Equity Bancshares, Inc. (EQBK) Q1 2025 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to Equity Bancshares First Quarter Earnings Call. My name is Lydia, and I'll be your operator today. [Operator Instructions] I'll now hand you over to Brian Katzfey, Director of Corporate Development and Investor Relations. Please go ahead.

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.

Good morning. Thank you for joining Equity Bancshares earnings call. Joining me today are Rick Sems, our Bank CEO; Chris Navratil, our CFO; and Krzysztof Slupkowski, our Chief Credit Officer. We are excited to share our company's strong beginning to 2025. In the first quarter, we achieved strong earnings, margin expansion and built up our reserves to strengthen our balance sheet for whatever comes next. During the quarter, we were excited to announce the merger with NBC Corp., expanding our presence and our market share in Oklahoma as we continue to grow in this strategic area. As we announced on the call a few weeks ago, this will be impactful to Equity Bank in many positive ways. It gets us into a market we have been working on for several years. And this will give us access to a new metro market to help us continue to build out our organic production in lending, treasury management and all other commercial products. We can't express how excited we are to bring the current management teams of NBC Oklahoma, including H.K. Hatcher, Glenn Floresca, Scott Bixler, Dennis Themer and Jeff Greenlee to our teams. As we wrapped up 2024 and looked ahead to 2025, we brought in additional capital with plans to grow both through mergers and acquisitions and organic production. In the first quarter, we executed on both fronts. Loans increased by $131 million, an annualized growth rate of 15.5%, while the NBC merger is expected to add approximately $900 million to assets to our pro forma entity. Following the completion of the NBC merger, we retained approximately $67 million in capital from our common stock raise in December, in addition to capital built through earnings, ready to deploy for strategic growth. While banks are typically sold rather than bought, we are seeing active conversations at a level we haven't experienced in recent years. We have numerous opportunities that could yet be announced this year. We closed the quarter with a TCE ratio of 10.13% and a tangible book value per share of $31.07. Compared to quarter 1 2024, our TCE ratio is up 36%, and our tangible book value per share is up 24%. Providing top-notch products and services through exceptional bankers continues to be our guiding principle as we aim to grow Equity Bank. I can't be more excited about what's ahead for our company. We started the year with a strong balance sheet, motivated bankers and a solid capital stack to execute our dual strategy of organic growth and strategic M&A. We began to see the results in Q1 and look forward to maintaining this momentum throughout the year. I will now ask Chris to walk us through our financial results.

Thank you, Brad. Last night, we reported net income of $15.0 million or $0.85 per diluted share. Excluding amortization of intangible costs, earnings impacting tangible common equity were $16.0 million or $0.90 per diluted share. Net interest income improved from $49.5 million to $50.3 million in the quarter, driving net interest margin to 4.27% from 4.17% linked quarter. While there were tailwinds in both quarters pushing up margin, we continue to be optimistic about our opportunities to maintain spreads and improve earnings through repositioning of earning assets into 2025. More to come on margin dynamics later in this call. Noninterest income for the quarter was $10.3 million, up $1.5 million from Q4. The increase was driven by a comparative improvement in earnings on bank-owned life insurance of $1.7 million as we realized a death benefit on an insured. Excluding this benefit, linked results were flat and in line with outlook. Noninterest expenses for the quarter were $39.0 million (sic) [ 39.1 million ] up $1.2 million from Q4. The increase was driven by normal beginning of the year dynamics in payroll as well as additional accruals to account for strong first quarter results. As indicated in our outlook slide for Q2, we expect noninterest income to normalize in future quarters. Our GAAP net income included a provision for credit loss of $2.7 million. The provision is a result of increasing loan balances for the quarter, coupled with increased uncertainty related to the current economic environment due to the recent trade policy announcements. We continue to hold reserve for economic challenges that might arise. To date, we have not seen concerns in our operating markets. The ending coverage of ACL to loans is 1.26%. As Brad mentioned, our TCE ratio for the quarter moved above 10%, closing at 10.13%. The funds from the capital raise in Q4 continue to be maintained at the holding company with no current intentions of pushing into the bank. At the bank level, the TCE ratio closed at 9.87%, benefited both by earnings and improvement in the unrealized loss position on the securities portfolio. I'll stop here for a moment and let Krzysztof talk through our asset quality for the quarter.

Thank you, Chris. During the quarter, nonaccrual loans decreased by 10.3% to $24.2 million, while nonperforming assets declined by 19.6% to $27.9 million. The declines during the quarter are due to specific assets moving out without replacement. Nonperforming assets remain at historical lows. Total classified assets declined during the quarter to $63.9 million or 10.24% of total bank regulatory capital. The decline in classified assets is primarily the result of the resolution of the Main Street lending program loan moved to OREO in Q4. Year-over-year classified assets continue to show an increase. The trend is primarily due to one QSR-related customer, which we have discussed in previous calls. We do not currently expect any losses on this credit, but consider the downgrade appropriate based on recent trends in operating results. Delinquency in excess of 30 days moved up during the quarter to $18.2 million, but remained low at approximately 50 basis points of total loans. The increase was temporary. The few loans added causing this increase at quarter end have been resolved as of today's call. This was administrative in nature and has been corrected and is not expected to repeat in future quarters. Net charge-offs annualized were 2 basis points for the quarter compared to 4 basis points in Q4 and 11 basis points full year 2024 as realized losses continue to be muted. Recognized charge-offs continue to reflect specific circumstances on individual credits and do not indicate broader concerns across our footprint. Our credit outlook for 2025 remains positive as problem trends remain at levels below historic norms and are trending down through the first quarter. While rhetoric in the economy would indicate the potential for increased risk, we continue to leverage our portfolio monitoring tools to identify potential problems and remain prudent in our credit underwriting while maintaining healthy levels of capital and reserves to face any future economic challenges. We believe this approach will continue to yield positive outcomes while acknowledging risk remains as reflected in our allowance levels.

Thanks, Krzysztof. During the final 4 months of 2024, the FOMC reduced their target rate 100 basis points, the impact of which was materially realized through the end of the first quarter 2025. During the quarter, cost of funds declines of 8 basis points outpaced the decline in coupon yields on assets of 4 basis points. The positive net trend in coupon results was further buoyed by $2.3 million in benefits on nonaccrual assets, adding another 19 basis points to the stated margin result of 4.27%. In addition to realized liability sensitivity following the cuts, we also realized expansion of average interest-earning assets and a decline in average interest-bearing liabilities as a percentage of average interest-earning assets, all positive trends linked quarter. Average loans increased during the quarter at an annualized rate of 5.7%, while total interest-earning assets increased 4.8%. Ending loan balances are $54 million above average balances for the quarter. The increase in margin and earning assets led to net interest income growth of $1.8 million, which was partially offset by the reduced day count in the period, yielding total periodic growth of $822,000. As we look to the remainder of the year, we are optimistic about margin maintenance as we see loan balance growth and continued lag repricing on our asset portfolios. Our outlook slide includes the forecast for the second quarter as well as full year 2025. As indicated, we anticipate margin between 4% and 4.10% in the second quarter on average earning assets between $4.8 billion and $4.9 billion. 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 12 basis points to average loans on an annualized basis. Rick?

Our production teams had an excellent start to the year as we realized loan growth of more than $130 million in the first quarter, while also maintaining deposit balances exclusive of anticipated municipality outflows. Tulsa and Kansas City were significant contributors to the quarter's results, and I look forward to enhanced contributions from the remainder of the footprint in 2025 as pipelines are strong and our teams are motivated to drive our organization forward. Organic originations in the quarter totaled $197 million, up 64% compared to the previous quarter. Total production was $254 million, which included $57 million of fully guaranteed government loans purchased at a discount. Yield on organic originations was 7.41% for the quarter, up 5 basis points from the previous period. Considering the downward trend in the rate environment over the represented 180 days, realizing maintenance of production rates is a credit to our team's emphasis on providing value to our customers above and beyond facilitating a transaction. Under the leadership of Jonathan Roop, our retail teams have entered the year with aligned direction and a framework designed to drive success throughout our footprint. The first quarter showed positive trends in gross and net production levels, but we have a long way to go to meet the aggressive goals we have set. I look forward to assisting this group in realizing success throughout 2025 and beyond. Deposit balances, excluding brokered funds, declined in the quarter. The trend was attributable to seasonality in municipal and commercial funds versus customer outflow. I anticipate those funds will flow back in as tax revenues are realized by those entities throughout 2025. As we look forward to the combination of Equity Bank and NBC, I am excited to announce that Greg Kossover will be moving into a senior regional CEO role with oversight for the Equity Bank geography in Oklahoma and Northwest Arkansas. As we look to integrate the NBC footprint and onboard their team while also continuing to grow our legacy presence in both Oklahoma and Northwest Arkansas, Greg's leadership and Equity Bank experience will be integral to success. Greg built a home in Tulsa 6 years ago, so this allows him to be in the middle of his footprint and finally enjoy his new home during the [ work week ]. As we discussed in our announcement call, I could not be more excited about the markets we are entering and the team members we are adding through our partnership with NBC. As Chris mentioned previously, fee income was effectively flat for the quarter and in line with outlook. We continue to see a lot of opportunity to grow the line items comprising the total. Our in-branch mortgage, treasury, trust, wealth management and insurance offerings differentiate us from our primary competitors in the majority of our communities. Brad?

It is a very exciting time to be associated with our company. We're in a great position in our marketplace with our organic sales team. Our operating and risk teams led by Julie Huber are well positioned for growth. Our management team is ready for the challenge and more importantly, the opportunity that is ahead of us. Our Board has done a great job driving a strategic path that allows us to be ready to grow both organically and through M&A. As mentioned earlier, M&A conversations continue at a higher rate than I have ever seen them as my time as a banker. Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling dilution and the earn-back time line. We appreciate all the continued support from our employee base that is always ready to take on new opportunities and our investor base that has remained committed and steadfast as we execute on our strategy. I look forward to the rest of the year and beyond. Thank you for joining the call, and we are happy to take any questions at this time.

[Operator Instructions] Our first question comes from Terry McEvoy with Stephens.

Maybe a question for Brad or Krzysztof. I know it's early, but could you just talk about what you're hearing from your commercial customers in terms of how the tariffs could impact their business? And then maybe what actions are you taking to minimize the risk to the bank if the economy does deteriorate from here?

Yes. Good question, Terry. As everyone else in America, it's really hard to figure out what these actually mean for everyone. Many of our customers, as we've talked with them, went through this during Trump's last election. People kind of forget he did a tariff deal during his last election. And so they have actually put a lot of things into their contracts to be able to pass it on if they're contractors or suppliers. So they're able to pass on a lot of this expense to their end user. So I don't think they're going to be squeezed particularly. The question really is what does it do to the overall economy, which we don't think we've completely figured out yet. We did add some into loan loss reserve this quarter for those types of things, but we're not seeing any indication of slowdown at this point. It might be long answer to...

Yes. No, I appreciate the honesty very much. And then maybe a follow-up for Rick. Could you just talk about an update on the sales initiatives that you've helped put in place? We definitely saw that this quarter in terms of loans, maybe a baseball analogy, what inning are we in? Where are you seeing the success? And then you did highlight the products you have. When do you expect to see an acceleration of some of the fee income that's connected to those products

Yes. So Terry, you obviously know my background. So I'll use a baseball analogy. I mean we're still early. I think we're moving into the middle innings here, though, from the standpoint of getting it done. We saw a tremendous amount of calling in the fourth quarter, and I think that's leading to some of this. And so it's really just a matter of continuing that consistency. So we had good calling metrics. And a lot of it on calling. It's not about sales, it's about just making sure that you're in front of your customer and they're able to provide them solutions. So we're seeing more and more of that so that we're earlier on as far as if there's a problem being able to identify it and do something with it. As far as the product side of it goes, we're -- that is still on an early stage. We've got opportunities on the TM side that we're starting to see actually coming through this quarter. There's a couple of really nice TM wins out of our Tulsa markets. And you see it, it's interesting is that the markets that are really, really calling are really starting to see results from that. So Kansas City and Tulsa are driving both loans. But then as a result of that, they're getting into the C&I businesses, which do have that fee income side of it. So I think we're still early on, but I do expect that you're going to see a little bit more of a bounce back on the fee income as we get into the second half of the year. So hopefully, that helps.

Our next question comes from Jeff Rulis with D.A. Davidson.

Question on the loan purchases. Do you expect to see more? And is that embedded in your guide going forward?

No, we're not -- Jeff, that one specifically was a onetime deal that came across our desk that the economics made a lot of sense on. So we pursued it. But it's not something we're actively trying to do consistently.

Okay. Got it. And maybe just a follow-on kind of the last question on -- the growth optimism sounds great and it sounds like a lot of in-house work has been a driver of that. More on the customer end and in those community markets, it seems like activity seems to have increased some despite the sort of the environment. I guess what's sort of triggering that? Is it some of the work you've done in-house? Or is it maybe more on the demand side, anything you're seeing forming, particularly ex the metro markets?

Yes. I think on the community side, the community side is not clicking to where it can be. I think that's still -- when I look at where we can be towards the end of the year, I still see a lot of opportunity in that. And each community, when you really get into it, there's 3 or 4 great companies in all of these communities, and there's business there. And then there's ancillary business that run off of those companies within those communities. So that's really where we have to get to. And what we're seeing, the activity we're seeing is more calling on those identification of those names, which I think in the past, it was such and such a bank has those. So we're not going to call. And I think we're just -- we're changing that sort of mindset in the bank. And so at this point, we're not really getting those deals in yet. I think that is still to come on the community side.

Okay. All right. Brad, to circle back, I appreciate the comments on pretty good optimism on the M&A side despite that the market volatility. I guess trying to dig into the mindset of the -- those sellers or the folks that you're engaged with, is that -- is there some comfort level that despite the volatility, if we're trading stock for stock, we're looking for a partnership. I guess reasons for why maybe some sellers haven't shook loose here and your confidence on still getting deals secured. It would be helpful to just some of the background.

Yes. I think it's still driven by age of ownership and age of management. And so the companies that we've been talking to still have those things at the forefront. I think the time that you really -- if you actually are taking other people's stock, a great time to take it is not at the high end of the market, but when it's got more upside in it. So I think we do have a story to tell there, Jeff. And then there's also some deals that are out there that aren't interested in cash. So I think between the different opportunities and the drivers of those opportunities, I still think there's plenty of room for the rest of this year to get some deals announced..

Okay. And then one, just a housekeeping item. The expected deal accretion on NBC, is there a dollar figure that you've shared or maybe for the full year '25 or the second half of the year? Any milepost on that?

Yes. I'll put the exact numbers, Jeff, but year 2, so 2026 expected, it's about $0.50. It's -- I'm going to say $0.18, but I'll get you a specific number for the back half of 2025.

Our next question comes from Brett Rabatin with Hovde Group.

I wanted to start off on deposits and just what you're seeing in your markets and any thoughts on the cost of funds from here and your ability to lower your deposit costs. You obviously are somewhat below a lot of peers, partially given the markets, but just was hoping for some color on what you're seeing competitive-wise in your key markets

Yes, I definitely think it's -- obviously, the upward trend has abated. And I think it's given us -- we've had a little bit of ability to move those down. We're seeing a little bit more rational competition in that. That said, I don't really have a great answer for you as far as what we're going to do going forward, I think we're going to mirror moves that the Fed makes. So we've been pretty good. And you saw that in the second half of last year, where when there was a move, we were all over it and getting every day's worth of that. So we're still hand fighting on individual deals. We make exceptions where we need to make exceptions to keep relationships, but we're just really continuing to be very thoughtful in trying to keep those down. So I mean, Chris, has got a different idea on kind of where we're projecting that out. But I think we're just going to continue to, I'll say, ride the wave a little bit and try to be right at the forefront of that wave

Agree.

Okay. Great. And then just wanted to follow up on the NBC deal and just kind of see as you guys have dug in more on that transaction pre-closing, anything that comes to mind in terms of product sets or things that you think you can roll out on their platform that could be additive relative to what you announced?

I don't know from a product perspective, we really like the team, though. I mean when you get into these markets, they're doing a lot of stuff that I think we want to see regularly happen in our markets. They're really, really ingrained with their communities, really understand the players in that market as we've gotten out into that. And Greg Kossover spending every day out there in the markets, and then we've been down there as well with the team. It's a really good team with good experience and really good relationships. So I look at it and think a lot of our product capabilities, a lot of our digital products that we have, it's going to bode really well as we bring those online.

Yes. And I would say that they've got a great treasury sales team, but I think their treasury team is excited about the platform that we have with Q2. And I think that's going to be an enhancement to their customer base and their customer experience as well. But they do a great job with the relationships that they have with their customers. And I think everything we have is going to be additive. On the retail side, I think we're going to be able to add some marketing. And so our retail strategy, I think, will fit in really well with them. They're a great organization, which is what we were attracted to. So their product set is actually really good already.

Okay. And then maybe just one last one. Assuming the Fed does cut 2 or 3 times this year, would that boost the margin expectations you guys have towards the higher end of the range for guidance?

Brett. No, I don't think. So to me, we still continue to screen, especially as we move closer to what we'll call the liability floor as a fairly neutral organization. So I would say that as the Fed continues to move down to the extent it's 1, 2, 3 kind of cuts in a rational fashion, we'll continue to realize sustaining the margin position kind of as depicted in the outlook.

Our next question comes from Andrew Liesch with Piper Sandler.

Just on the full year loan guidance, I'm hearing some good optimism and we saw some good results here in the first quarter, but no change to the full year. I'm just curious why loan growth shouldn't be stronger than what you're already guiding for.

Yes. The full year outlook in there, Andrew, is consistent with where we started the year. Bringing in NBC as we close out Q2, the expectation is that outlook changes meaningfully. So for the purposes of the presentation, Q2 is where we focused our time in terms of production and then retained full year as we look to bring in NBC at the end of Q2.

We'll probably change that guidance as we get a better look at when we close on NBC and what our projection for third quarter looks like and beyond.

Yes, absolutely.

Got it. All right. And then maybe -- is that be similar commentary for the margin guide because 3.95% to 4.05% you're at the high end right now. And it seems like there's some good commentary for the quarter. Obviously, there'll be some shifts once NBC is rolled in there, but the 3.95% to 4.05% range seems a little low.

Yes. Same commentary there, Andrew. It's all -- we retained the full year estimation for the purposes of the full year outlook, which we will all be adjusting as we integrate NBC through the end of the second quarter. So look for new full year estimates as we integrate and understand that ending balance sheet and expected accretion through NBC at the end of Q2.

Got you. Looking forward to that in a few months.

Our next question comes from Damon Delmonte with KBW.

Just to kind of follow up on the margin. So Chris, just to kind of understand here in the second quarter, I think the core in the first quarter was like 4.08%. So you're basically just kind of blocking and tackling and you think you're able to kind of maintain that here in the second quarter. Is that fair?

Yes, that's fair.

Okay. And then could you just repeat what you said, if there are rate cuts later in the year, do you think you're able to defend like kind of a flattish core margin? Or do you expect there to be some modest benefit given a bias towards being liability sensitive?

Yes, it's a good question. I think we can continue to defend. That said, as you think about where we've been through the most recent cuts, we have evidenced a liability sensitivity position to be able to capitalize on that. So I would argue we'll absolutely be positioned to defend, and that's how we're looking to position the balance sheet. But that doesn't mean there isn't some modest upside potential if the rates cut in a kind of moderate fashion.

Okay. Great. And then just lastly, if the tariff activity kind of ramps up and economic uncertainty increases and we start to see a slowdown in growth, do you guys feel you have flexibility on the expense side to kind of act as an offset to some revenue headwinds?

Yes. I'll tell you, we're focused on every line item of our income statement, trying to drive value at the end of the day to shareholders. But we are focused on a number of lines on the expense side and trying to manage to a better efficiency footing through those line items. So yes, Damon, there's opportunity there. How quickly it comes through the income statement, we'll see, but we're absolutely focused on it, and we're looking to create value through it.

[Operator Instructions] We have no further questions. So this concludes our Q&A session as well as the conference call. Thank you, everyone, for joining. You may now disconnect your lines.