Equity Bancshares Inc (EQBK) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Equity Bancshares First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. Jacob Willis, Investor Relations Officer. Sir, please go head.

Good morning, and thank you for joining our Equity Bancshares presentation and conference call, which will include discussion and presentation of our first quarter 2018 results.

Joining me today are Equity Bancshares Chairman and CEO, Brad Elliott; and Equity Bancshares Executive Vice President and Chief Financial Officer, Greg Kossover.

The presentation slides to accompany our call are available for download at investor.equitybank.com, as is our press release detailing first quarter results.

You may also click the Event icon for today's call posted at investor.equitybank.com. If you're viewing this call on our webcast player, please note that slides will not automatically advance.

Please note Slide 2 including important information regarding forward-looking statements. From time to time, we may make forward-looking statements within today's call, and actual results may differ.

Slide 3 also details important additional information for investors and shareholders.

Following the presentation, we will allow time for questions and further discussion.

Thank you all for joining us. With that, I'd like to turn it over to Brad Elliott.

Good morning. I'm Brad Elliott, Chairman and CEO of Equity Bancshares. And here with me today is our CFO, Greg Kossover. Thank you for joining our First Quarter 2018 Equity Bancshares Earnings Call.

As you can see from the headline on our earnings release last night, Equity Bancshares posted record earnings for the first quarter 2018. We have worked hard to integrate 5 institutions since our November 2015 IPO, and these mergers as well as organic growth over this same time frame have led to these record results.

We are also excited to tell you our 2 most recent merger announcements, First National Bank Liberal and Adams Dairy Bank in Kansas City, are scheduled to close on May 4. As announced for these transactions this past December, these 2 mergers expand Equity Bank to 48 branches in 4 states we operate in: Kansas, Missouri, Oklahoma and Arkansas.

As we have continued to grow our balance sheet and expand geographically, we have also continued to add talent to the Equity Bank team. This past quarter, we added Craig Anderson, our Chief Operating Officer. Craig comes to us from a long and successful career at UMB, and he will head our metro markets as well as help us increase our fee income business lines, like treasury management, swap products and grow our card service business.

I'm especially excited about this addition to the team as Craig brings not only experience in our markets, but also adds significantly to our leadership base. He will work side by side with Wendell Bontrager to continue to lead our community markets.

We have also added Craig Mayo as our new Chief Credit Officer. Craig also comes to Equity with over 30 years experience in credit, and we are excited about his fit into our credit culture. Craig comes to us from County Bancorp, Inc. in Wisconsin, where he served as Chief Credit Officer through their process of becoming a public company and helping the credit underwriting through their last merger.

And of course, we are also excited about the addition of Tina Call and all the folks at First National Liberal and Adams Dairy. Those mergers occur on May 4, and we are excited to have both of these banks integrated.

As a quick update on recent mergers, I am happy about the integration and production levels of all 3 of our 2017 mergers: Prairie State Bank in Hoxie, Kansas; and both the Oklahoma mergers in Ponca City, Newkirk and Tulsa. All have integrated well and begun generating strong results for the Equity Bank franchise.

Our annualized organic loan growth during the first quarter was about 4.5%, and the first quarter is typically our slowest of the year. Deposits were down slightly in the quarter, but this is due to intentionally reducing approximately $48 million of the more expensive deposits from the Tulsa merger.

We have also been busy continuing to work down nonperforming assets, most of which we acquired through mergers. As we have said on our last call, we believe the current business environment is suitable for reducing nonperforming assets; and as such, Tim Kerr, our special asset manager, has done an excellent job reducing these with his team and on terms within our expectations. OREO has declined to $7.1 million at March 31, nonaccrual loans declined to $5 million and 12% in the quarter and the percent of regulatory classified assets to capital went from 24.7% in the fourth quarter to 19.5% in the first quarter.

At this point, Greg and I would like to take the discussion to the first quarter 2018 performance. Greg?

We will begin with the reconciliation of earnings per share for the quarter. As Brad said at the top of the call, stated diluted earnings per share for the first quarter is a record $0.58 per share on a record $8.7 million in net income allocable to common stockholders.

Mergers and acquisition expense adjusted for income taxes hurts earnings and EPS by $412,000 in the quarter or $0.03 per share. Additionally, we have a onetime executive compensation adjustment as disclosed in our 8-K of March 5 of $339,000 after tax or about $0.02 per share. First quarter earnings and EPS reconciled for these items are $9.5 million and $0.64 per share, both records for our company and in line with our expectations.

Looking at the components of net income. We start with net interest margin, which for the quarter was 3.91% as compared to net interest margin for the fourth quarter in 2017 of 3.79%.

Yield on assets is up in the quarter 20 basis points, led by loans with a yield of approximately 5.55% on a weighted average loan coupon at the end of March of about 5.04% compared to about 4.98% at year-end and 4.88% at March 31, 2017.

Securities, which yield at about 2.67% in Q1 2018, were about 2.50% at December 31 and 2.45% 1 year ago. Partially offsetting the improvement in asset yields is a rise in cost of funds in total of 10 basis points in the first quarter.

Cost of interest-bearing deposits was 94 basis points in the first quarter of 2018 compared to 87 basis points in the fourth quarter. Helping to offset these increases, our noninterest-bearing checking accounts have increased more than $28 million since year-end, reducing the overall current cost of deposits 14 basis points to 80 basis points versus 74 basis points at year-end. The cost of Federal Home Loan Bank overnight advances has risen about 24 basis points in the same time frame.

Brad?

We have a campaign running right now at Equity Bank to increase core deposits called one more a day, whereby each bank in our franchise is encouraged to increase checking accounts 1 per day.

As Greg stated, noninterest-bearing checking accounts are up in the quarter, and this is no doubt is part -- is in part of our efforts, of the team who opened over 3,600 checking accounts during the quarter. Greg?

Provision for loan losses was $1,170,000 in the quarter, essentially where we planned. Net charge-offs for the quarter were only $352,000, and nothing large was in that number.

ALLL as a percentage of total loans was 44 basis points at quarter end and total reserves with purchase accounting discounts was 1.19%.

As we continually monitor our portfolio and markets for macro trends, we continue to see muted credit weakness. However, and as I have stated before, we are also not loosening our credit criteria.

Wendell and the production teams, and now with Craig Anderson and Craig Mayo adding even more strength, are continuing to push hard at quality production.

Noninterest income for the quarter was in line with our expectations. After scrubbing our merger-related expenses and the executive comp mentioned earlier, noninterest expense in the quarter was also in line with our expectations.

Our efficiency ratio continues to trend downward ending the quarter at 59.6% and noninterest expense to average assets was 2.51%, both measures at their lowest since the company went public.

Our effective income tax rate for the first quarter was 22.5%, in line with our previous guidance. This leaves Equity Bancshares with a return on average assets, as stated, at 1.11% and pro forma-ed for the noncore adjustments of 1.21%. Return on average tangible common equity as stated is 14.1% and adjusted for noncore items is 15.3%.

As we look at our balance sheet mix, I once again thank the teams for all their efforts. Everyone at Equity Bank is pulling hard to deliver shareholder returns.

In the first quarter, we had our largest-ever all employee meeting, attended by all our associates and totaling over 625 people. In this meeting, we set our goals for the year and discussed the vital initiatives for each team at Equity. We have held this meeting every year since we founded the bank, and we believe it makes us different and more employee friendly, particularly to get and keep everyone on the same page, which helps us to be more shareholder friendly.

Loans grew $23 million or about 1%, which is not unusual for a first quarter. This does not take into account approximately $35 million of construction facilities originated but to be funded in future quarters.

The allowance for loan losses increased $818,000, and with purchase accounting discounts stands at $25.3 million. Securities were essentially flat and OREO plus nonperforming assets were down $5.8 million in the quarter.

On the liability side, deposits were relatively flat, down approximately $9 million. However, time deposits greater than $100,000 were reduced by design, as brokered CDs from recent mergers were allowed to roll off in the amount of $48 million and were offset by growth in transaction accounts of approximately $42 million. This in turn grew core deposits to total deposits from 78% to 80% this quarter.

Total stockholders' equity grew $7.3 million, the net of income allocable to common shareholders and the change in AOCI of about $2.1 million. Brad?

I am really excited to report the contribution being made by all our markets, both from recent mergers and from our legacy Equity Bank locations. Both Tulsa, primarily in loan production, and Ponca City in both loans and deposits, have performed to expectation. Also, Hoxie and our Western Kansas locations have been steady the past 12 months in both loan and deposit production. The teams in all these markets have made the transition into the Equity Bank system, and we are expecting the same from the teams at Liberal and Adams Dairy.

I am also excited about our legacy Equity Bank locations. Mark Parman and his team in Kansas City and Jeremy Machain, heading up Wichita, have led these 2 metro markets in strong fashion. I have not been more excited about these 2 markets and the leadership in each of them in the history of the bank.

We added new strength to the leadership team in Western Missouri, and our Ozark region continues to progress as a contributor to the Equity franchise.

Our capital ratios continue to be competitive and allow us to safely execute our mergers and growth strategies.

Tangible common equity ended the quarter at 8.70%, Tier 1 was 9.45% and total risk based was 12.81%. Tangible common book value per share is $18.22 at 3/31/18.

Basic share count at the end of March was 14,621,258 shares and diluted was 14,923,798 shares.

As we think about 2018, we want you to know that we are continuing on with our 2 strategies for growth: grow organically and grow through mergers.

We have been busy cultivating our merger pipeline, as we always do. And our current teams have been busy diligently to grow our existing markets with great customers and great products.

I once again want to thank all of our stakeholders for their support. Please know that each Equity Bank employee understands our goal is to deliver the most shareholder value we are capable of. Although, these are some of the best of times, we are not resting on our laurels. We are also stakeholders, and we know if we grow our customer base, book value and EPS, each shareholder wins.

With these common goals in mind, we are working responsibly to grow loans while maintaining our very high credit quality. We are focused on growing core deposits one account at a time if necessary, and we are protecting capital each step of the way. We will continue to do mergers we believe will grow shareholder value and with merger partners we believe fit into the Equity Bank culture.

At this time, we are happy to entertain questions.

(Operator Instructions) Our first question comes from the line of Michael Perito with KBW.

A couple questions for me. I want to start maybe on kind of the high level and the outlook here, Brad. I mean, you've -- fourth quarter and first quarter here, there's been a couple merger items in the expense line. But other than that, they've been 2 somewhat clean quarters, showing some good profitability trends, decent growth. And I'm curious, as you guys talk internally, how do you keep that momentum going while also having the M&A piece of the strategy? We've got 2 more deals coming on in May. Obviously, there'll be some noise around that. But what do you think you guys can do or what are you doing currently to kind of keep the fundamental momentum of the franchise going as you kind of have to integrate these new franchises?

That's good question, Michael. So it's really helped us with adding Julie Huber, moving her out of the Chief Credit Officer role last year, about this time -- or actually it was May or June time frame. It allows her to focus on the integration of M&A, and she is uniquely suited, in my opinion, to be able to see the whole company because she's been in so many different parts of the company. And so her focus on that really allows the rest of the team to focus on what they do. So as we get bigger and have done more and more M&A transactions, there's less and less distraction in the core organic team. And so I would tell you that we really try to keep that group separated from the M&A strategy until the time we close the transaction. So I would tell you that there's more focus on organic today than there ever has been. Wendell has done a really, really good job of getting that group focused and oriented towards organic growth. Adding Craig Anderson into that mix on leadership will really help both of them stay focused on organic growth while we're out working on M&A transactions. We've also implemented and started the strategy beginning of this year to really solidify the origination process and take that to the next level. And so I think as that gets implemented throughout this year, I think our organic machine honestly, Michael, just gets better and better. And I think we'll see much better results quarters from now from that organic origination than we ever have before.

Helpful, Brad. And then second question on the deposit side. Can you remind us kind of the mix geographically of deposits between your 3 more metro markets and then the rest of your franchise? And also, maybe just talk to some of the pricing disparities you're seeing in those markets. I mean, you mentioned that you rolled off some noncore funding, and I think it was in Tulsa, in the prepared remarks. Is the plan to try to replace that with core funding in market? Or is it so competitive where the plan is to kind of replace it with core funding in your more rural markets and go that direction?

So it's twofold. One is the Tulsa folks are really focused on growing deposits in that market. They had to fund their balance sheet because they couldn't fund the loan growth fast enough with that core deposit growth. So what I would tell you is it's a really good deposit market and it will grow. We have a really good bank location there in the right part of town. And so the number of checking accounts opened today, I think, are as high as they've probably ever been in a quarter for that group. And I think they're going to continue to grow their core deposits. It's not going to make up the funding needed, to be honest with you, in that market. So that market funding or that deposit funding then comes from our other markets that are not as asset-rich. And so if you remember it's about 60%, 65% funded from community markets and about 40% -- 35% to 40% funded from metro markets.

And has the pricing pressure in those community markets been notably less? Or are you really seeing it across the franchise?

So it's less -- there's pressure everywhere on betas, but it's less -- it's -- there's not as much pressure as there is in a market like Tulsa, Kansas City or Wichita. And so there's less pressure, but there's still pressure. Am I saying that correctly, Greg?

Yes.

Okay. Great. And then just one last one for me. On the loan growth side, Greg, you mentioned on my first question that there's more focused ever internally on the organic side. We've heard a lot of the larger and mid-cap banks talk about competition on commercial real estate, multi-family, C&I, auto, consumer stuff. It really seems to be all over. Just curious as you kind of bump up the organic growth here, can you talk a little bit about where incremental pricing is on the asset yield side? And are you still seeing decent yield pickup as you put new loans on? Or is the competition really kind of competing that away?

Well, Michael, our coupons have been up essentially every quarter for the last 5 quarters. This quarter, our coupon was 5.04% in the entire portfolio versus about 4.99% in Q4 '17. So even with the competition, I think the universe of banks in our space continues to understand that, as Brad alluded to, cost of deposits is increasing, betas are increasing, and we're -- I think we are seeing across the board more responsible loan pricing to offset that. So our teams have done a really nice job educating our customers and getting our loan yields and coupons to go up. So even though there's pressure out there, I think the fact that we're all living in a rising rate environment is in fact manifesting itself in better asset yields.

Our next question comes from the line of Terry McEvoy with Stephens.

Brad, maybe a question for you. Could you just talk about the loan pipeline, the outlook for the second quarter as it relates to loan growth? Do any geographies or industries stand out? And then maybe -- I know it's early in the quarter, but any comments on what you've seen over the last 3, 4 weeks?

Yes. So I would tell you, Terry, that the dollar amount in the pipeline is -- the close in the next 90 days is significant. Honestly, May is as big as we've had it ever for a month. So we're hoping that all that comes through. Until it's closed, it's never closed. But -- so we're looking for a good pipeline there. I think it will be -- we'll have to help you guys pull that out because next quarter, year-end, we're going to have the 2 mergers that come together. So we're going to have to separate out what was growth from the mergers and what was actually organic growth. But I think you're going to see good organic growth there. And it's kind of across the board, Terry. I'm actually looking at the pipeline report. We've booked a really good C&I deal out of our Tulsa market at the beginning of this quarter and -- in April, and so a big one for us. I mean, it's $20 million credit relationship that they have had a small piece of that we were able to pull the rest of it away from a large financial institution because they wanted a local bank. And so it's everything from C&I to construction loans. So it's kind of across the board on what we're looking at, and it's all markets. Kansas City, Wichita, Tulsa and even the community markets are doing a really good job of adding new opportunities. So the teams have -- I'll give Wendell and Patrick Harbert a lot of credit. They've really worked hard with their teams over the last year to get them focused on organic origination, not that they weren't always focused, but Mark Parman and Jeremy have added some really good new officers in Kansas City and Wichita. And so all of that's kind of hitting in. And so I'm pretty bullish, honestly, Terry, about where we're headed from an organic origination standpoint.

And then a question for Greg. The 3.91% margin, could you just kind of run through some of the upside versus the prior quarter and then maybe the sustainability and what your thoughts are on the second quarter on a core basis and then taking into consideration the pending deals?

Yes. So Terry, I think what -- let me give you the punchline first. I think that we should expect second quarter to be 3.75% to 3.80% on net interest margin post-mergers. The -- but that will be offset relative with the first quarter by higher average balances of earning assets, too. So I don't expect the dollars of net interest margin to be negatively impacted, but I think the rate will be. We had a -- it's difficult to tell the purchase accounting always what's going to happen with accretable yield. I estimate that in the first quarter, we might have had a couple of hundred thousand dollars, maybe $150,000 to $200,000 of accretable yield in addition to what we had budgeted. We also had a nice fee quarter. We looked at our loan fees, loan origination fees, and they were up several hundred thousand dollars from where we had budgeted. It's a very nice problem to have. We did originate about $35 million of construction loans that remain unfunded through Q1, but we took the fees on. So if you put all that in the blender, I would back off the 3.91% somewhere closer to 3.80% to 3.83%, and I would expect second quarter to be more like 3.75% to 3.80%. But again, dollars should not be negatively impacted as we'll be carrying higher average balances.

That's great. And then just the last question. Brad, when you ran through Craig Anderson and his new role at the company, you talked about growing loans, growing deposits, growing fees. Sounds like a big task. How do you maybe rank some of the maybe near-term priorities and where you'd expect to see success within those 3 areas of potential growth?

So what I would tell you is the team underneath him is built. It's not like he has to come in here and build that. We feel very fortunate to have him join our team. We've got a really experienced person from an institution that's much larger than us, so he brings a lot of experience to us that will help us. But the team is built underneath him so -- and is working. He doesn't have to fix things there. And so I think he'll be additive to that loan origination piece and the deposit treasury management origination piece. And I think the fee income piece, Terry, will be longer out. But we already have some initiatives underway, and he's going to help be the catalyst in moving those to completion. So we already had an initiative underway. We have a small card business today that we've had that doesn't produce a lot of income honestly, but the platform's there. And so I think Craig will help us be able to take that platform and be able to expand it into actual revenue.

(Operator Instructions) Our next question comes from the line of Andrew Liesch with Sandler O'Neill.

Just one follow-up. You've covered most of my questions. The pipeline -- this $35 million or so of construction that you took the fees on, are those expected to fund up this quarter or slowly throughout this year?

I would say slowly throughout the rest of the year.

Okay. And then were there any outsized paydowns here in the first quarter that affected loan growth?

No.

And I'm not showing any further questions at this time. I'd like to turn the call back to Mr. Willis for any closing remarks.

Ladies and gentlemen, this concludes our Equity Bancshares presentation and conference call. Thank you for joining, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.