Equity Bancshares Inc (EQBK) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Equity Bancshares' Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this call may be recorded.

It is now my pleasure to introduce Investor Relations Officer, Mr. Jacob Willis. Please go ahead, sir.

Good morning, and thank you for joining our Equity Bancshares' presentation and conference call, which will include discussion and presentation of our third 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.

Presentation slides to accompany our call are available for download at investor.equitybank.com, as is our press release detailing third 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. 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. Thank you for joining the Equity Bancshares' Third Quarter 2018 Earnings Call. I'm Brad Elliott, Chairman and CEO of Equity Bancshares, and here with me today is our CFO, Greg Kossover.

We had another outstanding quarter at our company in terms of organic and acquisitive growth and a solid quarter for performance, with an earnings per share adjusted for mergers and acquisitions at $0.68 per share. Greg will explain in a few moments the variances. Our credit quality remains strong, with year-to-date net charge-offs at a very small 3 basis points of loans. And our balance sheet growth continues to be brisk and responsible.

Our loans and deposits grew organically in the quarter $68 million and $59 million. In addition, we grew acquisitively, closing the City Bank and Trust transaction in late August, increasing loans $78 million and deposits $127 million from that transaction. This continues our 2-pronged growth strategy to grow organically in both metro and community markets and to look for outstanding strategic partners who want to be on Equity Bank team.

As we welcome a new team from Guymon and soon-to-be Cordell as well, I want to thank our operating teams in our loan and deposit operations, human resources, accounting, risk management, marketing and information technology for each of their efforts to provide the platform for this growth. They do an extraordinary job creating and managing bandwidth we need to continue our growth. I also want to thank our third-party advisers: Crowe LLP, our independent accountants; and Norton Rose Fulbright as our General Counsel. We rely on their hard work and expertise as we navigate a busy and oftentimes complicated calendar. We appreciate what they do and how they do it.

As the market has fluctuated the past weeks, our EQBK fundamentals have not changed. We will continue to do mergers that have earn-backs of 3 years. We continue to approach credit with sound underwriting and safety. Our teams continue to work hard on growing core deposits. We are building a talented team, and we are laser-focused to protect tangible book value and grow EPS. Our tangible book value is $18.22, up from $18.16 at June 30, even after recording the City Bank transaction during the quarter. Year-over-year, EPS has grown from $0.47 in the third quarter of 2017 to $0.68 this year, or 45% growth: 30% coming from core EPS growth, and 15% coming from Trump tax cuts.

I want to highlight Page 6. In the Q3 2018 results presentation filed last night, this page shows how we're clustering our banking centers in our 4-state footprint. The recently closed City Bank transaction and recently announced branches to be acquired in Guymon and Cordell, Oklahoma from MidFirst are examples. This concentration, in this case, with over $500 million of deposits, when coupled with the May 2018 closing of Liberal, Kansas merger, creates synergy and cost efficiency throughout our footprint. The same is true with Hays in Hoxie, Ponca City, Newkirk and Southeast Kansas; Adams Dairy in Kansas City; and with our branches in Western Missouri and Northern Arkansas. As we approach mergers, we look for new markets, and at the same time, look also at markets that create density and synergies in our existing markets.

Greg, please take us through the loan and deposit growth in the third quarter.

Thanks, Brad. Our annualized organic loan growth during the first 9 months of 2018 was approximately 8.5%, about where we forecasted in our legacy portfolio credit. Quality has improved year-to-date as we have worked down nonaccruals. Our OREO has decreased $900,000 to about $7 million. And as Brad said earlier, our year-to-date net charge-offs are a mere 3 basis points of loans. Our percentage of nonperforming assets to total assets has improved from 1.52% at 12/31/17 to 1.28% at September 30. Our ALLL has gone from 40 basis points to 43 basis points, even with our acquisitions during the same time frame. Our total reserves with purchase accounting discounts stand at 1.12%.

Looking at Page 14 of the slide deck, in the lower left-hand box, there's a footnote that shows 46.7% of the $33.1 million of purchase credit-impaired loans we have acquired. This represents those loans that are currently performing, but because they were marked at acquisition, are currently considered nonaccrual even though payments are being made. These total approximately $15.5 million.

As we stated last quarter, we are very focused on asset quality. No matter the source of the credit, originated or purchased through acquisitions, we will continue to work these assets hard, but fairly, to move them out of the bank in a responsible fashion.

Page 12 of the deck shows that our C&I portfolio remains strong at 22%, even with merger activity representing less C&I than we have. CRE is 42% of our loan portfolio, but well within capital guidelines. Ag and real estate construction each represent less than 10% of the portfolio.

I'd like to spend a moment on Slide 13, our metro market organic loan growth. Each of our 3 metro markets have shown considerable growth since our IPO 3 years ago: Wichita averaging 19% the last 3 years; Kansas City at 22%; and Tulsa at 12% the past year. The teams in these markets have worked diligently to grow their portfolios and to keep our credit risk in line with our policies. And today, our pipeline for loan remains as strong as always, with over $180 million of total net fundings.

Our deposits grew organically, $59.2 million, in the first 9 months of the year, which are typically our slowest 9 months for overall deposit growth. This 2.5% growth, and as adjusted for the intentional run-off of about $132 million in noncore funding, primarily acquired through mergers.

Looking at Slide 15. Noninterest-bearing deposits have grown to 17.1% of total deposits at 9/30, up from 15.4% at 12/31/17. Overall, transaction accounts have grown to 69.8% from 67.4%, this being the result of merger activity and also the hard work of our retail teams who are focused on developing core deposits. The overall cost of deposits has increased to 95 basis points from 84 basis points at June 30, 2018, which is to be expected in this rate environment. Signature deposits have increased $364 million since 12/31/17 and $140 million since June 30, 2018 through organic and merger activities.

Staying on the balance sheet. Cash and securities have increased as we have closed on mergers, OREO is down, and FRB and FHLB stock are up as we have grown. FHLB advances are up, but we expect them to decline in Q4 as seasonal deposit balances increase. Our bank stock loan has increased due to merger activity. However, bank dividends will allow significant paydowns in the next few quarters. We wish to show our appreciation for the team at ServisFirst for partnering with us and our growth strategy these most recent years, with the bank stock facility we have in place. They have been responsive and professional.

We have been using capital effectively. Our leverage ratio stands at the 8.6%, and our tangible common equity to tangible assets is at 7.62% and is increasing rapidly with our current earnings stream. Dropping below 8% is something we do from time to time, but only with the expectation we will grow it back above 8% in a reasonable time frame. Tangible book value per share is $18.22, up from $17.61 at 12/31/17.

Moving to the income statement. Our net interest margin was 3.76% this quarter, slightly below our guidance of around 3.80% to 3.85%. Accretable yield and loan fees were about where we consider normalized, contributing approximately 45 basis points to loan yield, but down from the second quarter $400,000 in fees and $280,000 in accretion. The coupon of the loan portfolio increased 8 basis points quarter-over-quarter from June 30 and 27 basis points since 12/31/17, as our teams continue to originate loans with the rate environment in mind. Overall yield on loans was 5.73% for Q3 compared to 5.30% 1 year ago.

Our total cost of deposits increased only 11 basis points in the third quarter from second quarter, going to 95 basis points. The estimated beta on time deposits was 75, and the estimated beta on transaction accounts was 58. The Q3 cost of interest-bearing signature accounts was 92 basis points compared to 76 basis points in Q2, and the cost of time deposits in Q3 was 1.55% compared to 1.41% in Q2.

FHLB overnight borrowing costs rose to 2.21% for the quarter as rates increased. Overall, net interest earnings were $32.8 million, up from $20.3 million a year ago. The $32.8 million is against consensus of $33.1 million or slightly less by about $300,000, accounted for in fees and accretable yield, which can be unpredictable.

Provision for loan losses was up $541,000 in Q3 over Q2. This was primarily due to loan growth and a credit acquired through merger that was appropriately marked at that time but continued to deteriorate. This deterioration is not systemic in the portfolio, rather a result of poor management from the borrower. There was an additional provision put on a credit of about $550,000 during the quarter. As Greg stated earlier, our ALLL continues to grow, and with purchased discounts, stands at 1.12% of loans.

Noninterest income was $5.4 million for the quarter, up from $4.6 million in Q2 and better than consensus by about $300,000. This increase is primarily due to higher account volumes for mergers. Noninterest expense was $22.9 million without merger expense and about $500,000 above consensus. OREO was slightly higher at $355,000 as we disposed of several properties in the quarter, an expense variance we will take to reduce OREO.

Overall, especially given our profile of growth, I am pleased with the company's utilization of resources. Not all growth is captured in M&A expense. Growth such as office space, travel and training, all of these are essential to the development of our platform and bandwidth to continue our growth strategies and are not smooth and difficult to time. More importantly, we continue to successfully implement our 2-pronged growth strategy without a dedicated merger team. And I believe that is essential to successfully executing and integrating mergers day 1 and long after the merger is closed.

Income taxes were in line with expectations, at about 22%. Moving to our reconciliation of earnings per share for the quarter, stated diluting (sic) [diluted] earnings per share for the third quarter is $0.64 per share on $10.3 million in net income allocable to common stockholders. Merger and acquisition expense, adjusted for income taxes, hurts earnings about $600,000 and EPS by $0.04 per share. The third quarter earnings and EPS reconciled for these items are approximately $10.9 million and $0.68 per share. Our efficiency ratio remains below 60%, and noninterest expense to average assets was below 2.5%. This leaves Equity Bancshares with a return on average assets as stated at 1.08% and adjusted for merger expenses of 1.14%. Return on average tangible common equity as stated is 14.91%.

Our merger pipeline opportunities continue to be active. We will stay true to our merger discipline by only selecting mergers which fit our criteria of a 3-year earn back and have strategic value, either in the opportunities for core deposits or in area of quality loan growth or both.

As we stated last quarter, we continue to see healthy banks with strong core deposits show interest in Equity Bank, and the inbound interest is as high as ever. I'm extremely proud of the team and to be a part of a banking organization that has grown so responsibly. It is 3 years ago next month that we went public on the thesis we could use our stock as a currency to merge other banks into equity. I'm happy to report we have closed 8 mergers, done 1 pipe and have another branch acquisition pending regulatory approval. We have grown EPS and watched our stock move from $22.50 to north of $44 in that time. Our assets have grown from $1.4 billion to just under $4 billion. And our share count has nearly doubled to over 15.8 million shares. Our board, our advisers, our employees and our customers have all been instrumental in this achievement, and I look forward to continuing this growth.

At this time, we are happy to entertain questions.

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

I wanted to start on the margin. Greg, just quick clarification, I guess first. I see in the deck it says 87 basis points for the total cost of deposits. I thought on -- you said 95 in your prepared remarks. Is that the total cost? Was that interest-bearing? Or -- I just wanted to make sure I had the right number for the total cost of deposits for the quarter.

Yes, total cost of deposits, Mike, at the third quarter is 115. With noninterest-bearing total cost of deposits is 95 basis points.

Okay. And then on the margin, so I guess if we assume that accretable yield in loan fees are -- stay fairly stable from here, what would your expectation be near term for the NIM? Is there -- is it hopeful to hold it steady? Is there room for it to move up a little with the loan coupons moving up? What are your expectations?

Yes. Guidance on net interest margin would be about the same in Q4, call that 3.75% to 3.78%. And dollars in net interest income for Q4 would be about $34.1 million.

Okay. And in terms of the trends that you're seeing out there, I realize a lot can change with the rate environment and whatnot, but how are you guys feeling on protecting the NIM as you continue to grow as we move beyond next quarter?

Yes. Here are the dynamics at play in our market, most of which are positive. We have really brisk loan demand right now, the addition of Tulsa, the development and the maturation of the team in Kansas City and Wichita. As you know, one of our strategies is to have heavier asset and loan growth in our metro markets and heavier deposit growth in our community markets, although we expect each type of market to contribute both deposits and loans. The truth is right now we're having a lot of success with a lot of high-quality loan customers across our footprint. And the betas on assets are still trailing slightly the betas on liabilities. And we're going to continue to put high-quality loan customers on the books, and that's going to force us to continue to compete for deposits, which we're going to do. And so I think you'll see a continued NIM stability but not expansion, and hopefully that leads to more NIM dollars as we go forward.

Great. Helpful, Greg. And then I wanted to -- Brad, I wanted to ask you a kind of a high-level question. As we think about, it sounds like the loan pipeline is strong. The M&A pipeline remains strong. As we move forward here, you guys are just under $4 billion, I think pro forma, about $4.2 billion, the deal closing hopefully next quarter. As you grow beyond that, I mean -- and we think about kind of the profitability of the franchise, is -- how do you guys think about it? I mean is -- as you guys do deals and grow and hit certain asset levels, are there certain efficiency ratios that you think are achievable? Does it depend? I mean I'm just trying to get a sense of kind of where positive operating leverage goes from here as you guys continue to do both the acquisitive and organic growth strategy and how you guys are kind of thinking about and your strategic plan about what's achievable as you hit certain asset levels.

Yes. Good question, Michael. So on Page 9, if you look at -- we continue to improve efficiency ratio. We continue to improve the noninterest expense, the average asset ratio. As we continue to leverage on new assets, we do hire some people, but not to the same percentage what the consolidation brings in efficiencies. So we're not adding a new CEO. We're not adding a new CFO. We're not adding new investment relations officers. And so there's a lot of things that stay fixed. And so I would say that as we continue to add size, we continue to get efficiencies. And as we continue to run markets, we continue to get efficiencies. And so the numbers don't always -- aren't always quite as clear because there's a little bit of bleed-over into the efficiency ratio from the M&A activity. But I would tell you that, that efficiency ratio continues to improve quarter-over-quarter, and as we continue to grow, we'll continue to improve as well.

Michael, I'd like to clarify one thing. The 87 basis points you referred to is in fact a year-to-date number, not a quarter-to-date number.

Got it. Okay, that makes sense. So quarter-to-date it's 95, year-to-date it's 87?

Yes, thank you.

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

Greg, maybe start with you, a question on expenses. You had nice progress on the efficiency ratio. Could you -- what are your thoughts on the 4Q expenses? Are there still some lingering cost saves from the deals that closed in, I know it's May and August, if I remember? And then what type of organic growth rate, as I think about '19, do you kind of build into just running the business?

Yes. Let's talk about expenses first, Terry. Our guidance for Q4 expenses will be just under $23 million. We -- as you know, we take cost saves and implement those day 1 and month 1. They don't linger on very long the way we handle our mergers and acquisitions. So Q4, from a cost standpoint, should be relatively clean for past mergers. And I feel pretty good about that. Loan growth for 2019, we are still working on our forecasting, especially with a handful of new markets. But we should expect somewhere between 8% and 10%.

Okay. And then as a follow-up, I just want to make sure I understand your response earlier on just new loan yields and being, I guess, conservative. And I guess my question is, are new loan yields somewhat dilutive to the margin because you're focusing on quality? Or has a higher rate environment helped you on new loan origination yields?

Actually, new loan yields are accretive to margin right now. We are continuing to get more coupon on loans as rates go up. I think our loan teams are doing a nice job continuing to communicate with our customer base that, as our costs rise and as the markets change, that we're going to have increased loan coupons and loan yields. So I don't see that being -- any compression coming from the asset side. In fact, we see growth. We were -- to put it in perspective, Terry, our loan coupon in Q4 of '17 of new loans coming on was about 4.68%. And today, that number for Q3 2018 is 5.35%, so a substantial move-up on new product being put on the balance sheet.

And then, Brad, just a last question for you. When you're talking to potential sellers, do they typically have a fixed price in mind or a range of price in mind? Or is it a multiple on earnings or tangible book value? And I guess, the reason I ask is if you're using stock and the stock -- all bank stocks have come down of late, does that maybe push out the discussions that you were having before the sell-off in bank stock prices?

The answer to that is yes to all the questions. But I mean some guys are looking at it as strictly a multiple of book. Some are looking at it -- and ladies are looking at it as an earnings multiple. Some are looking at it as they're going to take our shares and they're going to take that as a growth stock. And so they're really looking at what's the value of the combination together. So the current value is not as important as what the future value they believe holds. So there's that combination of all those, and each one of those conversations is completely different from the other one. And so from that, Terry, I tell you there's some conversations that will maybe stall a little bit. There's some conversations it doesn't affect at all. And then there's some that are – that'll be in between.

And our next question comes from the line of Andrew Liesch with Sandler O'Neill.

You've covered most of my questions. But I just want to follow up here just on your tone on loan growth versus what you said a quarter ago. Certainly the pipeline continues to improve, but I mean my sense is that your tone is more optimistic for growth. Is that the right way to be looking about -- looking at this? Like maybe just overall, thinner margins going forward, but maybe your growth is a little bit better than you were expecting?

Yes, and I would tell you we're working really hard on margin, Andrew. So we know that protecting the earnings stream is really protecting the margin. And the biggest way to protect that is to make sure that we're pricing to the market and what market will let us charge. On the loan kind of growth, as you've heard us talk for the last couple years, we've really worked hard on developing a sales process, defining that sales process, integrating marketing into that sales process. And what I would tell you is over the last 2 years, that has really been kicking in, and so the teams have really bought into that process and are utilizing that. And so a lot of the success is coming from the implementation of those sales tools over the last couple years. We sowed the seeds 24 months ago, and it started growing and we're really harvesting that. So I think we have a steadier stream of loan activity and deposit activity, both because of those sales processes. So I would tell you that what I'm confident in is that we will have less lumpiness probably, and more steady growth in the loan area and deposit area because of the teams. Wendell and Craig Anderson have done a good job working with their teams. And Jeremy and Mark Parman and Mike Bezanson and Josh Means and all the folks in Western Kansas are doing the things that they need to do each day to make sure that we have good customer growth in all those markets.

Okay, great. Then just one question on the funding side. I know you've been running off some hot money or some higher cost funds that you may have acquired through noncore accounts. How much of that is remaining? Or is this largely all done by now?

Yes. So Andrew, that's a great question. And I want to answer that, then I want to add a little bit more color around the funding costs relative to margin. We've run off somewhere between $100 million and $135 million of the noncore funding that we acquired. That still leaves us with around $50 million that we have on the books, and so that's where we stand on that. I want to revisit one thing because all 3 of you have asked about the margin. Our second quarter margin was stated at 3.93%, but we stated at that time and I'll restate today, that was probably 10 basis points at least higher than what we would consider normalized because of a heavy loan fee quarter in the second quarter and also a heavy accretable yield quarter. The 3.76% normalized against a 3.83% normalized margin from the second quarter is a decrease of about 7 basis points. And so our asset yields in total have gone up about 9 basis points, as our liability costs have gone up about 17 basis points. And so we're aware that as we're putting loans on, we're going to continue to grow deposits. And as Brad alluded to, Wendell and Craig and the retail teams are fully focused on growing core deposits. And I think we'll see a lot of that in the fourth quarter. The fourth quarter is a heavy deposit growth quarter for us, and we have that expectation. And in fact, 2 weeks in, we're already seeing the results of that. So the margin, as stated, looks a little worse than it actually is quarter-over-quarter.

Okay. Then these new funds that have come on this quarter, I mean have they been – or the cost of those, has that been reflected from the latest rate hike in September? Or...

Yes, yes.

(Operator Instructions) And our next question comes from the line of Jeff Rulis with D. A. Davidson.

Just a couple follow-ups on the expense side. First maybe MidFirst, that expectation for close, is that sort of an early Q1 close? Is there any visibility on exact timing on that one?

Yes, sometime in the first quarter. Those branch acquisitions from MidFirst are already on file with the Federal Reserve Bank in Kansas City. And when we get done with the approval, which is likely to happen in the first quarter, we'll move to close and convert those.

Okay. So and sort of backing into the sort of '19 expectations on expenses. If we're kind of a $23 million base, call it, Q4, and you kind of roll in that branch acquisition in 1Q, any expectations, broadly, on kind of your budget on expense growth for the balance of '19?

Yes. For '19, without M&A, a really fair number for us is about 3%.

Okay. And then on the provision side, sounds like safe to say that was a little elevated this quarter. And barring significant change on the credit side, and I guess there was some growth that picked up. I guess your expectations for the provisioning?

Yes. Our provision for 2018 will be somewhere around $4.5 million from where we stand today, we think. It'll be more than that in 2019. My guess is somewhere between $5 million and $6 million, Jeff. We've got the budget for loan growth, and we've got to continue to build the allowance as we move through, especially with all the mergers that we have. So guidance there, we're not completely done with our planning for 2019, but I would see that between $5 million and $6 million.

And I'm showing no further questions at this time. So with that, I'd like to turn the call back over to Investor Relations Officer, Mr. Jacob Willis, for closing remarks.

Thank you for joining our Equity Bancshares' conference call. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.