Ladies and gentlemen, thank you for standing by, and welcome to the Equity Bancshares' Third Quarter 2019 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Chris Navratil. 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 results.

Joining me today are Equity Bancshares' Chairman and CEO, Brad Elliott; Equity Bancshares' Executive Vice President and Chief Financial Officer, Greg Kossover; and Equity Bancshares' Executive Vice President and General Counsel, Brett Reber.

The presentation slides to accompany our call are available via PDF for download at investor.equitybank.com by clicking the Presentations tab. You may also click the Event icon for today's call posted at investor.equitybank.com to view the webcast player.

If you are viewing this call on our webcast player, please note that slides will not automatically advance. Please note Slide 2 including important information regarding forward-looking statements. From time to time, we may make forward-looking statements within today's call and actual results may vary.

Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us. With that, I'd like to turn it over to Brad Elliott..

Good morning. Thank you for joining the Equity Bancshares' third quarter 2019 earnings call. I'm joined today by Greg Kossover, our Chief Financial Officer; and our General Counsel, Brett Reber. I am pleased to announce Equity Bancshares has reported $0.66 per share in earnings for the third quarter of 2019.

This marks our second consecutive quarter of normalized operations. We will do a deeper dive into all aspects of our performance in a few moments. I first want to take a minute and thank all of our operating teams for their efforts in the initiatives we have put in place in 2019.

Without mergers occurring, we wanted to challenge the teams to find ways to improve performance organically and to continue to deliver shareholder value. We started with non-interest income and looked at each line item for the possibility of improvement.

I am pleased to report we have quarterly growth in non-interest income of 20% from quarter four 2018 through quarter three 2019 representing growth in dollars of $1.1 million.

We have also developed a platform under the direction of Gaylyn 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 end, our non-interest expense to average assets has reached 2.38%, the lowest it has been in five quarters. And our efficiency ratio has now [ph] decreased two consecutive quarters.

These results have occurred while 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 have also continued our repurchase of EQBK shares, and we have repurchased a total of 421,000 shares at an average price of $25.81. This essentially represents a merger to our shareholders as the calculated earn-back of our repurchase so far is well below three years.

Many in our industry have recently commented on the risk of loose credit underwriting in terms of pricing and structure 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 am pleased with the new originations we have had in this environment.

We have been putting on new loans at a steady pace which have nearly offset the payoffs received from credits with structures and terms we cannot accept. I am also pleased that our credit metrics have continued to improve quarter-over-quarter.

Brett, would you update everyone on the status of the remaining assets from the franchisor credit we discussed in the first and second quarters?.

Thanks Brad. As we discussed in the second quarter, the unprofitable piece of the relationship was sold at auction in May through the bankruptcy court. We spent a great deal of effort towards resolving the other commercial credit in the relationship of franchise entertainment and pizza-related business.

We have worked closely with the borrower during this past quarter to expedite the company's exit from bankruptcy and can report that the company's plan of reorganization was approved this past week, on October 17, and will be effective November 17, 2019.

We have agreed on new loan terms for the reorganized company, including the expectation that scheduled payments will resume in the fourth quarter of 2019.

We remain confident that the operation of 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 financed two vacation homes at a personal residence owned by the principles of these businesses.

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

Thanks Brett. As stated on the first quarter call, this was a relationship that goes back to 2011, with a then strong borrower who specialized in increasing revenues and profitability of under-performing companies.

We had a significant banking relationship with this borrower for several years, and they performed well and ultimately sold two of their portfolio companies for substantial profits. This credit performance was an unusual and significant matter for us.

I am pleased that our executive team took full responsibility for this result and has worked with our legal and credit teams to get this remaining business out of bankruptcy and return to normal operation.

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 the payoff of the two vacation homes and after an updated impairment analysis of the third quarter, we have concluded that our provision for loan loss taken in the first quarter remains adequate at this time. We also experienced other positive movements in the third quarter in our special asset area.

Greg?.

Thank you, Brad. Key quarter-over-quarter changes in our credit portfolio includes improvement in the classified assets ratio from 33.2% to 29.8% and 22.87% without the franchisor credit previously mentioned. Non-accrual loans declined 17% to $51 million and to $27.4 million without the franchisor credit.

Non-performing assets as a percent of assets declined to 1.40% and 82 basis points without the franchisor credit. Excluding the resolution of the franchisor credit, year-to-date net charge-offs for the Bank have been $700,000, only 3 basis points of average loans, which is below the rate in 2018..

Overall, I'm pleased with our credit quality improvement. Our ALLL is now at 69 basis points, and our total reserves including purchase discounts is at 1.14%.

Greg, will you lead us through the rest of the third quarter performance, please?.

We begin our earnings performance in the reconciliation of quarterly earnings per share back to core EPS. Stated diluted earnings per share is $0.66 for the quarter. We had approximately $0.03 per share in help from the FDIC insurance premium rebate which leaves our adjusted diluted earnings per share at $0.63 per share.

There were no merger expenses in the quarter and consensus EPS was $0.61 per share. Net interest margin was flat quarter-to-quarter at 3.42% against consensus estimates of 3.40%. As Fed lowered rates twice in the quarter it was advantageous for us to take advantage of our liability sensitivity.

We were proactive in reducing rates on our deposit offerings and of course the Federal Home Loan Bank lowered rates in conjunction with the Fed. Our cost of funds improved seven basis points to 1.69% and our cost of deposits were down eight basis points to 1.56%.

Our average non-interest-bearing checking balances increased over 1% during the quarter as well. Yield on loans were down four basis points and now stands at 5.70%. Our new loans went on at 5.60% during the quarter and are accretable yield accounted for about 20 basis points of help during the quarter which is somewhat typical for us right now.

The impact of the large nonaccrual loans relationship is about five basis points of loan yield. Average loans were down $9 million in the quarter and with asset quality remaining stable our need for loan loss provision was light at $679,000.

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

Brad would like to discuss noninterest income. As we stated at top of the call we’ve been working on improving noninterest income and we made progress in the quarter with an increase of 2% over second quarter a $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 noninterest income and our suite of products and services for our customers..

We have also improved the non-interest expense another one of our initiatives in 2019. Non-interest expense was 24.2 million against consensus estimates of 24.6 million and adjusted for FDIC tailwinds would have been just about on consensus. The 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 and 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 31, 2018 obviously slower than we'd like, but also responsible as Brad discussed earlier..

Yes, and our pipeline remains strong and our teams continue pushing hard to earn the business of core relationship oriented customers. We've 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 being impactful by first quarter 2020..

Average deposits were down slightly in the quarter about $50 million, and non-interest 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 as September 30 are 7.88% tangible common to tangible assets up 44 basis points from Q2, and our leverage ratio is 8.48% up from Q2 22 basis points..

I'm pleased with the efforts of the teams in the third quarter. We were able to grow EPS reduce special assets continued to grow noninterest 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'll continue to price and underwrite with the same discipline that we have since we started the bank our executives and 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..

[Operator Instructions] Our first question comes from Jeff Rulis with D. A. Davidson. Your line is open..

You talked about your sort of 2020 budgeting. Could you give us an idea of net loan growth outlook for 2020; and with that backdrop, I guess provisioning levels with runoff this quarter, you had your provisioning level, but I guess normalized. What are you looking for on both loan growth and provisioning in 2020? Thanks..

Loan growth in 2020 we're not done with the budgeting process yet, but I still think that we can get 6% to 8% loan growth in 2020. And provisioning, of course this would be agnostic to CECL at this point, would still be somewhere between $4.5 million and $5 million in our budgeting process..

And then you mentioned the work you've done on the ratcheting down expenses, a pretty clean number and I guess you've got the FDIC credit this quarter, but thoughts on that growth rate and as you continue to work with your employees on watching costs, is this a good base here or kind of [multiple speakers]?.

Yes, I think the outlook for non-interest expense with FDIC adjusted back in – we'll call it $24.6 million to $24.7 million a quarter. It's certainly a good base for Q4 and maybe slightly higher in 2020 as we continue to build out initiatives and stabilize the team as well.

The FTE count, I don't think will change much in 2020, but there would be a small, probably 2% to 3% inflation for employee costs..

And our next question comes from Andrew Liesch with Sandler O' Neill. Your line is open..

Just – can you provide some more comments around the margins, some of the puts and takes looking forward with the liability sensitive nature of the balance sheet to suspect there could be some benefits going forward, but what are you seeing on deposit pricing and any sort of competition in your markets?.

Yes so, we still - so we're - with 52 locations spread out amongst four states, the deposit pricing is very local, and there are local deposit pricers that are still irrational.

I would tell you that we've taken an aggressive stance on being a leader in the marketplace on having 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 deposits.

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

Thank you, that's helpful. And then just on the buyback, it looks like the activity slowed a little bit here in the third quarter with the stock trading around 140 tangible in capital building.

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

Yes, so Andrew, we've got a five-quarter beginning in second quarter of 2019, we have a five-quarter plan in place that allows 1.1 million shares to be repurchased.

There is a number out there that we like to stay below when we're buying it, and when we're comfortably below that number, we're in the market to buy, but when we're not comfortably below that number, we don't think it makes complete sense for our shareholder base.

We're viewing this very much with similar math to a merger, and we would like for our earn back to be less than three years. And so, that really triggers when we do enter the market to buy shares back and it's not always below that number..

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

I just want - just some clarity here, the entertainment or the pizza-related borrower 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 $14.5 million provision in the first quarter, you feel like that was the right level with no additional cost going forward?.

Yes Terry, that is correct. $14.5 million in the first quarter, we have been able move out one of the franchise businesses in May as Brett alluded to, and that that didn't require any more provision. We’ve also stalled to a vacation homes, the combination of those three assets basically did not require more provision.

So we’re left with -- we’re really left with the other franchisor business, and we think we have that provisioned directly..

And then sticking with asset quality, the decline in nonaccrual loans over $4 million, 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?.

Yeah, 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 we are liquidating assets and paying those loans down either through bankruptcy, reorganization, or through just actual liquidating those.

We also had some customers that we've been working on for a while. And those also have been – we've been receiving paydowns on those as well. So 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 are going to have a good quarter in this quarter in classified assets as we’ve got some customers that are seeing improving trends in that area or we've had some customers that are going to find a new home..

And just – maybe one last one, I think Brad -- I think it was you that mentioned the digital platform showing excellent results. I wonder if 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 forward?.

Yeah so two part question first one is – is the digital platform so we went to the Q2 product. We roll that out in first quarter of this year. The customer pull-through on that has been really good. I think the retention rate on our 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 at Equity Banc in last year. And so, we're very excited about the ability to continue to grow that platform and provide things more digitally.

Opening accounts online, 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 service 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 rollout in this quarter – we’re actually are in the testing phase of the cards.

So and – 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 continue to grow from that..

And our next question comes from Michael Perito with KBW. Your line is open..

I wanted to follow up on the – preliminary loan growth outlook for 2020 6% to 8% seems like a fairly strong number given some of the more qualitative, conservative qualitative, comments kind of by you guys in the prepared remarks.

Could you give us a little bit more color and I know it just preliminary but what you think is the driver of what would seem to be a nice rebound in loan growth in 2020 relative to year-to-date production in 2019?.

So our teams are actually doing a really good job what's kind of buried in the numbers is we reset a team in one of the markets that just wasn't catching on to equity banks philosophy. And so with that we had intentional runoff from that.

And that some of the customers we intentionally ran off, some of the customers left that weren’t fitting what we like in our underwriting standards and followed some of the loan officers that don't work for us any longer. That team has been rebuilt and I would say it’s mostly rebuilt in the end of second quarter.

And so, they've got – 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 have got really good processes and they’re really experienced bankers. And so we’re very excited about that aspect that's the biggest thing.

As we don’t see that there's a hole in the bottom of the bucket any longer. So, we’re not having to put so much water at the top just to keep the bottom from outstripping the top. And so just the slowdown in payoffs from that 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, Jasmine’s his group has done a great job in being able to grow loans. And so some of the other community markets or 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 had saw shrinkage in the past. So that's what helps us to be positive about 2020 in loan growth. It’s not bit hits here and there it's just steady constant growth across the whole footprint..

If rates continue to decline though, I mean – does that make you guys more cautious about that figure. Because presumably in that scenario I guess you’re competitively on the rate side it could be harder to get things through your underwriting model. And then also payoffs could continue to be pretty high if rates continue to come down.

Do you have any general thoughts on that?.

If rates continue to come down I think at some point that inverted yield curve is already inverted. So, that longer-term rates stuff may have already affected us and so, maybe it doesn’t affect us as much next year as it did this year. So I mean that’s kind of our outlook little bit and the other is our funding side is coming down.

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

And then just lastly kind of on similar topic, but just on the near term margin outlook obviously you guys benefited this quarter.

If you return to a more positive loan growth stature do you think that your ability to protect margin will be a little bit more challenged – moving forward or not necessarily?.

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 flat this quarter to down a little bit.

The deposit teams are still doing 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 we’ll be able to alter the next of the balance sheet a little bit between loans and securities which should help margin not hurt margin..

And we have a follow-up from Jeff Rulis with D.A. Davison. Your line is open..

I just wanted to get my hands around the large credit relationship we discussed. So the pizza business and personal real estate the business has been reorganized.

And I guess there has been adjusted payment terms I guess what is the – is there – are you pursuing an exit or sale of those items or is it extended I guess expected to stay with the bank and hit in terms effectively as a TDR.

Just trying to get an update on those items?.

And this is Brett the new loan agreement has a short maturity of – end of next year and I think the borrower and us are moving towards they are seeking a refinancing or sale of the company..

So the point Jeff we’re bringing it out of bankruptcy is the value, it’s been cleanest in bankruptcy there is no other losses. There is no other liabilities we’re the only creditor and so, it would be easy now out of bankruptcy for everybody to be able to see what's there and not be tainted in bankruptcy.

So instead of selling it in bankruptcy, which is an option, we all discuss the best way to achieve the most value for it.

And so we - Brett worked really hard to craft a loan agreement that gave us the same types of controls you have in bankruptcy and let it emerge from bankruptcy so that, they could go back to normal operations and then we could get a normal transactional sale out of it.

So we think we can maximize the value of it out of bankruptcy, but the goal of this is for equity not to be in this credit long-term..

And how is the – since it's been reorganized again - remind me how long that's been in place.

And – is there some initial inbound interest on selling that business?.

It just started – the plan was just approved last week, so it's not technically effective yet. But yeah there has been – in fact been interest throughout the bankruptcy process that they have - the borrowers has been entertaining folks kind of waiting for this, let's get out of bankruptcy and then do more active marketing process.

So we have seen some interest from a third-party..

Yeah, we had interest in third-party directly to the customer and directly to us..

Okay and just last one then.

So in a sense as it's been that the plan you put in place it is somewhat performing at this point or it's providing interest at this point - is that fair to say?.

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

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day..