Equity Bancshares, Inc. — 2019 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 12, 2019. Equity Bancshares is a Wichita, Kansas-based bank holding company whose Equity Bank operated 52 locations in Arkansas, Kansas, Missouri and Oklahoma, serving businesses, business owners and consumers.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Interest and dividend income | $44.5 million | $43.0 million | $132.5 million | $116.0 million |
| Net interest income | $31.5 million | $32.8 million | $93.5 million | $91.5 million |
| Provision for loan losses | $0.7 million | $1.3 million | $17.3 million | $3.2 million |
| Non-interest income | $6.6 million | $5.4 million | $18.3 million | $14.3 million |
| Non-interest expense | $24.2 million | $23.6 million | $74.8 million | $69.2 million |
| Net income | $10.4 million | $10.3 million | $15.6 million | $25.9 million |
| Diluted EPS | $0.66 | $0.64 | $0.98 | $1.66 |
Margins and returns: Q3 net interest margin was 3.42%, down from 3.76% in the prior-year quarter. Nine-month net interest margin was 3.44%, down from 3.86%. Q3 annualized ROAA was 1.02%, ROAE was 8.91%, and return on average tangible common equity was 14.38%. The reported Q3 efficiency ratio was 63.59%, compared with 59.93% in Q3 2018.
Balance sheet at September 30, 2019: Total assets were $4.07 billion; gross loans held for investment were $2.60 billion and net loans were $2.58 billion; deposits were $3.11 billion; total liabilities were $3.61 billion; and stockholders’ equity was $467.1 million. Book value per share was $30.25 and tangible book value per share was $19.99.
Credit quality: The allowance for loan losses was $17.9 million, or 0.69% of gross loans, versus $11.5 million, or 0.44%, at December 31, 2018. Nonperforming assets were $57.1 million, or 1.40% of assets, versus $39.6 million, or 0.98%, at year-end. Nonaccrual loans were $51.0 million. Classified loans increased to $95.9 million from $86.1 million.
Cash flow and liquidity: Nine-month operating cash flow was $30.9 million, investing cash flow was $54.8 million, and financing cash flow was $(110.4) million. Cash and cash equivalents declined to $168.1 million from $192.8 million at year-end. Federal Home Loan Bank advances were $410.1 million, retail repurchase agreements were $40.7 million, bank stock borrowings were $14.8 million, and subordinated debentures were $14.5 million. The company reported $415.1 million of additional FHLB borrowing capacity.
Capital: Equity Bank remained categorized as well capitalized. At September 30, 2019, Equity Bank’s total risk-based capital ratio was 12.06%, Tier 1 risk-based ratio was 11.43%, common equity Tier 1 ratio was 11.43%, and Tier 1 leverage ratio was 8.38%.
Material changes versus comparable periods
- Q3 net income increased $84 thousand year over year despite lower net interest income, primarily because non-interest income rose $1.1 million and the loan-loss provision declined $612 thousand.
- Nine-month net income fell $10.3 million, or approximately 40%, primarily because the loan-loss provision increased $14.1 million and non-interest expense increased $5.5 million. These effects more than offset higher net interest income, higher non-interest income and lower income taxes.
- The nine-month provision included a $14.5 million charge related to one credit relationship; $10.2 million of related loans were charged off during the first nine months.
- Gross loans grew $25.5 million, or 1.0%, from year-end. Residential real estate loans increased $85.2 million and real estate construction loans increased $79.8 million, while commercial real estate loans declined $127.7 million.
- Deposits declined $16.5 million, or 0.5%, from year-end. Savings and money-market deposits increased while time deposits declined $78.8 million.
- Non-interest income increased 28.5% for the first nine months, driven by service charges, debit-card income, mortgage banking and other income, including an $844 thousand gain on swap fees.
- The February 2019 MidFirst branch acquisition added three locations and approximately $98.5 million of deposits; it generated $4.7 million of goodwill and $0.9 million of acquisition-related expenses.
- The company repurchased 421,016 shares for $10.9 million through September 30, 2019, with 678,984 shares remaining under the authorized program.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or balance-sheet guidance. Management states that interim results are not necessarily indicative of full-year results.
- Management expects to implement the current expected credit loss standard, ASU 2016-13, in the first quarter of 2020. The financial impact was not known as of the filing date.
- The company identified a material weakness in internal control over financial reporting involving untimely or incorrect reconciliations of certain corporate accounts to the general ledger and ineffective review controls. Management began remediation and did not expect a material charge, but disclosure controls were deemed ineffective as of September 30, 2019.
- Management identified a significant credit relationship involving borrowers in Chapter 11 bankruptcy. Future collateral realizations may differ from estimates, and additional losses could be substantial relative to the allowance.
- The company faces interest-rate risk. Its modeled 12-month net interest income impact from an immediate rate change was negative 3.3% for a 100-basis-point increase and positive 1.6% for a 100-basis-point decrease at September 30, 2019.
- Other principal risks include economic and real-estate downturns, concentration in real-estate-secured lending, deposit and liquidity pressures, competition for deposits, regulatory and capital requirements, technology and cybersecurity events, LIBOR transition, acquisition integration and allowance adequacy.
- Legal matters include a CitiMortgage repurchase lawsuit with a stated judgment of $1.474 million if not appealed, an Equal Credit Opportunity Act claim, and a securities class action whose outcome the company could not reasonably estimate as of the filing. The CitiMortgage appellate decision referenced in the filing occurred on November 6, 2019, after the quarter end.
Most important facts for investors to verify
- Whether the identified internal-control material weakness has been fully remediated and whether any financial statement corrections or charges result.
- The ultimate recovery, additional charge-offs or reserve requirements associated with the bankrupt credit relationship.
- The impact of ASU 2016-13 adoption on retained earnings, allowance levels and regulatory capital in 2020.
- Whether deposit pricing and funding costs continue to pressure the 3.42% net interest margin and earnings.
- Trends in nonaccrual loans, classified loans, nonperforming assets and the 0.69% allowance-to-loans ratio.
- Liquidity availability, FHLB borrowing levels, deposit composition and the maturity of higher-cost time and brokered deposits.
- The status and potential cost of the disclosed litigation, including the CitiMortgage and securities class-action matters.