Equity Bancshares Inc (EQBK) 2025 Q3 法說會逐字稿

Hello, and welcome to the Equity Bancshares 2025 Q3 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 the Vice President, Director of Corporate Development and Investor Relations, Brian Katzfey, to begin. Please go ahead when you're ready, Brian.

Good morning. Thank you for joining us today for Equity Bancshares third 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 is Rick Sems, our bank CEO; and Chris Navratil, our CFO. We are excited to take you through one of the busiest, most transformational quarters our company has realized in its history. We kicked off the quarter with the close of our merger with NBC on July 2, adding locations throughout Oklahoma, including a new metro market in Oklahoma City and many outstanding other communities in Oklahoma.

At close, the merger added $665 million in loans and $808 million in deposits to the legacy Equity Bank balance sheet, serviced by an excellent team that is motivated to continue to drive growth in our now broader Oklahoma market. The last two weeks of August, we converted NBC onto Equity Bank's core system.

We are now operating fully integrated and all of the expenses will be rung out in the third quarter with a few trailing into the fourth quarter as we've now fully integrated that transaction. Following close of NBC, we marketed and closed on a subordinated debt raise, providing $75 million in capital at the holding company to allow the continued execution of our dual growth model.

In September, we announced our definitive merger agreement with Frontier Holdings, the parent company of Frontier Bank. The transaction will extend Equity Bank's footprint into Nebraska, a market we have been working to enter for many years. This adds strong earning assets and an engaged and highly productive team with locations in Omaha, Lincoln and other nearby communities.

Entering the year following our capital raise in December 2024, we had a strategic road map to enter both Oklahoma City and Omaha in 2025. We have accomplished our goal via two mergers with like-minded partners that provide ready-built scale to each of these markets. I want to take a minute to thank all the Equity Bank team members that have put the time and effort to position us for success on all of these transactions.

Julie Huber is best-in-class at organizing due diligence, spearheading the process and driving integration. Our continued success in closing these transactions is a credit to Julie and her team. David Pass and Becky Winter drive the technology integration and adoption process, allowing for near seamless conversions.

Jonathan Roop and his team of retail operators and ambassadors [man] the lobbies to assist customers with the transition. And Brian Katzfey and Brett Reber work with our regulators to facilitate a timely application process that allows them to be approved in as quick as time as possible. All transactions take committed effort from our organization and our team members for us to continue to shine and be able to execute on our strategies.

In addition to all of that, our legacy franchise and team members continue to be there for the communities and customers as we realized non-acquired growth in both loans and deposits portfolios during the period. We closed the quarter with our annual Board strategic retreat and left it energized to continue to grow Equity Bank, both in our current footprint that we're operating in and an expanding footprint in Nebraska.

The Board and management are aligned and confident in our capacity to execute on the opportunities ahead of us. I am proud of all that we have accomplished in the quarter, and I'm excited about all that we have positioned to accomplish as we close 2025 and to move to 2026.

I'll pause and hand it over to Chris to walk you through our financial results

Thank you, Brad. Last night, we reported a net loss of $29.7 million or $1.57 per diluted share for the quarter. In addition to all the expansionary developments Brad discussed, we also completed a bond portfolio repositioning during the quarter, selling $482 million in investment par value at a realized loss of $53.4 million.

The sold assets were yielding 2.2% on average, while the cash flow was reinvested in cash and securities yielding approximately 5%. Impacts on expectations for future quarters will be discussed in greater detail later in this call.

Adjusting earnings for the pretax loss of $53.4 million as well as costs incurred on M&A of $6.2 million and CECL double account provisioning of $6.2 million, pretax earnings were $28.4 million. Tax effective at 21% yields net income of $22.4 million or $1.17 per diluted share. Net interest income for the period was $62.5 million, up $12.7 million linked quarter.

Margin for the quarter was 4.45%, an improvement of 28 basis points when compared to margin of 4.17% linked quarter. Noninterest income, excluding the impact of the portfolio repositioning for the quarter was $8.9 million, up $300,000 from Q2.

The increase was driven by improvement in customer service charge line items, including deposit services, treasury, debit and credit card, mortgage and trust and wealth as we integrated the NBC franchise. Notably, noninterest income was not a core contributor of the acquired franchise and results were in line with expectations.

Noninterest expenses for the quarter were $49.1 million. Adjusted to exclude M&A charges, noninterest expenses were $42.9 million, an increase of 8.3%, reflecting the impact of the NBC acquisition. Noninterest expense as a percentage of average assets improved 22 basis points during the quarter to 2.80%. System conversion was completed in late August with associated expenses primarily out entering the fourth quarter. Our GAAP net income included a provision for credit loss of $6.2 million. The day two provisioning or CECL double count accounted for all of the provisioning. The ending coverage of ACL loans was 1.25%.

The ending reserve ratio, inclusive of discounts related to NBC closed the quarter at 1.36%. The periodic increase in ratio reflects the addition of non-PCD credit marks from NBC. TCE closed the quarter at 9.7%, reflecting the impact of the NBC transaction, offset by strong core earnings.

With the reissuance of $75 million of sub debt during the quarter, we closed with total risk-based capital of 16.1% and sufficient cash at the holding company to facilitate the Frontier acquisition and more. At the bank level, the TCE ratio closed at 9.9%, benefited both by earnings, exclusive of the cost of repositioning and improvement in the unrealized loss position on the securities portfolio.

I'll stop here for a moment and let Rick talk through our asset quality for the quarter.

Thanks, Chris. The addition of NBC's loan portfolio during the quarter added $7 million in nonaccrual relationships and $16.7 million in classified assets. Total PCD loans acquired were $32.8 million with a fair value mark of $7.5 million or 23%.

Management is actively working on resolutions on these additions and does not anticipate losses in excess of marks. Nonaccrual loans closed the quarter at $48.6 million, while classified assets closed the quarter at $82.8 million or 12.37% of bank regulatory capital.

Excluding additions from NBC, nonaccrual and classified assets declined $1 million and $4.9 million, respectively. Loans past due and nonaccrual as a percentage of end-of-period loans declined to 1.55% from 1.65% linked quarter.

Net charge-offs annualized were 10 basis points for the quarter as a percentage of average loans, while year-to-date charge-off annualized were 6 basis points. ACL coverage is sufficient to absorb more than 10 years of current period annualized losses.

Looking ahead, we remain positive on the credit environment and the outlook for the remainder of 2025. Despite some uncertainties in the broader economy, credit quality trends across our portfolio remained stable and below historic levels. Our partnership with NBC has yielded a combined organization with shared disciplined underwriting, strong capital and reserve levels positioned to navigate any potential headwinds. Chris?

Thanks, Rick. As I previously mentioned, margin improved 28 basis points during the quarter to 4.45%. Period results were positively impacted by 13 basis points of expansion in purchase accounting amortization and 7 basis points of nonaccrual improvement.

The remaining 8 basis points is attributable to improving asset mix and the bond portfolio repositioning. Normalizing purchase accounting to 12 basis points of margin and backing out nonaccrual benefit, would yield core margin of 4.35%. Cost of interest-bearing liabilities and cost of deposits increased 3 and 5 basis points, respectively, during the quarter as NBC's liabilities were dilutive to Equity's position entering the period.

The impact of the FOMC's decision to reduce rates late in the quarter will not have a meaningful impact on margin as the balance sheet remains neutrally positioned for this type of cut. During the quarter, average earning assets increased 16.3% to $5.6 billion. The combination of margin and asset expansion led to an increase in net interest income of $12.7 million, approximately $2 million ahead of the midpoint of our forecast.

Comparative outperformance was driven by better-than-expected purchase accounting and asset quality as well as the mid-period reposition of the bond portfolio and continued positive earning asset remixing. Loans were 76.2% of interest-earning assets for the quarter versus 75.8% in the previous quarter.

As we look to the fourth quarter, we anticipate margin in a range of 4.4% to 4.5% as additional tailwinds from the investment portfolio repositioning are partially offset by normalization of purchase accounting accretion and the removal of positive nonaccrual impacts. As a reminder, within our outlook, 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.

The outlook slide includes the fourth quarter 2025 exclusive of our announced transaction with Frontier and the full year 2026 inclusive of Frontier impacts. As we closed the quarter, the transaction is progressing through the approval process, and we anticipate receipt of approvals in the fourth quarter. Depending on the impact of the government shutdown on the process, we continue to anticipate closing the transaction in 2025. Rick?

Thanks, Chris. I wanted to start by echoing Brad's comments, acknowledging the exceptional efforts of the Equity Bank team over the past 90 days. It's been a transformational quarter, and it would not have been possible without the committed efforts of the best community bankers in the business. Our balance sheet was bolstered by the addition of NBC locations, customers and team members in the quarter. At acquisition, the transaction added $665 million in loan balances and $808 million in deposit balances.

As I've had the chance to work closely with the teams in Oklahoma City and throughout the state of Oklahoma since the close of the transaction, my excitement for the contribution of this market to equity continues to grow.

There is tremendous opportunity in the communities and tremendous potential in the bankers who are now a meaningful part of the Equity Bank franchise. Throughout the footprint, our production teams continue to originate loans and relationships at a high level. Exclusive of NBC, we realized modest growth in both the loan and deposit portfolio with the majority of our markets contributing. Loan production in the quarter was $243 million, up 23% linked quarter.

Originations came on at an average rate of 7.14%, representing continued accretion to current coupon loan yield on the portfolio. The team continues to focus on growing relationships, deepening wallet share and pricing for the value provided, which will benefit Equity Bank into the future.

In addition to realized production, our pipelines continue to grow throughout our banker network, positioning the bank to execute on organic growth initiatives as we close out 2025 and look to 2026. As we close the quarter, our 75% pipeline is $475 million.

Line utilization was flat for the quarter at approximately 54%, though unfunded positions rose with the addition of NBC and production in the quarter, providing opportunity for increases moving forward. Total deposits increased approximately $860 million during the quarter, excluding $808 million in balances added by NBC and $15 million in brokered account growth, organic deposit growth during the period was approximately $37 million.

Noninterest-bearing accounts closed the quarter at 22.52% of total deposits, up from 21.56% at the end of Q2. Our retail teams have been busy in 2025 and the first nine months have showed positive trends in gross and net production levels, including net positive DDA account production, but we have a long way to go to meet the aggressive goals we have set.

I look forward to assisting this group in realizing success throughout 2025 and beyond. The addition of NBC and the announced addition of Frontier add asset generation depth to our footprint, while complementary community markets continue to provide funding opportunities. As we closed our annual strategy session in September, management and the Board left align in the expectation for realized growth in the balance sheet and noninterest revenue lines through the remainder of 2025 and into 2026.

I look forward to assisting this excellent team in executing. Brad?

I take a great deal of pride in all that the Equity team has accomplished in 2025. We entered the year with capital to grow and an expectation that we can deploy it. As we close the third quarter and we look to the end of the year, we will have leveraged that trust to grow the balance sheet by approximately 40%, while positioning the company to earn $5 per share in 2026.

I am excited to lead this organization as we work to empower our employees, our customers and our communities while integrating a strong return for our shareholders. Management and the Board are aligned as we continue to execute on our mission throughout our growing footprint.

Thank you for joining the call, and we're happy to take your questions at this time.

Thank you. We will now begin the question-and-answer session.(Operator Instructions)

Terry McEvoy, Stephens.

Hi, good morning everybody. Maybe just start with the deposit question. Could you just talk about your pricing strategy, kind of actions taken before and then after the Fed rate cut last month to cut deposit costs? And maybe has the market moved along with you?

Yeah. I'll touch on it quickly, Terry, and then Rick might add some additional color. In terms of pricing strategy, we've been relatively consistent as we look at the rate cuts since the starting of the rate cut cycle in terms of being able to take the higher end of our deposit rates and consistently bring them down in line with the moves on the FOMC rates.

So as the most recent cut came into place, we implemented the same strategy and to date, haven't seen any meaningful shifts from it. On a competition basis, we haven't seen any meaningful outliers to competition at this point, really consistent trends in terms of what they're doing relative to what we're doing. So positive outcomes there as it relates to costs moving forward.

I don't think I have anything to add to that, Terry. We're not seeing -- we're able to get those costs out, and we're not really seeing a backlash.

Okay. Thanks for that. And then as a follow-up, could you just maybe run through business sentiment and your operating footprint and how that's kind of captured or incorporated into your outlook for loan growth?

Yeah. So we look at that pretty regularly from our team. I get feedback from the markets. And right now, things look pretty strong. We're not really seeing impacts or much of a -- obviously, tariffs continue to be a big question that people ask.

We're just not really seeing that being a problem. They seem to be able to be absorbed. And then a lot of our businesses really don't seem to have a lot of impact because of the local nature of it. So we look at that on a regular basis, and we're still really fairly -- at what we're seeing fairly bullish on what the market looks like.

Great, thanks for taking my question.

Jeff Rulis, DA Davidson.

Thanks. Good morning. A question on the deposit side as well. I thought you mentioned that the lift in deposit costs, was some of that linked quarter? Was that due to NBC, not so much just competition increasing that was more acquired lift?

Yes, Jeff, the increase period-over-period is entirely attributable to the liabilities brought on through the NBC transaction.

Got you. Okay. And then also on the loan front, it looks like based on averages, kind of a mid-single-digit period and '26 over '25 kind of loan growth expectation. And just wanted to kind of dig into that a little bit. Is that -- are you thinking that maybe payoff activity that's been a little bit of a near-term headwind that subsides a little bit? Or is that given the production and the pipelines that you think the clip of growth could kind of pick up into that mid-single-digit range? Just trying to unpack the expectations for payoff activity, if that's in that guide.

So a couple of things on that, Jeff. So when we look at it, we look at and kind of obviously, the amount of production. So the production, we're getting better at being consistent and having that at a higher number. So when you look at over the last three years kind of on a same banker-by-banker basis, we're just -- we're doing more production this year than we've done in either of the last two years, and we see that continuing to move. So that's one factor.

Then you're adding in Oklahoma City and we'll next year be adding in Omaha. Those are two markets in which you're going to see strong -- likely to see strong production in that. So that's going to help out. On the payoff side, in 2023 and in 2024, we had amortization, payoffs, paydowns of around 15% or 16% in each of those years from a beginning balance. So far this year, we're on pace to be around 23% on an annualized basis. So that's obviously an uptick.

Historically, you look at it, we kind of think around in that upper teens, 18% to 20% is what payoffs and paydowns should be. So likely, there's a scenario in there next year where we get -- we kind of bounce back a little bit to that lower level. So you put all those things together, and that gives us confidence in that ability to have growth next year.

That's great detail. Maybe just one last one on the credit side, kind of core legacy balances coming down on problem loans encouraging. And then in your commentary, it kind of sounded like, if anything, maybe some broader economic watching things. But I guess from your end of things, if you're looking at your portfolio, areas of strain, it sounds pretty contained, but where you would point to that maybe you continue to watch for potential issues, if anything, across the portfolio?

Yeah. What I would say, Jeff, is we're watching all areas closely. We're not seeing a lot of strain in any areas. We've talked about QSRs. We don't have a lot of QSR restaurant exposure as a percentage of our portfolio. But the -- if you look nationally, the food industry is tight. It's really hard for them to expand their ability to collect more and they can't cut costs because labor costs are still high and food costs are still high. So that's an area.

I think the consumer -- we're watching the consumer. We don't have a big consumer direct exposure, but we all have an indirect exposure to consumers. So I just think the consumer has to be getting tighter and tighter all the time, which has to -- at some point, has to lead to something. I don't know what that is, but it has to lead to something.

Agriculture, our ag guys, we're watching those guys pretty close. We have real low loan leverage on those. The Frontier Bank credits up there are really well structured and good. And so we're not looking for a lot of issues on those. They're going to have really good crops this year, although price isn't great.

But I think inflation is a bigger part of this economy than people are talking about. And I think where those -- where inflation hits people is where you're going to have exposure eventually, we're going to have a bubble pop. I still don't see that bubble yet.

Okay, thanks, Brad. I'll step back.

Nathan Race, Piper Sandler.

Hi guys, good morning. Thank you for taking the questions. I appreciate the loan production specifics in the quarter, but just curious what early indications you're seeing out of the team at NBC in terms of how they're contributing to loan growth these days in the third quarter and how they're kind of maybe taking advantage of the larger hold limits and expanded product set that Equity brings to the table?

Yeah. So just a couple of things there. For instance, when we talk about pipeline right now, we haven't put them into our pipeline. So that's all positive. I want to just make sure we're clear on that. And then we're just really starting that process. I mean having great costs over down has really, really helped because we're seeing -- we're able to make credit decisions pretty quick down there.

So I think what we're seeing is a lot of their really -- they've got some really great clientele down there, and they are already taking advantage of the opportunity for us to do larger holds. They have a fantastic footprint of $1 million and under loans, $2 million and under loans. It's really granular. But some of those are real strong borrowers.

And so we are -- and just last week, we had -- we were with a number of them. And so we've already gotten a couple of requests. Can you do a $5 million deal for us? Can you do a $10 million deal? So it's anecdotal at this point in time, but we're really seeing some of them taking advantage of that.

In addition to that, we also added a few bankers, and this is something that we'll be continuing to do as we bring the Frontier online as well. In Omaha, there's opportunity for growth. So we're adding more bankers just like we did in Oklahoma City and taking full advantage of that, the robustness of those markets. So far, again, it's anecdotally really positive opportunities and outcomes for us.

Okay. Great. That's really helpful color. And then a question for Chris on the margin guidance for next year. Obviously implies a step down from 4Q. But just curious, as you look at some of the offsets to some variable and floating rate loans repricing lower following additional presumable Fed cuts, I was hoping you could just kind of expand on some of the inherent levers that you guys have to mitigate some of that potential loan yield compression and just what the opportunity set looks like to improve the funding mix and cost of Frontier, which I think is running above Equity historically.

Yeah. Good questions, Nate. In terms of the forward-looking net interest margin compression, all of that is a function of the impact of Frontier relative to where Equity Bank is. So as I mentioned in the comments, there's not factored in reducing costs and associated impacts or reducing market interest rates and associated impacts on Equity Bank core margin. So that decline is just attributable to the margin being brought on by the Frontier Group post purchase accounting adjustments.

In terms of ability to address declining interest rates in the environment and how the balance sheet will operate, a couple of things I'd point out. One is, on the liability side, at prices above 2% today, we got -- there's $3 billion plus on our balance sheet today, currently costing us above that 2% Mendoza line.

At 3%, it's $2.5 billion, at 3.5% plus, it's $2.2 billion. On the asset side in terms of repricing through the end of 2026, we have $425 million of loan repricing that's currently on the books subprime rate. So there's room to -- some of it will come down, some of it will potentially move up.

There's room to maintain kind of relative neutrality there. As the Fed makes modest decisions around interest rates, the structure of the balance sheet will allow for, I think, control and consistency in margin figures. So there's quite a few levers in that mix that we can obviously pull as we begin to kind of pull downs on the FLMC side of things.

In terms of doing or improving the mix at Frontier specifically, as we bring them on, we'll have a balance sheet that has some excess cash that has some capacity to pivot and close out of what are the highest costing aspects of their cost of funding base. And then as we look to grow in Omaha, I think we're excited about the opportunity that there is to continue to expand franchise around the markets that we're acquiring there as well as continue to grow in our legacy core markets to be able to drive some repositioning of funding as we see some maturities and we see some roll-off in the NBC footprint -- I'm sorry, not the NBC, but the Frontier footprint, replacing them with those alternative lower-cost core structures.

Okay. That's super helpful. Thanks for the color, Chris. And I'm sorry, can you also remind us if you have any floors that would become impacted based on the number of future Fed cuts within the floating rate portfolio?

Yeah. We do have floors built into many of our loans. The actual floor rate being triggered, there's quite a bit of gap in terms of when we would actually start to hit them. So the majority have 200 basis points plus of capacity to be cut before they're going to meaningfully hit those floors driving prepayment. So there's still a cushion on them, but there are floors that are in place at a level after moderated cuts from here.

Okay, great. I appreciate all the color. Thanks guys.

(Operator Instructions)

Damon DelMonte, KBW.

Hey, good morning guys. Thanks for taking my questions. Just first question on the outlook for '26 and the range for provision. Chris, does that include like the day two CECL expectation? Or is that what you expect on like an operating basis?

That's just reflective of an operating basis provision, Damon. So it does not exclude -- it doesn't include the double count.

Okay. And so that seems to be a bit higher than kind of where you guys have been tracking more recently. Any color kind of behind that?

There's no specific drivers, I would say that we think there's additive risk. It's really just conservatism, I think, as we look forward as it relates to provisioning.

Okay. Great. And then with regards to like the securities portfolio this quarter, I think it's down to about 16 -- a little bit over 16% of average earning assets, which is lower than where it's tracked the first half of the year, which was closer to like 20%, 21%. How do you kind of -- when you look over the next few quarters here, where do you kind of see that ratio shaking out? Do you think it goes back towards the 20%? Or do you kind of have it more in the mid-teen range?

Yeah, Damon, I think it will settle at a lower than 20% position with the additions of -- with the expected addition of Frontier and the addition of NBC, that ratio is going to kind of inherently move down based on the combination they brought over. But the relative maintenance of kind of that mid- to high teen position will continue because there's liquidity and pledging needs where that portfolio is going to need to continue to maintain it at kind of that relative level. So I would look for it to stay closer to where it is versus expanding back to where it was.

Got it. Okay, great. Everything else has been asked and answered, so thank you.

Thank you.

Brett Rabatin, Hovde Group

Hey guys, good morning. I wanted to go back to payoffs for a second on loans, and you guys gave the number for payoffs this year versus historical. And I'm just curious, you're thinking about payoffs going forward. How does the recent movement of the intermediate to longer end curve, how do you sort of factor that into your thoughts on a possible cessation or slowing of loan payoffs?

Yeah. I mean, I think as it comes down a little bit, kind of perhaps, I actually don't -- as we've been looking at it, I don't think that we really think that there's going to be having too much impact on that. We've -- as I've kind of looked at it, again, it's more of when projects are being completed that we're seeing some of those taking it to the permanent market or having sales. That's, again, what we tend to see. We don't tend to see a lot of our customers that all of a sudden decide year-end that they're going to change it.

If there's a massive change in the rates, then that can happen. But right now, we're not seeing -- it's not 100 basis point, 150 basis point movement that would get them kind of out of bed to make the change. So I just don't see that necessarily being a big driver either to slow it or to speed it up with those rate movements right now.

Yeah. The payoffs we had are -- I can tell you, some of them are driven by kind of -- we can't go into too much detail from a customer information, but driven by kind of a weird situation that happened with one of our relationships from a debt standpoint. And so that drove a lot of movement from a relationship and related relationships that the estate needed to just clear it out. So we aren't going to see that again ever probably. So that drove a big chunk of payoffs this quarter.

Yeah. Brett, (multiple speakers) to be positive in terms of declining rates and sentiment is we do still carry consumer real estate, $0.5 billion of residential real estate loans that have relatively low coupons. In a world of improving sentiment on the consumer side, you'll see some increased prepayment there, which will actually have a positive impact on margin kind of regardless of how it's redeployed. So some opportunity will come with that declining rate and sentiment as well.

Okay, that's helpful. And then, Brad, I wanted just to get if you could, the outlook from an M&A perspective and just how you think about the changing landscape and what that might mean for your strategy relative to pricing, maybe earn-back periods or going to be lower or maybe you're going to be able to buy better banks relative to historical from a profitability perspective? Just wanted to get maybe your thoughts on how you see the environment for you guys over the next year.

Yeah. I don't think the environment has changed much in the last year. I think there's still a lot of opportunities there, a lot of conversations. As we look at these opportunities, there's ones that are going to garner better pricing and there's ones that are going to not garner that pricing. So we have a whole bucket and we don't stratify them and say we like this one more than that one.

We look strategically, do they fit? How do we integrate them? What's the timing of them. And so we still have lots of conversations going on with opportunities and we'll continue to be selective from the standpoint it has to fit our earn-back model and our strategy.

Okay, great. (inaudible) all the color guys.

(Operator Instructions).

And as we have no further questions in the queue, this does conclude today's Equity Bancshares earnings call. Thank you, everyone, for joining today's call. Have a great day, and you may now disconnect.