Equity Bancshares, Inc. — FY2022 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 services in Arkansas, Kansas, Missouri and Oklahoma. The filing covers the fiscal year ended December 31, 2022; the source does not provide a separate fourth-quarter income statement.
At year-end, Equity Bank operated 65 full-service branches, had 732 full-time-equivalent employees and had elected financial holding company status during the fourth quarter. The company sold four branches during 2022.
Key financial metrics
| Metric | FY2022 / Dec. 31, 2022 | FY2021 / Dec. 31, 2021 | Change |
|---|---|---|---|
| Net income | $57.7 million | $52.5 million | Up 9.9% |
| Diluted EPS | $3.51 | $3.43 | Up $0.08 |
| Net interest income | $162.8 million | $142.6 million | Up 14.2% |
| Net interest margin | 3.51% | 3.44% | Up 7 basis points |
| Non-interest income | $36.0 million | $32.8 million | Up 9.5% |
| Non-interest expense | $128.4 million | $119.5 million | Up 7.5% |
| Return on average assets | 1.15% | 1.18% | Down 3 basis points |
| Return on average equity | 13.08% | 11.75% | Up 133 basis points |
| Total assets | $4.98 billion | $5.14 billion | Down 3.0% |
| Total deposits | $4.24 billion | $4.42 billion | Down 4.0% |
| Net loans held for investment | $3.27 billion | $3.11 billion | Up 5.1% |
| Stockholders’ equity | $410.1 million | $500.6 million | Down 18.1% |
| Cash and cash equivalents | $104.4 million | $260.0 million | Down $155.5 million |
The allowance for credit losses was $45.8 million, or 1.38% of total loans, compared with $48.4 million, or 1.53%, in 2021. The provision for credit losses was $125,000, versus an $8.5 million reversal in 2021. Net charge-offs declined to $2.6 million from $8.7 million, and nonperforming assets declined to $18.2 million, or 0.37% of assets, from $66.0 million, or 1.28%.
Cash provided by operating activities was $74.1 million. Investing activities used $214.2 million, primarily because of $182.0 million of securities purchases and a $181.9 million net increase in loans. Financing activities used $15.4 million, including deposit reductions and $33.2 million of treasury-stock purchases. Year-end borrowings were $281.7 million, including $138.9 million of Federal Home Loan Bank advances and $96.4 million of subordinated debt.
Regulatory capital remained strong. The consolidated CET1 ratio was 12.26%, total risk-based capital was 16.08% and the Tier 1 leverage ratio was 9.61%. Equity Bank was categorized as well capitalized, with a total risk-based capital ratio of 15.71% and a Tier 1 leverage ratio of 10.77%.
Material changes versus the prior comparable period
- Net income increased $5.2 million, driven primarily by higher net interest income after credit-loss provision and higher non-interest income, partly offset by higher operating expenses.
- Net interest income benefited from higher average loan and securities balances and higher asset yields as the Federal Reserve raised rates. Interest expense also increased materially, particularly on deposits and Federal Home Loan Bank advances.
- Commercial real estate loans increased to $1.72 billion, or 52.0% of total loans, from $1.49 billion. Commercial and industrial loans increased modestly, while residential real estate and agricultural loans declined.
- Deposits declined $178.2 million. Non-interest-bearing demand deposits declined 11.8%, while time deposits increased 24.6%, indicating a less favorable funding mix and rising deposit costs.
- Stockholders’ equity declined primarily because accumulated other comprehensive loss increased by $115.3 million, largely reflecting unrealized losses on available-for-sale securities, and treasury stock purchases totaled $33.2 million.
- Non-interest expense increased despite merger expense declining to $594,000 from $9.2 million. Salaries and benefits, data processing, occupancy and equipment, advertising and other expenses increased.
- The company repurchased 163,727 shares during the fourth quarter at an average price of $33.33, leaving 836,273 shares authorized for repurchase under the program.
Guidance, outlook, management commentary, risks and unusual items
Management expects to continue pursuing organic commercial-loan and deposit growth and selective community-bank acquisitions. The filing does not provide quantified earnings, revenue, margin or loan-growth guidance. Management noted that additional Federal Reserve rate increases were expected in 2023, with potential effects on net interest income, deposit pricing, liquidity and credit quality.
- The loan portfolio is concentrated in commercial real estate, commercial and industrial lending and borrowers in Arkansas, Kansas, Missouri and Oklahoma. The ten largest loan relationships totaled approximately $367.2 million, or 11.1% of total loans.
- Interest-rate risk is significant. Modeling showed a 5.0% positive 12-month net-interest-income impact under an immediate 300-basis-point increase, but a 10.7% decline in modeled economic value of equity. Results depend on assumptions regarding deposit repricing, prepayments and loan behavior.
- Available-for-sale securities had $148.1 million of gross unrealized losses at year-end, contributing to the $113.5 million accumulated other comprehensive loss. Management stated it did not expect credit losses and did not intend, or expect to be required, to sell the securities before recovery.
- Liquidity risk increased as cash and deposits declined and Federal Home Loan Bank advances increased. Management stated that liquidity needs could be met through operating cash flows, loan and securities maturities, core deposits, FHLB advances and other borrowing relationships.
- LIBOR-linked contracts, derivatives and subordinated debentures remain a transition risk. Relevant U.S. dollar LIBOR settings were scheduled to cease June 30, 2023; the filing states the financial impact was not clear because it depends on contracts outstanding at transition.
- Two putative class-action lawsuits allege improperly collected overdraft fees, one in Kansas and one in Missouri. The company considers the claims without merit, is defending them, and cannot reasonably estimate potential losses.
- The company had $15.2 million of unfunded commitments related to affordable-housing investments, expected to be funded from 2023 through 2036, plus substantial loan commitments, unused credit lines and standby letters of credit.
- The company pledged all Equity Bank stock as collateral for a bank-stock loan facility with no balance outstanding at year-end and a $25.0 million maximum commitment. The facility was renewed through February 10, 2024.
Most important facts for an investor to verify
- Whether deposit outflows continue and how quickly deposit costs increase relative to loan and securities yields.
- The sustainability of the 3.51% net interest margin after the 2022 rate increases and any subsequent rate changes.
- Commercial real estate concentrations, the ten-largest-borrower exposures and potential problem loans of $37.6 million at year-end.
- The adequacy of the $45.8 million allowance for credit losses under changing economic, real-estate and interest-rate conditions.
- The duration, liquidity value and unrealized-loss exposure of the securities portfolio, including $148.1 million of gross unrealized losses.
- Future effects of the 18.1% decline in stockholders’ equity and the impact of additional repurchases or dividends on capital.
- Resolution and potential exposure from the two overdraft-fee class-action lawsuits.
- Execution risk and capital requirements associated with future acquisitions and branch integration.
- The completion and economic effects of the LIBOR transition for loans, derivatives and subordinated debt.