Business Context and Reporting Period
Equity Bancshares, Inc. is a Wichita-based bank holding company operating through Equity Bank, a Kansas state-chartered bank. The Company provides commercial, consumer, mortgage, treasury and wealth-management services through 69 branches in Arkansas, Kansas, Missouri and Oklahoma. This Form 10-K covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020.
Growth remained acquisition-driven and commercial-banking focused. The Company completed the American State Bancshares, Inc. acquisition on October 1, 2021, and acquired three Security Bank of Kansas City branches on December 3, 2021.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net interest income | $142.6 million | $132.7 million | +7.5% |
| Provision for credit losses | $(8.5) million reversal | $24.3 million provision | $32.7 million favorable |
| Total non-interest income | $32.8 million | $26.0 million | +26.2% |
| Net income | $52.5 million | $(75.0) million | +$127.5 million |
| Diluted EPS | $3.43 | $(4.97) | Returned to profitability |
| Net interest margin | 3.44% | 3.63% | Down 19 basis points |
| Efficiency ratio | 63.01% | 66.36% | Improved |
| Total assets | $5.14 billion | $4.01 billion | +28.0% |
| Total deposits | $4.42 billion | $3.45 billion | +28.2% |
| Loans held for investment, gross | $3.16 billion | $2.59 billion | +21.8% |
| Stockholders’ equity | $500.6 million | $407.6 million | +22.8% |
| Cash and cash equivalents | $260.0 million | $280.7 million | Down $20.7 million |
Return on average assets was 1.18%, return on average equity was 11.75%, and return on average tangible common equity was 14.10%. Tangible book value per common share increased to $25.65 from $24.68.
The loan portfolio was concentrated in commercial real estate at $1.49 billion, or 47.1% of total loans, and residential real estate at $638.1 million, or 20.2%. Commercial and industrial loans were $567.5 million, or 18.0%. The allowance for credit losses was $48.4 million, or 1.53% of total loans, compared with $33.7 million, or 1.30%, at year-end 2020.
Net charge-offs increased to $8.7 million from $2.8 million. Nonperforming assets increased to $66.0 million from $54.6 million, although nonperforming assets as a percentage of total assets improved modestly to 1.28% from 1.36%.
Borrowings totaled $151.9 million at year-end, including $95.9 million of subordinated debt and $56.0 million of retail repurchase agreements. No Federal Home Loan Bank advances or bank stock loan borrowings were outstanding at year-end. The Company reported a 9.09% Tier 1 leverage ratio, 12.03% CET1 ratio and 15.96% total risk-based capital ratio.
Cash Flow and Liquidity
- Operating activities provided $102.7 million of cash.
- Investing activities used $315.3 million, primarily reflecting $785.3 million of securities purchases, partially offset by $472.9 million of securities proceeds and cash received in the ASBI and Security acquisitions.
- Financing activities provided $191.9 million, principally from deposit growth, partially offset by debt repayments and $18.7 million of treasury-stock purchases.
- Cash and cash equivalents declined by $20.7 million to $260.0 million.
- Management stated that liquidity needs could be met through operating cash flow, loan and securities maturities, core deposits, Federal Home Loan Bank capacity and other borrowing relationships.
Material Changes Versus the Prior Comparable Period
- The Company returned to profitability, primarily because 2020 included a $104.8 million non-cash goodwill impairment charge. No goodwill impairment was recorded in 2021.
- Net interest income increased despite a decline in net interest margin, as higher earning-asset volumes and lower funding costs offset lower asset yields.
- Average loan balances increased 6.9%, while the year-end gross loan portfolio increased 21.8%, including acquired loans and purchased residential mortgage pools.
- Deposits increased 28.2%, with non-interest-bearing demand deposits increasing 57.2% and reaching 28.1% of total deposits.
- Non-interest income increased 26.2%, led by service charges, debit-card income, bank-owned life insurance income, trust income and other customer-related fees.
- Non-interest expense excluding goodwill impairment increased, including higher merger expenses of $9.2 million related primarily to the ASBI acquisition.
- The Company adopted CECL on January 1, 2021. The adoption increased the loan allowance by $15.7 million, reclassified $10.4 million of purchased-credit-impaired discounts into the allowance, and reduced retained earnings by $12.4 million.
Guidance, Outlook, Commentary and Risks
Management expects to continue pursuing organic commercial-loan and deposit growth and selective community-bank and branch acquisitions. The Company emphasized using lower-cost community-market deposits to fund commercial lending in metropolitan markets.
COVID-19 continued to affect borrowers and operations. At December 31, 2021, 20 loans totaling $36.3 million remained on payment deferral, down from 28 loans totaling $60.9 million at year-end 2020. PPP loans declined to 144 loans totaling $44.8 million from 1,612 loans totaling $253.7 million. Management believed remaining PPP loans were fully government guaranteed, but noted that changes in forgiveness or guarantee status could require additional credit-loss provisions.
The Company disclosed a sophisticated November 2021 cyberattack involving malware and unauthorized access to certain customer, employee and vendor information. Management stated that core processing systems were not accessed, normal operations resumed by November 2, and no material impact was expected based on information then known; however, the investigation, costs, insurance coverage and potential misuse of information remained subject to uncertainty.
- Credit risk remains significant because of commercial real estate exposure, geographic concentration in four Midwestern states, large borrower relationships and reliance on real estate and business collateral.
- The ten largest loan relationships totaled approximately $306.2 million, or 9.7% of total loans.
- Interest-rate risk is material. Management’s modeled 12-month net interest income impact was negative 4.4% under both an immediate 300-basis-point increase and a 100-basis-point decrease in rates.
- LIBOR transition could affect loans, derivatives, borrowings and subordinated debt. Management stated that existing fallback language was operational but that the ultimate financial impact remained uncertain.
- Acquisition integration, goodwill impairment, deposit concentration, liquidity, regulatory capital, cybersecurity, third-party technology providers and changing banking regulations remain material risks.
- Equity Bank was categorized as well capitalized, but dividends from the bank to the holding company remain subject to regulatory and capital restrictions.
- The Company paid $1.1 million of common-stock dividends in 2021 and repurchased approximately 613,756 shares for $18.7 million, including 132,873 shares under the new 2021-2022 authorization.
Important Facts for Investors to Verify
- Assess whether loan growth, particularly commercial real estate growth, is generating adequate risk-adjusted returns as interest rates and local economic conditions change.
- Review subsequent credit performance, charge-offs, nonperforming assets, deferred loans and the adequacy of the $48.4 million CECL allowance.
- Evaluate the realized revenue, expense savings, credit marks and integration costs from the ASBI and Security acquisitions.
- Monitor the financial and regulatory consequences of the November 2021 cyberattack, including insurance recoveries, remediation costs, litigation and customer attrition.
- Reconcile liquidity sources and uses, deposit concentration, uninsured deposits, short-term repurchase agreements and available borrowing capacity.
- Review sensitivity of net interest income, securities valuations and capital to rising rates, deposit repricing and mortgage-backed-security prepayments.
- Confirm future dividend capacity, subordinated-debt terms, covenant compliance and the renewal terms of the Equity Bank stock-secured borrowing facility.
- Verify all non-GAAP measures, including tangible book value, tangible common equity and the efficiency ratio, against the filing’s reconciliations.