Equity Bancshares, Inc. Class A

Hello, everyone, and welcome to Equity Bank Shares' fourth quarter 2024 earnings call. After the prepared remarks, there'll be an opportunity to ask questions. In order to participate in the Q&A, please follow the link that's listed on our December 26th press release on the Equity Bank Shares website. If you'd like to ask a question during Q&A, you can do so by pressing star followed by one on your telephone keypad. I'll now hand you over to Brian Gatsby to begin. Please go ahead.

Good morning. Thank you for joining us today for Equity Bank Share's 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 risk and other factors that could cause actual results to differ materially from those discussed. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us. With that, I'd like to turn the call over to our chairman and CEO, Brad Elliott.

Good morning. Thank you for joining Equity Bank Shares Earnings Call. Joining me today is Rick Sims, our bank CEO, Chris Navratel, our CFO, and Christoph Lukowski, our chief credit officer. We're pleased to take you through our fourth quarter results, including that 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 close 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 and completing these within those timelines is an achievement that highlights our core competency of our organization. Brett Reaver 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 allowed 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 than 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'll let Chris walk us through our financial results.

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 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 a credit in the prior quarter, a respectively 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 raise 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 the tangible common equity ratio closing at 9.60%. I'll stop here for a moment and let Christoph talk through our asset quality for the quarter.

Thanks, Chris. During the quarter, non-accrual loans decreased by 13.5% to $27 million to close the year, while non-performing assets increased to $2.3 million. The increase in problem assets is the result of a Main Street lending loan, which is reflected in repossessed assets at its gross 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 borrower's 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 charges 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?

Thanks, Christoph. 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, have outpaced the declining 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 one-time 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 406. 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 Rip 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 margin, 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 portfolios. 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 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? We closed the year with a loan portfolio of $3.5 billion and 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 discipline 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 payoffs outpaced an average production period. We realized $125 million in paydowns 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 jumpstart to that goal, I am excited to announce the return of a familiar face to Equity Bank. Greg Kosover will be rejoining 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 infros from our municipality customers. While we will see fund outflow during the fourth quarter as these customers deploy their seasonal funding, under Jonathan Rupp'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 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.

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 timeline, as always. Thank you for joining the call. We are happy to take questions at this time.

Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's your turn to speak. Our first question today comes from Ryan Payne with DA Davidson. Please go ahead. Your line is open.

Good morning. This is Ryan Payne for Jeff Roulis. 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?

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. I think we continue to be positioned in a status that we consider neutral regardless of a kind of up or down world. We think we're positioned to be okay in either.

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

Yeah. So our QSR bucket 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.

And the classification is proper.

Thank you. All right.

Yeah, 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 a non-substandard category by divesting of a few of the restaurants. They're 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.

Got it. Thank you. I'll step back.

The next question comes from Terry McEvoy with Steven. Please go ahead.

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?

Yeah, from a fee income perspective, we've seen some expansion in cost through data processing and people initiatives to where that's being reflected in the current outlook. I think there's some opportunity there to continue to drive down certain costs 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, and that's what's driving up that particular number. On the fee income side, we continue to think it's an eight to nine million dollar quarter run rate today, based on our relative position, which is where that full year number is coming from. Opportunities there, as Rick has alluded to, in terms of treasury, trust and wealth management, continuing 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 runway to where we are today, Derek.

Appreciate that. Thanks. And then as a follow-up, Brad, just 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?

Yeah, I think we're positioned well, first of all. 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. We're down the path on several of these opportunities. 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 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... 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, you know, got a lot of upside as we go through this cycle.

Appreciate all the color. Thank you.

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

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?

Yeah, so there's always Andrew a couple of things in our margin that are a bit unique in terms of purchase accounting and 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 lagged 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 over the last rate rise cycle. 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 in NII. So I think the opportunities 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.

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 the loans? And what percentage would you be looking to retain versus to partner out? And I'm assuming you're going to be the lead bank on these, is that right?

Yeah, most of these would be the lead bank. I mean, these are just situations where with our existing client base and if we go into other client bases, 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, you know, 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, you know, going to start competing in a totally different class here. We'll of course continue to keep a good portion of this going forward.

We have about five to $600 million of participated loans sold today. 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 and $25 million depending on risk rating. You know, if we do a project with somebody that's $40 million, we've got to find a home for that other 15. And so, you know, 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 opportunity that we currently already have on the books today.

Yeah, yeah, sounds like it. Great. Thanks for taking the questions here. I'll step back.

We have a question from Damon Delmont with KBW. Your line's open.

Hey morning guys, thanks for taking my question. Just want to circle back on the margin. Chris, do you have a spot margin for the month of December?

Yeah, so we closed December on an adjusted basis when you take out the non accrual and other items at 406.

OK, and then could you just kind of walk through some of the commentary you gave to Andrew on, you know, The range is 395 to 405 and you're kind of at the top end of that range already. So is the near would there maybe be some near term margin pressure because of the shift in 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 margins?

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 anti-competitive 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 a loan portfolio 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, but 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.

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

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 line.