Equity Bancshares, Inc. — 2017 Q2 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 six months ended June 30, 2017, compared primarily with the same periods in 2016 and with December 31, 2016 balance-sheet data. The company was an accelerated filer and emerging growth company.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Interest and dividend income | $25.1 million | $14.4 million | $48.3 million | $29.2 million |
| Net interest income | $21.2 million | $12.2 million | $41.1 million | $25.0 million |
| Provision for loan losses | $0.6 million | $0.5 million | $1.7 million | $1.3 million |
| Non-interest income | $4.0 million | $2.5 million | $7.3 million | $5.2 million |
| Non-interest expense | $15.1 million | $9.9 million | $30.4 million | $19.6 million |
| Net income | $6.4 million | $2.8 million | $11.2 million | $6.3 million |
| Diluted earnings per share | $0.51 | $0.34 | $0.91 | $0.75 |
| Net interest margin | 3.91% | 3.18% | 3.93% | 3.25% |
Second-quarter net income increased 123.3% year over year; six-month net income increased 78.5%. Annualized second-quarter ROAA was 1.07%, ROAE was 9.00%, and return on average tangible common equity was 12.36%. The reported efficiency ratio was 59.79% for the quarter and 60.7% for the six-month period, both improved from the comparable 2016 periods.
At June 30, 2017, total assets were $2.41 billion, gross loans held for investment were $1.53 billion, net loans were $1.52 billion, deposits were $1.82 billion, borrowings were $292.3 million, and stockholders’ equity was $286.1 million. The allowance for loan losses was $7.6 million, or 0.49% of total loans.
Cash flow, debt and liquidity
- Six-month operating cash flow was $14.0 million; investing cash flow was negative $87.5 million, primarily reflecting securities purchases, loan growth and the Prairie acquisition; financing cash flow was $62.5 million, primarily from deposit growth.
- Cash and cash equivalents declined to $24.2 million from $35.1 million at December 31, 2016.
- Federal Home Loan Bank advances were $257.4 million at a weighted-average rate of 1.24%, compared with $259.6 million at year-end. The company reported an additional FHLB borrowing capacity of approximately $204.6 million.
- Retail repurchase agreements were $21.1 million and subordinated debentures were $13.8 million. The company had no outstanding bank stock loan at June 30, 2017, although a $30 million borrowing facility was available through March 2018.
- Management stated that liquidity needs are expected to be met through operating cash flow, loan and securities maturities, core deposits, FHLB advances and other borrowing relationships.
Material changes versus prior comparable periods
- Net interest income rose 73.8% in the second quarter and 64.7% for the first six months, primarily because of substantial growth in average loans and securities, higher loan yields and merger-related purchase-accounting accretion.
- Average loans increased to $1.52 billion in the second quarter from $950.2 million in the prior-year quarter. The loan yield increased to 5.45% from 4.89%.
- Non-interest income rose 61.6% in the quarter and 41.8% year to date, led by debit-card income, service charges, mortgage banking and bank-owned life insurance income.
- Non-interest expense increased 52.2% in the quarter and 54.6% year to date. Higher salaries, occupancy, data processing, advertising and other operating costs reflected acquired branches and continued staff and market expansion.
- Gross loans increased 10.5% from December 31, 2016, while deposits increased 11.6%. The loan-to-deposit ratio was 84.0%, compared with 84.9% at year-end.
- Classified loans increased to $53.5 million from $32.2 million, and classified loans represented 3.5% of total loans versus 2.3% at year-end. Nonperforming assets increased to $37.9 million, or 1.57% of assets, from $31.3 million, or 1.43%.
Acquisitions, outlook, risks and unusual items
- On March 10, 2017, the company acquired Prairie State Bancshares, adding three western Kansas branches. Prairie contributed $14.9 million of common equity issued in the transaction and generated $5.7 million of goodwill and $1.4 million of core deposit intangibles. Acquisition-related costs were $926 thousand for the six months.
- On July 14, 2017, the company announced proposed acquisitions of Eastman National Bancshares and Cache Holdings, Inc., subject to regulatory and shareholder approvals and expected to close in the fourth quarter of 2017. The filing states that goodwill and core deposit intangibles are expected from both transactions.
- The filing provides no formal earnings, revenue or balance-sheet guidance. Management expects continued reliance on loan and deposit growth, but results remain sensitive to interest rates, funding costs, credit quality and acquisition integration.
- Key risks include economic or real-estate downturns in core markets, interest-rate volatility, declining credit quality, allowance inadequacy, liquidity pressures, competition, regulatory capital requirements, acquisition integration, cybersecurity and information-technology disruptions.
- Equity Bank was categorized as well capitalized. At June 30, 2017, its total risk-based capital ratio was 13.25%, common equity Tier 1 ratio was 12.80%, and Tier 1 leverage ratio was 9.35%.
- Interest-rate sensitivity modeling indicated that a 300-basis-point increase could reduce modeled 12-month net interest income by 9.2% and economic value of equity by 13.7%. A 100-basis-point decrease could reduce modeled net interest income by 1.5% and economic value of equity by 2.6%.
- Equity Bank is defending a lawsuit by CitiMortgage alleging breach of mortgage-loan repurchase obligations and seeking $2.7 million plus interest. Management considers an unfavorable outcome not probable, and the potential loss cannot currently be estimated clearly.
- The company adopted ASU 2016-09, reducing six-month income-tax expense by $216 thousand and increasing net income by $216 thousand, or $0.02 per diluted share. The filing states that the future impact of the expected-credit-loss standard, effective for the company in 2020, was not yet known.
Investor verification checklist
- Verify whether the increase in earnings is sustainable after separating acquisition-related purchase-accounting accretion, merger expenses and other nonrecurring items.
- Monitor classified loans, nonaccrual loans, other real estate owned, potential problem loans and allowance coverage as the loan portfolio expands.
- Assess deposit retention, deposit pricing and reliance on FHLB advances as funding costs rise.
- Review the regulatory and shareholder status, purchase consideration, financing and integration plans for the Eastman and Cache transactions.
- Reconcile non-GAAP measures, including efficiency ratio, tangible common equity and tangible book value per share, to GAAP results.
- Evaluate the CitiMortgage litigation and any future mortgage-loan repurchase or indemnification claims.