Equity Bancshares, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose subsidiary, Equity Bank, provides commercial, consumer, mortgage and agricultural banking services through 37 branches in Arkansas, Kansas and Missouri. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons primarily to March 31, 2016 and December 31, 2016.
On March 10, 2017, the Company acquired Prairie State Bancshares, Inc. of Hoxie, Kansas. Prairie added three branches, and its results were included beginning March 11, 2017. The transaction included $15.2 million of common stock and $12.3 million of cash consideration and generated preliminary goodwill of $5.6 million.
Key financial metrics
| Metric | Q1 2017 | Comparable period or date |
|---|---|---|
| Net income | $4.9 million | $3.4 million in Q1 2016 |
| Net income allocable to common stockholders | $4.9 million | $3.4 million in Q1 2016 |
| Basic / diluted EPS | $0.41 / $0.40 | $0.42 / $0.41 in Q1 2016 |
| Net interest income | $19.9 million | $12.8 million in Q1 2016 |
| Provision for loan losses | $1.1 million | $0.7 million in Q1 2016 |
| Non-interest income | $3.3 million | $2.7 million in Q1 2016 |
| Non-interest expense | $15.2 million | $9.7 million in Q1 2016 |
| Net interest margin | 3.96% | 3.33% in Q1 2016 |
| Annualized ROAA / ROAE | 0.88% / 7.45% | 0.83% / 8.99% in Q1 2016 |
| Total assets | $2.40 billion | $2.19 billion at December 31, 2016 |
| Net loans held for investment | $1.51 billion | $1.38 billion at December 31, 2016 |
| Total deposits | $1.82 billion | $1.63 billion at December 31, 2016 |
| Stockholders’ equity | $279.2 million | $258.0 million at December 31, 2016 |
| Cash and cash equivalents | $35.3 million | $35.1 million at December 31, 2016 |
Cash flow, liquidity, debt and capital
- Operating activities provided $9.8 million of cash. Investing activities used $70.1 million, primarily due to purchases of securities, loan growth and the $6.0 million net cash cost of the Prairie acquisition. Financing activities provided $60.5 million, mainly from a $65.2 million increase in deposits.
- Federal Home Loan Bank advances totaled $257.1 million at March 31, 2017, with a weighted-average rate of 0.97%. The Company also had $17.7 million of retail repurchase agreements and $13.8 million of subordinated debentures.
- The Company had no outstanding balance under its $30 million bank stock borrowing facility, which was extended to March 12, 2018. Management stated that applicable covenants were being met.
- Equity Bank was categorized as well capitalized. At March 31, 2017, its total risk-based capital ratio was 13.12%, common equity Tier 1 ratio was 12.70% and Tier 1 leverage ratio was 9.90%.
- Available liquidity included $35.3 million of cash and cash equivalents, securities cash flows, core deposits and additional FHLB borrowing capacity of approximately $184.6 million.
Material changes versus prior comparable periods
- Net income increased 41.4% year over year, while diluted EPS declined to $0.40 from $0.41 because of higher share count following acquisitions and other equity issuance.
- Net interest income increased 55.9% to $19.9 million. Average interest-earning assets increased by $493.4 million, and the average loan yield increased to 5.61% from 5.04%.
- Loan balances increased 9.8% from year-end to $1.52 billion, including substantial Prairie-related growth in agricultural and agricultural real estate lending.
- Deposits increased 11.7% from year-end. Non-interest-bearing demand deposits increased 32.7%, savings and money market deposits increased 24.0%, and time deposits increased 12.4%.
- Non-interest expense increased 57.1%, including $926 thousand of Prairie merger costs and higher salaries, occupancy, data processing and advertising expenses. Management identified $1.8 million of incremental operating expenses from the Community First acquisition and $112 thousand from Prairie.
- The allowance for loan losses increased to $7.0 million from $6.4 million, while the allowance ratio remained 0.46% of total loans. Net charge-offs rose to $479 thousand from $249 thousand.
- Nonperforming assets increased to $36.4 million, or 1.52% of assets, from $31.3 million, or 1.43%, at year-end. Nonaccrual loans increased to $28.2 million from $22.7 million.
- Classified loans increased to $47.1 million from $32.2 million. Management attributed $8.9 million of the increase to loans acquired in the Prairie transaction.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or balance-sheet guidance. Management stated that operating results for the quarter are not necessarily indicative of full-year results and that liquidity needs are expected to be met through operating cash flow, loan and securities repayments, deposits, FHLB advances and other borrowing relationships.
- The Company adopted ASU 2016-09 effective January 1, 2017. Excess tax benefits from stock option exercises reduced first-quarter tax expense by $207 thousand, increasing net income by the same amount and diluted EPS by approximately $0.02.
- Merger expenses of $926 thousand were recorded for the Prairie acquisition. Purchase accounting also produced significant accretion income; cash-flow disclosures show $1.8 million of net purchase valuation adjustment accretion or amortization.
- The Company is exposed to interest-rate risk. A modeled immediate 300-basis-point increase in rates would reduce projected twelve-month net interest income by 9.2% and economic value of equity by 22.4%; a 100-basis-point decline would reduce projected net interest income by 1.0%.
- Key risks include economic and real estate downturns in core markets, credit deterioration, adequacy of the loan-loss allowance, interest-rate changes, liquidity pressure, acquisition integration costs, regulatory capital requirements, competition, cybersecurity and information-technology disruptions.
- Equity Bank is defending a CitiMortgage lawsuit alleging breach of mortgage-loan repurchase obligations and seeking $2.7 million plus interest. Management believes the matter is not probable to result in an unfavorable outcome, but potential loss cannot currently be estimated clearly.
- The Company also noted possible future mortgage repurchase or indemnification demands from loan aggregators or government-sponsored entities, although no additional claims were outstanding at quarter-end.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the final purchase-accounting allocations and goodwill associated with Prairie, which were preliminary at March 31, 2017.
- Monitor nonaccrual loans, classified loans, potential problem loans and net charge-offs, particularly the increase in credit-risk measures following the Prairie acquisition.
- Assess whether the 3.96% net interest margin is sustainable as deposit costs, FHLB funding costs and interest rates change.
- Evaluate the effect of acquisition-related operating costs and merger integration on future efficiency and earnings.
- Review liquidity availability, collateral requirements and the maturity or repricing profile of FHLB advances and deposits.
- Track the CitiMortgage litigation and any additional mortgage repurchase or indemnification claims.
- Consider the effect of the forthcoming expected-credit-loss standard, ASU 2016-13, on the allowance for loan losses; the filing states that the impact was not yet known.