Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Equity Bancshares' Incorporated Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, 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 fourth 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' fourth 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 $0.64 per diluted share in earnings for the fourth quarter of 2019 and $10 million in earnings.

We also finished the year strong with net interest margin expansion which we will elaborate on shortly. 2019 was an interesting year for Equity Bank and I’m proud of our entire team for working as hard this past year than in any year since our inception.

It is easier to work hard with the tailwind, but it shows more character and fortitude when our teams accomplished what they did in 2019 with a headwind. As I look back on the year, we put up a new digital platform for our customers. We introduced our trust and wealth management division.

We closed our mid-first bank acquisition and attracted several key leaders to Equity Bank and helped in the personal development of many others. We added aircraft and health care financing to our lines of business, and now offer a full line of credit card services, including purchase and commercial credit cards.

We worked diligently on non-interest income and non-interest expense initiatives the past four quarters, and I'm proud to report our ratio of adjusted non-interest expense to average assets of 2.46%. It is the lowest it has been at any year end since we became public.

Our non-interest income grew every quarter in 2019 and is 22% higher in the fourth quarter of 2019 compared to the fourth quarter of 2018. This is a huge accomplishment for the operating teams here at Equity Bank.

Greg?.

We were also pleased with our improvement in net interest margin. Last spring, the interest rate environment went from rising to falling in what felt like a minute.

We were able to react quickly and take advantage of our liability sensitivity and have reduced our cost of deposits to 29 basis points from March 31, 2019 to 1.32% and 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% a 4 basis point improvement quarter-over-quarter from our adjusted Q3 NIM. Margin and growth of non-interest bearing deposits is an 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% about our one-off credit we have previously discussed. I credit the hard work of Craig Mayo and the special assets group for this improvement.

Though OREO increased slightly during the year, as the assets we have acquired are running their course through the disposition processes. This too 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 EQBK shares repurchased.

However, our stock buyback program is still in place, and we expect to execute on it when appropriate.

Brad?.

With the headwinds in 2019 and what becomes difficult events is oftentimes more important than the event itself. We followed our first quarter loan loss provision with outstanding results for the balance of 2019, including a reduction in our classified assets to regulatory capital as previously stated.

There has been plenty of press given to the Boeing 737 Max and the delay in its recertification. Wichita has a long history of producing aircraft and parts for the aviation industry. As such, our OEMs and their sub manufacturers have diversified and are good at managing tough times.

They've built for many different aviation companies and for many different airplane models, and we believe they will manage this environment without significant issues. Brett, 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 returned to normal operations. The company also sold two -- new franchises prior to year end. Regarding valuation of the asset, we had a specific allowance against this asset and then charge it down by that amount in the fourth quarter.

After updating the impairment analysis for the fourth quarter, we believe the asset is being carried at a reasonable value. In addition, the remaining personal loan to one of the company principles has returned to regular payments and the homes carrying this loan is on the market for sale.

While 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 regions.

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 markets in the most cost effective manner possible. A second goal is to continue to grow non-interest bearing deposit and reduce our cost of fund.

Our retail and commercial teams worked hard in 2019 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 in the quarter..

We begin with our earnings performance and reconciliation of quarterly earnings per share back to core EPS. Stated diluted earnings per share is $0.64 for the quarter higher than normal purchase accounting accretion of approximately $515,000 and early loan pay-off fees of approximately $307,000 account for about $0.04 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 $530,000 or about $0.03 per share.

Other expense in a combination of reduced payroll benefits and bonus accruals and elevated professional fees for special assets and accounting on a net basis of EPS about $400,000 were approximately $0.02 per share. Income taxes were slightly higher as we concluded our annual review and true-up, which hurt about $0.01 per share.

These adjustments leave our core EPS for the quarter at $0.62 per share representing a beat of consensus EPS by $0.02 per share..

It is 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've be it in margin, non-interest income and non-interest expense. This, I believe is a result of the focus of our operating teams from our previous discussed 2019 initiatives..

As we unpack the quarter, let's first look at the income statement. Starting with margin, loans fees were about on our expectations but accretable loan yield was elevated about 515,000 more than expected. In addition, there were about $307,000 of higher prepayments. Adjusted for this, loan yields were 5.55%.

Average 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 forecasts 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 to 26 basis points from the third quarter down to 1.43%.

Overall, net interest margin for the quarter is stated at 3.61% and would be 3.52% adjusted for the items noted earlier, a 4 basis point improvement from adjusted third quarter NIM. Provision for loan losses was $1,055,000 million in the quarter returning to a more normalized level at several quarters of muted provision.

Several older acquired loans were also charged down as they moved through the special assets process and into OREO. Non-interest 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 in line with our expectation.

Non-interest expense as stated was $24.9 million for the quarter and as adjusted as $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 of OREO sales.

Miscellaneous expenses adjusted as discussed earlier were normal to our expectations. We reported in our third quarter 10-Q 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 in the fourth quarter we provided an allowance for these items of about $530,000 after reconciling much of it. Any adjustments made were immaterial and we have not entered 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.

Brad?.

As we begin a review of the balance sheet, we start with loans, which were essentially flat during 2019. Although 2019 was not a growth year for our overall loan portfolio, I feel good about the quality of the new production we have been putting on.

As I have said on previous calls, I do not believe we are at a stage in the cycle where aggressive growth is wise long term for our stakeholders. In addition, 2019 marked a year where we saw irrational behaviour from some of our competition and we simply will not follow those competitors to the bottom.

We received a large amount of pay-offs during the year because of competitors and the inverted yield curve. I also believe that the competitive environment has begun to level out the irrationality, and with our pipeline still very strong standing 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 SEDAR’s balances, which can be our most expensive form of deposits.

Federal Home Loan Bank advances were down $60 million and we have continued to pay our bank stock lower down which we used in 2019 to repurchase EQBK stock when appropriate..

Our capital ratios at December 31 are 8.45% tangible common to tangible assets and our leverage ratio is backed over 9% at 9.02% both up significantly from earlier in the year. The Tier 1 risk ratio is 12.15%, our highest level since 2016. We finished the year with tangible book value per share of $20.75 up from $19.08 one year ago..

Although we will not be providing CECL guidance today, there will be an initial impact on capital as we record the CECL adjustment in the first quarter of 2020. For regulatory purposes, we will take advantage of the three year phase in.

We have been actively testing our modelling 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 for any year we have operated Equity Bank.

We completed our 18th Annual all employee meeting on Monday of this week, where every associate in the bank meets in Kansas City area for a day of outside motivational speakers breakout sessions for Equity Bank initiatives and you hear last year's results and the current vision from bank leadership about our new year objectives and the future of Equity Bank.

It is always my favorite day of the year for the bank and it is and it is exciting to see everyone and for everyone to come away with our goals for 2020. We have also received several inbound calls on potential mergers, the past few months and we'll continue to look 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.[Operator Instructions] Our first question comes from Terry McEvoy with Stephens. Your line is open..

Good morning guys, how are you?.

Good morning, Terry..

I guess just start. You've made really good progress reducing the non-performing assets since the first quarter.

I was wondering if you could just comment on the economic health in your markets especially given the Spirit AeroSystems and some of the stress there that's been in the headlines, as well as maybe your updated thoughts on the restaurant franchise portfolio..

So we'll take the 737 Max envisaging with our customers which we are in constant contact with them. Terry, it looks like they all have really good plans in place to be able to manage through this and 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 there's going to be any stress in that portfolio directly related to this from the standpoint of we don't see any of them 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 triple through our community if it sustains with another twelve months. The hope around town is that eventually this plane has to fly and it's a technology issue, not a structure issue.

So when it gets back in the air that it should get in the back in the air fairly quickly, and they'll 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 back up especially as they shut it down. So that's specific on that subject.

Second question was on the QSR restaurant lending. We don't see any stress in our QSR companies that we currently have. They're also operating very well. We did receive some pay-offs in 2019, and some of them it took blocks of restaurants out that had real estate associated with them and refinanced to other places. We got fixed rate financing.

But the ones that we have in our portfolio today which we look at regularly all seem to be operating well, and don't seem to have any stress in them now. We are -- the most of the concentration lies in Papa John's, Freddy's Frozen Custard. And so those are really the two concentration buckets that that we have.

And so those restaurant doors seem to be doing really well..

Thanks. And then a question for you, Greg. The 4Q 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 a nice fee quarter in Q4, maybe a little softer in Q1. The pipeline still looks very healthy. So, all said, I think that we are forecasting NIM Q1 flat to Q4, and NIM, as we move through 2020 up a little bit, not dramatic..

Just one last question. I like the new slide, slide 12, just talking about the digital banking. And I know you're making investments in technology.

Just overall that your thoughts on expenses in 2020 as you continue invest in technology growth and grow the franchise?.

Ask the question again, Terry, I'm sorry..

The expense outlook for 2020 given the ongoing investments in technology that you're showing here in the presentation?.

Yes. We've already made a big chunk of that investment in 2019. We've been, obviously been through our capital expenditures budget for 2020. Its 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 either in capital expenditures or expense associated with technology. Will be up a little bit, I think very small percentages, but not dramatically..

So that list on slide 12, Terry, those are all things that are already implemented in our company..

Okay. Thanks guys..

Thank you, Terry..

Thank you. Our next question comes from Andrew Liesch with Piper Sandler. Your line is now open..

Good morning, guys..

Good morning, Andrew..

Couple of follow-up from your prepared comments, Brad. You'd mentioned you've been getting some inbound calls from some prospective targets.

Like, what's been the hang up on some these deals? Is it pricing? Is it credit? What have you seen in these deals that maybe have given you some pause?.

Well, the market has changed from 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 don't think that they're not interested and aren't going to move forward with something eventually.

But I think they are waiting for more data points to come out so 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 CECL 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 CECL implementation is complicated and I think there might be some guys that 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..

Got you. Okay. That's some good help, good color. And then earlier you mentioned about how branch optimization can be part of your goal in 2020.

What does that really entail? Are there consolidation? Is it expanding to places where you want to have more of a presence? 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 our eight different regions, their responsibility for profitability in the organization, and as such have continue to not realign duties, but push accountability down to the regions. We have very talented people in our organization.

And as we've grown and as we brought most organizations in 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 Salmans, our Human Resource Executive and Julie Huber have worked pretty hard in the second half of 2019 to develop a new system of accountability and keeping our regions working, not independently, but working on their own as bankers, because they're very skilled and we want to take advantage of that..

Okay. That's very helpful. That you curdle on my other questions..

Thank you, Andrew..

Thank you. [Operator Instructions] Our next question comes from Jeff Rulis with D.A. Davidson. Your line is now open..

Hey, guys. Good morning..

Hi, Jeff..

Looking at the loan growth side of things, obviously, you had sort of flat to modestly down year. And Brad, you mentioned, kind of working through some things and feeling good about not chasing credits.

But I guess as you find your footing and look at 2020 what's the growth outlook look like on net loans if we think about all the factors involved with payoff activity, but just trying to frame up 20 growth outlook?.

So, I think mid single-digit loan growth is what we budgeted for. And so our planning for, Jeff, and I would tell you that and we've talked about this before, we took a specific stands with our team and group in Tulsa and Mike Bezanson's leadership down there with Greg Anderson has hired really high quality people.

I think we have a really, really solid team in Tulsa now 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 we had 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 or didn't 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 will tell you that irrationality has seem to seized and most of that I think driven by the yield curve.

And so, I think with not having those payoffs coming at us and the teams been retooled, I think we have a really good opportunity of growing loan substantially. Our community markets last year did a really solid job.

I think they're poised to do even a better job this year and I think our metro market 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 on-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. And Greg, I wanted to follow-up on margin. Just to make sure we got an apples-to-apples. If you could maybe comment on reported, so, you got a 361 reported, 352 adjusted.

What are those relative levels in the first quarter expectation?.

Yes. The relative levels in the first quarter would be the same as they were in the fourth quarter as adjusted. So we would expect after backing out 515,000 of tailwind and accretable yield, they would expect that number as adjusted to be the same in Q1.

And we've also backed out early prepayment fees of $307,000 which should normalize our loan fees in Q1 as well..

Okay.

So, the 352 hangs in the 350, 352 range and the 361 would come in to -- just help me on that level?.

Yes. The 361, if we run a normal quarter, the 361 won't exist. It will just be 350 to 352..

Got. Okay. Just converges into core already attracted. Okay. Helpful. And then the last one, just the follow-up on the expense question I think. So 5.5% I think growth in 2019 you talk about the investments that you've already. You talk about the late Q4 kind of spend on the accounting issue.

My guess is that points to a lower growth rate in 2020, but I don't know if you got any specifics on growth rate that you'd say is a comfortable number in 2020?.

Yes. We are below 1.5% on overall expense growth projected for 2020 relative to where we were at going into the fourth quarter of 2019. I'm happy to give you guys some guidance at least on Q1. I believe and as we stand here today, we are looking at margin being about the same.

We think that provision and this is not CECL adjusted, we're trying to keep apples-to-apples. So provision under the old incurred loss method 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 non-interest expense will go up in the first quarter. We will have the salaries adjustments in the first quarter that we didn't have in Q4, plus our FDIC premiums are likely to return to normal, which will also increase non-interest expense.

So I'm call in for non-interest income in the first quarter of somewhere around $6.3 million to $6.4 million and non-interest expense to be somewhere between 25.3 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 in our Q1 forecast and not from an operational health standpoint just from seasonality..

All right. Good stuff, Greg. You're holding out on us, but you gave us all the details there.

I guess, on the expense side then if you are looking at below 1.5% growth rate for 2020 and you step up in Q1 at something north of 25, that would mean that you'd certainly level off or source of decline for balance of the year?.

That is correct..

Okay. That's it for me. Thanks..

Thank you. Our next question comes from Michael Perito with KBW. Your line is now open..

Good morning. This is Michael Schiavone stepping in for Mike Perito..

Good morning, Michael..

Good morning.

Do you guys mind walking us through what your view of core earnings are for 4Q? And then any items we should think about as we try to use that exit run rate in 2019 and factoring it into our 2020 forecast?.

You bet, Michael. Quickly stated EPS was $0.64. We walked that down through a series of adjustments to $0.62 for fully diluted share. The components of that are -- we were higher in accretable yield and loan fees of $0.04 in Q4. We were higher, because we had reduced and non-interest expense. So that helped earnings $0.02.

But we also put a $0.03 reserve on our account reconciliations, so that hurt earnings $0.03 and taxes were slightly higher in Q4 by about a penny. So adjusted are $0.64 fully diluted stated EPS just down to $0.62.

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 non-interest income a little bit lower in Q1 just because of seasonality. But we will step up in non-interest expense in Q1 because of typical first quarter to fourth quarter adjustments.

And so, although, we're stated at $0.62 in Q4, we're calling for the few cents below that in Q1. And if we have a run rate of somewhere between $0.60 and $0.63 in the rest of 2020, that would give us potential projected EPS on a normalized basis of somewhere in the high $2.40 to $2.50..

Okay, great. Thanks for that detail.

And then for fess, you mentioned Q1, but can you talk about any other fee initiative like wealth or anything like that and expectations for 2020?.

Yes. So we've implemented the wealth management and 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 of 2020. And so, those initiatives, although we haven't specifically broken them out on expenses, we aren't adding a lot of expense to that group this year.

And hopefully they are generating revenue as they're continuing to book new assets onto the platform. So, all the technologies 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 current 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've 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 tie to our C&I customers. And so, we do think that will start ticking 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 point through from treasury sales. Some of that point through from other initiatives we had 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 try to increase in 2020..

Great. Thank you. And I know you guys hit on M&A a little bit.

But can you just talk about as a whole your capital priorities for 2020?.

That's a great question actually. and frankly we're pretty proud of how capital ended 2019, our ratios are all very healthy. And so, we're looking at, and we're looking at with our board, proper utilization of capital right now. And it’s a same thing, its been really since we went at public.

We'll look at each transaction individually and see what's best for the shareholders 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 it's effective from a pricing standpoint..

Great. Thanks for taking my questions..

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..