Q3 2024 Equity Bancshares Inc Earnings Call
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Speaker Change: Hello everyone and thank you for joining us for the Equity Bank shared 3rd quarter 2021 earnings call.
Speaker Change: This call will begin in approximately two minutes time. Thank you for standing by.
Speaker Change: Music Music
Lydia: Hello everyone and welcome to equity bank shares third quarter 2024 earnings call. My name is Lydia and I will be your operator today.
Lydia: If you'd like to ask a question during the Q&A, you can do so by pressing staff followed by one on your television keypad.
Speaker Change: On now hand you over to Brian Katzfey to begin. Please go to help.
Speaker Change: Before we begin, let me remind you that today's call is being recorded and it's available via webcast.investor.equitybank.com
Speaker Change: along with our earnings release in presentation material. Today's presentation contains forward-looking statements which are subject to certain risks on certain key.
Brian Katzfey: 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 discussion. Thank you all for joining us. With that, I'd like to turn the call over to our Chairman and CEO , Brad Elliott.
Brad Elliott: Good morning, and thank you for joining Equity Bank Chair's earnings call. Joining me today are Rick Sems, our Bank CEO.
Brad Elliott: Chris Navratil, RCFO, and Krzysztof Slupkowski, our Chief Creative Officer.
Brad Elliott: We are pleased to take you through our third quarter results.
Brad Elliott: including record results in many areas.
Brad Elliott: As rates have started to decline, our AOCI is recovering well from the bond restructuring done in late 2023.
Brad Elliott: Our margin is holding steady.
Brad Elliott: and we are optimistic about our opportunity to expand net interest income in the next several quarters as Chris will discuss.
Brad Elliott: Rick efforts to lead a sales-driven organization are starting to pay off as you can see in our balance sheet growth in loans and our strong pipeline.
Brad Elliott: We'd also receive a note where these final payments from a franchise or borrower that defaulted in 2019.
Brad Elliott: Brett Reaver and Greg Concerberg did excellent work to structure a workout that allowed the borrower to reorganize and assure its significant repayment of the debt. The resolution resulted in a current period growth income of $8.5 million.
Brad Elliott: This results underscores our commitment to an expertise in recovering on problem credits if they arise.
Brad Elliott: During the quarter, we also continue to execute on our mission to meet the needs of our customers while building the shareholder value.
Brad Elliott: Peridium loan balances increased by $147 million.
Brad Elliott: While on municipal customer balances in overall deposits, we're materially flat.
Brad Elliott: Our sales and operational teams, under the leadership of Rick Sems and Julie Hubert, are aligned and motivated to continue to drive the bank forward.
Brad Elliott: In addition to excellent operating results, we realized further expansion of capital while also increasing our dividend by 25% during the quarter.
Brad Elliott: Closing with TCE ratios of 8.21%, Intangible Book Value per share grows of 10.4%.
Brad Elliott: During the quarter, we also closed and converted our second bait merger of 2024.
Brad Elliott: Welcome in Kansas Land and its bankers to the Equity franchise.
Brad Elliott: Transaction closed 71 days after announcement with systems conversions taking place later in the third quarter.
Brad Elliott: As we look to the fourth quarter in the end of 2025, I am enthusiastic about our team.
Brad Elliott: are markets in the opportunity that lay ahead.
Brad Elliott: Our balance sheet remains strong and our organization is aligned in its goal to be the premier community bank in our footprint for our customers and potential partners.
Speaker Change: I'll let Chris talk to you through our financial results.
Chris Navratil: Thank you, Brad. Last night, we reported that income of 19.8 million or 128 per divided share. Adjusting for merger expenses and currentability is a Kansas land transaction, and gain on security sales, that income of 20.2 million or 131 per divided share.
Chris Navratil: That is your same-common to the last quarter-over quarter, 12-metinter's margin was 387 versus 394. We will discuss more genomics and more detail later in this call and remain optimistic about opportunities for margin maintenance and income expansion in future quarters.
Chris Navratil: The 92 think-up came in higher than our outlook for the quarter and included a continued positive trend in service charge line-ups.
Chris Navratil: Also reflected in non-interested income with an $831,000 gain on acquisition related to the Kansas Land transaction.
Speaker Change: That is just expensive adjusted for one time M&H charges total in $29.6 million or driven down quarter over quarter due to the $8.5 million recovery Brad previously discussed.
Speaker Change: Excluding this benefit, but right down to the former bank location of 742,000, and added in scientific rules of 900,000, nine of its expense, exclusive of MNA, was flat at 36.5 million length quarter.
Speaker Change: are a gap net income, including a provision for credit loss of 1.2 million primarily driven by a loan growth late in the third quarter. We continue to hold reserve for potential economic challenges, however, to date we have not seen specific concerns that are operating markets.
Speaker Change: The ending coverage of AC Auto Lone is 1.21%
Speaker Change: I'll stop here for a moment and let Chris Navratil through our asset quality for the quarters.
Chris Navratil: Thanks, Chris.
Chris Navratil: As the quality metrics continue to screen at historically low levels.
Chris Navratil: Total classified loans close to the quarter at $48.7 million or 8.3% of total bank regulatory capital, improving 15 basis points linked to water.
Chris Navratil: Not a cruel loans as a percentage of federal loans increased 10 basis points to 0.87%. Although the increase was primarily driven by the addition of one relationship, we are seeing an increase in the negative migration of small loans. The frequency and access of 30 days declined from $13.7 million to $10.3 million.
Chris Navratil: Met's charge of annualized were 18 basis points for a quarter, while year today charge of annualized were 13 basis points through September 30.
Chris Navratil: Reck of my chargals continue to reflect specific circumstances on the individual credits and do not indicate broader concerns across our footprint.
Chris Navratil: While our credit outlook for the year remains positive, we recognize minor weaknesses are emerging due to the ongoing impact of the inflation on our borrowers.
Chris Navratil: Specifically, smaller operators and quick service restaurants are facing pricing pressures and more than constraints.
Chris Navratil: While there is risk, the bank is adequately secured, exposure is granular and meaningful losses are not expected.
Chris Navratil: We've continued to leverage our portfolio monitoring tools to identify potential risks and remain through this and are credit on writing while maintaining healthy levels of capital and reserves to face any future economic challenges. Chris.
Chris Navratil: Thanks for the offer. Amber's loans increased during the quarter and annualized rate of 1.0 percent. Loaners and nations in the quarter are total $246 million. With a weighted average coupon of 7.75 percent. Positioning the bank for it improved earnings in the fourth quarter.
Chris Navratil: During the third quarter, the coupon yield on loan increased to 7% from 6.96% overall loan yields declined 4 basis points to 7.11% driven by an decline in purchasing a increase in a 5 basis point, and not a cruel effective and additional 5 basis points. Including these non-cupon items, loan yields improved 6 basis points.
Chris Navratil: Costumitre's bearing deposits increased to 2.85% while the contribution of average non-interest bearing deposits to the average deposits of mixed health consistent at 22%. Total cost of funds is effectively flat for the quarter at 3.11%.
Chris Navratil: That is your soon-come total of 46 million, down slightly linked quarter due to the previously discount colonial venomic.
Chris Navratil: Morgan and earnings are stable with continued potential for upside-by-adding production. It's on balance sheet positioning, leading up to the up-of-the-scenes decision to drop interest rates of tougher. We're able to neutralize the impact in the 50 basis point drop on earnings in margins.
Chris Navratil: We continue to carry excess cash balances, which are offset by wholesale borrowing. We are currently earning a positive strut on these positions, so it does have the effect of reducing margin. We calculate that the excess liquidity has the effect of reducing margin by 10 basis points for the current quarter.
Chris Navratil: Our outlook slide includes the forecast for the fourth quarter, as well as the first look at 2025. We do not include future rain changes, though our forecast continues to include the effects of lagging, repressing, and both our loan and deposit portfolios.
Chris Navratil: Our provision is forecast to be approximately 12 basis points to average loans, Rick.
Chris Navratil: In September, we held our annual strategic retreat with members of the board and senior banding leadership.
Chris Navratil: Our team left our time together, energized, and focused on all we expect to accomplish over the next three to five years. We are aligned and committed to executing for our customers, employees, and shareholders. We have maintained a strong balance sheet in our position to be a facilitator of the banking needs of our community, as well as a partner of choice for banks in our region, pursuing scale or ownership liquidity.
Chris Navratil: Our team is delivered on our mission during the third quarter.
Chris Navratil: Excluding an M&A, we grew ending loan balances by 118.2 million or 3.42%.
Chris Navratil: We also added Kansas Land during the quarter, contributing additional 28.3 million. Total Indian balances increased by 16.9% out of an annualized basis. As we entered the fourth quarter and looked at 20.25, the pipeline remains strong with 448 million in the 75% or greater bucket, and our 25% pipeline.
Chris Navratil: which is an indicator of opportunity identification that are all time high of 673 million.
Chris Navratil: With a strong pipeline and motivated vagres, I'm optimistic we'll continue to see organic balances grow.
Chris Navratil: The positive balances, excluding public funds, which generally see a decline in Q3, were down 20 million while the bank continued to allow for movement of high beta and non-relationship balances.
Chris Navratil: Under the leadership of Jonathan Root, I look forward to the retail team driving relationship expansion over the remainder of the year and into 2025.
Chris Navratil: In addition to this focus on retail, our commercial team remains focused on the in a full service banker to our customer base, including deposit and treasury services.
Chris Navratil: Our team continues to prioritize net interest margin and managing a challenging yield curve. This strategy has resulted in passing on loan opportunities at lower yield, as well as higher post-transactual deposits.
Chris Navratil: We closed the quarter with a loan to deposit ratio of 82.5%.
Chris Navratil: During the quarter, our team closed and converted another bank acquisitions. Under the leadership of Julia Hubert and David Pass, our team took successfully completed two acquisitions in 2024. Each of which was announced and closed within 75 days.
Chris Navratil: Our ability to facilitate these transactions is a continued source of pride from the team.
Chris Navratil: We believe there is a meaningful opportunity to both maintain and grow our deposit base in our current markets, allowing for further balance sheet and earnings growth in 2025 and beyond.
Chris Navratil: We have rolled out a comprehensive sales trading program, fostered organizational buy-in, and alignment fit-as with expanding our customer base and driving franchise value.
Chris Navratil: Coupled with our capacity to facilitate strategic lemonade, I'm excited about our positions to operate over the coming quarters. As indicated in our outlook slide, we expect to drive amid a high single digit organic loan growth in 2024 and in 2025.
Chris Navratil: We have the strategy, discipline, tools, and people in place to realize this expectation. Brad and I look forward to assisting the team in execution.
Chris Navratil: Service revenue improves quarter-over-quarter, including increasing contributions from cards.
Chris Navratil: Trust Welch Management and Mortgage. Our Trust and Welch Management team continues to add assets under management and has a robust pipeline headed into the fourth quarter in 2025.
Chris Navratil: Our company is well-catnalized, asset quality remains strong, our balance sheet structure is solid.
Chris Navratil: Our team is experienced and we have a granular deposit base.
Chris Navratil: We see momentum on the MDA front and expect that to continue.
Chris Navratil: Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling delusion in the urn back time line.
Chris Navratil: Thank you for joining the earnings call.
Speaker Change: Thank you. Please press star for the present number one if you'd like to ask a question and ensure your devices are muted locally when it's your time to speak. If you change your mind or your question as already been answered, please move to the draw a question by pressing star for the present number two.
Speaker Change: eight
Speaker Change: As a question comes from Jeff Reless with the A-Day of the Finns, please go ahead to your lines open.
Speaker Change: Thanks for the morning for playing.
Jeff Reless: I'm commenting on the the long growth inflection sounded on a fairly strong towards the end of the quarter and just wanted to get a sense for do you think? Sort of fed visibility had anything to do with that in terms of your customer base and some of your optimism going forward. Do you think that's triggered a little bit of activity? Yes, I agree.
Speaker Change: Yeah, probably not, a lot had to do with that. I mean, I think a lot of this, we're deals that we've been working on, relations we've been working on, you know, things just broke at that point in time. There's a number of things that people wanted to get done at the end of the quarter and I think that led to that. So as we look forward on it, I think it's, we're actually identifying opportunities with existing clients that we really haven't lent to in the past. That's one of the avenues and the other one obviously is we're just expanding that group being of prospects that we're calling on. So I really don't think that's probably the main reason why we saw things break free.
Speaker Change: Yeah, I'm sorry, yeah, generally speaking, I think that was probably maybe last year that might have been part of that, but I think that hasn't been really what I think driving at this point.
Speaker Change: Appreciate it. Pop into expenses. I just want to thank the Hammer Station Expansed, that is included in your Expansed Guide.
Speaker Change: So, the CDI Intangeable Emberizations, I would share referring to Jeff.
Speaker Change: Yep.
Speaker Change: Yeah, I think I would.
Speaker Change: Okay, and that's one one for the quarter, that's pretty, I mean, Kent's land was, you know, closed first day of the quarter, so that's a pretty good run on that line item.
Jeff Reless: Yep, that'll be a good run right for the next couple of quarters and then he'll start to see a little bit of pivot out of the okay, I'll start to run down from there, but yeah, good run right for the next couple.
Speaker Change: and I guess if you kind of exclude the offset and gain this quarter dropout merger cost, I look at the Q4 run rate. It looks a little maybe lower than implies or anything that we would expect to kind of come out of maybe out of comp or some.
Speaker Change: Modus Kossays, where we'll on the expense line at the one-timers.
Speaker Change: Where will some of them?
Speaker Change: that the clients come from if possible out of expenses to kind of get you, maybe that's what would occur to get you at the low end of that range on the expense guide.
Speaker Change: Yeah, I did a few things where we're working on from a current quarter perspective. It's Saturday's employee benefits, including almost a million dollars of additive accruals this time around. So that won't, that is an expected to repeat through the final quarter, that's just a catch up on here today performance.
Speaker Change: Leet other line out of here who was a shift in on funding claim, and so we did have.
Speaker Change: and some reserving for unfunded commitments in order that I don't necessarily anticipate repeating, just depending on how asphalt production facilitates the facilities in the fourth quarter.
Speaker Change: There's other line items in here, data processing, we're focused on opportunities there, advertising and business development, there's some.
Speaker Change: Opportunities that are heading into the fourth quarter. So there's some incremental small ones we can get, but the larger ones are the out of a cruel, through salaries and fully benefits and some opportunities that are going on.
Speaker Change: Okay, great. And maybe one quick last one, Krzysztof, but on the discussion of some inflation pressures on some borrowers, is that, you know, it doesn't sound like it's you concerned, broad-based, is that really a range-balanced group of borrowers? And do you see that somewhat transitory with that group? This kind of a little more of how this progresses from your perspective.
Speaker Change: Yeah, so I think what we're seeing is the credit quality normalization, the rest of the country has been experiencing for a year now. But if you look at our historic levels of problem loans, we're still below recent historical average and really near our historic low levels in some categories.
Speaker Change: But looking at our delinquency's trends, they moved down this border and only at 30 basis points of total loans, which is positive, but the delinquencies have been elevated in the last few waters.
Speaker Change: comparing to the historical, but if you look at what's hitting the link with Silvia at the least, it's all small loans and very granular.
Speaker Change: So, and then if you look at the not cool loans, it looks like a similar story, outside of them.
Speaker Change: of a larger credit that we're a mid-sized credit that hit or not accruals in the third quarter.
Speaker Change: So it looks like, it looks like, or, or, or,
Speaker Change: Smaller operators and smaller borrowers that's getting the most.
Speaker Change: you know stressed if you will at this time. We do not see that trend kind of migrating to our larger borrowers yet. We think that the smaller borrowers, the smaller operators, they don't have to.
Speaker Change: is pricing power to pass on the increased cost of their products, the customers like the bigger operators do. So I guess that's what we see for now.
Speaker Change: and a larger credit that went to non-cruel as SBA guarantee or SBA related as well. And I would actually say Jeff, one of the issues they have is the SBA gave them idle loan funds and so they had excess cash. It didn't manage it very well.
Speaker Change: which is what created some of the issues.
Speaker Change: and next question comes from Terry McAvoy with Stephen, your line is open.
Terry McAvoy: I think good morning. Maybe just a question for Chris. Could you just talk about how the balance sheets position for, call it, two more rate cuts in the fourth quarter and possibly more in 2025. And then on the deposits side, how are you managing adding new relationships with just managing the margin?
Chris Navratil: Yeah, so the first piece of that, Terry, from a sensitivity perspective, for the first 50 basis once you're in the corner, as we mentioned in the prepared commentaries, we've been able to ultimately neutralize that based on relative positioning, and there's continued room to do that, looking at total cost of funding, we got to a point through this cycle where there is significant room to move down, both on a contractual and a non-contractual basis, so optimistic as the Fed meters decline that will be able to neutralize the impact or nearly neutralize the impact of the model, it's got a moderate changes.
Chris Navratil: with the copy of the do something significant and crazy deal. In fact, I'll just like an impact the rest of the industry.
Chris Navratil: The secondary question there in terms of how we're approaching new customer acquisition, where we sit in the positioning of our balance sheet relatively is we have a significant amount of higher cost deposits with some significant lower cost deposits, higher cost deposits but higher cost deposits end funding, so there's some line of credit advances and things in there as well. Where we have some opportunity to reprise what is already higher costing at what would be a relatively high price in our marketplace, so we can be a bit opportunistic in some ways on how we pursue pricing new relationships and new opportunities, but we're going to continue with the discipline we've been operating under, we're going to approach being the community bank that are...
Chris Navratil: wants to need and do that to effectively multiply a pricing and service and make sure we're managing margin on the way down. So, Dr. Autotunistic, we are optimistic we have some opportunity there but we're going to remain disciplined.
Speaker Change: Thanks for that. And then as a follow-up, maybe a question or two on the new calling effort. Any specific markets where you really gain interaction and then when you look out over the next several quarters, where do you see the most upside is that loans, which I think we're starting to already see, where is it deposits and certain fee categories?
Speaker Change: Yeah, so on the real positive side, I mean, we've seen Tulsa and Wichita, and I actually say Western Missouri which is showing some real signs of being real strong for the fourth quarter as well. So those markets are doing really well. Kansas City's, you know, continues to be a consistent player for us in there. I think I also see out west and some of our western markets in Kansas as opportunities for us as well. So I think that that part's been all strong and really there are great companies in all of our markets.
Speaker Change: that we're just working to get at. So I'm optimistic that all of them can provide something to that. And I do see the loam side right now. That said, you know, so I think that's what we've focused initially on. But we're really now bringing in the fact that when we get the positives, we get the positives with it as well. So I think we're going to see that that's kind of the next phase of our sales process of really getting the team to work more on that deposit run and more on the fee income side. So I think that'll delay a little bit more on that. But as you probably know, we're going to see the positives rebounding back just from the public funds side of it in the fourth quarter. But from a growth perspective, new things like that, I think we'll
Speaker Change: Start seeing that more as the mid, between five and that area.
Speaker Change: Thank you, next and here we have Andrew Leach with Pipe-a-Sandler. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Yeah, that's what we're working on. And I think on the deposit side, I think it's, you know, the industries that were really focused on deposits until the last four or five quarters. If you look at our deposit cycles, the municipal deposits always flow out in the third quarter. It's kind of their low balances and their high balances is always December . So that's when the tax revenues come in for those municipalities. And if you remember, we bang.
Speaker Change: All the municipalities in all these small towns. So, the cities and the counties and the school districts. So, you know, it's really a big flow in that happens in those markets and it's kind of a something that we do. The good thing about it is Chris said, we actually have pricing power on those because they're usually tied to indexes. So, a lot of times there are higher cost of funds for our balance sheet and they automatically reprise.
Speaker Change: It breaks change, so it's not hard for us to reprise those higher cost deposits down during a cycle.
Speaker Change: and I do think Andrea has been working with the team, we're going to continue to see solid, low-growth and not crazy numbers just...
Speaker Change: Something that's in that 6 to 10% range as our teams have really bought into the whole process and the cycle and are really using the strategies that they're supposed to be doing and we have done in the past and so I think we're going to have to see solid loans growth as we go forward as a company. So we'll be able to manage that I think pretty well as we had in the 25th.
Speaker Change: And next question comes from Damon Downmont with KBW. Please go ahead.
Speaker Change: Yeah, through, so our portfolio today to comprise them about 40% fixed rate loans. We have a few hundred million, so three to 400 million of that'll reprise over the next five quarters.
Speaker Change: and then there is some of it that is longer dated, there's rather not a real estate in there and there's some.
Speaker Change: 3 to 5 years CRE stuff in there too.
Speaker Change: So we're going to continue to see some reprising over the next five quarters.
Speaker Change: and the composition kind of continues to remain the same about 40% of the force.
Speaker Change: Call your name fix right.
Speaker Change: And what do you have about happened to have like what the average yield is on what's repricing, what it's repricing from to where it would go.
Speaker Change: I don't have that over the next five quarters I can get it for a day then.
Speaker Change: I will say we have a meaningful aspect of the portfolio that I still thought are sub 5%.
Speaker Change: So fast.
Speaker Change: and there's meaningful opportunity to reprise out.
Speaker Change: Got a helpful. And then how about the CD side? You have any sizable blocks that it will be repriced and coming up.
Speaker Change: Now, that's really a continuous trend about the same levels of record or repriting.
Speaker Change: and those have been a little bit sporadic, so you saw during the quarter we saw some expansion at that cost, I think we'll see the opposite trend.
Speaker Change: and his race has come down, but I try to really...
Speaker Change: Relatively consistent one month over month over month over month.
Speaker Change: got it. Okay, and then just one last modeling question here. You mentioned that the fair value of creation this quarter was lower. Do you know how much it was? I think last quarter it was around six basis points of an impact to the margin. Do you know what it was this quarter?
Speaker Change: I can we saw a nine basis point to benefit on purchasing accounting and in June.
Speaker Change: and we saw four major points in September.
Speaker Change: and I expect to go order a run right to fall between those two numbers.
Speaker Change: I'll meet for that a great speaker.
Speaker Change: There's some more wrong questions to do now, but I think it'll fall between four and nine.
Speaker Change: Okay, great, and then the tax rate was also lower this quarter or anything unusual with that, and I know the guidance kind of goes back to what we were looking for this quarter, but anything unique this quarter.
Speaker Change: Yes, so we were able to take advantage of the tax planning strategy that allowed for the roof.
Speaker Change: He says some deferred taxes and net operating losses at our holding company, so we're realizing the benefit of that during the corridor, which is offsetting the impact of last quarter's hold-over transaction, so the two debt outs were the full year tax rates of our 21 percent.
Speaker Change: of Hosing Trends Corrum.
Speaker Change: Report.
Speaker Change: Got it. Okay, that's helpful. And then I guess, lastly, Brad, you mentioned that you guys are still active with prospects for M&A. Any change of the geographic strategy there and any change in the type of bank you'd be looking to acquire?
Brad Elliott: Now, our strategy is still the same. I would say that the M&A pipeline is strong in a number of conversations that we have going on.
Brad Elliott: and have honestly picked up in the last few weeks.
Brad Elliott: Some of them are clean deals, some of them are stressed deals and...
Brad Elliott: You know, you could actually see that there's a couple of FDIC deals that doesn't mean we're going to play in them, but or get them, but there's a couple of those hanging out there that have to come eventually, but the...
Brad Elliott: You know, the number of the conversations.
Brad Elliott: This is...
Brad Elliott: is pretty strong right now.
Brad Elliott: and Katzfey, okay, great.
Brad Elliott: That's what's going to change your geography and we're not going to change what we've been doing.
Speaker Change: Okay, great, appreciate that color. That's all that I had. Thank you very much.
Speaker Change: i