Equity Bancshares, Inc. — Q3 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, operated 65 full-service banking locations in Arkansas, Kansas, Missouri and Oklahoma at September 30, 2023. The filing covers the three and nine months ended September 30, 2023, with comparisons primarily to the corresponding 2022 periods and December 31, 2022 balance-sheet data.
Key financial metrics
| Metric | Q3 2023 | 9M 2023 | Comparable period |
|---|---|---|---|
| Interest and dividend income | $65.0 million | $182.4 million | $48.5 million / $134.8 million |
| Net interest income | $41.0 million | $119.6 million | $41.9 million / $120.8 million |
| Provision for credit losses | $1.2 million | $1.2 million | $(0.1) million / $0.3 million |
| Non-interest income | $8.7 million | $24.3 million | $9.0 million / $27.6 million |
| Non-interest expense | $34.2 million | $100.6 million | $32.2 million / $93.1 million |
| Net income | $12.3 million | $36.1 million | $15.2 million / $46.1 million |
| Diluted EPS | $0.80 | $2.30 | $0.93 / $2.79 |
| Net interest margin | 3.51% | 3.44% | 3.62% / 3.46% |
| Efficiency ratio | 68.8% | 69.3% | 63.1% / 62.6% |
Interest income increased substantially because of higher market rates and loan yields, but the benefit was largely offset by sharply higher deposit and borrowing costs. Loan yield increased to 6.67% in Q3 from 5.09% in the prior-year quarter, while the cost of interest-bearing deposits increased to 2.40% from 0.57%.
Balance sheet, liquidity and capital
- Total assets were $4.95 billion, down $36.4 million, or approximately 0.7%, from December 31, 2022.
- Gross loans held for investment were $3.28 billion, down $29.4 million, or 0.9%. Commercial real estate represented 52.5% of loans, and total real estate loans represented 75.8%.
- Total deposits were $4.08 billion, down $159.6 million, or 3.8%, from year-end. Non-interest-bearing demand deposits declined to $936.2 million from $1.10 billion.
- Cash and cash equivalents increased to $199.0 million from $104.4 million at year-end.
- Borrowings totaled approximately $376.5 million, including $100.0 million of Federal Home Loan Bank advances, $140.0 million of Federal Reserve Bank borrowings, $39.7 million of retail repurchase agreements and $96.8 million of subordinated debt.
- The $140.0 million Federal Reserve borrowing was outstanding under the Bank Term Funding Program, at a 4.38% rate and maturing March 22, 2024. Management stated that it was obtained as a precautionary liquidity measure.
- For the nine months, operating activities provided $63.6 million, investing activities provided $120.6 million and financing activities used $89.6 million. The financing outflow included deposit runoff, debt repayments and $17.6 million of treasury-stock purchases.
- Equity Bank remained classified as well capitalized. At September 30, 2023, its total risk-based capital ratio was 15.88%, common equity Tier 1 ratio was 14.67% and Tier 1 leverage ratio was 10.80%.
Material changes versus prior comparable periods
- Q3 net income declined $2.9 million, or approximately 19%, from Q3 2022; nine-month net income declined $10.0 million, or approximately 22%.
- Q3 net interest income decreased $0.9 million despite higher asset yields, as funding-cost increases exceeded the improvement in interest income. Nine-month net interest income decreased $1.2 million.
- Net interest margin declined 11 basis points in Q3 and two basis points for the nine-month period. The interest-rate spread declined to 2.92% in Q3 from 3.39%.
- Non-interest income declined 2.6% in Q3 and 12.1% for the first nine months. The nine-month decline included a $1.3 million loss on securities transactions and the absence of a $0.5 million branch-sale gain recorded in 2022. Mortgage banking income also fell because of higher mortgage rates.
- Non-interest expense increased 6.2% in Q3 and 8.0% for the nine months. Notable increases included data processing, FDIC insurance, professional fees, advertising, recruiting and travel expenses.
- Loans declined modestly, while asset quality indicators were mixed. Nonaccrual loans increased to $19.4 million from $17.6 million at year-end, and total nonperforming assets increased to $20.5 million from $18.2 million. Potential problem loans declined to $14.5 million from $37.6 million.
- The allowance for credit losses declined to $44.2 million from $45.8 million at year-end, equal to 1.3% of total loans. Nine-month net charge-offs were $2.8 million, compared with $2.1 million in the prior-year period.
- Available-for-sale securities declined to $1.06 billion from $1.18 billion. Gross unrealized losses on those securities were $163.7 million at September 30, 2023, contributing to accumulated other comprehensive loss of $122.0 million.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings, margin, loan-growth or deposit-growth guidance. Management stated that it continues to expect credit-loss assumptions to reflect slower prepayments, elevated inflation, supply-chain issues and monetary-policy effects, while also stating that overall credit trends remained positive. Management believes the allowance was adequate at September 30, 2023, but cautioned that future losses could be substantial relative to the allowance.
- Management identified deposit stability and liquidity as important risks following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank. Uninsured deposits were 36.4% of non-brokered deposits at September 30, 2023, compared with 25.3% at December 31, 2022.
- Interest-rate risk remains significant. The company’s modeled 12-month net interest income sensitivity was positive 7.3% under an immediate 300-basis-point increase and negative 2.3% under a 200-basis-point decrease. Modeled economic value of equity declined 10.2% under a 300-basis-point increase.
- The company carries significant commercial real estate exposure and identifies real estate values, borrower credit quality, local economic conditions and collateral appraisals as material risks.
- Three customer lawsuits allege improperly collected overdraft fees, including proposed class actions in Kansas and Missouri. The company believes the claims lack merit, but stated that potential losses cannot currently be reasonably estimated.
- The company adopted new accounting guidance for troubled-debt modifications and tax-credit investments in 2023. Management stated that the changes did not materially affect financial condition, results of operations or cash flows.
- The board approved a new authorization to repurchase up to 1.0 million shares from October 1, 2023 through September 30, 2024. No shares were repurchased under that program during Q3.
Most important facts for investors to verify
- Whether deposit outflows stabilize and whether higher deposit beta continues to compress net interest margin.
- The quality and concentration of the commercial real estate portfolio, including trends in nonaccrual, past-due and potential problem loans.
- Whether charge-offs and credit-loss provisions increase as interest rates remain elevated or economic conditions weaken.
- The liquidity impact and refinancing risk associated with the $140.0 million Federal Reserve borrowing maturing in March 2024 and other short-term funding.
- The realizability of the securities portfolio’s unrealized losses and the effect of interest-rate changes on tangible capital and accumulated other comprehensive loss.
- The potential financial and reputational impact of the overdraft-fee litigation and any future regulatory scrutiny of uninsured deposits.