Equity Bancshares, Inc. 10-Q Summary
Business Context and Reporting Period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose subsidiary, Equity Bank, operated 29 full-service branches in Kansas and Missouri as of September 30, 2016. The unaudited filing covers the quarter and nine months ended September 30, 2016, with comparisons to the corresponding 2015 periods and December 31, 2015 balances. Dollar amounts are in thousands unless otherwise stated.
Key Financial Metrics
| Metric | Three Months Ended Sept. 30, 2016 | Nine Months Ended Sept. 30, 2016 |
|---|---|---|
| Net interest income | $12.0 million | $36.9 million |
| Provision for loan losses | $0.1 million | $1.4 million |
| Non-interest income | $2.5 million | $7.7 million |
| Non-interest expense | $10.7 million | $30.4 million |
| Net income | $2.7 million | $9.0 million |
| Net income allocable to common stockholders | $2.7 million | $9.0 million |
| Diluted earnings per share | $0.32 | $1.07 |
| Net interest margin | 3.06% | 3.19% |
| Efficiency ratio | 72.35% | 68.1% |
At September 30, 2016, total assets were $1.56 billion, gross loans held for investment were $956.1 million, net loans were $950.0 million, deposits were $1.18 billion, and stockholders’ equity was $161.2 million. Cash and cash equivalents were $21.8 million. Borrowings totaled approximately $203.6 million, including $168.8 million of Federal Home Loan Bank advances and $25.4 million of retail repurchase agreements; no bank stock loan balance was outstanding.
For the nine months, operating activities provided $13.3 million of cash, investing activities used $2.9 million, and financing activities used $45.4 million. Cash and cash equivalents declined $35.0 million from year-end 2015.
Material Changes Versus Comparable Periods
- Third-quarter net income was essentially flat year over year at $2.7 million, while nine-month net income increased 15.6% from $7.7 million to $9.0 million. Net income allocable to common stockholders increased 17.6% for the nine-month period, partly because Series C preferred stock was redeemed in January 2016.
- Third-quarter net interest income increased 4.6% and nine-month net interest income increased 8.8%, primarily from higher average earning-asset and loan balances. However, net interest margin declined 42 basis points in the quarter and 62 basis points for the nine months, reflecting lower asset yields, higher funding costs, and use of a non-core FHLB borrowing-and-investment spread strategy.
- Non-interest income increased 24.4% in the quarter and 18.5% for the nine months. Growth was led by service charges, debit card income, and mortgage banking income, with part of the increase attributable to the First Independence acquisition completed in October 2015.
- Non-interest expense increased 21.1% in the quarter and 12.8% for the nine months. Increases included salaries, occupancy, data processing, telecommunications, and merger-related costs. First Independence contributed approximately $456 thousand of incremental quarterly expense and $1.3 million of incremental nine-month expense.
- The provision for loan losses declined to $104 thousand in the quarter from $537 thousand and to $1.4 million for the nine months from $1.9 million. Net charge-offs declined to $54 thousand in the quarter and $785 thousand for the nine months, compared with $1.1 million and $2.8 million, respectively, in 2015.
- Total assets decreased 1.8% from year-end 2015, primarily because of lower cash and net loans. Deposits declined 3.1%, while FHLB advances increased $23.3 million. Stockholders’ equity declined 3.6%, primarily because of the $16.4 million preferred-stock redemption, partly offset by retained earnings and accumulated other comprehensive income.
Asset Quality, Capital, Liquidity, and Debt
- The allowance for loan losses was $6.1 million, or 0.64% of gross loans, versus $5.5 million, or 0.57%, at December 31, 2015.
- Nonperforming assets declined to $12.8 million, or 0.82% of total assets, from $14.0 million, or 0.89%, at year-end. Nonaccrual loans were $7.2 million, and other real estate owned was $5.6 million.
- Loans were 81.2% of deposits and 61.4% of total assets at September 30, 2016. Approximately 98.5% of loans were classified as pass-rated credits; classified loans totaled $13.9 million.
- Equity Bank remained categorized as well capitalized. Its total risk-based capital ratio was 13.50%, common equity Tier 1 ratio was 12.94%, and Tier 1 leverage ratio was 8.44%.
- Management reported approximately $167.1 million of additional FHLB borrowing capacity based on qualifying collateral and FHLB stock. Liquidity was expected to be supported by operating cash flow, loan and security maturities, core deposits, FHLB advances, and other borrowing relationships.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal quantitative earnings guidance. Management stated that the FHLB borrowing-and-investment spread opportunity could be reduced or terminated daily and was not expected to be part of the company’s core earnings strategy. Management also cautioned that lower interest rates, loan repricing, prepayments, and higher deposit or borrowing costs could pressure margins.
- On July 14, 2016, the company agreed to acquire Community First Bancshares, Inc.; the transaction closed on November 10, 2016, after the reporting period. Community First operated five Arkansas branches.
- On October 20, 2016, the company agreed to acquire Prairie State Bancshares, Inc., with closing expected in the first quarter of 2017, subject to customary conditions and approvals.
- The company recorded $479 thousand of net gains from securities transactions for the first nine months, including a $414 thousand other-than-temporary impairment loss related to AgriBank subordinated notes and realized securities gains.
- Merger expense was $237 thousand in the third quarter and first nine months. The company also recorded a $58 thousand loss on debt extinguishment in the first nine months related to writing off deferred costs on the repaid bank stock loan.
- Equity Bank faced a lawsuit alleging breach of mortgage-loan repurchase obligations, with claimed damages of $2.7 million plus interest. Management considered an unfavorable outcome not probable, but stated that potential loss was difficult to estimate.
- Principal risks include economic and real estate downturns in Kansas and Missouri, interest-rate volatility, credit losses, allowance adequacy, liquidity and deposit outflows, acquisition integration, regulatory capital requirements, competition, cybersecurity and technology disruptions, and legal or repurchase claims.
Important Facts for Investors to Verify
- Verify the post-period accounting and capital effects of the Community First acquisition completed November 10, 2016.
- Monitor the expected closing, consideration, financing, and integration risks associated with the Prairie State acquisition.
- Assess whether margin pressure continues as asset yields decline and deposit and FHLB funding costs rise.
- Review the concentration of the loan portfolio in commercial and real estate lending and the adequacy of the $6.1 million allowance for loan losses.
- Track deposit trends, FHLB borrowing levels, available borrowing capacity, and cash balances as liquidity indicators.
- Evaluate the CitiMortgage litigation and any future mortgage-loan repurchase or indemnification demands.
- Distinguish recurring earnings from securities gains, acquisition-related items, merger expenses, and the non-core borrowing-and-investment spread opportunity.