Equity Bancshares, Inc. 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, mortgage, agricultural and wealth-management services through 69 full-service locations in Arkansas, Kansas, Missouri and Oklahoma. This unaudited Form 10-Q covers the three months ended March 31, 2022, with comparisons to March 31, 2021, and balance-sheet comparisons to December 31, 2021. Dollar amounts are in thousands unless otherwise stated.
Key financial metrics
| Metric | Q1 2022 | Comparable period or prior period |
|---|---|---|
| Net income | $15.7 million | $15.1 million in Q1 2021 |
| Diluted EPS | $0.93 | $1.02 in Q1 2021 |
| Net interest income | $39.3 million | $31.8 million in Q1 2021 |
| Net interest margin | 3.38% | 3.31% in Q1 2021 |
| Non-interest income | $9.0 million | $6.7 million in Q1 2021 |
| Non-interest expense | $29.5 million | $24.9 million in Q1 2021 |
| Efficiency ratio | 60.36% | 64.18% in Q1 2021 |
| Cash flow from operating activities | $7.8 million | $23.7 million in Q1 2021 |
| Cash and cash equivalents | $90.1 million | $260.0 million at December 31, 2021 |
| Total assets | $5.08 billion | $5.14 billion at December 31, 2021 |
| Total loans held for investment | $3.24 billion gross; $3.19 billion net | $3.16 billion gross; $3.11 billion net at December 31, 2021 |
| Total deposits | $4.38 billion | $4.42 billion at December 31, 2021 |
| Total borrowings | $194.2 million | $151.9 million at December 31, 2021 |
| Stockholders’ equity | $452.0 million | $500.6 million at December 31, 2021 |
Net income increased 3.8% year over year, while diluted EPS declined because of a higher share count. Annualized return on average assets was 1.24%, return on average equity was 12.88%, and return on average tangible common equity was 15.85%.
Material changes versus prior comparable period
- Interest and dividend income increased $6.8 million, led by $5.3 million of higher loan interest income and $1.6 million of higher taxable securities income. Average loans increased materially year over year, partly reflecting acquisitions.
- Interest expense declined $0.7 million. The cost of interest-bearing deposits decreased to 0.22% from 0.36%, primarily because of lower certificate-of-deposit costs.
- Net interest income increased $7.5 million, and net interest margin improved seven basis points to 3.38%.
- The credit-loss provision was a $0.4 million reversal in Q1 2022, compared with a $5.8 million reversal in Q1 2021. Management attributed the current-quarter reversal mainly to releases on specifically analyzed loans, partly offset by inflation, geopolitical and monetary-policy risks.
- Non-interest income increased 34.4% to $9.0 million. Service charges and fees increased $0.9 million, debit card income increased $0.3 million, and other non-interest income increased $1.1 million; mortgage banking income declined $0.4 million.
- Non-interest expense increased 18.4% to $29.5 million, principally because of higher salaries and benefits, data processing, occupancy and equipment costs. These increases included costs associated with the American State Bancshares and Security Bank acquisitions.
- Gross loans increased $87.0 million, or 2.8%, from December 31, 2021. Commercial and industrial loans increased 10.9% and commercial real estate loans increased 4.4%; agricultural loans declined 10.1% and residential real estate loans declined 3.8%.
- Total deposits declined $40.3 million, or 0.9%. Reciprocal and brokered deposits declined to $316.0 million from $373.5 million.
- Stockholders’ equity declined $48.6 million primarily because of after-tax unrealized losses on available-for-sale securities. Accumulated other comprehensive loss was $50.0 million at March 31, 2022, compared with accumulated other comprehensive income of $1.8 million at year-end 2021.
Credit quality, liquidity, debt and capital
- The allowance for credit losses was $47.6 million, or 1.5% of gross loans, compared with $48.4 million at December 31, 2021. Net charge-offs were $0.4 million, compared with net charge-offs of $0.1 million in Q1 2021.
- Nonaccrual loans declined to $20.7 million from $29.4 million at year-end. Total nonperforming assets declined to $37.5 million, or 0.74% of total assets, from $66.0 million, or 1.28%.
- Potential problem loans increased to $49.3 million from $32.6 million. The filing states that $6.3 million of loan modifications were considered troubled debt restructurings during the quarter, and $0.8 million of agricultural loans subsequently defaulted on modified terms during the preceding 12 months.
- Available-for-sale securities totaled $1.35 billion at fair value. Unrealized losses increased substantially to $69.1 million before tax, primarily because of higher interest rates; management stated that the securities were high quality and that it did not expect to be required to sell them before recovery.
- Cash and cash equivalents decreased $169.9 million. Investing activities used $165.9 million, primarily for securities purchases and loan growth; financing activities used $11.8 million, including deposit outflows, dividends and $12.4 million of share repurchases.
- At March 31, 2022, borrowings included $48.2 million of retail repurchase agreements, $50.0 million of Federal Home Loan Bank advances and $96.0 million of subordinated debt. The company had no outstanding balance under its bank stock loan facility and no Federal Reserve discount-window borrowings.
- Equity Bank remained categorized as well capitalized. Its March 31, 2022 ratios included total risk-based capital of 15.15%, Tier 1 risk-based capital of 13.90%, common equity Tier 1 capital of 13.90% and Tier 1 leverage of 9.98%.
- Off-balance-sheet commitments included $272.1 million of commitments to make loans, $13.6 million of mortgage loans in process, $426.6 million of unused credit lines and $20.5 million of standby letters of credit.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide quantitative earnings or balance-sheet guidance. Management cited continued loan growth, low-cost core deposits and relationship development as positive factors, but emphasized that results remain sensitive to interest rates, credit quality and economic conditions.
- Interest-rate risk is material. Management’s modeled 12-month net-interest-income sensitivity was negative 1.5% for an immediate 100-basis-point increase, negative 3.1% for a 200-basis-point increase and negative 5.1% for a 300-basis-point increase. The modeled economic value of equity declined 10.1% under a 300-basis-point increase.
- Major risks include commercial and real estate credit deterioration, changes in interest rates and monetary policy, inflation, liquidity pressure, deposit attrition, changes in securities values, agricultural conditions, competition, regulatory capital requirements, cybersecurity and technology disruptions, and integration costs from acquisitions.
- The company disclosed two lawsuits filed in January and February 2022 alleging improperly collected overdraft fees; plaintiffs seek class-action certification. Management believes the claims are without merit, but the potential loss cannot currently be reasonably estimated.
- The company reported that its November 2021 cyberattack remains a risk factor, including uncertainty regarding the nature, source and duration of the attack and the effectiveness of mitigation and remediation efforts.
- The company acquired American State Bancshares in October 2021 and certain Security Bank locations in December 2021. A separate transaction to sell three Kansas branches to United Bank & Trust was scheduled to close on June 24, 2022; the branches had average Q1 loans of $28.8 million and deposits of $68.9 million.
- The company repurchased 384,383 shares during the quarter at an average price of $32.21, leaving 482,744 shares available under the repurchase authorization.
- The company’s subordinated debentures primarily reference three-month LIBOR, while the subordinated notes convert to SOFR-based floating rates in 2025. Management stated that its LIBOR fallback provisions were operational but that the ultimate financial impact remains dependent on contracts outstanding at transition.
Most important facts for investors to verify
- Whether the sharp decline in accumulated other comprehensive income and tangible common equity affects regulatory capital, securities-sale decisions or future earnings.
- Whether the increase in potential problem loans and higher quarterly net charge-offs signals future allowance additions despite currently low nonperforming-asset ratios.
- The sustainability of loan growth and net interest margin as the Federal Reserve raises rates and deposit pricing changes.
- Liquidity coverage after the $169.9 million quarterly decline in cash, including continued access to Federal Home Loan Bank and other borrowing facilities.
- The ultimate exposure from the overdraft-fee litigation, the November 2021 cyberattack and any related remediation or regulatory costs.
- The financial and operational effects of the American State Bancshares and Security acquisitions and the planned sale of three Kansas branches.
- The effect of share repurchases and the expanded share count on diluted EPS, tangible book value and capital ratios.