Equity Bancshares, Inc. — Q1 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 to businesses, business owners and individuals through 64 locations in Arkansas, Kansas, Missouri and Oklahoma. This unaudited Form 10-Q covers the three months ended March 31, 2023, and was filed May 4, 2023. Dollar amounts are in thousands except per-share data.
Key financial metrics
| Metric | Q1 2023 | Comparable period or prior period |
|---|---|---|
| Interest and dividend income | $56.1 million | $42.7 million in Q1 2022 |
| Net interest income | $39.1 million | $39.3 million in Q1 2022 |
| Net interest margin | 3.44% | 3.38% in Q1 2022; 3.67% in Q4 2022 |
| Provision for credit losses | $(0.4) million reversal | $(0.4) million reversal in Q1 2022 |
| Non-interest income | $9.1 million | $9.0 million in Q1 2022 |
| Non-interest expense | $33.7 million | $29.5 million in Q1 2022 |
| Net income | $12.3 million | $15.7 million in Q1 2022 |
| Diluted earnings per share | $0.77 | $0.93 in Q1 2022 |
| Return on average assets | 1.00% | 1.24% in Q1 2022 |
| Return on average equity | 11.89% | 12.88% in Q1 2022 |
| Efficiency ratio | 70.00% | 60.36% in Q1 2022 |
| Total assets | $5.16 billion | $4.98 billion at December 31, 2022 |
| Gross loans held for investment | $3.33 billion | $3.31 billion at December 31, 2022 |
| Total deposits | $4.29 billion | $4.24 billion at December 31, 2022 |
| Cash and cash equivalents | $250.4 million | $104.4 million at December 31, 2022 |
| Stockholders’ equity | $425.1 million | $410.1 million at December 31, 2022 |
Operating cash flow was $19.1 million, compared with $7.8 million in Q1 2022. Investing activities used $18.2 million, while financing activities provided $145.1 million, primarily reflecting Federal Reserve and Federal Home Loan Bank funding activity. Net cash increased by $145.9 million during the quarter.
The allowance for credit losses was $45.1 million, or 1.4% of gross loans, compared with $45.8 million at year-end 2022. Net charge-offs were $0.4 million. Nonperforming assets were $17.1 million, or 0.33% of total assets, versus $18.2 million, or 0.37%, at December 31, 2022.
At March 31, 2023, Equity Bank was categorized as well capitalized. Equity Bancshares reported a 12.21% common equity Tier 1 ratio, 12.83% Tier 1 risk-based capital ratio, 15.98% total risk-based capital ratio and 9.60% Tier 1 leverage ratio. Borrowings included $140.0 million from the Federal Reserve Bank’s Bank Term Funding Program, $111.2 million of Federal Home Loan Bank advances, $45.1 million of retail repurchase agreements and $96.5 million of subordinated debt.
Material changes versus comparable periods
- Net income declined $3.3 million, or approximately 21%, year over year, primarily because non-interest expense increased $4.3 million.
- Interest income increased $13.5 million as loan and securities yields rose, but interest expense increased $13.7 million, largely because the cost of interest-bearing deposits increased to 1.73% from 0.22%.
- Net interest income declined modestly despite higher asset yields, as funding costs and interest-bearing liability volumes increased faster than earning-asset yields and volumes.
- Non-interest expense increased 14.5%, including higher salaries and benefits, professional fees, advertising, FDIC insurance and other expenses. Other expense increased $2.5 million, including higher unfunded-commitment credit-loss expense, solar tax-credit losses and insurance-related costs.
- Mortgage banking income fell 84.3% to $88 thousand because higher mortgage rates reduced activity, while bank-owned life insurance income increased $718 thousand.
- Loans increased $19.1 million, or 0.6%, from year-end. Commercial real estate loans represented 52.4% of gross loans and total real estate loans represented 75.4%.
- Deposits increased $45.1 million, but non-interest-bearing demand deposits declined $85.2 million. Time deposits increased $125.5 million, and reciprocal and brokered deposits increased to $625.6 million from $564.0 million.
- Accumulated other comprehensive loss improved by $12.3 million, primarily because of unrealized gains on available-for-sale securities and cash-flow hedges.
Outlook, management commentary, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that credit trends remained positive and supported a credit-loss reversal, while continuing to incorporate elevated inflation, supply-chain issues, slower prepayments and the effects of monetary policy into its loss estimates.
Recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank created market volatility and heightened customer, investor and regulatory focus on regional-bank liquidity, deposit composition and uninsured deposits. Equity Bank pledged additional investments and drew $140 million under the Bank Term Funding Program as a precaution. Management reported that the bank did not experience deposit runoff comparable to the failed institutions and believed its deposit concentration and asset-liability management practices were mitigating factors.
Key risks include rising deposit costs, interest-rate volatility, potential deposit outflows, reliance on real-estate collateral, commercial real-estate and agricultural credit exposure, adequacy of the allowance for credit losses, liquidity and funding access, higher FDIC assessments or regulatory requirements, cybersecurity and technology risks, competition, and LIBOR transition risk.
Three putative customer lawsuits allege improperly collected overdraft fees, including one filed in February 2023. The company believes the claims are without merit, but stated that potential losses cannot currently be reasonably estimated. The company repurchased 320,050 shares for $9.6 million during the quarter. The filing contains differing remaining-share figures under the repurchase program—459,488 in a footnote and 516,223 in Item 2—which should be reconciled.
After quarter-end, Richard M. Sems was appointed President of Equity Bank effective May 15, 2023, and Craig L. Anderson announced his resignation effective June 2, 2023. Sems’s employment agreement provides for a $600 thousand base salary, target cash bonus, equity awards and specified severance and change-in-control provisions.
Important facts for investors to verify
- Whether elevated deposit pricing and increased reliance on wholesale and Federal Reserve funding will further pressure net interest margin.
- The composition and trend of uninsured, reciprocal and brokered deposits, particularly given the filing’s reported 23.4% uninsured-deposit ratio among non-brokered deposits.
- Credit performance in the 75.4% real-estate portion of the loan portfolio, including commercial real estate and agricultural exposures.
- Whether the $45.1 million allowance for credit losses remains adequate under slower economic growth, higher rates and weaker collateral values.
- The nature, timing and potential cost of the overdraft-fee class-action litigation.
- The correct number of shares remaining under the repurchase authorization, given the conflicting disclosures.
- The sustainability of quarterly results after excluding favorable life-insurance income and the credit-loss reversal, while considering higher operating expenses.