Operator: Hello, everyone. Thank you for joining us, and welcome to the merger announcement call for Equity Bancshares Inc. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Luke Pfeifer, Director of FP&A and Investor Relations. Luke, please go ahead.
Luke Pfeifer: Welcome, everyone, and thank you for joining Equity Bancshares' 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 will 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.
Brad Elliott: Good morning, everyone, and thank you for joining us. Joining me today is Rick Sems, our Bank CEO, and Chris Navratil, 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 ROTCE was 16.5%. Pre-tax, pre-provision earnings were $36.9 million, the highest since we combined the three companies together. 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. For the first time since closing the acquisition, total loan balances increased during the quarter.
Brad Elliott: Under Rick's leadership, Mark Parman, Justin Harris, Greg Kossover, Craig Dunn, and their teams have continued to make sales calls, cultivated relationships, and emphasized 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 focused 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 will 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.
Brad Elliott: 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 3 September, we announced our agreement to merge Lincoln Bancorp, the holding company of Lincoln Savings Bank, headquartered in Reinbeck, Iowa, into Equity.
Brad Elliott: 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. Pro forma will be approximately $9.1 billion as a company. We are on track to close Lincoln in Q4, and momentum is building. We anticipate Lincoln will convert onto Equity systems in Q2 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.
Brad Elliott: Under the continued leadership of their commercial and retail teams, we are excited for what this strategic combination will contribute to our growing company. I am excited about the quarter and the trajectory of Equity Bank. Let me turn this over to Rick at this time.
Rick Sems: 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.
Rick Sems: Specifically, I would like to note Kansas City under the leadership of Jeff Keyes, 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 Getz 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 $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.
Rick Sems: 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.
Rick Sems: 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. With Lincoln, we add density in Des Moines and now enter Waterloo, Cedar Falls, as well as other surrounding community markets, which gives us opportunity for future growth. I will now turn it over to Chris.
Chris Navratil: Thanks, Rick. Good morning. Net income for the quarter was $26.8 million or $1.29 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 $1.40 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 Q2. 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 7 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 5 basis points.
Chris Navratil: 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 dilutive to margin. Year-to-date margin has averaged approximately 4.30%. Looking to the Q4, 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 Q3. The FOMC's decision to raise interest rates in September will provide a near-term benefit as contractual earning asset balances are repriced. 14% of the loan portfolio reprices daily and 22% monthly. New production is coming on at 6.91%.
Chris Navratil: The spot coupon on the loan portfolio is up 8 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 Q4 non-interest income, exclusive of the impact of Lincoln, between $10 and $11 million. Non-interest expense was $47.7 million.
Chris Navratil: Excluding $1 million of merger costs, expenses were $46.7 million, flat with the Q2. The efficiency ratio was 54%. We expect Q4 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-offs. 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 3 basis points in the period. Tangible book value per share was $32.30, compared to $33.45. The decline in per share value reflects a -$35 million adjustment to AOCI as rates rose during the period. Excluding AOCI, tangible book value per share grew $1.19, or roughly 3.6%.
Chris Navratil: 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 $0.22 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 a late Q4 close, impact of the transaction has been excluded from our forecast figures. No changes to previously announced expectations have been identified. I will turn it back to Brad for closing remarks.
Brad Elliott: Thank you, Chris. Now let us step forward and let us talk a little bit about 2027. We ended 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.
Brad Elliott: Franchise growth. Our legacy markets grew loans at nearly 12% annualized, and production was a record $379 million. The Lincoln and Omaha teams, that is Lincoln, Nebraska, we hired, are 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 pro forma balance sheet. It also positions us for further bolt-on opportunities in the state, with more than 200 banks under $2 billion in assets chartered there. We convert in Q2 2027, and with half the cost savings realized in the year, 2027 is where the accretion begins. Third, customers and deposits.
Brad Elliott: 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. 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.
Brad Elliott: 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 are happy to take your questions at this time.
Operator: We will now begin the question and answer session for this earnings call. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open. Please go ahead.
Jeff Rulis: Thanks. Good morning. Maybe a jump off from Brad, your comments as you look into 2027, and I guess preliminarily, wanted to think about maybe net loan growth, given the expectations, the organic side really coming on strong. Then I guess if you think about the possible runoff from Lincoln. This year, you are on pace for low single digit if you ex any acquisitions. How does it frame up for 2027, either big picture or specifically?
Brad Elliott: Yeah. 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 smash the two companies together on an asset basis, it does not 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 has been done on that in the industry is already better suited than we had in the last two transactions. Rick's teams are doing a 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.
Brad Elliott: Everyone in the company, from the board down to the line lender, is all focused on doing the right thing every day. On an organic basis, I think single digit upwards of that is something that we can definitely target in 2027.
Jeff Rulis: Sorry. Brad, you said, is that mid-single digit or just-
Brad Elliott: Mid-single digit. I don't think we are going to get to 10%, but somewhere between 5% and 7% is something that I think we can hit as a company.
Jeff Rulis: Got it. Okay. Thank you.
Brad Elliott: With the acquisition, I think without the acquisition, I think we could be actually stronger than that.
Jeff Rulis: Okay, appreciate it. Brad, another one for you on the M&A side. Just wanted to see if it is kind of the shifting sands of maybe rate expectations as we that new environment, do you think that coupled with, we have heard rumors of sort of as midterms approach and any potential catalyst if there is a shift on that front. I guess the question, rates or midterm elections, do you see that having any preliminary impact to deal activity or is it kind of business as usual on that front?
Brad Elliott: Most of the things that we have done are driven by age of ownership and age of management. Those two factors still exist. The conversations that I already have scheduled for this quarter, the reach out that I have received or that we have made, we have four or five conversations that are active at this point in time. It just matters on where they go. I do think the rising rates will put smaller banks on the sidelines again. I think their AOCI is going to go the wrong direction for them. I think that is what has kept them from coming to market in the past year or two. I think it will again be exacerbated.
Brad Elliott: I do think that there will be a slowness in consolidation based on that, because they missed kind of a window of correction here the last six months, to get something done. From our standpoint, we have a lot of active conversations that are agnostic to that or do not have AOCI real issues. I think we have a lot of opportunity that we can pick and choose from as we go through the process. It is not something that we need to do next year. There are conversations that could happen next year, if the numbers work together and the strategies work in the right direction.
Jeff Rulis: Okay. It doesn't sound like the political winds are anything that you're overly concerned with or impacting conversations, maybe broadly speaking.
Brad Elliott: 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 focused on getting something done before the White House seat comes up in 2 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, we'll just be consistent on what we're doing and how we're doing it. We can do one or 2 deals a year, so we'll have to pick and choose what those opportunities look like for us.
Jeff Rulis: Okay. Appreciate it, Brad. Thanks.
Operator: Your next question comes from the line of Brendan Nosal with Hovde Group. Your line is open. Please go ahead.
Brendan Nosal: Hey, good morning, everybody. Thanks for taking the questions.
Brad Elliott: Morning.
Brendan Nosal: Maybe starting off here on the net interest margin. A bit of a softer result this quarter, but you kept the outlook for Q4 of this year. There is a bunch of moving pieces in there. Can you maybe decompose the magnitude of each of those drivers for next quarter? I mean, you have the tailwinds of asset remixing and the Fed hike, but you have also got the headwind of rising funding costs also from the Fed. So how much does each of those work as you work the math on getting to your range?
Chris Navratil: Yeah. So good question, Brendan. There is a bit to unpack there. On the current period results, if you take in the excess liquidity that we allowed to carry for the period, that is seven-ish basis points of impact to net interest margin that is neutral to net interest income. So managing that, reduce 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.
Chris Navratil: The increase in deposit funding is heavily realized through the end of the quarter. We are 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 425 to 435.
Brendan Nosal: Okay. Got it. That is helpful. And then to the extent that we get additional rate hikes in the future, and we do not have kind of mixed considerations as well, what is like a rough ballpark estimate of kind of what each rate hike does to your margin?
Chris Navratil: Yeah. It adds between 3 and 5 basis points for every 25 basis points up.
Brendan Nosal: Got it. Okay. Fantastic. Thanks for taking my questions.
Operator: Your next question comes from the line of Matt Olney with Stephens. Your line is open. Please go ahead.
Matt Olney: Hey. Good morning. Thanks for taking the question. On the deposit side, it sounds like the balances in Q3 were relatively flat in the legacy markets, ex those public funds that you highlighted. It sounds like you are expecting some nice deposit growth here in the near term. Just any more color on just the incremental cost of these new deposit flows that you are anticipating?
Chris Navratil: Yeah. 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 year, as 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, call it 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.
Chris Navratil: But that's most of where Rick Sems' 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 at kind of at market, it's more aligned with brokered funding and those kind of costs. Rick?
Brad Elliott: Yeah. We always have a huge, yeah, huge. A large percentage inflow of deposits in Q4 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 Q4. So we always see a nice flow of deposits into those accounts because we have their operating accounts.
Rick Sems: And now to sort of strategically and down to the tactical level, one of the things that we've been doing is we're actually on accounts kind of year-over-year same stores. We're about 20% up in the quarter, Q3, 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. So we're actively seeking that. So, those things take a little time on it, but those are some of the tactical things we're doing that 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. So we're positive on that.
Matt Olney: Okay. That's all great color. Appreciate that. Then, I guess, shifting over towards the credit side, curious what you're seeing this quarter. Looks like charge-offs were a little bit heavier, but any cleanup commentary there? Then just taking a step back with high rate expectations from here into 2027, I'm curious what the credit team is focused on at this point. Thanks.
Rick Sems: Yeah. I mean, we're still optimistic with our credit. We're obviously seeing positive results from most of our commercial customers. I mean, we cleaned up a lot of stuff in the classified, had positive resolutions along those lines. So obviously, the consumer's being a little bit impacted. You see that sort of in some of their deposit base is a little stressed in that from a cost perspective. But that said, we don't have a lot. That's not a big piece of our portfolio. We haven't seen that fully move through to commercial. So we're still very positive on the credit side at this point.
Brad Elliott: It seems like 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.
Matt Olney: Okay, guys. That's helpful. Thanks again.
Operator: Your next question comes to the line of Nathan Race with Piper Sandler. Your line is open. Please go ahead.
Nathan Race: Hey, guys. Good morning. Thanks for taking the questions.
Nathan Race: Was curious, maybe Rick, if you can just comment on what you are seeing from a competitive pricing perspective on new loan production. Obviously, record production in the quarter, and it sounds like the pipeline is pretty strong. But just curious as you guys kind of expand your teams in some larger markets, whether it is Oklahoma City or Omaha, if you are seeing some degradation in terms of kind of what you are getting on new loan pricing, kind of relative to what you guys have been able to garner historically in some of the less competitive rural markets that you have operated in historically.
Rick Sems: Yeah, sure. So one thing I would note again is our average yield on production this quarter was 6.91%. So it is accretive to what we have got on our full portfolio. And the answer is it depends on the market. So, there are a couple of our markets that are more competitive on there, and we have got to get a little skinnier in those transactions. But we are still holding our line in most markets, to make sure that we are covering an ROE. We run an ROE model, and we make sure we cover that. So we have seen some competitive craziness in a few of our markets. But in the most, at this point in time, and I think that is part of why you are seeing the pipeline grow, is that we are in pretty good shape at this point in time.
Nathan Race: Okay, great. That is helpful. Just as we think about kind of excess capital management priorities in the next year, I imagine you are probably going to be in a kind of digestive phase with Lincoln at least for the next quarter or two. As you kind of just think about kind of returning excess capital shareholders into 2027, can you just maybe, Brad, comment on the buyback appetite given where the stock trades today and kind of any other capital initiatives you are contemplating? Obviously, saw the dividend hike here in Q3 as well.
Brad Elliott: Yeah. As everyone knows, when there is a filing with the SEC, companies are blocked out from repurchasing or trading in their shares. So we are not active at this point buying back our shares just because of the lockout that comes with the S-4 on file. But we will continue to be active in that. We have a board approval to continue to be active in that, have 1 million shares outstanding authorization. So that is one way we will return capital. Then I think we have plenty of ways to deploy capital through acquisition and organic growth.
Nathan Race: Okay. Then just maybe one last one for Chris. Obviously, it is going to be a bit noisy expense-wise next year, but just any thoughts around the kind of legacy expense growth run rate that we expect from the Equity franchise? Within that context, curious to what degree some of the AI initiatives and other technology items that are laid out in the slide deck can kind of limit expense growth to some degree next year.
Chris Navratil: Could you summarize that question again for us?
Nathan Race: Yeah. Just trying to think about the legacy operating expense growth run rate from the legacy Equity franchise into next year, and to what degree some of the technology initiatives and the AI implementations laid out on the slide deck can maybe limit expense growth to some degree into 2027.
Chris Navratil: Yeah. Nate, I will say around that, just generally speaking, we are in the process of budgeting and outlook expectations, so more formality to come around this as we move forward. But off the top, our expectation is that these initiatives over time allow us 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 NII to average assets, and you look at efficiency ratio, our goal and expectation is that on a legacy basis, that is coming down. Some of that comes with asset growth. A lot of it comes with control of costs. Specific initiatives for how technology moves the needle there are coming together, but I do not have clear line of sight today to give you the specifics.
Chris Navratil: But I can tell you we are focused on it, we are motivated by it, and we do see that there is positive leverage to be attained there. We just do not have it to a number that I want to stand on today and say it is definitively this.
Brad Elliott: We spent the last 2 days with a team going through some account verification and loan verification processes that are meaningful moves. When we get those implemented, Chris’ point is this stuff will trickle in, and you will see it come in through the balance sheet. It is not going to be a huge announcement that we are implementing this wonderful software, and it is going to eliminate 4% of our efficiency ratio. That is not how these things are going to be implemented. They are going to be implemented as the companies all in the industry are able to implement these things and through growth and through shrinkage of turnover. You will see these things optimize fairly quickly. And we are already seeing it today, but it is not going to happen in stairsteps. It is going to happen in a gradual line.
Nathan Race: Understood. I appreciate all the color. Thanks, guys.
Brad Elliott: Thank you.
Operator: Your next question comes from the line of Damon DelMonte with KBW. Your line is open. Please go ahead.
Damon DelMonte: Hey, good morning, guys. Thanks for taking my questions. Just to follow up on the expense commentary. Chris, just wondering if you had a ballpark of where Q1 2027 would start on a combined basis with Lincoln and then a cadence over the coming quarters throughout the year.
Chris Navratil: Yeah. What I will say on non-interest expense and really the culmination of what is Lincoln is the expectation on the EPS side continues to be the $0.27. As we have moving pieces into closing that transaction and understanding the dynamic of some various pieces we have talked about, I do not want to specifically say it is going to be non-interest expense or it is going to be NII or some other component. We are fully confident that we will get the $0.27. It is where it comes from. Damon, on that one, we will provide more explicit guidance as we get closer and have closed that transaction. For now, specific line items are not the way to look at it.
Damon DelMonte: Okay. Fair enough. I think Brad mentioned that pro forma, you guys are $9.1 billion. Always having ongoing discussions with potential suitors for M&A. At this point, is there anything that would hold you back from going over $10 billion in 2027 if you were to find a couple deals? Do you feel you have made the necessary investment in the infrastructure side of things from risk management and compliance and things of that nature to go over whenever that time comes? Or do you feel you need to continue to do work in that regard?
Brad Elliott: No, we have made a lot of progress over the last three years. We have 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 have been operating off of that plan, so our chief risk officer we hired 18 months ago, I believe, approximately, has done a great job with his team in building out the processes. So I feel very confident with where we sit today, that if a transaction took us over tomorrow, we would be ready to meet those challenges.
Damon DelMonte: Okay, great. Appreciate the color. That is all that I had. Thank you.
Chris Navratil: Thank you.
Operator: Your next call comes from the line of Brett Rabatin with StoneX Group. Your line is open. Please go ahead.
Brett Rabatin: Hey, guys. Good morning. Wanted to go back to the margin and just assuming that Lincoln closes, let's say early December, just wanted to see if you guys could give some thoughts on the margin impact from Lincoln in Q4 aside from the standalone operation.
Chris Navratil: Yeah. The impact to Lincoln as currently modeled, and again, Brett, I will caveat this with there is the moving pieces of what is the closing of Lincoln and the composition of both balance sheet and income streams is a little bit in flux. But the impact of Lincoln on the run rate margin is 8 to 10 basis points down. So if you think about that on a single month out of three, you are looking at 2 to 3 basis points of degradation based on, call it, a 1 December close.
Brett Rabatin: Okay. Yeah, that is what I was looking at. Okay. Then just, I know you do not want to give margin guidance for 2027, and there is a lot of variables that are in play, so to speak, but there are some definite tailwinds on the loan side with the origination rates and loan repricing and higher rates. But my question is there a risk that the margin relative to Q4 would see some additional pressure in 2027 just from funding new growth, i.e., new production on the balance sheet is at a lower margin than the existing one, which is obviously better than most peers?
Chris Navratil: Yeah, I will say two things there. One, 436 margin in Q2, 420 today, all numbers that we are 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, tough, but we are focused on how can we control for credit risk challenges to the balance sheet while also growing NII over time. So we do not want to take high-risk investments. We do not want to deploy capital poorly. But where we can grow the balance sheet, drive NII increase, even if it is at a slight detriment to overall margin, we are okay with it because we want to get EPS and we want to get tangible book value growth for our shareholders, and that is what is driving us at this point.
Chris Navratil: So yes, there could be some compression there based on incremental growth, but it is expansive to NII.
Brett Rabatin: Okay. Yeah. Perfect answer there. Then the last one, if I could, just around M&A. This is a question for Brad. Your first response around M&A kind of led me to question, you have obviously been an M&A-focused institution doing a deal every quarter, 2 or 3, and you have built out the geography quite a bit in the past few years. Do you think there is a shift to, hey, we are an organic story now, and maybe we are less interested in M&A? Or Brad, just any thoughts on what you see as the tools to double your franchise, as you say, in every 5 to 7 years from here? Can that be more organic than it is M&A?
Brad Elliott: Yeah, I think we actually traditionally have been good at organic. We actually are good at organic today. As Rick has helped bring some clarity to that, we're doing a really good job in our core markets of originations. I think we have a lot of room for that growth. I'm most excited about this year. The number of checking accounts we have grown in our same stores legacy markets is exceptional. Jonathan Roop 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. 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.
Brad Elliott: We're always. 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. Its footprint is so similar to everything else we operate at Equity Bank that it fits strategically so well. I think the combined company is going to be much better than the two companies separated. If 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.
Brett Rabatin: Okay. Great. Appreciate all the color, Brad.
Operator: There are no further questions at this time. This concludes today's call. Thank you for attending, and you may now disconnect.
Brad Elliott: That is hard.
