Business Context and Reporting Period
Equity Bancshares, Inc. is a Wichita, Kansas-based bank holding company whose subsidiary, Equity Bank, operated 52 full-service banking sites in Arkansas, Kansas, Missouri and Oklahoma. The unaudited Form 10-Q covers the three months ended March 31, 2020, with comparative results for the three months ended March 31, 2019 and balance-sheet comparisons to December 31, 2019.
Key Financial Metrics
| Metric | Q1 2020 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $3.944 billion | $3.950 billion at December 31, 2019 |
| Gross loans held for investment | $2.507 billion | $2.557 billion at December 31, 2019 |
| Total deposits | $2.960 billion | $3.064 billion at December 31, 2019 |
| Stockholders’ equity | $477.4 million | $478.1 million at December 31, 2019 |
| Net interest income | $32.1 million | $30.6 million in Q1 2019 |
| Provision for loan losses | $9.9 million | $15.6 million in Q1 2019 |
| Net income | $1.3 million | $(4.1) million in Q1 2019 |
| Basic and diluted EPS | $0.08 | $(0.26) in Q1 2019 |
| Net interest margin | 3.67% | 3.49% in Q1 2019 |
| Efficiency ratio | 68.88% | 69.26% in Q1 2019 |
| Annualized ROAA / ROAE | 0.13% / 1.05% | (0.42)% / (3.59)% in Q1 2019 |
Cash Flow, Liquidity and Debt
- Cash and cash equivalents increased to $142.3 million from $89.3 million at year-end 2019.
- Operating activities provided $8.5 million; investing activities provided $56.4 million; financing activities used $12.0 million.
- Financing cash flows included a $250.0 million FHLB term advance, net FHLB repayments of $184.2 million, $38.4 million of bank stock loan proceeds and $6.9 million of treasury-stock purchases.
- FHLB advances totaled $389.6 million, the bank stock loan totaled $40.0 million, subordinated debentures totaled $14.6 million, and repurchase agreements totaled $37.1 million at March 31, 2020.
- Management reported access to multiple liquidity sources, including core deposits, securities and loan maturities, FHLB advances, federal funds and the Federal Reserve discount window. FHLB collateral supported additional borrowing capacity of approximately $279.6 million.
- The Company and Equity Bank exceeded applicable regulatory capital requirements. Equity Bank’s March 31, 2020 ratios included total risk-based capital of 13.50%, Tier 1 risk-based capital of 12.71%, common equity Tier 1 capital of 12.71% and Tier 1 leverage of 9.39%; the bank remained classified as well capitalized.
Material Changes Versus Prior Comparable Period
- Net income improved by $5.3 million, from a $4.1 million loss to $1.3 million of income. The improvement reflected higher net interest income and a $5.7 million lower provision for loan losses.
- Net interest income increased 4.8% to $32.1 million. Interest expense declined 32.6% to $8.5 million, primarily because deposit and borrowing costs declined faster than asset yields.
- Interest and dividend income decreased 6.1% to $40.6 million, including a 32-basis-point decline in loan yield to 5.47% and a 3.2% decline in average loans.
- Non-interest income was essentially flat at $5.3 million. Debit card income increased 17.5% and mortgage banking income increased 86.1%, while other income declined, primarily because of derivative mark-to-market losses.
- Non-interest expense increased 0.8% to $25.8 million. Salaries declined, but occupancy, data processing, professional fees, FDIC insurance and other real estate owned expenses increased. Q1 2019 included $639 thousand of merger expenses; Q1 2020 had none.
- Gross loans declined 1.9% from year-end 2019, led by decreases in commercial and industrial, residential real estate, agricultural real estate, construction, agricultural and consumer loans, partially offset by growth in commercial real estate.
- Total deposits declined 3.4% from year-end 2019. Non-interest-bearing demand deposits increased to $508.4 million, while interest-bearing deposits decreased.
- The allowance for loan losses increased to $21.9 million, or 0.87% of total loans, from $12.2 million, or 0.48%, at December 31, 2019. Net charge-offs were $257 thousand, compared with $760 thousand in Q1 2019.
- The Company repurchased 295,461 shares for $6.9 million during the quarter and suspended the repurchase program in March in response to the COVID-19 environment.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management provided no formal earnings or balance-sheet guidance. It stated that Q1 results are not necessarily indicative of full-year 2020 results.
- COVID-19 materially affected the allowance calculation through increased qualitative loss factors. Management warned that prolonged economic deterioration could lead to additional provisions, credit losses, lower interest and fee income, and deterioration in asset quality and capital ratios.
- As of April 27, 2020, the Company had executed 927 payment deferrals covering approximately $474.7 million of outstanding loan balances. The deferrals generally covered 90 or 180 days and were not treated as troubled debt restructurings under applicable interagency guidance.
- The Company reported substantial PPP activity as of April 27, 2020. The notes state that 1,776 loans totaling $470.1 million had been closed or approved with the SBA, while the MD&A states 1,676 loans for the same funding amount. This inconsistency should be verified.
- COVID-19-sensitive exposures included approximately $239.9 million in hospitality, $222.2 million in construction, $144.2 million in retail, $96.4 million in restaurants, $85.1 million in multifamily, $62.9 million in aircraft manufacturing and $45.2 million in syndicated national credits.
- Nonperforming assets increased to $48.1 million, or 1.22% of assets, from $46.9 million, or 1.19%, at year-end. Nonaccrual loans increased to $42.1 million from $38.4 million.
- Goodwill of $136.4 million was not impaired at March 31, 2020. Management cautioned that a sustained decline in the stock price or other COVID-19 effects could trigger a future impairment charge, although such a charge would be non-cash and would not affect tangible or regulatory capital.
- The Company elected temporary CARES Act relief delaying CECL implementation and continued using the incurred-loss method at March 31, 2020. The filing expects CECL adoption to increase the allowance, but the ultimate impact was not quantified.
- A bank stock loan covenant waiver was obtained for the return-on-assets covenant for the quarter; the Company reported compliance with the other facility terms.
- Equity Bank must pay $1.474 million in connection with the CitiMortgage litigation judgment and may receive reassignment of certain collateralized loans. A separate securities class action remains pending, and its outcome could not be reasonably estimated.
- Management stated that a previously reported material weakness involving reconciliation of certain corporate general-ledger accounts had been fully remediated. Disclosure controls and procedures were deemed effective as of March 31, 2020.
- Interest-rate sensitivity modeling showed a projected 3.7% decline in twelve-month net interest income under an immediate 100-basis-point decline in rates and a 7.6% decline under a 300-basis-point increase. Economic value of equity was projected to decline 14.1% under a 100-basis-point decline.
Important Facts for Investors to Verify
- Reconcile the conflicting PPP loan counts reported in the notes and MD&A.
- Monitor COVID-19 deferral balances, subsequent delinquencies, charge-offs, nonperforming assets and future allowance or CECL adjustments.
- Assess deposit outflows, reliance on FHLB and other wholesale funding, borrowing costs and the bank stock loan maturity and covenant requirements.
- Evaluate concentrations in hospitality, construction, retail, restaurants and other pandemic-sensitive sectors, including collateral values and borrower liquidity.
- Track the CitiMortgage judgment, the pending securities class action and any additional mortgage repurchase or indemnification claims.
- Review whether goodwill remains recoverable and whether the remediated reconciliation controls continue to operate effectively.
- Consider the effect of suspended share repurchases, future regulatory capital requirements and restrictions on dividends from Equity Bank.