Equity Bancshares, Inc. — Form 10-Q Summary
Business context and reporting period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose subsidiary, Equity Bank, provides commercial, consumer, mortgage and other banking services through 37 branches in Arkansas, Kansas and Missouri. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods and December 31, 2016 balance-sheet data.
Results include Community First Bancshares beginning November 11, 2016, and Prairie State Bancshares beginning March 11, 2017. Prairie added three western Kansas branches and was acquired for $27.5 million, including $5.7 million of goodwill.
Key financial metrics
| Metric | Three months ended September 30, 2017 | Nine months ended September 30, 2017 |
|---|---|---|
| Total interest and dividend income | $24.6 million | $72.9 million |
| Net interest income | $20.3 million | $61.4 million |
| Provision for loan losses | $0.7 million | $2.5 million |
| Non-interest income | $4.0 million | $11.3 million |
| Non-interest expense | $16.4 million | $46.7 million |
| Net income | $5.2 million | $16.4 million |
| Diluted earnings per share | $0.41 | $1.33 |
| Net interest margin | 3.68% | 3.85% |
| Efficiency ratio, non-GAAP | 63.54% | 61.59% |
- At September 30, 2017, total assets were $2.41 billion, gross loans held for investment were $1.54 billion, deposits were $1.87 billion and stockholders’ equity was $291.8 million.
- Cash and cash equivalents were $27.5 million. Nine-month operating cash flow was $16.7 million, investing cash flow was negative $78.8 million and financing cash flow was $54.5 million, producing a $7.6 million decrease in cash.
- Borrowings totaled approximately $235.1 million, comprising $190.0 million of Federal Home Loan Bank advances, $31.2 million of retail repurchase agreements and $13.9 million of subordinated debentures. The company had no outstanding bank stock loan balance.
- FHLB advances were at a weighted-average rate of 1.28%, and the company reported additional FHLB borrowing capacity of approximately $213.6 million.
- The allowance for loan losses was $8.0 million, or 0.52% of gross loans. Nonperforming assets were $42.9 million, or 1.78% of total assets.
- Equity Bank was categorized as well capitalized. Its September 30, 2017 ratios included 13.17% total risk-based capital, 12.70% Tier 1 risk-based capital, 12.70% common equity Tier 1 capital and 9.26% Tier 1 leverage.
Material changes versus comparable periods
- Third-quarter net income increased 93.1% to $5.2 million from $2.7 million; nine-month net income increased 82.8% to $16.4 million from $9.0 million.
- Third-quarter net interest income increased 69.6%, while nine-month net interest income increased 66.3%, primarily from loan and securities growth, acquisitions and higher earning-asset yields.
- Average loan yield increased to 5.30% in the third quarter and 5.45% for the first nine months, compared with 4.72% and 4.88%, respectively, in 2016. Management attributed the improvement to the rising-rate environment and merger-related fair-value accretion.
- Non-interest income increased 59.7% in the third quarter and 47.7% for the first nine months. Debit-card income, service charges, mortgage banking and bank-owned life insurance income were key contributors.
- Non-interest expense increased 52.7% in the third quarter and 53.9% for the first nine months. Salaries, branch operating costs, data processing and merger expenses were significant drivers.
- Merger expenses were $1.0 million in the third quarter and $2.1 million for the first nine months, including costs associated with the pending Eastman and Cache transactions.
- Total assets increased 9.7% from year-end 2016, net loans increased 11.3%, deposits increased 14.6% and stockholders’ equity increased 13.1%. FHLB advances declined by $69.6 million.
- Classified loans increased to $47.4 million from $32.2 million at year-end, while nonaccrual loans increased to $34.7 million from $22.7 million. Management attributed approximately $10.1 million of these increases to the Prairie acquisition.
Outlook, risks, contingencies and unusual items
The filing does not provide formal quantitative earnings guidance. Management expects results to remain sensitive to loan growth, deposit pricing, interest rates, acquisition integration and credit quality. The company stated that it believes the allowance for loan losses is adequate, but warned that future losses could be substantial relative to the allowance.
- Eastman National Bancshares and Cache Holdings transactions were approved and expected to close in the fourth quarter of 2017. The company expected to record goodwill and core deposit intangibles in each transaction; final purchase accounting was not yet provided.
- Interest-rate sensitivity analysis showed modeled 12-month net interest income declines of 1.6%, 3.9% and 7.0% under immediate rate increases of 100, 200 and 300 basis points, respectively. Economic value of equity was modeled to decline 1.3%, 4.5% and 11.8% under those scenarios.
- The loan portfolio is concentrated in commercial, commercial real estate, residential real estate and agricultural lending in Arkansas, Kansas and Missouri. Economic weakness, real estate values and agricultural conditions could affect credit losses.
- The company disclosed a lawsuit by CitiMortgage alleging breach of loan repurchase obligations and seeking $2.7 million plus interest. Management believes an unfavorable outcome is not probable, but stated that the potential loss is difficult to estimate. It also identified possible future mortgage repurchase or indemnification demands, with uncertain amounts and outcomes.
- Unrealized losses on securities were not recognized in earnings because management considered the securities high quality, did not intend to sell them and expected recovery as they mature.
- The company adopted ASU 2016-09, reducing 2017 income-tax expense by $347,000 and increasing net income by the same amount, or approximately $0.03 per diluted share. The future impact of the expected-loss standard, ASU 2016-13, was not yet known.
Important facts for investors to verify
- Whether the Eastman and Cache acquisitions closed as expected and the resulting purchase accounting, goodwill, intangibles and integration costs.
- Trends in nonaccrual loans, classified loans, other real estate owned, charge-offs and the allowance coverage ratio.
- Whether loan and deposit growth is organic or acquisition-related and whether deposit-cost increases pressure the net interest margin.
- The sustainability of merger-adjusted efficiency improvements and non-interest income growth, including debit-card, service-charge and mortgage-banking revenue.
- Liquidity availability, FHLB collateral and borrowing capacity, deposit stability and any changes in regulatory capital classifications.
- The status and potential exposure from the CitiMortgage litigation and any additional mortgage repurchase or indemnification claims.
- The impact of interest-rate changes, securities prepayments and the adoption of future accounting standards on earnings, capital and liquidity.