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, provides commercial and consumer banking services through 29 branches in Kansas and Missouri. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015. The company reported approximately $1.41 billion of assets, $850.0 million of net loans held for investment, $1.03 billion of deposits and $126.1 million of stockholders’ equity at quarter-end.
Key financial metrics
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|---|---|
| Net interest income | $11.4 million | $10.2 million | $33.7 million | $30.7 million |
| Provision for loan losses | $0.5 million | $0.3 million | $1.9 million | $1.2 million |
| Non-interest income | $2.2 million | $2.9 million | $7.0 million | $7.1 million |
| Non-interest expense | $9.0 million | $9.3 million | $27.2 million | $26.2 million |
| Net income | $2.7 million | $2.4 million | $7.7 million | $7.2 million |
| Net income allocable to common stockholders | $2.7 million | $2.3 million | $7.6 million | $6.5 million |
| Diluted EPS | $0.43 | $0.38 | $1.21 | $1.02 |
| Net interest margin | 3.46% | 3.81% | 3.79% | 3.92% |
| Efficiency ratio | 65.5% | 74.3% | 66.4% | 70.7% |
At September 30, 2015, total assets were $1.414 billion, gross loans were $855.1 million, investment securities were $413.6 million, deposits were $1.028 billion and total borrowings were approximately $241.3 million. Cash and cash equivalents were $23.2 million. The allowance for loan losses was $5.0 million, or 0.59% of loans.
Regulatory capital remained above minimum requirements. Equity Bank was classified as well capitalized, with total risk-based capital of 12.53%, Tier 1 risk-based capital of 12.03%, common equity Tier 1 capital of 12.03% and Tier 1 leverage capital of 8.62%.
Material changes versus comparable periods
- Third-quarter net income increased 12.5% and net income allocable to common stockholders increased 15.5% year over year. Nine-month net income increased 7.5%, while common-stockholder income increased 16.4%.
- Net interest income increased 11.2% in the quarter and 9.8% for the nine-month period, primarily from loan and earning-asset growth. Average loans increased to $830.7 million in the quarter and $780.2 million for the nine months.
- Net interest margin declined 35 basis points in the quarter and 13 basis points for the nine months, reflecting lower loan yields, increased securities holdings, greater use of the FHLB funding line and a temporary spread strategy involving borrowed funds invested in federal funds.
- Gross loans increased 17.9% from December 31, 2014, led by commercial and industrial loans, residential real estate loans and real estate construction loans. Commercial and industrial loans included $31.8 million of broadly syndicated shared national credits and $20.0 million of mortgage finance loan participations.
- Deposits increased 4.7% from year-end 2014, primarily through growth in time deposits and savings and money market deposits. FHLB advances increased substantially, from $21.0 million at year-end to $190.8 million at September 30, 2015.
- Non-interest income declined 23.2% in the quarter because the prior-year period included a $631,000 gain on available-for-sale securities. Nine-month non-interest income declined 1.5%, despite higher debit-card and mortgage-banking income.
- Non-interest expense declined 3.2% in the quarter but increased 3.7% for the nine months. The nine-month increase included a $316,000 loss on early extinguishment of FHLB term advances and $77,000 of merger expenses.
- Net charge-offs increased to $1.1 million in the quarter and $2.8 million for the nine months, compared with $295,000 and $707,000, respectively, in the prior comparable periods. Nonperforming assets nevertheless declined to $13.0 million, or 0.92% of assets, from $15.6 million, or 1.33%, at December 31, 2014.
Outlook, commentary, risks and unusual items
Management emphasized continued loan growth, deposit development and use of FHLB borrowing to fund lending and investment activity. The temporary FHLB-funded federal-funds investment spread was approximately 25 basis points and was not expected to be part of core earnings or the long-term strategy.
On October 9, 2015, the company completed its acquisition of First Independence Corporation and First Federal Savings & Loan of Independence for approximately $14.7 million in cash. The acquired institution had estimated assets of $134.0 million, including $90.0 million of loans and $29.4 million of securities, and estimated liabilities of $119.4 million. Final purchase accounting valuations were not yet complete.
On November 16, 2015, the company completed an initial public offering. Gross proceeds paid to the company were approximately $43.7 million, with expected net proceeds of approximately $39.2 million. Management planned to use the proceeds for operating needs, redemption of Series C preferred stock and repayment of the $19.0 million bank stock loan.
Interest-rate risk was significant. Management’s modeling indicated that an immediate 100-basis-point increase in rates could reduce projected 12-month net interest income by 3.1% and economic value of equity by 2.2%; a 300-basis-point increase could reduce them by 11.0% and 22.9%, respectively. The company also faced credit risk from its concentration in commercial and real estate lending, particularly in Kansas and Missouri.
Other disclosed risks included economic and real-estate downturns, deterioration in borrower credit quality, allowance adequacy, liquidity constraints, deposit concentration, competition, regulatory capital requirements, acquisition integration, cybersecurity and information-technology disruptions, adverse weather, and potential mortgage-loan repurchase claims. Equity Bank was defending a CitiMortgage lawsuit alleging breach of loan repurchase obligations, with claimed damages of $2.7 million plus interest; management stated that an unfavorable outcome was not considered probable. A separate U.S. Bank dispute was settled in June 2015.
Important facts investors should verify
- Whether post-quarter-end IPO proceeds were used as planned to redeem Series C preferred stock and repay the bank stock loan.
- Final purchase accounting for the First Independence acquisition, including goodwill, core deposit intangibles, acquired loans and assumed FHLB advances.
- Whether elevated charge-offs and the lower allowance ratio remain consistent with subsequent credit performance.
- The sustainability of loan growth, particularly shared national credits, mortgage finance participations and purchased residential mortgage pools.
- The effect of heavier FHLB borrowing and deposit repricing on liquidity, funding costs and net interest margin.
- Progress and potential exposure in the CitiMortgage litigation and any future mortgage-loan repurchase or indemnification claims.
- The impact of interest-rate changes on projected earnings and economic value of equity, recognizing that the filing’s sensitivity analysis depends on management assumptions.
- The effect of the temporary spread strategy, merger expenses, debt-extinguishment loss and other nonrecurring items on reported versus recurring earnings.