Equity Bancshares, Inc. Form 10-Q Summary
Business Context and Reporting Period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose subsidiary, Equity Bank, operated 52 full-service locations in Arkansas, Kansas, Missouri and Oklahoma as of June 30, 2019. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods, and the balance sheet is compared with December 31, 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Total interest and dividend income | $44.8 million | $38.8 million | $88.0 million | $73.0 million |
| Net interest income | $31.3 million | $30.9 million | $61.9 million | $58.7 million |
| Provision for loan losses | $1.0 million | $0.8 million | $16.6 million | $1.9 million |
| Non-interest income | $6.5 million | $4.6 million | $11.8 million | $8.8 million |
| Non-interest expense | $25.0 million | $26.0 million | $50.6 million | $45.6 million |
| Net income | $9.2 million | $6.9 million | $5.2 million | $15.6 million |
| Diluted earnings per share | $0.58 | $0.44 | $0.32 | $1.02 |
- Second-quarter net interest margin was 3.42%, down from 3.93% in the prior-year quarter. Management attributed the decline primarily to deposit and other funding costs increasing faster than asset yields.
- Second-quarter annualized return on average assets was 0.92%, return on average equity was 8.10%, and the reported non-GAAP efficiency ratio was 65.59%.
- At June 30, 2019, total assets were $4.18 billion, gross loans held for investment were $2.68 billion, deposits were $3.19 billion, total borrowings were approximately $515.6 million, and stockholders’ equity was $458.4 million.
- Cash and cash equivalents were $181.4 million. Six-month operating cash flow was $18.9 million, investing cash flow was negative $37.8 million, financing cash flow was $7.5 million, and the net change in cash was negative $11.4 million.
- Equity Bank was categorized as well capitalized. At June 30, 2019, its total risk-based capital ratio was 11.49%, common equity Tier 1 ratio was 10.88%, and Tier 1 leverage ratio was 8.21%.
Material Changes Versus Comparable Periods
- Second-quarter net income increased $2.4 million, or approximately 34%, principally because of higher non-interest income, modestly higher net interest income, and substantially lower merger expenses.
- Six-month net income declined $10.4 million, or approximately 67%, primarily because the provision for loan losses increased by $14.7 million. A $14.5 million provision was recorded in the first quarter for one credit relationship.
- Net interest income increased $0.4 million in the second quarter and $3.2 million for the six-month period, but net interest margin contracted as interest-bearing deposit costs rose materially.
- Non-interest income increased 40.5% in the second quarter and 33.2% for the six-month period. Growth was led by debit card income, service charges and fees, mortgage banking income, and gains on swap fees.
- Second-quarter non-interest expense decreased 3.7% because merger expenses fell from $5.2 million to $0.3 million. Excluding merger expenses, operating expenses increased, including salaries, data processing, professional fees and FDIC insurance.
- Gross loans increased $104.6 million, or 4.1%, from December 31, 2018. Residential real estate loans increased $115.4 million and real estate construction loans increased $70.5 million, while commercial real estate loans declined $67.1 million.
- Total deposits increased $62.4 million, or 2.0%, while Federal Home Loan Bank advances increased $59.9 million. The company also repurchased 277,806 shares during the second quarter for $7.2 million.
Credit Quality, Outlook, Risks and Unusual Items
- Nonperforming assets increased to $67.1 million, or 1.61% of total assets, from $39.6 million, or 0.97%, at December 31, 2018. Nonaccrual loans increased to $61.2 million from $33.2 million.
- Net charge-offs were $9.5 million in the second quarter and $10.3 million for the six-month period. A $9.2 million second-quarter charge-off related to the previously identified credit relationship.
- The allowance for loan losses was $17.8 million, or 0.66% of total loans, compared with $11.5 million, or 0.44%, at year-end 2018. Classified loans increased to $106.2 million from $86.1 million.
- The identified credit relationship involved two related franchisor borrowers that entered Chapter 11 bankruptcy. The company stated that future realized collateral or sale values could differ from its estimates and that additional losses could be substantial relative to the allowance.
- Management provided no formal earnings or financial guidance in the filing. It stated that operating results for the interim periods are not necessarily indicative of full-year results.
- The company acquired three MidFirst Bank branches in Oklahoma on February 8, 2019. The acquisition added approximately $98.5 million of deposits and generated $4.7 million of goodwill; acquisition-related costs were $0.9 million.
- ASU 2016-13, the current expected credit loss standard, becomes effective for the company in the first quarter of 2020. Management had not yet determined its financial statement impact.
- The company disclosed a putative securities class action filed in May 2019 concerning alleged misleading statements about credit quality and the identified credit relationship. The company believes the claims are without merit and stated that the outcome could not reasonably be estimated.
- Other principal risks include economic or real estate downturns, interest-rate volatility, credit losses, liquidity pressures, competition, acquisition integration, regulatory and capital requirements, cybersecurity and technology disruptions, LIBOR transition, and changes in deposit costs.
- The company reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the period.
Important Facts for Investors to Verify
- Reconcile the six-month earnings decline with the $14.5 million first-quarter credit provision, the subsequent $9.2 million charge-off, bankruptcy developments, and any future recoveries.
- Assess whether the increase in nonaccrual and classified loans is isolated or indicates broader deterioration, particularly in commercial and industrial and real estate exposures.
- Monitor net interest margin, deposit pricing, deposit mix, and reliance on Federal Home Loan Bank advances.
- Review the company’s implementation of the current expected credit loss standard and the eventual opening retained-earnings and capital effects.
- Evaluate liquidity against $470.3 million of commitments to extend credit and standby letters of credit, including the portion that may be drawn.
- Consider the effect of the $7.2 million share repurchase on capital, tangible book value, and regulatory capital ratios.
- Follow the disclosed securities class action, the CitiMortgage litigation, and potential mortgage repurchase or indemnification claims.
- Verify the sustainability of non-interest income growth, including the second-quarter $0.5 million gain on swap fees and acquisition-related transaction volumes.