Equity Bancshares, Inc. (NASDAQ:EQBK) Q1 2024 Earnings Call Transcript

Equity Bancshares, Inc. (NASDAQ:EQBK) Q1 2024 Earnings Call Transcript April 17, 2024

Equity Bancshares, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Equity Bancshares Incorporated Q1 2024 Earnings Conference Call. My name is Harry, and I’ll be coordinating your call today. [Operator Instructions] I would now like to hand over to your host, Brian Katzfey, Vice President, Director of Corporate Development and Investor Relations at Equity to begin. Please go ahead.

Brian Katzfey: Good morning. Thank you for joining us today for Equity Bancshares’ first 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.

Brad Elliott: Good morning, and thank you for joining Equity Bancshares’ earnings call. We’re excited today to take you through our first quarter results, including record net interest income, strong overall earnings, and the completion of our merger with Rockhold Bancorp, just 67 days after a formal announcement. Joining me today is Rick Sems, our Bank President; Chris Navratil, CFO; Krzysztof Slupkowski, our Chief Credit Officer. We entered the year positioned to grow our balance sheet and revenue streams through both organic and acquisitive avenues. During the quarter, we executed on this positioning with the cash acquisition of Rockhold, as well as organic commercial loan growth. The Bank of Kirksville added more than $340 million in core deposits over eight locations in North Central Missouri.

Our new team members in the market are excited to be a part of the Equity Bank franchise, and continue to provide excellent service to their communities. Our team remains focused on organic growth initiatives while completing the transaction. Rick has worked hard to enhance the sales culture throughout our organization which will pay dividends through the remainder of the year. We have excellent leaders and operators throughout our organization that I expect to thrive under Rick’s leadership. Growth in earnings, driven by our growing balance sheet, allowed us to emphasize shareholder return through continuation of quarterly dividends as well as active participation in our share repurchase program. During the quarter, we repurchased 209,591 shares under the current authorization of up to 1 million shares.

While uncertainty remains in the economic environment, our bank closes the quarter with a well-positioned balance sheet to continue to take advantage of opportunities to grow both organically and through strategic M&A. Our team members are engaged, and have the tools to meet the needs of our community. I am proud of how we started the year and look forward to continuing our positive momentum. I will let Chris talk you through our financial results.

Chris Navratil: Thank you, Brad. Last night we reported net income of [$14.9] (ph) million, or $0.90 per diluted share. Adjusting for merger expenses incurred related to Bank of Kirksville as well as the day one provision for the acquired performing loans, net income was $16.1 million or $1.03 per diluted share. Net interest income was up $4.7 million linked quarter while net interest margin improved from 3.49% to 3.75%. We will discuss margin dynamics in more detail later in this call. Non-interest income, adjusted for the loss on the repositioning of investments in Q4, was up $4.5 million linked quarter. The positive trend was driven by $2.7 million in positive outcomes on special assets as well as $1.2 million in gain on acquisition related to the Bank of Kirksville transaction.

In addition to these non-run rate items, we also saw service fee revenue, including service charges, debit card, credit card, trust and wealth management and mortgage, improve by 5% during the quarter. Non-interest expenses adjusted for one-time M&A charges totaling $35.5 million or modestly up linked quarter and in line with expectations based on the timing of the Bank of Kirksville close. While we are still in the process of finalizing the accounting for the Bank of Kirksville transaction, original estimates continue to appear in line with 2024 EPS accretion of $0.36. The gain on acquisition is primarily due to the improvement in the fair value of Kirksville’s bond portfolio between the announcement date and close. As previously disclosed, merger of systems will be completed during Q2, after which cost saves are expected to be fully realized.

Our GAAP net income included a provision for credit loss of $1.0 million. The provision for the quarter is entirely attributable to the day-one adjustment to reflect the acquisition of the Bank of Kirksville portfolio. We continue to hold reserve for potential economic challenges; however, to-date, we have not seen any specific concerns in our operating markets. The March 31 coverage of ACL to loans is 1.28%. I’ll stop here for a moment and let Krzysztof talk through our asset quality for the quarter.

Krzysztof Slupkowski: Thanks, Chris. Asset quality metrics continue to screen at historically low levels, with total classified loans closing the quarter at $39 million or 6.65% of total bank regulatory capital. The acquisition of Bank of Kirksville had a negligible impact on the bank’s problem asset position. Non-accrual loans as a percentage of total loans remained below 70 basis points. Net charge-offs annualized were 8 basis points for the quarter. 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. Under the current interest rate environment, we have updated our portfolio of stress test and completed a full cycle of annual reviews and renewals incorporating the latest operating results of our borrowers.

These evaluations continue to affirm the resiliency of the portfolio and highlight the strength of local economies as evidenced by our credit quality trends. Nevertheless, we acknowledge that risk remains. Through the end of the first quarter, we have not seen specific deterioration in any of our portfolios. As mentioned previously, we benefited in the quarter from the resolution of specific assets totaling $2.7 million, and are reflected in other income. This positive result is primarily driven by recovery on two credits from the Almena State Bank acquisition and the effort of our legal and special assets team led by Brett Reber and June Pressnell. Chris?

Chris Navratil: Thanks, Krzysztof. Average loans increased during the quarter at an annualized rate of 11.1%, excluding the impact of the Bank of Kirksville, which added $67.6 million in average balance into the quarter. During the quarter, the coupon yield on loans increased to 6.83% from 6.71%. Overall loan yields improved 23 basis points during the quarter to 6.85% as the headwinds impacting Q4 2023 results were not repeated. Our bond portfolio yield improved to 3.84% from 2.73%. The positive trend was driven by the bond repositioning during the fourth quarter, in addition to the purchase accounting marks on the Bank of Kirksville portfolio. Cost of interest-bearing deposits increased 19 basis points to 2.77% in the quarter, while the contribution of average noninterest-bearing deposits to the average deposit mix declined to 21.7% from 22.8%.

The Bank of Kirksville transaction was accretive to this number. We closed the quarter with a period-end ratio of 22.5%. Net interest income totaled $44.2 million during the quarter, up $4.7 million in the fourth quarter, as our earnings streams benefited from previous period strategic decisioning and continues to outpace rising funding costs. 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 margin. We calculate that the excess liquidity has the effect of reducing margin by 8 basis points for the current quarter. Non-interest expense during the quarter was $35.5 million, excluding $1.6 million in realized merger charges.

Salaries and benefits increased $1.4 million due to annual compensation adjustments, the addition of Kirksville team members, and front-loaded payroll tax impact. As previously disclosed, the integration of systems following the Bank of Kirksville transaction will take place in Q2, after which cost saves will be fully realized. Our outlook slide includes a forecast for the second quarter as well as 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 forecast to be approximately 12 basis points to average loans. Rick?

Rick Sems: I am pleased with our start to 2024 and all that we are positioned to accomplish moving forward as we continue to emphasize value creation in our markets. Our team was able to successfully close a merger transaction in 67 days following an announcement, an incredible accomplishment in the current environment. I need to give Julie Huber and her entire team a big shout out. This result is only possible with the full leadership team working together. While working through the transaction, our legacy customer base and markets remained in focus. We started the quarter strong, but have seen some of our expected Q1 loan closings move to Q2. In addition, we continue to take advantage of opportunities to exit certain credits and low-yielding loans.

With that said, we believe our prospects remain strong for the remainder of the year. As we close the quarter, pipelines remain strong, increasing 15% from year-end. And we look to build on our culture of sales as we move forward. As we drive a culture of sales, we have hired a Managing Director of Sales and Training, seasoned executive, Betty Bergquist. Betty will be aligning our team with the primary focus of organic growth. During the quarter, customer deposit balances, excluding Bank of Kirksville accounts, trended consistently with expectations as excess municipality dollars that were added in Q4 were moved out. Total deposits closed the quarter at $4.4 billion. Loans as a percentage of deposits closed at 79.7%, positioning our bank to be a capable lender for new and current customers in our footprint.

Our teams are focused on value creation through deepening relationships, identifiable expertise and application of a high-operating tempo that ensures our customers receive the high level of service they have come to expect of our bank. This focus, coupled with the opportunity provided by our balance sheet position, and growing marketplaces, had me excited for our outlook over the remainder of the year. Partnering with the Bank of Kirksville and their committed team of banking professionals provide added scale and market expansion, which will contribute to our growth goals throughout 2024. Early feedback shows an engaged team exceeding expectations. As indicated in our outlook slide, we continue to 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 revenues improved quarter-over-quarter, including increasing contributions from card, trust and wealth management, service charges and mortgage. Our teams are focused on enhancing customer value in 2024 and beyond which we expect to drive expansion of business lines moving forward. Finally, I am pleased to announce the addition of Craig Dunn, Regional CEO in our Community East market, including Western and North Central Missouri. Craig joins us with extensive experience in the markets he will now be overseeing. I look forward to partnering with Craig as we look to continue to build in these markets.

Brad Elliott: Our company is well capitalized. Our asset quality metrics continue to be the best they have been in the history of Equity. Our balance sheet structure is positioned for times like this. Our team is experienced, and we have a widespread granular deposit base. Our strategic directives for 2024 have me more excited than I have been since the beginning of 2020. Our team has taken the Board’s strategic initiatives, and are hitting the ground running. We look forward to 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. We’ve had several positive conversations, and we feel the distressed market will begin to resolve itself as well. Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling dilution and the earn-back timeline. With that, we are happy to take your questions.

Operator: [Operator Instructions] Our first question today is from the line of Terry McEvoy of Stephens Inc. Terry, your line is now open. Please go ahead. Terry McEvoy, your line is now open, if you’d like to proceed with your question. My apologies, Terry, if you could just repeat your question, that would be great. Thank you.

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Q&A Session

Terry McEvoy: Yeah, sorry about that. Good morning, everybody. Chris, how are you thinking about a higher for longer rate environment in terms of where and when deposit rates will peak in your forecast?

Chris Navratil: Yeah. So, Terry, our forecast currently isn’t including any kind of changes in interest rates, so we’re not factoring any reductions or increases. So, it’s holding flat to where we are today. I think, as we look at peaking out deposit rates, we’ve been thinking about between 40% and 50% as a maximum beta, we’re still sub-40% today, so about 36% is our beta thus far. I expect that is going to get above 40%, but I’m optimistic we’re not going to get to the high levels that we talked about previously, which is that kind of 50% beta perspective. We’re continuing to see opportunities with deposits, and because we have a meaningful aspect of our portfolio that’s already out there at kind of what I consider high ends of the market, we have opportunities to reposition some as well.

So, we’re still thinking about between — we expect to hit 40% on an all-in beta and potentially creep above it, but I think we’ll stay below the 50% overall, even in the higher for longer world.

Terry McEvoy: Excellent. Seems like once you’re asked the question on fee income, can you just remind me where you’ve made investments and where you see incremental growth in fees this year?

Chris Navratil: Yeah. So, I think we’re seeing incremental growth on the treasury management side in our service revenues, and then we’re also seeing it in our wealth management area. So, we just kind of rolled out a new product set with some bundles on business side. So, we continue to expect to see some growth in that area.

Brad Elliott: And if you remember, Terry, a couple of years ago we started our corporate credit card business and that is still not mature yet. So, I think we have still lots of room for expansion, which creates interchange income off of that corporate credit card business.

Terry McEvoy: And then maybe I’ll squeeze one last one in. Brad, the 67 days from announcement to close, so many other deals are just have been delayed much, much longer and extended. I guess my question is, what’s the special sauce? What’s working for you to announce a deal, get it closed, get it converted and move on to your next one? Because others just haven’t been as successful.

Brad Elliott: Well, I think some of that is just communication with the regulators on what you’re working on, what fits their box and our box, and having it be something in our footprint that doesn’t have lots of issues around it. And so, I think it has to do with delegated authority outside of Washington DC is what really helps those transactions. And so, let’s don’t tell everybody in the world that, that happened so that somebody doesn’t figure out how to squash that. So, we’re crossing our fingers and just happy that it’s happening that way.

Terry McEvoy: Perfect. Thanks for the insight. Appreciate it.

Operator: Our next question today is from the line of Brett Rabatin of Hovde Group. Brett, your line is open if you’d like to proceed with your question.

Brett Rabatin: Hey, guys, good morning. Wanted to start with the commercial real estate portfolio and just what’s repricing on that this year and next year, and just how much opportunity might you have to reset the bar, so to speak, on some of the loan portfolio from a yield perspective?

Rick Sems: Yeah. This is Rick. So, we’re repricing every single month, meaning roughly on average kind of $100 million or so. And all of those are — as the rates stay longer, we still have quite a bit — and I’ll have to get you the exact number as far as, I don’t know, Chris, if you have that, for what’s actually coming up. But about $100 million each month it looks like we put on, and we’re putting those on, on average around 8.5% — 8.3% to 8.5% each month. So, there’s still room to go on that piece of repricing. So, we can get you some — the exact numbers for — we look at it on each quarter how much is getting coming due, so that’s all available. And what we’ve been doing is, on some of those, we choose then if we can’t get that rate, we choose to exit those relationships if it’s not — if there’s not enough meaningful business.

Brad Elliott: We started the cycle, though, over 50% of our portfolio was floating. And so, that’s two years ago now, and we didn’t go longer on commercial — on commercial deals, we didn’t go longer than five years. And most of the time we were three years or less. So, I don’t know the dollar amount that’s left in there, but it’s not as significant.

Rick Sems: Yeah, I think in total — I can’t remember. We talked about it last quarter. I can’t remember the exact number. We’ll get you that.

Brett Rabatin: Okay. Appreciate that. And then just on the loan pipeline, it sounds like you guys are pretty optimistic on growth this year, maybe relative to some peers. And just wanted to hear maybe how much of that was just organic growth with your existing customers versus maybe some opportunities to take market share from maybe some other banks that are pulling back given their balance sheet constraints, et cetera?

Chris Navratil: Yeah. So I mean, we are really pushing on getting out and calling on prospects. So, we’re seeing that — I think we kind of started that in the fourth quarter and we’re starting to see some benefit from that, especially on the C&I side. So, we had a little growth in the first quarter in C&I. We want to see more of that as we move into the second half of the year. So, that aspect of it that we’re looking, a lot of that is new business. So again, with new business though, and when it’s on the pipeline, as you know, that there’s absolutely guarantee that that’s going to close. But what — the more looks we get, the more opportunity for this year and for next year and the following year.

Brett Rabatin: Okay. And if I could sneak in one last one, too, on the deals that you guys are looking at, is there a benchmark or a way for us to think about accretion levels that you would consider with transactions from here?

Rick Sems: Maybe a little bit of detail on that, Brett, in terms of accretion level, what are you referring to? Like, what you’re looking for in terms of running rate accretion versus what we’re willing to accept on dilution or…

Brett Rabatin: Yeah. Just the typical parameters around — if you’re looking at transactions and my guess is that any deals that you’re looking at a bank’s balance sheet might have some underwater assets. And so, the pricing might be relatively attractive. And so, to some extent, you’re fixing someone’s balance sheet that’s underwater and so just thinking about those opportunities as they come what your parameters might be for tangible payback and accretion from an EPS perspective, what you’d be looking for, those sort of things.