Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the equity Bancshares' third quarter 2019 earnings call. At this time all participant lines are in listen only mode. After the speakers presentation, there will be a question and answer session.

To ask a question Darren I shouldn't you need the press star one on your telephone.

Please be advised that today's conference is being recorded.

If you acquire any further [laughter], Please press star zero I.

I would now like to hand, the conference over to your Speaker today Mr., Chris never tell please go ahead Sir.

Good morning, and thank you for joining equity Bancshares conference call, which will include discussion and presentation of our third quarter 2019 or so.

Joining me today, our equity Bancshares, Chairman and CEO , Brad Elliot equity Bancshares, Executive Vice President and Chief Financial Officer, Brian costs over an equity Bancshares Executive Vice President General Counsel right rubber.

The presentation slides to accompany our call are available by a PDF for download at Investor day equity banks dotcom by clicking the presentation tab. You May also put the event icon for today's call posted at Investor about equity Bank Dotcom to view the webcast player. If you have you in this call in or webcast Blair. Please note that flies when that automatically advanced please.

No fly to 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 there. 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 Bretaa.

Good morning.

And for joining the equity Bancshares their core 2019 earnings call.

I'm joined today by grain costs over our Chief Financial Officer, and our General Counsel Brett LIBOR.

I'm pleased to announce equity Bancshares has reported 66 cents per share in earnings for the third quarter 20 night team.

This marks our second consecutive quarter of normalized operation.

We will do a deeper dive into all aspects.

And our performance in a few moment.

I first want to take a minute and thing.

All of our operating teams for their efforts in the initiatives, we have put in place in 2019.

Without mergers are occurring.

We wanted to challenge the teams to find ways to improve performance organically.

And to continue deliver shareholder value.

We started with non interest income.

And looked at each line item for the possibility of improve.

I'm pleased to report we have quarterly growth in non interest income of 20% from quarter 428 team through quarter, 320, 19, representing growth in dollars of 1.1 million.

We've also developed a platform under the direction of game when Mcgregor to provide a full suite of trust and wealth management services that will continue to provide growth in non interest income in the coming quarters.

We have also pushed hard to reduce expenses in areas where opportunities exist without sacrificing quality in our core initiatives.

To that in our non interest expense.

The average assets has reached 2.38% the lowest it has been in five quarters.

And our efficiency ratio has now decreased two consecutive quarters.

Results have occurred well the teams have been building out several new exciting initiatives.

Which include card services, focusing on purchasing cards and commercial credit cards.

Our new digital platform, which went live in the first quarter and from which we have seen excellent results.

New specialty finance initiatives.

And of course, the trust and wealth management Division already discussed.

We've also continued our repurchase of DQ BK shares.

And we have repurchased a total of 421000 shares.

At an average price of $25 in 81 cents.

This essentially represents a merger to our shareholders as a calculated on back of our repurchase so far is well below three year.

Many in our industry have recently commented on the risk of loose credit underwriting in terms of pricing and structure as it at this stage of the cycle.

Our net loan growth has been smaller this year than previous years and that is primarily because irrational players in our markets continue to price and underwrite outside of standards, we are willing to accept.

I'm pleased with the new originations we have had in this environment.

We've been putting on new loans, and a steady pace, which have nearly offset the pay offs received from credits with structures and terms we cannot accept.

I'm also pleased that our credit metrics have continued to improve quarter over quarter.

Brent would you update everyone on the status of the remaining assets from the franchise more credit we discussed in the first and second quarters.

Thanks Brent.

As we discussed in the second quarter, yet profitable piece of the relationship was sold at auction and make sure the bankruptcy court.

We spent a great deal of effort towards resolving the other commercial credit in the relationship your franchise entertainment and pizza related business.

Worked closely with a borrower during this past quarter to expedite the company's exit from bankruptcy and can reports that the company's plan of reorganization was approved this past week October 17th and will be effective November 17th 2019.

We've agreed on new loan terms for the reorganize company, including the expectation that scheduled payments will resume in the fourth quarter of 29 team.

We remain confident that the operations the company outside of bankruptcy will enhance existing store operations reduce expense and delay allow for new franchise sales and create a positive overall resolution.

We also finance to vacation homes in a personal resident.

By the principles of these businesses.

We received a pay off on the two vacation homes during the quarter and the personal resident is listed for sale. We believe this home will sell in due course were reasonable market based value.

Thanks, Brett as stated on the first quarter call. This was a relationship that goes back to 2011, whether then strong borrower, who specialize in increasing revenues and profitability of underperforming companies, where a significant banking relationship with this borrower for several years.

They performed well and ultimately sold two of the poor their portfolio companies for substantial profits.

That's great performance wasn't unusual and significant matter Frank I'm pleased that our executive team took full responsibility for this result, and has worked with our legal and credit teams get this remaining business out of bankruptcy and returned to normal operation.

You may recall from our first quarter earnings call in April that the then current impairment analysis, Paul for a provision.

For loan loss of $14.5 million.

After the resolution of the bakery business and the payoff of the two vacation homes and after an updated impairment analysis of the third quarter.

We have concluded that the our provision.

For a long lost taken in the first quarter remains adequate at this time, we also experienced positive movement in the third quarter in our special asset area, Greg. Thank you Brad.

He quarter over quarter changes in our credit portfolio includes improvement in the classified asset ratio from 33.2% to 29.8% and 22.87% without the franchise or credit previously mentioned.

Non accrual loans declined 17% to $51 million and to $27.4 million without the franchise or credit.

Nonperforming assets as a percent of assets declined to 1.40% and 82 basis points without the franchise where credit.

Excluding the resolution of the franchise or credit year to date net charge offs for the bank had been $700000 only three basis points of average loans, which is below the rate in 2018.

Overall, I'm pleased with our credit quality improvement.

Our a triple though is now at 69 basis points and our total reserves, including purchase discount is at 1.14%.

Greg when you lead us through the rest of third quarter performance. Please.

We began our earnings performance and reconciliation of quarterly earnings per share back to core EPS stated diluted earnings per share is 66 cents for the quarter. We had approximately three cents per share and help from the FDIC insurance premium rebate, which leaves our adjusted diluted earnings per share at 63.

Three cents per share there were no merger expenses in the quarter and consensus EPS was 61 cents per share.

Net interest margin was flat quarter to quarter at 3.42%.

Against consensus estimates a 3.40%.

As the fed lowered rates twice in the quarter. It was advantageous for us to take advantage of our liability sensitivity, we were proactive and reducing rates on our positive offerings and of course, the federal home loan bank lowered rates in conjunction with that.

Our cost of funds improved seven basis points to 1.69% and our cost of deposits went down eight basis points from 1.56%.

Our average non interest bearing checking balances increased over 1% during the quarter as well.

Yield on loans went down four basis points and now stands at 5.70% our new loans went on at 5.60% during the quarter and our Accretable yield accounted for about 20 basis points of health during the quarter, which is somewhat typical for us right now.

The impact of the large nonaccrual loan relationship is about five basis points of loan yield.

Average loans were down $9 million into quarter and with asset quality remaining stable our need for loan loss provision was light that $679000.

Securities yields were about 2.55% during the quarter compared to 2.68% in the second quarter and the impact of bond premium amortization continued to rise and with seven basis points.

Would you like to discuss noninterest income.

As we stated at the top of a call.

We've been working on improving noninterest income and we've made progress in the quarter with an increase of 2% over second quarter is $6.6 million against consensus estimates of 6.4 million.

Some of this is from the Lumpiness of the mortgage banking activities, but we also improved in key areas of service charges and debit card income I'm really excited about our initiatives to grow non interest income and our suite of products and services for our customers.

We have also improved the noninterest expense another up our initiatives in 2019.

Noninterest expense was 24.2 million against consensus estimates of 24.6 million and adjusted for FDIC Tailwinds would have been just about on consensus.

A major areas of salaries and benefits occupancy and professional fees were all down quarter over quarter. There were no merger expenses in the quarter.

Our effective income tax rate year to date is 20.1%.

I remain proud of each equity bank associate in all of the teams working on some of these initiatives is difficult, but each area of the bank has stepped up and made a big difference.

Moving to the balance sheet loan growth has been about $20 million since December 30, Onest 2018, obviously slower than we'd like but also responsible as Brad discussed earlier.

Yes.

Our pipeline remains strong and our teams continue pushing hard to earn the business of core relationship oriented customers.

We have also been preparing our 2020 business planning and we believe our teams are poised to grow and improve all areas of the bank.

We identified very specific initiatives at our annual board retreat in August .

And the teams.

Are on track to have these initiatives.

Impactful by first quarter 2020.

Average deposits were down slightly in the quarter about $50 million and noninterest bearing checking were up slightly about $6 million average federal home loan bank advances increased from Q2 $41 million and our bank stock loan increased about $4 million, reflecting the repurchase of our treasury stock.

Our capital ratios at September 30 are 7.8% tangible common to tangible assets up 44 basis points from Q2, and our leverage ratio is 8.48% up from Q2 22 basis points.

Im pleased with the efforts of the teams in the third quarter.

We were able to grow EPS.

We do special assets.

We continue to grow non interest income.

And continue to control.

Our spend rate on non interest expense.

And make no mistake. This is a difficult rate environment, and too often and irrational competitive environment.

Our shareholders have my commitment, we will not go down that rabbit hole.

We will continue to price and underwrite with the same discipline that we have since we started the bank.

Our executives in our directors our shareholders as well.

And we want the same for our families as we do for the greater shareholder base.

We appreciate the support and loyalty of our shareholders and we'll continue working hard to maximize your value in all phases.

Of the banking cycles.

At this time, we'll entertain questions.

As a reminder to ask a question you need to press star one on your telephone.

Again that star one to ask a question.

Please standby why.

Well, we come pilots una roster.

Our first question comes from Jeff Foolish D.A. Davidson Your line is open.

Thanks, Good morning.

Good morning gel in the.

You talked about your sort of 20 budgeting could you give us an idea of.

Net loan growth outlook for.

For 2020, and with that backdrop, I guess provisioning levels.

And I.

With the run off this quarter.

Your your provisioning level, but but I guess normalized 40, what are you looking for on both loan growth in provision and good morning. Thanks.

Hey, Jeff its Greg and loan growth in 2020.

We're not down with the budgeting process, yet, but I still think that.

We can get 6% to 8%.

The loan growth in 2020.

And provisioning and of course this would be.

Agnostic to Cecil at this point.

I would still be somewhere between four and a half in $5 million in our budgeting process.

Got it okay.

And then you mentioned the work you've done on the.

Ratcheting down expenses.

A pretty clean number and I guess, you've got that the.

We actually credit this quarter, but thoughts on on that growth rate and as you continue to work with your.

Employees on on watching costs.

It's a good space here.

I'd like to.

I think the outlook for non interest expense.

And with FDIC adjusted back in the call, what we'll call it $24.6 million to $24.7 million a quarter and certainly a good base for Q4 and may be slightly higher in 2020.

As we.

Continue to build out initiatives.

And.

And stabilized the team as well the to the ft. He count I don't think will change much.

In 2020.

There would be a small probably 2% to 3%.

Installation for employee costs.

Okay. Thanks, Greg ill step back.

Thanks.

Thank you and our next question comes from Andrew Liesch with Sandler O'neill. Your line is open.

Hi, everyone.

Good morning, and just a this is Fred smart more comments around the margin some of the puts and takes looking forward into the liability sensitive nature the balance sheet to suspect there could be some benefits going forward, but what are you seeing on on deposit pricing I'm sort of competition on your markets.

So we still so were you know with 52 locations spread out amongst four states. The deposit pricing is very local and there are local deposit prices that are that are still irrational I would tell you that we've taken an aggressive stance on on being a leader.

In the marketplace on having pill to lower when the fed lowers or lower when the cost of funds need to be lower compared to where the market is and so we've seen movement down in that Andrew and I would tell you that we're going to stay very focused on being a leader in that area and making sure that.

We're not overpaying for deposits in an environment, where we should be lowering deposit.

So outlook for that is if the fed continues to move lower interest rates, we're going have to continue to lower deposit rates.

[noise].

Alright. Thank you that said that that's helpful and they just on on the buyback activity slowed a little bit here in the third quarter stock trading around 140 tangible and capital building.

What are your thoughts on that why not be it'll be a little bit more aggressive with that and rather than I would imagine M&A is little bit tougher with your stock here, but why not buy more of your own stock.

Yeah. So Andrea we then.

We've got five quarter beginning in second quarter at 2019, we have a five quarter plan.

Place that allows 1.1 million shares to be repurchased.

There's a there's a number out there that.

That we like to stay below when we're buying it and when we're comfortably below that number we're in the market divide that when we're not comfortably below that number we don't think it makes complete sense for our shareholder base.

Viewing this very much with similar math to a merger and we would like for our earned back.

To be less than three years.

So that really triggers when we when we do enter the market to buy shares back and it's not always below that number.

Okay.

That covers my questions I'll step back thank you.

Thanks, Andrew.

Thank you and that's reminder, if you would like to ask the question Press Star one.

And our next question comes from Terry Mcevoy Stephens. Your line is open.

Good morning.

Good morning, Terry.

But just want to just some clarity here the entertainment or pizza related bar, where that came out of bankruptcy did that occur in the fourth quarter here and if so you did not expect that to impact the loan loss provision and again that 14 in a half billion dollar provision in the first quarter you feel like that was the right level with no additional.

Cost going forward.

Yep, Terry and that is correct.

14, and a half in the first quarter.

We have been able to move out.

One of the franchise businesses in May as Bret alluded to.

And that Didnt require any more provision we've also sold.

Two of the occasion homes the combination of those three assets.

Basically did not require more provision so we're left with.

We're really left with the the other franchise or business and we think we have that provisioned correctly.

And then sticking with asset quality the decline in nonaccrual loans over $4 million, which was which was nice to see could you just talk about the activity there in the third quarter and then maybe an update on the franchise portfolio overall.

Yes, so we had some changes in.

Nonaccrual loans.

In the quarter Terry good question.

We had some AG loans that either have been upgraded because they are performing better or we had some liquidation of.

Some of those assets.

Through.

The farmers were liquidating assets and paying those loans down.

Either through bankruptcy reorganization or through just actual eliminating those we also had some customers that we've been working on for awhile.

And those also had been we've been receiving paydowns on those as well.

So.

That's a that's a nice improvement to that I think we're going to see more improvement to that.

This quarter as we continue to see some things improve in that area. We also I think going to have a good quarter in this quarter in classified assets as we've got some customers that.

Our seeding seeing improving trends in that area or we've had some customers that offense are going to find a new home.

And just maybe last winter.

Brad I think as you did mention the digital platform showing excellent results. One of you could just expand on that comment and then the build out of cards and card services. What do you think that can contribute going but going forward.

Yes. So two part question first one is the digital platform. So we went to the Q2 product we rolled that out in first quarter of this year the customer pull through on that has been really good.

I think the retention rate on customers is also going to improve.

And so.

We're also looking at how to expand offerings and how to market through that platform. So I think we have really upgraded the customer experience that equity bank in the last year and so we're very excited about the ability to continue to grow that platform and provide things more digitally opening accounts on.

Why opening loans online and being able to market.

Where the customers moving to interact with us more than where the branches just meet them. So we're very excited about that it also is very exciting product for our commercial customers, which was a huge improvement over the other product that we had prior.

The next question is the.

Card services business, we have a lot of pent up demand for that we're going to move cautiously and slowly in rolling that out and so.

That's going to roll out in this quarter I'm, where we're going to we've actually are in the testing phase of the cards. So.

And it's going to be issuing them. So.

I wouldn't say, we're going to budget anything Terry.

Much for next year on profitability on that but it's going to be a growing.

Segment in the second half of next year.

Would be the time that we would see more interchange income continued to grow from that.

It sounds great. Thank you guys.

Thanks, Gary.

Thank you and our next question comes from Michael Perito with KBW. Your line is open.

Hey, good morning, guys.

Good morning, Michael.

I wanted to follow up on on the loan the preliminary loan growth outlook for 2026, 8%. It seems like a fairly strong number given some of the more qualitative conservative qualitative comments kind of but you guys. In the prepared remarks can you give us a little bit more color and I was just preliminary but but what do you think is the driver of of what would seem to be a nice rebound and loan growth.

From 2020 relative to up you know your today production in 2019.

So our teams are actually doing.

Really good job, what's kind of buried in the numbers is we reset at team in one of the markets that just wasn't catching onto equity banks.

Philosophy, and so with that we had a intentional run off from that in that some of the customers. We intentionally ran off.

Some of the customers left that weren't fitting what we liked in our underwriting standards and followed some of the loan officers workforce and longer that team has been rebuilt.

I would say is mostly rebuilt in the end of second quarter and so they've got a you know it takes a.

Nine month period for them really to start producing loans and so we see that team being able to.

Add instead of subtract.

And so.

We've got a really good pipeline with them they've got really good processes, and they're really experienced bankers and so we're very excited about that aspect. That's the biggest thing is we don't see if theres a hole in the bottom of the bucketing longer. So we are having to put so much water. The top just to keep the bottom from from outstripping the top and so just that.

The slowdown in payoffs from bat intentional I think is going to help us and then our teams have been working on calling programs and calling efforts.

Across the entire phase, we've got Western Missouri, Josh means its group has done a great job.

In being able to grow loans and so some of the other community markets. Our rural markets are really helping to add as well the guys down in Arkansas are doing the same thing and so we're seeing growth in some of those markets. We have sought shrinkage in the past.

Thats what helps us be positive about 2020 in loan growth. It's it's not big hits here and there, it's just steady constant growth across the whole footprint.

If rates continue to decline, though I mean that it does that are you.

Does that make you guys more cautious about that figure because presumably that scenario I guess steel competitively on the rate side it could be harder to get things through your underwriting model and then also you know payoffs could continue to be pretty high for if rates continue to come down do you have any general thoughts on that.

Yes.

You know if.

If rates continue to come down.

I think at some point that inverted yield curve is already inverted so that longer term rate stuff may have already.

Affected us and so maybe it doesn't affect us as much next year as it did this year no I mean, that's kind of our outlook a little bit and the other is our our funding side is coming down and so.

I think as we continue to call on good quality customers that want to banking relationship versus a transactional relationship we're able to still do attract those customers.

Yeah.

And then just lastly kind of on a similar topic, but just yet.

The near term margin outlook, obviously, you guys benefited this quarter. If you returned to a more positive loan growth stature do you think that.

Your ability to protect margin will be a little bit more challenged as as moving forward or or not necessarily.

You know Michael it's a fantastic question and I think the answer is not necessarily.

First of all we're doing a great job.

Continuing even though the deposits were on average essentially.

Lap this quarter to down a little bit on the deposit team for still done a great job, which gives us some opportunity to continue to pay down federal home loan bank advances and improve margin secondly.

If we continue if we have success growing loans will be able to alter the mix of the balance sheet, a little bit between loans and securities, which should help margin not hurt margin.

Got it great. Thank you guys for taking my questions I appreciate it.

Thanks, Michael.

Thank you and we have a follow up from Jeff Rulis with D.A. Davidson. Your line is open.

Thanks, I just wanted to get my hands around.

The large.

Credit relationship we've discussed that so that the pizza business and the personal in real estate.

The the business has been reorganized and I guess, there's been a justice payment terms I guess.

What is the.

Is there.

Are you pursuing an exit or sale of those items or is it.

Extended.

That's expected to stay with the bank and paid at terms as effectively as a TDR I'm just trying to.

Get an update on those items.

Spreads in our new loan agreement has.

Short maturity of yeah end of next year and adding to yet.

Borrower and thus are moving towards.

They are seeking a refinancing or sale of the company.

So the point, Jeff of bringing it out of bankruptcy as the value. It's been Clinton bankruptcy. There's no. Other lawsuits there's no other liabilities were the only creditor and so.

It would be easy now out of bankruptcy for everybody to be we'll see what's there and not be tainted in bankruptcy. So instead of selling it in bankruptcy, which is an option we will discuss the best way to achieved the most value for it and and so weve Brett worked really hard to craft.

A loan agreement they gave us the same types of controls you have in bankruptcy.

And let it emerged from bankruptcy so that they could go back to normal operations and then we could get a normal transactional bail out of it. So we think we can maximize the value of out of bankruptcy, but.

But the the goal of business for equity not to be in this credit long term.

And how is the kids, it's been really reorganized.

Again remind me how long that's been in place and are you is there some initial inbound interest on.

Selling that business.

Got it just started the plant we just approved last week. So it's not technically a effective yet, but yes. There has been factored in interest throughout the bankruptcy process that they have.

The borrowers as been entertaining folks kind of waiting for this.

Netscout of bankruptcy and then.

More active marketing process.

We have seen some.

Interest from third party.

Yes, just interested third party directly to the customer directly to us.

Okay.

And just last one Dan so.

That said.

As it's been.

The plan you put in place it is.

Somewhat performing at this point or its a.

Providing interest at this point is that is that fair to say.

That will be fair to say that they're going to resume interest payments at by the end of the year as part of the.

Reorganization plan.

Got it okay. Thank you.

Thanks, Jeff.

Thank you ladies and gentlemen does concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Okay.