Equity Bancshares, Inc. (EQBK) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Equity Bancshares Q4 2017 Results Presentation and Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. John Hanley, Senior Vice President and Director of Investor Relations. Sir, you may begin.

Good morning. Thank you all for joining our Equity Bancshares presentation and conference call, which will include discussion and presentation of our fourth quarter and year-end 2017 results. With 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. The presentation accompanies the discussion of our Q4 results and is available by clicking the presentation tab to download the PDF. You may also click the event icon for today's call posted at investor.equitybank.com. If you are viewing this call on our webcast player please note the slides will not automatically advance with the presentation. And please note Slide 2, which includes 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. Please also note Slide 3 with important additional information for investors and shareholders. Following the presentation, we will allow time for questions and further discussion. Thank you all once again for joining us. And with that, I'd like to turn it over to Brad Elliott.

Good morning. I'm Brad Elliott, Chairman and CEO of Equity Bancshares, and here with me this morning is our CFO, Greg Kossover. Thank you for joining our fourth quarter 2017 Equity Bancshares earnings call. The teams at Equity Bank worked hard in the fourth quarter to close and convert the Patriot Bank merger in Tulsa and the Eastman merger in Ponca City and Newkirk. Both on November 10. I am pleased to report both mergers and conversions occurred as anticipated with no significant hiccups and no interruptions to business for our teams or our customers, both Mark Detten and his team in Ponca City and Newkirk, and Mike Bezanson and his team in Tulsa hit the ground running and have already made the transitions into the Equity family. And we are excited to have them both as a big part of the Equity Bank franchise. We also announced the upcoming mergers of First National Bank of Liberal with their five branches, and Adams Dairy Bank in Kansas City. We have filed our applications for both mergers. Tina Call and her team at First National Bank of Liberal have been working diligently on the integration process since announcement. As has David Chinnery and his team at Adams Dairy Bank. We are just as excited for these mergers as we were when we announced them in December. I am also pleased to report our legacy Equity teams did an outstanding job on organic growth in the fourth quarter and in 2017 overall. We were able to grow loans organically $125 million which is 9% year-over-year, and core deposits 10%, which is more than $100 million year-over-year. From the earliest days of the bank, we have focused on core deposits. A recap of 2017 shows we acquired $80 million in core deposits from the Prairie State Bank merger, $198 million from the Eastman merger and $147 million from the Patriot merger. These three transactions coupled with year-over-year organic growth of $105 million highly complements the outstanding lending capacity in the Tulsa region brought by the Patriot Bank merger with Mike Bezanson and his lending team, and the robust lending opportunities in Kansas City in Wichita. And our next two mergers include the deposit rich platform of First National Bank of Liberal and the expansion in Kansas City with Adams Dairy Bank continuing the development of our healthy balance sheet. I have said in previous quarters that organic growth is often lumpy as ours has been but in the end our teams accomplished our goals for 2017 and we are excited to start 2018 as expected. We have also been busy continuing to work down non-performing assets much of which we acquired through merger. Myself and our team believe that current business environment is suitable for reducing non-performing assets, and as such, Tim Kerr, our Special Asset Manager, has done a nice job working these down with his team. And on terms within our expectations OREO has declined to $7.9 million at year-end. Loans past due greater than 90 days declined 10% in the quarter and our 2017 year-to-date net charge-offs were less than $900,000. The percentage of legacy regulatory classified assets to capital went from 23% in the third quarter to 16% in the fourth quarter. The closing of two mergers, organic growth and the announcement of the next two mergers makes for an exciting quarter for our shareholders, as does the passage of the Tax Cut and Jobs Act in December. For equity this legislation comes at a time when our taxable income is growing significantly and this legislation should enhance our operating performance even more. Greg will discuss taxes more in a few moments. Finally, before we go through our fourth quarter performance I would like you to know that I have been working to streamline our board of directors to improve the efficiency of our corporate governance, increase our agility for strategic decision making and to have more customer, market-focused bank level boards. Accordingly, at the 2018 annual meeting, we will reduce the size of the holding company board to nine directors from 14 and our bank board will continue to be 15 directors. This was a challenging decision as all of the directors bring different and valuable skill sets and backgrounds. However, as we currently have neared boards at the holding company and the bank, we will continue to access those skills and attributes. I have been blessed to work alongside so many excellent directors and I want each of them to know I am grateful for both their past service and their future service, and for all their stewardship no matter which board they will serve on. At this point, Greg and I would like to take the discussion to the fourth quarter and 2017 performance. Greg?

Thank you, Brad. We will begin with a reconciliation of earnings per share for the quarter. Stated diluted earnings per share for the fourth quarter is $0.31 per share on $4.3 million in net income allocable to common stockholders. Mergers and acquisitions expense adjusted for income taxes hurts earnings and EPS by $2.1 million in the quarter or $0.15 per share. Because we have a deferred tax asset, we must record the reduction in rate for the future benefit, hurting earnings by $1.2 million and $0.10 per share. Fourth quarter earnings and EPS reconciled for these items are $7.6 million and $0.55 per share, both records for our company. We will jump into the components of net income starting with net interest margin which for the quarter was 3.79% as compared to net interest margin for the fourth quarter and 2016 of 3.60%. Yield on assets is at year-over-year 39 basis points led by loans with the yield of 5.40% versus 5.21% one year ago on a weighted average loan coupon at the end of December 2017 of about 4.95%, compared to about 4.80% one year ago and 4.90% in the third quarter 2017. Securities which yielded about 2.50% in Q4 2017 were about 2.10% a year ago. Partially offsetting the improvement in asset yields is a rise in cost of funds in total of 24 basis points year-over-year. Cost of interest bearing deposits were 87 basis points in the fourth quarter of 2017 compared to 68 basis points one year ago, a rise of just under 20 basis points. Helping to offset these increases, our non-interest bearing checking accounts have increased more than $115 million year-over-year, reducing the overall current cost of deposits 13 basis points to 74 basis points versus 58 basis points a year ago. The cost of Federal Home Loan Bank overnight advances has risen about 75 basis points year-over-year. Brad?

As we stated at the outset of the call, our effort to increase core deposits is paying off. Will Bontrager and his teams are laser focused on this important initiative. And it is also one of our goals when we look at mergers in community markets to find attractive core deposit franchises such as First National Bank Liberal, Eastman and Adams Dairy. Greg?

Provision for loans losses was $503,000 in the quarter, reflecting ongoing high quality credit trends. Net charge-offs for the year were less than $900,000. We continually evaluate both our internal credit quality for weakness and concentrations and also our markets for macro trends. We are not seeing any systemic deterioration in credit to speak off. However, we are also not loosening our credit criteria.

Our growth is coming from hard work, of the hard work of our lending teams. I am also very happy that our due diligence teams have done an outstanding job in evaluating credit on merger opportunities. And I believe our underwriting and purchase accounting marks reasonably reflect the condition of the portfolios we acquired through merger. Non-interest income for the quarter generally reflects what we expected, including a few weeks of growth contributed from the Oklahoma banks. After scrubbing our merger related expenses, non-interest expense was up in the quarter primarily because of the Oklahoma mergers, inclusions and the numbers after November 10, and the settlement of the CitiMortgage lawsuit for approximately $475,000. Our effective income tax rate for 2017 was 33.4% compared to 32.4% in 2016. The 2017 provision for income taxes also includes a charge of $1.2 million in the fourth quarter for the Tax Cuts and Jobs Act to reflect the impact on our deferred tax asset to the federal tax rate reduction to 21%. This tax reform also reduces our 2018 estimated federal effective rate to about 18%, resulting in a total income tax rate of about 22.6% when including an approximate state rate in 2018 of about 4.6%. This 2018 estimated total effective tax rate of 22.6% compares favorably to the 2017 total effective tax rate of about 33.4%, and as Brad alluded to earlier, comes at a time when we are increasing taxable income through both organic and acquisitive growth. We brought to conclusion the CitiMortgage lawsuit that has been in the legal system for years. As you may recall, they stem from mortgages originated in the mid-2000s which has been disputed. The amount provided by judgment, which as Greg stated, needed to hit in the fourth quarter, was about $475,000 pre-tax bringing to a resolution approximately $2.5 million lawsuit. As we turn to our balance sheet, I once again thank the teams for delivering meaningful growth in earning assets without changing our underwriting expectations and also for working hard to fund our asset growth with core deposits. Obviously, as we add scale, we get more efficient and have more platform and capacity to serve our customers and markets even better than we have in the past.

Total assets grew $978 million in 2017 or 45%. Loans grew $720 million or 52%. As Brad stated earlier, organic loan growth was 9%. The allowance for loan losses increased $2 million and with purchase accounting discounts stands at $25.4 million in total reserves. Securities increased $136 million including $60 million related to mergers and as Brad stated earlier, OREO even with mergers decreased $749,000. On the liability side, deposits grew $752 million and core deposits grew 10% without mergers and 32% from mergers. Federal Home Loan Bank advances increased $88 million including about $25 million related to merged banks balances at conversion. Total stockholders' equity grew $116 million or 45% of which $21 million was from net income and the balance predominantly from stock issued and mergers. This growth in capital is partially offset by $52 million of growth in intangible assets related to merger activity. Share count at the beginning of the year was 11,680,000 shares and at the end of the year was 14,606,000 shares, representing share growth of 2.9 million shares and 25% as we have used our currency in mergers. Brad?

As you can tell from the commentary, our balance sheet continues to grow and create efficiencies. This is the result of a tremendous effort from everyone at Equity and the continued success of our customer base. As we look into 2018, we are encouraged by the continued health of our metro markets in Wichita, Kansas City and now Tulsa. As I stated on the third quarter call, we did not change the expectations for our production teams and I am proud to say today they rose to the challenge. We are also excited about our growing presence in community markets where we believe we can be effective at increasing deposits and loans. The addition of the new Western Kansas market and the Oklahoma market in 2017 will continue to help fund the loan efforts in our previous mentioned metro markets. Greg?

Our capital ratios continued to be competitive and allow us to safely execute our mergers and growth strategies. Tangible capital end of the year at 8.42%, tier 1 was 10.33%, and total risk weighted was 12.54%. Tangible book value per share is $17.61 at 12/31/17, up from $16.64 at 12/31/16 or $0.97, on EPS of $1.62 and includes the impact of the three mergers in 2017.

As we look at mergers, we always focus on people, earn back and the recovery of any tangible book dilution. When considering our EPS in 2017 was $1.62 per share and the change in tangible book value was $0.97, we had minimal dilution to book value because of the combinations. And these three mergers contribute approximately $0.50 in earnings per share. We believe our short earn back criteria is working responsibly and the integration of the merged banks is occurring rapidly. I once again want to thank our stakeholders for their support. Our employee teams continue to work hard and perform at high levels. We are also thankful for all the customer who entrust their business banking relationship to Equity and it is exciting for us to serve new customers in Oklahoma. Our board continues to be supportive of management and the initiatives we are pursuing and all this I believe is allowing us to deliver our business plan to our shareholders, grow organically and grow acquisitively. At this time we are happy to entertain any questions.

[Operator Instructions] Our first question comes from the line of Andrew Liesch from Sandler O'Neill. Your line is open.

Question around -- couple of questions around the margin here. Really just related to loan yields, just curious where new yields are coming on the balance sheet for production. Then also what are you seeing in funding cost in your market. I think I remember there were some accounts that were having higher betas last quarter. So just kind of curious what those two dynamics are.

Yes. Andrew, the coupon in our loan portfolio has been going up about 3 to 5 basis points per quarter and when I say coupon, I mean stated rate on loans. So it does not include loan fees, does not include purchase accounting amortization. So not yield but coupon has been going up about three to five basis points per quarter. That continued in the fourth quarter. So we are currently putting loans on the books at a little over 5% to deliver a weighted average coupon in the portfolio at the end of 2017 of 4.95%. So we are making progress on the new coupons being put on. The funding cost, as you can tell, are continuing to go up. Our total funding cost were up four basis points in the fourth quarter over third quarter 2017. It's purely a function of the fed moving rates. However, we are also growing non-interest bearing checking accounts. That total at the end of the year was $318 million, up substantially from the beginning of the year and up from third quarter which is helping to offset that a little bit. But clearly we are seeing a rise in rate on the funding side and that number is three to five basis points per quarter for the last several quarters.

Got you. Okay. That’s really helpful. And then related to the provision, came in a little bit lower than I was forecasting. Certainly credit trends are very positive. How should we look at providing going forward related to charge-offs or recoveries in loan growth.

Well, the provision was smaller in the fourth quarter. We actually had net recoveries in the quarter, not net charge-offs and as Brad said on the dialog, net charge-offs for the year were less than $900,000 which are very small for a bank of our size. And so at the end of the day the allowance for loan loss reflects what we think the risk in the portfolio is. Going forward, we continue to monitor all the different facets of the areas that we lend in, including ag and C&I and real estate. And right now we are seeing nothing systemic in the loan portfolio that leads us to think that first of all our ALLL is low. We think it is where it should be. Going forward, we are going to continue to do our best to provide provision for loan losses. Of course we will follow generally accepted accounting principles but I think what you saw in the fourth quarter is a little lighter than what we would like to provide in 2018. But we will wait and see what the loan portfolio dictates. Brad, you want to add to that?

Yes, I think, Andrew, we look at the model and we try to make sure that we can contribute as much as the model allows us to.

[Operator Instructions] And our next question comes from the line of Terry McEvoy from Stephens. Your line is open.

This is actually [Nate] [ph] from Terry's team. Maybe if we can just start off back in M&A side of things. It sounds like Adams Dairy and Liberal are going smoothly. Have you guys seen any changes in terms of discussions, the pace of discussion or the appetite of sellers given tax reforms here?

So I would tell you, Nate, that the discussions are still -- we are still having a lot of discussions. I would say for this time of year we are probably having more discussions than usual. And so I would say that the pace of merger opportunities would probably stay on the same pace they have been or they are not decreasing.

Got it. Got it. Thanks for the commentary. And then maybe touching on Andrew's margin question and specifically towards the deposit side of things. How are you guys thinking about maybe trying to increase the signature deposits? What are your strategies going forward and then maybe if you could give us some color on, like municipal deposit exposure and that sort of thing? Thanks.

Yes. So Wendell has reorganized his team so they truly are laser focused. They have been focused. We didn’t get the growth of 10% last year because they weren't focused. That comes from effort and focus but our market efforts in our products and services are focused on if we can increase that. Don’t put this in your modeling but our goal is to increase that even more than we did last year. And so I would tell you that we have worked on marketing, we have worked on product types and then we have also worked with our sales team so they understand the importance and have them incentivized to do the right things to increase those deposits in those markets. So we have a really good franchise today and we have a really good franchise in areas that I really believe we can increase deposits. So we are really going after those in a very focused manner in 2018. And so I think we will continue to see movement in a positive direction on that. From municipalities, we are not probably increasing municipality relationships than what we have. But we still competitively bid them if we get the opportunity in a marketplace but we have mostly relationships in the markets that we are in, especially community markets and so I think we will continue to maintain those. I don’t see a large increase from where we are today.

Got it. That’s helpful. And then maybe one last quick one. Just really the growth in the quarter, it sounds like on organic basis. What are you looking for thinking about as we head into '18, and then do you see any opportunities, I think you are now back up to like 75% commercial loans. Any opportunities to grow the commercial, the consumer side of things and maybe just diversify a little bit further here.

Yes. So we have an emphasis on consumer lending. We implemented underwriting platform about 18 months ago. That’s in full swing now. Our folks are producing some consumer loans in the markets that we serve. So I think we will see some growth in that. It's just there is not as much available for that in our market place. We have a really effective residential real estate team that’s able to originate loans in the community markets. So I think we will see some growth from residential real estate mortgages as well they have balanced our portfolio. And then our commercial lending teams are doing well and we will still be emphasized on that. The teams at Tulsa, Wichita, and Kansas City had a great year last year and they are off to having a really good year this year as well.

[Operator Instructions] This concludes today's Q&A session. I would now like to turn the call back over to Mr. John Hanley for closing remarks.

Thank you. Ladies and gentlemen, this will conclude our Equity Bancshares presentation and conference call. Thank you once again for joining us and please have a great day. Good bye.

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