Business Context and Reporting Period
Equity Bancshares, Inc., headquartered in Wichita, Kansas, is a bank holding company whose subsidiary, Equity Bank, provides commercial, consumer, real estate, agricultural, mortgage and related financial services through 51 locations in Arkansas, Kansas, Missouri and Oklahoma. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021. Dollar amounts are in thousands, except per-share data, unless otherwise stated.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 |
|---|---|---|---|---|
| Net interest income | $39.0 million | $32.1 million | $105.4 million | $97.1 million |
| Provision for credit losses | $1.1 million | $0.8 million | $(6.4) million reversal | $23.3 million |
| Non-interest income | $7.8 million | $6.5 million | $23.6 million | $17.5 million |
| Non-interest expense | $30.7 million | $130.8 million | $81.4 million | $180.5 million |
| Net income attributable to common stockholders | $11.8 million | $(90.4) million | $42.0 million | $(87.5) million |
| Diluted earnings per share | $0.80 | $(6.01) | $2.86 | $(5.75) |
| Net interest margin | 3.86% | 3.47% | 3.56% | 3.54% |
- Quarterly net income improved by $102.2 million year over year, principally because the prior-year quarter included a $104.8 million goodwill impairment charge. Nine-month net income improved by $129.5 million for the same primary reason, supplemented by lower credit-loss expense and higher revenue.
- Quarterly net interest income benefited from approximately $5.5 million of PPP loan forgiveness fees. Nine-month loan fees increased by approximately $12.2 million year over year.
- Non-interest income increased 20.8% in the quarter and 34.9% for the nine months, supported by service charges, debit-card income, bank-owned life insurance income, trust income, insurance commissions, acquisition-related gains and securities gains.
- Q3 annualized ROAA was 1.09%, ROAE was 11.05% and ROATCE was 13.27%. The reported Q3 efficiency ratio was 56.65%, a decrease from 67.38% in the prior-year quarter.
Balance Sheet, Liquidity and Capital
- Total assets were $4.26 billion at September 30, 2021, up $249.9 million, or 6.2%, from December 31, 2020.
- Gross loans held for investment were $2.69 billion, up 3.6% from year-end; net loans were $2.63 billion. Real estate loans represented 72.2% of gross loans.
- Available-for-sale securities increased to $1.16 billion from $871.8 million. The portfolio had $6.1 million of gross unrealized losses, which management attributed primarily to interest-rate movements rather than credit deterioration.
- Deposits increased 6.2% to $3.66 billion. Non-interest-bearing demand deposits increased to $984.4 million, or 26.9% of total deposits.
- Cash and cash equivalents were $142.3 million, compared with $280.7 million at year-end. The decrease primarily reflected securities purchases and loan funding.
- Borrowings totaled approximately $127.2 million, including $39.1 million of retail repurchase agreements and $88.0 million of subordinated debt. All Federal Home Loan Bank term advances were prepaid in July 2021, resulting in a $372 thousand debt-extinguishment loss.
- Nine-month operating cash flow was $79.6 million; investing cash flow was $(414.5) million; financing cash flow was $196.5 million; and the net change in cash was $(138.4) million.
- Equity Bank was categorized as well capitalized. At September 30, 2021, its total risk-based capital ratio was 15.74%, common equity Tier 1 ratio was 14.49% and Tier 1 leverage ratio was 10.13%.
Material Changes Versus Comparable Periods
- The company moved from a net loss in 2020 to profitability in 2021, largely because the 2020 results included the $104.8 million goodwill impairment charge.
- The provision for credit losses changed from $23.3 million of expense in the first nine months of 2020 to a $6.4 million reversal in 2021, reflecting improved economic inputs, lower specific reserves and improved loss experience under the CECL model.
- CECL adoption on January 1, 2021 increased the loan allowance by $15.7 million, increased the unfunded-commitment allowance by $0.8 million, reclassified $10.4 million of purchased-credit-impaired discount into the allowance and reduced retained earnings by $12.4 million.
- Loan composition shifted toward real estate: commercial real estate increased 6.2%, residential real estate increased 28.5%, and real estate construction increased 29.3%, while commercial and industrial loans declined 22.5%, partly reflecting PPP forgiveness.
- Nonperforming assets increased to $74.3 million, or 1.74% of assets, from $54.6 million, or 1.36%, at year-end. Nonaccrual loans increased to $65.0 million from $43.7 million.
- The allowance for credit losses increased to $52.8 million, or 1.96% of gross loans, from $33.7 million, or 1.30%, at year-end. Nonperforming aircraft-manufacturing loans totaling $20.4 million were moved to nonaccrual and classified as substandard.
Outlook, Commentary, Risks and Unusual Items
- No specific quantitative earnings or revenue guidance is provided. Management states that operating results for the nine months are not necessarily indicative of full-year results.
- COVID-19 remains a material uncertainty. At September 30, 2021, 27 loans totaling $59.5 million remained subject to COVID-related payment deferrals, compared with $60.9 million at year-end 2020. Hospitality exposure was approximately $306.2 million, including $20.5 million in deferral, and aircraft-manufacturing exposure was $36.0 million.
- Management believes the allowance is adequate, but acknowledges that worsening economic conditions, real estate values, borrower performance or industry conditions could require additional provisions and materially affect earnings.
- PPP loans totaled $95.8 million across 443 loans, and Main Street Lending Program balances totaled $14.2 million. PPP loans generally earn 1.0% and are understood by the company to be fully government guaranteed.
- On October 1, 2021, the company completed its acquisition of American State Bancshares, Inc. and its bank subsidiary. The acquired bank reported approximately $788.5 million of assets, $452.7 million of loans, $177.2 million of securities and $659.1 million of deposits at September 30, 2021. Results began contributing on October 2, 2021; goodwill and core deposit intangibles were expected to be recorded.
- The company announced a planned acquisition of three bank locations in St. Joseph, Missouri, subject to regulatory approval, and a planned sale of three Kansas locations to United Bank & Trust, expected in the second quarter of 2022.
- The company authorized an additional repurchase program for up to 1.0 million shares beginning October 29, 2021. During Q3, it repurchased 57,239 shares for $1.8 million; 123,448 shares remained available under the prior program at September 30.
- The company faces a putative class-action lawsuit alleging improperly collected overdraft fees. Management believes the claim is without merit, but the outcome cannot currently be estimated.
- Interest-rate sensitivity modeling indicated a potential 4.6% decline in twelve-month net interest income under an immediate 300-basis-point increase and a 5.1% decline under an immediate 100-basis-point decrease. Actual results may differ materially from modeled results.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Determine whether the improved earnings profile remains sustainable after the unusually significant 2020 goodwill impairment comparison and after PPP-related fee income subsides.
- Review the allowance methodology, including CECL qualitative adjustments, and monitor whether nonperforming loans and nonperforming assets continue to rise.
- Assess credit concentration and collateral risk in hospitality, commercial real estate, aircraft manufacturing and other pandemic-sensitive sectors.
- Evaluate the liquidity impact of securities purchases, loan commitments of $592.0 million, standby letters of credit of $12.2 million and the reduction in cash balances.
- Review purchase accounting, goodwill, core deposit intangibles, integration costs and pro forma financial effects of the American State Bancshares acquisition.
- Confirm the timing, regulatory approvals and financial effects of the announced branch acquisitions and divestitures.
- Consider exposure to interest-rate changes, LIBOR transition, securities duration and the company’s modeled sensitivity of net interest income and economic value of equity.
- Review the overdraft-fee litigation, contractual obligations and other contingencies because the filing does not provide a reasonably estimable potential loss.