Equity Bancshares, Inc. — 2016 Q2 Form 10-Q Summary
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, real estate and other banking services primarily in Kansas and Missouri through 29 branches. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the comparable 2015 periods and December 31, 2015 balance-sheet data.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|
| Net interest income | $12.2 million | $11.5 million | $25.0 million | $22.5 million |
| Provision for loan losses | $0.5 million | $0.6 million | $1.3 million | $1.3 million |
| Non-interest income | $2.5 million | $2.0 million | $5.2 million | $4.4 million |
| Non-interest expense | $9.9 million | $9.0 million | $19.6 million | $18.0 million |
| Net income | $2.8 million | $2.6 million | $6.3 million | $5.0 million |
| Diluted EPS | $0.34 | $0.40 | $0.75 | $0.78 |
| Net interest margin | 3.18% | 3.89% | 3.25% | 4.01% |
- Q2 net income allocable to common stockholders increased 12.7% to $2.8 million; six-month income increased 27.6% to $6.3 million.
- Q2 revenue growth reflected higher net interest income and non-interest income, partly offset by a 10.1% increase in non-interest expense.
- Annualized Q2 return on average assets was 0.69%, return on average equity was 7.32%, and management’s non-GAAP efficiency ratio was 68.15%.
- Net interest margin declined primarily because asset yields fell in a low-rate environment and funding costs increased. Management estimated Q2 margin would have been approximately 3.48% excluding the temporary FHLB-funded spread opportunity.
Financial condition, liquidity and capital
| Balance-sheet item | June 30, 2016 | December 31, 2015 | Change |
|---|
| Total assets | $1.545 billion | $1.586 billion | Down 2.6% |
| Gross loans held for investment | $980.1 million | $960.4 million | Up 2.1% |
| Net loans | $974.1 million | $954.8 million | Up 2.0% |
| Total deposits | $1.197 billion | $1.216 billion | Down 1.6% |
| Cash and cash equivalents | $46.2 million | $56.8 million | Down $10.6 million |
| Stockholders’ equity | $158.2 million | $167.2 million | Down 5.4% |
- Investment securities decreased by approximately $48.9 million, while net loans increased by $19.2 million.
- Six-month cash flow from operating activities was $7.3 million and from investing activities was $32.2 million; financing activities used $50.1 million, producing a $10.6 million decline in cash and cash equivalents.
- Financing uses included repayment of the $18.6 million bank stock loan and redemption of $16.4 million of Series C preferred stock. No bank stock loan balance remained at June 30, 2016.
- Federal Home Loan Bank advances were $147.6 million at a weighted-average rate of 0.54%; management reported additional borrowing capacity of approximately $149.8 million based on collateral and FHLB stock.
- Equity Bank was categorized as well capitalized. Its total risk-based capital ratio was 13.22%, common equity Tier 1 ratio was 12.67%, and Tier 1 leverage ratio was 8.49% at June 30, 2016.
Material changes versus prior periods
- Average loans grew substantially, increasing interest income, but the average loan yield declined to 4.89% in Q2 2016 from 5.58% in Q2 2015.
- Interest expense rose 45.6% in Q2 and 47.9% for the first six months, reflecting higher average interest-bearing liabilities and deposit rates.
- Non-interest income increased 19.7% in Q2 and 15.9% year to date, led by service charges and debit-card income. First Independence acquisition accounts contributed materially to these increases.
- Non-interest expense increased 10.1% in Q2 and 8.8% year to date, including incremental costs from four First Independence branches, higher salaries, data processing, professional fees and FDIC insurance.
- Credit performance improved: Q2 net charge-offs declined to $482 thousand from $1.5 million, and six-month net charge-offs declined to $731 thousand from $1.7 million.
- Nonperforming assets declined to $12.8 million, or 0.83% of assets, from $14.0 million, or 0.89%, at year-end. Classified loans declined to $12.2 million from $15.4 million.
- The allowance for loan losses increased to $6.0 million, or 0.62% of total loans, from $5.5 million, or 0.57%.
Outlook, risks, contingencies and unusual items
- The filing does not provide formal quantitative earnings or revenue guidance. Management stated that the FHLB-funded spread opportunity is not expected to be part of core earnings or the long-term strategy and can be reduced or terminated daily.
- On July 14, 2016, after quarter-end, the Company agreed to acquire Community First Bancshares, Inc., parent of Community First Bank, which operates five Arkansas branches. Closing was expected in the fourth quarter of 2016, subject to regulatory and shareholder approvals.
- Equity Bank is defending a CitiMortgage lawsuit alleging breach of mortgage-loan repurchase obligations and seeking $2.7 million plus interest. Management considered an unfavorable outcome possible but not probable and could not reasonably estimate a loss.
- The Company identified potential exposure to future mortgage repurchase or indemnification demands involving loan aggregators and government-sponsored entities, although the amount and outcome are uncertain.
- Principal risks include economic deterioration in Kansas and Missouri, real-estate concentration, interest-rate volatility, credit losses, allowance adequacy, liquidity and deposit outflows, acquisition integration, regulatory capital requirements, competition, cybersecurity and information-technology disruptions.
- The Company recorded a $415 thousand other-than-temporary impairment loss related to AgriBank subordinated notes during Q2. Securities transactions produced a $59 thousand net gain in Q2 and a $479 thousand gain year to date.
- New accounting standards, including the current expected credit loss model effective in 2020, were under evaluation and may increase the timing or amount of credit-loss recognition.
Important facts for investors to verify
- Whether loan growth and non-interest income remain durable after separating acquisition-related benefits and securities gains.
- The sustainability of net interest margin in light of declining asset yields, higher deposit costs and reliance on FHLB funding.
- Allowance adequacy and future credit performance, particularly for commercial and real-estate loans and the sizable loan commitments.
- Liquidity sensitivity to deposit declines and the availability, collateral requirements and cost of FHLB borrowings.
- Regulatory and shareholder approvals, purchase accounting and integration costs associated with the Community First transaction.
- The potential financial and reputational impact of the CitiMortgage litigation and any future mortgage repurchase claims.
- The filing’s non-GAAP measures, including efficiency ratio, tangible common equity and tangible book value, should be reconciled to GAAP measures before comparison with other banks.
