Equity Bancshares (EQBK) Q3 2026 earnings call transcript

I will now hand the conference over to Luke and thank you for joining equity bank shares third quarter earnings call. A quick note before we begin, 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. After the presentation, we'll open the floor up for questions and discussion. A conversation we look forward to.

With that, let me turn the call over to our chairman and CEO, Brad Elliott.

Good morning everyone and thank you for joining us. Joining me today is Rick Sims, our bank CEO and Chris Navritel, our CFO. Our third quarter shows what happens when a larger franchise starts to work together. Net income was $26.8 million or $1.29 per diluted share. Core earnings was $29 million or $1.40 per share and our core ROTC was 16.5%.

Pre-tax, pre-provision earnings were $36.9 million. The highest sense we combined the three companies together and our efficiency ratio was 54%. The story of the quarter is organic loan growth. This improvement is something that we have focused on for the last several years. Loans in our legacy markets grew at an annualized rate of nearly 12%. Production was the largest in our history and for the first time since closing the acquisition, total loan balances increased during the quarter. Under Rick's leadership, Mark Parman, Justin Harris, Greg Cossover, Craig Dunn, and their teams have continued to make sales calls, cultivated relationships, and emphasize value creation for our customers on both lending and the deposit side. The results in the quarter reflect the effort and confirm the ability of our franchise to grow the balance sheet organically.

Remaining focus on technology initiatives, finding ways to automate processes, enhancing lead generation, and expanding the services our customers rely on provides opportunity to add operating leverage and enhance shareholder returns as the balance sheet grows. I continue to be excited about the emerging technology we'll do in our industry and what it will do in our bank as we continue to pursue all that it offers.

The funding market has tightened over the quarter as we have seen migration within both our legacy and acquired footprints. Declines are concentrated in large rate-sensitive customers, including public funds, while our retail and treasury teams continue to grow relationships, full service relationships which start with deposits are the focus of our teams and that will never change.

We have strong strategies to deal with the pricing challenges that come during these cycles in our industry. Our branch network during these periods is the strength of equity and we are excited to operate during these periods as we think we have a competitive advantage. Mergers create financial statement noise, but strategically adding core deposits and expanding markets to the equity franchise is core to what we do. Execution on this strategy will provide opportunity to continue the success realized in the quarter. As you know, on September 3rd, we announced our agreement to merge Lincoln Bank Corp, the holding company of Lincoln Savings Bank, headquartered in Rhinebeck, Iowa into equity. Lincoln has served the Iowa community since 1902 and operates 16 locations across central and northeast Iowa.

The transaction gives us a meaningful presence in the Des Moines and Waterloo Cedar Falls area and a strong in-market deposit franchise. It is financially attractive and builds on the disciplined approach of our 15 prior transactions since 2015. Proforma will be approximately $9.1 billion as a company.

We are on track to close Lincoln in the fourth quarter and momentum is building. We anticipate Lincoln will convert onto equity systems in the second quarter of 2027. We do not plan to close or consolidate any branches which protects the customer relationships that makes this franchise so valuable. Closing on time lets us capture cost savings and earnings accretion as early as possible. Lincoln brings exceptional banking talent, deep relationships and strong communities to the consolidated franchise. Under the continued leadership of their what this strategic combination will contribute to our growing company. I'm excited about the quarter and the trajectory of equity bank.

Let me turn this over to Rick at this time.

Thanks Brad. This quarter was about organic growth and the numbers show it. Total loans grew $39 million to $5.44 billion, our first quarterly increase since the acquisitions closed. In our legacy markets, balances grew $106 million or 2.9% to $3.5 billion. That is nearly 12% annualized. Within our acquired markets, we continue to see period over period decline in balances, although it was slowed as production improved by 55% as our teams continue to find traction post-integration into equity's processes. Production across the bank reached a new high. We closed $379 million in loans at an average rate of 6.9%, up 64 million or 20% from last quarter and up 136 million or 56% from a year ago. Our legacy markets produced $279 million of that, up 11% from last quarter.

Specifically, I would like to note Kansas City, under the leadership of Jeff Keys, Wichita, under the leadership of Harrison Helms, Western Missouri, under the leadership of Blake Moreland, Tulsa, under the leadership of Ryan Morris, and Western Kansas, under the leadership of Levi Goetz for the production and balances they were able to generate this quarter.

Looking forward, our 75% weighted pipeline stands at 534 million, up 27% from last quarter, and line utilization was at 55.3%. We have hired 13 bankers year to date across Oklahoma City, Omaha, Lincoln, Wichita, and Des Moines, and those teams are still ramping up. Total deposits declined to 136 million or 2.2% to 6.17 billion. In our legacy markets, deposits were down 102 million, excluding public funds which declined due to pricing, pressure, and seasonal payments. Balances in legacy markets were effectively flat on the quarter and up 3.6% from a year ago. Average deposit balances for the period were flat.

Non-interest bearing deposits were 18.7% of total deposits down from 20.2% in the first quarter. Rebuilding that mix and replacing brokered funding with core relationship deposits over time is a priority for our retail and treasury teams. On accounts, our legacy markets produced 6,269 accounts in the quarter, up 22% over same quarter last year. In addition, digital active users reached almost 79,000, up 10% from a year ago. 759 business accounts were opened in the quarter, which is an area of focus with the average balance per business account growing nearly 4%.

Fee income momentum continued. Treasury fees grew 4% on the quarter and 11% on the year. We are just getting started there. Continued momentum from trust and wealth and mortgage banking provided additional benefit. On credit, the provision was 1.7 million and the allowance stands at 1.18% of loans. Net charge-offs were 2.1 million or 15 basis points annualized, up from 12 basis points last quarter. Non-performing assets were 1% of total assets.

Non-accrual loans were 69 million. Classified assets to regulatory capital were 10.42% down 140 basis points in the quarter. We remain comfortable with the overall credit posture of the portfolio.

On Lincoln, integration planning is well underway. Local leadership and decision making will stay in place as we welcome their teammates, customers, and communities. We now operate in seven growing metro markets. We believe the best in the Midwest. And with Lincoln, we add density and Des Moines and now enter Waterloo Cedar Falls as well as other surrounding community markets, which gives us opportunity for future growth. I'll now turn it over to Chris.

Thanks, Rick. Good morning. Net income for the quarter was 26.8 million or 129 per diluted share. Excluding M&A expenses of 1.0 million, intangible amortization of 1.8 million and securities gains, core net income was 29.0 million or 140 per share in line with last quarter. Core return on average tangible common equity was 16.5%. Net interest income was 72.8 million down 1 million from the second quarter.

The periodic decline was driven by increasing costs within the deposit portfolio, as well as declining yield on interest earning assets. Total cost of deposits moved up seven basis points on a flat average balance. As both Brad and Rick mentioned, the market tightened for deposits as we saw the short end of the curve rise. Investment yield declined as excess discount realization from the previous quarter did not recur. Loan coupon yields declined five basis points.

Net interest margin was 4.2% down 16 basis points affected by the same drivers as net interest income, as well as composition dynamics. Average earning assets increased to 6.87 billion from 6.80 billion driven by cash and securities, which were funded by expanded borrowings. The impact of the growth is absent other changes, accretive to income and deluded to margin. Year to date margin has averaged approximately 4.30%.

Looking to the fourth quarter, excluding Lincoln, we expect margin to return to the 4.25 to 4.35% range. We enter the quarter with $50 million in loan balances in excess of the average for the third quarter. The FOMC's decision to raise interest rates in September will provide a near-term benefit as contractual earning asset balances are reprised. 14% of the loan portfolio reprices daily and 22% monthly. New production is coming on at 6.91%. The spot coupon on the loan portfolio is up eight basis points to 6.48% while production and repricing will continue to be accretive to the book.

On the other side of the balance sheet, as forward rate curves continue to indicate near-term rate rise, competition is expected to continue. As Rick indicated, we are committed to continue driving deposit growth and relationship expansion, but the potential for headwinds is evident. Non-interest income was 10.8 million compared to 10.3 million of core non-interest income last quarter. That is an increase of 0.5 million and non-interest income represented 12.9% of total revenue up from 11.2%. Debit and credit card, trust and wealth management, and treasury all grew. We expect fourth quarter non-interest income exclusive of the impact of Lincoln between 10 and 11 million. Non-interest expense was 47.7 million, excluding $1 million of merger costs, expenses were 46.7 million, flat with the second quarter.

The efficiency ratio was 54%. We expect fourth quarter non-interest expense exclusive of the impact of Lincoln between 47 and 48 million. Provision expense was 1.7 million, and the allowance for credit losses was 1.18% of loans, effectively flat to the previous quarter. The allowance covers 7.7 years of current period annualized charge loss. We continue to expect a provision run rate of roughly 1.5 to 2 million per quarter, depending on loan growth and charge off levels. Capital remains strong, TCE closed the quarter at 9.1% up three basis points in the period, and tangible book value per share was 32.30 compared to 33.45. The decline in per share value reflects a $35 million negative adjustment to AOCI as rates rose during the period.

Excluding AOCI, tangible book value per share grew $1.19 or roughly 3.6%. CET1 was 12.15%, and total risk-based capital was 14.94%. Capital generation was approximately $21 million for the quarter. During the period, we announced a 22% increase in our dividend to 22 cents per share. Our repurchase plan remains in place, though it is currently paused as we work to finalize the Lincoln transaction. At close, we expect pro forma TCE to total assets of approximately 8.5% and total risk-based capital of approximately 13.4%. As Brad and Rick mentioned, the Lincoln merger is continuing to progress as anticipated. As we expect the late fourth quarter close, impact of the transaction has been excluded from our forecast figures. No changes to previously announced expectations have been identified.

I'll turn it back to Brad for closing remarks.

Thank you, Chris. Now let's step forward, and let's talk a little bit about 2027. We enter the quarter at 7.6 billion in assets. With Lincoln, we expect to be 9.1 billion as a company. Over the past year, we built a stronger franchise. In 2027, we plan to show what that franchise can do, and it comes down to four things.

Franchise growth. Our legacy markets grew loans at nearly 12% annualized, and production was a record $379 million. The Lincoln and Omaha teams that's Lincoln, Nebraska, we hired our building pipelines in markets we were not present in a year ago. As a transition from our recent acquisition works through the balance sheet, that growth shows up in total balances. In this quarter, we saw the first signs that we are able to grow as an organization organically.

Second, Iowa. Lincoln savings bank contributes excellent bankers, strong communities, and additional scale to perform a balance sheet. It also positions us for further bolt-on opportunities in the state with more than 200 banks under $2 billion in assets charted there. We convert in the second quarter of 2027, and with half the cost savings realized in the year, 2027 is where the accretion begins.

Third, customers and deposits. We have 166,000 accounts, 79,000 active digital users, and Treasury platform that continues to gain momentum. Core relationship growth and a full Treasury suite are the answers to growing new deposit relationships and fee income, and the early signs are in the numbers as Rick shared in his comments.

Fourth, efficiency. Expenses were flat in this quarter. We believe we can grow the balance sheet and deepen relationships without growing the cost structure at the same pace. M&A has always been part of how we have built this company, and Lincoln savings bank is a good example of the discipline we apply. It fits our strategy, it meets our return for shareholders, and it makes equity a better company. We remain active, but our energy is on executing what is in front of us, organic growth, integrating Lincoln, and building tangible book value for our shareholders, and increasing earnings per share.

Year to date, core earnings per share are at $4.14, which puts us in a position to surpass our $5 target for 2026. That is what this team has done every year, and we plan to keep doing it, building earnings per share as we grow the company. Thank you for joining us on the call today, and now we're happy to take your questions at this time.

Yeah, so we've in some of the modeling and the numbers that we released, Jeff, we reflected some of the runoff that we expect already in Lincoln Savings Bank. If you just match the two companies together on an asset basis, it doesn't equate to $9.1 billion. So we think we did a better job of disclosing some of that shrinkage that naturally happens as part of the merging of the companies together. So hopefully the modeling and analytical work that's been done on that in the industry is already better suited than we had in the last two transactions. So, you know, we're looking, I mean, Rick's teams are doing a really, really good job. I feel very confident that the Oklahoma group and the Nebraska group are on the way to growth.

We have really strong production out of all the rest of our teams, everyone in the company from the board down to the line lender is all focused on doing the right thing every day. So, you know, on an organic basis, I think single-digit upwards of that is something that we can definitely target in 2027.

Yeah, I don't think we're going to get to 10%, but somewhere between 5% and 7% is something that I think we can hit as a company. Without the acquisition, I think we could be actually stronger than that.

They're not. I think if there's a blue wave that happens on the house and the Senate side, I think some people are going to get more focus on getting something done before the White House seat comes up in two more years. So I think over the next 24 months, I think there could be a wave of activity that comes to the marketplace. How that affects equity bank is, you know, we'll just be consistent on what we're doing and how we're doing it. You know, we can do one or two deals a year. And so, you know, we'll have to pick and choose which, what those opportunities look like for us.

Morning.

Yeah. So good question, Brian. And there's a bit to unpack there on the current period results. If you take in the excess liquidity that we allow to carry for the period, that's seven-ish basis points of impact to net interest margin that's neutral to net interest income. So managing that, you know, reduce cash, cash, et cetera, takes care of seven basis points of the delta. On the changing interest rates, the Fed move adds about 10 basis points to loan yields.

The increase in deposit funding has been, is heavily realized through the end of the quarter. We're going to continue to see some migration up there, but the 10 basis points on the loan side should outpace it. So normalizing for the liquidity is 427, adding the impact of the additional rate movements adds a few more basis points to get you in that range of that additional rate hikes in the future. I mean, we don't have kind of mixed considerations as well.

We'll take a rough ballpark estimate of kind of what each rate hike does to your margin. Yeah. It adds between three and five basis points for every 25 basis points up.

Yeah. So I'd say a couple of things. One, we're optimistic about continued remixing and opportunity in our non-interest bearing and low cost commercial and retail aspects of the business. We went through payment of taxes in April. We've seen continuation of a relatively lower balance. So there's some opportunity there as we close out the years, balances grow into the end of the year that we typically see seasonally. So there's some benefit there. As you think about a new incremental deposit to the extent you're pulling it from called a special or a public fund opportunity or something that's actively bid, you're seeing it up at the top end of what you would think a short term interest rate is.

But that's most of where Rick's time is spent. Most of where his team's time is spent is on the customer relationship, the development of those customers that aren't as rate sensitive and are focused on the broad relationship aspect. So that's where our time and efforts are. But where we have to go get funding kind of out market, it's more aligned with brokerage funding and those kind of costs.

Rick. We always have a huge large percentage inflow of deposits in the fourth quarter because I don't remember the number of municipalities, but it's somewhere between 50 and 100 municipalities that we bank across our system that have tax revenues that come in in the fourth quarter. So we always see a nice flow of deposits into those accounts because we have their operating accounts.

And Matt, I want to sort of strategically and down to the technical level, one of the things that we've been doing is we're actually on accounts kind of sort of year over year same storage. We're about 20% up in the third quarter for the number of accounts. So our teams are really driving those accounts. We've also implemented a few tools that allows them to be more proactive in identifying additional business that customers have with other banks. And so we're actively seeking that. So those things take a little time on it, but those are some of the technical things we're doing, why we're optimistic. Obviously, we've seen that in the legacy markets with the growth of loans and we're doing more of that now on the side of deposits.

And so we're positive on that.

Yeah, I don't think we're, I mean, we're still optimistic with our credit. We're obviously seeing positive results from most of our commercial customers. And we cleaned up a lot of stuff in the classified, had positive resolutions along those lines. So, you know, we're, you know, obviously, the consumers being a little bit impacted. You see that sort of in some of their deposit basis, a little stress in that with from a cost perspective. But that said, you know, we're not, we don't have a lot. That's not a big piece of our of our portfolio. And we haven't seen that fully moved through to to commercial. So we're still very positive on the credit side at this point.

It seems like that the commercial business is making money. And we see that because the average balance of our commercial account is actually up. So the average commercial customer is stronger where our consumer customer average balance is down about $1,000 on average per account. So you can see that coming through in those two ways.

Yeah, sure. So one thing I'd note again is our average yield on production this quarter was 6.91. So it's, you know, it's a creative to what we've got in our full portfolio. And I would, the answer is it depends on the market. So, you know, there are a couple of our markets that are more competitive on there. And we've got to get a little skinnier in those transactions. But we've got, we're still holding, we're holding our line on most in most markets to make sure that we're covering an ROE. We run an ROE model and we should recover that. So we've seen some competitive craziness in a few of our markets. But in the most at this point in time, we're actually, you know, I think that's part of why you're seeing the pipeline grow is that we're in pretty good shape at this point in time.

Yeah, so, you know, as everyone knows, when there's a filing with the SEC, companies are blocked out from repurchasing or trading in their shares. So we aren't active at this point. Buying back our shares just because of the lockout that comes with S4 on file. But, you know, we'll continue to be active in that. We have a board approval to continue to be active in that and have a, you know, million dollars or a million shares outstanding authorization. So, you know, that's one way we'll return capital.

And then I think we have plenty of ways to deploy capital through acquisition and organic growth.

Could you summarize that question again, words?

Yeah, Nate. I'll say around that, just generally speaking, we're in the process of budgeting and outlook expectations. So more formality to come around this as we move forward. But you know, off the top, our expectation is that these initiatives over time allow us to to grow the balance sheet without growing the expense rate at the same clip. So as we look to next year, as you look at NIE average assets and you look at efficiency ratio, our goal in expectation is that on a legacy basis, that's coming down. Some of that comes with asset growth, a lot of it comes with the control of cost specific initiatives for how technology moves the needle there are coming together.

But I don't have clear line of sight today to give you kind of the specifics, but I can tell you we're focused on it, we're motivated by it. And we do see that there is positive leverage to be attained there. We just don't have it to a number that I want to stand on today and say it's definitively this. We spent the last two days with a team going through some account verification and loan verification processes that are meaningful moves. If we win, we get those implemented. Chris's point is this stuff will trickle in and you'll see it come in through the balance sheet. It's not going to be a huge announcement that we're implementing this wonderful software and it's going to eliminate 4% of our efficiency ratio.

That's not how these things are going to be implemented. They're going to be implemented as we as the companies all in the industry are able to implement these things and through growth and through shrinkage of turnover. You'll see these things optimize fairly quickly. We're already seeing it today, but it's not going to happen in stair steps. It's going to happen in a gradual line.

Yeah. What I'll say on non-interest expense and really the culmination of what is Lincoln is the expectation on the EPSI. It continues to be the 27 cents, but as we have moving pieces into closing that transaction and understanding that the dynamic of some various pieces we've talked about, I don't want to specifically say it's going to be non-interest expense or it's going to be NII or some other component. We're fully confident that we'll get the 27 cents. It's where it comes from.

So, Damon, on that one, I just, we'll provide more explicit guidance as we get closer and have closed that transaction, but for now, specific line items aren't the way to look at it.

No, we've made a lot of progress over the last three years. We've been very focused on that. We have a very specific operating plan on how to get to that number. Rick, honestly, did a good job of bringing in a couple of federal reserve bank risk employees that were on furlough at the time that helped us write that plan over a 90 day period. We've been operating off of that plan. And so our chief risk officer, we hired 18 months ago, I believe, approximately, has done a great job with his team and building out the processes. So I feel very confident with where we set today that if a transaction took us over tomorrow, we'd be ready to meet those challenges.

Yeah, the impact to Lincoln is currently modeled. And again, Brett, I'll caveat this with the moving pieces of what is the closing of Lincoln in the composition of both balance sheet and income streams is a little bit in flux. But the impact to of Lincoln on the the run rate margin is 8 to 10 basis points down. So as you think about that on a single month out of three, you're looking at two or three basis points of degradation based on call it a December first close.

Yeah, I think I think I'll say two things there. One, 436 margin in Q2, 420 today, all the numbers that we're really proud of and as an industry are hard to retain. So maintaining and growing margin from here is going to be to your point, Brett Tuft. But we're focused on how can we control for, you know, credit risk challenges to the balance sheet while also growing NII over time. So we don't want to take high risk investments, we don't want to play capital poorly. But where we can grow the balance sheet, drive NII increase, even if it's at a slight detriment to overall margin, we're okay with it because we want to get EPS and we want to get tangible book value growth for our shareholders.

And that's, that's what's driving us at this point. So yes, there could be some compression there based on incremental growth, but it's expansive NII.

Yeah, I think we, we actually traditionally have, have been good at organic. We actually are good at organic today. And as Rick has helped bring some clarity to that, you know, we're doing a really good job in our core markets of originations. I think we have a lot of room for that growth. You know, I'm most excited about this year. The number of checking accounts we have grown in our same stores, legacy markets is exceptional. Jonathan Root and that retail team have done an amazing job of growing those number of checking accounts. And I think we can just improve on that every year. So I think there is an organic story in our picture. We don't need to do another M&A transaction to be meaningful and relevant.

So, you know, we have, we're always this, the LSB transaction came up because Iowa's been on our list of places we wanted to be for the last four or five years. And its footprint is so similar to everything else we operated equity bank that it fits strategically so well. I think the combined company is going to be much better than the two companies separated. And so, you know, we have other opportunities that look like that. We're going to jump on them. But it's only going to be in the footprint that we're currently in.