Equity Bancshares, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Equity Bancshares, Inc. is a Wichita, Kansas-based financial holding company whose subsidiary, Equity Bank, provides banking services primarily to businesses, business owners and individuals through 64 full-service locations in Arkansas, Kansas, Missouri and Oklahoma. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, with comparisons to June 30, 2022 and December 31, 2022.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Year-over-year change | Six months ended June 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Net interest income | $39.4 million | Down $0.1 million | $78.5 million | Down $0.3 million |
| Provision for credit losses | $0.3 million | Down $0.5 million | $(0.1) million reversal | Compared with $0.4 million provision |
| Non-interest income | $7.0 million | Down $2.7 million | $15.6 million | Down $3.1 million |
| Non-interest expense | $33.1 million | Up $1.7 million | $66.4 million | Up $5.5 million |
| Net income | $11.5 million | Down 24.9% | $23.8 million | Down 23.0% |
| Diluted EPS | $0.74 | Down from $0.94 | $1.51 | Down from $1.86 |
| Net interest margin | 3.38% | Down 1 basis point | 3.41% | Up 2 basis points |
| Efficiency ratio | 69.45% | Up from 64.38% | 69.6% | Up from approximately 62.4% |
At June 30, 2023, total assets were $5.09 billion, gross loans held for investment were $3.32 billion, net loans were $3.28 billion, deposits were $4.23 billion and stockholders’ equity was $418.4 million. Loans increased 0.3% from December 31, 2022, led by commercial real estate growth, while total deposits decreased 0.3%.
Interest income increased substantially as loan yields rose to 6.34% in the second quarter from 4.59% a year earlier. This benefit was largely offset by sharply higher funding costs: the cost of interest-bearing deposits rose to 2.14% from 0.28%, and total interest expense increased to $21.8 million from $4.1 million.
Six-month operating cash flow was $38.5 million. Investing activities provided $69.3 million, primarily reflecting securities maturities and sales, while financing activities provided $66.0 million. Cash and cash equivalents increased to $278.1 million from $104.4 million at December 31, 2022.
Material changes versus comparable periods
- Second-quarter net income declined $3.8 million, primarily because non-interest income decreased $2.7 million and non-interest expense increased $1.7 million.
- Non-interest income included a $1.3 million net loss on securities transactions, compared with a $32 thousand loss in the prior-year quarter. Mortgage banking income also declined 50.2% year over year.
- Non-interest expense increased due mainly to higher data processing, professional fees, advertising, FDIC insurance costs and other expenses. Other expense included approximately $1.0 million of solar tax-credit amortization in the quarter.
- Net interest income remained broadly stable despite higher asset yields because deposit and other funding costs rose faster. The quarterly interest-rate spread narrowed to 2.83% from 3.25%.
- The allowance for credit losses declined to $44.5 million from $45.8 million at year-end, equal to approximately 1.3% of gross loans. Second-quarter net charge-offs were $0.9 million, compared with $0.2 million in the prior-year quarter.
- Nonaccrual loans decreased to $15.0 million from $17.6 million at December 31, 2022. Total nonperforming assets declined to $15.7 million from $18.2 million.
- Unrealized losses on available-for-sale securities remained significant at $146.1 million before tax, although accumulated other comprehensive loss improved to $110.2 million from $113.5 million at year-end.
- The company repurchased 669,166 shares during the first six months at an average price of $26.55 per share, leaving 167,107 shares authorized for repurchase at June 30, 2023.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued pressure from elevated funding costs and noted that additional Federal Reserve rate increases were expected during the remainder of 2023. Management stated that the efficiency ratio may remain above its five-year historical average until fixed-rate assets reprice or mature.
Equity Bank borrowed $140.0 million under the Federal Reserve’s Bank Term Funding Program as a precaution amid industry-wide concerns following bank failures. The borrowing carried a 4.38% rate and matured March 22, 2024. Management said the company had not experienced deposit runoff comparable to the failed institutions and believed its deposit composition, concentration and asset-liability management practices supported liquidity.
At June 30, 2023, Equity Bank remained classified as well capitalized. Regulatory ratios included a 14.33% common equity Tier 1 ratio, a 14.33% Tier 1 risk-based capital ratio, a 15.54% total risk-based capital ratio and a 10.65% Tier 1 leverage ratio. The company used the regulatory accumulated-other-comprehensive-income exception in its capital calculations.
Key risks include deposit migration or loss of customer confidence, higher uninsured deposits, rising funding costs, interest-rate sensitivity, commercial real estate concentration, deterioration in borrower credit quality, potential allowance shortfalls, liquidity constraints, cybersecurity and operational disruptions, increased regulatory requirements and competition. Uninsured deposits were 25.5% of non-brokered deposits at June 30, 2023.
Equity Bank is defending three putative class-action lawsuits alleging improperly collected overdraft fees. The company considers the claims without merit, but stated that potential losses cannot currently be reasonably estimated.
Important facts for investors to verify
- Whether deposit pricing and higher-cost time or brokered deposits continue to pressure net interest margin and earnings.
- The composition and stability of uninsured, reciprocal and brokered deposits, including the $628.7 million of reciprocal and brokered deposits reported at June 30, 2023.
- Exposure to commercial real estate, which represented 53.1% of gross loans, and the effect of economic or real estate-market deterioration on credit losses.
- Trends in nonaccrual loans, potential problem loans, charge-offs and the adequacy of the $44.5 million allowance for credit losses.
- The liquidity implications of the $140.0 million Federal Reserve borrowing, available borrowing capacity and pledged collateral.
- The effect of the $146.1 million pretax unrealized loss in available-for-sale securities on tangible capital and liquidity if securities must be sold.
- Potential financial, legal and reputational exposure from the overdraft-fee litigation and any future regulatory response to banking-sector events.
- The sustainability of earnings given the $1.3 million securities loss, tax-credit-related items and other nonrecurring or volatile income and expense components.