Equity Bancshares Inc (EQBK) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Equity Bancshares, Inc. first-quarter 2016 earnings conference call. (Operator Instructions).

I would now like to introduce your first speaker for today, John Hanley, Investor Relations Director. Have the floor, sir.

Thank you. Good morning, everyone. Welcome to Equity Bancshares, Inc. first-quarter 2016 earnings call. At this time if you are viewing on webcast, please note that you may advance our presentation slides using the button on the lower right corner of the player. If you are on tablet, you may swipe up to advance the slide.

During today's discussion, we may make forward-looking statements which carry certain risks and uncertainties. We encourage you to review the forward-looking disclaimers on slide 2 of our results presentation.

In addition, some of our discussion may include references to non-GAAP financial measures. A reconciliation of these measures can be found in our earnings press release dated April 21 and in today's presentation. All materials are available on our website, investor.equitybank.com.

It is now my pleasure to welcome Equity Bancshares's Chairman and Chief Executive Officer, Brad Elliott, and Chief Financial Officer, Greg Kossover. After the presentation we will be happy to answer questions as time permits.

With that, I will turn it over to Brad.

Thank you, John. Good morning, I am Brad Elliott, Chairman and Chief Executive Officer of Equity Bancshares, Inc., the parent company of Equity Bank in Wichita, Kansas. Thank you for joining our earnings call for the quarter ended March 31, 2016, our second earnings call since our IPO last November.

I have with me today Chief Financial Officer, Greg Kossover. I begin by thinking our board of directors and our executive, production and operating teams who are working very hard to deliver our shareholders as much value as we can.

On March 31, we concluded our first full quarter as a public company. And as well, as we will explain over the next few minutes, it was a great start to our public company journey. We have committed Equity Bancshares to being a great public company.

And one of the ways we believe we have demonstrated this commitment is through the strong performance amidst the many changes we have been through.

Jumping into slide 1. We had the most profitable quarter in the history of our Company, earnings of $0.41 per diluted share on over $3.4 million of net income allocable to common stockholders; and 43% growth over the first quarter of 2015. We are proud of these results, and Greg will take us through a summary of our performance in the next few minutes.

In addition to earnings, we had significant accomplishments in the first quarter. We realize the integration of our October 9 acquisition of First Independence Corporation. Also, we repaid our SBLF funds, and we restructured our bank stock loan into a line of credit. Both transactions delivered the capital -- both transactions leveraged the capital we raised in our IPO.

The Bank's stock line also positions us well, and will assist us in any acquisition requiring a cash component of consideration.

Core signature deposits are a key element of our strategic plan, and we grew them by $26.4 million in the first quarter. In addition, one of our Company's internal breakthrough promises is to grow the core deposits in the new markets we acquire in the First Independence acquisition.

Many banks see a runoff of deposits in the early stages following an acquisition. However, we kept our promise and have grown deposits in the First Independence markets by 11% or $6.6 million since the acquisition. We ended March 31, 2016, with $1.5 billion of assets and total deposits of $1.2 billion, which represents year-over-year growth of 28%. We ended March 31, 2016, with total loans of $938 million, representing year-over-year growth of 25% and a loan to deposit ratio of 76%.

Turning to loans, as you may have seen from our recent 8-K filing, we restructured our commercial lending platform to allow our high-performing lenders to continue delivering our customers a great commercial banking experience. Our loans are slightly down in the first quarter, primarily from our lower yielding participated mortgage warehouse lines, and other one to four family residential balances of approximately $23 million.

And even though our overall construction lines remain slightly underfunded as our borrowers first inject their equity into their projects, our commercial industrial loans, not including the change in the participated mortgage warehouse lines, increased in the quarter by $1.3 million.

We continue our strong capital position with tangible common equity to tangible assets of 8.98%, and bank level total capital to risk-weighted assets of 13.62%. Our nonperforming assets continued to be at levels below 1% of assets at the end of the first quarter, and total classified assets decreased to 13.3% of capital. Our annualized charge-offs were 0.11% of loans, and our allowance for loan losses grew $474,000 or 9%, in accordance with our loan loss reserve modeling.

Finally, we worked hard in the first quarter to continue the development of our acquisition pipeline. The strategy outlined in our S1 last fall remains intact, and we are excited about the number of banks interested in discussing consolidation with us.

As we have said, banks are sold, not bought. This means we work at the seller's pace and try to match their needs within reason. That said, we are engaging in active or ongoing discussions with as many as 5 to 10 financial institutions all in various stages of dialogue, from introductions to due diligence to active negotiations.

We are committed to being an outstanding public company, and although we work extremely hard to close acquisitions, we will not compromise our short-term shareholder value with poor transaction economics. And we will not compromise our long-term shareholder value with poor fit culturally and socially.

Greg will now take us through our first-quarter performance.

Thank you, Brad. As you can see from slide 2, we continued our history of growing tangible common book value per share which stands at $16.50 at March 31, 2016, and our compounded annual growth rate from 2012 to 2015 is 11.2%. Also, as shown on slide 2, we have grown assets to $1.5 billion. The decrease in total assets from 12-31-15 is from lower yielding assets as Brad described a moment ago, and also includes the February sale of approximately $25 million of investment securities, taking advantage of the lower interest rate environment at that time and generating a gain of $420,000.

Looking at slide 3, our net income allocable to common stockholders in the first quarter of 2016 was a record $3.439 million or $0.41 per diluted common share, and generated an annualized return on tangible common equity of 10.55%.

Loan and investment security balances were higher when compared to the first quarter 2015, along with deposits and Federal Home Loan Bank borrowings. And as mentioned earlier, the First Independence transaction was realized in the first quarter, helping interest income and non-interest income to increase year over year, coupled with a modest year-over-year increase in interest expense and non-interest expenses.

We also continued the deployment of our leverage strategy or spread opportunity, which is detailed in our IPO prospectus. This results in year-over-year increase in interest income from federal funds sold and other, and an increase in FHLB advanced interest expense.

The benefit of this strategy is approximately $0.01 per share after taxes and is a nice segue into slide 4. Turning to slide 4 in the presentation, our first-quarter 2016 net interest margin was 3.33%, and approximately 3.63% without the leverage strategy. This compares to 3.26% and approximately 3.50% for the quarter ended December 31, 2015.

Although not a part of our core operating model, we intend to utilize this strategy when it is profitable to do so. Our yield on loans improved to 5.04% from 4.95% in the fourth quarter 2015, primarily due in part to origination fees, the 25 basis point rate hike in December, and an overall slight improvement in the portfolio coupon.

The contribution to our learning yield from net accretable yield generated from acquisitions was approximately 5 basis points during the quarter. The yield on our securities portfolio improved approximately 3 basis points, and our cost of deposits was virtually unchanged. And the repayment of our bank stock loan improved net interest margin approximately 5 basis points in the first quarter 2016.

On the right-hand side of this slide, our efficiency ratio continued to improve from 66.9% for 2015 to 64.1% in the first quarter 2016.

Also, as the First Independence and IPO transactions have settled out and as our average assets have grown, our non-interest expense to average assets has improved markedly from 2.80% for the year 2015 to 2.35% for the first quarter 2016.

As we did on our last earnings call, before I discuss our provision for loan losses in our total reserves, Brad is going to walk us through his summary of our loan portfolio and our position in our markets.

We continue to be asked, rightfully so, about our exposure to oil and gas. Our portfolio has very little direct exposure to oil and gas of about 44 basis points of total loans. And only one credit is greater than $1 million, and we believe it is adequately collateralized and is well-managed by the borrower.

We continue avoiding lending on credits indirectly tied to energy, such as manufacturing, retail, hospitality in hotspots. We do not believe we have any significant exposure to these types of credits. I believe our loan concentrations continue to be well-managed. Our teams continue to be disciplined in our sales process, our underwriting standards and our pricing goals. I believe this is evident in our quarter-over-quarter loan yield growth.

Our asset quality remains high both, from these disciplines and from the hard work with our special assets team. Greg.

Turning to slide 5, you can see our nonperforming assets continue to be well-managed, with our NPAs to total assets at 0.98%, and our classified loans to regulatory capital at 13.3% as of March 31.

Net annualized charge-offs are 0.11% of average loans in the first quarter or $249,000. Consistent with our allowance for loan loss methodology and modeling, we provided $723,000 into our allowance for loan losses, which now stands at 64 basis points of loans compared to 57 basis points at December 31, 2015.

Total reserves, including our purchase discounts, stand at 86 basis points of loans at March 31, compared to 81 basis points at December 31, 2015.

I'd like to take a moment and turn to slide 6. We strive to manage our capital to both an efficient and conservative result. As such, we deployed a portion of our IPO proceeds into the retirement of our SBLF funds and also to the restructuring of our bank stock loan. As Brad stated earlier, our bank stock line of credit assists us when target banks desire a cash component of consideration. Yet the line of credit has a de minimis carrying cost until drawn upon and then has a cost of approximately 4%.

At 3-31-16, our capital position reflects 8.98% tangible common equity to tangible assets, and leveraged ratios at the holding Company of 8.53% and 8.48% at the bank. We feel these levels of capital are both efficient for our shareholders and allow us to execute our growth plans.

Brad will finish with a discussion of our lending and retail performance.

Looking at slide 7, we have an impressive loan portfolio growth of 9.97% from 2012 through 2015. And although our loans were down slightly in the first quarter of 2016, our growth from March 31, 2015 is 25%. And our mix remains heavily commercial and our pipeline remains strong.

I believe our markets here in Kansas and Missouri continue to provide abundant loan opportunity, both in the commercial and industrial segments as well as in the consumer segment. The restructuring of our commercial lending platform should allow us to continue to capitalize on these opportunities, as we expect to deliver even better customer service because of it.

I am particularly proud of our lending teams who continue to utilize and develop our sales and pricing strategies which have led to higher than peer margins and very high credit quality.

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

On slide 8, you can see that our core signature deposits grew $26 million in the first quarter or over 3%. This resulted in a basically flat cost of deposits quarter over quarter and helped grow our net interest margin, as Greg alluded to earlier.

I am proud of our retail teams for not only our systemwide core deposit growth, but it is even more impressive to grow core deposits in our newly acquired Southeast Kansas branches, from $59.7 million when we are acquired them to $66.3 million today.

Finally, regards to acquisitions. We continue to be engaged in discussions with several potential institutions in the footprint shown on slide 9. As stated on the first earnings call, Greg and I are methodically identifying targets that meet our criteria. And we will stay disciplined in our approach, focus on our existing target geographies, and be ready when the right transaction fits our model.

We appreciate you taking the time today to join our call, and we thank you for the interest in learning more about Equity Bancshares. We are now available for questions at this time.

(Operator Instructions) Michael Perito, KBW.

A quick question. If I've kind of taken all your commentary about -- it sounds like loan growth is going to pick up over the balance of the year here. And just if I am looking at the NII with this leverage strategy staying on, do you guys expect to be able to grow the NII dollars on a quarter-to-quarter basis from here?

We do, Mike. We should see -- with our loan growth we should see an improvement in overall yield. It will either come from the reduction of the leverage strategy or from a transfer potentially from securities portfolio running off to more loans. Either way, we should see interest income increase.

Okay, thanks. And then a question on the deposits. You had the nice growth in the signature deposits. I was wondering if you could maybe give us a little bit more color. You guys mentioned that the deposit costs were flat, but I'm curious if there is any difference in kind of your more metro markets or your more rural markets, or have they pretty much been flat across the entire footprint?

The flatness would come in the expense side. We saw -- as we mentioned, we saw growth in markets even that we just acquired, Mike. So we had some good growth in Wichita; we had good growth in most of our markets. And most of it came in the signature banks -- the signature account side.

So that is really appealing to us, as the lower cost of deposit and a stickier cost of deposit. So I don't think we will see quite as much growth going forward as we had in the first quarter. But our depository and retail teams are very focused on this, and our treasury and management teams are really focused in on continuing to grow core deposits.

Yes, sorry, I think I was a little unclear. So I meant -- the comment that the deposit costs were flat quarter over quarter. Just curious if, taking that a step deeper, if there was any movement in kind of the more rural community bank markets or in the metro markets. Was there any like offsetting actions or were they pretty much flat across your entire footprint from a funding cost perspective?

Pretty much flat.

Okay, great. Thanks, guys.

Terry McEvoy, Stephens.

Brad, I guess a question for you. You talk about the abundant opportunities to grow the loan portfolio this year, and you mentioned some strength in the pipeline. I guess can you just run through kind of your confidence in that pipeline turning into growth, and then maybe dig a little bit deeper. I know you said it is broad-based, but any one or two areas that really stand out to you that you feel the most optimistic about?

Sure. So we had forecasted in the first quarter to have several construction lines that we had booked on our system. And with customers to fund it up in the first quarter, they lagged; just the construction process didn't get -- had their equity in first and didn't get funded.

So I am pretty confident, because those are on our books and can't go anywhere, that they are going to fund this quarter as the construction is still moving forward. Along with that, we have approved the largest pipeline that we have had in a long time, and then we also have in underwriting a lot of credits.

So I have a lot of confidence, Terry, that we are going to be able to hit our projections of 8% to 10% loan growth. And it comes from the fact that I am very in tune with the sales process. We have restructured that right at year end. It is really kicking in and our folks are seasoned, balanced, and are really focused on that.

And we have some really good, strong opportunities from our Kansas City market and from our Western Missouri market that we haven't seen before. And our other markets are at or above plan today. So I am pretty confident that we will -- we do not have a problem in that area at all.

Then moving over to M&A, you talked about 5 to 10 banks that you are talking to, I guess as you think about the last three to six months. How many of those banks are the conversations going from an introduction to more active negotiations? And are you at this stage now where it is more negotiations versus just kicking the tires?

Sure, good question. We actually had -- and these are not stale opportunists -- we actually had a couple opportunities in the first quarter that we felt didn't fit our wheelhouse, and we passed on more than they passed on us, so -- because we were more excited about the other opportunities in our pipeline.

We have a couple of opportunities that are in late stages of negotiation. And then we have a couple opportunities that are in continuing negotiations and a couple opportunities that are in the investment stage. And I would say it is closer to 10 than it is 5, Terry. And I would say we have two or three in every one of those stage categories.

Maybe one last question, if I could. Expenses came in better than what I was looking for. As you think about either the second quarter or full-year 2016, what type of growth rate would you help us with?

And then in terms of the restructuring of the commercial lending division, will there be any expenses involved with that that would -- either that came through in Q1 or will show up in Q2?

Yes, we had a good quarter, Terry, controlling expenses, partially because we probably had some conservative estimates. Being a new public filer and going through the process, we did not want to be aggressive in our estimate of expenses.

I still like the expense profile and projections that we put together at the beginning of the year, which is somewhere between $9.8 million and $10 million a quarter. We will see higher expenses more than likely in quarters two through four, as we continue to build the production teams and as we continue to build the support teams; and frankly, as we continue to pursue mergers and acquisitions.

From the restructuring of the production area, we will not see an increase in expense. We will actually see a decrease in expense in quarter two. And I think that we will absorb some of that or free up some of that expense to be deployed in other producers.

So I don't see that it is going to increase our expense level. It would slightly actually decrease it in quarter two, but nothing significant.

Okay, thanks, guys.

(Operator Instructions) It likes we have no other questioners in the queue at this time. So I would like to turn the call back over to management for closing remarks.

We appreciate you taking the time and joining us. Once again, I would like to thank our board of directors, our executive management team, and our Equity Bank teams for their work and effort during the first quarter, and look forward to finishing the year.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone, have a great day.