Equity Bancshares, Inc. — FY2023 Form 10-K Summary
Business context and reporting period
Equity Bancshares, Inc. is a Wichita, Kansas-based financial holding company whose principal subsidiary, Equity Bank, provides commercial and personal banking, mortgage, wealth-management and insurance services through 64 branches in Arkansas, Kansas, Missouri and Oklahoma. This Form 10-K covers the fiscal year ended December 31, 2023; the filing does not present a separate fourth-quarter-only income statement.
At year-end, the Company reported $5.03 billion of assets, $4.15 billion of deposits, $3.29 billion of loans net of allowance and $452.9 million of stockholders’ equity. The Company employed 717 full-time equivalent employees.
Financial performance and condition
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net interest income | $159.0 million | $162.8 million | Down $3.8 million |
| Provision for credit losses | $1.9 million | $0.1 million | Higher provision |
| Non-interest income | $(19.1) million | $36.0 million | Primarily affected by securities loss |
| Non-interest expense | $135.6 million | $128.4 million | Up 5.6% |
| Net income | $7.8 million | $57.7 million | Down $49.9 million |
| Diluted EPS | $0.50 | $3.51 | Down $3.01 |
| Net interest margin | 3.46% | 3.51% | Down 5 basis points |
| Return on average assets | 0.16% | 1.15% | Lower |
| Return on average equity | 1.85% | 13.08% | Lower |
The principal unusual item was a $51.9 million net loss on securities transactions, resulting from the sale of approximately $490.1 million of investment securities to reposition the portfolio toward higher-yielding loans, securities and cash. Management reported adjusted net income of $48.9 million, or adjusted diluted EPS of $3.13, excluding the after-tax securities loss; these are non-GAAP measures.
Interest and dividend income increased to $246.7 million from $188.2 million, but interest expense increased much faster, to $87.7 million from $25.4 million. The cost of interest-bearing deposits increased to 2.21% from 0.53%, while the loan yield increased to 6.39% from 4.98%. The efficiency ratio increased to 70.55% from 64.60%.
Balance sheet, credit quality, liquidity and capital
- Total assets increased 1.1% to $5.03 billion. Cash and cash equivalents increased to $379.1 million from $104.4 million, while securities declined to approximately $921.9 million from $1.19 billion.
- Gross loans held for investment increased 0.6% to $3.33 billion. Commercial real estate represented 52.8% of loans, commercial and industrial loans 17.9%, and residential real estate loans 16.7%.
- Deposits declined 2.3% to $4.15 billion. Non-interest-bearing demand deposits declined 18.2% to $898.1 million, while savings and money-market deposits increased 17.1% to $1.48 billion. Non-brokered deposits represented approximately 92.4% of total deposits.
- Total borrowings were $380.5 million, including $43.6 million of repurchase agreements, $100.0 million of FHLB advances, $140.0 million of Federal Reserve borrowings and $96.9 million of subordinated debt. The Federal Reserve borrowing was secured under the Bank Term Funding Program and had a 4.38% rate and March 22, 2024 maturity.
- Cash flow from operating activities was $76.5 million and investing activities provided $232.2 million, principally from securities sales, calls, paydowns and maturities. Financing activities used $34.0 million, including deposit declines, treasury-stock purchases and dividends. Cash and cash equivalents increased $274.7 million during the year.
- The allowance for credit losses declined to $43.5 million, or 1.31% of loans, from $45.8 million, or 1.38%. Net charge-offs increased to $4.2 million from $2.6 million, and net charge-offs to average loans increased to 0.13% from 0.08%.
- Nonperforming assets increased to $26.5 million, or 0.53% of assets, from $18.2 million, or 0.37%. Nonaccrual loans were $25.0 million. Potential problem loans declined to $11.1 million from $37.6 million, and classified assets as a percentage of regulatory capital declined to 7.09% from 9.98%.
- Equity Bancshares reported a 15.48% total risk-based capital ratio, 12.36% Tier 1 risk-based ratio, 11.74% CET1 ratio and 9.46% Tier 1 leverage ratio. Equity Bank was categorized as well capitalized.
- Accumulated other comprehensive loss improved to $57.9 million from $113.5 million, primarily reflecting recovery in the fair value of available-for-sale securities and cash-flow hedges.
Material changes versus the prior comparable period
- Profitability deteriorated materially because the securities repositioning loss more than offset higher loan yields and interest income.
- Funding costs rose sharply as market rates increased and deposits migrated toward higher-cost accounts. The net interest margin narrowed despite higher asset yields.
- Liquidity was strengthened through substantially higher cash balances and increased Federal Reserve borrowing following the March 2023 banking turmoil.
- Loan balances grew modestly, while credit-risk indicators were mixed: classified and potential problem loans improved, but nonperforming assets and charge-offs increased.
- Non-interest expense increased 5.6%, driven mainly by salaries and benefits, data processing, professional fees and FDIC insurance expense.
- The Company repurchased $17.9 million of common stock during 2023. No shares were repurchased under the new authorization during the fourth quarter; up to 1.0 million shares remained authorized through September 30, 2024.
Outlook, commentary, risks and unusual items
Management intends to continue organic commercial-loan and deposit growth and selectively pursue community-bank acquisitions. The merger with Rockhold BanCorp, parent of Bank of Kirksville, closed on February 9, 2024, after the reporting date. The transaction added approximately $340 million to $350 million of deposits, approximately $122 million of loans and eight branches in northcentral Missouri. Management expects a core deposit intangible but no goodwill from the acquisition.
The Company expects to pay dividends at similar levels in the future, but dividends remain subject to board approval, earnings, capital, liquidity, regulatory restrictions and the ability of Equity Bank to upstream dividends. No formal earnings or margin guidance is provided in the filing.
- Key exposures include commercial real estate concentration, local economic conditions in the four-state footprint, interest-rate sensitivity, deposit competition and liquidity risk.
- At December 31, 2023, the available-for-sale securities portfolio had $51.9 million of net unrealized loss and $81.5 million of gross unrealized losses. Management attributed the losses principally to interest rates and stated it did not expect credit losses on the affected portfolios.
- The ten largest loan relationships totaled approximately $344.7 million, or about 10.3% to 10.4% of total loans. The ten largest non-brokered depositors represented $270.6 million, or approximately 6.5% of deposits.
- The Company disclosed three pending overdraft-fee lawsuits, including proposed class-action allegations. The Company considers the claims without merit, but cannot reasonably estimate potential losses.
- The Company failed to satisfy the return-on-assets covenant under its bank-stock loan facility during 2023. The facility had no outstanding balance at year-end, a $25.0 million maximum commitment and was renewed through February 10, 2025. The Company has pledged all Equity Bank stock as collateral.
- Management and the auditors concluded that internal control over financial reporting was effective. The critical audit matter was the allowance for credit losses, particularly qualitative adjustments and economic assumptions.
Most important facts for investors to verify
- Whether the securities repositioning was a one-time event and whether the resulting portfolio produces sustainably higher yields.
- Deposit trends, uninsured-deposit levels, deposit pricing and reliance on Federal Reserve, FHLB and other wholesale funding.
- Commercial real estate concentrations, classified loans, nonaccrual loans, charge-offs and the adequacy of the $43.5 million allowance.
- The financial contribution, integration costs and asset quality of the Rockhold/Bank of Kirksville acquisition.
- The effect of interest-rate changes on net interest income, economic value of equity and securities valuations.
- The potential financial and regulatory impact of the overdraft-fee litigation and the bank-stock loan covenant breach.
- Dividend capacity, share repurchases and capital ratios after acquisition-related balance-sheet growth.