategy. While the Midwest economy remains strong, we anticipate and are prepared for more difficult conditions. I'll turn it over to Craig for a discussion on production.
spk16: Thanks, John. Loan growth in the quarter, excluding PPP and branch sales, was 56.8 million, or 6.9% annualized. Loan growth in the commercial and commercial real estate portfolios was 9.25% annualized. We continue to successfully originate loans at higher interest rates, and we are seeing higher yields as a result of nearly 60% of our loan portfolio having adjustable rates. During the fourth quarter, the yield in the loan portfolio increased 50 basis points to 5.59%. Cost of interest-bearing deposits increased 45 basis points to 105 basis points in the quarter. Our pipeline stands at 600 million today and as John said, we continue to exercise reasonable caution in terms and conditions on new and renewal loans. Non-interest income of 8.3 million was down 1.1 million quarter over quarter when excluding gain on sale of the branch realized in the fourth quarter of 422,000. Service revenue with the exception of mortgage banking, held relatively consistent during the quarter while the benefit of previous acquisitions to non-interest income as well as the declining mortgage production environment drove the quarterly decline. We are seeing positive momentum in our health savings and trust and wealth management divisions and expect further positive contribution to non-interest income in 2023. Eric? Net interest income.
spk13: totaled $42 million in the fourth quarter, increasing from $41.9 million in the linked quarter. We continue to benefit from the rising interest rate environment, with net interest margin increasing five basis points, linked quarter to 3.67%. Turning to page eight of the slide deck, you can see the composition of the change in net interest income, which benefited from an increase in the yields on earning assets offset by the increase in the cost of interest-bearing liabilities. We benefited 10 basis points from purchase accounting in the fourth quarter, up one basis point link quarter, but above our expectation going forward. Non-interest expense categories increasing from the third quarter included salaries and benefits, advertising, and other expenses. Salaries and benefits increased 3.5% link quarter, attributable to lower job vacancy rates, which will incrementally improve our service and sales to our customers. Advertising expenses increased from the third quarter, mainly attributed to our direct banking platform. As a reminder, our direct bank strategy is designed to meet our deposit needs while helping keep our deposit betas lower in our non-direct channels. Other expenses include our tax credit partnership amortization in the fourth quarter, totaling $1.9 million compared to $1.4 million in the third quarter. Our outlook slide includes an updated view for 2023. We do not include future rate hikes. Our forecast still includes the effects of lagging deposit rates. Moderating the impact of higher deposit rates will be an emphasis on relationships to drive non-interest bearing accounts. A forecasted one billion of loan portfolio cash flows in 2023 with a weighted average yield of 6.75%, which is 63 basis points below our current origination yields, as well as a successful deployment of cash flows off the investment portfolio into the loan portfolio, which has about a 500 basis point spread. In the fourth quarter, non-interest-bearing deposits declined due to expected seasonality from our commercial and municipal portfolios and further reduction in customers' excess liquidity. As Brad mentioned, our sales teams have renewed efforts to focus on building and acquiring new relationships, which should have the effect of increasing non-interest-bearing deposits for total funding. Our provision is forecasted to be 20 basis points to average loans. This is a more optimistic view than the current consensus, mainly because of our existing coverage level to loans, the lack of recognized losses, and previous qualitative reserve build for recognizing economic uncertainty. We expect a higher level of advertising expense in 2023 to support our deposit acquisition efforts. Though efforts are underway to introduce products and services that we anticipate will reduce the cost of customer acquisition. Opportunities that potentially result in positive operating leverage include technology products and services we've been working on through 2022 that will allow for better experience for our customers, improved revenue, and incrementally reduce expenses through improved efficiencies.
spk18: right our exceptional employees are focused on core banking services in 2023 developing relationships with prospective clients and broadening relationships with current customers checking account growth and high quality credit origination remains top of mind we met with several banks in the fourth quarter in the beginning of this year as well discussing their options of whether is a good time and having low liquidity and in a high rate and interest environment, that Equity Bank would be a good upstream merger partner for them. Those discussions will continue. Our performance through 2022 sets us up for success in 2023, and we are excited for the future. And with that, we're happy to take your questions.
spk15: Thank you.
spk17: As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
spk15: Our first question comes from Jeff Rulis with DA Davidson.
spk17: You may proceed.
spk08: Thanks. Good morning, all. Question on the loan growth side, a bit of a softball. I guess you guys are sort of pointing to kind of mid-single digit in 23. Just interested in kind of the constraints there. I mean, is it – I bet it's a bit of a mix of demand you're seeing, appetite for risk on your own side, and the ability to fund that growth. But kind of the pressure points would be interested in just How do you characterize loan growth in the coming year and what you're looking for there?
spk18: I think there's a lot of loan opportunities out there, Jeff. We're just trying to make sure that we're balancing the ability to put on things that make sense from an interest rate standpoint. We don't need to or haven't stretched our credit underwriting. There's lots of opportunities out there. You can grow a lot faster. The question is, can we get that type of loan growth and keep an interest rate that we want for our balance sheet? Because we have a viewpoint that we think that rates might continue to keep rising, and so we can't be locking in rates now on the asset side that aren't going to reprice in the very near term. We're just being moderate on that from the standpoint that we want to make sure we can originate things that fit our interest rate bucket and in the same sense are prudent for us to do. But there's lots of lending opportunities out there. That's not the issue.
spk11: Jeff, this is Eric.
spk13: On the period-to-period, so year-end-to-year-end loan growth, we're forecasting around 7% to 8%. Am I correct? seem a little softer in the forecast slide because that's average balance.
spk08: That's helpful. Thanks, Eric. And maybe while I got you, Eric, on the margin of the average for the month of December, just trying to figure out how that compares to the full quarter average.
spk13: I don't have the December average in front of me. I would say December probably is a little softer than the quarter just due to the deposit data that we experienced in the month of December, which you can actually see on slide nine of our deck. That's a newer disclosure for us where we broke down the components of yield and cost and added the cumulative betas for loans. And it says deposits, and that's total deposits, not just interest-bearing. But you can see for deposits, we had a cumulative beta of 16% in Q4 and then a 20% beta in December.
spk08: Gotcha. Yeah, I guess looking at the outlook on margin too, it's kind of range bound in Q1, maybe to the downside a little bit, and then for the full year a little lower. So I appreciate it. Maybe one last one, Brad, just wanted to circle back to your commentary on on having discussions with partnerships of other banks. I guess is that picked up a bit, you know, trying to get a sense for relative more banks coming out of the weeds to say, let's partner up. Just interested in a little more color there. Thanks.
spk18: Yeah, I think we're, you know, I think it's been a fairly quiet period. And so the conversations we've had have been, the requests have been more, more prevalent in the last 60 days than they were in the prior 90 or 120 days. So I would say those conversations are actually picking up. I think this time of year always picks up steam a little bit because people get their year-end numbers done. And so they get their packets together to come to market. So it'll be an interesting time spring for us, I think, because I think there's going to be some opportunities there. And so, you know, what do we want to do and how do we skin those things? And we've got some creative ways that we can deal, I think, with AOCI. And so, you know, we're ready to start having those conversations.
spk07: Okay. Appreciate it. Thank you.
spk17: Thank you. One moment for questions. Our next question comes from Andrew Leash with Piper Sandler. You may proceed.
spk06: Hey, guys. Good morning. I wanted to touch on, I guess, with the margin guide not having any rate hikes built into there, it just seems like with some of the repricing and the beta on the deposit side that there's still an upward bias even with a 25 basis point rate hike. Is that still the case, or has it gotten to the point where it should be pretty neutral now?
spk13: I would say with 25 basis points movement, we're probably looking between zero and two basis points of expansion on them.
spk06: Got it. All right. That's helpful. Then on the mortgage front, obviously that line item's been under pressure here for a couple, a few quarters. If I looked at where it's been the last couple of quarters, is that a good
spk13: place to build off for for your 2023 outlook or do you think maybe just because of the markets you're in it's a little bit stronger yeah we we uh what we did andrew is we looked at the second half of 2022 uh actual and we use if you annualize that that's pretty close to our expectation for a full year 2023. gotcha um let's see no i think that's uh about
spk06: That covers all the questions I have. Everything else has been answered. I'll sit back. Thanks.
spk17: Thank you. One moment for questions. Our next question comes from Damon Del Monte with KBW. You may proceed.
spk03: Hey, good morning, guys. How's it going today?
spk00: Good, Damon.
spk03: Good. So just a quick question on the credit and the outlook. Great commentary and color that was provided in the prepared remarks. You know, the reserve, I think, is pretty healthy, you know, around 138. And just kind of wondering what your thoughts are on maintaining that level as we go through 2023 and kind of what you would expect for net charge offs and kind of how we can kind of use that to triangulate into a loan loss provision as we look out over the next few quarters.
spk13: I'll let John talk about environment, and I can bring it back to the financials.
spk03: Great.
spk10: Yeah, the environment for us from a credit quality standpoint, you know, it's kind of difficult to characterize because you know what the headwinds look like, but our two largest markets, you know, as we said on the call, have 3% unemployment still. If you look at IPRE office and commercial, people in the Midwest are in the office and working. It doesn't have those headwinds to the degree that the rest of the country does. You look at what we're seeing in our portfolio and how we're monitoring it and past dues remain low, overdrafts remain low. They're almost abnormally low. The borrowing base compliance, we look at borrowing bases. The compliance with the borrowing bases is good. Our loan covenant compliance and monitoring, we're not providing a lot of waivers. We've got favorable compliance with our borrowing bases. Borrower levels of liquidity remain strong. We're continuing to see borrowers have a strong level of liquidity. What I hear when I look at the economy and listen to other earnings calls, particularly from the The larger banks is that the expectation is kind of muted. So from a credit call standpoint, it seems odd, but we sort of see the continuance of the trend we've had for the last year.
spk13: So David, when you put all that together, from a budgeting perspective, we still look at 20 basis points on average loans for provisioning. But when you listen to John, I could see us coming in lower than that based on what we're seeing today in the economic environment and what we're seeing in our portfolio. That certainly could change over the year, but based on our current coverage and the our current credit quality from an ACL point of view. I think that the qualitative aspects of the ACL take into account that uncertainty, but the quantitative are really showing the lack of loss that we have flowing through our model.
spk03: Okay, that's helpful. I appreciate that color. And then with regard, this is kind of a technical question here, but with regards to the, you know, the impact on the tax rate this quarter because of the timing, which really, you know, related to the solar credit. So should we anticipate like the low end of your 14 to 16% range in the first quarter because you get a bigger benefit or is that just embedded in the overall guidance?
spk13: That's embedded in the overall forecast. Got it.
spk02: Okay. All right. That's all that I had for now. Thank you very much.
spk17: Thank you.
spk15: One moment for questions.
spk17: Our next question comes from Terry McEvoy with Stevens. You may proceed.
spk19: Good morning, everyone. Good morning, Terry. I guess we've talked about the deposit betas were below the industry last year, and that was the playbook that you talked about. I guess my question is what deposit betas are you using in your margin outlook? If we do get a couple rate hikes, how would that impact the beta assumption?
spk13: Right now, we're using a terminal beta of 40% in our budgeting for 2023. I don't know if continued rate hikes would alter that assumption. At this point, that is something that we talk about in our asset liability committee every month, and we'll continue to monitor that.
spk19: Thanks. Maybe as a follow-up, maybe could you discuss how you're using the digital bank as an overall funding tool?
spk13: Yeah, so the digital bank, also a brilliant bank, our direct bank channel is a vehicle for us to Raise deposits, and that is a market rate, and it helps us focus our efforts in raising deposits in that channel versus our core markets where we do have conversations with our customers on rate, but it reduces the potential cannibalization of deposits and repricing deposits there.
spk19: Maybe one last one on capital management. Slide, was it 18, talks about the TCE target at 8.5. It was 7% at the end of the year. How does that come into play as you think about additional or further buyback activity?
spk13: We, management and the board, talk about the buyback each time we meet, and we take into account our current expectation for the upcoming year, what we're seeing in the economic and operating environment. In the most recent quarter, we did buy back some shares, but not at a pace that we had in earlier quarters, and I think that was due to us wanting to gain some more certainty on our view of 2023. Now that we have that, I think you'll see us back in the market here in the beginning of the year, and our constraint factor right now is retained earnings. So we want to make sure that we are within a certain percentage, call it 60% to 70% payout and not higher than that.
spk18: So said differently, Terry, we look at TCE, but TCE, we look at it minus AOCI. So when we're doing our analysis, we're very comfortable that the AOCI is going to come back. And we know it's going to come back mostly or almost always going to come back by the end of 2025. So we look at it minus that. And so that's that's not going to be a restraining factor for us in buying back shares. Okay.
spk19: Understood. Thanks for taking my questions and appreciate all the details and the prepared remarks. Thank you.
spk17: Thank you. And I'm not showing any further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.
spk14: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial Star 1-1. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Thank you. you Thank you. Thank you. Thank you. Thank you. Thank you.
spk17: Good day, and thank you for standing by, and welcome to the fourth quarter 2022 Equity Bank Shares, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Navratil with Equity Bank Shares. Please go ahead.
spk20: Good morning, and thank you for joining Equity Bank Shares conference call, which will include a discussion and presentation of our fourth quarter 2022 results. Presentation slides to accompany our call are available via PDF for download at investor.equitybank.com by clicking the presentation 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 two 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.
spk18: Thank you, Chris. Good morning. Welcome to our fourth quarter earnings call. And thank you for your interest in equity bank shares. With me on the call today are CFO Eric Newell, COO Greg Kosover, President Craig Anderson, and Chief Credit Officer John Creech. I want to start by celebrating two accomplishments. First, net income for 2022 was a company record totaling $57.7 million. Second, we had a record revenue totaling $197.8 million. Both achievements show the strength of our franchise our success in serving our customers and showcase our talented group of employees. A year ago, we had expectations of rising interest rates, but no one was forecasting 400 basis points of increases from the Federal Reserve. Our teams worked to prepare for this inevitable rising rate environment in 2020 and 2021 by keeping our loan pricing short. The results speak for themselves. Loan yields in the fourth quarter of this year were 123 basis points higher than last year. Anticipating a challenging environment for raising and maintaining deposits, I mobilized the teams to refine our sales approach to find incremental ways we could do better. We took the opportunity to focus on operational efficiencies to better serve our customers with better products and services that contribute to their success. I am confident that this sets us up for better performance in 2023. Looking forward, there is a lot of economic uncertainty. But rather than dwelling on the uncertainty, Our team is focused on what we can control, like deeper relationships with our customers, asking prospective customers for their business, being prudent with our capital, and not veering from our underwriting philosophy to achieve loan growth. I am proud of the honor of Newsweek's best bank in Kansas in the under 10 billion category for 2023. We were also recognized for the third year in a row by the Wichita Business Journal as one of the best places to work based on employee survey data. I'll let Eric talk you through our financial results.
spk13: Thank you, Brad, and good morning. Last night we reported net income of $11.6 million, or 72 cents per diluted share. Non-interest income excluding the $422,000 gain on the branch sale in the fourth quarter was $7.9 million down $1.1 million length quarter. Non-interest expenses less merger costs increased length quarter to $35.2 million. We calculate core EPS to be $0.70 for diluted share. To reconcile GAAP earnings to core earnings this quarter, remove merger expenses of $68,000 and gain on branch sale of $422,000. On page six of the investor deck, we added a new visual to show the impact of our solar tax program. For the total year, we added $811,000 to net income. The timing of the benefit and tax provision and the cost of partnership expense is determined by when we entered into the tax investment versus when the project is placed in the service. Importantly, we expect to adopt accounting for investments and tax credit structures using the proportional amortization method. which moves the tax credit expense currently and non-interest expense to the tax line and removes this noise. Late in December, we learned of a tax credit that we had invested in May 2022 would be delayed, not being placed in the service in the calendar year of 2022, as we originally forecasted. This had the effect of adversely impacting the tax provision in the fourth quarter, which is a true-up for the full year. we expect this project to be placed into service early in 2023. Our GAAP net income includes a release through provision for credit loss of $151,000. While we expect softening in the broader economy in 2023, we have not seen economic trends in our markets that are of specific concern, and more importantly, we have not seen any declining asset quality trends in our portfolio. While we continue to have qualitative reserves set aside for this uncertainty, The modest release represents improvement in our asset quality and reserves we had previously set aside for specific credits that our special assets team had fully resolved and the credits are no longer on our balance sheet. The December 31 coverage of HDL to loans is 1.38%. I'll stop here for a moment and let John talk us through asset quality for the quarter. John? Thanks, Eric.
spk10: Credit performance for the quarter was again strong, seeing improvement across all categories. Special mention loans declined from $35 million at the beginning of the year to $8 million at quarter end. Special mention loans improved $1 million for the quarter. Delinquencies over 30 days past due were $1.3 million lower, ending the quarter at $6 million. Non-accrual loans declined $5.5 million finishing the quarter at 0.53% of total loans. I'm most proud of Cherie Peterson and Brett Reber, our general counsel, for working together to reduce OREO to 600,000, excluding branches, our lowest level in a decade. Non-performing assets declined 11.5 million to 18 million on December 31st. The majority of our non-accrual loans were acquired via bank acquisitions. Net charge-offs for the quarter were $501,000. Rising rates, inflation, and economic uncertainty continue to be a concern. At the same time, consumer liquidity levels and employment have not yet returned to historically normal levels. The credit card portfolio is relatively new and has not yet produced consumer losses that one would expect in a downturn. We continue to have relatively low rates of overdrafts and overdraft-related charge-offs. Unemployment rates in our largest two markets were less than 3% at year-end. At the end of the quarter, loans to homebuilders were only $28 million. Most of our homebuilders continue to have strong liquidity or good secondary sources of repayment. Declining commodity prices and drier conditions are a concern for farmers. The war in Ukraine is providing a floor for grain producers. Cattle prices have pushed upward with a favorable outlook for 2023. Our hotel portfolio has performed well following the pandemic. Travel resurgence is providing a good tailwind for the lodging sector. About 7.5% of our loan portfolio is income producing office and commercial properties. All newer commercial IPRE loans have been financed with comfortable loan to values and debt yields. the Midwest appears to have less issues getting employees into the office than the rest of the country. Equity Bank, for example, never went to a remote or hybrid environment as all employees remained in the office throughout the pandemic. Since fiscal year-end 2019, our Texas ratio has declined from a high of 14% to 3% at year-end, while regulatory capital increased from $348 million to $588 million. During this same period, our ACL has increased from a low of $12 million to $46 million and covers non-accrual loans by 260%. Our bankers remain vigilant on the credit front, and we have been successful with our loan pricing strategy. While the Midwest economy remains strong, we anticipate and are prepared for more difficult conditions. I'll turn it over to Craig for a discussion on productions.
spk16: Thanks, John. Loan growth in the quarter, excluding PPP and branch sales, was 56.8 million, or 6.9% annualized. Loan growth in the commercial and commercial real estate portfolios was 9.25% annualized. We continue to successfully originate loans at higher interest rates, and we are seeing higher yields as a result of nearly 60% of our loan portfolio having adjustable rates. During the fourth quarter, the yield in the loan portfolio increased 50 basis points to 5.59%. Cost of interest-bearing deposits increased 45 basis points to 105 basis points in the quarter. Our pipeline stands at $600 million today, and as John said, we continue to exercise reasonable caution in terms and conditions on new and renewal loans. Non-interest income of $8.3 million was down $1.1 million quarter over quarter when excluding gain on sale of the branch realized in the fourth quarter of $422,000. with the exception of mortgage banking, held relatively consistent during the quarter, while the benefit of previous acquisitions to non-interest income, as well as the declining mortgage production environment, drove the quarterly decline. We are seeing positive momentum in our health savings and trust and wealth management divisions and expect further positive contribution to non-interest income in 2023. Eric? Net interest income.
spk13: totaled $42 million in the fourth quarter, increasing from $41.9 million in the linked quarter. We continue to benefit from the rising interest rate environment, with net interest margin increasing five basis points, linked quarters at 3.67%. Turning to page eight of the slide deck, you can see the composition of the change in net interest income, which benefited from an increase in the yields on earning assets offset by the increase in the cost of interest-bearing liabilities. We benefited 10 basis points from purchase accounting in the fourth quarter, up one basis point link quarter, but above our expectation going forward. Non-interest expense categories increasing from the third quarter included salaries and benefits, advertising, and other expenses. Salaries and benefits increased 3.5% link quarter, attributable to lower job vacancy rates, which will incrementally improve our service and sales to our customers. Advertising expenses increased from the third quarter, mainly attributed to our direct banking platform. As a reminder, our direct bank strategy is designed to meet our deposit needs while helping keep our deposit betas lower in our non-direct channels. Other expenses include our tax credit partnership amortization in the fourth quarter, totaling $1.9 million compared to $1.4 million in the third quarter. Our outlook slide includes an updated view for 2023. We do not include future rate hikes. Our forecast still includes the effects of lagging deposit rates. Moderating the impact of higher deposit rates will be an emphasis on relationships to drive non-interest bearing accounts. A forecasted one billion of loan portfolio cash flows in 2023 with a weighted average yield of 6.75%, which is 63 basis points below our current origination yields, as well as a successful deployment of cash flows off the investment portfolio into the loan portfolio, which has about a 500 basis point spread. In the fourth quarter, non-interest-bearing deposits declined due to expected seasonality from our commercial and municipal portfolios and further reduction in customers' excess liquidity. As Brad mentioned, our sales teams have renewed efforts to focus on building and acquiring new relationships, which should have the effect of increasing non-interest-bearing deposits for total funding. Our provision is forecasted to be 20 basis points to average loans. This is a more optimistic view than the current consensus, mainly because of our existing coverage level to loans, the lack of recognized losses, and previous qualitative reserve build for recognizing economic uncertainty. We expect a higher level of advertising expense in 2023 to support our deposit acquisition efforts, though efforts are underway to introduce products and services that we anticipate will reduce the cost of customer acquisition. Opportunities that potentially result in positive operating leverage include technology products and services we've been working on through 2022 that will allow for better experience for our customers, improved revenue, and incrementally reduce expenses through improved efficiencies. Brad?
spk18: Our exceptional employees are focused on core banking services in 2023, developing relationships with prospective clients and broadening relationships with current customers. Checking account growth and high-quality credit origination remains top of mind. We met with several banks in the fourth quarter and the beginning of this year as well, discussing their options of whether it's a good time in having low liquidity and in a high-rate interest environment that Equity Bank would be a good upstream merger partner for them. Those discussions will continue. Our performance through 2022 sets us up for success in 2023, and we are excited for the future. And with that, we're happy to take your questions.
spk17: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
spk15: Our first question comes from Jeff Rulis with DA Davidson.
spk17: You may proceed.
spk08: Thanks. Good morning, all. question on the loan growth side. A bit of a softball. I guess you guys are sort of pointing to kind of mid single digit in 23. Just interested in kind of the constraints there. I mean, is it, you know, I bet it's a bit of mix of demand you're seeing, appetite for risk on your own side, and the ability to fund that growth. But kind of the pressure points would be interested in just how you characterize loan growth in the coming year and what you're looking for there.
spk18: I think there's a lot of loan opportunities out there, Jeff. We're just trying to make sure that we're balancing the ability to put on things that make sense from an interest rate standpoint. We don't need to or haven't stretched our credit underwriting. There's lots of opportunities out there. You can grow a lot faster. The question is, is can we get that type of loan growth and keep a interest rate that we want for our balance sheet? Because we have a viewpoint that we think that rates might continue to keep rising, and so we can't be locking in rates now on the asset side that aren't going to reprice in a very near term. We're just being moderate on that from the standpoint that we want to make sure we can originate things that fit our interest rate bucket and in the same sense are prudent for us to do. But there's lots of lending opportunities out there. That's not the issue.
spk11: Jeff, this is Eric.
spk13: On the period-to-period, so year-end-to-year-end loan growth, we're forecasting around 7% to 8%. seem a little softer in the forecast slide because that's average balance.
spk08: That's helpful. Thanks, Eric. And maybe while I got you, Eric, on the margin, do you have the average for the month of December? Just trying to figure out how that compares to the full quarter average.
spk13: I don't have the December average in front of me. I would say December probably is a little softer than the quarter just due to the deposit data that we experienced in the month of December, which you can actually see on slide nine of our deck. That's a newer disclosure for us where we broke down the components of yield and cost and added the cumulative betas for loans. And it says deposits, and that's total deposits, not just interest-bearing. But you can see for deposits, we had a cumulative beta of 16% in Q4 and then a 20% beta in December.
spk08: Gotcha. Yeah, I guess looking at the outlook on margin too, it's kind of range bound in Q1, maybe to the downside a little bit, and then for the full year a little lower. So I appreciate it. Maybe one last one, Brad, just wanted to circle back to your commentary on on having discussions with partnerships of other banks. I guess is that picked up a bit? Trying to get a sense for relative, more banks coming out of the weeds to say, let's partner up. Just interested in a little more color there. Thanks.
spk18: Yeah, I think it's been a fairly quiet period. And so the conversations we've had have been, the requests have been more, more prevalent in the last 60 days than they were in the prior 90 or 120 days. So I would say those conversations are actually picking up. I think this time of year always picks up steam a little bit because people get their year-end numbers done. And so they get their packets together to come to market. So it'll be an interesting time spring for us, I think, because I think there's going to be some opportunities there. And so, you know, what do we want to do and how do we skin those things? And we've got some creative ways that we can deal, I think, with AOCI. And so, you know, we're ready to start having those conversations.
spk07: Okay. Appreciate it. Thank you.
spk17: Thank you. One moment for questions. Our next question comes from Andrew Leash with Piper Sandler. You may proceed.
spk06: Hey, guys. Good morning. I wanted to touch on, I guess, with the margin guide not having any rate hikes built into there, it just seems like with some of the repricing and the beta on the deposit side that there's still an upward bias even with a 25 basis point rate hike. Is that still the case, or has it gotten to the point where it should be pretty neutral now?
spk13: I would say with 25 basis points movement, we're probably looking between zero and two basis points of expansion on them.
spk06: Got it. All right. That's helpful. Then on the mortgage front, obviously that line item's been under pressure here for a couple, a few quarters. If I look at where it's been the last couple of quarters, is that a good place to build off for your 2023 outlook, or do you think maybe just because of the markets you're in, it's a little bit stronger?
spk13: Yeah, what we did, Andrew, is we looked at the second half of 2022 actual, and if you annualize that, that's pretty close to our expectation for a full year 2023.
spk06: Gotcha. Let's see. No, I think that's about... That covers all the questions I have. Everything else has been answered. I'll sit back. Thanks.
spk17: Thank you. One moment for questions. Our next question comes from Damon Del Monte with KBW. You may proceed.
spk03: Hey, good morning, guys. How's it going today?
spk00: Good, Damon.
spk03: Good. So just a quick question on the credit and the outlook. Great commentary and color that was provided in the prepared remarks. You know, the reserve, I think, is pretty healthy, you know, around 138. And just kind of wondering what your thoughts are on maintaining that level as we go through 2023 and kind of what you would expect for net charge offs and kind of how we can kind of use that to triangulate into a loan loss provision as we look out over the next few quarters.
spk13: I'll let John talk about environment, and I can bring it back to the financials.
spk03: Great.
spk10: Yeah, the environment for us from a credit quality standpoint, you know, it's kind of difficult to characterize because you know what the headwinds look like, but our two largest markets, you know, as we said on the call, have 3% unemployment still. If you look at IPRE office and commercial, people in the Midwest are in the office and working. It doesn't have those headwinds to the degree that the rest of the country does. You look at what we're seeing in our portfolio and how we're monitoring it and past dues remain low, overdrafts remain low. They're almost abnormally low. The borrowing base compliance, we look at borrowing bases. The compliance with the borrowing bases is good. Our loan covenant compliance and monitoring, we're not providing a lot of waivers. We've got favorable compliance with our borrowing bases. Borrower levels of liquidity remain strong. We're continuing to see borrowers have a strong level of liquidity. What I hear when I look at the economy and listen to other earnings calls, particularly from the the larger banks is that the expectation is kind of muted. So from a credit cost standpoint, it seems odd, but we sort of see the continuance of the trend we've had for the last year.
spk13: So David, when you put all that together, from a budgeting perspective, we still look at 20 basis points on average loans for provisioning. But when you listen to John, I could see us coming in lower than that based on what we're seeing today in the economic environment and what we're seeing in our portfolio. That certainly could change over the year, but based on our current coverage and the our current credit quality from an ACL point of view. I think that the qualitative aspects of the ACL take into account that uncertainty, but the quantitative are really showing the lack of loss that we have flowing through our model.
spk03: Got it. Okay. That's helpful. I appreciate that color. And then with regard, this is kind of a technical question here, but with regards to the, you know, the impact on the tax rate this quarter because of the timing, which really, you know, related to the solar credit. So should we anticipate like the low end of your 14 to 16% range in the first quarter because you get a bigger benefit or is that just embedded in the overall guidance?
spk13: That's embedded in the overall forecast. Got it.
spk02: Okay. All right. That's all that I had for now. Thank you very much.
spk15: Thank you. One moment for questions.
spk17: Our next question comes from Terry McEvoy with Stevens. You may proceed.
spk19: Good morning, everyone. Good morning, Terry. I guess we've talked about the deposit betas were below the industry last year, and that was the playbook that you talked about. I guess my question is what deposit betas are you using in your margin outlook? If we do get a couple rate hikes, how would that impact the beta assumption?
spk13: Right now, we're using a terminal beta of 40% in our budgeting for 2023. I don't know if continued rate hikes would alter that assumption. At this point, that is something that we talk about in our asset liability committee every month, and we'll continue to monitor that.
spk19: Thanks. Maybe as a follow-up, maybe could you discuss how you're using the digital bank as an overall funding tool?
spk13: Yeah, so the digital bank, also Brilliant Bank, our direct bank channel, is a vehicle for us to Raise deposits, and that is a market rate, and it helps us focus our efforts in raising deposits in that channel versus our core markets where we do have conversations with our customers on rate, but it reduces the potential cannibalization of deposits and repricing deposits there.
spk19: Maybe one last one on capital management. Slide, was it 18, talks about the TCE target at 8.5. It was 7% at the end of the year. How does that come into play as you think about additional or further buyback activity?
spk13: We, management and the board, talk about the buyback each time we meet, and we take into account our current expectation for the upcoming year, what we're seeing in the economic and operating environment. In the most recent quarter, we did buy back some shares, but not at a pace that we had in earlier quarters, and I think that was due to us wanting to gain some more certainty on our view of 2023. Now that we have that, I think you'll see us back in the market here in the beginning of the year. And our constraint factor right now is retained earnings. So we want to make sure that we are within a certain percentage, call it 60% to 70% payout and not higher than that.
spk18: So said differently, Terry, we look at TCE, but TCE, we look at it minus AOCI. So when we're doing our analysis, we're very comfortable that the AOCI is going to come back. And we know it's going to come back mostly or almost always going to come back by the end of 2025. So we look at it minus that. And so that's that's not going to be a restraining factor for us in buying back shares. Okay.
spk19: Understood. Thanks for taking my questions and appreciate all the details and the prepared remarks. Thank you.
spk17: Thank you. And I'm not showing any further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.
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