Transcript
Coming up, another episode of Plugged In with my man Steve Williams and a great guy out in Kansas, Brad Elliott, founder of Equity Bank, a roughly $5.5 billion institution doing some impressive things. Equity has been a strong merger partner for a number of organizations, and Brad is somebody I consider a true entrepreneur.
We love what we call the troublemakers, Brad, and you’re a founder who got started at a time when people were looking at the world through the dot-com crash, 9/11 and everything else that was happening. Then we’re going to talk about the string of M&A transactions that helped build the bank.
For bankers wondering what entrepreneurship can look like inside this industry, this should be a fun conversation.
I believe 2002 is when you got the doors open. Hold me honest on the stat.
We closed in 2003, but 2002 is when I formed the holding company.
Then you took the company public in 2015, moved it over to the New York Stock Exchange a few years ago, and today you’re doing business in Kansas, Missouri, Oklahoma and Arkansas.
That’s correct. We’ve also hired somebody in Des Moines, Iowa, and we’re opening a loan production office there soon.
That’s awesome. Congratulations.
Normally I share some funny travel experience with Steve as a way to get Plugged In. Today I brought a book I’ve been reading, How to Lie with Statistics. It’s given me a lot of ideas for conversations like this. Even though the book has been out for a long time, it really reminds you to be thoughtful about the numbers people put in front of you.
You mentioned Brad’s company has been doing M&A. We know this industry is marked by consolidation waves, and investment bankers keep saying more deals are coming. It had been relatively quiet until recently, when the M&A landscape surged with a wave of announcements.
We paid attention to Columbia Banking System’s acquisition of Pacific Premier. The next day, Eastern Bank said it was getting together with HarborOne. You could also add Mechanics Bank and HomeStreet. The West Coast is getting interesting with larger regional banks.
The name of the game is not to underestimate the resiliency of the community-bank space. Volatility has been a theme, but there are entrepreneurs like Brad who have positioned their businesses to navigate uncertain times successfully.
And there’s still a big pipeline of sellers out there where an institution like Equity could be a prime buyer. I think it’s going to get exciting.
Brad has been forced at times to spend some quality time with me. We haven’t listened to as much music together as Steve and I have, but I believe he’s heard a few of these episodes. We like to use music to get things creative and flowing.
Today I thought we needed a banger to kick things off, Faith No More’s “Epic.”
That’s a classic.
We could also use Journey’s “Separate Ways,” Nirvana’s “Come as You Are,” Kate Bush’s “Running Up That Hill” and The Killers’ “Human.” We’ve got five songs to use as inspiration.
As I said, we’ve got a great entrepreneur here. We’ve been in a period of volatility, but that doesn’t mean you can’t take risks or try different things.
So, with Faith No More and “Epic” cranked up, Brad, talk to us about the entrepreneurial spirit you want to maintain at the bank as it continues to mature as an organization.
That’s actually one of the hardest things to keep in an organization as you grow and get bigger. When you put more processes in place, it can drive out people’s willingness to make a mistake.
What’s hard about maintaining entrepreneurial spirit is that, as you get bigger, decisions are more visible. I was talking with Kirk Wycoff at Patriot. We used to take a lot of risk in this industry in consumer lending and other areas. People don’t want to do that as much anymore because when you make decisions, you eventually have to book and record losses.
That’s what we’re supposed to do as an industry. But if you’re charging off 0.25% of your loan portfolio, everybody looks at you sideways today because that’s high relative to the industry.
They forget there was a time when you could charge 8.5% or 9% for certain credits when prime was around 7%, and taking that risk was okay.
The same thing happens as I’m building this company. It’s hard for people to continue to underwrite, take appropriate risks and do the things they need to do throughout the organization.
We push on that really hard. It’s part of our values. We call them ICARE, and the E in ICARE is entrepreneurial spirit. We talk about it a lot, but you have to actively encourage it. It’s very easy for that to disappear from an organization.
Brad, one place that shows up is Equity’s net interest margin. In the first quarter this year, it was about 4.27%. To put that in perspective, Bank of America’s was around 2.36%.
You’re nearly 200 basis points higher because you’re willing to dig into relationships and take risk. If you were explaining how you get a 4.27% margin in today’s environment, what’s the secret sauce?
My goal someday is to have as high a margin as Johnny Allison’s. Johnny is always well above 4.5%, so he’s better at this than I am.
I think it comes down to asking for the business and then asking to be paid for the business. If you’re entrepreneurial, turning credit around quickly and getting an answer back quickly, you should get paid for those things because the customer can’t get that at the larger bank down the street.
If you’re simply a commodity, we probably aren’t the bank for you. If you’re somebody we can understand, somebody we want to deal with and continue to partner with, and you see us as a partner, we can get paid that extra quarter or half a percent.
We work on it all the time. We’re a margin business, and if people want to sell on price, they’re not selling margin. That means they’re not really salespeople. They’re order takers.
We never want to hear about the commoditization of the industry, which is part of why we wanted Brad on today. And if listeners heard Kirk Wycoff’s name and thought it sounded familiar, he’s a past Plugged In guest.
I love what Brad’s saying because whether you’re talking about Johnny Allison or what you’ve built, it comes back to performance, discipline and execution. We should probably bring our secret-sauce bottle back out.
I’ve spent time with Brad in the past, and what impresses me is he doesn’t get seduced by shiny objects. Sometimes I’m the one trying to put a shiny object in front of him because, of course, I’m a consultant.
Years ago, I talked to Brad about Bitcoin. I think you actually had a physical Bitcoin somewhere in your office.
I have it in my desk drawer over there.
There we go. It does exist. It isn’t an urban legend.
We’d talk about crypto and DeFi, and Brad would push back. That’s why I wanted Journey’s “Separate Ways” here.
We could go down the crypto and stablecoin path, but really I was thinking about AI, generative AI and all the talk about applications inside banks like Brad’s.
How are you trying to get your arms around technology opportunities that can lead to the business outcomes you care about?
AI is something our industry is already using in early forms, including bots. I don’t think adaptation is going to be hard for banking. I think AI is going to be very powerful. The question is how we implement it as quickly as possible in ways that have the most meaning for us.
I think it’s going to matter in BSA, compliance, deposit operations and credit. The companies and people that figure out those use cases first and best are going to get the greatest efficiency gains.
Over the next five years, I think there’s a lot of efficiency to be gained from AI. Credit is ripe for it.
For us, it isn’t about worrying that we’re going to lose jobs. We’re a growing company. If we can implement these tools well, growth will take care of those employees.
We have to figure out how to do it for shareholders, compliance and better service. We need faster information back to customers, while also using AI to make the bank safer and protect against fraud.
I’m not sure fintechs can develop all of this by themselves because they don’t always understand the business deeply enough.
I’m working with a couple of organizations that are actually inside banks and trying to create businesses. I think that model has promise.
It’s similar to the way data processing developed. Data processing was created out of banks. How do we get AI-focused data processors inside organizations so they can start stripping out the work we can do better?
Close enough to the grit of the business is your point there. There’s often a lament after a regulatory exam that you don’t have enough compliance people or BSA people.
The dream of saying, “Yes, I do. I have unlimited robots,” would be pretty nice because staffing increases in those areas aren’t going toward growth. They’ve become an added tax.
The robots don’t take vacation days.
At least not yet.
More robots in compliance.
What I like about Brad’s answer is that you have a leader modeling the behavior. That’s important as these tools become commercially viable and relevant. If you’re not willing to invest your own time and curiosity, how can you expect your team to do it?
That lends itself to a conversation around teams. Brad, you mentioned you’re a growing organization. As you grow with clients, you bring new people into the team.
If Nirvana’s “Come as You Are” is our inspiration, how do you think about growing your team, especially as a business known for doing acquisitions well?
We look at it several ways. First, we put a lot of time and effort into growing people internally.
We have a bank management trainee program with five to seven people in each class, and we’ve been doing that for about six years. That’s a significant investment in the next generation of bankers. We’re trying to keep those people and move them through the organization so we have our next set of managers coming from within.
We also have Equity University, where we bring current managers through a 12-month program to give them a broader understanding of the organization and banking. They meet for two days each month.
That’s some of our internal development. But if you’re a growing company like ours, you also have to be open to recruiting people from the outside.
Bringing in people who have learned from other organizations helps you grow and learn faster.
You can only grow so fast if you’re learning exclusively on your own. If you can bring in knowledge from three, four or five other organizations, you can accelerate that learning.
I think we’ve done a really good job at Equity of recruiting from outside while also promoting from within when we can.
That echoes what Malcolm Holland at Veritex talked about, bringing outside perspective into the management team. Dave Brager at Citizens also talked about maintaining a disciplined talent pipeline with ownership at the executive level rather than delegating everything to others.
It’s about getting a rich and diverse universe of people to see your company as a great place to apply their talent and skills.
Brad, how do you attract relationship managers? If you’re a commercial bank, growth is driven by who’s out there building relationships. What is it about Equity that attracts top relationship managers?
The first thing about relationship managers is they want their customers taken care of well. They’re looking for an organization that is going to take care of their customer base.
We had a chance to pick up some people in Tulsa because the bank they were with had moved away from what those bankers and customers were focused on.
They wanted to come to an organization that wanted new business and would take care of the customers they had.
That’s really what attracts good relationship managers. They want their customers taken care of because their reputation is on the line every time they sell their services to a customer.
Obviously money and opportunity matter, but a true relationship manager is focused on the customer and how the new organization is going to take care of them.
We’ve talked in previous episodes about being a magnet for talent. This is another example of a well-run business becoming one.
When I think about growth and how organizations scale, you’ve got organic growth, margin expansion and M&A. There has been a growing appreciation within the C-suite for engaging in M&A conversations.
Brad, I think you’ve done 21 deals in 23 years. If somebody wants to talk to a serial acquirer, those statistics make the case.
That’s right.
That number of deals and integrations is why I chose Kate Bush’s “Running Up That Hill.” You have to run, you have to integrate, and you’ve been able to do that.
Are there lessons you’re sharing with your team in advance of the next deal? What would you put in Brad Elliott’s handbook to M&A success?
First, define a process and follow it. We’ve done 21 full M&A transactions and about another five branch or deposit acquisitions.
When I did our first M&A transaction, I had a due-diligence list of about 75 items. Today our list is about 3,000. We define everything down into process and procedure.
We’ll find something new in every transaction that we need to remember for the next one. There are so many lessons learned, and we document them every time so we don’t have to repeat the same errors. We get better each time.
Three different times we’ve announced two M&A deals on the same day, then closed and converted them on the same day. We didn’t plan those for 180 days. We did them in about 130 days from announcement to close and conversion.
You’ve built a team that knows how to slide down the firepole and get to work.
We have, and one important thing is we don’t have an M&A team. There’s nobody at our company dedicated exclusively to M&A. Every department has to do its own lifting.
I designed it that way because I don’t think you should have an M&A team that dumps the transaction on the operating team and then runs to the next one.
Every department handles its own integration, due diligence and underwriting, and owns it all the way through the process.
I think that’s one of our secrets. We don’t outsource it internally to a group that later dumps it and moves on.
Everybody owns the outcome all the way through, and that has helped us integrate smoothly and continue doing deals.
I’m going to lend you my hashtag, Own the Outcome, because that is absolutely an own-the-outcome approach to doing a deal.
We’ve covered a lot of ground pretty quickly, but there’s one thing I always like to put in front of a CEO who’s growing a business: trust.
Trust can be built over time on a golf course, but in the digital world it’s much harder to create and maintain. There’s plenty of fraud out there making it even harder.
You’re running a bank and a business with a lot of challenges coming at you. You have to be digitally enabled for relationship managers to do their jobs and for customers to trust you with their business.
Talk a little about building trust in a mobile-first, always-digital world.
It’s an interesting concept. Some of it comes from brand. Your brand and what customers can find about you are the first things they’re going to look at.
We run a digital-only bank called Bankers’ Bank, and we’ve been running it for about three years. We solicit deposits nationwide through that arm outside the four states where Equity operates. If you’re in one of our four states, you can’t open an account through it.
What we’ve learned is that those digital customers care deeply about what’s available about you online because that’s their only connection to you.
What we really have to focus on as community banks, and what we’re focused on at Equity, is expanding our digital presence around our existing physical footprint.
Can we expand beyond the three-to-five-mile radius around a branch to 10, 15 or 20 miles?
People can see the physical branch, so they already have some recognition of the brand from the marketing we do. Can we then push farther into those markets through digital channels?
That’s a major focus for us over the next two to five years, expanding our digital footprint.
We’ve had a good conversation with Brad. It’s always fun to hear your stories and catch up.
He’s Steve Williams, I’m Al Dominick, and we want to thank you for getting Plugged In with Cornerstone Advisors.
Keep the growth coming, Brad. Great to talk to you.
Thank you.
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