Equity Bancshares, Inc. — Q2 2021 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, consumer, mortgage, agricultural and wealth-management services through 51 banking locations in Arkansas, Kansas, Missouri and Oklahoma. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with comparisons primarily to the corresponding 2020 periods and December 31, 2020.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net income | $15.2 million | $1.7 million | $30.2 million | $2.9 million |
| Diluted earnings per share | $1.03 | $0.11 | $2.06 | $0.19 |
| Net interest income | $34.6 million | $32.9 million | $66.4 million | $65.0 million |
| Provision/(reversal) for credit losses | $(1.7) million | $12.5 million | $(7.4) million | $22.4 million |
| Non-interest income | $9.1 million | $5.7 million | $15.8 million | $11.0 million |
| Non-interest expense | $25.8 million | $23.9 million | $50.7 million | $49.7 million |
| Net interest margin | 3.50% | 3.49% | 3.41% | 3.58% |
| Efficiency ratio | 58.85% | 61.98% | 61.4% | 65.4% |
At June 30, 2021, total assets were $4.27 billion, gross loans held for investment were $2.82 billion, net loans were $2.76 billion, deposits were $3.69 billion and stockholders’ equity was $413.0 million. Cash and cash equivalents were $139.3 million. Available-for-sale securities totaled $1.04 billion.
Gross loans increased 8.6% from December 31, 2020, led by residential real estate loans, which increased 31.7%, and real estate construction loans, which increased 19.5%. Deposits increased 7.0% to $3.69 billion, while total borrowings were $144.3 million. Subordinated debt totaled $87.9 million, including $75.0 million of subordinated notes.
Operating cash flow for the first six months was $47.2 million. Investing activities used $430.2 million, primarily for purchases of available-for-sale securities, loan growth, mortgage-loan purchases and $25.0 million of bank-owned life insurance. Financing activities provided $241.6 million, principally from deposit growth and Federal Home Loan Bank activity. Cash and cash equivalents declined by $141.4 million during the period.
Capital remained strong. At June 30, 2021, Equity Bank reported a total risk-based capital ratio of 15.62%, common equity Tier 1 ratio of 14.36% and Tier 1 leverage ratio of 9.86%; regulators continued to classify the bank as well capitalized.
Material Changes Versus Comparable Periods
- Q2 net income increased $13.5 million, or approximately eightfold, primarily because the credit-loss provision changed from a $12.5 million expense to a $1.7 million reversal, while net interest income and non-interest income also increased.
- Six-month net income increased $27.3 million to $30.2 million. The improvement primarily reflected a $29.9 million favorable change in the credit-loss provision, a $4.8 million increase in non-interest income and a $1.4 million increase in net interest income.
- Net interest income rose despite a lower six-month net interest margin. Lower deposit and other funding costs offset lower yields on interest-earning assets. Q2 deposit cost declined to 0.31% from 0.63% in the prior-year quarter.
- Non-interest income increased 58.8% in Q2 and 43.3% for the first six months. Growth included higher service charges, debit-card income, trust income, mortgage banking revenue, bank-owned life insurance income and gains associated with the Almena acquisition.
- Non-interest expense increased 7.8% in Q2 and 2.0% year to date. Q2 included $460 thousand of merger expenses; data processing, advertising, telecommunications and ATM costs also increased.
- The allowance for credit losses was $51.8 million, or 1.84% of total loans, versus $33.7 million, or 1.30%, at December 31, 2020. The increase principally reflects adoption of the CECL methodology on January 1, 2021, including a $15.7 million increase in the loan allowance and a $12.4 million reduction in retained earnings.
- Nonperforming assets increased to $66.7 million, or 1.56% of total assets, from $54.6 million, or 1.36%, at year-end. Nonaccrual loans increased to $56.8 million from $43.7 million, although management stated that CECL-related gross-up effects increased reported nonaccrual assets by approximately $12.6 million.
- The company repurchased 73,070 shares during Q2 for $2.1 million at an average price of $28.94 per share. Approximately 180,687 shares remained available under the repurchase authorization at June 30, 2021.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or financial guidance. Management reported improving economic conditions and expressed optimism regarding key loan portfolios, but emphasized that the duration and effects of COVID-19 remained uncertain. Management’s CECL estimates incorporated projected economic conditions and qualitative adjustments associated with pandemic-related risk.
- COVID-19-related payment deferrals covered 36 loans totaling $68.4 million at June 30, 2021, compared with $60.9 million at December 31, 2020. These deferrals were not treated as troubled debt restructurings under applicable relief provisions.
- Hospitality exposure was approximately $296.7 million, or 11.7% of loans excluding PPP loans; $26.2 million was participating in a deferral program. Aircraft-manufacturing exposure was approximately $37.7 million, or 1.5% of loans excluding PPP loans.
- PPP loans totaled $271.5 million across 2,751 loans and were reported as fully guaranteed by the U.S. government. Main Street Lending Program balances totaled $14.2 million.
- Interest-rate risk is material. The company’s modeled 12-month net interest income impact was negative 5.3% under an immediate 300-basis-point increase and negative 4.7% under a 100-basis-point decrease. Modeled economic value of equity declined 19.1% under a 100-basis-point decrease.
- The company announced a planned fourth-quarter 2021 acquisition of American State Bancshares, including American State Bank’s 17 Kansas locations, subject to regulatory and customary closing conditions. It also announced a planned acquisition of three bank locations in St. Joseph, Missouri, expected to close in the fourth quarter of 2021.
- The company is defending a proposed class-action lawsuit alleging improperly collected overdraft fees. Management believes the claim is without merit, but the filing states that the outcome cannot currently be reasonably estimated.
- The filing identifies risks related to credit quality, real estate collateral, deposit and loan concentration, liquidity, interest rates, LIBOR transition, cybersecurity, regulatory capital, acquisition integration, competition and continued pandemic effects.
Investor Verification Items
- Verify whether the Q2 earnings improvement is sustainable after excluding provision reversals, PPP forgiveness-related income, Almena-related gains and other acquisition-related items.
- Monitor nonaccrual loans, nonperforming assets, hospitality exposure, deferred loans and the adequacy of the $51.8 million CECL allowance as pandemic relief programs expire.
- Assess the effect of lower asset yields, a liability-sensitive balance sheet and modeled interest-rate shocks on future net interest margin and earnings.
- Review liquidity coverage, deposit composition, pledged securities, borrowing capacity and the concentration of securities in mortgage-backed instruments.
- Evaluate the execution, regulatory approval, purchase accounting and integration risks associated with the American State Bancshares and St. Joseph transactions.
- Track the proposed overdraft-fee class action and any future disclosure of a probable or estimable loss.