Equity Bancshares, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company. Equity Bank operated 51 full-service banking locations in Arkansas, Kansas, Missouri and Oklahoma as of March 31, 2021. The filing covers the unaudited three months ended March 31, 2021, with comparison to the three months ended March 31, 2020 and balance-sheet comparison to December 31, 2020.
Financial performance and key metrics
| Metric | Q1 2021 | Comparable period / prior period |
|---|---|---|
| Net income | $15.1 million | $1.3 million in Q1 2020 |
| Diluted EPS | $1.02 | $0.08 in Q1 2020 |
| Net interest income | $31.8 million | $32.1 million in Q1 2020 |
| Net interest margin | 3.31% | 3.67% in Q1 2020 |
| Provision for credit losses | $(5.8) million reversal | $9.9 million provision in Q1 2020 |
| Non-interest income | $6.7 million | $5.3 million in Q1 2020 |
| Non-interest expense | $24.9 million | $25.8 million in Q1 2020 |
| Efficiency ratio | 64.2% | 68.9% in Q1 2020 |
| Return on average assets | 1.48% | 0.13% in Q1 2020 |
| Return on average equity | 15.45% | 1.05% in Q1 2020 |
| Operating cash flow | $23.7 million | $8.5 million in Q1 2020 |
At March 31, 2021, total assets were $4.20 billion, net loans were $2.74 billion, total deposits were $3.63 billion and stockholders’ equity was $397.8 million. Gross loans held for investment increased 7.9% from year-end 2020 to $2.80 billion. Available-for-sale securities increased to $998.1 million from $871.8 million.
The allowance for credit losses was $55.5 million, or 1.99% of total loans, compared with $33.7 million, or 1.30%, at December 31, 2020. Net charge-offs were $65 thousand, equal to an annualized 0.01% of average loans.
Cash and cash equivalents declined to $136.7 million from $280.7 million at year-end. Investing activities used $353.0 million, principally for purchases of securities, loan growth, mortgage-loan purchases and $25.0 million of bank-owned life insurance. Financing activities provided $185.2 million, primarily from a $186.9 million increase in deposits.
Borrowings included $40.3 million of retail repurchase agreements, $9.9 million of Federal Home Loan Bank advances and $87.8 million of subordinated debt. Equity Bank had $719.8 million of additional FHLB borrowing capacity and $275.3 million of Federal Reserve discount-window borrowing capacity, subject to collateral and other requirements.
Material changes versus comparable periods
- Net income increased $13.8 million year over year, driven mainly by the $15.7 million swing from a provision for credit losses to a reversal, higher non-interest income and lower operating expense.
- Net interest income declined $336 thousand and net interest margin fell 36 basis points, as asset yields declined faster than funding costs. Loan yield decreased to 4.59% from 5.47%, partly because of low-yielding PPP loans, while the cost of interest-bearing deposits decreased to 0.36% from 1.09%.
- Average loan balances increased to $2.74 billion from $2.53 billion. PPP loans totaled $414.1 million across 3,772 loans at March 31, 2021.
- Non-interest income increased 26.5%, including higher mortgage banking, debit-card and derivative-related income, partly offset by lower service charges.
- Non-performing assets increased to $70.1 million, or 1.67% of assets, from $54.6 million, or 1.36%, at year-end. Nonaccrual loans increased to $57.5 million from $43.7 million.
- Deposits increased $186.9 million, or 5.4%, with non-interest-bearing demand deposits rising to $972.4 million from $791.6 million.
- The Company adopted CECL on January 1, 2021. Adoption increased the loan allowance by $15.7 million, added $838 thousand for unfunded commitments, reclassified $12.0 million of purchased-credit-impaired discount to the allowance, and reduced retained earnings by $12.4 million.
- Accumulated other comprehensive income declined $7.8 million during the quarter because of after-tax unrealized losses on available-for-sale securities.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management cited improving economic inputs and historical loss experience as the primary reasons for the first-quarter credit-loss reversal, but stated that future allowance requirements remain sensitive to economic conditions, asset quality and COVID-19 developments.
COVID-19 remains a material uncertainty. At March 31, 2021, 38 loans totaling $73.9 million were subject to payment deferrals, including $26.3 million of hospitality exposure. Hospitality exposure was $296.4 million, or 12.4% of loans excluding PPP loans; aircraft-manufacturing exposure was $39.4 million, or 1.7%.
Nonperforming assets and classified loans increased, although management stated that the allowance was adequate. Loans in the COVID-19 deferral program were not automatically classified or treated as troubled debt restructurings under applicable guidance.
The Company completed valuation work related to the 2020 Almena State Bank acquisition, reducing the previously recorded acquisition gain by $78 thousand and recording $152 thousand of merger expense in Q1 2021. It also repurchased 233,012 shares for $5.9 million at an average price of $25.35, leaving 253,757 shares authorized for repurchase.
Key risks include credit deterioration, real-estate collateral values, interest-rate movements, liquidity and deposit outflows, COVID-19-related borrower stress, PPP fraud or servicing issues, LIBOR transition, cybersecurity and operational disruptions, regulatory capital requirements, acquisition integration and litigation. Equity Bank was classified as well capitalized, with a total risk-based capital ratio of 15.69% and a Tier 1 leverage ratio of 9.63%.
Equity Bank is defending a proposed class-action lawsuit alleging improperly collected overdraft fees. The filing states that the outcome cannot currently be reasonably estimated.
Important facts for investors to verify
- Whether the Q1 credit-loss reversal is sustainable or primarily reflects temporary improvement in CECL economic assumptions.
- Performance of the $73.9 million of COVID-19-deferred loans, particularly the hospitality portfolio.
- Trends in nonaccrual loans, classified loans, nonperforming assets and collateral values.
- Future net interest margin pressure from PPP loans, low interest rates and the Company’s modeled sensitivity to rate changes.
- Deposit stability, brokered-deposit levels and available borrowing capacity relative to liquidity needs.
- Impact of the CECL adoption adjustment and potential future allowance changes on capital and earnings.
- Progress and cost of integrating the Almena acquisition, as well as the outcome of the overdraft-fee litigation.