Equity Bancshares Inc (EQBK) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Equity Bancshares 2015 year-end results conference call. (Operator Instructions). As a reminder, this conference may be recorded. I would now like to turn the conference over to our host of today's call, Mr. Brad Elliott, Chairman and CEO. You may begin.

Good morning. I am Brad Elliott, Chairman and CEO of Equity Bancshares, Inc., the parent company of Equity Bank in Wichita, Kansas. Thank you for joining our earnings call for the fourth quarter and year ended December 31, 2015. I have with me today over Chief Financial Officer, Greg Kossover.

Before we get into our performance for the most recent quarter, let me first say thank you to our advisors, underwriters, Board of Directors and staff for their efforts in our successful initial public offering on November 11, 2015.

Let me also say thank you to our legacy shareholders for their many years of trust in our Company, and also to our new investors as we embark on our journey as a publicly held company. Our Board of Directors, myself, Greg, and our entire bank are committed to being an outstanding public company.

Turning to slide 1, we had an amazing fourth-quarter in 2015. We entered the fourth quarter after record quarterly earnings in the third quarter ended September 30, 2015 of $2.7 million in net income allocable to common shareholders.

We also exceeded our expectations for earnings in the fourth quarter with net income allocable to common stockholders of over $2.5 million. Our year ended December 31, 2015 was also a record earnings year with over $10 million in net income allocable to common stockholders. Greg will take us through a summary of earnings in a few moments.

On October 9 we closed and converted our latest acquisition, First Independence Corporation of Independence, Kansas and its subsidiary bank, First Federal Savings & Loan with four locations and Southeast Kansas. First Federal had a strong retail presence in their markets and brought approximately $87 million in deposits, $60 million considered to be signature accounts or core deposits to our Company.

Transactions such as this are in important part of our acquisition and growth strategy. In the transaction we acquired approximately $90 million in loans, primarily single-family residential loans in the market these branches operated in.

As importantly, I could not be more pleased with the team members who have made the transition from First Federal to Equity Bank's platform. They bring extensive expertise in their markets and a fantastic customer service attitude and approach and have worked very hard alongside our existing Equity Bank team to become fully integrated in a very short period of time.

Also in the fourth quarter we had our successful initial public offering. We issued 1,941,000 shares priced in the range at $22.50. This includes the exercise of the greenshoe of 291,000 shares.

The net proceeds of the IPO of $39 million were used for the retirement of small business lending fund obligations in the amount of $16.4 million and we also have repaid our bank stock loan of approximately $18.6 million.

The rest of the proceeds remain in the Company for future growth and we have also negotiated a new line of credit secured with our bank stock for the use for potential cash element of consideration in future acquisitions.

We ended 2015 with total assets of $1.6 billion, loans of $960 million, and deposits of $1.2 billion with all categories showing substantial growth from the prior period.

As you can see from slide 2, we continued our history of growing tangible common book value per share, which stands at $15.97 at December 31, 2015. In fact, our compounded annual growth rate since 2011 is 9.5%. And with the First Federal transaction we continued our discipline of acquiring institutions with reasonable book value dilution and that are accretive to earnings per share.

And after recognizing all purchase accounting adjustments and recording the deferred tax income asset that came from the First Federal acquisition, we have actually recorded a small bargain purchase gain.

Also shown on slide 2, we have grown assets in 2015 to $1.6 billion or 35% from December 31, 2014, both from the acquisition and also from net organic growth of 24%, another core element of our growth strategy. Greg will take us through the fourth-quarter performance.

Thank you, Brad. Looking at slide 3, even with the exceptions driven by our acquisition and the IPO, our net income allocable to common stockholders in 2015 was a record $10.1 million including net income allocable to common stockholders in the fourth quarter of $2,506,000 and generated a return on tangible common equity in 2015 of 9.66%.

Included in the fourth-quarter results were expenses on a pretax basis of $1.6 million for the First Independence transaction and these expenses were essentially in-line with our original estimates. Helping to offset these expenses was a $386,000 recovery of an investment security previously written down in 2011 and, as Brad mentioned, we recorded a bargain purchase gain of $682,000.

Turning to slide 4, our net interest margin for the year was 3.65% and for the quarter was 3.26%, which included the continuation of our leverage or spread strategy we initiated in the third quarter 2015. This strategy is explained in our IPO prospectus and provides net revenue to help offset expenses from the acquisition and IPO.

Although not a part of our core operating model, we intend to utilize this strategy when it is profitable to do so. Our, quote, normalized net interest margin in the quarter would have been approximately 3.50% without this strategy and approximately 3.75% for the year.

The contribution to our net interest margin from net accretable yield generated from acquisitions was approximately 3 basis points during the year and a negative 3 basis points during the fourth quarter. The First Federal portfolio came across with an approximate yield of 5.07% and enhances our existing loan portfolio yield by approximately 4 basis points.

Our cost of total deposits remained essentially flat in the fourth quarter as compared to the third quarter, up only 2 basis points. This includes a proactive review and update of select deposit offerings to our customers and the inclusion of the First Federal deposit base.

Also noted on this slide, our efficiency ratio, adjusted for the First Federal transaction expenses, dropped to 67% from 73% at December 31, 2014, something we have worked very hard on as a Company.

Brad, before I discuss our provision for loan losses and our total reserves, please take us through your summary of our loan portfolio.

One question looming is the industry's exposure to oil and gas and the second and third order of effects of those exposures. Our portfolio has very little direct exposure to oil and gas of less than 90 basis points of total loans and only 2 credits greater than $1 million. We believe both are adequately collateralized and well-managed by the borrowers.

We have tried to avoid lending on credit indirectly tied to energy such as manufacturing, retail and hospitality in hotspots. And we do not believe we have any significant exposures to these types of credits.

Turning to slide 5, you can see our nonperforming assets continue to work down with our NPAs to total assets at 0.89% and our classified loans to regulatory capital of 15%, both measures down four quarters in a row. The majority of these classified loans are legacy credits from acquisitions and our special assets team has worked responsibly to bring them down.

Net charge-offs in 2015 are primarily due to approximately $2.3 million of charge-offs on problem credits previously identified before 2015. One of these credits had a portion of its business as a supplier to the oil and gas fields.

We have also continued to manage our concentrations in all aspects of our loan portfolio, as has been our custom, attempting to avoid any significant losses from one segment of the economy.

However, given what the international and domestic markets have been through and in recent weeks, and the uncertainty of these developments, we believe it is prudent to continue to build our allowance for loan loss reserve and total reserves to reflect total economic trends related to our portfolio at December 31, 2015.

Greg will take us through our fourth-quarter provision and resulting reserves and other income statement items.

Not shown in the slides, but referencing our income statement and balance sheet from our press release yesterday, we provided $1,180,000 to our allowance for loan losses in the fourth quarter and we had net charge-offs of $712,000.

The largest charge-off of $419,000 was primarily from one previously identified problem credit and we do not believe it is an indication of overall weakness in our portfolio. We did adjust our qualitative factors representing the macro environment which resulted in an overall higher provision for loan losses during the quarter of approximately $350,000 attributed to this qualitative factor.

Our allowance for loan losses stands at 57 basis points of our loan portfolio today. And when coupled with purchase accounting reserves our total reserves stand at 81 basis points of overall loans, up from 74 basis points at September 30. After considering the previously discussed nonrecurring items in the fourth quarter, noninterest income and noninterest expense were essentially in line with prior quarters.

Finally, our 2015 effective income tax rate, adjusting for the bargain purchase gain which is not taxable, is approximately 30% and includes the benefits of tax credits from our low income housing assets we had on our books plus from similar credits which we acquired from First Federal.

I would like to take a moment and turn to slide 6. At December 31, 2015, our capital position includes 8.37% tangible common equity to tangible assets and a 9.43% leverage ratio at the holding company and 8.39% at the bank. We feel these levels of capital are both efficient for our shareholders and allow us to execute our growth plans.

Next, Brad will discuss our lending and retail performance.

Looking at slide 7, our loan portfolio grew approximately $15 million in the fourth quarter, not including the acquisition of approximately $90 million in loans from the First Federal transaction.

Our 2015 loan growth, not including First Federal, was approximately $145 million or 20%. We are particularly proud of this growth as we have not been a bank to chase credits with easy terms. This approach is also evident in our loan portfolio yield in 2015 of 5.31%.

Our lending teams continue to utilize a well-defined and proven sales process. Our bankers use a targeted approach for market segments that we have seen success in, as well as segments with potential in our markets. Sales activities and calls are recorded in our customer relationship management system and followed systematically to maximize our potential.

Regarding deposits, on slide 8, I am equally as proud of our retail teams for continuing to grow our deposits and our retail products. Adjusted for First Federal transaction, deposits grew over $100 million in the fourth quarter and over $145 million in 2015.

Both measures include over $70 million in year-end deposits from our public municipality depositors. That is growth of 15% and includes growth in our signature accounts or our core deposits of 12%.

We believe core deposits are of critical value in any healthy bank and it remains a vital element of our business plan to continue to grow these deposits both organically and through acquisitions.

And regarding acquisitions, we continue to be engaged in discussions with potential institutions in our footprint shown on slide 9. Greg and I are methodically identifying targets that meet our criteria. And we will stay disciplined in our approach and focus on existing target geographies and be ready when the right transactions fit our model.

There are hundreds of banks in this geography and we feel the opportunity for consolidation is still significant. We are very excited about our future at Equity Bancshares and how we are positioned to capitalize on our opportunities.

Thank you for taking the time from your busy schedules to join us on our call today and we can take questions at this time.

Either the audience is muted or does the leader see any questions up?

(Operator Instructions). Terry McEvoy.

I guess just on M&A, a question I guess for Brad or for both of you guys. Is the volatility in the markets to sell off in bank stocks, has that pushed some M&A conversations to the sidelines or potentially accelerated some things? And then does having a public currency now change the discussions as well for you guys?

So that is a two-part question I think, Terry. The selloff in the broader market has not changed any of the discussions that we have had that are ongoing. It has not sidelined or stalled any of those discussions out. So that is the first part of that question.

The second part of the question I heard was has it accelerated any of the conversations. We have had inbound calls since we did the IPO from potential merger candidates. And so, it has helped those conversations and I believe will continue to help those conversations.

And then just as a follow-up, thanks for the discussion around energy. Could you give us an update on some of your niche lending groups, how they are performing, whether it is transportation, the QSR or maybe some of the aircraft lending that you do?

Yes, the aircraft lending manufacturing has remained strong and our manufacturing customers as a whole seem to be still -- have a backlog in their work production and still have record profits honestly from a customer-to-customer standpoint.

The QSR lending has remained very active. We booked some loans in the fourth quarter and we have some in the pipeline to continue that. We do not see a slowdown in that at all.

And the other question was on transportation. We have not seen a lot of new requests, but we haven't seen any payouts or a slowdown down in that area as well.

Great, thank you.

(Operator Instructions). Michael Perito.

Two questions, maybe one to start on the organic growth. So, I mean it looks like the last couple of quarters it has been about 8% to 10% on an annualized basis. I mean is that still kind of the range you guys are hoping to do in 2016 given everything you are seeing as it stands today?

We do not see any slowdown and, Michael, that 10% number is right in the ballpark on what we have our teams focused on across the board.

Okay. And then maybe a follow up to Terry's question. I mean it seems like if I take your comments and prepared remarks -- it sounds like the provision expense might trend higher on a quarterly basis a bit in 2016.

But it also sounds like that the tax rate might be a bit lower. I mean, do these two items -- is the right way to think about as kind of that they both will net out in terms of the bottom-line impact to 2016?

That is correct, Michael. They are decoupled, they're unrelated. We are fortunate to have very healthy performance from some of our income tax credits in 2015 continue into 2016. And our 2016 provision just reflects any losses that we think we might have in the portfolio as well as growth. And like we did in the fourth quarter, we will keep our eye on the macro environment.

Okay, perfect. And then maybe on the margin, can you maybe just -- more from a modeling perspective, can you maybe help us with the near-term kind of trajectory? I mean, so it sounds like the leverage strategy is going to stick around for the near-term as you guys have the excess cash.

Should we expect the same magnitude in the first quarter and in the same kind of size in terms of the bigger balance sheet? Or are you guys going to kind of wind that down and to start to deploy it into loans as that demand kind of remains consistent?

Yes. We will always deploy it into loans given the opportunity. But as long as we have the opportunity to leverage that opportunity -- the spread opportunity, and as long as it is comfortably profitable we will probably continue to do that.

And so, I think you can expect our net interest margin to include that in it, as well as obviously the other elements of margin from our loan and deposit portfolios and investment securities.

So, is the right way to think about it -- is the margin probably at least near-term it is going to hang out probably around this [3.30%] level but NII should continue to grow on a quarterly basis in 2016?

Correct.

Okay, perfect. Thanks, guys.

(Operator Instructions). And I am showing no further questions at this time. I would like to turn the conference back over to management.

We appreciate your time and your interest in Equity Bancshares. We look forward to a positive quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.