Equity Bancshares Inc
NYSE:EQBK
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Earnings Call Analysis
Summary
Q3-2024
Equity Bancshares showed robust performance in Q3 2024, reporting a net income of $20.2 million or $1.31 per share. Loan balances increased by $147 million, alongside a solid pipeline for future growth. The company achieved a 25% dividend hike and a tangible book value growth of 10.4%. With a current net interest margin of 3.87%, they anticipate mid- to high single-digit organic loan growth in 2024 and 2025. Merger integrations remain on track, bolstering their community banking goals. Despite minor credit weaknesses due to inflation pressures, the bank maintains strong asset quality and is well-positioned for future opportunities in both loans and deposits.
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Hello, everyone, and welcome to Equity Bancshares' Third Quarter 2024 Earnings Call. My name is Lydia, and I will be your operator today. [Operator Instructions] I'll now hand you over to Brian Katzfey to begin. Please go ahead.
Good morning. Thank you for joining us today for Equity Bancshares' Third Quarter Earnings Call. Before we begin, let me remind you that today's call is being recorded and is available via webcast at investor.equitybank.com, along with our earnings release and presentation materials.
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 discussion. Thank you all for joining us.
With that, I'd like to turn the call over to our Chairman and CEO, Brad Elliott.
Good morning, and thank you for joining Equity Bancshares' earnings call. Joining me today are Rick Sems, our bank CEO; Chris Navratil, our CFO; and Krzysztof Slupkowski, our Chief Credit Officer.
We are pleased to take you through our third quarter results, including record results in many areas. As rates have started to decline, our AOCI is recovering well from the bond restructuring done in late 2023. Our margin is holding steady, and we are optimistic about our opportunity to expand net interest income in the next several quarters, as Chris will discuss.
Rick's 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. We also received a noteworthy final payment from a franchisor borrower that defaulted in 2019. Brett Reber and Greg Kossover did excellent work to structure a workout that allowed the borrower to reorganize and assure a significant repayment of the debt. The resolution resulted in a current period gross income of $8.5 million. This result underscores our commitment to and expertise in recovering on problem credits if they arise.
During the quarter, we also continued to execute on our mission to meet the needs of our customers while building shareholder value. Period-end loan balances increased by $147 million. While nonmunicipal customer balances and overall deposits were materially flat, our sales and operational teams, under the leadership of Rick Sems and Julie Huber, are aligned and motivated to continue to drive the bank forward.
In addition to excellent operating results, we realized further expansion of capital while also increasing our dividend by 25% during the quarter, closing with TCE ratios of 8.21% and tangible book value per share growth of 10.4%.
During the quarter, we also closed and converted our second bank merger of 2024, welcoming KansasLand and its bankers to the equity franchise. The transaction closed 71 days after announcement, with systems conversions taking place later in the third quarter.
As we look to the fourth quarter and into 2025, I am enthusiastic about our team, our markets, and the opportunities that lay ahead. 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.
I'll let Chris talk you through our financial results.
Thank you, Brad. Last night, we reported net income of $19.8 million or $1.28 per diluted share. Adjusting for merger expenses incurred related to the KansasLand transaction and gain on security sales, net income was $20.2 million or $1.31 per diluted share. Net interest income was flat quarter-over-quarter, while net interest margin was 3.87% versus 3.94%. We will discuss margin dynamics in more detail later in this call and remain optimistic about opportunities for margin maintenance and income expansion in future quarters.
Noninterest income came in higher than our outlook for the quarter and included a continued positive trend in service charge line items. Also reflected in noninterest income was an $831,000 gain on acquisition related to the KansasLand transaction.
Noninterest expenses adjusted for onetime M&A charges totaling $29.6 million were driven down quarter-over-quarter due to the $8.5 million recovery Brad previously discussed. Excluding this benefit, the write-down of a former bank location of $742,000 and additive incentive accruals of $900,000, noninterest expense, exclusive of M&A, was flat at $36.5 million linked quarter.
Our GAAP net income included a provision for credit loss of $1.2 million, primarily driven by 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 in our operating markets. The ending coverage of ACL to loans is 1.21%. I'll stop here for a moment and let Krzysztof talk through our asset quality for the quarter.
Thanks, Chris. Asset quality metrics continue to screen at historically low levels. Total classified loans closed the quarter at $48.7 million or 8.3% of total bank regulatory capital, improving 15 basis points linked quarter. Nonaccrual loans as a percentage of total 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 negative migration of small loans.
Delinquency in excess of 30 days declined from $13.7 million to $10.3 million. Net charge-offs annualized were 18 basis points for the quarter, while year-to-date charge-offs annualized were 13 basis points through September 30. Recognized charge-offs continue to reflect specific circumstances on individual credits and do not indicate broader concerns across our footprint.
While our credit outlook for the year remains positive, we recognize minor weaknesses are emerging due to the ongoing impact of inflation on our borrowers. Specifically, smaller operators and quick service restaurants are facing pricing pressures and margin constraints. While there is risk, the bank is adequately secured, exposure is granular and meaningful losses are not expected.
We continue to leverage our portfolio monitoring tools to identify potential risks and remain prudent in our credit underwriting while maintaining healthy levels of capital and reserves to face any future economic challenges. Chris?
Thanks, Krzysztof. Average loans increased during the quarter at an annualized rate of 1.8%. Loan originations in the quarter totaled $246 million with a weighted average coupon of 7.75%, positioning the bank for improved earnings in the fourth quarter.
During the third quarter, the coupon yield on loans increased to 7% from 6.96%. Overall loan yields declined 4 basis points to 7.11%, driven by a decline in purchase accounting accretion of 5 basis points and nonaccrual effect of an additional 5 basis points. Excluding these non-coupon items, loan yields improved 6 basis points.
Cost of interest-bearing deposits increased to 2.85% while the contribution of average noninterest-bearing deposits to the average deposit mix held consistent at 22%. Total cost of funds was effectively flat for the quarter at 3.11%.
Net interest income totaled $46 million, down slightly linked quarter due to the previously discussed loan yield dynamics. Margin and earnings are stable with continued potential for upside via additive production. Based on balance sheet positioning leading up to the FOMC's decision to drop interest rates in September, we were able to neutralize the impact of the 50-basis-point drop on earnings and margins.
We continue to carry excess cash balances, which are offset by wholesale borrowings. We are currently earning a positive spread on these positions, though it does have the effect of reducing margins. We calculate that the excess liquidity has the effect of reducing margin by 10 basis points for the current quarter.
Our outlook slide includes the forecast for the fourth quarter as well as the first look at 2025. We do not include future rate changes, though our forecast continues to include the effects of lagging repricing in both our loan and deposit portfolios. Our provision is forecasted to be approximately 12 basis points to average loans. Rick?
In September, we held our annual strategic retreat with members of the Board and senior bank leadership. Our team left our time together, energized and focused on all we expect to accomplish over the next 3 to 5 years. We are aligned and committed to executing for our customers, employees and shareholders. We have maintained a strong balance sheet and are positioned to be a facilitator of the banking needs of our community as well as the partner of choice for banks in our region pursuing scale for ownership liquidity.
Our teams delivered on our mission during the third quarter. Excluding M&A, we grew ending loan balances by $118.2 million or 3.42%. We also added KansasLand during the quarter, contributing additional $28.3 million. Total ending balances increased by 16.9% on an annualized basis.
As we enter the fourth quarter and look to 2025, pipelines remained strong with $448 million in the 75% or greater bucket, and our 25% pipeline, which is an indicator of opportunity identification, at an all-time high of $673 million.
With the strong pipeline and motivated bankers, I'm optimistic we will continue to see organic balances growth. Deposit 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 non-relationship balances.
Under the leadership of Jonathan Roop, I look forward to the retail team driving relationship expansion over the remainder of the year and into 2025. In addition to this focus on retail, our commercial teams remain focused on being a full-service banker to our customer base, including deposit and treasury services.
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 yields as well as higher cost transactional deposits. We closed the quarter with a loan-to-deposit ratio of 82.5%.
During the quarter, our team closed and converted another bank acquisition. Under the leadership of Julie Huber and David Pass, our teams have successfully completed 2 acquisitions in 2024, each of which was announced and closed within 75 days. Our ability to facilitate these transactions is a continued source of pride for the team.
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.
We have rolled out a comprehensive sales training program, fostered organizational buy-in and aligned incentives with expanding our customer base and driving franchise value. Coupled with our capacity to facilitate strategic M&A, I'm excited about our position to operate over the coming quarters.
As indicated in our outlook slide, we expect to drive mid- to high single-digit organic loan growth in 2024 and 2025. 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.
Service revenue improved quarter-over-quarter, including increasing contributions from cards, trust wealth management and mortgage. Our trust and wealth management team continues to add assets under management and has a robust pipeline headed into the fourth quarter in 2025.
Our company is well capitalized. Asset quality remains strong. Our balance sheet structure is solid. Our team is experienced, and we have a granular deposit base. We see momentum on the M&A front and expect that to continue. Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling dilution and the earn-back time line.
Thank you for joining the earnings call. We are happy to take your questions at this time.
[Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson.
Commenting on the loan growth inflection sounded fairly strong towards the end of the quarter. 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. Probably not a lot had to do with that. I mean I think a lot of this were deals that we've been working on, relationships we've been working on. 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 grouping of prospects that we're calling on. So I really don't think that's probably the main reason why we saw things break through.
Okay. And -- so that really hasn't been an overhang, maybe call it year-to-date, like widening the time horizon. You haven't heard -- I don't know where rates are going to go. I'm going to hold back on projects generally speaking...
We're not hearing that now. Yes, I'm sorry, yes, generally speaking. No, I think that was probably, maybe last year, that might have been part of that. But I think we've -- that hasn't been really what's, I think, driving at this point in time.
Appreciate it. Hopping to expenses. I just want to -- the amortization expense, that is included in your expense guide?
So the CDI intangible amortization, is that what you're referring to, Jeff?
Yes.
Yes, that's included.
Okay. And that $1.1 million for the quarter, that's pretty -- I mean, KansasLand was closed first day of the quarter. So that's a pretty good run rate on that line item.
Yes, that will be a good run rate for the next couple of quarters, and then you'll start to see a little bit of pivot out of okay start to run down from there. But yes, a good run rate for the next couple.
Okay. And as -- I guess if you kind of exclude the offsetting gain this quarter, dropout merger costs, I look at the Q4 run rate, it looks a little maybe lower than implied. Is there anything that we would expect to kind of come out of the -- is it maybe out of comp or some modest cost saves. Where will -- on the expense line, absent the one-timers, where will some of the declines come from, if possible, out of expenses to kind of get you maybe to say what would occur to get you at the low end of that range on the expense guide?
Yes, I'd say there's a few things we're working on. From a current quarter perspective, salaries and employee benefits included almost $1 million of additive accruals this time around. So that won't -- that isn't expected to repeat through the final quarter. That's just a catch-up on year-to-date performance.
The other line item here includes a shift in unfunded commitments. So we did have some reserving for unfunded commitments this quarter that I don't necessarily anticipate repeating just depending on how actual production is facilitated into the fourth quarter.
There's other line items in here, data processing, we're focused on opportunities there, advertising and business development. There are some opportunities there that are heading into the fourth quarter. So there's some incremental small wins we can get, but the larger ones are the additive accruals through salaries and employee benefits and some opportunities in that other line.
Okay. Great. And maybe one quick last one, Krzysztof. But on the kind of discussion of some inflation pressures on some borrowers, is that -- it doesn't sound like you're too concerned broad-based. Is that really a range-bound select group of borrowers? And do you see that somewhat transitory with that group? Just kind of a little more of how this progresses from your perspective?
Yes. 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.
But looking at our delinquencies trends, they moved down this quarter and only at 30 basis points of total loans, which is positive. But the delinquencies have been elevated the last few quarters comparing to the historicals. But if you look at what's hitting the delinquency list, it's all small loans and very granular.
So -- and then if you look at the nonaccrual loans, it looks like a similar story outside of a larger credit that -- or midsized credit that hit our nonaccruals in the third quarter. So it looks like smaller operators and smaller borrowers that's who's getting the most 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 the pricing power to pass on the increased cost of their product to the customers like the bigger operators do. So I guess that's what we see for now.
And the larger credit that went to nonaccrual is 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, which is what created some of the issues.
Our next question comes from Terry McEvoy with Stephens.
Maybe just a question for Chris. Could you just talk about how the balance sheet is positioned for, call it, 2 more rate cuts in the fourth quarter and possibly more in 2025? And then on the deposit side, how are you managing -- adding new relationships with just managing the margin?
Yes. So the first piece of that, Terry, from a sensitivity perspective, for the first 50 basis points during the quarter, as we mentioned in the prepared commentary, 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 the cycle where there is significant room to move down, both on a contractual and noncontractual basis. So optimistic as the Fed meters decline that will be able to neutralize impact or nearly neutralize the impact of those kind of moderate changes with the caveat to do something significant and crazy, it will impact us just like it will impact the rest of the industry.
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 as we have a significant amount of higher cost deposits with some significant lower cost deposits, I'd say higher cost deposits, but higher cost deposits and funding. So there's some line of credit advances and things in there as well.
Where we have some opportunity to reprice what is already higher costing, that one 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 our customers want and need and do that to effectively both via pricing and service and make sure we're managing margin on the way down. So opportunistic we -- or optimistic we have some opportunity there, but we're going to remain disciplined.
And then as a follow-up, maybe a question or 2 on the new calling efforts. Any specific markets where you feel you're really gaining traction. And then when you look out over the next several quarters, where do you see the most upside? Is it loans, which I think we're starting to already see, or is it deposits and certain fee categories?
Yes. 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 continues to be a consistent player for us in there. I think I also see out West -- in some of our Western markets in Kansas as opportunities for us as well.
So I think that part has been all strong. And really, there are great companies in all of our markets. that we're just working to get at to. So I'm optimistic that all of them can provide something to that.
And I do see the loan side right now. That said -- so I think that's what we focused initially on, but we're really now bringing in the fact that when we get deposits -- when we get loans, we get deposits 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 the deposit front and more on the fee income side.
So I think that will delay a little bit more on that. But as you probably know, we're going to see the deposits rebounding back on the -- 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 start seeing that more into mid-'25 in that area.
Next in queue we have Andrew Liesch with Piper Sandler.
Just kind of a follow-up question here, the last topic. You've ran through historically some thoughts on if you increase the loan-to-deposit ratio from 80% to 90%, what that would mean to earnings and profitability. Now obviously, there's some seasonal aspect here in deposits and redoubled efforts to expand the deposit base. But do you think that this might be the start of a trend of slowly increasing that loan-to-deposit ratio?
Yes. Yes, that's what we're working on. And I think on the deposit side, I think it's -- the industry is never really focused on deposits until the last 4 or 5 quarters. If you looked 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 bank all the municipalities in all these small towns, so the cities and the counties and the school districts. And so it's really a big flow in that happens in those markets, and it's kind of something that we do. The good thing about it, as 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 reprice if rates change. So it's not hard for us to reprice those higher cost deposits down during the cycle.
And I do think, Andrew, as Rick has been working with the team, we're going to continue to see solid loan growth and not crazy numbers, just something that's in that 6% to 10% range as our teams have really bought into the whole process in 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 see solid loan growth as we go forward as a company.
And on the loan to deposit, I mean, we're always looking for those noninterest-bearing. And then to Chris' point earlier, that then gives us that ability to be disciplined to if we want to let go, just gives us flexibility. So we'll be able to manage that, I think pretty well as we head into the '25.
Our next question comes from Damon DelMonte with KBW.
Just a couple of questions around the margin. Chris, could you just remind us what you guys have in the way of fixed rate loans that we'll be repricing either here in the fourth quarter or probably more so in '25?
Yes. Through -- so our portfolio today is comprised of about 40% of fixed rate loans. We have a few hundred million, so $300 million to $400 million of that will reprice over the next 5 quarters. And then there is some of it that is longer dated. There's residential real estate in there and there's some 3- to 5-year CRE stuff in there, too. So we're going to continue to see some repricing over the next 5 quarters, and the composition kind of continues to remain the same, about 40% of the portfolio being fixed rate.
And what -- do you have -- happen to have like what the average yield is on what is repricing from to where it would go?
I don't have that over the next 5 quarters. I can get it for you, Damon. I will say we have a meaningful aspect of the portfolio that is still sub-5%. So there's meaningful opportunity to reprice up.
Got it. That's helpful. And then how about -- on the CD side? Do you have any sizable blocks that it will be repricing coming up?
No, that's really a continuous trend about the same levels every quarter repricing, and those have been a little bit sporadic. So you saw during the quarter, we saw some expansion in that cost. I think we'll see the opposite trend as rates have come down. But that trend is really a relatively consistent one month over month over month.
Got it. Okay. And then just one last modeling question here. You mentioned that the fair value accretion this quarter was lower. Do you know how much it was? I think last quarter, it was around 6 basis points of an impact to the margin. Do you know what it was this quarter?
Last quarter, purchase accounting was -- one second, we saw 9 basis points of benefit on purchase accounting in June. And we saw 4 basis points in September. I expect the go-forward run rate to fall between those 2 numbers. I'll lean towards the lower end just because there's some more volatility to it now, but I think it will fall between 4 and 9.
Okay. Great. And then the tax rate was also lower this quarter. 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?
Yes. So we were able to take advantage of a tax planning strategy that allows for the release of some deferred taxes and net operating losses at our holding company. So we're realizing the benefit of that during the quarter, which is offsetting the impact of last quarter's BOLI transaction. So the 2 net outs for the full year tax rate is about 21%, but they're definitely opposing trends quarter-over-quarter.
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 to the geographic strategy there? And any change in the type of bank you'd be looking to acquire?
No. Our strategy is still the same. I would say that the M&A pipeline is strong, the number of conversations that we have going on have honestly picked up in the last few weeks. Some of them are clean deals, some of them are stressed deals, and 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 number of conversations is pretty strong right now. And we're not going to change geography and -- we're not going to change our geography, and we're not going to change what we've been doing.
We have no further questions. So this concludes our Q&A session as well as the conference call. Thank you for joining us. You may now disconnect your lines.