Equity Bancshares, Inc. (EQBK) Q1 2022 Earnings Report, Transcript and Summary

Good day and thank you for attending by. And welcome to First Quarter 2022 Equity Bancshares 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. [Operator Instructions]. I’d now like to hand the conference over to your host today, Chris Navratil. Please go ahead.

Good morning. And thank you for joining Equity Bancshares conference call which will include a discussion and presentation of our first 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 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.

Thank you, Chris, and good morning. Thank you for joining our call and your interest in Equity Bancshares. Joining me is Eric Newell, our CFO; Greg Kossover, our Chief Operating Officer; and our President, Craig Anderson. I'm pleased with the operating trends we showed in the quarter. Our earnings were both very strong and surpassed expectations. With excellent loan growth and reported strong net interest income, our EPS was $0.93 per share versus consensus of $0.63 and Eric will discuss in a few minutes. Our hard work has yielded significant credit quality improvement with a decrease in our classified and non-performing assets. Our credits purchased in both the Almena and American State Bank mergers and our previously disclosed aerospace related credit, all saw improvement. And in some cases, elimination through payoff or disposition of assets. This resulted in a meaningful reduction of our criticized asset ratio. We continued execution by our special assets and credit teams is a reflection of the addition a year ago of counsel [indiscernible] personnel's expanded role in this area. This team has transformed our process management of this area. Our fee-based businesses continued to add to our income stream. After several years of focus on improving and introducing new products and services we continue to see improved trends. We are just in the beginning phase of many of these businesses. So it is very encouraging to watch these teams of Christian Humphries, Andrew Musgraves, Ben Morris, and all our commercial and retail staff increasing sales. We'll continue to keep an eye on our expenses and find ways to uncover positive operating leverage. We start implementation of our ITM network over the next several quarters. And our operations teams are always looking at ways to automate processes. We stay committed to our capital management measures in the first quarter. We were well positioned to take advantage of downward pressure on financial stocks with our stock repurchase program and declared a common stock dividend in the quarter also. We have many other positive items to note, but I will leave some of those for Craig, Eric and Greg to talk about. I will let Eric take you through the numbers and then we'll walk you through some of the other areas of focus for 2022.

Thank you, Brad and good morning. Last night we reported net income of $15.7 million or $0.93 per diluted share. Non-interest income decreased slightly linked quarter to 9 million and non-interest expenses less merger costs decreased 4.1 million linked quarter to 29.1 million. We calculate core EPS to be $0.94 per diluted share. To reconcile GAAP earnings to core earnings this quarter, remove merger expenses of 323,000 and [indiscernible] benefit of 134,000. I note that in the first quarter we recognized 827,000 of PPP fee and interest income compared to a peak of 8.2 million recognized in the third quarter of last year. We haven't been excluding PPP from our core numbers, given its contribution to our financial results for the last eight quarters. But its contribution is now de minimis and we are pleased about the improved quality of our first quarter earnings. Our GAAP net income includes a net release of ACL did a provision to the allowance for credit losses totaling 412,000. The uncertainty of the economic environment and continued impact on the economy of previous stimulus measures are reflected in our qualitative and economic components of the calculation. The March 31 coverage of ACL to non-PPP loans is 1.48%, down from 1.55%, the previous quarter. The decline of the coverage is entirely driven by ACL that was being held against specifically analyzed loans. If we normalize one times, benefiting NIM, normalize the provision expense to approximately 10 basis points on average loans on an annual basis, and zero out the release of reserves for unfunded loans. We get an EPS of $0.70 per share, which beats the consensus of $0.63. The beat is primarily in the expense line with consensus at 31.6 million and our normalized level at 30.1 million. I'll stop here for a moment and let Greg talk through our asset quality for the quarter, Greg.

Thanks, Eric. As we anticipated during the fourth quarter of 2021 earnings call, other repossessed assets declined $20 million in the first quarter of '22 based on the resolution of the largest of our aviation assets, which was sold at an attractive price and above where it was marked. There remains one smaller asset tied to this relationship Equity Banks portion of that participated total is approximately $1.1 million. Overall, non-accrual loans declined $8.6 million quarter-over-quarter, and now stand at just 64 basis points to total loans, the lowest level since we went public. As a reminder, our non-accruals were driven mostly by acquired assets and the teams are constantly evaluating these for upgraded status as credits improve. The ACL is 1.48% of non-PPP loans as Eric has discussed and net charge offs are muted at just five basis points annualized. I'm proud to report that through the hard work of our special assets and credit teams, we now have a classified asset ratio of approximately 17%. Without the required gross up for GAAP of the remaining participated repossessed aviation credit, that ratio would be lower by 160 basis points. We expect this ratio to continue to decline as we see improvement in classified assets acquired in mergers. And we have done this in the face of great uncertainty driven by the pandemic. Eric?

Thanks, Greg. I do think it's worth commenting about our general reserve. While we had significant improvement in our asset quality during the quarter, resulting in a large release of specific reserves. We did build ACL to general reserves. During the quarter, we saw significant growth in our loan portfolio and important model input that drives general reserving. And assessing the economic landscape, we first acknowledged that our customers experienced a great benefit over the last quarter with some of the headwinds as public safety measures in place during the pandemic have largely or entirely been lifted. The COVID concern has been replaced by the uncertainty of inflation, supply chain disruption and input cost escalation that our customers are starting to experience, in part due to the stimulus pumped into our economy since the start of 2020, as well as the geopolitical situation. To be clear, we've yet to see our customers experience any specific difficulties from these concerns. But in assessing the landscape, we believe the risk of an economic slowdown, coupled with inflationary pressures presents uncertainty that supports our general reserve build during the quarter. Craig, why don't you take everyone through your thoughts on the quarter?

Thanks, Eric. Organic originating loans totaled 304 million in the first quarter, of the total originations 92% were in commercial, CRE and agricultural loans. These originations resulted in linked quarter loan growth of 87 million. When excluding the change in our PPP loan balances, loan growth in the quarter was 111 million, or 14.3% annualized. I am proud of the work that the sales teams have put in over the second half of last year. That helped us notch a very successful first quarter. We have renewed our focus on speed to market. Over the last couple of years, our attention was rightly focused on helping our customers get access to PPP and Main Street lending programs to assist with pandemic-related challenges and uncertainties. Thankfully, we have turned a corner. We are working with the shared service and credit administration teams to further streamline our underwriting process. By finding ways to better automate and enhance our loan processes, we provide a service to our customers and prospects that our competition cannot match. And better yet, it allows our sales teams to focus on being trusted advisors to our customers, helping them find solutions and products to make their businesses more successful. Our fee income did show a modest decline from the fourth quarter, but this is clouding some very positive news. First, we have seasonality in our crop insurance sales that peaks in the fourth quarter and is not repeatable in the first quarter. Second, the contribution of mortgage banking revenue declined this quarter due to rising mortgage rates and a slower selling season in the winter. Commercial credit card and debit card interchange was similar to modestly growing linked quarter despite some of the typical seasonality generally experienced with spending. We continue to emphasize putting commercial cards in the hands of our clients driving debit card utilization through marketing campaigns. The build out of our HSA platform is nearly complete. 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 account needs. In time this will contribute fee income through interchange and accounts that use a brokerage option. We have recently had two changes in regional leadership that I am very excited about. We recruited a new leader for our Tulsa region that has spent much of his career in the region working for a top national bank. We are excited about his leadership and potential to continue to develop our Tulsa footprint and enhance its contribution to our results. We've also promoted an internal candidate to lead our southwest Kansas region. His prior experience was successfully supporting sales efforts in our retail network in Western Missouri, Southeast Kansas and northern Oklahoma. Eric?

Thanks, Craig. Net interest income totaled 39.3 million in the first quarter increasing from 37.2 million in the linked quarter, representing a 2.1 million increase. During the first quarter the yield in the loan portfolio, excluding PPP increased approximately 32 basis points. We add a 1.5 million benefit to interest income in the quarter from loans previously non-accrual being moved to accrual. When excluding a one-time benefit and PPP impacts in both comparable periods NIM in the first quarter, increased 19 basis points to 3.2%. Slowed premium amortization in our investment portfolio contributed approximately 7 basis points of improved yield in the quarter from the linked period. Our interest bearing liabilities also experienced continued improvement, declining two basis points from the fourth quarter. Origination fees recognized from forgiven PPP loans continuing to decrease. NIM was benefited by PPP loan fees in the first quarter by five basis points as compared to 12 basis points in the fourth quarter. We recognized 755,000 of fee income and 71,000 of interest income related to PPP loans in the first quarter, down 1.9 million from the fourth quarter. At quarter end, we had 500,000 of net unrecognized fee income associated with PPP loans, which is totaled 20.3 million. The team has been focused on ensuring we proactively position the balance sheet for a rising rate environment. Over the last 18 months, we've been quite conservative about originating loans that were priced out further than three to five years on the curve. We've recently seen some customers opt to accept a variable rate because of the steepness in the front end of the curve that is causing fixed rates to be significantly higher. We recently took advantage of the record increase in two year yields and swapped a part of our portfolio from variable to fixed for two years. While that may seem counterintuitive, our modeling and analysis showed that there was a great deal of value to capture that will benefit our NIM. In the event, interest rates don't rise as the market currently expects, we do even better. Our outlook slide does show moderate decline in NIM in the second quarter. There is some conservatism in that number due to some uncertainty with the cost of funds. Currently, our competitive landscape in our community markets remains very rational, which should allow us to lag any rate increases. However, if the FOMC follows through with a 50 basis point increase in May, and even June, as some market observers think may happen, it could alter the competitive landscape on rates. On the asset side, we're seeing improvement in origination and renewal yields. C&I origination yields increased 14 basis points in the first quarter, which was about 40% of the quarter's origination volume. We expect premium amortization in the investment portfolio to remain slower, which should assist in yields from that portfolio. And as I have said, in prior calls, we're working to move earning assets away from the investment portfolio to loan portfolio, which will assist in higher asset yields. Brad?

I'd like to point out our progress and our strategic goals for 2022. We were focused on the continued improvement of operating performance. We saw progress in the first quarter on our goal to achieve a return on tangible equity in the mid teens. We continue to look for opportunities to reduce excess liquidity on our balance sheet and increase fee income in our revenue mix. We saw our loan to deposit ratio increase, as I mentioned before tailwinds from our credit and loan growth will help drive us towards greater operational efficiency. We're excited about the build out of our HSA business, which provides cross selling opportunities to our commercial and municipality clients, as well as state-of-the-art platform to our existing HSA client base. Our commercial credit card product continues its positive momentum and contributing to fee income. We are looking at several other opportunities to add to our suite of services and products for our customers that will support our goal of increasing fee income as a part of our revenue mix. Eric?

I wanted to turn your attention to the forecast slide upon the earnings deck, which will put some specifics on our expectations for the remainder of 2022. As Brad mentioned, our long-term goals remain unchanged, improving our revenue mix, increasing the contribution to that mix, driving positive operational leverage off of our expense base and driving our loan to deposit ratio to levels we saw pre-COVID. This last goal is dependent in part on economic factors in the markets we serve. Successfully shifting excess liquidity to the loan portfolio from cash and investments is critical to improving our pre-tax pre-provision return on assets. Brad?

We're in active conversations with several different companies about partnering. Equity continues to be ready and willing to act as a partner to banks that fit and complement our organization. Provided they assist equity in making progress to our stated financial profitability goals as that really emphasize, we will stay true to our requirements on earned back, cultural fit, and geographic strategic fit. We will maintain our focus on organic growth efforts. And as always, we'll look for opportunities to rationalize our branch footprint while improving the digital experience for our customers. And with that, we're happy to take your questions.

[Operator Instructions] Our first question comes from the line of Terry McEvoy from Stephens. You may begin.

Hey, guys. Good morning. Maybe, Eric, just to start with a question. If the Fed raises rates 50 basis points in May, can you just kind of walk us through kind of both sides of the balance sheet and what you think that would mean to the net interest margin? And I know you ran through your outlook slide and touched on a couple of things, but just want to be maybe specific to this quarter in an event we'll likely see.

Yes, I mean, on the funding side, we don't have a lot of dependence right now on wholesale funding, so that that the impact, there would be fairly minimal. And given our liquidity or loan to deposit ratio, we have been looking at, letting some customers that might be rate sensitive, and they're only here for one product, that we don't have a relationship with them. We might let that weed the bank, but we would be competitive with the customers that do have a relationship with us, particularly if they are providing or using a service that has fee income or contributes fee income. But again, I think, we haven't really seen a lot of irrational pricing in our markets yet. And I'm hoping that even with a 50-basis point increase, we'll continue to see that not changed. On the asset side, I think based on our -- we use a loan pricing model, everything goes through that model. And we've obviously seen market rates already pop up on the expectation of increases. And so we've been seeing that already in what we've been originating, one of the examples there, in my prepared commentary was C&I, being about 14 basis points higher in the fourth, our first quarter versus the fourth quarter in terms of origination. So, putting that all together, I think that it'll be a fairly balanced them. I just don't know if we'll have a lot of movement from where we're at right now.

Thank you. And, Brad, maybe as a follow up, you talked about just conversations with potential M&A partners. How are pricing expectations maybe changed, as rates have gone up, but then you also have to balance some economic uncertainty and inflation? And I guess maybe, if you could maybe talk to the size of the potential partners that you're having conversations with as well? Thank you.

Yes. We've got three or four active conversations that we have going on and some are in modeling stages. And what I would tell you is everybody understands how they have to fit in a box, and how they have to work on an earn back. They are sophisticated organizations, with good bankers on the other side. So, I think expectations are in line with where things need to be to get deals done. The question is, which ones are the best strategic fit, which ones brings the right opportunities to us? We passed on a deal. That was fairly sizable for us. And we just said, it had a lot of cleanup work in the portfolio still. And so we just thought, in this time of the cycle, it wasn't the right time to take into that opportunity. And so we've passed on that. So we're looking at, strategic fit still, it has to fit economically. And then, do we think it will move the needle for us and our shareholders.

Appreciate that. Thank you both.

Our next question comes from line of Jeff Rulis From DA Davidson. Your line is open.

Thanks. Good morning. Just a couple follow ups on the kind of the outlook slide, as well -- so the loan growth guide and kind of the average balances. If you could kind of frame up the outlook kind of the low and high end of the 3, 2 to 3, 4 billion in average loans. Could we assume the low side is sort of economic uncertainty that sort of plays out? Where there some other competition or price sensitivity on the low end and maybe just -- is three, four at the high end absence of those pressures? Thanks.

Yes, just kind of a nuance with -- that's a full year average balance so that three two is taking into account the actual average for the first quarter. So I would say that, that's a little bit of a nuance there. I wouldn't expect we don't have an expectation that our loans are going to shrink from where we're at right now. So I would probably look more towards the midpoint there for average for the year, which I think if using that midpoint, I think it gets to about another 8% annualized growth from where we're at 331 to the end of the year, which I think is a little bit stronger than where we started our expectations. Coming into 2022, where I think we're looking more at 4% growth.

Got it. So okay, so the right, if you're kind of three, two, on average, exiting first quarter, again, if you kind of flatline, that's just the reason for providing that conservative low end, is it true that just the economic uncertainty is what would kind of push that down?

Yes. That's a fair statement, Jeff. Given, we feel good about that. The remainder of the year based on what we know, now, and what we see our pipelines. However, again, if the Fed moves 100, 150 basis points here in the next couple of quarters, that could alter the dynamics of the market and uptake of our customers. But we're not seeing that at the moment.

Sure. And to that end Eric, three to 310 margin guide, both for Q2 and to the full year. Can you clarify that assumes no further rate hikes? Or it assumes sort of an average of expectations out there?

Yes, we're not really -- we don't build in rate hike feature rate hikes into our modeling. So it's not like we were not like -- it's not like we put that in our -- however many rate hikes the Fed is expected or what the market is expecting on there. For the second quarter outlook, though, I mean, it seems like the market has coalesced around the fact that that is going to move in May. So, we have looked at some modeling with and I talked to Terry, about that on his question. So, , I think that there's probably a little bit of an expectation of rate hike in Q2, but not so much beyond that in our outlook.

Okay. Got it. Maybe last one. I just wanted to firm up the buyback appetite again, you're sort of -- if you apply first quarter activity, to what you've got remaining authorized, you get sort of to the end of that I just wanted to -- for the balance of the year, and I know that valuations change and the environment to change. But your view of further appetite, and maybe the board's view of maybe increasing that or extending the authorization? Thanks.

Yes, I think our board understands the capital markets and the use of capital markets tools. And so I can't ever see when our board wouldn't have an available appetite to be in a stock buyback as long as it's prudent. But we will always have an authorization available unless we were not allowed to do that for some regulatory purpose. But I can't see anytime in the foreseeable future where we wouldn't have a standing open buyback available and using that to help increase earnings per share and doing the right thing for all shareholders.

Our next question will come from [indiscernible] Group. Your line is open.

Hey, guys, good morning. Wanted to -- I guess first talk about the loan, one dualization in ag and, I know it's been in the 20s and it's usually in the 50s Any update on ag and other farmers we've talked about how they're making money hand over fist what the demand might be in the ag markets and then just general as you're looking at the long pipeline what pieces of the business Looks like they're poised for more growth.

I'll take part of this question and turn the rest of it over to Craig. The ag utilization is still remains down, which is a positive from the standpoint of -- our customers are sitting on lots of cash. And our ag customers are sitting with lots of cash. And so they're not utilizing the lines of credit. We think that's positive from the standpoint of -- it puts them in a very healthy position and gives them lots of flexibility. There is a change in the commodity prices. Right now, the input prices are going up. But the grain sales prices are also going up faster. And so, at this point, they're on pace to make a lot of money again this year. And they're all starting to forward sell some of that crop. We have very stable crops in our area, because we are in a place where uses irrigation. So we're not dependent on Mother Nature as much as other places. And so I think that also bodes well for us. And so our ag guys are in good shape. I'll let Craig take the second part of that question.

Yes. The results of our first quarter loan growth were primarily driven by significant activity in both Wichita and Kansas City, we were able to win a couple of very significant C&I opportunities. And then we had a very large CRE transaction in Q1. Our pipelines right now are very, very strong, they're very consistent with where we've been over the last probably four quarters, very excited about the opportunities to continue to increase our loan portfolio. And there's a significant focus in our community markets on kind of the smaller middle market credits, and so starting to see some nice lift in that particular area, primarily from our kind of our Western Missouri, northern Oklahoma and Southeast Kansas territories.

Okay. That's helpful. And then, wanted to hear get back to the conservatism around the margin on the funding side, and maybe get an update on -- I think some of that might be based on anticipating a higher beta on MMDA, 75% beta, so what you guys are thinking on -- money market, or has that changed? And maybe any thoughts on this more rate sensitive pieces of the funding mix?

Yes, I agree with your statement or question on what could be driving that conservatism. So, again, we've been seeing a lot of rational pricing within our community markets in terms of competition on the deposit side. And I think there's just a lot of liquidity out there. And so I think, some of our competitors are probably looking at the same way we are, if you have -- a customer that doesn't really have a deep, or any relationship with us, other than just that have product, we're willing to let that go across the street. And so we might have been experiencing a little of that here in the first quarter. But I do think that if the Fed moves, once, I'm not so concerned about the once, but some market observers are thinking that there could be another follow up 50 basis points in June. So you have 100 basis points in a very short period of time. I do think that that could alter some of the dynamics there and cause some of the betas to rise from where we're seeing it right now. And I would think that pretty much sums up the reason for the conservatism on the on the NIM.

Okay. And then, just lastly, for me, just wanted to talk about credit leverage from here, and it was nice to see the decline and classify assets and you guys address in the aerospace credit. It now, it seemed like you could have some current leverage from here, like maybe the provisioning was still having potential to be pretty light. Can you give us any color on --specifically the reserves are on the commercial real estate book and the C&R portfolio from here and the dynamics around possibility of having a low provision continuing going forward?

Yes, we kind of we budget kind of like my, what I would say is we were budgeting for growth. So you're right in that we might be seeing might have some credit leverage as how you explained it, in terms of the asset quality, improving and knock on wood, no further losses which would drive for Originating from a historical perspective, but, we continue to expect loan growth. And so that's one of the reasons why we budget for about 10 basis points on an annualized basis on average loans, through the year. So yes, we did have that release here in the first quarter, which I walked through on my prepared comments, and I will repeat myself, but so we did have that. But that was really driven a lot by what happened with what Greg talked about. So I would really actually probably say that I would put 10 basis points of provision going forward, again, on an annualized basis.

Okay, great. Appreciate all the color.

[Operator Instructions] Our next question from Andrew Liesch from Piper Chandler. You may begin.

Hi, guys. Good morning. Just kind of following up on this last question here. So the reserve building from the economic and qualifying factors here in the first quarter, that's just more of what you're seeing currently and more of a one off event, the 10 basis points is still we should be using for going forward. Just assuming that or with the caveat that may be there's another one of one of these provisions down the line?

Yes, I mean, I kind of look at it from a coverage perspective. So if you look at ACL to non-PPP loans, we're hovering around 150 basis points based on how we're seeing the uncertainty in the economy based on what I talked about in our my prepared commentary. I would expect that coverage would stay pretty close to that 150 basis points. It's not a certain anchor in our modeling, it just happens to be where we're landing. So that 10 basis points is just expecting further growth to maintain that around the 150.

Okay. That's helpful. And then just on the expense guide, on the outlook slide there. That looks a little conservative on the high end, but I guess what, what would happen for expenses to get to $128 million this year?

Well, the biggest contributor to expenses is our people. I think we've done a really good job in limiting our -- some of the -- there's been a lot of attention on wage growth. And I think that we've done a pretty good job in limiting that here. I think from a budgetary perspective, we had between 3% and 4% growth. And that's currently in our numbers. But if we need to, to respond to something that we're not expecting to that could be one source of an increase, but at this point, you know, we're feeling uncomfortable of that. We won't get up to that 128.

Got it. Okay, that's helpful. My other questions have been asked and answered. Thanks so much.

And our next question will come from the line of Damon DelMonte from kg KBW. Your line is open.

Hey, good morning, guys. Hope everybody's doing well today. Thanks for taking my question. So just want to kind a little bit bigger of a broader picture on the loan growth outlook. Can you just kind of talk about maybe some of the dynamics you're seeing in the market with supply chain issues and just, broader geopolitical risks that could be impacting your local economies? Are you seeing any slowdowns anywhere? Is there any major areas of concern on your end?

Yes, we don't. At this point, we don't see a lot of slowdown in our marketplace. So our region has some oil and gas dependency. And so with oil and gas being at $100, the Oklahoma Kansas Missouri markets are doing incredibly well. Arkansas is doing incredibly well driven by retail. Now, you know, the JB Hunt's trucking technology and Walmart effect down there. And you, so everything in our marketplace is doing well. We have some uplift from the aerospace industry. There's huge backlogs right now in that industry. So there's, good demand on that side. There are some supply chain issues, but the supply chain issues are just holding back the ability to produce more jets at this point. So we don't really have any indicators right now that any problems or any slowing of the economy in our place, do you think?

Yes. And Damon, I would also say, as you listen to Brad's commentary, what's embedded in that is, even in our four-state geography, there is a pretty sizable amount of diversity. So Western Kansas, is really very propped up by a healthy ag economy. Kansas City's economy is healthy, and it's a little different than Wichita is a little different than Tulsa. So we're blessed with having some diversity in our economic basis in our footprint.

Got it. Okay. That's helpful. I appreciate that. And then, I guess -- and most of my other questions have been asked and answered. I guess with regards to the fee income, Eric, the last couple quarters, the other non-interest income line has been higher than it was earlier than previous quarters, I should say. Is there anything in there that you don't have a lot of confidence in being repeatable? Or do you think that something in the low $2 million quarterly range is appropriate.

I think the high 1 million, low 2 million is appropriate going forward. One of the things that is in there is mark-to-market for derivatives and with higher rates. That's a positive benefit to us.

Got it. Okay. That’s helpful. All right that’s all I had. Thanks a lot guys. Appreciate it.

Thank you. And ladies and gentlemen, I’m showing no further questions at this time. This will conclude our first quarter Equity Bancshares presentation. Have a great day.