Earnings Call Transcript - EQBK Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Equity Bancshares, Inc. Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Chris Navratil. Please go ahead.

Chris Navratil, Host

Good morning, and thank you for joining Equity Bancshares conference call, which will include discussion and presentation of our third quarter 2020 results. Presentation slides to accompany our call are available via PDF for download at investor.equitybank.com by clicking the Presentation tab. You may also click the Event icon for today posted at investor.equitybank.com to view the webcast player. If you're viewing this call on our webcast player, please note that slides will not automatically advance. Please reference Slide 1, including important information regarding forward-looking statements. From time to time, we may make forward-looking statements within today's call, and actual results may vary. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us. With that, I'd like to turn it over to Brad Elliott.

Brad Elliott, CEO

Thank you, Chris, and good morning. Thank you for joining our call, and for your interest in Equity Bancshares. Joining me is Eric Newell, our CFO; Greg Kossover, our Chief Operating Officer; and our President, Craig Anderson. Despite the disruption and uncertainty of COVID-19, I'm excited about how the Equity Bank team has been able to achieve. Our company has accomplished many of our 2020 objectives while dealing with the disruption of the challenging operating world we currently face. We continue to protect and support our team members on the frontlines as they serve our customers and their communities. I can't remember a time that our capital has been better positioned to take advantage of opportunities that might come our way. We are poised for organic growth, and we'll keep looking for opportunistic banks that need merger partners. We intend to responsibly continue our share repurchase program and remain focused on key strategic initiatives that we must accomplish to become a high-performing bank. I believe it is beneficial to have the goodwill impairment we discussed in our earnings release in our rearview mirror. It is a non-economic issue for our stakeholders and improves our operating ratios without impacting our continued growth in tangible book value per share. Eric will detail our balance sheet and goodwill adjustment more in a moment. In our third quarter, we finished raising offensive capital totaling $75 million, which will allow us to take advantage of opportunities I previously mentioned. We successfully completed our joint regulatory exam with the Federal Reserve in the State of Kansas in the third quarter. Our tangible book value has grown 14% since the end of 2019, or $2.97 per share. We completed our 2019 stock repurchase program in September, repurchasing 383,000 shares, all of which were accretive to tangible book value and earnings. In addition, the Board approved a second repurchase program totaling $16 million to start in the fourth quarter of 2020, subject to customary regulatory review. At the start of the pandemic, our equity teams took a trusted advisor approach with our customers to preserve cash. We did this very early in the process. It did result in 26% of our loans being on deferral at June 30th. But it helped our customers set aside much-needed cash reserves for the current period, as well as for the reopening period of this pandemic. As the 90-day deferrals expired in the third quarter, we remained focused on ensuring our customers had what they needed to operate. And when looking at the deferrals, we ensured that those that needed an additional deferral were still showing the impact from the pandemic. On September 15th, we reported our progress with only 11% of our loans still on deferral at that date. As expected, at the end of the third quarter, we had approximately 1% of our loans still remaining on deferrals. Through this period, our customers' cash position has increased. In some cases, the amount of cash on hand is the highest they have ever experienced. By taking the approach we did early in the process, we saw our customers positioned to survive and possibly thrive in the recovery from this pandemic. Over the last several months, Craig Anderson and I visited our regions regularly and met with local customers. I'm excited to see our customers adapting to the changed environment and how many are operating at levels superior to the start of the COVID-19 disruption. I am pleased the Equity team continues to be steadfast partners to our customers and communities. I thank our bankers for their commitment and approach to helping our local communities. As a community bank, we do what it takes to help each community succeed. Eric, why don't you take us through the details of the quarter?

Eric Newell, CFO

Thank you, Brad, and good morning. During the quarter, we identified a non-cash goodwill impairment totaling $104.8 million, which resulted in a GAAP loss of $6.01 for the quarter ending September 30th. Driving this impairment is the drop in bank stocks overall, including the company's common stock price, resulting in a lower fair value of our capital versus book value prior to the impairment, the reduction in market multiples of peers used in our valuation analysis, our cash flow forecast in light of uncertainty related to the pandemic, and higher discount rates given the environment. The impairment does not affect cash balances, liquidity, tangible book value or regulatory capital ratios. As some of the goodwill was created from taxable events, the effect on capital totaled $99.5 million, with $5.3 million of deferred tax assets being created due to timing differences in expense recognition for book and tax purposes. Let me peel back the GAAP number to assist in understanding core operating performance. Without the goodwill impairment, pre-tax earnings would have been $11.4 million using a pro forma tax rate of 22.5%. The resulting pro forma net income would have been $9.1 million or $0.60 per diluted share. This includes the effect of PPP loans on our balance sheet. During the quarter, we recognized $1.3 million of SBA fees related to PPP loans compared to $1.03 million in the second quarter. Both of these numbers are net of costs associated with originating PPP loans. As a reminder, we will recognize a total net $11 million of fees associated with the PPP program, for which we have already recorded $2.3 million, leaving $8.7 million left to recognize. At September 30th, we had submitted approximately 26% of our PPP dollars for forgiveness and have started to see the SBA forgiving loan balances. We believe that anything that had been submitted by the end of the quarter will be recognized in the fourth quarter this year and the remainder will be recognized in 2021. PPP loans totaled $376 million at September 30th, and the average balance in the quarter totaled $375 million. Interest earned from the PPP loan portfolio was $960,000 during the quarter. Pre-tax pre-provision revenue in the quarter ending September 30th totaled a pro forma $12.6 million when excluding the impairment. This compares to the second quarter pre-tax pre-provision revenue of $14.7 million, which included a non-recurring benefit of $932,000 deferring the expenses associated with the PPP loan origination. The trend in the third quarter run rate of pre-tax pre-provision is primarily due to the timing of FAS 91 salary deferral in the second quarter that is not expected in future quarters. Our net interest margin held up well given the headwinds. We've enhanced our margin disclosure in our press release tables by adding granularity to the table in the loan section. NIM declined 2 basis points linked quarter, showing stability in total earning assets and cost of interest-bearing liabilities. We are particularly happy with the progress made in our interest-bearing deposits, with the cost declining 13 basis points linked quarter. Late in the third quarter, we paid off a relatively higher-cost FHLB borrowing that had a notional value of $250 million. We expect to see some modest improvement in the cost of FHLB advances in the fourth quarter, offset by a modest increase in the cost of other borrowings as we only have two months of the $75 million subordinated debt in the third quarter. As Greg and I mentioned in the second quarter earnings call, the expectation for future declines in interest-bearing deposits will largely be driven by continued repricing of the CD portfolio. The average life of that portfolio is about 14 months and we are nine months into the repricing. So we expect to see another quarter of benefit before we level out. On the interest-earning assets, we have taken a measured approach to new origination yields, generally originating loans with a four handle versus a three handle. This has allowed us to maintain relative stability in the yield earned on our loans, declining 6 basis points linked quarter. The total securities portfolio is expected to continue to decline in yield, and over time, as we see loan demand, we will remix the composition of our earning assets into loans. If we exclude PPP loans from the NIM analysis, for the quarter ending September 30th, the yield on C&I, total loans and total earning assets would be 5.16%, 5.01% and 4.19%, respectively. This compares to 5.23%, 5.07%, and 4.24%, respectively, for the quarter ending June 30th. Excluding PPP loans again, pro forma NIM for the quarters ending September 30th and June 30th would be 3.59% and 3.65%, respectively. You will note that our provision for loan loss was $815,000, materially lower than what we recorded in the first half of 2020. As a reminder, we continue to be under the incurred loss methodology for the allowance for loan losses, and we used qualitative factors in the first half of 2020 to add $22.4 million to the allowance for loan losses. Qualitative factors included the rise in unemployment and the incidence of deferred loans. While these factors have both eased, the uncertainty remains. Facts and circumstances have not materially changed, which drove the minimal provision in the quarter. If circumstances remain unchanged, we do not believe a material provision under the incurred loss method will result in the fourth quarter. At September 30th, we had $5.7 million of credit marks on acquired loans. When included in the ALLL, the pro forma coverage ratio rises to 1.69% when excluding the ending balance of PPP loans from the denominator. Under the CARES Act, we are required to adopt CECL at December 31, 2020, and are ready to do so. When adopting CECL, the effect of the adoption will run through capital and not current period earnings. We are expecting that at December 31, after adopting CECL, our ACL coverage of non-PPP loans is expected to be north of 2%, positioning us well for 2021.

Greg Kossover, COO

Thanks, Eric. I want to echo Brad's comments about working with our customers through this period of uncertainty. We took early steps to work with our customers to preserve cash, which resulted in a higher level of deferred loans at June 30th than perhaps you saw at many of our peers. However, as these 90-day deferrals came up for review during the summer, Craig Mayo and myself took a close look at those customers who may have needed an additional deferral to ensure it was not due to inherent weakness in the credit and that it was specific to implications from COVID-19. Of the total deferred loans at June 30th, we did provide a second deferral on commercial loans totaling $158 million. That deferral was typically not for another 90 days, though. As a result, we now report a small level of deferrals at the end of the quarter, about 1%. There will be one-off concerns that may show up in our non-performers in future periods. But for the most part, I share in the optimism Brad indicated. Our customers have responded to the changing environment by adjusting their business plans and approaches, and in some cases, our customers are operating at the highest level of performance and profit they have experienced. While we are pleased with the success of transitioning the majority of our customers out of deferral programs during the quarter, there is continued uncertainty in the operating environment, and I would like to spend a little time on two specific portfolios, hotel and aviation. Our hotel portfolios continue to comprise approximately 10% of the overall portfolio. As discussed, our book is comprised of experienced hoteliers with the proven capacity to weather changing economic cycles, and they have proactively managed their businesses to shrink costs and conserve cash, positioning themselves to continue to perform in an uncertain environment. As of today, in our hotel portfolio, we have seen one loan, which was purchased in a merger at less than $4 million transition to non-performing assets. Management will continue to work closely with these borrowers to position their businesses and the bank for continued success. Manufacturing directly tied to aerospace comprised approximately 2% of the overall portfolio at September 30th. The relationships consist of proven operators with diversified capacity to serve various components of the airline manufacturing industry. The management teams of each of the underlying businesses have proactively managed their operations to best position themselves for continued performance. However, as the airline industry remains in flux due to the impact of the pandemic, risk remains. Management will continue to closely monitor this portfolio and proactively work with our borrowers to ensure the best result for both the businesses and the bank. While we show a minor uptick in total non-performing assets from $55.8 million to $59.4 million, it can be attributed to one shared national credit. This credit totaled $6.2 million and has currently been contracted to sell and should settle in the next few weeks with a slight loss but already reserved for in the third quarter. Excluding this relationship, total non-performing assets were $53.3 million at quarter end and trending positively as compared to June 30th. Other real estate owned is down linked quarter as we continue to responsibly sell assets when excluding our closed branches that were added to OREO in the third quarter. There possibly will be other issues in credit that arise as various borrowers face different COVID-19-related issues. However, we believe our resources are adequate, and our teams are focused. As we move forward, the management team will continue to closely monitor performance within our portfolio and proactively work through issues as they arise. The credit and special assets teams led by Craig Mayo are seasoned and prepared to continue to support the bank and our customers.

Brad Elliott, CEO

One of our strategic goals has been to grow the quality of our deposit base by having industry-leading technology for our customers. In 2019, we implemented a new online and mobile banking platform. We knew this would elevate our customers' experience, and the upgrade proved critical for our company in 2020. We've seen engagement with our mobile and online channels continue to grow throughout the year. Usage grew during our branch-light period in the second quarter, and enrollments, payments, and log-ins have continued to grow throughout the third quarter. I frequently get asked by investors about branch utilization and hear from my peers that they are now closing branches for cost efficiencies. We did close three branches permanently in May of this year from previously evaluating the efficiencies of our branch network. We will perform a continual review of our branches to understand performance and profitability and have always done this. We have seen our branch utilization hold steady in our community markets. This is reassuring and critical to our strategic goal of defending and growing the quality of our deposits and key to our multi-channel customer experience. We do not anticipate that there will be a meaningful change in our branch strategy in the markets we serve. I'm also delighted at the progress we've made in 2020 with consumer DDA deposits, which are not affected by PPP funds. At the end of the third quarter, we had opened a net 3,400 new consumer DDA accounts year-to-date compared to a net 1,200 through the same period in 2019. The average consumer DDA balance increased by 20% in 2020 from 2019.

Eric Newell, CFO

Expanding on Brad's theme, service charges and fees improved to $1.7 million from $1.4 million in the linked period, entirely from a higher level of overdraft fees. NSF fees have continued to normalize from earlier periods, totaling $1.1 million in the third quarter from $807,000 in the second quarter. Also noteworthy is the increase in debit card income linked quarter. We experienced an increase of 12% in transaction count in the third quarter from the second quarter, corresponding to a 13% increase in debit card income we experienced in the third quarter.

Brad Elliott, CEO

Another strategic goal we continue to work on is improving the mix of revenue by increasing fee income to total revenue. We continue to emphasize areas of opportunity such as trust and wealth management, led by Gaylyn McGregor and Glenn Malan, and treasury income from our commercial clients. We've made progress in our trust and wealth management area as we have doubled assets under management since 2019. The pipeline of new clients is encouraging, and I expect the contribution to fee income from the unit to become more meaningful as we grow AUM in future periods. I would ask our President, Craig Anderson, to discuss our pipeline.

Craig Anderson, President

Thanks, Brad. I want to update you on loan growth and pipelines. While we experienced a decline in loan balances in the third quarter of approximately $80 million, we have seen our pipelines build throughout the summer, more so in August and September. We are hopeful that pull-through improves and translates into loan growth in the fourth quarter and early 2021. In the third quarter, we originated $154 million of new loans with a weighted yield of 4.44% compared to non-PPP loan originated of $92 million in the second quarter with a yield of 4.47%. We are an approved Main Street lender with the Federal Reserve of Boston and have closed several loans, and we have been active in looking at new deals. We had the opportunity of looking at 90 borrowers over the last several months. To date, we have internally approved approximately $300 million and are working with the prospective borrowers and the Federal Reserve. As a reminder, 95% of any Main Street Lending originations are sold to the Federal Reserve. These loans also bring substantial treasury fee income and large non-interest-bearing deposits.

Brad Elliott, CEO

Thanks, Craig. Before we open it up for questions, I want to once again commend our Equity Bank teams in our markets for their focus on our customers. Craig Anderson has done a great job leading our commercial banking and sales teams. Craig Mayo has led our credit administration team with a focus on our high asset quality and process improvements. Brad Daniel has helped us maintain competitive products and be a key choice for deposit customers throughout our regions. Julie Huber and Jeremy Allen have continued to lead the charge for improvements to our processes and technology implementation. And most of all, our bankers from tellers to personal bankers to treasury and trust have embodied the entrepreneurial spirit that's been key for our company's growth. With that, I'd be happy to open it up to take questions now.

Operator, Operator

Our first question comes from the line of Jeff Rulis with D.A. Davidson.

Jeff Rulis, Analyst

Yes. I have a couple of questions regarding credit. Eric, I believe you mentioned that figure above 2% ACL; would that suggest a day 1 adjustment in the $20 million range?

Eric Newell, CFO

That's probably a little north of what we're thinking, although not all of that would flow through capital, but you're pretty close.

Brad Elliott, CEO

There's two parts to that, Jeff. Both the marked loans will flow back in and the other part of that. So that's how you get to it.

Eric Newell, CFO

Day 1 adjustment.

Jeff Rulis, Analyst

Fair enough. Okay. And just, Greg, I think you outlined the expectation on the SNC credit that was added. I guess, as we go into '21 over the next couple of quarters, what's expected to be a heavier loss year for the industry, any of those chunkier credits that reside in non-accrual expected to become current or pay off, given you hold a little higher balance than peers?

Greg Kossover, COO

It's a good question, Jeff. As of September 30, we're pleasantly surprised that credit quality in the industry has remained stable, and we're not seeing any significant negative trends at the moment. The specific SNC you referenced was not related to COVID; it stemmed from some litigation issues, and we didn't want to take the risk associated with holding onto it. Therefore, we decided to sell it, and that sale has already been negotiated and will finalize in about a week. Currently, we aren't concerned about any of our other larger credits. We're monitoring several industries closely, such as lodging and aviation. We've been actively working with our borrowers, many of whom have secured additional capital, which is encouraging and reflects positively on them and their organizations. While some credits and assets may not be performing as we would like on a national level, we took proactive steps years ago to exit relationships with weaker credits, leaving us with strong borrowers. I don't expect significant shifts in our current classifications in the fourth quarter, and I can't predict what will happen in the first and second quarters. For now, things remain stable and consistent.

Jeff Rulis, Analyst

Okay. It doesn't seem like there will be an immediate decline while you seek resolution of the approximately $55 million base if you exclude the SNC credit, and it appears you're comfortable with that balance. Moving to the margin, Eric, you mentioned some factors affecting the borrowings, both on the FHLB and the sub-debt. How do those factors align with your comments about the core margin? What's your expectation as you manage it? I would also like to note the impact excluding PPP, but just focusing on the core level?

Eric Newell, CFO

Yes, Jeff, looking at our expectation for the next quarter, we're thinking when you exclude the effect of PPP from income as well as the average balance, we're thinking we're probably going to see another compression of probably 6 basis points to 8 basis points. Some of that is due to the increase or the effect of having the sub-debt in the full $75 million for the full three months. That will have an effect of increasing our total interest-bearing liabilities. We'll still see a benefit from the time deposits coming down a little bit. But the cost of that sub-debt is going to offset the benefits we're seeing in the time deposits and FHLB. And then in terms of earning asset side, again, non-PPP, we're seeing probably a similar decline in earning asset yields like we saw say at PPP this quarter.

Jeff Rulis, Analyst

And so I guess if we roll into '21, it sounds as if the sub-debt impact sort of normalizes, then it's sort of more of a settling sort of outlook on the margin, granted a lot of puts and takes to still occur, but the margin in '21, the thought there is that, that normalizes some?

Eric Newell, CFO

Yes. Looking at the overall picture, excluding the impact of PPP, we anticipate some fluctuations in the fourth quarter and the beginning of 2021 as those loans are forgiven. The increase in fees may make our GAAP Net Interest Margin appear uneven. However, excluding that factor, I agree with you, Jeff. We expect to see stability in our interest-bearing liabilities if we continue improving the composition of our non-interest-bearing deposits, which would be beneficial. On the earning asset side, we are optimistic that as loan growth occurs, we can enhance the mix of loans in our total earning assets. We have been careful in originating loans that yield closely to our portfolio yield. While we might see some adjustments, we are hopeful that we can maintain our loan yield. Regarding investment securities, we have not been observing attractive yields, resulting in a decline in that portfolio, which we believe will continue. However, we are optimistic that shifting to loans will help mitigate the negative effects of this decline.

Brad Elliott, CEO

Jeff, so one thing I want to circle back on, Craig Mayo and Greg are working hard on moving non-performing assets out. We actually have several that could move out in the fourth quarter, but we sure can't commit to that because there's a lot that can happen between now and then. So there's a lot of moving parts in there that they're working really hard on making some things happen. But as you know, with those, they twist and turn.

Operator, Operator

Thank you. Our next question comes from the line of Michael Perito with KBW. Your line is open.

Michael Perito, Analyst

I have a couple of questions. First, regarding the margin discussion, it's clear that while you have some strategies to implement, there are also fundamental pressures to consider. Brad, in relation to the current cost structure of the franchise, you mentioned branches in your earlier statements. However, it seems essential to maintain strong cost discipline to safeguard profitability, especially since margins are facing challenges. Could you elaborate on your current thoughts or strategies beyond branch-related costs? What measures or ideas do you have in mind to manage or limit expense growth in the future?

Brad Elliott, CEO

Yes, we need to remain vigilant on this. There are two aspects to consider; one is our effort to boost non-interest income while keeping an eye on our expense ratio. We are highly focused on managing expenses, controlling salaries, and monitoring the number of full-time equivalents. We are examining this across every department we have.

Michael Perito, Analyst

And any specific thoughts on kind of the near-term expense run rate here? I mean, you had a little bit of the drop last quarter, which I think was more accounting related. But are you hopeful to kind of hold in on this $26 million run rate that you had in the first and third quarter on a core basis?

Brad Elliott, CEO

Yes. I actually think that we're probably going to see a little benefit in the fourth quarter. I wouldn't go back to the second quarter as a run rate, though, because there were some things happening in that quarter where it was a benefit to us. But I would look towards the first quarter and maybe even a little bit better than that. But I wouldn't expect that we would have a run rate like the third quarter on NIE and the goodwill impairment.

Michael Perito, Analyst

Okay. And then, Brad, more on the fee side, I mean, you guys were kind of in that $6.5 million range for the last three quarters of 2019, saw a little bit of a drop-off in the first half of the year, which I think, I imagine was at least partly environmental, but nice pickup in the third quarter. Any expanded thoughts on the outlook there and maybe the one or two areas of growth you think are most critical to try and see some expansion there that's sustainable?

Brad Elliott, CEO

Our retail deposit fees are recovering after a decline, and we are seeing an increase month-over-month. The wealth management team is effectively building relationships and adding assets under management, which is expected to boost fee income. We have also introduced corporate credit cards and are transitioning those back in-house after previously referring customers to U.S. Bank. As this fee income grows consistently each month, we anticipate significant growth in this area as well. We started the year with strong initiatives and have successfully implemented them. Additionally, interchange income is rising as card usage outpaces cash transactions, indicating further growth potential. Did I overlook anything, Eric?

Eric Newell, CFO

No.

Michael Perito, Analyst

Can you share any additional expectations regarding the bank's liquidity position and the size of the investment portfolio in the upcoming quarters? From what we're hearing in the industry, many commercial and retail customers are holding more cash, which has positively impacted deposit balances. However, I've also heard from other banks that these customers still have a limited appetite for spending. I'm curious if you could provide a brief comment on liquidity and any insights into how the investment portfolio might change in the near term.

Eric Newell, CFO

Yes. In terms of liquidity, I think you're seeing that our on-balance sheet liquidity is probably stronger now than it's been in a long time given the fact that we've seen some nice deposit growth and particularly on the consumer side. As Brad's comments indicated, we've seen about 20% growth year-over-year on the consumer DDA side, and we've been opening more accounts there. So we're happy about that. In terms of the investment portfolio, you're right in terms of the redeployment of cash flow into the portfolio hasn't been attractive in yields. That portfolio is a source of liquidity. It does provide us some pledging capabilities for some of our public deposits. So there is a level where we would not want that to fall below. But I think we're well ahead of that at this point. So we're hopeful that as cash comes back to us, we're able to redeploy it on the loan side of the balance sheet.

Operator, Operator

Thank you. Our next question comes from the line of Terry McEvoy with Stephens. Your line is open.

Terry McEvoy, Analyst

Maybe a question for you, Brad. I'm just curious, are there any, call it, restrictions or limitations just from the goodwill impact and write-down and the related EPS loss? You don't pay a dividend, but in the past, you've been buying back stock. And clearly, M&A has been an important and key part of your growth story.

Brad Elliott, CEO

We don't expect any impact from that. We have earned back into that and retained earnings within four quarters, so we don't see any real effect on our ability to execute our strategy. As mentioned in our prepared comments, the Board has approved the reimplementation of the buyback program. Assuming we get the usual approval from the regulators, we should be able to proceed with that. We have ample liquidity at the holding company for this purpose. I believe we are in a very strong position to capitalize on opportunities. We continue to explore these opportunities, and I feel more positive about the company now than I have in the last couple of years. After experiencing some growing pains recently, we have moved past those challenges. Our team, from accounting to risk management, has worked exceptionally hard. We've hired a new internal auditor who has performed very well, and all our processes are functioning effectively. I think we are better positioned today than we were two years ago, and our capital position has improved significantly. Overall, I feel optimistic about executing our various organic and M&A strategies.

Terry McEvoy, Analyst

That's great to hear. And then just for my follow-up. Greg, I think you mentioned more one-off concerns as it relates to just NPAs or maybe specifically charge-offs. What segment of the portfolio stands out? Is it the two that you kind of talked about in the prepared remarks? And I noticed this quarter, you didn't disclose retail, and I think it was restaurants as well. Maybe some updated comments on those kind of $100 million plus portfolios?

Greg Kossover, COO

Yes. Retail restaurants, we didn't put in the deck this time, Terry, because, by and large, they're doing well. And you clearly are up to speed on the dynamics of what COVID has done to dining and all that stuff. Most of our restaurants are in fast food and takeout with really strong companies, and so it's doing fine. We highlighted aviation because we expect that that's on people's mind. We don't have a large portfolio there, and what we have is really well-positioned going into this, lots of capital, fantastic operators. One of our largest credits just had a very large equity infusion into their company, recognizing that they're going to continue to make parts for the major aircraft manufacturers. So we feel very good about that. We've been working closely with them. The hotel portfolio is holding up really well, Terry. We've got great borrowers. We've got great product. We do have one, as I mentioned, hotel that we acquired in a merger that has moved to non-accrual. We have not recognized a loss on that because the asset is in pretty good shape. That's just been impacted by cash flow. And frankly, it wasn't well-run going into COVID. We did not originate that loan. We are working closely with our borrowers on a weekly basis, making sure that we understand that portfolio. And some product, the more budget, roadside products is doing very well as fewer people fly and more drive. But the product that we have that is more urban, East Coast, West Coast to those borrowers and sponsors, as we said before, are the best around. And so myself and others are working closely with them. I don't have any in those portfolios that I look at and say, man, that's going to be a problem. As we sit here today, we do have a couple of other credits that we're also paying attention to that are outside of those industries. But so far, between adjusting the operations and the guarantor-sponsor support, they're holding up quite well.

Terry McEvoy, Analyst

That's good to hear. Thanks, guys.

Brad Elliott, CEO

Yes, aerospace, the credit that we were most worried about in aerospace. Yes. We got it, Terry.

Operator, Operator

Thank you. Our next question comes from the line of Andrew Liesch with Piper Sandler. Your line is open.

Andrew Liesch, Analyst

Just a couple of follow-up questions to previous remarks. The buyback, just curious, timing on when that could be approved by the regulators and your appetite to use it? And how quickly you want to go through it?

Brad Elliott, CEO

Yes. We would anticipate that to happen in the fourth quarter and be able to be used in the fourth quarter.

Andrew Liesch, Analyst

Okay. Got you. And then you referenced capital being strongest it's been in some time. And expecting loan growth to come back ex-PPP. But from an acquisition standpoint, I mean, obviously, the stock has the greatest valuation right now or the greatest currency to do deals. But is there any chatter of potential transaction in the markets you guys are looking at?

Brad Elliott, CEO

Yes, there are ongoing conversations about potential transactions. The main factors driving this are the age of ownership and management, which remain unchanged. As certain developments occur, we expect to see progress in this area. They will require a merger partner, and I believe we will be well-positioned to assist them with those opportunities.

Operator, Operator

Thank you. Ladies and gentlemen, I'm showing no further questions. Thank you for joining the Equity Bancshares Third Quarter Conference Call. Have a great day.