Q2 2019 Earnings Call
Hello, and welcome to equity Bancshares' second quarter 2019 earnings call. At this time all participants are in all this and only mode. If anyone needs assistance during the conference Spry Star C. zero for an operator now it's my pleasure to turn the cold to Chris <unk> for opening remarks.
Good morning, and thank you for joining equity Bancshares' conference call, which will include discussion and presentation of our second quarter 29, P. and results.
Joining me today are equity Bancshares', Chairman and Chief Executive Officer, Brad Elliott.
Equity Banksters executive Vice President and Chief Financial Officer, Greg costs over and equity Bancshares' General Counsel <unk> rebirth.
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Thank you all for joining us with that I'd like to turn it over to bread.
Good morning.
Thank you for joining the equity base shares second quarter of 2019 earnings call.
I'm joined today by great crossover or Chief Financial Officer.
And our general Counsel Red River.
After a challenging first quarter I'm pleased to announce our company bounce back nicely in the second quarter with 59 cents a share in earnings.
Adjusted for merger expenses.
And we had resolution to a piece.
I'll be underperforming credit relationship we discussed in April .
For the first quarter earnings call.
That relationship had to commercial creditors.
And the credit involving a franchise bakery business was sold at auction in May.
Brett.
Will you please take us through the highlights of that transaction.
As Brad just noted the unprofitable piece of the relationship was sold at auction in May do the bankruptcy court.
We had accrued enough specific loan loss provision, where the realize value of auction did not create additional loss.
<unk>, which was about $9 million and it's related interest is off our books out of the bag.
In addition, we spent a great deal of effort toward resolving the other commercial credit in the relationship the franchise entertainment and pizza related business.
Although this business of put in chapter 11 bankruptcy, along with a bakery business. We believe correctly. It was profitable and has a strong prospects as an ongoing concern.
We work closely with the bar where to expedite the company's next it for bankruptcy to reduce the delay and expense involved.
In those proceedings.
We're supportive of the bars desire to return to normal operations outside of bankruptcy.
We believe operation of the company outside of bankruptcy will enhance existing store operations allow for new franchise sales and create a positive overall resolution.
The company recently filed is proposed plan of reorganization disclosure statement and is working at the plan approved by his creditors in the court. The target date for plan approval is early October .
We also have other assets finance to these more hours, which consists of three homes for the principles of the business two of which are listed for sale.
We believe these houses will sell in due course for a reasonable market base value.
The third is never been pass do.
The principles continue to work with us on a fair outcome on these loans.
As stated on the first quarter call. This was a relationship that goes back to 2011.
With the then strong borrower who specialize in increasing revenues.
It profitability of underperforming companies.
What is significant banking relationship with this borrower for several years.
And they performed well and ultimately sold to have their portfolio companies for substantial profits.
Although I've, obviously been disappointed by the performance of these credits.
And it is a responsibility of myself.
And our executive team completely own.
I'm happy to see the hard work of our legal.
Credit teams to get this remaining business out of bankruptcy and returned to normal operation.
Great.
You may recall from our first quarter earnings call in April that the then current impairment analysis called for a provision for loan loss of $14.5 million.
After the resolution of the bakery business and after I updated impairment analysis for the second quarter. We have concluded that our provisions a loan loss taken in the first quarter remained adequate at this time.
Excluding the resolution you're the bakery business you're to date net charge offs for the bank had been $506000 only two basis points of the average loans, which is the same rate as 2018.
In addition, if the entertainment Pizza franchise right was taken out of our nonperforming asset ratios. We would now be at 91 basis points nonperforming assets total assets down from 98 basis points at the end of 2018.
Classified assets script really above the credit stand at 24.8% of regulatory capital at the end of June .
Nonaccrual loans would be 32 million down from $33.2 million at December 31st.
You know Oreo from December 31st to June 30th is down, 10% and is only $5.8 million.
For a presentation of our asset quality metrics. Please refer to slide 14 into debt presented with our press release from last night.
<unk>.
And his credit group continue to work hard at reducing special assets and we thank them for the results they are achieving.
Our teens and myself are focused on maintaining the same credit standards.
We have achieved throughout the history of the bank.
Craig in his credit Department.
As well as the lending teams are all joined with me and executive team in originating high quality credit.
Administering those credits with proper diligence.
And working out any credits that may require resolution.
I think it is important to note that two thirds of our nonperforming credits.
I have been booked through mergers.
And one third had been originated from our credit platform.
We treat them all the same it is Greg noted our net charge offs without the large credit mentioned.
That'd been only two basis points.
And our total reserves, including eight triple L.
And purchase discounts.
Or 1.14 per cent of load.
Greg will take us through the rest of the quarters performers.
We begin with our earnings performance and reconciliation of quarterly earnings per share back to core E.P.S.
Stated diluted earnings per share is 58 cents for the quarter.
Adding back merger expenses of one cent per share leaves adjusted diluted earnings per share 59 cents.
Compared to street consensus 60 cents per share.
There were minimal platform enhancement expenditures this quarter, however, professional fees directly associated with the previously mentioned nonperforming credits are estimated at two cents per share.
Although we were within.
One sense of consensus earnings.
We are not satisfied with our result, low production remains soft.
As we continue to bank credits, but fit our underwriting while pricing them appropriately and although we have leveled off in reduced pricing on our deposit offerings are margin continues to be appointed emphasis with our games.
We are working to increase spread.
We began 2019 with an initiative to reduce costs and improved on interest income.
On a court basis, we have delivered on the initiative by examining and reducing overhead.
Primarily in our overall compensation expense.
And by increasing revenue in deposit account fees and well it's treasure management.
This is an ongoing initiative. The teams are focused on in addition to their production goals.
We believe those efforts will show significant improvement.
F.D. headcount from Q1.
To the end of Q3 by example.
Looking at the income statement, starting with margin loan fees were light compared to our expectations driven by lower originations commercial loan balances have been mostly flat overall since December 31st and residential mortgages have increased indicative of the environment.
Accretable O'neill was relatively normal.
Securities balances and yields were essentially in line with our forecasts and expectations. However, there was a small reduction in yield on taxable securities due to faster free payments on mortgage backed securities.
As brands that earlier, we had anticipated a rate cut from the fed and proactively leveled and reduced rates on our deposit offerings.
This is help lead to a quarter over quarter flattening a cost on transaction accounts for us.
<unk> and public thumb deposits continued to be competitive and this leads us to an increase in overall cost of deposits of three basis points to 1.64% compared to 1.61% in Q1.
After factoring noninterest checking the cost of deposits for Q2 is 1.40%.
Our data is 65 and 75 on transaction and time accounts are essentially leveling off from prior quarters.
Overall net interest margin for the quarter as stated at 3.42% and would be 3.47%, but for the non accrual impact of the credit we had been discussing.
Normalized loan fees would take them to about 3.53%.
We mentioned last quarter of the impact of amortizing securities premiums to call date as opposed to maturity date.
And that accounting change birds margin about four basis points during the quarter.
Provision for loan losses was $974000 in the quarter returning to a more normal level.
Noninterest income for the <unk> $6.5 million, an increase of $1.2 million over the previous quarter or 22%.
And better than expectation by $800000.
Each line item of non interest income was that quarter over quarter service charges and fees up 16%.
Debit card income up 26%.
Mortgage banking up 77% and other is at 12%. Some of this improvement is seasonal and some of it is from the efforts. The team has put in during the first six months of 2019 as we have previously discussed.
Non interest expense as stated was $25.0 million for the quarter and $24.7 million without merger costs as compared to expectations $24.1 million to 600000 dollar a delta mostly coming from elevated professional fees of about $300000.
Primarily associated with our workout credit in a higher than expected FDIC insurance costs and a quarter of about $170000.
How're F.D.I.C. assessments changed in the second quarter based on the first quarter recall report, which included the large loan loss provision.
Of particular note however is the quarter over quarter reduction in salaries and benefits of about $1 million.
Part of this decrease is explained by incentive compensation and overtime paid in the first quarter for elevated business activities such as the mid first merger and acute you online banking platform and part is explained by a reduction in current year performance bonuses.
However, an additional portion is explained in the efforts of the team to responsibly reduce overtime and overall compensation expense as our business environment allows.
Are effective income tax rate, you're today is 20.8%.
I'm very proud of each equibank associate for their efforts in pushing non interest income and driving down non interest expense.
The results Greg just described are in large part due these efforts.
While we continue to work on these initiatives.
We will not take shortcuts in any of our key areas assuring our customers employees and shareholders.
We will continue to improve bank operations in performance.
But not at the risk of safe and sound, making correct.
As we begin to review the balance deed I first want to stay in the second quarter, we repurchased 277800 sticks shares of our stock at an average price of $25.95.
This price is within the range, we expected and the impact on our tangible common equity tangible assets ratio is approximately 18 basis points in annualized accretion T.E.P.S. is about four cents per share at this point.
Moving to the rest of the balance sheet lung growth was acceptable for the second quarter. However, we believe the lending environment was still slow for the first six months of 2019.
As we have stated.
Or we will not change our credit culture to chase credit growth for the sake of growth.
Loans are up about $105 million from December 31st. However, most categories are flat were relatively small growth except for single family residential which is about $100 million.
Our pipeline is still very strong and our team continues working as hard as it ever has to originate and service loans within our high underwriting standards.
The market, we serve have fantastic banking relationship opportunities.
And I believe the pace of our growth.
More than ever is based on banking relationships not banking deals.
That often leads to inconsistency.
In loan growth.
We are in this space for the long run and assets will continue to work hard and be smart about our portfolio.
Although the second quarter is traditionally a slower quarter for deposit growth for us we were able to grow non interest bearing deposits at about 1%.
As bread said, we have reduced the rate on our deposit offerings and I do not believe that has caused our deposits decline I believe are declining deposits $75 million in the quarter is a reflection of normal seasonality.
We typically see deposits flat to declining in the first six months of the year and then picking back up again in the second half.
That are home, we'll bank advances increase from Q1 to fund the asset growth and the change in deposits.
Our van stock loan increased about $7 million, reflecting the repurchase of our treasury stock.
Our capital ratios at June 30th Parsed, 7.44% tangible comment of tangible assets and our leverage ratio is 8.26%.
Although efficient both of these are slightly below where we would like we are mindful of the impact our growth and the stock repurchase plan have on them.
Overall, our second quarter was okay.
But we are not satisfied.
Even though our efforts to build non interest income as a more significant driver of earnings are paying off.
And are not interest expense is trending favorably.
With some hard work from our operating teams.
Our production teams are working hard and working smart to book assets that meet our criteria.
It's rubber cure in price.
Core deposit growth.
We have also had a great year.
For product and platform development, including our new online banking platform.
Which is exceeded our expectations.
Well It trust, which have also exceeded our expectations.
And we will be introducing new credit card services.
In the third quarter.
We also continue to receive inbound traffic for merger related discussions, which is encouraging as mergers continue to be a piece of our long term strategy.
We'll continue to work on reducing nonperforming assets.
To increase net interest margin.
But we won't take unnecessary risks to do so.
This means no unnecessary credit risk duration risk composition risk.
In our asset or liability.
I believe we are at at time in the cycle, where hard work will be rewarded even more than usual.
For all our stakeholders and shareholders.
You have my word we all continued to put forth the outstanding effort. The equity bank team has always expected over so.
At this time, we will entertain questions.
Thank you, ladies and gentlemen, I need to have a question at this time for US to start then one on your touch tone telephone. If your question has been answered Oh, you wish to remove yourself from the queue press the pound key.
I came to get into Q. by Star in line.
Our first question any some Michael <unk> W. you align yourself then.
Hey, good morning Gosh.
And like you might.
I wanted to start appreciate all the all the color and all the items you guys gave me your prepared remarks can we may be drilled down into the expense is a little bit more they fit a little heavier than what I've been looking for a fourth quarter exit runrate for the first half the year I need just general thoughts about where you think that the the trend in the back half of the year and.
As as you kind of think of the overall efficiency the company, maybe any broader thoughts their practice as we move forward with the with the right environment being what it is would be helpful.
Hey, Mike we had somehow our audio cut out in the first part of your question can you ask the first part again please.
Yeah, you, probably <unk> I was just asking kind of for near term expectations on expenses because the the first half year has been a little heavier than what I've been looking for that also just a broader comment on kind of efficiency goals from Brad as as we move forward with the new rate environment.
Yeah, let let me get started like and let you know that as we talked about Brad in the team have worked really hard on.
Looking at all of the expenses he challenged.
The operating teens early in the year to look at a revenue not interest revenue and non interest expense.
And so we think that the teams have accomplished a great deal with that and.
Probably guidance would be for a non interest expense.
I'm in the second half of the year at about a 24.5 in Q3.
And right now I would give the stain guidance for you for but it's a little bit fluid right now as we're going through some of these expense reviews, you want to take that red yeah.
So my we worked really hard this year as we talked about I think you'll see efficiency pickups.
That will be something you guys can measure in third quarter over what first quarter started at and so you know the teams are worked really hard to make sure that we have optimized all the opportunities that we have in all the different departments that we currently have so.
On the expense side I think we.
You'll see differences from two to to Q3 on the revenue side I think you're also going to see differences as the as the deposit we withdraw their deposit products and so the fee income on deposit products is up and I think that we'll continue to trim that way as we get better and better at Treasury services that we continue to turn that way our wealth management and Trust Division is booking assets. So I think we'll continue to see revenue production from there and then when the card services business kicks in I think we'll continue to see a revenue production from that they answer your question Michael.
Yes.
Very helpful. Thank you.
I wanted to maybe transition to credit quickly it seems like these.
<unk> two credits from the first quarter or or either you know ones, Don and the others on its way to being a little bit more firmly resolved, but I want to ask will actually a little bit of a different question. Just you know we we saw a bank in in the Midwest have some some difficulties with their act portfolio I believe it was dairy and cattle and I'm. Just curious if you could maybe remind us kind of the make up of your AG exposure and and if there's been any kind of recent developments, so or performance worth, noting good or bad that that's on your radar.
Yeah, well the good thing is you only lose a week drop eight times before it makes bumper crop and so since the wheat crop is now harvested.
It's a bumper crop and so our western Kansas markets, which is the majority of our our AG markets. We do have some in central Missouri, as well and in northern Oklahoma, but that that crop is.
More than two times the average on on production.
And is also the prices.
Very positive. So we're you know we're doing well from that aspect.
And then the corn crop for US is a very positive in that we're at a high high desert. So we don't usually expect a lot of rain, we actually did get above normal rainfall, but for our areas that just means that we add inches instead of.
Tens of inches and so they all got their crops planted that that crop looks really good most of it is irrigated and so with the price being up in the yield looking very positive at this time I think our farmers are all going to have a very healthy year and so we are going to suffer the issues that a lot of the other places have suffered we do have some <unk>.
Protein production.
In both cattle hog and beef, but those markets are also doing very well. So it looks like our AD guys are going to have a good year.
To a great year, and so that's gonna actually heal up a lot of them.
From the ones that have been struggling as you remember about 8% of our loan portfolio is tied to AG.
How full thank you and then.
Just lastly, kind of a little bit of a should teach challenge question here for you guys. You know I mean it it the first half of the year here has had some challenges you know obviously the <unk>.
Plus years before that were or very active from a deal perspective.
I wish the thought process internally I mean is it does it make sense to have a more of an internally focused 2019, and 2020, where access capital is allocated to buybacks and efficient teacher tried to gain and you try to kind of report you sell them, what you've put together here before you know introducing other outside firms do I'm, an actor or do you think that you know that the credit flip beside that you know once you got to get through these efficiencies in the next quarter. So you guys will be ready and and <unk> still kind of the best bet to tip to create value moving forward.
So we've always said, it's a two prong approach Michael we always had to focus on run on the bank.
And so you know we've gone periods, where we didn't do any lemonade transactions because they didn't fit our model our pricing model and so I would say we are still very open to eliminate transactions that fit in with the model. I also tell you that we're very focused internally I'm, making sure that all the processes are up to speed with what we need to have to be able to run the institution.
We currently have and so I'd say, it's a two prong approach and I would you know we don't force anything into a bucket.
And so I would say our operating teams are going to get very good at running the institution and making it as efficient as possible and will still continue to have merger conversations with other people who have the desire to partner with us.
Got helpful Guides I appreciate you answering all my questions that I. Thank you.
Thanks <unk>.
Oh and next question comes from <unk> <unk> <unk>.
More than guys.
First question I was hoping you could discuss the credit performance and trends of the restaurant franchise portfolio X. The one relationship that so we've been talking about the last couple of months.
Yeah, So the credit trends on the I think the question tears the credits <unk> twins on the rest of the restaurant QSR portfolio the.
Credit trends on that portfolio of actually done really well most of it is tied to concept restaurants like Freddy's a taco bell.
Papa Johns my missing lingering.
And so those those concepts ever been performing well the operators that we currently finance have performed well and so on a store by store basis, we have not seen deterioration in any of those metrics.
We are monitoring those well but.
Very closely and so I would tell you that that.
That franchise lending is has gone well as you know.
The majority of that.
It was all too local operators and so with that comes we are secured by a lot of times real estate.
Equipment and also.
Personal guarantees.
Right.
And and and Greg Thanks for all the the commentary on the the name dynamics in the second quarter. I guess my question is do you think the pause it costs can fall in the the third and fourth quarter. He had mentioned lowering rates in certain markets are certain products and as you think about all the variables loan fees accretion combined with the funding costs <unk> directly where do you think the margin can head.
Over the next two quarters.
Yeah.
Well, Terry we would start by hoping that it's it's leveled off.
At its current level the margin I'm, referring to.
And we would like to think that our deposit costs can continue to come down and third and fourth quarter and our heavy growth quarters in our core deposits every year, it's been that way since the inception of the bank and so we think that we can continue to grow deposits. We think we can level off and hopefully reduce some of the funding costs and of course, if the fed.
Will ease a little bit.
That will help or borrowings at federal humble bank as well. So I went conservatively say, we'd like to start off by seeing a leveling and Q3 and four and maybe with a little luck, we'll get some improvement.
And then just last question the the digital bank platform that was rolled out in the second quarter. You just talk about how much of that was defensive in nature, just given the competitive landscape and what some of the larger banks already have out and then on the on the offensive side are you a growing relationships growing clients because of this new product.
Yeah. So.
To Terry I would tell you that the product that we were currently on prior to going to do to just was not of this scale or capability for a bank our size and so we were having limitations on being able to manage customer relationships.
The product offerings on the commercial treasury side were not adequate in so it gave us the ability to do more and marketing.
Robust product.
To our customer base, so from that standpoint, a little bit defensive but also a little bit offensive. It gives us a much better opportunity to be able to market directly to those customers.
And try to enhance the relationships we have within our customer base. It also gives us the ability, which we're in the process of working on rolling out a shadow bank. So that we could have a.
Bank that we could use on a national platform to raise deposits.
At different deposit costs than we would offer in our regional market and so that gives us an offensive tool as we continue to look at funding ways.
As many other institutions have that same capability and so it gives us some ongoing capabilities that we wouldn't be able to have on our own.
Great appreciate it thanks guys.
Thanks Terry.
Thank you. Our next question comes from <unk> Abe Davidson your lines open.
The morning interested in their digits in the second half of.
For loan growth just talk about how maybe.
You know if that's picked up in July and and what you're expecting from.
Talk about strong pipelines, but I want to I want to get your thoughts on.
The second half thanks.
Yeah, Jeff or teams are working hard we do have.
A solid backlog of loans that are in the pipeline.
For funding some of those I'm looking at the report some of those are draws in so I don't have a breakdown by by type.
In particular, but some of those are draws which means the commercial real estate loans already book.
So some of that will be commercial real estate.
And then.
Yeah, and I was doing.
In our marketplace is getting a little softer.
So.
I'm not sure about the growth in the senile ending as we're seeing some softening on balances on our lines of credit in R.C. and I portfolio, not meaning that they are having issues, but meaning that they're not expanding and and buying new equipment, but allowing cash flow to pay down debt in cash flow to pay down their lines of credit.
Would you said would you characterize it as sort of mid single digits, you know high single digit.
Where would you get to pick a range about expectations for net growth.
<unk>, 3% to 5% three three or 5%.
And that's annualized.
That would that would be annualized yes.
Okay.
That's true.
And then on the on the problem credit balance Greg I think you mentioned, you know 30 million or half of the nonaccruals or in the <unk>.
<unk> relationship with disgust.
Are there are the remaining.
Roughly 30 million or there's some junkier credits in there two or three that make up.
A a decent sized portion of that remaining balance.
Okay.
Yeah.
No after those relationships the largest nonaccrual.
Loan is a 2.3 million and then it drops to 1.5.
And you mentioned a great portion of those have been acquired.
<unk>.
Been through acquisition.
Our is there any.
It's kind of characteristics of those that are they a certain type of loans like just the balance of them are they in one.
Or to product categories.
So the majority of those are required which also means that some of them are showing his nonaccrual loans, but if you remember $29 million of that nonaccrual.
His current and.
<unk>.
21.7, sorry, Terry 21.7 million of that is is accruing and current.
But is on non accrual because it was a purchase counting adjustment against it.
And that stuff is all over the board I mean, some of it's $500000.
Some of it's $2 million.
<unk>, if we put a credit purchase mark on it we have to list it as nonaccruing.
Par yeah Nonaccruing nonperforming.
But but reality is the customers never missed a payment and it's still.
Paying as the contract says.
So.
Fast forwarding that I mean, these these balances seem like if if you know.
Once once it's been altered does it stay that way it I guess.
The balance of that 30 million you'd expect to stay on the books for for a reasonable amount of time is that.
Fair Yeah.
Yeah, you know we do we do trying to force these customers at times.
To find other homes. So it's not that we just allow them to continue to make payments, but you know there's a lot of times, where these things are a five year contract.
And there's not much we can do to him to.
To have them move somewhere else and so we put a mark on it because it wasn't written to our credit standard our credit policy and so we put a mark against it. So you know, it's it's well reserved but they pay off over time.
A lot of times more than leaving and finding another institution.
Got it thanks.
<unk> 89 next question is from and <unk> O'neal.
Hey, guys.
<unk>.
Good morning, just a clarification jeffs question that that 3% to 5% for net growth was that Justin see an eye or was that the entire portfolio.
That'd be <unk> that would be the entire portfolio.
Okay.
And then just curious on the the long growth in the in the second quarter was any of that purchased or was it all originated internally.
Some of it was purchased and some of it was originated.
Yeah.
The purchase loans were in the.
Wonder for family.
Buckets, and we've purchased from people in the past.
Okay, so you're familiar with <unk> with their underwriting.
Yes.
Gotcha.
And you know what I think that covers all the other question see everything that I wanted that has been asked and answered all a step back. Thanks.
Thank you Andrew.
Thank you and maybe some <unk> easy you have a question or comment guess by star in line.
Mm.
All right, ladies and gentlemen, and thank you for joining the equity Bancshares presentations call have a great day.