Equity Bancshares, Inc. 2019 Q1 Form 10-Q Summary
Business context and reporting period
Equity Bancshares, Inc., headquartered in Wichita, Kansas, is the bank holding company for Equity Bank, which provides banking services through 52 full-service locations in Arkansas, Kansas, Missouri and Oklahoma. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparisons to March 31, 2018 and December 31, 2018. Dollar amounts are in thousands unless otherwise noted.
On February 8, 2019, Equity Bank acquired deposits and selected assets and liabilities of three MidFirst Bank branches in Oklahoma. The acquisition added approximately $98.5 million of deposits, generated $4.7 million of goodwill and contributed results beginning February 9, 2019.
Key financial metrics
| Metric | Q1 2019 | Comparable period |
|---|---|---|
| Interest and dividend income | $43.2 million | $34.1 million in Q1 2018 |
| Net interest income | $30.6 million | $27.8 million in Q1 2018 |
| Provision for loan losses | $15.6 million | $1.2 million in Q1 2018 |
| Non-interest income | $5.3 million | $4.3 million in Q1 2018 |
| Non-interest expense | $25.5 million | $19.6 million in Q1 2018 |
| Net income (loss) | $(4.1) million | $8.7 million in Q1 2018 |
| Diluted earnings (loss) per share | $(0.26) | $0.58 in Q1 2018 |
| Net interest margin | 3.49% | 3.91% in Q1 2018 |
| Efficiency ratio | 69.26% | 59.59% in Q1 2018 |
| Return on average assets | (0.42)% annualized | 1.11% in Q1 2018 |
At March 31, 2019, total assets were $4.07 billion, gross loans held for investment were $2.62 billion, net loans were $2.59 billion, deposits were $3.26 billion and stockholders’ equity was $453.5 million. Cash and cash equivalents were $167.5 million.
Gross loans increased $43.6 million, or 1.7%, from December 31, 2018. The largest loan categories were commercial real estate at $1.04 billion, commercial and industrial at $587.9 million, and residential real estate at $510.1 million. The allowance for loan losses increased to $26.3 million, or 1.01% of gross loans, from $11.5 million, or 0.44%, at year-end.
Total deposits increased $137.4 million, or 4.4%, from year-end, primarily due to the MidFirst acquisition. Federal Home Loan Bank advances declined $119.9 million to $265.0 million. Total borrowings were $331.2 million at March 31, 2019, including $265.0 million of FHLB advances, $43.4 million of repurchase agreements, $8.5 million of bank stock borrowings and $14.3 million of subordinated debentures.
Operating cash flow was $12.8 million. Investing activities provided $56.4 million, including $85.4 million of net cash received in the MidFirst acquisition, while financing activities used $94.6 million, primarily due to FHLB repayments. Cash and cash equivalents declined $25.4 million during the quarter.
Equity Bank remained categorized as well capitalized. At March 31, 2019, Equity Bank reported a total risk-based capital ratio of 11.56%, a Tier 1 risk-based capital ratio of 10.64%, a common equity Tier 1 ratio of 10.64% and a Tier 1 leverage ratio of 8.12%.
Material changes versus prior comparable periods
- Net income declined $12.8 million year over year, primarily because the loan-loss provision increased $14.5 million and non-interest expense increased $5.9 million.
- Management attributed the elevated provision largely to an isolated credit relationship involving two related franchisor borrowers that entered Chapter 11 bankruptcy. A $14.5 million allowance was recorded based on updated expected sale values and financial information.
- Net interest income increased $2.9 million, but net interest margin declined to 3.49% from 3.91% as funding costs rose faster than asset yields. The cost of interest-bearing liabilities increased to 1.71% from 1.06%.
- Non-interest income increased $1.1 million, or 25.2%, driven primarily by higher debit card income and service charges associated with business growth and prior acquisitions.
- Non-interest expense increased 30.1%, reflecting higher salaries and benefits, data processing, professional fees, amortization of core deposit intangibles and costs associated with the expanded branch network.
- Nonperforming assets increased to $77.4 million, or 1.90% of total assets, from $39.6 million, or 0.97%, at December 31, 2018. Nonaccrual loans increased to $71.0 million from $33.2 million.
- Classified loans increased to $95.1 million from $86.1 million, while potential problem loans declined to $24.0 million from $52.9 million.
- The company adopted new lease accounting guidance and recorded $3.3 million of operating lease liabilities and $3.3 million of right-of-use assets. It also adopted guidance on premium amortization for callable debt securities, reducing retained earnings by $1.4 million.
Outlook, risks, contingencies and unusual items
The filing does not provide formal quantitative earnings guidance. Management expects operating results to remain sensitive to interest rates, funding costs, loan demand, credit quality, economic conditions and competition. Management states that first-quarter results are not necessarily indicative of full-year results.
Key risks include economic deterioration in the company’s core markets, exposure to real estate collateral, rising or falling interest rates, competition for deposits, liquidity pressures, inadequate loan-loss reserves, acquisition integration costs, regulatory capital requirements, cybersecurity and technology disruptions, and the impact of adopting the current expected credit loss standard. ASU 2016-13 is scheduled to become effective in the first quarter of 2020; the filing states that its financial impact was not yet known.
Equity Bank is defending a CitiMortgage lawsuit involving alleged loan repurchase obligations. The claimed damages are $2.7 million plus interest; management describes the outcome as reasonably possible to result in an unfavorable outcome but continues to contest the matter. The filing also notes possible exposure to similar future mortgage repurchase or indemnification demands, although the amount and outcome are uncertain.
Off-balance-sheet commitments totaled approximately $492.7 million at March 31, 2019, consisting primarily of commitments to extend credit. Standby and performance letters of credit totaled $6.8 million. The company’s bank stock borrowing facility was amended to increase the maximum commitment to $40.0 million and extend its maturity to May 15, 2020.
Interest-rate sensitivity modeling indicated that an immediate 100-basis-point increase could reduce projected twelve-month net interest income by 3.3% and economic value of equity by 2.0%. A 100-basis-point decrease was modeled to increase net interest income by 1.1% but reduce economic value of equity by 2.7%.
After quarter-end, the board authorized repurchases of up to 1.1 million common shares beginning April 29, 2019 and ending October 30, 2020, subject to modification or discontinuation.
Investor verification points
- Verify whether the $14.5 million allowance related to the bankrupt franchisor borrowers proves sufficient and monitor recoveries, collateral values, bankruptcy outcomes and additional charge-offs.
- Track nonaccrual loans, classified loans, nonperforming assets and the allowance coverage ratio in subsequent quarters.
- Assess whether deposit pricing and funding costs continue to compress net interest margin.
- Evaluate the earnings contribution, deposit retention and integration costs of the MidFirst branch acquisition.
- Review capital ratios after any share repurchases, balance-sheet growth or credit deterioration.
- Monitor liquidity, FHLB borrowing capacity and the maturity of short-term funding.
- Assess the potential impact of CECL adoption in 2020 on the allowance, retained earnings and regulatory capital.
- Follow the CitiMortgage litigation and any additional mortgage repurchase or indemnification claims.
- Distinguish GAAP results from management’s non-GAAP measures, including tangible book value, return on tangible common equity and the efficiency ratio.