Equity Bancshares, Inc. — Q3 2020 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 and other banking services through 49 locations in Arkansas, Kansas, Missouri and Oklahoma. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020. The filing is materially affected by the COVID-19 pandemic, related borrower assistance programs and the recognition of goodwill impairment.
Key financial metrics
| Metric | Three months ended Sept. 30, 2020 | Three months ended Sept. 30, 2019 | Nine months ended Sept. 30, 2020 | Nine months ended Sept. 30, 2019 |
|---|---|---|---|---|
| Net interest income | $32.1 million | $31.5 million | $97.1 million | $93.5 million |
| Provision for loan losses | $0.8 million | $0.7 million | $23.3 million | $17.3 million |
| Non-interest income | $6.5 million | $6.6 million | $17.5 million | $18.3 million |
| Non-interest expense | $130.8 million | $24.2 million | $180.5 million | $74.8 million |
| Net income (loss) | $(90.4) million | $10.4 million | $(87.5) million | $15.6 million |
| Basic and diluted EPS | $(6.01) | $0.67 basic; $0.66 diluted | $(5.75) | $0.99 basic; $0.98 diluted |
| Net interest margin | 3.47% | 3.42% | 3.54% | 3.44% |
All dollar amounts above are as reported in the filing; balance-sheet dollar amounts are also summarized below in millions for readability.
- Goodwill impairment: The company recorded a $104.8 million non-cash goodwill impairment charge in the third quarter. Goodwill remaining at September 30, 2020 was $31.6 million and remains subject to further impairment if operating performance, share price or market conditions deteriorate.
- Balance sheet: Total assets were $3.87 billion, down from $3.95 billion at December 31, 2019. Gross loans held for investment were $2.73 billion, up 6.6% from year-end, while net loans were $2.69 billion. Total deposits were $3.13 billion, up 2.3%.
- Credit reserves: The allowance for loan losses increased to $34.1 million, or 1.25% of total loans, from $12.2 million, or 0.48%, at December 31, 2019. The filing states that the increase primarily reflected COVID-19-related qualitative factors and portfolio composition.
- Asset quality: Nonaccrual loans were $52.7 million and total nonperforming assets were $61.7 million, compared with $38.4 million and $46.9 million, respectively, at December 31, 2019. Nonperforming assets were 1.60% of total assets and 2.26% of total loans plus other real estate owned.
- Capital: At September 30, 2020, the company reported a consolidated total risk-based capital ratio of 17.35%, common equity Tier 1 ratio of 12.76% and Tier 1 leverage ratio of 8.76%. Equity Bank was classified as well capitalized, with ratios of 15.41%, 14.16% and 9.31%, respectively.
- Liquidity and debt: Cash and cash equivalents were $65.8 million. Federal Home Loan Bank advances were $167.9 million, retail repurchase agreements were $46.3 million and subordinated debt was $87.5 million, including $75.0 million of subordinated notes issued in 2020. The company had $568.8 million of additional FHLB borrowing capacity and $275.6 million of Federal Reserve borrowing capacity secured by pledged assets.
- Cash flow: For the nine months ended September 30, 2020, operating activities provided $36.4 million, investing activities used $35.2 million and financing activities used $24.7 million. Cash and cash equivalents declined by $23.5 million to $65.8 million.
- Equity and tangible book value: Stockholders’ equity was $402.2 million, down from $478.1 million at year-end, primarily because of the net loss and share repurchases, partly offset by accumulated other comprehensive income. Tangible common equity was $352.3 million, and tangible book value per common share was $23.72.
Material changes versus the prior comparable period
- Net income shifted to a $90.4 million third-quarter loss and an $87.5 million nine-month loss, principally because of the goodwill impairment charge.
- Net interest income increased 1.8% in the third quarter and 3.9% for the nine months, helped by lower funding costs and higher loan volume. The benefit was partly offset by lower loan yields, including the impact of 1.0% PPP loans.
- Non-interest income declined 1.3% in the third quarter and 4.5% for the nine months. Lower service charges and other non-interest income offset higher debit-card and mortgage-banking income.
- Excluding goodwill impairment and merger expenses, non-interest expense increased 7.4% in the third quarter and 2.5% for the nine months. The reported efficiency ratio was 67.4% for the third quarter; management reported 66.1% for the nine-month period, excluding specified unusual items.
- Gross loans increased $169.1 million from year-end. Commercial and industrial loans increased 50.0% to $857.2 million, while residential real estate loans declined 20.1% to $402.2 million.
- Non-interest-bearing demand deposits increased $212.7 million, while time deposits decreased $209.8 million from December 31, 2019.
- All held-to-maturity securities were transferred to available-for-sale during the third quarter to provide greater asset-liability management flexibility. Available-for-sale securities totaled $798.6 million at September 30, 2020.
- The company repurchased 383,523 shares during the third quarter at a weighted average price of $15.48 per share, completing the previously authorized 1.1 million-share program.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or financial guidance. Management stated that the operating results for the nine months are not necessarily indicative of full-year results.
- COVID-19 accommodations: The company reported that 3,221 PPP loans totaling approximately $367.8 million remained outstanding at September 30, 2020. It also reported COVID-19 payment deferrals on approximately $40.2 million to $41.2 million of loans, but the filing contains inconsistent counts and balances in different sections. These loans were generally not treated as troubled debt restructurings under applicable guidance.
- Future credit risk: Management warned that borrowers may be unable to resume payments after deferrals end, potentially causing higher nonaccrual loans, additional provisions, charge-offs and reversals of accrued interest and fees.
- Concentrations: Exposure to hospitality was approximately $285.9 million and aircraft manufacturing approximately $65.1 million, excluding or based on exposure definitions described in the filing. Management indicated that these portfolios were well secured and that none of the identified exposures were actively participating in a deferral program at September 30, 2020.
- CECL: The company elected the temporary CARES Act relief from implementing the current expected credit loss model and continued using the incurred-loss method at September 30, 2020. CECL adoption was expected to increase the allowance, but the ultimate impact was not quantified.
- Goodwill: The impairment analysis assumed an economic downturn over a 12-month period followed by conservative growth. Further deterioration in performance, stock price or market conditions could result in additional impairment.
- Liquidity and capital risks: An extended recession, deposit outflows, higher wholesale funding costs or restrictions on dividends from Equity Bank could reduce liquidity or impair the parent company’s ability to service debt. Management nevertheless stated that funding markets remained open and that regulatory capital exceeded requirements.
- Legal matters: Equity Bank is expected to satisfy a $1.5 million judgment in the CitiMortgage matter, subject to potential reassignment of collateralized loans. A separate putative securities class action was dismissed with prejudice on October 14, 2020, subject to a possible appeal.
- Subsequent events: The Federal Reserve Bank of Kansas City authorized a new program to repurchase up to 800,000 shares from October 30, 2020 through October 29, 2021. On October 23, 2020, Equity Bank acquired Almena State Bank’s assets and assumed its deposits; September 30 reported assets were $65.7 million and deposits were $64.9 million, but acquisition accounting was incomplete when the filing was prepared.
Most important facts for investors to verify
- Whether post-deferral borrower performance leads to additional provisions, charge-offs, nonaccrual loans or interest reversals.
- The ultimate impact of CECL adoption, including the cumulative-effect adjustment to retained earnings and regulatory capital.
- Whether goodwill remaining after the $104.8 million impairment requires further write-downs.
- The exact number and balance of COVID-19 loan deferrals, given inconsistent disclosures of 63 versus 68 loans and approximately $40.2 million versus $41.2 million.
- The performance and government-guarantee treatment of the $367.8 million PPP portfolio, including any fraud, forgiveness or servicing risks.
- Liquidity trends, deposit composition, brokered deposits, FHLB borrowing capacity and the parent company’s reliance on bank dividends to service debt.
- The final purchase accounting and ongoing financial effects of the Almena State Bank acquisition.