Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to the fourth quarter 2019 equity Bancshares incorporated earnings conference call. At this time, all participants are not listen only mode.
After the speaker presentation, they won't be a question and answer session.
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If you acquire any further assistance. Please press star Zero I would now like to hand, the conference your speaker today, Chris Novitas. Please go ahead Sir.
Good morning, Thank you for joining equity Bancshares conference call, which will include discussion and presentation of our fourth quarter 2019 results. Joining me today, our equity Bancshares, Chairman and CEO , Brad Elliot equity Bancshares Executive Vice President and Chief Financial Officer, Greg crossover equity Bancshares Executive Vice President and General Counsel.
Presentation slides to accompany our call are available by a PDF for download at Investor Day equity Bank Dot com by clicking the presentation down you May also quickly event icon for today's call posted at Investor Day equity Bank Dot Com to view the webcast player if youre viewing this call on our webcast player. Please note that flies will not automatically.
Advance.
Please note slide two including important information regarding forward looking statement from time to time, we may make forward looking statements within today's call and actual results may vary.
The presentation, we will allow time for questions on further discussion. Thank you all for joining us with that I'd like to turn it over to Brett.
Good morning, Thank you for joining the equity Bancshares fourth quarter 2019 earnings call I'm joined today by Greg Passover.
Our Chief Financial Officer, and our General Counsel Brett Favre.
I'm pleased to announce equity Bancshares has reported 64 cents per diluted share in earnings for the fourth quarter of 2019.
$10 million and earnings.
We also finished the year strong with net interest margin expansion.
Which one which we will elaborate on shortly.
Do you 19 was an interesting year for equity bank and I'm proud of our entire team. We're working on working as hard this past year really any year since our inception.
It is easier.
To work hard with a tailwind.
But it shows more character and fortitude, where our team accomplished what they did.
In 2019 with a headwind.
As I look back on me here.
We put up a new digital platform for customers.
We introduced our trust and wealth management Division.
We closed or more mid first bank acquisition.
And attracted several key leaders equity bank.
And held in the personal development of many others.
We had an aircraft in health care financing sure lines of business and now offer a full line.
Card services, including purchase a commercial credit cards.
We work diligently on noninterest income and noninterest expense initiatives, the past four quarters and I'm proud to report our ratio of adjusted non interest expense the average assets of 2.46%.
Is the lowest it has been at any year in since we became public.
Our non interest income through every quarter in 2019 and is 22% higher in the fourth quarter of 29 team compared to the fourth quarter of 28.
This is a huge accomplishment for the operating teams here at equity me Greg.
We're also pleased with door improvement in net interest margin.
Last spring the interest rate environment went from rising to falling and whats felt like a minute we were able to react quickly and take advantage of our liability sensitivity and have reduced our cost of deposits 29 basis points from March 31, 2019% to 1.32% in our overall cost of funds has.
Decreased 28 basis points for that same timeframe to 1.43%.
This improvement in cost of funds has led to an adjusted net interest margin of 3.52% of four basis point improvement quarter over quarter from our adjusted Q3 NIM.
Margin and growth of noninterest bearing deposits isn't area, we will continue to focus on in the upcoming quarters.
We also worked out our classified assets ratio to a very respectable, 21.2% and 15.9% without or one off right. It. We have previously discussed I credit the hard work of Graphicmail into special assets group for this improvement.
Oh Oreo increased slightly during the year as assets, we have acquired or running their course through the disposition processes. This II will continue to be a focus for us in 2020, our stock price was above our price point to repurchase shares in the fourth quarter and as such there were no you became shares repurchased however, our stock.
Buyback program is still in place and we expect to execute on it when appropriate red.
With the headwinds in 2018, and what becomes a difficult event.
Is often times more important than the event itself.
We fall or first quarter loan loss provision with outstanding results for the balance of 29 team, including a reduction in our classified assets to regulatory capital as previously stated.
Very good plenty oppressed given to the Boeing 737 Mac.
And the delay in its recertification.
Would you try the long history of producing aircraft and parts for the aviation industry.
As such our Oems and there are some manufacturers have diversified and are good at managing tough times.
They built for many different aviation companies.
For many different airplane models and we believe they will manage this environment without significant issues right can you. Please give us an update on the pizza credit we've been working on.
We continue to make progress on the pizza credit the pizza business came out of bankruptcy in the fourth quarter and return to normal operations. The company also sold two franchise new franchises prior to year end.
Regarding valuations, yes, we had a specific allowance against this asset and a charge it down by that amount in the fourth quarter. After an update the impairment analysis for the fourth quarter, we believe the asset as being carried at reasonable value.
In addition, the remaining personal loan to one of the company principles has returned to regular payments and the homes carrying this phone is on the market for sale.
Well the teams have been working on these results. We have also been focusing on some very exciting 2020 goals. One of these goals is to push more accountability for results down to our eight region.
We have a very diverse and attractive footprint and we want to better utilize talents of our regional leaders and their bankers as we believe they will perform well in 2020.
Both individually.
And as an overall company.
Branch optimization will be a part of this goal as we look to deliver our financial services to our market in the most cost effective manner possible.
A second goal is to continue to grow non interest bearing deposit and reduce our cost the fun.
Our retail and commercial teams.
Worked hard between 19 on this and we expect to can continue to grow these deposits in 2020.
We also expect to expand our new credit card services program in early 2020.
And continue the growth of our trust and wealth management operation.
Greg Please take us through the financial highlights quarter.
We begin with our earnings performance and reconciliation of quarterly earnings per share back to core EPS.
Stated diluted earnings per share is 64 cents for the quarter.
Higher than normal purchase accounting accretion of approximately 515000 in early loan payoff fees of approximately 307000 account for about four cents per share.
There was also a reserve put in place related to the account reconciliation matter disclosed in our third quarter 10-Q of about $530000 for about three cents per share.
Other expense and a combination or reduced payroll benefits and bonus accruals and elevated professional fees for special assets and accounting on a net basis, Paul bps about $400000 were approximately two cents per share.
Income taxes were slightly higher as we concluded our annual review and true up which hurt about one cents per share. These adjustments leave our core EPS for the quarter at 62 cents per share representing a beat consensus GPS by two cents per share.
It's nice to exceed consensus earnings, especially when it is related to the core earnings of our bank.
Adjusted for the items, Greg just listed we beat in margin.
Non interest income and non interest expense.
Yes, I believe is a result or the focus of our operating teams from our previous discuss 2019 initiatives.
As we own path to quarter, let's first look at the income statement, starting with margin loan fees were about on our expectations, but accretable loan yield was elevated about 515000 more than expected. In addition, there were about $307000 higher prepayments.
Adjusted for this loan yields were 5.55%.
Bridge coupon on loans was down about 13 basis points quarter over quarter following interest rate movements.
Securities balances and yields were essentially in line with our forecast and expectations.
As we said earlier the real story is the change in our cost of deposits, which decreased 24 basis points quarter over quarter and our total cost of funds declined 26 basis points from the third quarter down to 1.43%.
Overall net interest margin for the quarter stated at 3.61% and would be 3.52% adjusted for the items noted earlier, a four basis point improvement from adjusted third quarter NIM.
Provision for loan losses was $1.055 million in the quarter returning to a more normalized level after several quarters of muted provision.
Several older acquired loans were also charged down as they move through the special assets process and into Oreo.
Noninterest income for the quarter was $6.6 million 6.5 million normalized for elevated check commission charges and slightly better than consensus the components of non interest income were inline with our expectation.
Noninterest expense as stated was 24.9 million for the quarter and as adjusted this $24.6 million against consensus of $24.75 million.
Adjusted salaries and benefits were down primarily due to a reduction in bonus accruals professional fees were slightly elevated due to work on special assets and modestly higher for third party accounting expense and Oreo was a bit higher due to some losses on Oreo sales.
Miscellaneous expenses adjusted as discussed earlier were normal to our expectations.
We reported in our third quarter to into an account reconciliation issue, which we have addressed we have developed a new account reconciliation team that was able to get the accounts current and are now resolving any remaining reconciling items our estimate in the third quarter for potential expense was adequate for the exposure and then the first fourth quarter.
We provided an allowance for these items of about $530000 after reconciling much of it.
Any adjustments made were immaterial and we have not ended the process of collection on many of the items from third parties.
Our effective income tax rate year to date is 22.2% and includes a typical year end true up red.
As we begin a review of the balance sheet, we start with loans.
Which were essentially flat during 2019.
Although 29 team was not a growth year.
Our overall loan portfolio I feel good about the quality of the new production.
We have been putting on.
As I've said on previous calls.
I do not believe we were at a stage in the cycle, where aggressive growth is why is long term for our stakeholders. In addition, 2019 marked a year, where we saw irrational behavior from some of our competition and we simply will not follow those competitors to the bottom.
We received a large amount of payoffs during the year because of competitors.
And the inverted yield curve.
I also believe.
But the competitive environment has begun to level out your rationality.
And with our pipeline still very strong steady today at about $204 million.
We are poised to deliver loan growth in the next few quarters.
Continuing on the balance sheet securities balances were in line with our expectations and there was no significant changes in other assets deposit balances were down slightly in 2019, primarily from seed ours balances, which can be our most expensive form of deposits.
And our home loan bank advances were down $60 million, we've continued to pay our bank stock loan down, which we used in 2019 to repurchase IEC you BK stock when appropriate.
Our capital ratios at December 31, our 8.4 or 5% tangible common tangible asset and our leverage ratio is back over 9% at 9.0 too.
Both up significantly from earlier in the year.
The tier one risk based.
12.15.
Our highest level since 2016, we finished the year with tangible book value per share of 20.75.
Up from 19.81 year ago.
Although we will not be providing cecil guidance today, there will be and initial impact on capital as we record the seasonal adjustment in the first quarter of 2020.
For regulatory purposes, we will take advantage of the three year phase and we had been actively testing our modeling and we'll be ready to disclose additional information in our Form 10-K to be filed in March.
I'm looking forward to 2020 as much or more than four any year, we have operated equity bank.
We completed our 18th annual all employee meeting on Monday of this week.
Every associate in the Bank meeting, Kansas City area for a day of outside motivational speakers breakout sessions for equity bank initiatives and here last year's results and the current vision from bank leadership about our new your objective and the future of equity bank in it.
Always my favorite day every year for the bank and it isn't it it is exciting to see everyone and for everyone to come away with our goals for 2020.
We've also received several inbound calls on potential mergers the past few months and we'll continue to work at deals that make sense for our stakeholders.
It is my opinion consolidation will continue to occur and I'm excited to see how the new possibilities will play out.
Thanks for all your support in 2019, and I look forward to 2020 with excitement.
At this time, we will entertain questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question Chris The Pankey. Please stand by by the composite can they roster.
First question comes from Terry Mcevoy, Let's Stephens. Your line is now open.
Good morning, guys how are you.
Good morning, Gary.
I guess just start you've made really good progress, reducing the nonperforming assets since since the first quarter I was wondering if you just comment on the economic health in your markets, especially given the spirit Aerosystems. Some distress there that's been in the headlines as well as baby your updated thoughts on the on the restaurant franchise portfolio.
Yep.
So.
We'll take the 737 Mac.
Visiting with our customers, which we are again.
Constant contact with them.
Terry It looks like.
They all have really good plans in place to.
Be able to manage through this not have it be a material I mean, it's obviously a chunk of their volume, but it's not going to break their companies. So we don't see that theres going to be any stress in that portfolio directly related to this from the standpoint of we don't seem to have been going negative debt service coverage ratios.
Or having issues.
In an operating basis, so from that standpoint.
It is an impact on our community, which will trickle through our community if it sustains into another 12 months.
The low around town is is that eventually explain has to fly and it's a technology issue not a structure issue. So when it gets back in the area that it should get in the back of the are fairly quickly.
And there will be able to generate production again all of the signs are that they are going to that they're working on making sure that everything stays intact. So they can ramp this backup, especially as they shut it down so.
That's specific.
On that that subject.
Second question was on the QSR restaurants lending.
See any stress in our QSR companies that we currently have.
They are also operating very well.
We did receive some payoffs in 2019 on some of it took blocks of restaurants out that had real estate associated with them and refinanced other places.
Got fixed rate financing.
But the ones that we had in our portfolio today, which we look at regularly.
All seem to be operating well.
Don't seem to have any stress in them now we are.
The most of the concentration lies and.
Papa John's.
Freebies.
Frozen custard. So those are really the two concentration buckets that that we have.
So.
Those restaurant doors seem to be doing really well.
Thanks, a question for you Greg the the Fourq margin had some moving parts as you think what the first quarter. What are your thoughts on the core margin accretion and then loan fees just to give us a sense for a reported margin at least through the first couple of quarters of 2020, and maybe full year as well if you've got that.
Yes.
Projecting Q1 margin flat over Q4 in that 350 to 352 range.
And fees, we had we had a nice quarter in tooth than Q4.
Maybe a little softer in Q1.
The pipeline still looks very healthy. So all said I think that we are forecasting them Q1 flat.
To Q4, and NIM as we move through 2020.
Up a little bit not dramatic.
Just one last question I'd like to new Slide 12 is talking about the digital banking and I know, you're making investments in technology. Just overall your thoughts on expenses in 2020, as you continue investing technology growth and grow the franchise.
Yes, yes.
Yet asked a question again, Terry I'm sorry.
The expense outlook for 2020, given the ongoing investments in technology that.
That you're showing here in the presentation.
Yeah, we've already made.
Big chunk of that investment.
In 2019.
We've been obviously been through our capital expenditures budget.
For 2020, it's actually a little bit less than it was in 2019 simply because a lot of the platform has been developed so you're not going to see a big spike and either in capital expenditures or expense associated with.
Technology will be up a little bit think very small percentages.
But but not dramatically.
So that lift on slide 12, Terry those are all things that are already implemented in our company.
Okay. Thanks, guys.
Thank you Gary.
Thank you. Our next question comes from Andrew Liesch with Piper Sandler Your line is now open.
Morning, guys.
Andrew.
Couple follow up question from your prepared comments, Brad you mentioned that you've been getting some inbound calls from front from prospective targets like what's what's been the hang up on some of these deals are the pricing is a credit or what have you seen in these deals that maybe a given you some pause.
Well.
You know the.
The market has changed in from 20 early 2019 late 2018 to what the pricing is today and I think some private companies are figuring out how to make that presentation to their board of directors.
I think that they're not interested in aren't going to move forward with something eventually, but I think there they're waiting for more data points to come out so that that conversation easier for them to have.
And as you know banks are sold and not bought and so I think it's on their timeline that these things move forward.
I do have a sentiment Andrew that as seasonal now moves to private company implementation over the next 20 months.
I think there will be more opportunities over the next 20 months than there are today, just driven by the fact that seasonal implementation is complicated.
And I think there might be some guys. It just say.
I don't want to go through this in my shop, I'm going to we're going to find an exit strategy.
Gotcha, Okay no. That's some good helped by the good color.
And then earlier you mentioned about how brought branch optimization can be part of your goal in 2020, what does that really in tail are there.
Consolidation is it a expanding to places where you want to have more of a present what can you just expand on that further.
Yes, Andrew what that really means for US right now is that we've been working on.
Emphasizing to the.
To our eight different regions.
Hi, there responsibility for profitability in the organization.
And as such have continued to.
Not realigned duties that bush.
Accountability down to the regions, we have very talented people.
In our organization and as we've grown and as Weve.
Brought merged organizations and we want to make sure that we're utilizing that talent well by giving them. The correct amount of authority and the correct amount of responsibility and Brad and Patrick Salomon's, our human resource executive.
Julie do but we have worked pretty hard.
In the second half of 2019 to develop a new system of accountability and keeping.
Our our.
Regions.
Working as not not independently, but working on their own.
As.
As bankers, because they're very skilled and we want to take advantage of that.
Okay. That's very helpful that you've heard all my other questions.
Thank you Andrew.
Thank you as a reminder to ask the question you'll need to press star one on your telephone.
Next question comes from Jeff will this with D.A. Davidson Your line is open.
Hi, guys good morning.
Having Jeff.
Looking at the.
Loan growth side of things.
Obviously, you had sort of a flat to modestly down year add Brad you mentioned kind.
Kind of working through some things and feeling good about not chasing credits.
But I guess as you find your footing and look at 20.
What's the growth outlook look like on that on debt loans. If we think about it all all the factors involved with payoff activity, but just trying to frame up 20.
Growth outlook.
So I think I think mid.
Single digit loan growth is what we budgeted form.
And so our planning for Jeff and I would tell you that we and we've talked about this before we took a specific stance with our team at group in Tulsa, and Mike Museums leadership down there with Greg Anderson has hired really high quality people I think we ever.
Really really solid team in Tulsa, now, which which we totally turned over.
In the last 12 months their pipelines are really strong I'd say, we have one of our best experienced teams down there now.
And so we're really excited about what we see out of that group that group was a negative large negative loan growth last year.
And we look for them to be a large positive loan growth. This year and so just that alone is going to help the bottom of the bucket and the other thing is is we had you know.
Probably $100 million plus in payoffs of loans that were strictly tied to.
Mostly the inverted yield curve, giving them a lot lower fixed rate loan.
For a long term that we could offer our didnt want to offer on an internal basis and so.
Even with the swap products, we didn't want to compete with what they were being offered out there and so I would tell you that that is that irrationality has seemed to cease in mostly I think driven by the yield curve and so I think with not having those payoffs coming at us and the teams being retooled.
I think we haven't really good opportunity of growing loans substantially our community markets last year did a really solid job I think they are poised to do us even a better job. This year and I think our metro markets are poised to do a much better job this year as well and so the combination of all that I feel really good about our AR.
The ground operating teams.
And we have the best group, we've ever had and so we've been working a lot on sales training and process training and so I think those things those initiatives are going to really show through this in 2020.
Thanks, Brad.
Greg I wanted to follow up on the margin.
To make sure we got an apples to apples if you could maybe comment on.
Reported much so you've got a 361 reported 352 adjusted what are those.
Elective levels in the first quarter.
Expectation.
Yes, they the relative levels in the first quarter would be.
The same as they were in the fourth quarter as adjusted.
So we would expect and after backing out.
515000 of tailwind in Accretable yield, we would expect that number as adjusted to be the same in Q1.
And we've also backed out early prepayment fees of $307000, which should normalize.
Our.
Loan fees in Q1 as well.
Okay. So the 352.
Hangs in the 353 52 range.
The 361.
Would come in to.
So.
Yes, yes, yes, the 361.
If we run a normal quarter. The 361 won't exist it'll just be Threed 350 to 352 got it okay.
Merges into the into the core.
Corrected okay.
Helpful. And then yes over the last one was just a follow up on the expense.
A question I think you so 5.5% I think growth in 19, you talked about the investments that you've already made you've talked about the late Q4 kind of spend on the accounting issue.
My guess is that points to a lower growth rate in 20, but I don't know if you've got any specifics on.
A growth rate that should say is a comfortable number 20. Yeah. We are we are below 1.5% on overall expense growth projected for 2020 relative to.
Where we were at.
Going in to the fourth quarter of 2019, I'm happy to give you guys some guidance.
On.
At least on on Q1.
The.
I believe and that's we stand here today.
We are looking at margin being about the same we think that provision.
And this is not Cecil adjusted we're trying to keep apples to apples so provision under the old incurred loss method.
I would be slightly less than what we experienced in Q4.
Our non interest income probably will be a little less.
In Q1 simply because of seasonality Q1, being a softer quarter and then our noninterest expense will go up in the first quarter.
We will have the salaries.
Adjustments in the first quarter that we didnt have in Q4, plus our FDIC premiums are likely to return to normal which will also increase.
Non interest expense, so im calling for non interest income in the first quarter of somewhere around 6.3 to 6.4 million and non interest expense to be somewhere between 25.
0.3, and 25.4, which is.
An increase from Q4 clearly.
Effective tax rate.
Somewhere in the 22.2% range and so we had a great quarter in Q4.
And we're proud of it we're very likely to come down a few cents.
Our Q1 forecast.
And not from from an operational health standpoint, just from seasonality.
All right good stuff, Greg hold out on us, but you gave us all the details there.
So on the on the expense side. Then if you are looking at below 1.5% growth rate for 2020 any step up in Q1 it.
Something north of 25 that would into that would mean that you'd certainly level off for or so so rank line balance of the year. That's correct. That's that is correct. Okay. That's it for me. Thanks.
Thank you next question comes from Michael Perito with KBW. Your line is now open.
Good morning, This is Michael Shivani stepping in for Mike Credo.
Good morning, Michael.
Good morning.
Do you guys mind walking us through what your view of core earnings are.
For Q and then any items, we should think about as we try to use that exit run rate in 2019 and factoring it into our 2024 cap.
You bet you bet Michael quickly.
Stated EPA asked was 64 cents.
We walk that down through a series of.
Adjustments to 62 cents per fully diluted share the components of that are we were higher in accretable yield and loan fees of four cents in Q4.
We were higher because we had reduced non interest expense so that helped earnings two cents.
But we also put a three sent reserve.
On our account reconciliations.
So that hurt earnings three cents and taxes were slightly higher in Q4 by about a penny so adjusted our 64 cents fully diluted stayed at S.
Just down to 62 cents.
And again quickly.
We're going to see.
We're calling for the same core NIM in Q1, and we're calling for.
About the same noninterest income a little bit lower in Q1, just because of seasonality, but we will see a step up in non interest expense in Q1 because of.
Typical first quarter.
Fourth quarter adjustments and so although we are stated at 62 cents.
In Q4, we're calling for a few cents below that in Q1.
And.
If we have a run rate.
Somewhere between.
60, and 63 cents.
In the rest.
2020 that would give us.
Potential projected EPS on a normalized basis somewhere.
In the height to dollar and 40 sensors to two doors and 50 cents.
Okay, great thanks for that detail.
And then for fees you mentioned Q1, but can you talk about any other fee initiatives like wealth or anything like that and expectations for 2020.
Yes, so weve implemented the wealth management Trust division they have a really good pipeline.
And.
We're forecasting that that group would be.
In a breakeven state by the end of the year 2020 and so.
Those initiatives, although we havent, specifically broken them out on expenses.
They are they we aren't adding a lot of expense to that group this year.
Hopefully they're generating revenue.
As there continued to book new assets onto the platform. So all the technology has been invested.
The people have been invested and so we're continuing to.
Grow customer bases, there and so they're doing a great job with that.
We also have card services that we've invested in the technology in 2019 and so.
We already had a credit card division it was very small.
On the retail side and so what we really said is we don't want to grow the retail side, but we're focusing on the commercial side and so purchasing cards and.
Corporate credit cards, really tied to our C and I customers and so.
We do think that that will start kicking in this year, although we have not specifically broken out that initiative, but you can see quarter over quarter, we have had improvement in the deposit area.
Some of that's pulling through from Treasury sales. So it was pulling through from other initiatives. We have on debit card spend and so all those things have been working in 2019 to increase and we'll continue to work hard with our teams to make sure those trade increase in 2020.
Great. Thank you and I know you guys hit on M&A, a little bit, but can you just talk about year as as a whole year capital priorities for 2020.
Yeah, It's a great question Nash and frankly, we're pretty proud of how capital.
Ended 2019, our ratios.
Are all very healthy and so we're looking at that and we and we're looking at.
With our board proper utilization.
Capital right now.
Nick and it's the same thing it's been really since we went public we'll look at each transaction.
Individually and see what's best for the shareholders.
And and react accordingly, but right now I think all capital options are available to the organization.
And we'll still focus on stock buyback.
Utilization.
As a.
Capital deployment strategy as long as is the effective from a pricing standpoint.
Yes.
Great. Thanks for taking my question.
Thank you.
Thank you I'm not showing any further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
The Jonas.