Q4 2023 Equity Bancshares Inc Earnings Call

Presentation

Operator

Good day, and thank you for standing by, and welcome to the Q4 2023 Equity Bancshares Inc. earnings conference call. At this time, all participants are in a listen only mode. After speakers' presentation, there will be a question and answer session to ask a question. During the session, you'll need to press star one one on your telephone. You will then hear an automated message advise in your hands raised. To withdraw your question, please press star one. Once again, please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Cassidy, Director of Investor Relations. You may begin.

Good morning.
Thank you for joining us today for Equity Bancshares Fourth Quarter Earnings Call.
Before we begin, let me remind you that today's call is being recorded and is available via webcast at investor dot Equity Bank.com, along with our earnings release and presentation materials for today's presentation contains forward-looking statements, which are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed Following the presentation we will allow time for questions and further discuss.
Thank you all for joining us. With that, I'd like to turn the call over to Chairman and CEO, Brad Elliott.

Good morning, and thank you for joining Equity Bancshares Earnings Call. We are excited today to take you through our fourth quarter results, including beating consensus earnings, our repositioning of our bond portfolio and our announced merger with Roxgold Bancorp, the parent company of Bank of Clarksville. Joining me today are Rick Sims, our bank presidents, Chris Navtel, our CFO, and Christoph McAfee, our Chief Credit Officer.
Let's look back at the fourth quarter entering the quarter, our balance sheet strength, including high levels of capital, robust loan loss reserves and available liquidity position. The bank to take advantage of the current environment to build for the future. We announced the merger with the Bank of Clarksville, which combines like-minded organizations while expanding our footprint in Missouri. We are excited to report that we received approval from the Federal Reserve Bank this week and anticipate of closing in February different than with past transactions. We will not convert the core systems until May of this year due to scheduling conflicts with a different core and electronic providers.
Also during the quarter, we repositioned [$450 million] in our investment portfolio, significantly improving our earnings while not impacting tangible equity, it back tangible book value have expanded during the quarter and year over year. As you will see in our slide deck, these transactions reflect our team's focus on value creation. Our employee base is engaged and motivated to drive exceptional outcomes, which provide value to our customers, employees and shareholders. I'm incredibly proud of all we accomplished this quarter and throughout 2023, it was a year of challenges and change. And as we reflect at December 31st, equity is better positioned for the future than ever before. I have never been more excited about what equity is positioned to accomplish than I am starting 2024. We have an excellent management team, strong balance sheet and a guiding expectation to be the bank of choice for our communities. I'll let Chris talk you through our financial results.

Thank you. That last night we reported a net loss of $28.3 million or $1.84 per diluted share. Adjusting for the loss realized within the repositioning of our investment portfolio as well as one-time merger expenses. Operating income was $11.9 million or $0.77 per share, compared to $0.80 per share in the third quarter. Net interest income was down $1.5 million linked quarter, while net interest margin declined from 3.51% to 3.49%. We will discuss margin dynamics in more detail later in this call.
Noninterest income adjusted for the loss on repositioning of investments in Q4 was down $1.5 million during this quarter. Decline is primarily attributable to derivative fair value change and the special asset benefit related to our Munis State Bank [$540,000] during Q3 that did not recur. Noninterest expenses adjusted for one-time M&A charges totaling $34.7 million were modestly higher quarter over quarter, primarily due to incentive accruals and increased advertising costs.
Our GAAP net income, including -- included provision for credit loss of $711,000 to understand the attribution of the inputs, you can reference our earnings deck, which shows the calculation. We continue to hold reserves for potential economic challenges. However, to date, we have not seen any specific concerns that our operating market for December 31st coverage of ACL to loans is 1.31%. And I'll stop here for a moment and let Christoph talked through our asset quality for the quarter.

Thanks, Chris.
And asset quality metrics remain at historically low levels in the fourth quarter with total classified loans closing the quarter at $40.5 million or 7.1% of total bank regulatory capital. Nonaccrual loans as a percentage of total loans remained below 75 basis points. Net charge-offs for the year were 13 basis points of average loans recognized charge-offs have been reflective of specific circumstances on individual credits and not related to broader concern in the markets in which we operate.
We have now completed a whole cycle of annual reviews and renewals incorporating the latest operating results for borrowers. These have affirmed the resilience of our portfolio in the current interest rate and economic environment. We have not seen any deterioration at this point in our commercial real estate book, we continue to monitor our portfolio for early signs of deterioration.
Our risk rating migration during this cycle has resulted in a historically low problem credit ratios, a testament to our disciplined underwriting practices at origination, the strength of our local economies and proven workout strategies. While our credit outlook for 2024 is positive. We maintain a favorable position in terms of capital reserves and credit strength to confront any potential future economic challenges.

Thanks, Christoph. As previously mentioned, we sold a large portion of our bond portfolio during the quarter, pulling forward cash flow of approximately [$450 million]. As of the end of the period, our sales have settled and funds have been redeployed in securities purchases. Funding of loans are being held in cash or used as an alternative to more expensive funding sources for the balance sheet. The benefits of the transaction are expected to be fully realized in the first quarter of 2024.
Loans increased during the quarter at an annualized rate of 6.1%. Loan originations in the fourth quarter totaled [$143 million] with a weighted average coupon of 8.61% compared to [$149 million] and a weighted average coupon of 8.46% in the third quarter. We continue to successfully originate loans in the current interest rate environment, contributing to expanding coupon yield on interest-earning assets.
During the fourth quarter, the coupon yield on loans increased to 6.71% from 6.62%. Total loan yield declined as purchase accounting loan fees and nonaccrual accounting contributed [2 basis points] in Q4 versus 15 basis points in quarter three for these levels to be consistent period over period NIM would have improved 8 basis points.
Cost of interest-bearing deposits increased 19 basis points to 2.58% in the quarter, a decline from the 26 basis points of expansion in third quarter while the contribution of average noninterest-bearing deposits to the average deposit mix declined to 22.8% from 23.0%. Net interest income totaled $39.5 million in the fourth quarter, down $1.5 million from the third quarter, driven by declining average earning assets and the excess cash liquidity. The bank has been maintaining was used to fund the decline in average deposit balance.
We continue to have [$140 million] outstanding at the Federal Reserve's bank term funding program. We are currently earning a positive spread on that borrowing, though it does have the effect of reducing margin. We calculate that the excess liquidity had the effect of reducing margin by 7 basis points for the current quarter. Salaries and benefits increased [$741,000] in the quarter due to a decline in share-based compensation forfeiture as well as the year-end incentive accruals. Marketing expenses remain elevated from advertising to continue to attract deposits.
Our outlook slide includes the forecast for the first quarter as well as the full year 2024. We do not include future rate changes. Though our forecast still includes the effects of lagging repricing in both our loan and deposit portfolios. Our provision is forecasted to be approximately 12 basis points of average loans. Important to note, the forecast does not include the impact of the Bank of KIRK silver merger. Previous disclosure at announcement date indicated income accretion of $0.36 for 2024
Ric.

I'm pleased with what we accomplished in 2023 and all that we are positioned to accomplish moving forward as we continue to emphasize value creation in our markets, partnering with the Bank of KIRK. So and their committed team of banking professionals provides added scale and market expansion, which will contribute to our growth goals in 2024.
During the quarter, our non-broker deposit base increased by $13.3 million attributed to seasonal inflows in our municipality operating accounts. We continue to see pressure on pricing and have maintained our disciplined approach as we consider the impact of Bank of KIRK school closing in the first quarter. As we enter 2024, we will be going to market with a new suite of checking accounts designed internally by Jonathan Roop and Julie Huber, which we believe will enhance our value proposition for customers.
In addition to our new accounts we have partnered with milestone Inc. to provide digital wealth services to our customer base, further enhancing our value proposition with our consumers. We believe we have the team and the suite of products to remain the bank of choice in the markets we serve.
On the asset side of the balance sheet, our loan production continued at a consistent pace as we originated the same dollar level of loans in Q4 as in Q3, but it improved yields and ROEs to the bank.
As we look to 2024, pipelines are strong and we expect pull through to increase as rate pressures moderate. As of the end of quarter, our 75% probability pipeline stood at $450 million, while a 50% probability was $260 million, bringing our greater than 50% pipeline to over $700 million.
As indicated in our outlook slide, we expect to drive mid to high single digit organic loan growth in 2024. We have the strategy, discipline, tools and people in place to realize this expectation. I look forward to assisting the team in execution. Service revenue was down quarter-over-quarter, though we continue to see increasing contributions from previous investment in cards, treasury, and wealth management and insurance. Our teams are focused on enhancing customer value in 2024 and beyond, which we expect to drive expansion of the business lines moving forward.
And finally, I am pleased to announce the promotion of just inherent to regional CYO. community south. We will now view he will now be leading both our Ozark and South East Kansas markets. Justin has been leading the Ozark markets for a couple of years and is ready for an expanded role. I look forward to partnering with Justin as we look to continue to be to help to build Equity Bank in these markets.

Our company is well capitalized. Our asset quality metrics are the best they've ever been in. Our balance sheet structure is solid, and we have a granular deposit base, which is positioned to improve with the addition of the Bank of Copesul. Our strategic directives for 2024 have been set and the team has hit the ground running. Rick in collaboration with Mark Partin. Brad Daniel, adjusted Harris have their teams poised to hit their goals for 2024, and we look forward to onboarding our new purpose-built team members and continuing to redeploy assets into customer relationships that build franchise value.
We continue to see momentum on the M&A front and expect that to continue throughout the year. Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling dilution and the earn-back time line. As you can see from our presentation, I believe we have the right team, the right balance sheet, the right geography and a proven track record to execute on strategy that we started some 20 years ago. We have the ability to grow organically and through M&A was an exciting time for our team members. Thank you for your interest in Equity Bancshares, and we'll open it up for questions and thank you.

Question and Answer Session

Operator

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one. Again, please stand by while we compile the Q&A roster and one moment. First question.
And our first question comes from Terry McEvoy from Stephens Inc. Your line is now open.

And good morning. Thanks for taking the questions. Chris, if I heard you correctly, the margin outlook assumes no changes in interest rates.
I guess my question is if the forward curve is accurate and we get a rate cut, let's call them the middle part of this year? how do you think the balance positioned for rate cuts?

Yes, great question, Terry. We look at the balance sheet as near as near to neutral as it can be at the moment.
Our real challenge in terms of attempting to forecast that out and I think the industry is challenged is how does competition react on deposit rates as the market begins to come down for short-term rate. So we have the capacity. We have the positioning on our balance sheet to be able to cut quickly, but in a situation where competition is being irrational, it can become challenging. So it's hard to pinpoint exactly how we're going to react in a downward rate environment but we look at it on a contractual readjustment basis. We have the capacity to maintain a neutral balance sheet today.

And just sticking with the margin, and I apologize if I missed it. What was the accretion in the fourth quarter . i heard 11 basis points in Q3, but I couldn't find Q4?

the purchase accounting accretion?

correct.
Yes, sorry about that.

Yes.
Purchase accounting was [1 basis point] in Q4.

Perfect.
And then maybe lastly, could you just update us on the size of the aviation loan portfolio and share? Any comments you might have on how the challenges at Boeing may impact some of your Wichita based suppliers that you have relationships with?

Hey, this is Krzstof. Thanks for the question. It's a very fair question given the recent developments, I can tell you that our direct exposure in the to Spirit and bank the Boeing is is minimal. We have made a conscious decision about two and three years ago to reduce our exposure in the aerospace, even given everything that's transpired with the MAX and just COVID as of today, we only have about $15 million in direct exposure to aerospace, of which only $6 million has some exposure to Spirit and Boeing. It is local credit of the borrowers that making that are making up the $6 million, they have diversified revenue streams. So only a portion of their revenue comes from Spirit and to add more flavor to it, half of this exposure has got government guarantees So up. So we feel pretty good about the risk exposure we have to this sector this time

That would have been different, Terry, a few years ago, we probably would have had $75 million of exposure a few years ago.

Thanks again for taking my questions,

Operator

Jeff Rulis from D.A. Davidson. Your line is now open bank.

So good morning. Just a couple of questions on the the outlook slide, but I did get the get the rate or sort of the margin down, Pat, so if I hear you right, kind of 3.49% reported, I think you mentioned and a regular way would have would have been maybe 3.57%?
Is that right?
As you talk about on the impact of have some one-timers in there

if it was normalized compared to last quarter?
Jeff, it would have been 3.57%. I think I look at last quarter is a little bit high. So somewhere between, call it 3.54% on a normalized basis is when I look at.

3.54%.
Okay. And the expectation to hop into the 3.70%, 3.80% range in the first quarter, what was the underpinnings of that increase?

So that's all tied into the bond repositioning efforts in the fourth quarter. So we saw a small period of benefit on the bond repositioning in December, so they will realize a full period of benefit from that into the first quarter, which is what's driving that NIM?

Is that all repositioning or is there some core traction gaining on margin at that point?

So it's the majority of the repositioning, there is some traction being gained generally in terms of growth of our loan portfolio. You saw throughout Q4, we referenced in the call 6% linked quarter growth where we're bullish on our capacity to continue to grow the loan portfolio. So there's some additive benefit to putting on those higher yielding assets. And then the majority of that uptick is driven by the repositioning of the bonds.

Got it.
And then it kind of extend the time and it's got your comments on the sort of neutral balance sheet will depend on positive as deposits as maybe cuts get layered in, but pretty flat for the year because of what would the Kirkland in a vacuum shortage impact if at all on that margin.

$0.36 accretive to overall earnings. I'll get you the margin impact as we talk, Jeff, I got to get it pulled up.

just have kind of a similar question on the average earning asset growth. Looks like legacy pretty flat. Is it safe to say that earning asset we could just [tack] on KIRK spill and kind of that's the expectation for the full year?

Yes, I think that's the right way to think about it.
The average earning assets being flat is essentially some repositioning of using cash that we currently have on our books to fund loans. So not adding incrementally more average earning assets as we build the loan book loan portfolio.
And then you [cac] Kirk's will on top of it, Jeff?
Yes.

Okay. Got it. Just one quick one on credit. Just wanted to talk about that, that increase in nonaccruals. I think it was a [dingular] credit, but if you could walk us through the addition there.

So most of the increase that you see is is related to one larger credit. There was another smaller credit that makes up the difference, but it was a it's a primary residence, large large credits that large loan on the primary residence that we have a first mortgage that we feel very good about from a loan-to-value standpoint. So we're hoping to get out of soon

it is that a borrower that has other lending relationships with the bankers is singular residents.

This is the only this is the only one we have.

Okay. And maybe, Brad, just real quick on the as you maybe close Clarksville next month, kind of leaning into that if the M&A additional deals don't transpire kind of checking in on your appetite of the buyback, if we go some time without any any transactions that look attractive?

Yes.
What I would tell you, Jeff, is even with the M&A front, we're back in the looking at the buyback each day. So on where we've got enough capital to close the transaction. We did hold capital back at the last quarter to make sure that we did that. We have excess capital to fund the transactions that we've we accomplished that so we're now looking at buyback this quarter and M&A deal came to fruition. You know, we'd have a quarter or two before if we close. And so we're building cash pretty fast and earnings are strong. So we're back looking at buybacks on a daily basis.

Okay. Thank you.

Operator

Andrew Liesch from Piper Sandler. Your line is now open.

Morning, guys. More sticking with the outlook slide here on average deposits looks pretty flat throughout the year. I heard you mentioned you got the new checking account suite coming up, but you have some brokerage there. I guess what are the ins and outs on deposit growth? And obviously the loan growth is pretty optimistic. So do we assume that you're going to use cash flows in the securities book to fund that without much deposit growth?

Yes.
So first off, just I'm looking at it flat. I mean, we've got, as we've talked about, we had some inflows as we normally do on the seasonality of the public funds business. So seven do that. So we're going to kind of backfill that throughout the year. That's why you don't see a large growth in that business.
In addition to that, with as we add in the bank of Clarksville we've just taken a more conservative approach as far as making sure that we continue to to be very disciplined on what our cost of funds are. And so I think that's why we're viewing this as as a little bit less growth. We're also going to trying to look and see to make sure we tried to push our our mix, which is what the new products are geared towards. So continuing to maybe give up a little bit of that time deposits to replace it, hopefully with a with more not non-interest bearing transaction accounts they don't.
Because you wanted to the other question, Jim?
I'm sorry, you had another question on there yet.

Funding the loan growth then is it really just going to be remixing that you have that, like where are the cash flows off the securities book?

Yes.
So we do have some continuing cash flows coming off of our securities book. We're continuing to look at from a capital perspective, having excess capital and potentially pursuing more opportunities continuing to sell in the market creates opportunity for us to be opportunistic in repositioning the bond portfolio directly as we did in the fourth quarter.
If you look at the end of the fourth quarter, Andrew, we are sitting on a meaningful level of cash at that point we've continued to have meaningful cash levels kind of throughout the year. So part of that repositioning or loan funding is coming right out of that cash.
And then when we get back get the bank of Clarksville.
With that transaction, we're bringing on more cash and some relatively short-term investments. So there's cash flow coming off of that one quickly to sell without meaningful deposit balance growth. We have, we believe, the capacity to continue to fund the loans at the level that we're depicting here on call.

Right.
You've covered all my other question I'll step back.

Operator

Damon DelMonte from KBW.

Your line is now open, and we want to guide for Resideo well today on just a couple of quick ones here. One that the deposit remixing that's been occurring on. I think non-interest bearing deposits are now down to around 22% of total deposits. Do you feel you've kind of reached a floor there on and it's instructive to hold from there? Feel like there's still some rotation or migration out of that category?

Well, I wish I could give you an exact answer on them and things, but I think we're seeing we're not seeing accounts it decreasing. So what we're really seeing is we're seeing a balance balances decrease within those accounts. So we do think that those accounts are getting fairly low in the consumer area. But since we're so granular on it. It's something that we're obviously continuing to keep an eye on, but it requires us to start growing accounts. And so that's kind of what we're looking at so I don't think I I think it does feel like that that number is slowing on and you know. And so also if that's the case, Tom, I think we might still have a quarter of a little bit more of a kind where it continues to shrink on an average basis. But but we're getting to that to that final point

here so what I would tell you is, yes, it did move down a tick, but it moved down a tick only because we're in roundings, right? So it didn't move down from 23% to 22%, it moved down from just below 23% to somewhere into the [22%s]. So it's not like it. It fell [whole percentage point] even quarter to quarter.

Right, right.
Got it.
Okay. And then on the guidance slide, I think for for noninterest income, you're guiding to $8 million to $9 million for next quarter. And I think this quarter was kind of in the low $7 million range. Just kind of help us figure like walk us through from where you were here in the fourth quarter and how you get to $8 million to $9 million that?

Yes.
So we were we were somewhat light this quarter compared to what we'd looked at as a run rate. Some of that driven by derivative fair valuation. So when you look quarter over quarter, we benefited from derivative fair value change in Q three. We were hurt by in Q4. We don't expect the same level of kind of comparative shift. And then as we look into next year, where we are continuing to see opportunities from some of our legacy acquired assets that are bringing in opportunity to realize some benefit from working out some special assets similar to what we've had in previous quarters with the upticks in kind of repurchase obligations and other things we've talked about. We're seeing some of that come back through again, and we expect to benefit from in the first quarter and have some additional benefit throughout the year, which is what's been reflected in that figure.

Okay, that's helpful. Thank you. And then lastly, just on the loan growth at the high single digit outlook, could you just kind of give us a little bit more color as to what areas of the portfolio you feel most comfortable about. Is it on the C&I side where businesses are investing, any capital expenditure projects?

Or is it more on the development side of which the CRE book, we're definitely seeing C&I positive movement on C&I and owner-occupied CRE as well. Both of those look pretty strong and kind of really good start to the year that give us confidence in being able to hit those numbers. And additionally, I think we'll see sort of small we have a really small portfolio when you look at things like our private banking and our exposure to he locks and things like that, I think you'll see small incremental growth in that as well.
So it's a development, we'll definitely have looking forward. We'll definitely have some of our construction deals. We'll be funding up this year that are that we're looking at. So we had that competence in there. So we're not we're being really thoughtful on the new deals that we do in that space. But done, we're seeing a lot of stuff coming back to us.
So things that we held firm on from both a credit perspective and a pricing perspective, we're getting to see another look at those deals as maybe other banks are either falling by the wayside or there's some concern by the by the borrower on that bank, you get the deal done. So it's not I wouldn't just say it's just one area and it's not all. And but it's really kind of those that owner-occupied CRE and C&I for sure with we've added them a little bit on the consumer side.

Okay.
That's helpful. That's all that I had.Thank you.

And Jeff, just to circle back really quickly on one open question on accretion to NIM from BOK. The way we had it modeled is 7.5 to 10 basis points of NIM accretion for this year.

Operator

Okay. Thank you.
And I'm showing no further questions.
This concludes today's conference call and thank you for participating. You may all disconnect.