Business Context and Reporting Period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose subsidiary, Equity Bank, provides banking services to businesses, business owners and individuals through 29 branches in Kansas and Missouri. This unaudited Form 10-Q covers the three months ended March 31, 2016, with comparisons to March 31, 2015 and December 31, 2015.
First Independence Corporation, acquired in October 2015, contributed four branches in southeast Kansas and affected the year-over-year comparison.
Key Financial Metrics
| Metric | Q1 2016 | Comparable period or prior date |
|---|---|---|
| Total assets | $1.529 billion | $1.586 billion at December 31, 2015 |
| Gross loans held for investment | $938.1 million | $960.4 million at December 31, 2015 |
| Total deposits | $1.234 billion | $1.216 billion at December 31, 2015 |
| Net interest income | $12.758 million | $11.033 million in Q1 2015 |
| Net interest margin | 3.33% | 4.13% in Q1 2015 |
| Net income | $3.440 million | $2.441 million in Q1 2015 |
| Net income allocable to common stockholders | $3.439 million | $2.398 million in Q1 2015 |
| Basic/diluted EPS | $0.42/$0.41 | $0.38/$0.38 in Q1 2015 |
| Return on average assets, annualized | 0.83% | 0.84% in Q1 2015 |
| Return on average equity, annualized | 8.99% | 8.31% in Q1 2015 |
| Operating efficiency ratio | 64.05% | 66.62% in Q1 2015 |
| Cash and cash equivalents | $44.6 million | $56.8 million at December 31, 2015 |
| Total borrowings | $130.7 million | $194.1 million at December 31, 2015 |
| Stockholders’ equity | $155.1 million | $167.2 million at December 31, 2015 |
Profitability and Revenue Drivers
- Total interest and dividend income increased 19.5% to $14.862 million, primarily from higher average loan and securities balances.
- Net interest income increased 15.6% to $12.758 million, although the net interest margin declined 80 basis points to 3.33% as asset yields fell in a low-rate environment and funding costs increased.
- Non-interest income increased 12.6% to $2.698 million, led by service charges and fees, debit card income, mortgage banking income and a $420 thousand gain on available-for-sale securities.
- Non-interest expense increased 7.4% to $9.689 million. Salaries and benefits, data processing and operating costs associated with First Independence were major contributors.
- The provision for loan losses was $723 thousand, broadly unchanged from $725 thousand in Q1 2015. Net charge-offs increased to $249 thousand from $123 thousand.
- Income before taxes was $5.044 million and income tax expense was $1.604 million, producing an effective tax rate of 31.8%, compared with 33.8% in Q1 2015.
Cash Flow, Liquidity and Capital
- Operating activities provided $4.444 million of cash, while investing activities provided $44.965 million, principally from securities proceeds and a net reduction in loans.
- Financing activities used $61.652 million, including $45.901 million of FHLB repayments, repayment of the $18.612 million bank stock loan and redemption of $16.372 million of Series C preferred stock.
- Cash and cash equivalents declined $12.243 million during the quarter to $44.586 million.
- FHLB advances declined to $99.538 million from $145.439 million and carried a weighted-average rate of 0.54%. The company reported $201.6 million of additional FHLB borrowing capacity based on collateral and FHLB stock.
- Equity Bank was categorized as well capitalized. Its March 31, 2016 total risk-based capital ratio was 13.62%, Tier 1 risk-based capital ratio was 13.06%, common equity Tier 1 ratio was 13.06% and Tier 1 leverage ratio was 8.48%.
Material Changes Versus Prior Comparable Period
- Net income increased $999 thousand, or 40.9%, while net income allocable to common stockholders increased $1.041 million, or 43.4%.
- Average loans increased substantially year over year, but the period-end loan portfolio declined 2.3% from December 31, 2015 to $938.1 million.
- Average interest-earning assets increased $460.2 million, but the overall yield declined, contributing to the lower net interest margin.
- Total deposits increased $18.3 million, or 1.5%, from year-end. Savings and money market deposits increased $33.6 million, partly offset by lower interest-bearing demand and time deposits.
- Total assets declined $57.0 million, or 3.6%, from year-end, while total liabilities declined $44.9 million, or 3.2%.
- Stockholders’ equity declined $12.1 million, principally because of the $16.4 million preferred-stock redemption, partly offset by retained earnings, accumulated other comprehensive income and stock-based compensation.
- Nonperforming assets increased to $14.9 million from $14.0 million at year-end. Nonaccrual loans rose to $9.0 million from $8.2 million, while classified loans declined to $13.7 million from $15.4 million.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings, revenue or balance-sheet guidance.
- Management stated that its FHLB-funded investment “spread opportunity” generated a positive spread of approximately 43 basis points. Management noted that this activity can be reduced or terminated daily and is not expected to be part of core earnings or strategy; without it, Q1 net interest margin would have been approximately 3.63%.
- Management stated that liquidity needs can be met through operating cash flow, loan and securities maturities, the core deposit base, FHLB advances and other borrowing relationships.
- Interest-rate risk is material. The company’s modeled twelve-month net interest income impact was negative 1.5% under an immediate 100-basis-point increase and negative 4.2% under a 100-basis-point decrease as of March 31, 2016. The modeled economic value of equity impact was positive 1.9% under a 100-basis-point increase and negative 3.0% under a 100-basis-point decrease.
- The loan portfolio is concentrated in commercial and real estate lending, with substantial exposure to Kansas and Missouri economic conditions and real estate values. Management identified potential risks from economic downturns, interest-rate changes, credit deterioration, allowance adequacy, competition, liquidity, regulatory capital requirements, cybersecurity and third-party systems.
- Equity Bank is defending a CitiMortgage lawsuit alleging breach of mortgage-loan repurchase obligations and seeking $2.7 million plus interest. Management believes the outcome is not probable to be unfavorable, but the potential loss is not currently estimable.
- The company had $200.4 million of commitments for credit extensions and standby or performance letters of credit at March 31, 2016. These commitments may not require full funding because they can expire unused.
- The company redeemed its Series C preferred stock and repaid its bank stock loan in January 2016 using IPO proceeds. The remaining IPO proceeds are intended for future growth.
- Management was evaluating several recently issued accounting standards, including revenue recognition, financial instruments, leases and share-based payments. The filing states that the lease standard is expected to increase reported assets and liabilities, but the financial impact was not yet quantified.
Most Important Facts to Verify
- Whether the lower 3.33% net interest margin persists as loan and securities yields remain under pressure and deposit costs rise.
- The sustainability and risk-adjusted contribution of the non-core FHLB-funded spread opportunity.
- Trends in nonperforming loans, classified loans, charge-offs and the allowance, which increased to $5.980 million, or 0.64% of total loans.
- Commercial real estate and other real estate concentrations, collateral values and sensitivity to Kansas and Missouri economic conditions.
- Liquidity availability after the quarter-end reduction in FHLB borrowings and the effect of deposit concentration, including the increase in one business money-market account.
- The status and potential exposure from the CitiMortgage litigation and any future mortgage-loan repurchase or indemnification claims.
- The effect of First Independence integration costs and revenue contribution on future operating performance.
- Future capital distribution capacity under the Basel III capital conservation buffer and restrictions on dividends from Equity Bank to the holding company.