Participants

Brian Katzfey; VP, Director of Corporate Development and IR; Equity Bancshares Inc

Brad Elliott; Chairman of the Board, Chief Executive Officer; Equity Bancshares Inc

Chris Navratil; Chief Financial Officer, Executive Vice President; Equity Bancshares Inc

Krzysztof Slupkowski; Chief Credit Officer; Equity Bancshares Inc

Richard Sems; Executive Vice President, President of Equity Bank; Equity Bancshares Inc

Jeff Rulis; Analyst; D A Davidson

Terry McEvoy; Analyst; Steven

Andrew Liesch; Analyst; Piper Sandler

Damon Del Monte; Analyst; KBW

Presentation

Operator

Hello, everyone and welcome to Equity Bank shares. Third quarter, 2024 earnings call. My name is Lydia and I'll be your operator today.
If you'd like to ask a question during the Q&A you can do so by pressing star, followed by one on your telephone keypad.
I'll now hand you over to Brian Katzfey to begin. Please go ahead.

Brian Katzfey

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.

Brad Elliott

Good morning and thank you for joining Bancshares shares 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 franchise or 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 million.
This result underscores our commitment to an 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 in loan balances increased by $147 million million while non municipal customer balances and overall deposits were materially flat.
Our sales and operational teams under the leadership of Rick Sims 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 Kansas land 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.

Chris Navratil

Thank you, Brad. Last night, we reported net income of $19.8 million or $128 per diluted share adjusting for merger expenses incurred related to the Kansas land transaction and gain on security sales net income was $20.2 million or $131 per diluted share.
That interest income was flat quarter over quarter while net interest margin was $387 versus $394.
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.
Non interest income came in higher than our outlook for the quarter and included a continued positive trend in service charge line items also reflected in non interest income was an $831,000 gain on acquisition related to the Kansas land transaction.
That interest expenses adjusted for one time 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 added an incentive accruals of 900,000 non interest expense. Exclusive of M&A was flat at $36.5 million link 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 ac all the loans is 1.21%.
I'll stop here for a moment and let Krzysztof through our asset quality for the quarter.

Krzysztof Slupkowski

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, not accrual 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 today's charge offs annualized were 13 basis points through September 30 recognized charges 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?

Chris Navratil

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 the 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 four basis points to 7.11% driven by a decline in purchase accounting accretion of five basis points and not accrual effect of an additional five basis points excluding these non coupon items, loan yields improved six basis points.
Cost of interest bearing deposits increased to 2.85%. While the contribution of average non interest 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 by additive production based on balance sheet positioning.
Leading up to the FOM CS 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. 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.
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

Richard Sems

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 three to five years.
We are aligned and committed to executing for our customers, employees and shareholders. We have maintained a strong balance sheet and 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.
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 Kansas land 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 remain 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 a strong pipeline and motivated bankers. I'm optimistic we will continue to see organic balances grow 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 Ruo, 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 two 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, foster organizational buy in and align inc entives 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.

Brad Elliott

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 timeline.
Thank you for joining the earnings call. We're happy to take your questions at this time.

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Jeff Rulis, D A Davidson.

Jeff Rulis

Thanks. Good morning. Commenting on the, the long growth inflection sounded fairly strong towards the end of the quarter. I 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, and some of your, optimism going forward, do you think that's triggered a little bit of activity?

Richard Sems

Yeah, I probably not a lot, had to do with that. I mean, I think a lot of this, we were deals that we've been working on relationships, we've been working on. You know, things just broke at that point in time. There was a number of things that people wanted to get done at the end of the quarter and, and I think that led to that. So as we look forward on it, it's, we're actually identifying opportunities with existing clients that we really haven't went to in the past. That's one of the, the avenues and the other one obviously is, is we're just expanding that group, you know, of prospects that we're calling on. So I, I really don't think that's probably the main reason why we, we saw things break free.

Jeff Rulis

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, I don't know where rates are going to go. I'm going to, I'm going to hold back on projects. Generally speaking, if you don't.

Richard Sems

Yeah. I'm sorry? Yeah, generally speaking, I think that was probably, maybe, maybe last year that might have been part of, of that. But I think we've, that hasn't been really, what's, I think, driving, driving at this point

Brad Elliott

In time?

Jeff Rulis

Appreciate it. Pop into expenses. I just want, the amortization expense that is included in your expense guide.
Is that,

Chris Navratil

So the CD I, and tangible amortization, is that what you're referring to, Jeff?

Richard Sems

Yeah.
Yeah, that's included.

Jeff Rulis

Okay. And that '11 for the quarter, that's pretty, I mean, can land was, you know, closed first day of the quarter. So that's a pretty good run rate, on, on that line item.

Chris Navratil

Yeah, that'll be a good run rate for the next couple of quarters and then you'll start to see a little bit of pivot. That would be okay. I'll start to run down from there. But, yeah, good run rate for the next couple.

Jeff Rulis

And as, I guess if you kind of exclude the offsetting gain this quarter drop out merger costs, I look at the Q4 run rate. It, it's, it, it looks a little maybe lower than imply. Is there anything that we would expect to kind of come out of the, is it, is it, maybe out of comp or, or some modest cost saves where, where will on the expense line absent the one timers? Where will some of the declines come from if, 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.

Chris Navratil

Yeah, I say there's a few things we're working on, from a current quarter perspective, salaries and employee benefits included almost a million dollars 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 commitment.
So we did have some reserving for unfunded commitments this quarter that I don't necessarily anticipate repeating. Just depending on how actual production facility is facilitated in the fourth quarter. There's other line items in here, data processing, we're focused on opportunities there, advertising and business development.
There's some opportunities there heading into the fourth quarter. So there's some incremental, small ones we can get, but the, the larger ones are the additive accruals through salaries and employee benefits and, and some opportunities in that other line.

Jeff Rulis

Okay, great. And, and maybe one quick last one, Christo, but on the kind of discussion of, of some inflation pressures on, on some borrowers is that, you know, it doesn't sound like you're too concerned broad based, is that really a range balance, select group of, of, of borrowers? And, and do you see that somewhat transitory and with that group. Just kind of a little more of how this progresses from, from your perspective.

Krzysztof Slupkowski

Yes. So I think what we're seeing is, 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, but looking at our, looking at our delinquencies trends, you know, they moved down this quarter and, and only a 30 basis points of total loans, which is, which is positive. But, but you know, the delinquencies have been elevated the last few quarters comparing to the historical, but if you look what, what's hitting the delinquency list, it's, it's, it's all small loans and very granular.
So, and then if you look at the nonapproval loans, it's, it's looks like a similar story outside of of a, of a larger credit that, that or, or midsized credit that hit or non approvals in, in the third quarter.
So, it looks like it's, it looks like our, our smaller operators and, and smaller borrowers, that's who's getting the most 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 operator operators, they don't have the pricing power to pass on the increased cost of their product to the customers. Like the bigger operate operators do. So, so I guess that's what we see for now

Brad Elliott

And in a larger credit that went to not accrual is SB a guarantee or SB A related as well. And I would actually say Jeff, one of the issues they have is the SB A gave them I loan funds and so they had excess cash and didn't manage it very well. Which is what created some of the issues.

Jeff Rulis

Okay, I appreciate it. Thank you.

Operator

Terry McEvoy, Steven.

Terry McEvoy

Hi, thanks. Good morning. Maybe just a question for Chris. Could you just talk about how the balance sheet position for? Call it two more rate cuts in the fourth quarter and possibly more in, in 2025? And then on the deposit side, how are you managing adding new relationships with just managing the, the margin?

Chris Navratil

Yeah, so the the first piece of that terry from a sensitivity perspective for the first 50 basis points you during the quarter, as we mentioned in the prepared commentary, we 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's there is significant get room to move down both on a contractual and non contractual basis.
So optimistic is the, is the fed meters of decline that will be able to neutralize the impact or, or nearly neutralize the impact of those kind of moderate changes with the copy have to do something significant and crazy. It'll 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, You know, 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 that the 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 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 our customers want and need and do that to, to effectively both by a pricing and service and and make sure we're managing margin on the way down. So, opportunistic, we are optimistic. We have some opportunity there, but we're, we're going to remain disciplined.

Terry McEvoy

Thanks for that. And then as a follow up, maybe a question or two on the new calling efforts. Any specific markets where you feel you're, you're really gaining traction. And then when you look at over the next several quarters, where do you see the most upside? Is that loans which I think we're starting to already see or is it deposits and in certain fee, fee categories?

Richard Sems

Yeah. So, 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, of being real strong for the, the fourth quarter as well. So those, those markets are, are, are doing really well. Kansas City, you know, continues to be a consistent player for us in there. I think I, I also see out out west in some of our western markets in, in in Kansas as opportunities for us as well.
So I think that that part it's been all strong. And really there are great companies in all of our markets that we're just working to get out to. So I'm, I'm optimistic that all of them can, can provide something to that. And I do see the loan side right now that said, you know, so I think that's what we focused initially on.
But we're really now bringing in the fact that when we get deposit, we get loans, we get deposits with it as well. So I think, I think we're going to see that that's kind of the next phase of our, our sales process of really getting the team to work more on, more on the deposit front and more on the, on the fee income side.
So I think that'll delay a little bit more on that. But, as, as you probably know, we're going to see the deposits in rebounding back on the just from the public fund side of it in the fourth quarter. But from a growth perspective, new things like that, I think we'll we'll start seeing that more into mid mid '25 in that area.

Terry McEvoy

Thanks for taking my questions.

Operator

Andrew Liesch, Piper Sandler.

Andrew Liesch

Hey guys, good morning. Kind of a follow up question here. The last topic you ran through historically, some thoughts on. If you increase the loan 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 to 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?

Brad Elliott

Yes, that's what that's what we're working on. And I, and I think on the deposit side I think it's, you know, the industry is never really focused on deposits until the last four or five 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, 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, 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 a cycle.
And I, and I do think Andrew as Rick has been working with the team, we're going to continue to see solid loan growth. And, and not crazy numbers, just something that's, you know, in that 6 to 10% range as our teams have really bought into the, the whole process in the cycle and, and have, 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 loan growth as we go forward as a company

Richard Sems

And on the loan to deposit, I mean, we're always looking for those non interest bearing and that to chris' Point earlier that then gives us that, 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 '25.

Andrew Liesch

Got it. Thank you. You know, you've answered all my other questions. I'll step back.

Operator

Damon Del Monte, KBW.

Damon Del Monte

Hey, good morning guys. Hope everybody's doing well. 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 will be re pricing either here in the fourth quarter or probably more so in, in '25.

Chris Navratil

Yeah, through. So our portfolio today is comprised of about 40% of fixed rate, fixed rate loans. We have a few $100 million million. So $300 million to $400 million of that will reprice over the next five 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 five quarters. And the the composition kind of continues to remain the same, about 40% of the portfolio being fixed rate.

Damon Del Monte

And what do you have a happen to have? Like what the average yield is on? What's repricing, what is repricing from to where it would go?

Chris Navratil

I don't have that over the next five quarters I can get it for you, Damon. I will say we have a meaningful aspect of the portfolio that is still fall or sub 5%. So there's there's meaningful opportunity to reprice out,

Damon Del Monte

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 coming up?

Chris Navratil

No, that's, that's really a continuous trend about about the same level as every quarter re pricing. And those have been a little bit sporadic. So you saw during the quarter, we saw some expansion of that cost. I think we'll see the opposite trend as rates have come down. But that, that trend is really relatively consistent one month over month, over month.

Damon Del Monte

Got it. Okay. And then just one last modeling question here, you mentioned that the fair value increase in this quarter was lower. Do you, 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?

Chris Navratil

Last quarter? Purchase accounting was give me second. We saw nine basis points of benefit on purchase accounting in, in June and we saw four basis points in September. And I expect to go forward run right to fall between those two numbers.
I'll lean towards the lower end just because there, there's some more to do it now, but I think it'll fall between four and nine.

Damon Del Monte

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,

Chris Navratil

Let me take it. Yes. So we were able to take advantage of a tax planning strategy that allowed 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 bow transaction. So the two net out where the full year tax rate is about 21%. But they're definitely opposing trends quarter over quarter.

Damon Del Monte

Got it. Okay. That's helpful. And then I guess lastly, you know, Brad, you, you mentioned that you guys are still you know, active with prospects for M&A you know, any, any change to the geographic strategy there and, 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 you know, the M&A pipeline is strong, the number of conversations that we have going on, I have honestly picked up in the last few weeks. Some of them are clean deals, some of them are stressed deals and, 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, you know, the number of conversations is, is, it is pretty strong right now and we're not going to change your geography and we're not, we're not going to change our geography and we're not going to change what we've been doing.

Damon Del Monte

Okay, great. Appreciate that color. That's all that I had. Thank you very much.

Operator

Yes. Thank you. 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 line.