Business Context and Reporting Period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose wholly owned subsidiary, Equity Bank, provides commercial, mortgage and consumer banking services through 34 branches in Arkansas, Kansas and Missouri. This Form 10-K covers the fiscal year ended December 31, 2016, with unaudited quarterly information for the fourth quarter of 2016.
The company’s strategy centers on organic commercial loan and deposit growth and selective acquisitions of community banks. Equity completed the acquisition of Community First Bancshares of Harrison, Arkansas on November 10, 2016, adding five branches, approximately $462.9 million of assets and $375.4 million of deposits.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total assets | $2.192 billion | $1.586 billion | +38.2% |
| Total deposits | $1.630 billion | $1.216 billion | +34.1% |
| Net loans held for investment | $1.377 billion | $954.8 million | +44.2% |
| Total stockholders’ equity | $258.0 million | $167.2 million | +54.3% |
| Net interest income | $52.6 million | $46.3 million | +13.7% |
| Provision for loan losses | $2.1 million | $3.0 million | -$0.9 million |
| Total non-interest income | $10.5 million | $9.8 million | +6.8% |
| Total non-interest expense | $47.1 million | $38.6 million | +22.0% |
| Net income | $9.4 million | $10.3 million | -9.0% |
| Net income allocable to common stockholders | $9.4 million | $10.1 million | -7.4% |
| Diluted EPS | $1.07 | $1.54 | -$0.47 |
| Net interest margin | 3.30% | 3.65% | -35 bps |
| Return on average assets | 0.55% | 0.75% | Down |
| Return on average equity | 5.55% | 8.19% | Down |
Fourth-quarter 2016 net income was $417,000, or $0.04 diluted EPS, compared with $2.6 million, or $0.34 diluted EPS, in the fourth quarter of 2015. Fourth-quarter results included $16.7 million of non-interest expense, including substantial merger-related costs.
Asset Quality, Liquidity and Capital
- Net charge-offs declined to $1.2 million, or 0.12% of average loans, from $3.5 million, or 0.43%, in 2015.
- The allowance for loan losses increased to $6.4 million, but declined to 0.46% of gross loans from 0.57%.
- Nonperforming assets increased to $31.3 million, or 1.43% of total assets, from $14.0 million, or 0.89%. Management attributed substantially all of the increase to the Community First acquisition.
- Classified loans increased to $32.2 million from $15.4 million, also primarily due to Community First. Potential problem loans totaled $9.5 million.
- Cash and cash equivalents were $35.1 million at year-end, down from $56.8 million. The company reported $193.7 million of additional borrowing capacity from the Federal Home Loan Bank.
- Borrowings totaled $293.9 million, including $259.6 million of FHLB advances and $13.7 million of subordinated debentures. The bank stock loan had no outstanding balance at year-end.
- Equity Bank remained well capitalized, with a 13.01% total risk-based capital ratio, 12.58% Tier 1 risk-based capital ratio, 12.58% CET1 ratio and 10.42% Tier 1 leverage ratio.
Material Changes Versus the Prior Comparable Period
- Balance-sheet growth was driven by the Community First acquisition and continued organic expansion. Excluding Community First, gross loans grew 9.0%.
- Average loans increased 23.7%, supporting higher interest income; however, loan yield declined to 4.98% from 5.31% and the net interest margin declined to 3.30% from 3.65%.
- Interest expense increased 36.0% as deposits and FHLB borrowings grew and funding costs increased.
- Non-interest expense rose $8.5 million, primarily because merger expenses increased to $5.3 million from $1.7 million, salaries and benefits increased $2.7 million, and data-processing and occupancy costs increased.
- The company raised approximately $25.0 million in gross proceeds through a December 2016 private placement of 770,000 Class A shares at $32.50 per share; net proceeds were used partly to repay debt and support growth.
- The Series C preferred stock was redeemed for $16.4 million in January 2016, leaving no preferred stock outstanding at year-end.
- Book value per common share increased to $22.09 from $18.37, while tangible book value per share increased to $16.64 from $15.97.
Cash Flow, Outlook and Unusual Items
- Operating activities provided $15.5 million of cash. Investing activities used $140.7 million, primarily for loan growth, securities purchases and other investments. Financing activities provided $103.4 million, mainly from deposit growth, FHLB borrowings and common-stock issuance.
- Management expects to continue pursuing strategic acquisitions and organic commercial loan and deposit growth, particularly in Wichita and Kansas City, while using community-market deposits to fund metropolitan-market lending. The filing does not provide quantitative earnings or revenue guidance.
- Merger expenses were $5.3 million in 2016, primarily related to Community First. The acquisition generated $40.7 million of goodwill and $3.6 million of core deposit intangibles.
- Equity recorded a $414,000 other-than-temporary impairment loss related to AgriBank subordinated notes, resulting in net securities gains of $479,000.
- On March 10, 2017, after the reporting date, the company acquired Prairie State Bancshares for approximately $27.5 million, consisting of $12.3 million in cash and 479,468 shares of Class A common stock. Prairie reported approximately $151.4 million of assets, $133.0 million of loans and $130.3 million of deposits at December 31, 2016.
- The company has not historically paid common-stock dividends and does not expect to do so in the foreseeable future. Dividend capacity depends substantially on dividends from Equity Bank and regulatory capital requirements.
Principal Risks and Contingencies
- Credit losses may rise because the loan portfolio is concentrated in commercial, commercial real estate and real-estate-secured lending in Arkansas, Kansas and Missouri. The ten largest loan relationships represented approximately $175.8 million, or 12.6% of total loans.
- Commercial real estate, construction, agricultural and small-business borrowers are sensitive to local economic conditions, collateral values and commodity prices.
- Interest-rate changes could reduce net interest income. Management’s modeling indicated a 11.2% decline in projected twelve-month net interest income under an immediate 300-basis-point rate increase.
- Deposit concentration and funding risk remain relevant. The ten largest non-brokered depositors represented approximately $224.6 million, or 13.8% of deposits, and withdrawals could increase reliance on more expensive borrowings.
- Acquisition integration, goodwill impairment, regulatory approvals, capital requirements and the ability to retain key bankers could affect future growth and profitability.
- The company faces extensive banking, consumer-protection, anti-money-laundering, cybersecurity and data-privacy regulation, with associated compliance costs and enforcement risk.
- Equity Bank is involved in litigation brought by CitiMortgage concerning alleged mortgage-loan repurchase obligations and approximately $2.7 million of claimed damages, plus interest. The filing states that the potential loss cannot currently be estimated and that the bank intends to contest the matter.
- The company has pledged Equity Bank stock as collateral for a $30.0 million maximum borrowing facility, although no balance was outstanding at December 31, 2016.
Important Facts for Investors to Verify
- Reconcile reported earnings excluding the $5.3 million of merger expenses and assess the recurring cost base following Community First integration.
- Review the composition, seasoning and performance of Community First’s acquired loans, including the increase in nonaccrual and classified assets.
- Assess whether loan growth can continue without further net-interest-margin compression or increased funding costs.
- Verify the company’s post-acquisition capital ratios, goodwill and core deposit intangible balances after the Prairie transaction.
- Review liquidity under deposit outflow and interest-rate stress scenarios, including available FHLB capacity and collateral requirements.
- Monitor the CitiMortgage litigation and any additional mortgage repurchase or indemnification claims.
- Confirm the company’s continuing no-dividend policy and the regulatory restrictions affecting future distributions.