Equity Bancshares, Inc. 2020 Form 10-K 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, mortgage, wealth-management and related banking services through 51 branches in Arkansas, Kansas, Missouri and Oklahoma. This Form 10-K covers the fiscal year ended December 31, 2020. The filing also provides unaudited fourth-quarter information.
Equity Bank completed the FDIC-facilitated acquisition of two Almena State Bank locations on October 23, 2020, adding approximately $66.9 million of assets, $62.5 million of deposits and $31.4 million of loans.
Financial performance and key metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $132.7 million | $125.9 million |
| Provision for loan losses | $24.3 million | $18.4 million |
| Total non-interest income | $26.0 million | $25.0 million |
| Total non-interest expense | $209.0 million | $99.6 million |
| Goodwill impairment | $104.8 million | None |
| Net income (loss) | $(75.0) million | $25.6 million |
| Diluted EPS | $(4.97) | $1.61 |
| Net interest margin | 3.63% | 3.48% |
| Efficiency ratio | 66.36% | 65.45% |
| Return on average assets | (1.87)% | 0.64% |
| Return on average equity | (16.14)% | 5.52% |
Net interest income increased 5.4%, primarily because average earning-asset volumes and loan fees increased while funding costs declined. Interest income was pressured by lower market rates and the inclusion of low-yielding PPP loans.
At December 31, 2020, total assets were $4.01 billion, deposits were $3.45 billion, net loans were $2.56 billion and stockholders’ equity was $407.6 million. Cash and cash equivalents were $280.7 million, compared with $89.3 million at year-end 2019.
Gross loans held for investment increased 1.4% to $2.59 billion. Commercial real estate loans were $1.19 billion, commercial and industrial loans were $734.5 million, and residential real estate loans were $382.0 million. The allowance for loan losses increased to $33.7 million, or 1.30% of loans, from $12.2 million, or 0.48%, in 2019.
Total deposits increased 12.5% to $3.45 billion, including a significant increase in non-interest-bearing demand deposits. Borrowings declined materially as Federal Home Loan Bank advances fell to $10.1 million from $324.4 million. The Company issued $75.0 million of 7.00% fixed-to-floating subordinated notes due 2030; carrying value of subordinated debt was $87.7 million at year-end.
Cash and cash equivalents increased by $191.4 million during 2020. Operating activities provided $43.6 million, investing activities provided $96.0 million and financing activities provided $51.8 million. Financing cash inflows primarily reflected deposit growth and subordinated-note proceeds, partly offset by debt repayments and $19.3 million of treasury-stock purchases.
Regulatory capital remained strong. At December 31, 2020, the Company reported a 17.35% total risk-based capital ratio, 12.82% CET1 ratio and 9.30% Tier 1 leverage ratio. Equity Bank reported a 15.73% total risk-based capital ratio, 14.48% CET1 ratio and 10.07% Tier 1 leverage ratio and was classified as well capitalized.
Material changes versus the prior comparable period
- Net loss of $75.0 million replaced 2019 net income of $25.6 million, primarily because of the $104.8 million non-cash goodwill impairment charge recorded in the third quarter.
- Goodwill declined to $31.6 million from $136.4 million. Management concluded that further impairment was not warranted at December 31, 2020, but the remaining balance could be at risk if performance, stock price or market conditions deteriorate.
- Provision expense increased $5.9 million to $24.3 million as management raised qualitative loss factors in response to COVID-19-related economic uncertainty.
- Net charge-offs declined to $2.8 million from $17.6 million in 2019, when a $14.5 million provision and $15.2 million of net charge-offs related to one credit relationship affected results.
- Nonperforming assets increased to $54.6 million, or 1.36% of assets, from $46.9 million, or 1.19%. Potential problem loans increased to $52.3 million from $27.2 million.
- The securities portfolio was repositioned: all $612.3 million of held-to-maturity securities were transferred to available-for-sale status on September 1, 2020. Available-for-sale securities totaled $871.8 million at year-end.
- Tangible book value per common share increased to $24.68 from $20.75 despite the GAAP loss, partly reflecting the goodwill write-down and accumulated other comprehensive income.
- The Company repurchased 313,231 shares during November and December 2020 at an average price of $20.82, leaving 486,769 shares authorized for repurchase under the program.
Guidance, outlook, management commentary and risks
The filing does not provide formal earnings or revenue guidance. Management expects to continue pursuing organic commercial-loan and deposit growth, selective community-bank acquisitions and branch-network optimization, while emphasizing credit discipline and integration capabilities.
COVID-19 remained the principal near-term uncertainty. At December 31, 2020, 28 loans totaling $60.9 million remained subject to payment deferrals. PPP loans totaled $253.7 million across 1,612 loans, and $14.1 million was outstanding under the Main Street Lending Program. Hospitality exposure was approximately $264.9 million, or 11.3% of loans excluding PPP loans; aircraft-manufacturing exposure was approximately $41.7 million.
The Company deferred adoption of the CECL credit-loss standard until January 1, 2021. Management estimated that adoption could increase the allowance for credit losses by $30 million to $40 million, increase the deferred tax asset by $4.0 million to $6.4 million and reduce retained earnings by $12.0 million to $19.6 million. The filing states that the ultimate impact remained dependent on credit quality, macroeconomic forecasts, portfolio composition and management judgments.
Principal risks include deterioration in commercial real estate and commercial credit, geographic concentration in four Midwestern states, COVID-19-related borrower stress, deposit concentration, interest-rate and net-interest-margin sensitivity, LIBOR transition, cybersecurity and third-party technology risks, regulatory capital requirements, acquisition and integration execution, goodwill impairment and liquidity at the parent-company level.
Equity Bank’s negative retained earnings balance, primarily related to the goodwill impairment, means regulatory approval would be required for the bank to pay a dividend to the holding company. The Company has not historically paid common-stock dividends and does not expect to do so in the foreseeable future. A Missouri federal lawsuit alleging improperly collected overdraft fees was filed in November 2020; the Company stated that it could not reasonably estimate the outcome.
Most important facts for an investor to verify
- Whether post-CECL allowance levels, credit costs, nonperforming assets and loan-deferral balances increased materially after January 1, 2021.
- Whether the remaining $31.6 million of goodwill is impaired in subsequent periods.
- Performance of the hospitality portfolio and other COVID-19-sensitive exposures after borrower accommodations expire.
- Actual parent-company liquidity and access to dividends from Equity Bank, including compliance with debt covenants and regulatory restrictions.
- Trends in deposits, deposit pricing, non-interest-bearing balances and reliance on wholesale funding.
- Whether commercial real estate concentrations, classified loans and the $52.3 million of potential problem loans translate into higher charge-offs.
- Results and costs of the Almena acquisition and any additional acquisitions or branch transactions.
- Resolution and potential financial exposure from the overdraft-fee class-action litigation.