Equity Bancshares, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. Dollar amounts are in thousands except per-share data. Equity Bancshares is a Wichita-based bank holding company whose Equity Bank operated 42 branches in Arkansas, Kansas, Missouri and Oklahoma. The filing is unaudited and should be read with the 2017 Form 10-K.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Interest and dividend income | $34,123 | $23,215 | 47.0% |
| Net interest income | $27,787 | $19,893 | 39.7% |
| Provision for loan losses | $1,170 | $1,095 | 6.8% |
| Non-interest income | $4,251 | $3,339 | 27.3% |
| Non-interest expense | $19,627 | $15,226 | 28.9% |
| Net income | $8,711 | $4,864 | 79.1% |
| Diluted EPS | $0.58 | $0.40 | 45.0% |
- Margins and returns: Net interest margin was 3.91%, down from 3.96%. Annualized ROAA was 1.11%, ROAE was 9.35%, and ROATCE was 14.05%. The non-GAAP efficiency ratio improved to 59.59% from 61.59%.
- Balance sheet: Total assets were $3.176 billion, up 0.2% from December 31, 2017. Gross loans held for investment were $2.125 billion, up 1.0%; net loans were $2.116 billion. Total deposits were $2.368 billion, down 0.6%. Stockholders’ equity was $381.5 million, up 2.0%.
- Credit quality: The allowance for loan losses increased to $9.316 million from $8.498 million, or 0.44% of gross loans. Net charge-offs were $352, compared with $479 in Q1 2017. Nonperforming assets declined to $42.351 million from $48.183 million, and classified loans declined to $51.2 million from $61.4 million.
- Cash flow and liquidity: Operating activities provided $14.9 million; investing activities used $22.9 million, primarily for loan growth and securities purchases; financing activities used $1.1 million. Cash and cash equivalents declined to $43.1 million from $52.2 million.
- Debt and funding: Borrowings totaled approximately $414.4 million, including $355.8 million of FHLB advances, $42.1 million of retail repurchase agreements, $14.0 million of subordinated debentures and a $2.4 million bank stock loan. The company had $178.7 million of additional FHLB borrowing capacity based on pledged collateral and FHLB stock.
- Capital: Equity Bank was categorized as well capitalized. Its total risk-based capital ratio was 12.29%, common equity Tier 1 ratio was 11.89%, and Tier 1 leverage ratio was 9.06%.
Material changes versus comparable periods
- Net income increased $3.8 million, driven primarily by a $7.9 million increase in net interest income and a $912 increase in non-interest income, partly offset by higher operating expenses.
- Average interest-earning assets increased substantially, with average loans rising to $2.123 billion from $1.403 billion. Growth reflected the Prairie, Eastman and Cache mergers and broader customer and lender expansion.
- Interest expense rose 90.7% to $6.3 million as average interest-bearing liabilities increased and funding costs rose. Total cost of funds increased to 1.06% from 0.77%.
- Non-interest expense increased primarily due to salaries and benefits, data processing, occupancy, professional fees, FDIC insurance and amortization of core deposit intangibles. Merger expense declined to $531 from $926.
- The 2017 Tax Cuts and Jobs Act reduced the effective tax rate to 22.5% from 29.6%, although the company stated that lower excess tax benefits partly offset the benefit.
- Available-for-sale securities increased to $174.7 million, while held-to-maturity securities declined to $522.0 million. Accumulated other comprehensive loss increased to $5.2 million, primarily because of unrealized securities losses associated with higher interest rates.
Outlook, risks, contingencies and unusual items
- The filing does not provide specific quantitative earnings, revenue or margin guidance. Management stated that first-quarter results are not necessarily indicative of full-year results.
- Two previously announced acquisitions, First National Bank of Liberal and Adams Dairy Bank, closed on May 4, 2018. March 31 estimated consideration was $47.0 million and $17.4 million, respectively; purchase accounting was incomplete at the reporting date.
- Management identified interest-rate volatility as the primary market risk. A modeled immediate 300-basis-point increase would reduce 12-month net interest income by 9.6% and economic value of equity by 17.4%; these are simulations, not forecasts.
- Key risks include economic or real estate downturns, credit deterioration, allowance adequacy, deposit or liquidity pressure, rising funding costs, acquisition integration, competition, regulatory capital requirements, technology and cybersecurity events, and adverse weather or market conditions.
- Equity Bank faced a CitiMortgage lawsuit involving alleged loan repurchase obligations. The filing reported a $477 loss contingency recorded at December 31, 2017 after judgment on six loans; potential additional mortgage repurchase or indemnification claims remain uncertain.
- The company adopted ASC 606, ASU 2016-01 and ASU 2016-15 on January 1, 2018. ASC 606 did not produce a cumulative-effect adjustment. The company is evaluating future standards, including CECL, which becomes effective in the first quarter of 2020 and whose impact was not yet known.
Important facts for investors to verify
- Whether loan growth and acquisition-related expansion can offset rising deposit and wholesale funding costs while maintaining the 3.91% net interest margin.
- The sustainability of the 79.1% year-over-year earnings increase after considering merger contributions, tax reform and nonrecurring items.
- Future credit performance, particularly in the predominantly commercial and real-estate loan portfolio, and the adequacy of the $9.3 million allowance.
- Liquidity effects of declining deposits, $355.8 million of FHLB advances, and approximately $398.9 million of off-balance-sheet credit commitments.
- The final purchase accounting and integration results for the May 2018 acquisitions, including goodwill, core deposit intangibles and acquired credit exposure.
- Resolution and potential expansion of mortgage repurchase litigation or similar claims.
- The eventual retained-earnings impact of CECL implementation and the effect of future interest-rate changes on earnings and capital.