Business Context and Reporting Period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose wholly owned subsidiary, Equity Bank, provides commercial, consumer, mortgage and treasury-management services through 42 branches in Arkansas, Kansas, Missouri and Oklahoma. This Form 10-K covers the fiscal year ended December 31, 2017, with unaudited fourth-quarter information also presented. The company is an accelerated filer and emerging growth company.
Growth is driven by commercial lending, core deposit expansion and acquisitions of community banks. In 2017, the company completed acquisitions of Prairie State Bancshares, Eastman National Bancshares and Cache Holdings.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets | $3.17 billion | $2.19 billion | +44.6% |
| Total deposits | $2.38 billion | $1.63 billion | +46.1% |
| Loans held for investment, net | $2.09 billion | $1.38 billion | +52.1% |
| Stockholders’ equity | $374.1 million | $258.0 million | +45.0% |
| Net interest income | $86.0 million | $52.6 million | +63.5% |
| Non-interest income | $15.4 million | $10.5 million | +47.5% |
| Net income | $20.6 million | $9.4 million | +120.3% |
| Diluted EPS | $1.62 | $1.07 | +51.4% |
| Net interest margin | 3.83% | 3.30% | +53 basis points |
| ROAA | 0.84% | 0.55% | Improved |
| ROAE | 7.03% | 5.55% | Improved |
| Efficiency ratio | 61.39% | 66.67% | Improved |
Profitability benefited primarily from substantially higher average loans and securities, acquisition-related balance-sheet growth, higher loan yields and termination of the prior-year FHLB “spread opportunity.” Loan yield increased to 5.43% from 4.98%, while the cost of interest-bearing liabilities increased to 0.88% from 0.67%.
The provision for loan losses was $3.0 million, compared with $2.1 million in 2016. Net charge-offs declined to $887 thousand from $1.2 million. The allowance for loan losses was $8.5 million, or 0.40% of total loans, compared with $6.4 million, or 0.46%, at year-end 2016.
Cash and cash equivalents were $52.2 million at December 31, 2017, compared with $35.1 million at year-end 2016. Operating activities provided $27.1 million of cash, investing activities used $222.4 million, and financing activities provided $212.4 million. The company funded loan and securities growth primarily through deposit growth and FHLB borrowings.
Total borrowings were approximately $401.7 million, including $347.7 million of FHLB advances, $37.5 million of retail repurchase agreements, $14.0 million of subordinated debentures and a $2.5 million bank stock loan. The FHLB line was collateralized by qualifying loans, and the company reported additional FHLB borrowing capacity of approximately $125.3 million.
At December 31, 2017, Equity Bank remained well capitalized. Bank ratios included an 11.80% CET1 ratio, 11.80% Tier 1 risk-based capital ratio, 12.17% total risk-based capital ratio and 10.01% Tier 1 leverage ratio.
Fourth-Quarter 2017 Results
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Net interest income | $24.6 million | $15.7 million |
| Provision for loan losses | $503 thousand | $760 thousand |
| Non-interest income | $4.1 million | $2.8 million |
| Net income | $4.3 million | $417 thousand |
| Diluted EPS | $0.31 | $0.04 |
Material Changes Versus the Prior Comparable Period
- Loan growth was 52.1% year over year; excluding the 2017 acquisitions, gross loans grew approximately 9.0% organically.
- Deposits increased 46.1%, with particularly strong growth in savings and money-market deposits and non-interest-bearing demand deposits.
- Commercial real estate remained the largest loan category at $987.7 million, or approximately 47% of net loans; commercial and industrial loans were $507.5 million.
- Nonperforming assets increased to $48.2 million from $31.3 million. Nonaccrual loans rose to $40.3 million from $22.7 million, with $16.7 million of the increase attributed directly to the 2017 mergers.
- Classified loans increased 90.5% to $61.4 million, while potential problem loans increased to $21.1 million from $9.5 million.
- Non-interest expense increased 43.3% to $67.5 million. Salaries and benefits rose 54.7%, and merger expense was $5.4 million, reflecting the Prairie, Eastman and Cache transactions.
- Goodwill increased to $104.9 million from $58.9 million, primarily from the 2017 acquisitions. Tangible book value per common share increased 5.9% to $17.61, compared with a 16.0% increase in GAAP book value per share to $25.62.
- Common shares outstanding increased to 14.6 million from 11.7 million, mainly because acquisition consideration was paid partly in stock.
Outlook, Commentary, Risks and Unusual Items
Management intends to continue organic commercial-loan and deposit growth and selectively pursue additional community-bank acquisitions. Agreements were signed in December 2017 to acquire Kansas Bank Corporation, parent of First National Bank of Liberal, and Adams Dairy Bancshares, parent of Adams Dairy Bank. Both transactions were expected to close in the second quarter of 2018, subject to regulatory and stockholder approvals. The filing does not provide formal earnings or revenue guidance.
The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% beginning in 2018. Equity recorded a $1.1 million fourth-quarter tax charge, principally from remeasurement of deferred tax assets. The ultimate effect of tax reform could change as interpretations and guidance develop.
Key risks include concentration in Arkansas, Kansas, Missouri and Oklahoma; substantial commercial real estate and commercial lending exposure; rising nonperforming and classified loans; interest-rate sensitivity; dependence on deposits and FHLB funding; acquisition integration and goodwill impairment; regulatory capital and dividend restrictions; cybersecurity and third-party technology risks; competition; and potential mortgage-loan repurchase or indemnification claims.
The company reported $366.1 million of off-balance-sheet credit extensions and commitments, including $358.2 million of commitments to extend credit and $7.9 million of standby and performance letters of credit. A lawsuit involving CitiMortgage resulted in a $477 thousand loss contingency recorded at December 31, 2017; the filing also notes possible future mortgage repurchase or indemnification claims whose amount and outcome are uncertain.
The company has not historically paid common-stock dividends and does not expect to pay them in the foreseeable future. Equity Bank’s ability to remit dividends to the holding company is subject to regulatory and capital restrictions.
Future accounting changes include CECL, effective for the company in the first quarter of 2020, which management expects could materially increase the allowance for credit losses. The filing states that the impact had not yet been determined.
Important Facts for Investors to Verify
- Verify whether the sharp 2017 earnings increase is sustainable after excluding merger-related expenses, acquisition accounting accretion and other unusual items.
- Review subsequent credit performance of acquired loan portfolios, particularly the $16.7 million increase in nonperforming assets attributable to 2017 acquisitions.
- Assess commercial real estate, commercial and industrial, agricultural and geographic concentration risks relative to capital and allowance levels.
- Reconcile deposit growth, brokered or reciprocal deposits, large depositor concentrations and available FHLB borrowing capacity with liquidity needs.
- Evaluate the effect of the 2018 acquisitions and related stock issuance on tangible book value, capital ratios, earnings and goodwill.
- Monitor the effect of tax reform and the future CECL adoption on effective tax rates, deferred tax assets, allowance requirements and regulatory capital.
- Review the CitiMortgage matter and any subsequent mortgage repurchase, indemnification or litigation claims.
- Confirm management’s stated internal-control conclusions and note that the independent auditor did not provide an attestation opinion on internal control because the company was an emerging growth company.