Equity Bancshares, Inc. — 2015 Form 10-K Summary
Business context and reporting period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose wholly owned subsidiary, Equity Bank, provides commercial, personal, mortgage banking and related financial services through 29 branches in Kansas and Missouri. This Form 10-K covers the fiscal year ended December 31, 2015, with quarterly information including the fourth quarter of 2015.
Growth is driven by commercial lending, core deposit generation, organic expansion and selective community-bank acquisitions. In October 2015, the Company acquired First Independence Corporation, adding four branches in southeast Kansas.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total interest and dividend income | $53.0 million | $46.8 million | 13.3% increase |
| Net interest income | $46.3 million | $41.4 million | 11.8% increase |
| Provision for loan losses | $3.0 million | $1.2 million | $1.8 million increase |
| Total non-interest income | $9.8 million | $8.7 million | 13.0% increase |
| Total non-interest expense | $38.6 million | $35.6 million | 8.2% increase |
| Net income | $10.3 million | $9.0 million | 14.6% increase |
| Net income allocable to common stockholders | $10.1 million | $8.3 million | 22.3% increase |
| Diluted earnings per share | $1.54 | $1.30 | 18.5% increase |
| Net interest margin | 3.65% | 3.92% | 27-basis-point decline |
| Efficiency ratio | 66.94% | 72.67% | Improved |
| Return on average assets | 0.75% | 0.78% | Declined |
| Return on average equity | 8.19% | 7.30% | Improved |
Fourth-quarter 2015 net income was $2.6 million, compared with $1.8 million in the fourth quarter of 2014. Fourth-quarter diluted EPS was $0.34 versus $0.28. Fourth-quarter results included $1.2 million of provision for loan losses and $11.7 million of non-interest expense.
Balance sheet, liquidity and capital
- Total assets were $1.586 billion, up 35.0% from $1.175 billion.
- Total deposits were $1.216 billion, up 23.9% from $981.2 million.
- Gross loans held for investment were $960.4 million, up 32.3%; net loans were $954.8 million.
- Investment securities totaled approximately $441.3 million, up 40.6% and equal to 27.8% of total assets.
- Cash and cash equivalents were $56.8 million, up from $31.7 million.
- Total borrowings were approximately $194.1 million, including $145.4 million of FHLB advances, $18.6 million of bank stock debt and $9.3 million of subordinated debentures.
- Total stockholders’ equity was $167.2 million, up 42.0%, primarily due to $38.9 million of net IPO proceeds and retained earnings of $10.1 million.
- Book value per common share was $18.37 and tangible book value per common share was $15.97.
- Equity Bank was categorized as well capitalized. Its total risk-based capital ratio was 12.77%, Tier 1 risk-based capital ratio was 12.26%, common equity Tier 1 ratio was 12.26% and Tier 1 leverage ratio was 8.39%.
Operating activities provided $13.6 million of cash. Investing activities used $266.9 million, principally for loan growth and securities purchases. Financing activities provided $278.4 million, largely from deposit growth, FHLB borrowings and the IPO. Ending cash increased by $25.1 million.
Material changes versus the prior comparable period
- Loan growth accelerated, including substantial increases in residential real estate and commercial and industrial loans. Residential real estate loans increased 86.1% to $250.2 million; commercial and industrial loans increased 43.1% to $262.0 million.
- The First Independence acquisition added approximately $135.0 million of assets, $87.1 million of deposits and $89.9 million of loans. The transaction generated a $682 thousand gain on acquisition and $1.7 million of merger expense.
- The November 2015 IPO generated $38.9 million of net proceeds and resulted in the Company becoming publicly traded on Nasdaq under the symbol EQBK.
- Net interest margin contracted to 3.65% from 3.92%, primarily because of lower loan yields, a greater securities mix, increased residential mortgage exposure and higher funding costs.
- Net charge-offs increased to $3.5 million from $851 thousand, and the allowance for loan losses declined to $5.5 million, or 0.57% of loans, from $6.0 million, or 0.82%.
- Asset quality improved overall: nonperforming assets declined to $14.0 million, or 0.89% of assets, from $15.6 million, or 1.33%; classified loans declined to $15.4 million from $31.5 million.
- The efficiency ratio improved because revenue growth exceeded the increase in operating expenses, despite merger costs and a $316 thousand loss from prepaying FHLB term advances.
Guidance, outlook, commentary, risks and unusual items
Management expects to continue pursuing organic commercial-loan and deposit growth and selective acquisitions in its Midwestern markets. The filing does not provide formal quantitative earnings or revenue guidance.
- Management views the First Independence acquisition as an opportunity to expand in southeast Kansas and achieve operating synergies through integration.
- The Company used approximately $35.0 million of IPO proceeds on January 4, 2016 to repay the $18.6 million bank stock loan and redeem Series C preferred stock with a $16.4 million liquidation preference.
- On January 28, 2016, the Company entered into a new borrowing facility with maximum capacity of $20.0 million, secured by Equity Bank stock and maturing January 26, 2017.
- Interest-rate risk is material. The filing’s simulation indicated that an immediate 300-basis-point increase could reduce projected 12-month net interest income by 9.8% and economic value of equity by 22.0%.
- Credit risk is concentrated in Kansas and Missouri, with significant commercial real estate and commercial lending exposure. The ten largest borrowers represented approximately 16.7% of total loans, while the ten largest non-brokered depositors represented approximately 15.9% of deposits.
- Liquidity depends heavily on core deposits, FHLB funding and continued access to capital markets. Equity Bank’s ability to pay dividends to the holding company is subject to regulatory and capital restrictions.
- Material risks include economic and real estate downturns, higher charge-offs, margin compression, deposit outflows, acquisition integration, regulatory capital requirements, cybersecurity and third-party technology disruptions.
- Equity Bank is defending a CitiMortgage lawsuit involving alleged loan repurchase obligations and claimed damages of $2.7 million plus interest. The filing states that the potential loss cannot currently be estimated.
- The Company settled litigation with U.S. Bank in June 2015. The filing also discusses possible future mortgage repurchase or indemnification claims, although management does not believe a material unfavorable outcome is probable.
- The Company has not historically paid common-stock dividends and does not expect to pay them in the foreseeable future.
Most important facts for investors to verify
- Whether rapid loan growth, particularly in residential and commercial real estate lending, is sustainable without renewed deterioration in credit quality.
- Whether the lower allowance-to-loans ratio adequately covers future losses given the increase in net charge-offs.
- The effect of further interest-rate increases on net interest margin, funding costs, projected net interest income and economic value of equity.
- The actual cost savings, revenue contribution and integration progress from First Independence.
- Liquidity and collateral availability after the post-year-end repayment of the bank stock loan and redemption of Series C preferred stock.
- The outcome and potential financial exposure from the CitiMortgage litigation and any future mortgage repurchase claims.
- The sustainability of earnings excluding the $682 thousand acquisition gain, $756 thousand of securities-related gains and other nonrecurring items.
- Future regulatory capital requirements, dividend restrictions and the Company’s ability to fund additional acquisitions without diluting shareholders.