Equity Bancshares, Inc. (NASDAQ:EQBK) Q4 2024 Earnings Call Transcript

Equity Bancshares, Inc. (NASDAQ:EQBK) Q4 2024 Earnings Call Transcript January 23, 2025

Operator: Hello, everyone, and welcome to Equity Bancshares’ Fourth Quarter 2024 Earnings Call. After the prepared remarks, there will be an opportunity to ask question. [Operator Instructions] I’ll now hand you over to Brian Katzfey to begin. Please go ahead.

Brian Katzfey: Good morning. Thank you for joining us today for Equity Bancshares’ fourth 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 risks 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: Good morning. Thank you for joining Equity Bancshares’ earnings call. Joining me today is Rick Sems, our bank’s CEO; Chris Navratil, our CFO; and Krzysztof Slupkowski, our Chief Credit Officer. We’re pleased to take you through our fourth quarter results including net interest margin expansion, strong earnings, and a successful capital raise of common stock. The close of the quarter ends an exceptional year for our company. We closed the year with record earnings per share of $4.04, franchise growth via completion of two M&A transactions, tangible book value per share growth of $4.70 or 18.5%, and a continued execution of our mission to be the premier community bank in our footprint. In 2024, Rick and his team reset our organic growth engine through a realignment of incentives, emphasis on process and efficiency, and identification of potential expansion areas within our footprint.

I look forward to the success from all of this effort in 2025 and beyond. Julie Huber and her team successfully completed two whole bank acquisitions, which were each announced and closed within 75 days. As you know all acquisitions require a significant effort in completing these within those timelines is an achievement that highlights our core competency of our organization. Brett Reber and the credit team successfully oversaw the resolution of multiple legacy credits benefiting the bottom-line by more than $10 million. Our entire team operated in a historically challenging interest rate environment, emphasizing value with our customers and potential partners, which allows for margin expansion, balance sheet growth, and excellent balance sheet positioning.

During the fourth quarter, we saw an opportunity to bring in offensive capital in the form of common equity. Thanks to investors that believe in our story and mission, we were able to bring in $87 million, which will be used for the funding of M&A growth and other organic growth. The market continues to be active and we continue to engage in more meaningful conversations that I’ve had at any point in my banking career. I couldn’t be more excited about what is ahead for our company. We entered the year with a strong balance sheet, motivated bankers, and a strong capital stack to execute on our dual-pronged strategy of organic growth and strategic M&A. I’d like Chris walk us through our financial results.

Chris Navratil: Thank you, Brad. Last night we reported net income of $17 million or $1.04 per diluted share. Net interest income improved from $46 million to $49.5 million in the quarter, driving net interest margin to 4.17% from 3.87% linked quarter. While there were tailwinds for the quarter pushing up margin, we continue to be optimistic about our opportunities to maintain spread and improve earnings through the repositioning of earning assets into 2025. More to come on margin dynamics later in this call. Non-interest income came in in line with our outlook for the quarter. Excluding the gain on acquisition from prior quarter results, non-interest income improved $331,000 during the period. Non-interest expenses, adjusted for one-time M&A charges and the benefit associated with disposition of credit in the prior quarter, we expect to be flat linked quarter at $37.7 million, modestly above our outlook.

Our GAAP net income included a provision for credit loss of $98,000 reflecting charge-offs for the quarter offset by declining loan balances. We continue to hold reserve for potential economic challenges. However to-date, we have not seen specific concerns in our operating markets. The ending coverage of ACL to loans is 1.24%. Capital during the quarter increased $88.9 million to $593 million, while our tangible equity ratio improved to 9.95%. As Brad mentioned, the funds from the capital raised in Q4 are being maintained at the holding company with no current intentions of pushing into the bank. Capital at the bank was up $4 million in the quarter with a tangible common equity ratio closing at 9.60%. I’ll stop here for a moment and let Krzysztof talk through our asset quality for the quarter.

Krzysztof Slupkowski: Thanks, Chris. During the quarter non-accrual loans decreased by 13.5% to $27 million to close the year, while nonperforming assets increased $2.3 million. The increase in problem assets is the result of the Main Street lending loan which is reflected in repossessed assets and its rough balance netting out the participated percentage would result in a decline in non-performing assets of $1.4 million during the quarter. Total classified loans increased to $73.5 million or 12.1% of total bank regulatory capital. The increase in classified assets 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 the borrowers’ operating results.

Delinquency in excess of 30 days remained relatively flat both year-over-year and quarter-over-quarter as a percentage of the portfolio. Net charge-offs annualized were four basis points for the quarter while full year net charge-offs were 11 basis points as a percentage of average loans. 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 though trending up during the quarter. We continue to leverage our portfolio monitoring tools to identify potential risk and remain prudent in our credit underwriting, while maintaining healthy levels of capital and reserves to face any future economic challenges.

Chris?

Chris Navratil: Thanks, Krzysztof. During the final four months of the year the FOMC reduced their target rate 100 basis points the impact of which was predominantly realized in the fourth quarter. Following the reductions cost of funds declined to 25 basis points at outpaced decline in coupon yield on interest-earning assets of 13 basis points driving 12 basis points of margin improvement in the quarter. In addition to realized liability sensitivity following the cuts we also realized onetime non-accrual benefits and expansion of loan fees due to early payoffs totaling $1.5 million which added 11 basis points to the current quarter’s margin. Normalized for these items margin would have been 4.06%. Average loans increased during the quarter at an annualized rate of 5.7% reflecting the strong production to close quarter three.

Loan originations in the fourth quarter totaled $120 million with a weighted average coupon of 7.36%. Loan originations normalized in the quarter while payoffs accelerated. As we look to 2025, we expect to see both average and period-over-period balance growth as Rick will discuss in greater detail. Average loan growth was offset by declines in cash and investments as balances and cash flows were used to redeem debt and maturing broker deposits during the period. The increase in margins partially offset by a declining earning asset base led to net interest income growth of $3.4 million or 7.4% during the quarter. As we look to 2025, we are optimistic about margin maintenance as we see loan balance growth and continued lag repricing on our asset portfolio.

Our outlook slide includes the forecast for the first quarter as well as full year 2025. As indicated, we anticipate margin between 3.95% and 4.05% in the first quarter on average earning assets between $4.75 billion and $4.85 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 approximately 12 basis points to average loans. Rick?

Rick Sems: We closed the year with a loan portfolio of $3.5 billion at a deposit portfolio of $4.4 billion each up 5% year-over-year. Our teams have been working hard to grow and maintain relationships that are core to our organization’s purpose, while adding new markets and producers through strategic M&A allowing for continued execution of our mission to return value to our shareholders. In a year, that included 100 basis points of market reference rate change, the discipline of our bankers has led to no decline in coupon interest rates within our loan portfolio. Our team remains focused on realizing value and managing the challenging rate environment, which has led to passing on opportunities that didn’t align with our requirements.

Remaining disciplined provides both balance sheet flexibility as well as an opportunity for greater returns over time. During the fourth quarter, we realized a trend reversal in loan production as significant pay-offs outpaced an average production period. We realized $125 million in pay-downs in excess of our average quarterly run rate, primarily driven by credit and rate decisions for our borrowers. These lost balances are generally not relationships that are lost, and we anticipate opportunities to provide financing to these clients on their future ventures. As we look to 2025, we anticipate a return to growth and are optimistic our organic engine can add mid to high single-digit expansion during the year. As a jump start to that goal, I am excited to announce the return of a familiar face to Equity Bank.

Greg Kossover will rejoin the executive team beginning in Q1 in a role overseeing our capital market strategy focused on both sourcing and distributing large credits amongst our preferred banking partners. From his office in Tulsa, he will also be integral to our continued expansionary goals within the Oklahoma market either via M&A, or entry through loan production facilities. Greg has been a significant part of the Equity Bank story both through his previous role on the management team, and his service as a Director. We are happy to welcome him back. Deposit balances excluding broker funding increased by $200 million as we realized the benefit of seasonal inflows from our municipality customers. While we will see fund outflow during the first quarter as these customers deploy their seasonal funding under Jonathan Roop’s leadership our retail teams are preparing to deepen relationships and drive household expansion through 2025.

In addition to our retail focus, we continue to emphasize full-service relationships with our commercial customers, which we anticipate fueling growth. There is a meaningful opportunity to both maintain and grow our loan and deposit base in our current markets allowing for further balance sheet and earnings growth in 2025 and beyond. We have rolled out a comprehensive sales training program, fostered organizational buy-in and aligned incentives with expanding our customer base and driving franchise value. Coupled with our capacity to facilitate strategic M&A, I am excited about our position to operate over the coming quarters.

Brad Elliott: Our company is exceedingly well capitalized. Asset quality remains strong. Our balance sheet structure is solid and our team is experienced and we have a granular deposit base. We see momentum in the M&A front, as opportunities and conversations continue at an extraordinary pace. Equity will remain disciplined in our approach of accessing these opportunities, emphasizing value while controlling dilution and earn-back time line as always. Thank you for joining the call. We are happy to take questions at this time.

Operator: [Operator Instructions] Our first question today comes from Ryan Payne with D.A. Davidson. Please go ahead. Your line is open.

Q&A Session

Ryan Payne: Good morning. This is Ryan Payne on for Jeff Rulis. Looking at the margin going forward is the preference going to be for more or less rate cuts or any changes in rate sensitivity there?

Chris Navratil: No changes in terms of sensitivity as you compare back to kind of recent performance. I think, what you’ve realized through the most recent cuts is liability sensitivity on the front end, but I think we continue to be positioned in a status that we consider neutral regardless of kind of up or down world. We think we’re positioned to be okay in either.

Ryan Payne: Got it. Okay. And then on the credit front, do you have the total percent of loans to quick service restaurants?

Krzysztof Slupkowski: Yes. So our QSR market is less than 3% of our loan portfolio. The thing to kind of point out is that it’s fairly granular. We don’t hold large positions to a single borrower that classified credit was actually our largest position we have in the bucket. So there’s granularity between borrowers and diversification between brands. So we’re not concentrated in any brand.

Brad Elliott : And the classification is —

Ryan Payne: Got it. Okay. Thank you.

Brad Elliott : Yes. From what we have on that credit, the classification is proper, although, they have a really good plan to be able to move that credit back into non-substandard category by divesting of a few of the restaurants that are dragging the cash flow down on that. So there’s actually — this operator actually has a pretty good path to actually putting themselves back on track.

Ryan Payne: Got it. Thank you. I’ll step back.

Operator: The next question comes from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy : Hi. Thanks. Good morning, everyone. Maybe start question for Chris. Could you just discuss what was behind the change in the 2025 expense and fee income outlook relative to the initial outlook that you talked about in October?

Chris Navratil : Yes. From a fee income perspective, we’ve seen some expansion in costs through data processing and people initiatives to where that’s being reflected in the current outlook, I think there’s an opportunity there to continue to drive down certain costs of our footprint that we’re focused on. But generally speaking, we’re continuing to see that kind of inflationary aspect of certain aspects of the expense line item, that’s what’s driving up that particular number. On the fee income side, we continue to think it’s an $8 million to $9 million a quarter run rate today based on our relative position, which is where that full year number is coming from. Opportunity there is, as Rick has alluded to, in terms of treasury, trust and wealth management continue to see more accretion from those particular lines of business into that line where the high end is attainable, but that’s just the general run rate on where we are today, Terry.

Terry McEvoy : Appreciate that. Thanks. And then as a follow-up, Brad, just I think we all know a lot of optimism that bank M&A is going to heat up here in 2025. Could you just expand on kind of where you are with your discussions, number of parties? And ultimately how, when and where do you see equity participating in this upcoming M&A wave?

Brad Elliott : Yes. I think we’re positioned well, first of all, and I don’t want to go into tons of details on the specific transactions, but we’ve got between six and eight conversations we have going on. Several of them are in the modeling stage of trying to evaluate what’s the best structure and pricing for those transactions. So I mean, we’re down the path on several of these opportunities. So I think that 2025 is going to be a very busy year for M&A in our region at least and I don’t think we’ve hit the peak process of that. I think the peak process of that aspect is after everybody gets their year-end numbers done, and you can kind of finalize what those run rates are, and what the budgets for next year are, so that you can do the exact modeling to get to a good pricing on the transaction.

So we’re very bullish on what 2025 will look like. From an M&A standpoint, we’re actually very bullish from what 2025 will look like from an organic standpoint as well. So, I think the M&A front is we’ve got a lot of upside as we go through this cycle.

Terry McEvoy : Appreciate all the color. Thank you.

Operator: Thank you. Our next question in the queue comes from Andrew Liesch with Piper Sandler. Your line is open.

Andrew Liesch : Good morning, guys. I just want to follow-up on the margin guide. It just seems like with the benefits on the funding costs you had this quarter, and then the full quarter benefit of the last two rate cuts that bias could even be above this range. Is there some conservatism baked in there or what might be a headwind to the margin?

Chris Navratil : Yeah. So there’s always, Andrew, a couple of things in our margin that are a bit unique in terms of purchase accounting and fee recognition. So I think there’s always a little bit of volatility there, and I have a — I tend to go conservative in terms of forward estimate based on those moving pieces. I do think there’s opportunity on margin, as you mentioned in the comments, there’s going to be some lag repricing down in the asset portfolio based on the changes that the FOMC has made, but we also have continuing opportunity to reprice up based on changes that have not yet been realized, right, over the last rate rise cycle as certain assets that are reaching maturities are going to reprice into what is now a higher interest rate environment.

And then as we’ve talked about previously, continuing opportunity to reposition cash flows out of securities and cash balances and into customer relationships and loans create a tailwind opportunity for us in terms of driving additive margin and NII. So I think the opportunity is there in terms of forward outlook based on where we stand today, a little bit of conservatism. But yeah, generally speaking, the reason for that is more just the periodic potential variability that we’ve realized historically.

Andrew Liesch: Got it. Makes sense. And then the capital market strategy that Greg is going to be overseeing I guess how large are you guys willing to go on these loans? And what percentage of the — would you be looking to retain versus the partner out? And I’m assuming you’re going to be the lead bank on these. Is that right?

Chris Navratil: Yeah. Most of these would be the lead bank. I mean these are just situations where with our existing client base and as we go into other client base, we’re not looking to do $200 million, $300 million deals here. These are really for our core customers so that we can grow with them, that we can position if they have multiple deals that we can position different pieces with other banks that we consider core partners. So I don’t think you take this and think we’re going to start — you’re competing in a totally different class here. We’ll, of course, continue to keep a good portion of this going forward.

Brad Elliott: We have about $600 million…

Andrew Liesch: Got it. Very helpful.

Brad Elliott: Andrew, we have about $500 million to $600 million of participated loans sold today. So it’s a pretty big job from a standpoint of what we have to continue to place because we keep our internal limit between $15 million and $25 million depending on risk rating. So if we do a project with somebody that’s $40 million, we’ve got to find a home for that other $15 million. And so we’ve always built the organization this way that we don’t want to not do business with those relationships, but we also aren’t — we haven’t moved up our internal hold limit in several years because we just feel like it’s better to keep it kind of where it is and keep a granular relationship with us. So there’s a lot to manage on the …

Andrew Liesch: Got it.

Brad Elliott: …opportunities that we currently already have on the books today.

Andrew Liesch: Yeah. Yeah. it sounds very good. Great. Thanks for taking my questions here. I’ll get back.

Operator: We have a question from Damon DelMonte with KBW. Your line is open.

Damon DelMonte: Hey. Good morning guys. Thanks for taking my question, just wanted to circle back on the margin. Chris do you have a spot margin for the month of December?

Chris Navratil: Yeah. So we closed December on an adjusted basis when you take out the non-accrual and other items at 4.06%.

Damon DelMonte: Perfect. Okay. And then, could you just kind of walk through some of the commentary you gave to Andrew on — the range is 3.95% to 4.05% and you’re kind of at the top end of that range already. So is the — would there maybe be some near-term margin pressure because of the shift in loan balances this quarter? And then, as you start to grow positive and start growing balances you’ll kind of recapture some of the maybe near-term compression. Is that how we should think about margin?

Chris Navratil: Yeah. That’s how I’m thinking about the risk to margin Damon, as we look into the first quarter a couple of dynamics, right? So as you think through the points that Rick had in terms of some of the payoffs and paydowns we realized in the fourth quarter. Part of that was seeing some interest rates out there that were somewhat anticompetitive relative to what we’re willing to do. So there is that now market sentiment a little bit that has me hedging a little bit towards conservatism as it relates to the margin. And then there is contractual repricing on the loan portfolio that does create some short-term headwind. Again, there’s still repricing that’s going to be fully realized on the deposit side. So it’s not a meaningful move down. I think there is the potential for headwind there and that’s where I think conservatism lives when coupled with the purchase accounting and fee income that tends to have a little bit of volatility in our run rate.

Damon DelMonte: Got it. Okay. I appreciate that color. That’s actually all that I had. Everything else was asked and answered. Thank you.

Chris Navratil: Thank you.

Operator: Thank you. We have no further questions. So this concludes our Q&A session and our conference call. Thank you everybody for joining. You may now disconnect your lines.