Equity Bancshares, Inc. — Form 10-Q Summary
Business context and reporting period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company for Equity Bank, which operated 48 full-service branches in Arkansas, Kansas, Missouri and Oklahoma as of June 30, 2018. The filing covers the three and six months ended June 30, 2018; interim financial statements are unaudited. Equity Bank primarily serves businesses, business owners and individuals.
Results include KBC and Adams Dairy Bancshares beginning May 5, 2018, following their acquisitions. The company also announced an agreement to acquire City Bank and Trust Company, expected to close in the fourth quarter of 2018 subject to customary conditions and regulatory approval.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Interest and dividend income | $38.8 million | $73.0 million |
| Net interest income | $30.9 million | $58.7 million |
| Provision for loan losses | $0.8 million | $1.9 million |
| Non-interest income | $4.6 million | $8.8 million |
| Non-interest expense | $26.0 million | $45.6 million |
| Merger expense | $5.2 million | $5.8 million |
| Net income | $6.9 million | $15.6 million |
| Diluted earnings per share | $0.44 | $1.02 |
| Net interest margin | 3.93% | 3.92% |
| Annualized return on average assets | 0.79% | Not separately provided for the six-month period |
Compared with the prior-year periods, second-quarter net income increased 8.1% and six-month net income increased 38.9%. Net interest income increased 45.9% for the quarter and 42.9% for the six months. Non-interest income increased 15.9% and 21.1%, respectively. The effective tax rate declined to 21.9% for the quarter and 22.2% for the six months, principally due to the Tax Cuts and Jobs Act.
Balance sheet, credit quality, debt and liquidity
- Total assets were $3.71 billion at June 30, 2018, up 17.1% from December 31, 2017.
- Gross loans held for investment were $2.41 billion, up 14.7%; commercial real estate represented approximately 42.4% of the portfolio and total real estate loans represented 72.7%.
- Total deposits were $2.64 billion, up 10.6%. Non-interest-bearing demand deposits were $442.3 million, or 16.8% of deposits.
- Borrowings totaled approximately $631.5 million, including $557.6 million of Federal Home Loan Bank advances, $41.4 million of retail repurchase agreements, $18.4 million of bank stock loans and $14.1 million of subordinated debentures.
- Cash and cash equivalents were $47.7 million, compared with $52.2 million at December 31, 2017. The company reported $235.3 million of additional FHLB borrowing capacity based on qualifying collateral and FHLB stock.
- The allowance for loan losses was $10.1 million, or 0.42% of gross loans, compared with $8.5 million, or 0.40%, at year-end. Six-month net charge-offs were $0.3 million.
- Nonperforming assets were $45.9 million, or 1.24% of total assets, down from $48.2 million, or 1.52%, at December 31, 2017. Classified loans declined to $54.9 million from $61.4 million.
- Equity was $433.3 million, up 15.8% from year-end. Equity Bank was categorized as well capitalized; its June 30 total risk-based capital ratio was 11.99%, Tier 1 risk-based ratio was 11.61%, common equity Tier 1 ratio was 11.61% and Tier 1 leverage ratio was 9.33%.
Six-month cash flow from operating activities was a use of $10.7 million, investing activities used $89.8 million and financing activities provided $95.9 million, producing a $4.5 million decrease in cash. The company stated that expected funding needs could be met through operating cash flows, loan and securities maturities, core deposits, FHLB advances and other borrowing relationships.
Material changes versus prior comparable periods
- Average interest-earning assets increased substantially, principally from acquired loan portfolios and securities. Average loans increased to $2.22 billion for the six months from $1.46 billion in the prior-year period.
- Interest expense rose 103.7% in the second quarter and 97.7% for the six months, reflecting higher volumes and higher rates on deposits and borrowings. The six-month cost of interest-bearing deposits increased to 0.97% from 0.74%.
- Non-interest expense rose 71.7% in the quarter and 50.2% for the six months. Merger costs, salaries, data processing, occupancy and FDIC insurance were key contributors.
- The reported efficiency ratio, excluding merger expenses and certain other items, improved to 58.4% for the quarter and 59.0% for the six months, compared with 59.8% and 60.7%, respectively.
- Available-for-sale securities increased to $180.2 million and held-to-maturity securities increased to $666.0 million. Accumulated other comprehensive loss increased to $6.0 million, primarily from unrealized securities losses associated with higher interest rates.
- The company issued shares in the KBC and ADBI acquisitions, increasing outstanding Class A shares to approximately 15.8 million at June 30, 2018.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects operating results for the interim period may not be indicative of the full year. The company identifies interest-rate movements, economic downturns, real estate exposure, credit losses, liquidity, acquisition integration, competition, regulatory requirements, capital requirements, cybersecurity and information-technology disruptions as significant risks.
Interest-rate sensitivity modeling indicated that an immediate 100-basis-point increase could reduce projected 12-month net interest income by 4.1% and economic value of equity by 2.8% as of June 30, 2018. A 100-basis-point decrease was modeled to increase net interest income by 2.4% and economic value of equity by 0.5%.
- The company recorded $5.8 million of merger expense for the six months, primarily related to KBC and ADBI.
- Goodwill and core deposit intangibles increased substantially following acquisitions; goodwill was $125.5 million and core deposit intangibles were $19.8 million at June 30, 2018.
- A CitiMortgage lawsuit remains outstanding. A January 2018 judgment held Equity Bank liable with respect to six loans; Citi appealed. The filing states that the potential damages were $2.7 million plus interest and that a $477 thousand loss contingency had been recorded at December 31, 2017.
- The company adopted ASC 606 and other accounting updates in 2018. It is evaluating the future impact of the current expected credit loss standard, which becomes effective in 2020; the impact was not yet known.
- Management stated that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan and deposit growth from KBC and ADBI can be retained while controlling funding costs and integration expenses.
- The sustainability of the 3.92% six-month net interest margin as deposit and borrowing rates rise.
- Commercial real estate concentration, collateral values, classified loans, nonaccrual loans and the adequacy of the $10.1 million allowance.
- The effect of higher FHLB borrowings and the $18.4 million bank stock loan on liquidity, capital and interest-rate sensitivity.
- Final purchase-accounting adjustments, goodwill and core deposit intangible balances for the KBC and ADBI acquisitions.
- The outcome and potential exposure from the CitiMortgage litigation and any additional mortgage repurchase or indemnification claims.
- Regulatory approval, timing, consideration and integration costs related to the planned City Bank and Trust acquisition.