EQUITY BANCSHARES INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Results: Net income was $19.8M, net interest margin stood at 3.87%, non-interest income was higher than expected, and non-interest expenses were down due to a $8.5M recovery from a problem credit.
• Asset Quality: Asset quality metrics were historically low, but minor weaknesses were emerging in smaller operators and quick service restaurants due to inflation; exposure was granular and losses not expected.
• Loan Growth: Period-end loan balances increased by $147M; loan originations in Q3 were $246M with a weighted average coupon of 7.75%; average loans increased at an annualized rate of 1.8%.
• Mergers and Acquisitions: Closed and converted the second bank merger of 2024 (KansasLand), announced and closed within 75 days; two acquisitions in 2024 were completed within 75 days.
• Sales and Operations: Team aligned and motivated; balance sheet showed growth in loans; strong pipeline; service revenue improved with contributions from cards, trust, wealth management, and mortgage; trust and wealth management added assets under management.

Segment Performance

• Net Income: Reported net income of $19.8 million, or $1.28 per diluted share. Adjusting for merger expenses and gain on security sales, net income was $20.2 million, or $1.31 per diluted share.
• Net Interest Income: Flat quarter-over-quarter; net interest margin was 3.87% versus 3.94%.
• Non-Interest Income: Higher than outlook, including positive trend in service charge line items and an $831,000 gain on acquisition related to the KansasLand transaction.
• Non-Interest Expenses: Adjusted for one-time M&A charges totaling $29.6 million, down quarter-over-quarter due to the $8.5 million recovery. Excluding this benefit, non-interest expense exclusive of M&A was flat at $36.5 million linked quarter.
• Provision for Credit Loss: $1.2 million, primarily driven by loan growth late in the third quarter; ending coverage of ACL to loans is 1.21%.
• Asset Quality: Total classified loans closed the quarter at $48.7 million, or 8.3% of total bank regulatory capital, improving 15 basis points linked quarter. Non-accrual loans as a percentage of total loans increased to 0.87%; delinquency in excess of 30 days declined; 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.
• Loans: Average loans increased during the quarter at an annualized rate of 1.8%; loan originations in the quarter totaled $246 million; period-end loan balances increased by $147 million; loan to deposit ratio was 82.5% at quarter-end.

Guidance

• Loan Growth: Expect mid to high single-digit organic loan growth in 2024 and 2025.
• Margin: Optimistic about opportunities for margin maintenance and income expansion in future quarters; neutralized the impact of the 50 basis point rate drop in September.
• Expenses: CDI intangible amortization from the KansasLand transaction will have a good run rate for the next couple of quarters; salaries and employee benefits had $1M additive accruals not expected to repeat; unfunded commitments reserving not expected to repeat.

Risks

• Inflation Impact: Smaller operators and quick service restaurants facing pricing pressures and margin constraints; risk exists but bank is adequately secured, exposure granular, meaningful losses not expected.
• Rate Changes: Secondary impact on the industry if the Fed makes significant rate changes; excess liquidity reducing margin by 10 basis points in the current quarter.

Question and Answer

• Q: Commenting on loan growth inflection and expenses A: Loan growth due to deals and relationships worked on; CDI intangible amortization is included in expenses, with a good run rate for the next quarters, and expense declines expected from additive accruals and other line items.
• Q: Balance sheet position and new customer acquisition A: Can neutralize the impact of rate cuts; disciplined in new customer acquisition, focusing on pricing and service to manage margin.
• Q: New calling efforts and upside A: Strong traction in Tulsa, Wichita, Western Missouri; most upside seen in loans initially, then moving to deposits and fee income.
• Q: Margin, fair value accretion, tax rate, M&A A: Fixed rate loans will reprice over the next five quarters; fair value accretion run rate between 4-9 basis points; tax rate lower due to tax planning strategy; M&A pipeline strong with many conversations, same geographic and acquisition strategy.