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spk01: Hello and welcome to the Equity Bank Shares Incorporated Q1 2024 earnings conference call. My name is Harry and I'll be coordinating your call today. If you'd like to ask a question during Q&A, you may do so by pressing style 1 on your telephone keypad. I would now like to hand over to your host, Brian Katzby, Vice President, Director of Corporate Development and Investor Relations at Equity to begin. Please go ahead.
spk00: Good morning. Thank you for joining us today for Equity Bank Shares 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.
spk03: Good morning, and thank you for joining Equity Bankshare's earnings call. We're excited today to take you through our first quarter's results, including record net interest income, strong overall earnings, and the completion of our merger with Rockhold Bancorp just 67 days after formal announcement. Joining me today is Rick Sims, our bank president, Chris Navratel, CFO, Christoph 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.
spk13: Thank you, Brad. Last night we reported net income of 14.9M dollars or 90 cents 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 16.1M dollars or 1.030 per diluted share. Net interest income was up $4.7 million linked quarter, while net interest margin improved from $349 to $375. We will discuss margin dynamics in more detail later in this call. Non-interest income, adjusted for the loss on 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 acquisitions 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 improved by 5% during the quarter. Non-interest expenses adjusted for one-time M&A charges totaling $35.5 million were modestly off the lead 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 36 cents. 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 GAF 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 Kirksell 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 loans is 1.28%. I'll stop here for a moment and let Christoph talk through our asset quality for the quarter.
spk09: 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 percentage of total loans, remained below 70 basis points. Net charges analyzed were 8 basis points for the quarter. Recognized charges 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 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 reflected in other income. This positive result is primarily driven by recovering two credits from the Almena State Bank acquisition and the effort of our legal and special assets team led by Brett Reber and June Pressmetal. Chris?
spk13: Thanks, Christoph. 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 non-interest-bearing deposits to the average deposit mix declined to 21.7% from 22.8%. The Bank of Kirksville transaction was accreted to this number. We closed the quarter with a period-end ratio of 22.5%. That interest income totaled $44.2 million during the quarter, up $4.7 million in the fourth quarter, as our earnings streams benefited from previous periods' strategic decisioning and continued 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 days 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.
spk02: Rick? I'm 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 opportunity 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 Burquist. 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 have 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.
spk03: Our company is well capitalized. Our asset quality metrics continue to be the best they have been in the history of equities. 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 delusion and the earn back timeline. With that, we are happy to take your questions.
spk01: If you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind and would like to withdraw yourself from the queue, please dial star 2. And when preparing to ask your question, please ensure that your phone is unmuted locally. Our first question today is from the line of Terry McEvoy of Stevens. Terry, your line is not open.
spk05: 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.
spk06: Thank you. 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?
spk13: 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, you know, as we look at peaking out deposit rates, we've been thinking about between 40 and 50 as the 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 a meaningful aspect of our portfolio. It'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, you know, 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.
spk06: It 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?
spk02: 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 the business side, so we continue to expect to see, you know, some growth in that area.
spk03: 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.
spk06: And then maybe I'll squeeze one last one in, Brad. The 67 days from announcement to close, so many other deals 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.
spk03: 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. I think it has to do with delegated authority outside of Washington, D.C. is what really helps those transactions. Let's don't tell everybody in the world that that happened so that somebody doesn't figure out how to squash that. We're crossing our fingers and just happy that it's happening that way.
spk06: Perfect. Thanks for the insight. Appreciate it.
spk01: Our next question today is from the line of Brett Robertson of Hovda Group. Brett, your line is open if you'd like to proceed with your question.
spk10: Hey, guys. Good morning. wanted to start with this with the commercial real estate portfolio and just what's repricing on that this year and next year and just how much opportunity much you have to reset the bar so to speak on some of the loan portfolio from a yield perspective yeah this is rick so we're repricing you know every single month i mean roughly on average you know kind of 100 million dollars or so
spk02: And all of those, 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 8.3 to 8.5 each month. So there's still room to go on that piece of repricing. we can get to some, the exact numbers for, we look at it on a, 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 in full business.
spk03: We started the cycle though, over 50% of our portfolio was floating. And so, you know, That's two years ago now, and we didn't go longer. 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.
spk02: 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 to that. Yeah.
spk10: 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.
spk02: Yeah, so 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. We're starting to see some benefits from that, especially on the CNI side. So we had a little growth in the first quarter in CNI. 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 at, a lot of that is new. new business so again with new business though and when it's on the pipeline as you know that there's I've sent a guarantee that that's going to close but what what it more looks we get the more opportunity for this year for next year in the following year okay and if I could sneak in one last one to on on the deals that you guys are looking at
spk10: Is there a benchmark or a way for us to think about, you know, accretion levels that you would consider with transactions from here?
spk13: Maybe a little bit of detail on that, but in terms of accretion level, what are you referring to? Like what we're looking for in terms of running rate accretion versus what we're willing to accept on dilution or...
spk10: Yeah, just, you know, the, the typical parameters around, you know, if you're looking at transactions and, you know, my guess is, is that any deals that you're looking at, you know, a bank's balance sheet might, might have some underwater, you know, assets. And so the pricing might be relatively attractive. And so to some extent you're, you're fixing someone's balance sheet that's underwater. And so just thinking about those opportunities as, as they come, you know, what your parameters might be for tangible payback and accretion from an EPS perspective, what you'd be looking for, you know, those sort of things.
spk03: So I would say we haven't changed our parameter on earn back, so if accretion waters down equity we would I mean it still has to be less than a three-year earn back or maybe even less than that because there is some risk in that credible yield going away quicker but we we haven't changed any of our parameters on what we're looking at from a transaction standpoint yeah okay thing I'd say Brad as we think about those transactions we're trying to look at them in terms of the fair value of that balance sheet after
spk13: or done, so when the marks are kind of all the way through the process. So as we look at pricing, as we look at a lot of the conversations we're having, it's focused more on what is the balance sheet worth versus what is tangible book value today. So willing to accept a little bit less dilution typically just because of the way we're looking at structuring those transactions.
spk10: Okay. That's helpful. Thanks, guys.
spk01: Our next question today is from the line of Andrew Leash of Piper Sandler. Andrew, your line is open if you'd like to proceed with your question.
spk08: Thanks. Good morning, guys. Just a question. Now with the Bank of Kirksville deal closed, has the asset sensitivity of the balance sheet shifted much at all?
spk13: Not meaningfully, Andrew. The Kirksville assets are relatively short, but there's a little bit of duration in there. So you're still looking at kind of two to three years overall. They don't have a lot of fixed long-term on the long side. And then their liabilities are predominantly non-time-based. So in theory, completely flexible, but it just kind of depends on how the market moves in competition-based.
spk08: Okay, so still pretty neutral to rate changes?
spk03: Yeah. You might talk about some of the positives we're already seeing up there.
spk02: Yeah, I mean, we're seeing deposit growth right now. We're seeing a really engaged group of folks, and so it continues to be a really good source of deposits for us. And what we're able to do is, in that market, bring in a lot of the digital products that we have. And so there's actually, from the clientele side, really liking what we're doing, and as a result – you know, I think we're going to continue to see maybe a little bit, you know, we were kind of wanting to just hold serve there on deposits. I think we might continue to see some decent growth there through the end of the year.
spk08: Got it. That actually kind of leads into my next question. It's on funding the loan growth for this year. Is it going to come from client deposit growth or is there any remixing of assets that might fund it as well?
spk13: I think the answer to that is both Andrew and then optimistically we'll get all the loan growth that we could hope for and then you know you could see some funding by a wholesale borrowing as well because we have the capacity to do it now our bond portfolio especially the Kirksville portfolio is very short so you're going to see some cash flows coming in that give us opportunities to reposition into loans we also have some cash as we kind of as you mentioned the phone call that excess liquidity we're carrying that can be repositioned into loans so We have opportunities today to redeploy assets, ideally, into customer relationships, and those cash flows will continue to come through as the year goes on.
spk02: And I would add that given the discipline that we've had on cost of funds, it just gives us dry powder to make a decision, you know, as things move in the market. So I think we're on a real strong point there, as Chris has said, to do either one.
spk07: Got it. That's all really helpful. I'll step back. Thanks for taking the question.
spk01: Thank you. Our next question is from the line of Jeff Rudis of DA Davidson. Jeff, your line is open. Please go ahead.
spk04: Thanks. Just a couple credit questions, if I could. You know, some encouraging link quarter statistics. Maybe going back to the last quarter, that primary residence mortgage credit that was brought on or identified, any movement on that specifically?
spk03: Yeah, we were able to get that, we actually sold the note and moved that credit on.
spk04: Okay. And then a broader question on the, I guess the balance of existing NPAs or even classifieds. Of that, what's, you know, were acquired versus kind of legacy? I know that blurs the lines, but As we've talked about, I think you've been successful in chasing down sort of gains from or recoveries from, you know, acquired loans. Just trying to get a sense of the bucket of NPAs or classifieds, what of that is acquired and what was underwritten legacy.
spk09: Yeah. So if you look back on the last few years on a historical basis, you're going to find that majority of our problem assets are acquired loans. So more than half, more than half of what you see is actually acquired. And that's been the case for the last few years. And, you know, as you can tell, our assets, our problem assets are going down quarter by quarter, seems like it. And part of it is due to kind of a slowdown in an M&A space, but also on our special assets teams and our legal team is just focused on resolving some of these issues and execute on the contracts that we have in place and better our positions.
spk04: And Christophe, of those acquired that you're sort of going after, I don't know if we're in the seventh inning of All that have been acquired, do you think you've chased down recoveries? Is there a percent of that? Just trying to get a sense for it. It sounds like maybe there's potential for further recoveries. Any way to position where you are in that process of at least of what you know of what you've acquired to date?
spk09: Yeah, I would say the big wins have already been won. And whatever, there's a little bit of it left, not much. But I would say on the recovery side, there's probably less opportunity going forward. I would say that our problem assets loans today, they're well reserved. And, you know, I don't see any further losses or recoveries in that space.
spk03: We do have a large recovery that we are still chasing out there. So substantial one that is still out there.
spk04: Got it. And Brad, I appreciate the M&A thoughts. Pivoting to the buyback, I mean, do we view that as you can kind of do both or more specifically you know i think shares are trading kind of around where kind of the average price you had last quarter um just checking in on the appetite of buyback um does that wane or increase with m a opportunities or do you feel like that's going to be at least for the short term going to be a pretty steady level or or maybe even greater from your perspective
spk03: Yeah, I think we'll still remain active in the buyback market. We don't have anything imminent that, like a couple quarters ago, we knew we had Kirksville that was coming. that hadn't been announced yet. So we stopped the buybacks as we were building cash to be able to make sure we had enough cash to transact that. On the M&A front, we do have conversations going, but we don't have those conversations that would have as big a need for cash as that one did. So I think we will continue to be opportunistic in the buyback market.
spk04: Okay, thank you.
spk01: As a reminder, if you'd like to ask any further questions, please dial star 1 on your telephone keypad now. And our next question today is from the line of Damon Delonte. Damon, your line is open. Please go ahead.
spk11: Hey, good morning, everyone. Hope you guys are all doing well. My first question is regarding the margin. So this quarter's margin, Chris, was 375. How much fair value accretion was included in that?
spk13: The total fair value accretion there is when you combine all of our transactions, so not just BOK specifically, there was $150,000 in loans as well as less than half a million dollars in bonds.
spk11: Okay. And how should we think about kind of a projected fair value accretion going forward?
spk13: Yeah, so the bond portfolio we acquired was $5 million underwater, so we're going to create $5 million on the bond portfolio over a two to two and a half year life, which is relatively well in line with what we disclosed as we went through the deal mechanics to begin with. The fair value mark on the loan book is just north of three million dollars that three million dollars will come in over we're currently projecting a life of between three and a half and four years so that's just gonna be realized over that over that time horizon got it okay and then does the guidance that you guys provided in the slide deck incorporate the projected fair value or is that excluding that it includes it it doesn't okay
spk11: great um and then with regards to the the cni growth i'm sorry i just said it's reflective of the okay yeah oh okay great yeah thank you um and then with regards to the cni growth this quarter um how much of that was increased in line utilization versus new credits coming on the books new it was new credits It was all new credits. Okay. And do you have a level of where the line utilization stands today and kind of how that's fared more recently?
spk02: I don't have that right in front of me. We can get that for you.
spk03: Yeah. We don't have that calculator.
spk11: Okay. No problem. And then just lastly on the CRE, Thanks for the color on the expected maturities that are forthcoming. From a broader perspective, are you guys having proactive conversations with the borrowers that are on tap to mature or have their rates reset so you can be in position to know whether or not you're going to have to move them off the books or come up with a different solution just so that you have a a handful of credits one quarter that have to exit and it kind of impacts the overall growth. Are you having those initial conversations with folks?
spk02: Yeah, we're absolutely being proactive on looking at that. I mean, that's why we try to work ahead at least at a minimum a quarter ahead to have those conversations. And then as we're bringing them into credit committee, we have those discussions on yield and then also on ones in which there might be something that we just don't like to credit. And as Christoph has done and his team has done, I mean, we're doing a lot of stress testing on it to understand if rates are being reset, what that's gonna look like, so that we're working well ahead of that. We know that now. We know that in advance for those ones that are at very low rates being raised up based on what their performance has been, if they can handle it or not. So yes, we're absolutely doing that proactively.
spk11: Got it. Okay, great. That's all that I had. Thank you very much.
spk01: Thank you. And we have no further questions in the queue at this time. So this will bring us to the end of the Equity Bank Shares Incorporated Q1 2024 Earnings Conference Call. Thank you all for joining. You may now disconnect your lines.
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