Equity Bancshares, Inc. (EQBK) Earnings Call Transcript

Hello, everyone, and welcome to the Equity Bancshares, Inc. 2025 Q2 Earnings Call. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I would now like to hand you over to your host, Brian Katzfey, Vice President, Director of Corporate Development and Investor Relations, to begin. Please go ahead when you are ready.

Good morning. Thank you for joining us today for Equity Bancshares second 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, and thank you for joining Equity Bancshares Earnings Call. Joining me today are Rick Sems, our bank's CEO; Chris Navratil, our CFO; and Krzysztof Slupkowski, our Chief Credit Officer. We are excited to share our company's sustained strong beginning to 2025. In the second quarter, we achieved strong earnings, core margin expansion and successfully closed our merger with NBC Bank on July 2. Limiting time between announcement and closure of our transaction has been a core competency of Equity. Our work to receive all required approvals on this transaction within 60 days of announcement provides confidence to a seller and value to our shareholders. We are proud of our teams for putting us in a position to continue to excel in this space. We couldn't be more excited to welcome the leadership and team members of NBC Bank, H.K. Hatcher, Glenn Floresca, Jeff Greenleigh, Dennis Demer and Scott Bixler. That team, coupled with Ken Fergeson joining our Board, are excellent additions to Equity Bank franchise. I look forward to all they can and will accomplish as we continue to expand our presence in the state of Oklahoma. While executing on our M&A strategy, our team has also remained hyper-focused on serving the communities in which we operate. I'm very proud of all that Rick has accomplished as he and Jonathan Roop have worked to reset and retool our retail staff and philosophy. He has also made a lot of progress with our commercial teams. Originations are growing as our commercial product sales. Loan balances year-to-date are up $100 million, while deposits, excluding seasonal public funds have held their ground. Our teams are motivated and armed with tools to meet the needs of our communities, and we look forward to continued execution on our mission. We closed the quarter with a TCE ratio of 10.63% and a tangible book value per share of $32.17. Compared to second quarter 2024, our TCE ratio is up 41% and our tangible book value per share is up 25%. Providing top-notch products and services through exceptional bankers continues to be our guiding principle as we aim to grow Equity Bank. We started the year with a strong balance sheet, motivated bankers and a solid capital stack to execute on our dual strategy of organic growth and strategic M&A. We have executed through the first half of the year and look forward to maintaining this momentum throughout the year. I'll now hand it over to Chris to walk you through our financial results.

Thank you, Brad. Last night, we reported net income of $15.3 million or $0.86 per diluted share. Adjusting for costs incurred on M&A and the extinguishment of debt, earnings were $16.6 million or $0.94 per diluted share. Net interest income for the period was $49.8 million, up $1.8 million linked quarter when adjusting for $2.3 million in nonaccrual benefits realized in the prior period. Margin for the quarter was 4.17%, an improvement of 10 basis points when compared to core margin of 4.07% linked quarter. We continue to be optimistic about our opportunities to maintain spreads and improve earnings through repositioning of earning assets throughout 2025. More to come on margin dynamics later in this call. Noninterest income for the quarter was $8.6 million, up $500,000 from Q1 when excluding the $2.2 million BOLI benefit realized in that quarter. The increase was driven by improvement in customer service charge line items, including deposit services, treasury, debit and credit card, mortgage and trust and wealth. Noninterest expenses for the quarter were $40 million. Adjusted to exclude loss on debt extinguishment and M&A charges, noninterest expenses were $38.3 million, down modestly in the quarter and in line with outlook. Debt extinguishment charges of $1.4 million were realized during the quarter as the company chose to redeem our outstanding subordinated debt issue following its first capital and interest rate reset period. The plan is to refinance within the month. As we have discussed in past calls, we are in an opportunity-rich environment and maintaining this source of capital provides continued flexibility while resetting allows for capital maintenance and a better coupon. Our GAAP net income included a provision for credit loss of $19,000. The provision is the result of realized charge-offs, partially offset by a moderate decline in ending loan balances. We continue to hold reserves for any economic challenges that could arise. To date, we have not seen concerns in our operating markets that would indicate these challenges are on the horizon. The ending coverage of ACL to loans is 1.26%. As Brad mentioned, our TCE ratio for the quarter remained above 10%, closing at 10.63%. The funds from the capital raise in Q4 continue to be maintained at the holding company with no current intention of pushing into the bank. At the bank level, the TCE ratio closed at 10.11%, 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.

Thanks, Chris. During the quarter, nonaccrual and nonperforming loans moved up as we saw migration of the QSR relationship we have discussed on previous calls. Nonaccrual loans closed the quarter at $42.6 million, up $18.3 million from the previous quarter. The increase is almost entirely driven by that same QSR relationship. The customer has a good path to exiting the underperforming locations over the next several quarters. We remain engaged with the borrower in a collaborative effort to pursue a full resolution through multiple avenues. Until resolution of the challenged stores is realized, classification as a nonaccrual asset is an appropriate step. Total classified assets closed the quarter at $71 million or 11.4% of total bank regulatory capital. Importantly, classified asset levels remain well below our historical averages and continue to be actively monitored and managed. Delinquency in excess of 30 days moved down during the quarter to $16.8 million. Net charge-offs annualized were 6 basis points for the quarter, while year-to-date charge-offs annualized were 4 basis points. Recognized charge-offs continue to reflect specific circumstances on individual credits and do not signal systemic issues within our markets. Looking ahead, we remain positive on the credit environment and the outlook for the remainder of 2025. Despite some uncertainty in the broader economy, credit quality trends across our portfolio remain stable and below historic levels. Our disciplined underwriting, strong capital and reserve levels position us well to navigate any potential headwinds. We believe this proactive and measured approach will support continued sound credit performance while allowing us to respond quickly if conditions change. Chris?

Thanks, Krzysztof. As I previously mentioned, margin adjusted for onetime items in Q1 improved 10 basis points in the quarter. The improvement during the period was driven by remixing of balance sheet as loans comprised 76% of average earning assets as compared to 75% in the previous quarter. Yield expansion on the loan portfolio driven by increasing coupon results and a reduction in both the level and cost of interest-bearing liabilities. Average loans increased during the quarter at an annualized rate of 6.2%, while average interest-earning assets increased 1.7%, the increase in margin and earning assets, coupled with an additional day in the period led to core net interest income growth of $1.8 million. As we look to the remainder of the year, we are optimistic about margin maintenance on the legacy portfolios as we see loan balance growth and continued lag repricing on our asset portfolios. In addition to our legacy portfolio, following the July 2 closing of NBC, we will begin to realize the benefits of that transaction. While we are continuing to work through fair valuation estimates, we expect to realize margin improvement from the addition of the underlying assets and liabilities. Refer to our outlook slide for additional detail on second half earnings expectations, reflecting current estimates of the impact of NBC. As a reminder, 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 have had an excellent start to the year as we realized loan growth of more than $100 million through the first 2 quarters while also maintaining deposit balance exclusive of anticipated municipality outflows. As we look to layer in the NBC footprint and their exceptional leadership team, I'm excited to see what the equity team can accomplish in the second half of 2025. Production in the quarter totaled $197 million, in line with prior period organic production and twice as much as Q2 2024. Rates on new production were 7.17% compared to 6.73% in Q1, continuing to provide accretive value compared to current yields. While originations kept pace, decreasing line utilization and increasing level of payoffs during the period resulted in a decline in ending balance sheet as compared to prior quarter end. Higher payoffs resulted during the period were related to positive outcomes for borrowers, asset sales or upstream takeouts. We anticipate additional opportunities to bank these borrowers in the future. As we closed the quarter, our 75% pipeline is $481 million, up $119 million or 33% from quarter 1. The team continues to focus on growing relationships, deepening wallet share and pricing for the value provided, which will benefit Equity Bank in the future. Our retail teams entered the year with aligned direction and a framework designed to drive success throughout our footprint. The first half of the year showed positive trends in gross and net production levels, including net positive DDA account production, though we have a long way to go to meet the aggressive goals we have set. I look forward to assisting this group and realizing success throughout 2025 and beyond. Deposit balance, excluding brokered funds, declined $43 million. Lost balances were primarily in commercial accounts due to normal outflow activities. The accounts remain open and active. With the closing of NBC, Equity adds Oklahoma City, a growing metro market with opportunities to leverage a larger balance sheet and franchise, while the many Oklahoma communities added continue to align with the Equity Bank mission. With a great crossover and H.K. Hatcher and all of our market leaders driving our franchise forward, we can accomplish a lot. Brad?

It is a very exciting time for everyone associated with Equity. Our employee base has opportunities to grow and learn. Our Board is incredibly engaged and focused on what creates long-term shareholder value. The communities we serve to continue to get the scale of a larger company with a small town feel and our shareholders benefit by continued EPS growth, market and deposit base expansion, all leading to compounding tangible book value. We're in a great position in our markets with our organic sales team. Our management team is ready for the challenge and relishes the opportunity ahead of us. Our Board has done a great job navigating a strategic path that allows us to grow both organically and through M&A. M&A conversations continue at a very high rate. Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling dilution and the earn-back time line. I look forward to the rest of the year and beyond. Thank you for joining our call today, and we're now happy to take any questions you might have.

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

Maybe start with a question for Chris. Could you just -- Chris, could you talk about plans for the NBC Bank bond -- the bond portfolio at NBC Bank and just overall thoughts on managing the securities portfolio in the second half of the year?

Yes. Good question, Terry. Under the -- so under the terms of the NBC agreement, the NBC management team actually affected sale of their bond portfolio prior to our acquisition of the bank. So coming over to our balance sheet, effectively, those have been monetized into cash balances, and there's a very small level of securities being brought over that have just been retained for the purposes of managing pledging positions. So that cash will come into our environment with the opportunity to deploy both for securities portfolio needs as well as funding loan growth and funding other alternatives on the balance sheet. So no specific actions needing to be taken by us at this point as it relates to their bond portfolio just based on what's actually coming over to us. In terms of managing the rest of the way, the bond portfolio for us is a mechanism by which to deploy cash with an improved return potentially. But really, the balances fluctuate dependent on need on both liquidity and pledging as well as cash balances relative to deposits. So we saw in the quarter some average balance decline. We had some purchases into the end of the quarter, which is going to grow that balance for average balance purchases going in as we begin Q3. But that it's a balancing function in that securities portfolio where we're maintaining to kind of best leverage our cash position while also having the liquidity and the pledging required for municipality deposits.

We constantly are looking, Terry, is there an opportunistic time to rebalance that portfolio also. So if there's a thought process that we come up with to do a structured trade or rebalance that portfolio, we'll move forward with that as well.

And a question for Krzysztof. Are you seeing any stress within that QSR portfolio outside of the one relationship that we've talked about for the past couple of quarters?

Yes. So... And I've discussed this on previous calls, we do have -- we do see softer operating numbers from -- in that sector from our other borrowers. When it comes to classified numbers, we have one small relationship in that space outside of this large one that we -- that I mentioned. But outside of that, we have a lot of granularity in this portfolio. We have diversification between the different QSR concepts, different brands. We have diversification when it comes to geography and borrowers. So there's a lot of granularity over there. And this is definitely the one we just downgraded is definitely the largest concern.

And maybe just one last quick one back to Chris. That step down in the fourth quarter as it relates to noninterest expenses relative to the third quarter, is that all cost savings from the deal? Or is there anything else baked into that decline in 4Q?

Yes, it's predominantly the impact of NBC. I think we always have a little bit of a downward trend through the year in terms of NIE, primarily in the salaries and employee benefit line items, but most of that reduction is the NBC savings.

And the next question comes from Jeff Rulis with D.A. Davidson.

Maybe a couple of questions on the larger QSR credit. The first is what triggered the move to nonaccrual? Is it just sort of a time, I suppose, is sort of the first part. And then second piece is, Krzysztof, you mentioned the expectation for a path of exiting some of the better locations. And I guess if there's properties that are sold, would you anticipate that, that can, I guess, reduce the nonaccrual amount before you kind of fully resolve the whole relationship? In other words, can we see that balance trickle down as you have progress in some of those other locations?

Yes. So your first question on the nonaccrual treatment, we just got to a point of time where it was appropriate set from an accounting standpoint, the loans were past due from a payment perspective. When it comes to exiting the stores, I talked about exiting the unprofitable stores. They have a market that is unprofitable for them. All of the stores in the market are underperforming, dragging their cash flow down. So we're working on a -- or we have a plan in place that they're executing or we're going to execute to exit these stores. And then the rest of the locations are performing very well. They're able to carry the debt level that we have. So we're not exactly sure how long this process is going to take. We think it's going to be the next several quarters, at least 3 quarters to execute on this plan and then stabilize cash flow. So the hope is that once that's executed and we're in the -- in a better cash flow situation later next year, we could potentially talk about upgrading this to accrual status.