Equity Bancshares Inc (EQBK) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2016 Equity Bancshares earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference may be recorded. I would like to introduce your host for today's conference, Senior Vice President of Investor Relations, Mr. John Hanley. Sir, you may begin.

Thank you. Welcome to Equity Bancshares' second-quarter earnings call with our year-to-date results through June 30, 2016. I'd like to remind you PDF presentation materials to accompany our call are available at investor.equitybank.com by clicking either the presentation tab or the event icon for today's call.

In addition, this call is viewable as a webcast at investor.equitybank.com. If you are viewing our webcast presentation, please note you will need to manually advance the slides using the controls at the lower right of the presentation.

Please note the first two slides within our presentation materials with the forward-looking statements disclaimer, as well as important information for investors. From time to time, we may make forward-looking statements within today's call and actual results may differ.

It is now my pleasure to welcome Equity Bancshares' Chairman and Chief Executive Officer, Brad Elliott and Executive Vice President 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.

Good morning. I'm 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 June 30, 2016, our second call in eight days.

I have with me today our Chief Financial Officer, Greg Kossover. Our last call was to announce the transaction with Community First Bancshares and its bank, Community First Bank. Today, we are going to discuss our second-quarter performance, but I want to take this moment and once again thank the Community First Board of Directors, Jerry Maland and Dan Bowers, the entire executive management team at Community and all their employees for the very professional handling of both the excitement of the transaction and the significant changes that come with these types of events.

I am even more excited now about our merger with Community First after we have been allowed to spend time with the Community First team, their customers, their shareholders and the markets they serve. I also want to thank our Equity Bank and Equity Bancshares employees and directors for the monumental task of getting transactions such as these over the goal line.

Our teams work unselfishly hard to meet the goals set by our Board of Directors and executive management team. If you have not viewed our Let's Build Equity video on our website at equitybank.com, I encourage you to do so. You will immediately see why I enjoy coming to work at this fantastic bank each day.

We committed Equity Bancshares to being a great public company eight months ago when we completed our IPO. We work to achieve this goal by delivering shareholder value through organic and acquisitive growth in what remains a dynamic and always challenging environment, including changing regulations, direction of rates set by the Federal Reserve, now BREXIT, the needs of our customers and of course, competitive pressures.

Even so, our teams continue to work merger and acquisition opportunities that we believe will deliver shareholder value while daily working to serve our customers, which is always priority number one and building future customers through a formalized sales process and by offering an always growing suite of products and services. We thank our very loyal customers for their business and the support throughout our Equity Bank franchise.

Moving along to slide 1, I will point out we have had record earnings year-to-date June 30, 2016 and continued our leverage strategy, although Greg will discuss in a few minutes we intend to wind it down in the third quarter. We have grown loans and deposits year-over-year substantially both organically and through our First Federal acquisition.

Our capital levels remain strong and efficient. OREO and NPAs continue their downward trend and we have another very low quarter of net charge-offs. We completed our annual joint regulatory examination in May, which was a joint exam by the State of Kansas and the Federal Reserve. We have a very valuable and professional relationship with each of them and keep them in tune to our initiatives and use their guidance.

In addition to the Community First announcement, we continue actively developing and cultivating our merger and acquisition pipeline. We are proud of all of this activity, and Greg will take us through a more detailed review of our financial performance in a few moments.

We ended June 30, 2016 with $1.5 billion of assets and total deposits of $1.2 billion and with total loans of $980 million representing year-over-year growth of 18% and quarter-over-quarter growth of 4.5%, representing some of the results of our restructuring in our commercial lending division. Our lending teams are working hard and smart and delivering quality production while working inside our high credit standards. Our loan-to-deposit ratio at June 30 is 82%.

I do want to note our net interest margin from first quarter to second quarter is down 4.4%. Greg will go through the details in a moment. There are several reasons for this. First, we have resisted to pricing lending relationships so low we can't make an internal rate of return. This can lead to lost short-term opportunities, but we believe it is long-term healthy for our shareholders.

Second, we have protected some of our very important large depositors by staying competitive with our deposit rates. Lastly, as the market allows, we sometimes take advantage of selling opportunities and take securities gains and we do it as we did in the second quarter. And those gains run through non-interest income helping the bottom line but not net interest income. Greg, will you now take us through our second-quarter performance?

Sure. Thank you, Brad. As you can see from slide 2, we continued growing tangible common book value per share, which is $16.87 per share at June 30, 2016. I also point out the payoff of SBLF in the first quarter and the restructuring of our bank stock loan, which is very helpful as we look at the cash components of our acquisition pipeline.

Turning to slide 3, our net income allocable to common stockholders in the second quarter 2016 was $2,846 million or $0.34 per diluted common share and $6.3 million year-to-date or $0.75 per diluted share and generated an annualized return on tangible common equity of 9.59%.

Slide 4 is where we revisit Brad's earlier comment on net interest income. Although we continued the deployment of our leverage strategy, or spread opportunity, which is detailed in our IPO prospectus, we likely will discontinue deploying it at the end of the third quarter. It has served a meaningful purpose as we incurred the transaction cost of the IPO and the First Federal integration and it helped to offset those expenses.

Also the transaction with Community First will bring several new markets of lending opportunities, as will other opportunities in our M&A pipeline and we want our stakeholders to have clear presentation to our net interest margin, and the benefit of this leverage strategy can sometimes cloud our net interest margin. Net interest margin year-to-date 2016 would have been 3.55% without this strategy.

Staying on net interest income, loan fees were approximately $180,000 lower than first quarter, which can and do fluctuate based on a variety of circumstances such as competition and overall deal pricing. Our portfolio coupon was virtually unchanged from approximately 4.71% during the first quarter to 4.70% in the second quarter.

In addition, as Brad said, we look at the possibility of taking advantage of the markets when those opportunities occur. In the second quarter, we sold approximately $16 million of lower-yielding government securities and replaced them with similar securities with slightly higher yields. We also sold approximately $34 million of securities during the quarter with gains totaling approximately $457,000. Unfortunately, these gains were almost entirely offset by a call on a single high-yielding [agri-credit] bond. The call was based on the government changing the capital calculations for entities such as agri-credit, allowing them a technical opportunity to call the bonds since debts such as this no longer qualifies for their capital.

Therefore, our interest income on securities was down $217,000 in the quarter, but gains, not including the impact of agri-credit, were $475,000 during the quarter and year-to-date are $895,000. And as mentioned earlier, that benefit is in non-interest income, not net interest income.

Finally, on net interest income, we had several large deposit relationships, which are very sticky, which came up for renewal and we were slightly more aggressive on our pricing and as such, our cost of deposits rose 3 basis points during the quarter negatively impacting net interest income by $62,000.

On the right-hand side of slide 4, our efficiency ratio has improved to 66.1% year-to-date. 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 2.38% for year-to-date June 30, 2016.

Slightly hurting the June numbers is about $0.01 per share of merger costs on a potential transaction that did not get completed in the second quarter. In all, we believe $0.36 per diluted share of core EPS during the quarter is more representative after allowing for the merger costs and opportunity costs of the investment securities interest income.

Brad will now walk us through his summary of our loan portfolio and our position in our markets.

We continue to be asked about our exposure to certain concentrations such as CRE and energy. We mentioned last quarter that our portfolio has very little direct or indirect exposure to oil and gas and that has not changed. We also monitor carefully our CRE portfolio, which contains about 20% in non-owner occupied, which is performing well and we believe to be well-secured. Overall, I believe our concentrations continue to be well-managed, our underwriting standards are strong as represented on our asset quality slide 5 and our lending teams are hustling as always. We grew loans in the second quarter and our NPAs improved and net charge-offs were a low 16 basis points annualized. Greg.

On slide 6, we can see our capital ratios remain strong and efficient. I will reiterate from the call last week on the Community First announcement our capital ratios will temporarily decline at the closing of that transaction to approximately 8.18% tangible common equity to tangible assets and approximately 11.7% tier 1 common ratio with both expected to increase in 2017 to over 9% and over 13% respectively as earnings of the combined companies increase. This is important for several reasons, including the ability to continue to pursue acquisitions at a pace not impeded by capital constraints, which is a nice segue for Brad to finish with a discussion on M&A, as it remains core to our strategy.

Before I hand it over to him, slide 7 shows some loan detail and slide 8 recaps our deposits. The decline in deposits is primarily from seasonal use of public funds. Brad.

The map on page 9 probably looks familiar to you by now and we are excited to see purple triangles in the Harrison, Berryville, Eureka Springs and Pea Ridge, Arkansas markets. As Greg said, we will continue our discussion with other banks in our footprint for possible partnering opportunities. Today, we continue to have dialogue with 5 to 10 banks and we always continue to develop new relationships as a part of our routines. Thank you for listening today and we are now available for questions.

(Operator Instructions). Terry McEvoy, Stephens.

Greg, thanks for all the details into the 2Q NIM and the puts and the takes there. I guess as you think about the third-quarter core NIM, how much of an impact, that agri-bond, how much of an impact will that have? Could you talk about the purchase accounting accretion and then just the core NIM given the flattening of the yield curve that occurred throughout the second quarter. Putting that altogether, just what are your general thoughts on the margin?

Yes, I don't see the margin declining from where it was in the second quarter for several reasons. The agri-credit bond was very small, Terry; it was about $2.1 million. So even though it was high-yielding, it represents a very small amount in our portfolio. I expect our cost of deposits to hang about where it was in the second quarter and, like I said in the talk, our loan coupons are not decreasing. It will depend largely on production and origination fees in the third quarter, but if we have a typical quarter for origination fees and as we rebuild our investment securities portfolio, I would expect our net interest margin to continue to be in that 3.55%, 3.60%, low 3.60%s range.

I have a question for Brad. We are almost getting closer to the end of July. Can you just talk about loan activity so far in the third quarter and whether you expect to see maybe an acceleration in Q3 versus what was just reported for the second quarter?

Yes, Terry, good question. We have several construction loans that we have had booked for some of them over a year. One in particular has not had a draw on it yet. Its first draw, which will be about $10 million, will come in August, which will help a lot. We've been anticipating that. It's a project that's been funding up. It's a little behind schedule from the weather that happened late spring into June, but the pipeline is actually laying in front of me and I feel very confident that we have the committed loans -- we have loan commitments on them, or we have them in the construction loan bucket and they will be funding. So I'm feeling pretty bullish on the ability to continue good loan growth into the third quarter.

And our teams are very focused on it and as we talked about retooling our sales process at the end of last year, that is paying dividends. We've got really good prospects and we've got a really good lending team right now, so I'm confident that our group is doing the right thing.

Thanks. And then just one quick follow-up for Greg. Expenses were better than I had modeled and it sounds like there were some non-core items in there. I think you called them opportunistic. I forget what you said specifically. Could you quantify those expenses?

In the second quarter, we had about $0.01 per share of merger -- this may be what you are referring to, Terry -- of merger expenses on a transaction not related to Community First, which actually hurt non-interest expense in Q2. But I expect our Q3 run rate of non-interest expense to look very similar to the second quarter.

Great. Thanks, guys.

Michael Perito, KBW.

Maybe a quick question for Brad, just a more high-level question. We are in this environment now where it seems like interest rates are not really going to cooperate anytime soon. Obviously, it's anyone's guess, but assuming they don't, are you guys starting to think about any other platforms you have like maybe your mortgage platform, you are starting to maybe invest there, think about other ways to help you guys grow earnings? Or from your seat, do you think it's more additional M&A transactions that will help you grow earnings even in a less favorable interest rate backdrop?

So I would say we are very focused twofold, Mike. Our organic growth is something that's important to us and so we have continued to try to recruit commercial lenders and real estate lenders in our market. We actually had a good month in June and May. Not all of the earnings pulled through on the secondary market sales in June to reflect that, but they will come in in July, as they were just over the quarter-end.

So our real estate secondary market group is doing a pretty good job. We are always looking at adding people to that and our manager of that is doing a good job of driving that. And then our commercial guys are -- we rolled out a new sales program about 30 days ago and it's generating a lot of leads for us. We have a good sales process, as I've talked about, but we've got the right people in place driving that in processes. But then our acquisition pipeline I think will continue to give us good growth. I don't anticipate that our compounded annual growth rate will change from what it has been in the past.

So we've been a high-growth company since we started the Company, and I think we will be a high-growth company and that will be twofold. It will come from the inquisitive side, but also filling it with organic growth on the loan side.

Thanks. And then a question maybe for Greg on the provision. It's jumped around a bit the last few quarters. It sounds like the loan growth outlook is pretty steady and robust. Should we expect to maybe see a bit higher provisioning levels going forward as the loan growth continues to come in and you look at your reserves today?

Yes, that's a great question, Mike. We have really two forces at play, and you touched on loan growth. So when we look at budgeting our provision, as everybody knows, we book our provision based upon what our modeling tells us we need to provide for to have an adequate allowance.

Certainly, as loans grow, that provision will increase. However, offsetting that is, as we've talked about before, our history has a very low history of net charge-offs, which mathematically require less allowance and therefore less provision. So even though we are going to be growing loans in the next several quarters, I would expect our provision for losses to look very similar annualized what it has been year-to-date.

Okay. Great. And then just one last one from me, a follow-up to Terry's question on the margin. I know you guys provided some initial thoughts, but can you guys maybe expand a little bit on how you think the Community First transaction is going to impact your margin, especially under the backdrop of we are moving the leverage strategy by year-end?

Yes. So to be specific, I think that when we combine our net interest margin and Community First's net interest margin, I get somewhere in the modeling process between 3.75% and 3.8%. They have a very high net interest margin. As Brad has alluded to, they are very talented bankers and they work very hard at it. And as we combine their margin into our margin without the leverage strategy, I see it settling in on a pro forma basis between 3.75% and 3.8%.

Very helpful. Thanks, guys.

(Operator Instructions). At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Brad Elliot for closing remarks.

Once again, I would like to thank our Board of Directors, our executive management team and our Equity Bank teams for all of their work and efforts during the quarter. We look forward to working day to day with our new teammates at Community First. I appreciate you taking your time to join us on this call today. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Have a great day.