Equity Bancshares, Inc. — 2020 Second-Quarter 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 and consumer banking services through 49 locations in Arkansas, Kansas, Missouri and Oklahoma. The filing covers the three and six months ended June 30, 2020. Results were materially affected by the COVID-19 pandemic, related borrower assistance programs, lower interest rates and the Paycheck Protection Program.
Financial performance and key metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Net interest income | $32.9 million | $31.3 million | $65.0 million | $61.9 million |
| Provision for loan losses | $12.5 million | $1.0 million | $22.4 million | $16.6 million |
| Non-interest income | $5.7 million | $6.5 million | $11.0 million | $11.8 million |
| Non-interest expense | $23.9 million | $25.0 million | $49.7 million | $50.6 million |
| Net income | $1.7 million | $9.2 million | $2.9 million | $5.2 million |
| Diluted earnings per share | $0.11 | $0.58 | $0.19 | $0.32 |
| Net interest margin | 3.49% | 3.42% | 3.58% | 3.46% |
| Efficiency ratio | 62.0% | 65.6% | 65.4% | 67.4% |
Net income declined 81.7% in the second quarter and 42.9% for the first six months, primarily because of higher COVID-19-related provisions and lower non-interest income. Lower deposit and borrowing costs more than offset declines in loan and securities yields, increasing net interest income and net interest margin.
Financial condition, liquidity and capital
- Total assets were $4.21 billion at June 30, 2020, up from $3.95 billion at December 31, 2019.
- Gross loans held for investment were $2.81 billion, up 9.8% from year-end; commercial and industrial loans increased 54.5%, substantially reflecting PPP originations.
- Loans, net of the allowance, were $2.77 billion. The allowance for loan losses increased to $34.1 million, or 1.21% of total loans, from $12.2 million, or 0.48%, at year-end.
- Total deposits increased 6.0% to $3.25 billion. Non-interest-bearing demand deposits increased to $756.6 million from $481.3 million.
- Cash and cash equivalents were $178.3 million, compared with $89.3 million at December 31, 2019.
- Borrowings included $344.9 million of Federal Home Loan Bank advances, $51.6 million of retail repurchase agreements and $55.6 million of subordinated debt.
- On June 29, 2020, the Company issued $42.0 million of 7.00% fixed-to-floating subordinated notes due 2030, recorded net of $1.1 million of issuance costs. An additional $33.0 million was issued on July 23, 2020.
- Six-month cash flow was $24.6 million provided by operating activities, $180.8 million used in investing activities and $245.2 million provided by financing activities, resulting in an $89.0 million increase in cash.
- Equity Bancshares and Equity Bank exceeded applicable regulatory capital requirements. Equity Bank remained classified as well capitalized, with a 14.36% total risk-based capital ratio, 13.11% Tier 1 risk-based ratio, 13.11% common equity Tier 1 ratio and 8.88% leverage ratio.
Material changes versus prior comparable periods
- Provision expense rose to $12.5 million in the second quarter from $1.0 million, reflecting higher qualitative loss factors for the expected economic effects of COVID-19. The six-month provision increased to $22.4 million from $16.6 million.
- Net charge-offs were $0.3 million in the second quarter and $0.6 million for the first six months, compared with $9.5 million and $10.3 million, respectively, in the prior-year periods. Management stated that it had not yet experienced COVID-19-related charge-offs.
- Loan yields declined to 4.68% in the second quarter from 5.74% in the prior-year quarter, while the cost of interest-bearing deposits declined to 0.63% from 1.64%.
- Non-interest income declined 11.1% in the second quarter and 6.3% for the first six months. Service charges fell, partly because of COVID-19-related government support programs, while mortgage banking and debit card income increased.
- Non-interest expense declined 4.3% in the second quarter and 1.7% for the first six months. There were no merger expenses in 2020 versus $276,000 in the second quarter and $915,000 in the first six months of 2019.
- Nonperforming assets increased to $57.8 million, or 1.37% of assets, from $46.9 million, or 1.19%, at December 31, 2019. Classified loans increased to $71.4 million from $65.6 million.
Outlook, management commentary, risks and unusual items
- The Company provided no formal earnings or financial guidance. Management stated that the duration and severity of COVID-19 impacts remain uncertain.
- As of June 30, 2020, the Company had executed 1,296 COVID-19-related payment deferrals covering $649.3 million of loans, with $7.0 million of deferred interest. These short-term modifications were generally not treated as troubled debt restructurings under applicable interagency guidance, but borrowers remain subject to monitoring.
- PPP loans totaled $373.0 million across 3,081 loans and carried a 1% interest rate. The Company understood these loans to be fully guaranteed by the U.S. government; a change in that treatment could require additional provisions.
- Higher-risk industry exposures, excluding PPP loans, included approximately $273 million of hospitality loans, $206 million of retail loans, $108 million of restaurant loans and $63 million of aircraft manufacturing exposure. A significant portion of these portfolios was subject to payment deferrals.
- The Company elected temporary CARES Act relief from implementing CECL and continued using the incurred-loss methodology at June 30, 2020. Management expected CECL adoption to increase the allowance, but the ultimate impact was not quantified.
- Goodwill of $136.4 million was tested for impairment at June 30, 2020. The estimated reporting-unit fair value exceeded carrying value by only 0.23%, and no impairment was recorded. Further stock-price or operating deterioration could result in a non-cash impairment charge.
- Liquidity was supported by deposits, cash, securities maturities, FHLB advances and other borrowing sources. Management warned that deposit outflows, volatile wholesale funding costs or inability of the bank to pay dividends could pressure liquidity and debt service.
- The Company disclosed a $1.5 million judgment related to the CitiMortgage litigation and a pending securities class action for which the outcome could not reasonably be estimated.
- The stock repurchase program was suspended in March 2020, then reinstated on July 23, 2020. The Company had repurchased 716,477 shares at a weighted average price of $24.79, with 383,523 shares remaining authorized for purchase.
- Effective July 31, 2020, Eric Newell was scheduled to become Chief Financial Officer, succeeding Gregory Kossover, who assumed the Chief Operating Officer role.
Most important facts for investors to verify
- Whether deferred borrowers resume payments and whether COVID-19-related deferrals lead to higher nonaccrual loans, charge-offs or future provisions.
- The eventual CECL adoption impact on retained earnings, allowance levels, capital ratios and reported earnings.
- The performance and government-guarantee status of the $373.0 million PPP portfolio.
- Credit concentration and collateral trends in hospitality, retail, restaurants, commercial real estate and aircraft manufacturing.
- Whether goodwill remains recoverable given the minimal 0.23% excess of estimated fair value over carrying value.
- Funding costs, deposit stability, available borrowing capacity and the Company’s ability to service debt if bank dividends are restricted.
- Developments in the CitiMortgage judgment and pending securities class action.