Earnings Call Transcript - EQBK Q4 2025

Operator, Operator

Hello, and welcome to the Equity Bancshares, Inc. 2025 Q4 Earnings Call. My name is Carla, and I will be coordinating your call today. I would now like to hand you over to your host, Brian Katzfey, Vice President, Director of Corporate Development and Investor Relations, to begin. Please go ahead when you're ready.

Brian Katzfey, Vice President, Director of Corporate Development and Investor Relations

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 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.

Brad Elliott, Chairman and CEO

Good morning, everyone. Thanks for being here today. Joining me are Rick Sems, our bank CEO; and Chris Navratil, our CFO. I'm really proud to wrap up what's been a big year for Equity Bank. We ended 2025 with a strong balance sheet and earnings that beat our expectations. We started the year with $5.3 billion in assets and finished with $6.4 billion in assets. We added an additional $1.4 billion when we closed the Frontier merger on January 1. That's nearly 50% growth. With that kind of scale, we're pushing to earn more than $5 per share in 2026. That's a huge milestone made possible by our team, our partners and the trust of our investors. I couldn't be more proud of what our team completed in 2025. While handling the two biggest transactions in our company's history, our folks stayed focused on what matters most, our customers. Despite a tough environment with more competition and lower rates, we still grew loans and deepened relationships. Everything we do is about making the best decisions for our customers, our employees and our shareholders. In 2025 and into 2026, we stay true to our mission. We're creating opportunities for our people to grow, rolling out new products and processes to better serve our communities and staying laser-focused on delivering strong returns. Thanks to David Pass and our tech team, we're heading into 2026 with a big push on using technology to improve service and efficiency. We're focused on using data smarter and moving faster across the board. Even with the Frontier acquisition, our capital position and generation remains strong. We'll keep being thoughtful about how we deploy capital to benefit everyone, our shareholders, customers and employees. Our Board, leadership and team are all aligned and energized. I'm excited about what's ahead in 2026. I'll stop here and hand it over to Chris to walk through the numbers.

Chris Navratil, CFO

Thank you, Brad. Last night, we reported net income of $22.1 million or $1.15 per diluted share. Adjusting for non-core items in the quarter, including merger expense of $1.5 million, litigation settlement expense of $1 million to fund anticipated resolution of our ongoing overdraft suits, and nonaccrual benefit of $900,000, adjusted earnings were $23.3 million or $1.21 per diluted share compared to adjusted earnings of $22.4 million or $1.17 per diluted share in the previous quarter. Purchase accounting accretion on the loan portfolio was $2.3 million in each period. Net interest income for the quarter was $63.5 million, up $1 million linked quarter. Margin for the quarter was 4.47%, an improvement of 2 basis points when compared to the margin of 4.45% linked quarter. Non-interest income for the quarter was $9.5 million, up $400,000 from adjusted Q3 and in line with expectations. Non-interest expenses for the quarter were $46.6 million. Adjusted to exclude M&A charges and the litigation settlement accrual in both periods, non-interest expenses were $44.1 million compared to $42.9 million, an increase of 2.7% linked quarter. The increase is attributable to provisioning for unfunded commitments, which was up $1.2 million in the quarter. Excluding these non-core items for each period, adjusted non-interest expense as a percentage of average assets improved 2 basis points to 2.80%. Our GAAP net income included an immaterial release of reserve through the provision as periodic loan balances were down and charge-offs were muted. The ending coverage of ACL loans was 1.26%. The ending reserve ratio, inclusive of discounts related to NBC, closed the quarter at 1.33%. During the quarter, we were active under our repurchase authorization, acquiring 172,338 shares at a weighted average cost of $41.69. 872,662 shares remained under the authorization approved by the Board in September. TCE closed the quarter at 9.9%, up 23 basis points quarter-over-quarter. CET1 and total capital closed the quarter at 13.1% and 16.3%, respectively. At the bank level, the TCE ratio closed at 10.3%. I'll stop here for a moment and let Rick talk through asset quality for the quarter.

Richard Sems, Bank CEO

Thanks, Chris. In the quarter, we saw a series of positive outcomes in our credit portfolio. Nonaccrual loans moved down to $40.3 million from $48.6 million linked quarter, a 17% decline. The improvement was driven by a relationship brought on through NBC, resolution of which also contributed positively to margin and provisioning. The remaining nonaccrual balance is comprised of a number of low dollar exposures with only two in excess of $1 million to $3 million. The largest QSR relationship we have discussed previously continues to move towards resolution. Loans past due and nonaccrual as a percentage of end-of-period loans declined to 1.53% from 1.55% linked quarter. Net charge-offs annualized were 7 basis points for the quarter as a percent of average loans, down 4 basis points linked quarter. Year-to-date net charge-offs annualized were 6 basis points. Looking ahead, we remain cautiously optimistic on the credit environment and the outlook for 2026. Despite some uncertainty in the broader economy, credit quality trends across our portfolio remained stable and below historic levels. The addition of Frontier's portfolio is not expected to have a meaningful impact on credit quality trends as their portfolio is granular and well underwritten as indicated in their history of strong credit performance.

Chris Navratil, CFO

Thanks, Rick. As I previously mentioned, margin improved 2 basis points during the quarter to 4.47%. The combination of loan purchase accounting and nonaccrual benefits contributed 22 basis points in each period. The modest expansion is attributable to declines in the cost of funding, outpacing declines in the earning asset yield as the impact of our bond portfolio repositioning was fully realized in the quarter. Normalizing loan purchase accounting to 12 basis points of margin and excluding nonaccrual benefits yields a core margin of 4.36%. As we continue to see the FOMC move down interest rates in the quarter, the cost of deposits declined by 10 basis points and the cost of funding declined by 12 basis points. As we look ahead to future FOMC decisions, the balance sheet remains positioned to realize a neutral impact in a moderated decline scenario. During the quarter, average earning assets increased 1.21% to $5.64 billion. The combination of margin and asset expansion led to an increase in net interest income of $1 million, approximately $700,000 ahead at the midpoint of our forecast. Comparative outperformance was driven by better-than-expected purchase accounting and asset quality as well as the repositioning of the bond portfolio in the previous quarter. Loans as a percentage of average earning assets declined from 76.2% to 74.6%. As we previously mentioned, we closed on our merger with Frontier on the first day of the new year. Frontier contributes $1.3 billion in loan assets against $1.1 billion in deposits. As we look to Q1 2026, we anticipate loans as a percentage of average earning assets of approximately 80% and a loan-to-deposit ratio of 88%. While purchase accounting remains in process, using the modeled expectations from our announcement, the addition of Frontier's portfolio will be accretive to NII, but dilutive to margins. We anticipate margin for the quarter and throughout 2026 of 4.2% to 4.35%. In addition to the impact on margin, our merger with Frontier is expected to add noninterest expense of $23 million to $24 million and noninterest income of $2 million to $3 million. Refer to the outlook within our investor presentation for additional detail on expectations for 2026. The conversion of Frontier systems is scheduled to take place in the middle of February with anticipated cost savings realized by the end of Q1.

Richard Sems, Bank CEO

Thanks, Chris. I want to start by emphasizing the exceptional efforts of the Equity Bank team over the last 180 days. It has been a transformative year and it would not have been possible without the committed efforts of the best community bankers in the business. I want to thank all the operating teams that report to Julie Huber, David Pass, Chris Navratil and Krzysztof Slupkowski. The teams have done a great job executing on the integration of NBC and getting ready for Frontier. They have done a great job of making all this look routine. As we enter 2026, we have a presence in six states, including five major metros and many strong communities. We have the tools, products and motivated teams to drive excellent performance in the new year. During the quarter, throughout the footprint, our production teams continue to originate loans and relationships at a high level. Loan production in the quarter was $220 million, down linked quarter, but up $100 million compared to the same period last year. Originations came on at an average rate of 6.77%, representing continued accretion to current coupon loan yield on the portfolio. Production was offset by continued headwinds in the portfolio from payout activity. We were cognizant of the impact of Frontier on the pro forma balance sheet, and we're strategic in our approach to pricing new business in the quarter, resulting in a modest level of decline in ending balances. 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 look to 2026. At the close of the quarter, our 75% pipeline is $452 million. Line utilization was flat for the quarter at approximately 54%, though unfunded positions rose with production in the quarter, providing opportunities for increases moving forward. Total deposits increased approximately $43.5 million during the quarter, including core deposit expansion of $123.5 million, offset by a decline in brokered deposits of $80 million. Noninterest-bearing accounts closed the quarter at 22.4% of total deposits. Our retail teams were busy in 2025 and results showed positive trends in gross and net production levels, including net positive DDA comp production, though we have a long way to go to meet the aggressive goals we have set. As we welcome Frontier, Mark Parman will join Doug Ayer to lead the team through the transition and into the future. We couldn't be more excited about the expansion in these markets. Greg Kossover has done a great job leading the NBC Group through the transition into the Equity Bank platform and our culture. Heading into 2026, we are well positioned to use available liquidity to grow throughout our markets as we look to deliver mid-single-digit organic loan growth. The additions of NPC and Frontier add asset-generation depth to our footprint, while complementary community markets continue to provide funding opportunities. As we close 2025 and look to 2026, management and the Board are aligned in the expectation for realized growth in the balance sheet and noninterest revenue lines. I look forward to assisting our excellent teams in executing on that plan.

Brad Elliott, Chairman and CEO

I take a lot of pride in what our team accomplished this year. We came into 2025 ready to grow, and we did just that, growing our balance sheet by nearly 50% and positioning ourselves to drive towards $5 per share in 2026. It's an honor to lead this company. We're committed to empowering our people, serving our customers and communities, and delivering strong returns for our shareholders. Our Board and leadership team are fully aligned, and we're ready to keep executing on our mission. I want to take a moment to thank Rick and Chris for their outstanding work this year. The amount of modeling, analysis and strategic planning that goes into evaluating M&A opportunities is immense. And while we only pursue a few, each one takes a tremendous amount of effort from the entire team to get across the finish line. Brett Reber also plays a critical role in these efforts, and I want to recognize his contribution as well. Beyond M&A, I'm just as excited about the organic growth we're working on. We're putting the right tools, strategies and people in place to drive that growth. And I believe we're setting ourselves up for long-term success across our footprint. Thanks again for joining us today, and we're happy to take your questions at this time.

Operator, Operator

Our first question comes from Jeff Rulis with D.A. Davidson.

Ryan Payne, Analyst

This is Ryan Payne on for Jeff Rulis today. Just on the margin guide, I want to confirm that this includes expected accretion from Frontier if you have a read on that going into 2026, just trying to get at a consolidated core margin expectation?

Brad Elliott, Chairman and CEO

Yes. Ryan, that does include the accretion for Frontier into 2026, yes.

Ryan Payne, Analyst

Got it. And I appreciate the loan growth guide, but maybe on competition, are you seeing other stretch on pricing or underwriting standards? How do you see things shaking out there?

Richard Sems, Bank CEO

Yes, this is Rick. We are definitely noticing some competition in the market. We have made the strategic decision to maintain our higher pricing. We had about $1 billion in production this year, with one-time payoffs totaling around $700,000. A portion of that, approximately 75%, involves cases where pricing dropped significantly, with competitors setting rates about a point lower than ours to win those deals. We have decided to forgo those opportunities and keep our pricing stable. Our production remains strong, and we expect this trend to continue through the quarter. As we benefit from lower paydowns this quarter, we anticipate seeing growth, so we are not too worried about the competitive pricing situation.

Brad Elliott, Chairman and CEO

We've experienced similar situations in the past after completing a merger with a very high loan-to-deposit ratio. Now, we are adding Frontier, which also has a high loan-to-deposit ratio and assets that can be sold in participations to other institutions, allowing us to access additional resources. We strategically evaluated this opportunity and determined that we should not lower rates on our portfolio when we anticipate receiving higher rates on our balance sheet soon. Although we've had strong originations, it doesn't make sense to book items at rates lower than what we believe the market will offer just to maintain loan volume.

Operator, Operator

And our next question comes from Damon DelMonte with KBW.

Damon Del Monte, Analyst

Just a follow-up on the commentary on the loans. Brad, you just mentioned about the opportunity to pull back some participations that left the Frontier bank. What types of loans are those? Are they traditional C&I loans? Or are they CRE? And any color on the opportunity there?

Richard Sems, Bank CEO

Actually, this is Rick. It's a combination, probably about $50 million in that range across various types of loans. So it's not just one type of loan.

Damon Del Monte, Analyst

Got you. Okay. Great. And then when you look at your expense guide for next year, I think at the time of the merger, you guys targeted around 23% cost saves. I guess now that the deal has closed and you've had a good look at the Frontier, how do you feel about those cost saves? And do you think there's an opportunity to come in at the lower end of the expense range?

Chris Navratil, CFO

Yes, Damon. The 23%, I think, is still a good number. Can we do a little better than that? I think we'll find out as we progress through the first quarter and know better. But today, I think that's a good baseline for thinking about Frontier. That said, the lower end of the expense guide is still an accomplishable number. So we've been talking about over the last few quarters and really the last couple of years of initiatives to drive additional efficiency into the way we go about operations, looking specifically at contracts and driving cost reductions across some of our partnerships that products and services we're providing to customers. So there's absolutely opportunity to hit it without, call it, outsized positives coming out of Frontier from a cost-saves perspective. But that said, using 23% is still a good number today, and there may be upside to that as well.

Damon DelMonte, Analyst

Got it. Great. And then just lastly, from a capital management perspective, nice to see some buyback during the quarter. M&A has been a big topic of discussion with you guys, particularly in this last year with the two deals that you got done. But I guess how do you feel about things now that Frontier is done and you're going through the integration process? Should we think more about capital management falling into the buyback bucket in the near term? Or do you see more M&A opportunity in the near horizon?

Brad Elliott, Chairman and CEO

As you know, banks are sold rather than bought. We emphasize that frequently. However, it will depend on the opportunities we have to utilize that capital. I believe we will start doing that around midyear. We're generating approximately $25 million this quarter, which means we're accumulating capital over time. We have sufficient capital to pursue both strategies, and we are confident that opportunities will arise for both. We'll consider share buybacks when appropriate and will allocate capital in that manner while also engaging in M&A activities. We are currently having a lot of productive discussions regarding M&A opportunities.

Operator, Operator

And our next question comes from Nathan Race with Piper Sandler.

Nathan Race, Analyst

Chris, I was wondering if you could just help us on a good starting point for the margin? I know it's going to include some accretion in the first quarter. And what is that margin outlook for the first quarter contemplate in terms of the opportunities to reduce some of the higher-cost funding that should be picking up from Frontier?

Chris Navratil, CFO

Yes. I would look at the low end to the midpoint for the first quarter. So let's call it, 4.25% for the first quarter. It does contemplate some repositioning of debt and high-cost liabilities on the Frontier balance sheet. So immediately post-transaction, we paid off all of the holding company's debt they had. So there's some cost savings. There's some margin improvement there. They do have some higher-cost FHLB borrowings and brokered funding that we'll continue to look at opportunistically reducing, which I'll comment on the cost of cash. So it becomes something of a neutral trade in terms of NII, but will improve margin a little bit. But yes, I'd look at about 4.25% for the first quarter and the holding company debt immediately out, looking at some other opportunities to reduce cost through the first quarter as well.

Nathan Race, Analyst

Okay. That's really helpful. Rick, do you have any insight into the expected payoffs in the first quarter and your perspective on the progression of net loan growth throughout this year? Do you expect it to be more weighted towards the second, third, and fourth quarters? I would appreciate your thoughts on the pipeline, visibility in payoffs, and the trajectory of loan growth as we move through 2026.

Richard Sems, Bank CEO

Currently, our pipeline remains strong, consistent with previous quarters, and we anticipate maintaining production levels for this quarter. Regarding payoffs, there are some unexpected, unscheduled ones that can make it challenging to predict. We generally don't have detailed lists showing significant unexpected payoffs for this quarter, and our team is proactive in managing this. Typically, the second and third quarters present substantial growth opportunities for us, leading to an increase in overall loan balances. However, it's important to note that payoffs can arise unexpectedly.

Brad Elliott, Chairman and CEO

The borrower gets an offer, the borrower is marketing something, doesn't know whether they want to sell it or not; they aren't communicating with their lender on that strategy because it's not something that they want to spook the lender about. So sometimes payoffs aren't scheduled. We've never had payoffs like we had last year, so I don't anticipate that repeating itself. Rick's got the team doing really great originations. We had four quarters in a row last year where we had our strongest origination. So I think we're well positioned to continue to grow the balance sheet and keep it where we want it to be and increase our margin.

Nathan Race, Analyst

Got you. That's really helpful. If I could just sneak one last one. Just on the buyback appetite going forward, obviously, like to see some share repurchases in the quarter, and was wondering if you could just remind us in terms of kind of what your governors are in terms of how aggressive you want to be on buybacks going forward. Obviously, you're going to be building capital at really strong clips just given the profitability profile these days and the outlook for this year. And obviously, that includes some thoughts on kind of the expectations for acquisitions this year as well, which I appreciate your earlier comments, Brad, that there's still some active discussions going on.

Brad Elliott, Chairman and CEO

Yes, we always look at it similarly to acquisition opportunities. So we look at that 3-year earn-back-ish range on buybacks. And as we're deploying capital, we're making sure that we know we have a capital need coming up, we might be less aggressive on the buyback side; or if we don't think we'll have any opportunities coming up, we might be more aggressive. But it kind of gives you a framework of how we think about it as an organization. We've been very active in the buyback market over the last five years and consistently been in that market when it works for our company and so on a return basis. So I might give you enough parameters there that you can come to some conclusion on what kind of range we look at on buybacks and how we deploy capital.

Operator, Operator

And our next question comes from Brett Rabatin with Hovde Group.

Anya Pelshaw, Analyst

This is Anya Pelshaw speaking on behalf of Brett. Just hoping you guys could comment on what you're seeing competitively as far as deposits go and also some thoughts on deposit generation in newer markets.

Richard Sems, Bank CEO

Yes, this is Rick. First off, I want to mention that we're seeing strong progress in gathering deposit accounts. We've implemented some changes that have allowed us to open accounts in a way that we haven't done in the past, which is a positive development. However, balances are still a challenge as many people are seeking higher balances. We're maintaining a disciplined approach to pricing, prioritizing account acquisition, especially for transaction accounts, which we believe will be beneficial in the long run. The team has done an excellent job, and we've successfully gathered deposits this year. Looking ahead, we know the environment will be tough, but I’m optimistic about our presence in promising areas like Oklahoma City and Omaha, particularly with NBC and Frontier. These community markets are strong, and with our expanding product offerings, we are starting to see an increase in account generation, suggesting potential growth. Although it’s a competitive landscape, we feel confident in our ability to grow deposits this year.

Operator, Operator

And the next question comes from Terry McEvoy with Stephens.

Brandon Rud, Analyst

This is Brandon Rud on for Terry. My first one just on loan growth in 2026. Are there any markets or commercial segments, in particular, that you may anticipate outperform the portfolio as a whole?

Chris Navratil, CFO

Yes. Each year, we have a couple that seem to do well off of there. I like what's happening in Missouri. I think that's a market that can do really, really well for us. And then I think what we're doing down in Oklahoma, same type of thing. I think there's a lot of opportunity in Oklahoma City and in the surrounding communities. As we're getting to know the team up in Nebraska better, that's going to create a lot of opportunities for us as well. So those are the Tulsa down in Oklahoma has been a very strong generator for the last couple of years, and I expect that to continue to be the case as well.

Brad Elliott, Chairman and CEO

Kansas City had a booming year.

Chris Navratil, CFO

Yes, Kansas City had a great year this year, and the same goes for Missouri. Both in Kansas City and the surrounding community markets present strong growth opportunities for us.

Brandon Rud, Analyst

Okay, perfect. Maybe more of a modeling question, but I think I heard your comments on loan pricing earlier. Where are new loans coming on at? And how does that compare to those that are paying up and maturing? I'm just trying to get a sense of the incremental benefit that they're picking up.

Richard Sems, Bank CEO

Yes. So the new originations are accretive today to where our coupon has been heading. So the new originations that are coming out are about 50 basis points ahead of our coupon yield that's included within the margin. So we're seeing, call it, an accretive impact of each of the incremental dollars that are going out. So as we can grow that balance sheet, you should see comparative expansion of loan yield on a coupon basis, right? So backing out the purchase accounting nonaccrual that is up.

Brandon Rud, Analyst

Okay, perfect. And I guess the last one for me. Over the near term, I heard your comments that accretion is within the 4.20% to 4.35%. I guess, do you have a near-term sense of where that may shake out? I think you said normalized to 12 basis points for the fourth quarter. I'm assuming that steps up a bit in 1Q.

Richard Sems, Bank CEO

The 12 basis points represents the cost benefit of NBC. As we incorporate more Frontier components, you can expect additional accretion. I can provide you with the basis point attribution, although I don’t have it right now, but it is included within the range of 4.20% to 4.35%.

Operator, Operator

We have a follow-up from Nathan Race.

Nathan Race, Analyst

September quarter and as compared to 3.34% reported for the year ago...

Operator, Operator

And as we have no further questions in the queue, this does conclude today's call. Thank you, everyone, for joining. You may now disconnect.