Earnings Call Transcript - EQBK Q1 2025

Operator, Operator

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

Brian Katzfey, Director of Corporate Development and Investor Relations

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.

Brad Elliott, Chairman and CEO

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.

Chris Navratil, CFO

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 increased by $1.2 million from Q4 to $39.0 million. 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 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, resulting from increasing loan balances for the quarter and increased uncertainty due to the current economic environment and recent trade policy announcements. We continue to hold reserves for potential economic challenges. To date, we have not seen concerns in our operating markets. The ending coverage of allowance for credit losses to loans is 1.26%. As Brad mentioned, our tangible common equity 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 them into the bank. At the bank level, the tangible common equity ratio closed at 9.87%, benefiting from both earnings and improvement in the unrealized loss position on the securities portfolio. I'll stop here for a moment and let Krzysztof discuss our asset quality for the quarter.

Krzysztof Slupkowski, Chief Credit Officer

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 from 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.

Chris Navratil, CFO

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.

Richard Sems, Bank CEO

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 Elliott, Chairman and CEO

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 in 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 timeline. 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, Operator

Our first question comes from Terry McEvoy with Stephens.

Terence McEvoy, Analyst

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?

Brad Elliott, Chairman and CEO

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 the loan loss reserve this quarter for those types of things, but we're not seeing any indication of slowdown at this point.

Terence McEvoy, Analyst

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?

Richard Sems, Bank CEO

Yes, Terry, you know my background. I'll use a baseball analogy. We're still early in the game, but I think we're moving into the middle innings in terms of getting things done. We experienced a significant amount of outreach in the fourth quarter, which I believe is driving some of this progress. It's really just about maintaining that consistency. Our calling metrics have been good, and it's not just about sales; it's about being present for our customers and providing them solutions. We're identifying problems earlier and addressing them. Regarding our product side, we're still in the early stages. We have opportunities in the TM sector that are beginning to come through this quarter, with some notable TM successes from our Tulsa markets. Interestingly, the markets with the most outreach are starting to see results. Kansas City and Tulsa are generating both loans and entering the C&I business, which contributes to fee income. While we are still early in this process, I do anticipate a bit of a rebound in fee income as we progress into the second half of the year. I hope that provides clarity.

Operator, Operator

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

Jeff Rulis, Analyst

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

Chris Navratil, CFO

No, we're not pursuing loan purchases consistently. That particular deal was a one-time opportunity that made economic sense for us, so we decided to go for it.

Jeff Rulis, Analyst

Got it. Regarding the growth optimism, it sounds promising, and it appears that a lot of the in-house work has contributed to that. On the customer side and in those community markets, activity seems to have increased somewhat despite the challenging environment. What do you think is causing that? Is it related to the efforts you've made in-house, or is it more about increasing demand? Are you noticing anything developing, especially outside the metro markets?

Richard Sems, Bank CEO

I believe there is still significant potential on the community side, which is not yet fully realized. As I look ahead to the end of the year, I see many opportunities available. Within each community, there are several strong companies, and there’s business to be found alongside additional opportunities that stem from those companies. Our focus needs to shift towards identifying these businesses. Previously, there was a hesitation to reach out, thinking certain banks already had those relationships, but we are changing that mentality within the bank. Currently, we haven't secured those deals yet, but I anticipate that they will come in time on the community front.

Jeff Rulis, Analyst

Sure. Brad, to return to your earlier points, I appreciate your positive outlook on mergers and acquisitions despite the current market volatility. I'm curious about the perspective of the sellers or the individuals you are dealing with. Is there a sense of assurance that even with the volatility, a stock-for-stock trade means we're seeking a partnership? I'm interested in understanding why some sellers haven't yet made a move and your continued confidence in securing deals. Any background information you could provide would be useful.

Brad Elliott, Chairman and CEO

Yes, I believe it's still influenced by the age of ownership and management. The companies we are in discussions with are keeping these factors in mind. I think the best time to acquire stock from others is not when the market is at its peak, but when there is potential for more growth. We definitely have a compelling narrative to share. Additionally, there are some opportunities available where sellers are not looking for cash. Considering the various opportunities and their motivations, I remain confident that there are still plenty of prospects for deals to be announced by the end of this year.

Jeff Rulis, Analyst

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?

Chris Navratil, CFO

Yes. I'll provide the exact numbers, Jeff, but for the year 2026, it's expected to be around $0.50. I would say it's approximately $0.18, but I'll get you a specific number for the second half of 2025.

Operator, Operator

Our next question comes from Brett Rabatin with Hovde Group.

Brett Rabatin, Analyst

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.

Richard Sems, Bank CEO

Yes, I believe the upward trend has slowed down. This has allowed us some leeway to reduce those costs. We’re noticing more rational competition in that space. However, I don't have a definitive answer on our future strategy; we plan to align with the moves made by the Federal Reserve. We have been effective in this regard, as demonstrated in the second half of last year, where we responded promptly to changes. We are still negotiating on individual deals and making exceptions when necessary to maintain relationships, but we are focused on keeping costs down. Chris has a different perspective on our projections, but our strategy will be to continue adapting and staying at the forefront of these changes.

Chris Navratil, CFO

Agree.

Brett Rabatin, Analyst

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?

Chris Navratil, CFO

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.

Brad Elliott, Chairman and CEO

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.

Brett Rabatin, Analyst

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?

Chris Navratil, CFO

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.

Operator, Operator

Our next question comes from Andrew Liesch with Piper Sandler.

Andrew Liesch, Analyst

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.

Chris Navratil, CFO

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.

Brad Elliott, Chairman and CEO

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.

Chris Navratil, CFO

Yes, absolutely.

Andrew Liesch, Analyst

Got it. And is that similar commentary for the margin guide? The range of 3.95% to 4.05% currently puts us at the high end, and there seems to be some positive insights for the quarter. Clearly, there will be some changes once NBC is integrated, but the 3.95% to 4.05% range feels slightly low.

Chris Navratil, CFO

Yes, we have maintained our full year estimates for the overall outlook, which we will adjust as we integrate NBC through the end of the second quarter. Therefore, expect to see revised full year estimates as we integrate and assess the balance sheet and anticipated accretion from NBC by the end of Q2.

Andrew Liesch, Analyst

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

Operator, Operator

Our next question comes from Damon Delmonte with KBW.

Damon Del Monte, Analyst

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?

Chris Navratil, CFO

Yes, that's fair.

Damon Del Monte, Analyst

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?

Chris Navratil, CFO

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.

Damon Del Monte, Analyst

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?

Chris Navratil, CFO

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 an 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, Operator

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