Equity Bancshares Inc (EQBK) 2025 Q2 法說會逐字稿

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're 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 Laskowski, 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. [Limited 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 announcements 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: HK Hatcher, Glenn Floresca, Jeff Greenlee, Dennis Themer, 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 helped 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 non-accrual 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.

Non-interest 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 well. Non-interest expenses for the quarter were $40 million. Adjusted to exclude loss on debt extinguishment and M&A charges, non-interest 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 alone 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 continued to be maintained at the holding company with no current intention of pushing into the bank. At the bank level, the TCE ratio rose 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 Chris talk through our asset quality for the quarter.

Thanks, Chris. During the quarter, non-accrual and non-performing loans moved up as we saw migration of the QSR relationship we have discussed on previous calls. Non-accrual 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 outages. Until the resolution of the challenged stores is realized, classification as a non-accrual 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 remained 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 remained 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 a remixing of balance sheet and loans comprised 76% of average earning assets as compared to 75% in the previous quarter. Yield expansion on the loan portfolio, driven by increase in 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 portfolio as we see loan balance growth and continued lag repricing on our asset portfolio.

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 two 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 one. 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 said, I look forward to assisting this group and realizing success throughout 2025 and beyond.

Deposit balance, excluding brokered funds, declined $43 million. Loss balances were primarily in commercial accounts due to normal outflow activities. The accounts remain open and active. With the closing of NBC, Equity adds to 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 great [cross over] and HK Hatcher and all of our market leaders driving our franchise Board, 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 continue to get the scale of a larger company with a small-town field, 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 continued at a very high rate. Equity will remain disciplined in our approach to assessing these opportunities, emphasizing value while controlling dilution in the earn-back timeline.

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) Terry McEvoy, Stephens.

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

Yeah. Good question, Terry. In 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 of 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 needed 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 purposes 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.

Yeah, we constantly are looking, Terry. It's our opportunistic time to rebalance that portfolio also. So if there is a thought process that we come up with to do a structured [treasure] to 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?

Yeah. And I've discussed this on previous calls, we do see softer operating numbers in that sector from our other borrowers. When it comes to classified numbers that we have, we have one small relationship in that space outside of this large one that I mentioned.

But outside of that, we have a lot of granularity in this portfolio. We have diversification between the different QSR concepts and 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.

Thank you for that. And maybe just one last quick one back to Chris. That step down in the fourth quarter as it relates to non-interest 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?

Yeah, 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.

Jeff Rulis, D.A. Davidson.

Maybe a couple of questions on the larger QSR credit. The first is, what triggered the move to non-accrual? Is it just sort of time, I suppose, 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 non-accrual 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? Thanks.

Yeah. So your first question on the non-accrual treatment, we just got to a point of time where it was appropriate that, 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 markets 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 three quarters to execute on this plan and then stabilize cash flow. So the hope is that once that's executed and we're in a better cash flow situation later in next year, we could potentially talk about upgrading this to accrual status.

Okay. I appreciate it. And Brad, it sounds fairly positive on the M&A front. Interested in the sellers, the conversation there as they view seeing regulatory approval for deals accelerating, is that changing the tone or bringing more folks to the table? Or has it just been a pretty steady state of the folks that you talk to in terms of partnerships? Wondering if that reg approval speed is changing the tone with sellers at all.

Yeah. Let me finish on the QSR restaurant. There are several paths to resolution there. One is that they closed down the eight restaurants that are underperforming. And then the other restaurants are currently cash flowing positive today. So they actually, actually have a really good business of their other 33 stores. And so if they can't execute on getting things done fast enough, we're going to ask them to sell the whole package and force them into that process. So there's several avenues to liquidation here from our standpoint.

On the M&A front, I don't think it's driven by regulatory. I think it's driven by -- we're on the tail end of a four-year or five-year period where you couldn't sell your financial institution because, four years ago, you were in COVID. Two years ago, we had a really low interest rate environment, which has taken some time for people to realize what their new tangible book value really is. And so now that we have kind of passed those two windows, I think the age of ownership and age of management is driving those decisions.

And so ownership teams have windows on when they want to have liquidity. A lot of them are past that window from two to five years. And so that's really what's driving this or the management team is three to five years older than they wanted to be when they had talk to their owners about selling the institution. And so it's really age of ownership and age of management that's driving every conversation that we have, and that hasn't changed, and I don't think it will change. I think there's -- the reason why there's so much activity is I think there's been so much put off of timing from the past several years.

(Operator Instructions) Damon DelMonte, Keefe, Bruyette, & Woods.

First one, maybe for Rick on the outlook here in the second half of the year for loan growth. It seems like clearly explained what led to the end-of-period decline this quarter. Could you just talk a little bit about kind of the optimism here in the back half of the year and kind of what's driving that both from a geographic standpoint and asset class?

Sure. Yeah, we're definitely seeing continued pipelines building. I mean, our pipelines are at the highest levels they've been at. So that's a lot of where the optimism comes. We're seeing more activity in the C&I side as well and our [treasury] side remained strong as well.

So we've got a lot of deals coming in, and you get these waves of payoffs. And the reality is we -- you get typically one quarter a year, you get a lot of -- it seems like you get a lot of payoffs.

And so reality is in the last year, trailing four quarters, we've had two months with large [PAT]. So I think there's some aspects of that slowing down as well with the production engine that we have. And the last four quarters of production has been really good. And so if we just continue on that path, with a little bit less pass, you're going to see that growth. So that's really why we have the optimism for the second half of the year.

Got it. And the lower line utilization this quarter, was that something that was kind of seasonally driven? Or is that maybe a shift in your customer operating approach?

No. I think there's a couple of -- there's actually a couple of specific things with a large -- it's actually a situation where a couple of our wealthy customers have some lines, they receive some money and headlines and paid them down. It's sort of a unique situation that happened. Those lines remain in place.

We expect those to probably be drawn on again as we get later in the year as well. So that had a sort of a disproportionate amount. I think also some of it is in some of the ag lines as well as those come back. So again, we're optimistic that this was just sort of a onetime, let's say.

It actually affected our deposit balances and our load balances because we're carrying them in different entities on the deposit side, then distributed those funds to several principles, and then those principles paid down their line with credit. So we got hit twice from the same customer base, but that's actually a positive result from the standpoint customers doing extremely well, and they'll draw those lines back up again.

Got it. Appreciate that color. And then just lastly, Chris, on the margin outlook, I think you mentioned that there's some repricing that's going to be occurring over the next few months for loans. Do you have some numbers around kind of what you expect in total loans to be repricing in the back half of the year?

Yeah. We continue to have kind of like repricing in there, Damon, really on both sides. There's some up. There's some down. I would look at our core margin as kind of maintaining right where we realized it this quarter. So that lag reprice had the effect of maintaining around that [4.17] point as you consider both the liabilities and the loans.

And then as we look forward into 2026, there continues to be some runway there of additional repricing, again, on both sides of the balance sheet, some time structured deposits and some longer-dated loans that we'll continue to see move up.

(Operator Instructions) Brett Rabatin, Hovde Group.

I wanted to just start on Wichita. And just with the environment of more defense spending and Wichita having a bit of an aviation and military backdrop. Just wanted to hear what was going on in Wichita. And then I know you guys have gotten away from aircraft lending and that kind of thing. But just wanted to see if that might be an opportunity for you and get -- maybe get a little bit more color on how Wichita is doing with the sub trend?

Yeah. So if you look at our portfolio, it's less than 10% of our company now is based in Wichita, so it's not a big factor for us on an overall basis, macro basis. But on a micro basis, we have less than $5 million, I think, outstanding to suppliers in the aircraft industry from a direct exposure, that's down from $100-plus million five years ago.

So we really -- we're not in that space any longer. It's not affecting our community what's going on with Boeing in particular, very much because Cessna, Beechcraft, and Learjet are doing so well that there's so much demand for the jobs. And Spirit isn't laying people off. Spirit Boeing are not laying people off yet and having the many announcements that they're going to.

So there's still a lot of demand for jobs here and the workforce is very intact. Their biggest issue in that workforce is I think Cessna has somewhere between 500 and 750 retirees annually out of their workforce. So making sure that they can replace them with skilled workers is important. And I'm sure all the manufacturers are the same way. So the demand for talent here is still very, very high, and we're not seeing any effects of the Boeing Spirit relationship on the marketplace yet today.

I can look out my window and I can see 190 fuselages on the ground out there for Spirit on delivery, so.

Okay. And then just a question for Chris back on the margin. It would seem like you're implying that you can't get much more out of the deposit betas or good deposit costs lower from here absent Fed cuts. Any thoughts on how you're modeling that and just what you guys think deposit growth takes at this point?

Yeah. So a couple of things on that. In terms of the actual deposit betas as it applies to our phase today, so call it a no growth-phase position, there's a little bit of potential continued repricing as we have some time deposit maturities. But as you saw over the past few quarters, as rates started to come down, we, like the industry, took -- we're strategic in how we move forward quickly.

And we're able to get those costs out relatively quickly to [tell] the opportunity set for (technical difficulty) went down. That said, we continue to have some that are, what I call, at market today. I think, depending on how competition behaves, there's always going to be a little bit of continued opportunity there. Now the offset to that is if competition stays irrational or moves to a more (inaudible) is they could go the other direction on it. So I think that's the risk.

What I'd tell you is new deposits today, to the extent they're interest-bearing, the market is competitive out there. So seeing numbers that are meaningfully accretive to where our current cost of deposit is on an interest-bearing basis is a challenge right now on a relative to cost of fund basis, so there's still some value there. But where we can pursue commercial relationships, we grow the loan balances and with them drive commercial deposit relationships and where John Roop and Rick Sems can find success in driving consumer relationships and DDA accounts, all those incrementally create value.

So as we see traction there, there's opportunity for us. But on a, call it, static basis, Brett, the majority of those costs have come out at this point.

Okay. And then maybe just one last one for me. Brad, I think you're still optimistic about M&A and the possibilities. Is the size range for you guys from a target perspective increasing? Or any color on how you're thinking about the typical target from here?

Yeah. The opportunities have been increasing on size for us. But I think their size range, the set that we have is $1.5 billion and below. And so I think you could think we're going to spend our energy on $250 million institutions to $1.5 billion, and kind of anything in between there that fits our geographic footprint is kind of what we're focused on.

(Operator Instructions) And as we currently have no further questions in the queue, this concludes today's Equity Bancshares earnings call. Thank you, everyone, for joining. You may now disconnect. Please have a great rest of your day.