Equity Bancshares, Inc. — Q2 2022 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, consumer and wealth-management services through 66 full-service banking sites in Arkansas, Kansas, Missouri and Oklahoma. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, filed August 8, 2022.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $39.6 million | $34.6 million | $78.9 million | $66.4 million |
| Provision/(reversal) for credit losses | $0.8 million | $(1.7) million | $0.4 million | $(7.4) million |
| Non-interest income | $9.6 million | $9.1 million | $18.7 million | $15.8 million |
| Non-interest expense | $31.4 million | $25.8 million | $60.9 million | $50.7 million |
| Net income | $15.3 million | $15.2 million | $30.9 million | $30.2 million |
| Diluted EPS | $0.94 | $1.03 | $1.86 | $2.06 |
| Net interest margin | 3.39% | 3.50% | 3.39% | 3.41% |
- Q2 annualized ROAA was 1.21%, ROAE was 13.99% and return on average tangible common equity was 17.60%.
- Q2 efficiency ratio was 64.38%, compared with 58.85% in the prior-year quarter; the six-month ratio was 62.4% versus 61.4%.
- At June 30, 2022, total assets were $5.00 billion, gross loans were $3.22 billion, net loans were $3.18 billion, available-for-sale securities were $1.29 billion, deposits were $4.29 billion and stockholders’ equity was $428.1 million.
- The allowance for credit losses was $48.2 million, or approximately 1.5% of total loans. Nonaccrual loans were $18.9 million, and total nonperforming assets were $37.0 million, or 0.74% of total assets.
- Cash and cash equivalents were $103.6 million. Six-month operating cash flow was $43.1 million; investing activities used $173.1 million and financing activities used $26.4 million.
- Borrowings included $80.0 million of Federal Home Loan Bank advances, $52.8 million of retail repurchase agreements and $96.1 million of subordinated debt.
- Equity Bank remained classified as well capitalized. At June 30, 2022, its total risk-based capital ratio was 15.14%, Common Equity Tier 1 ratio was 13.88% and Tier 1 leverage ratio was 9.94%.
Material changes versus comparable periods
- Q2 net income increased $0.1 million year over year, while six-month net income increased $0.7 million. Higher loan and taxable securities income was substantially offset by higher operating expenses and the shift from credit-loss reversals to provisions.
- Six-month net interest income increased $12.5 million, primarily from higher average loan and taxable securities balances. The six-month net interest margin declined two basis points to 3.39%.
- Q2 non-interest income increased 5.9% to $9.6 million. Six-month non-interest income increased 18.0% to $18.7 million, led by service charges, debit-card income, other non-interest income and bank-owned life insurance income. Mortgage banking income declined materially.
- Q2 non-interest expense increased 21.8%, and six-month expense increased 20.1%, primarily due to additional personnel and occupancy costs following the American State Bancshares and Security Bank acquisitions, higher data-processing costs and increased other expenses.
- Gross loans increased $67.8 million, or 2.1%, from December 31, 2021. Commercial real estate loans increased $156.9 million, while residential real estate loans declined $59.2 million and agricultural loans declined $42.2 million.
- Deposits declined $128.2 million, or 2.9%, from year-end. Cash declined $156.4 million, while Federal Home Loan Bank advances increased from zero to $80.0 million.
- Stockholders’ equity declined $72.5 million, mainly because after-tax unrealized losses on available-for-sale securities reduced accumulated other comprehensive income by $79.2 million. The company repurchased 740,227 shares for $23.6 million during the first six months.
- Nonperforming assets declined from $66.0 million at December 31, 2021, to $37.0 million at June 30, 2022. COVID-19-related payment deferrals were zero at June 30, compared with $36.3 million at year-end.
- On June 24, 2022, Equity Bank completed the sale of three Kansas branches to United Bank & Trust, transferring $52.7 million of deposits and $26.1 million of loans and recognizing a $0.5 million gain.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal financial guidance or earnings targets. Management stated that the allowance for credit losses was adequate at June 30, 2022, but warned that changes in credit quality, inflation, supply-chain conditions, monetary policy and broader economic conditions could produce materially different future provisions or losses.
- Interest-rate risk is significant. Management’s modeled 12-month net interest income impact was negative 1.2% under a 100-basis-point increase and negative 4.4% under a 300-basis-point increase. Modeled economic value of equity declined 14.0% under a 300-basis-point increase.
- The securities portfolio had $102.7 million of gross unrealized losses at June 30, 2022, compared with $12.9 million at year-end, primarily from rising interest rates. Management did not intend to sell the securities and recorded the losses in accumulated other comprehensive income rather than earnings.
- Key risks include commercial real estate concentration, borrower credit deterioration, collateral-value declines, deposit attrition, liquidity needs, interest-rate volatility, regulatory capital requirements, LIBOR transition, technology and cybersecurity disruptions, acquisition integration and competition.
- The company disclosed a November 2021 cyberattack and related investigation and remediation activities. Management stated that its products and internal systems were secure, but identified the matter as a forward-looking risk.
- Equity Bank faces two proposed class-action lawsuits alleging improper overdraft-fee collection, one in Kansas and one in Missouri. The company believes the claims are without merit and cannot reasonably estimate potential losses.
- Subordinated debt includes $75.0 million of 7.00% fixed-to-floating notes due 2030 and subordinated debentures tied primarily to LIBOR. The company states that its LIBOR fallback provisions are operational and continues to evaluate the transition.
Important facts for investors to verify
- Whether deposit declines and increased FHLB borrowing persist, and how funding costs respond to further rate increases.
- The duration and market-value sensitivity of the available-for-sale securities portfolio, including the effect of accumulated unrealized losses on tangible capital.
- Commercial real estate concentration, changes in nonaccrual and classified loans, and the adequacy of the $48.2 million allowance for credit losses.
- Whether higher personnel, occupancy, technology and other operating costs normalize after the 2021 acquisitions.
- The sustainability of service-charge, derivative-related and other non-interest income, particularly as mortgage banking activity declines.
- The status and potential exposure of the overdraft-fee litigation and any developments from the cyberattack investigation.
- Progress on LIBOR-linked contracts and the effect of the transition on subordinated debt, derivatives and variable-rate loans.
- Capital ratios after share repurchases, dividends, securities-market losses and any future balance-sheet growth.