Equity Bancshares, Inc. — Q3 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, operates 66 full-service banking locations across Arkansas, Kansas, Missouri and Oklahoma. The filing covers the three and nine months ended September 30, 2022, and was filed November 8, 2022. The company primarily serves businesses, business owners and individuals.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net interest income | $41.9 million | $39.0 million | $120.8 million | $105.4 million |
| Provision/(reversal) for credit losses | $(0.1) million | $1.1 million | $0.3 million | $(6.4) million |
| Non-interest income | $9.0 million | $7.8 million | $27.6 million | $23.6 million |
| Non-interest expense | $32.2 million | $30.7 million | $93.1 million | $81.4 million |
| Net income | $15.2 million | $11.8 million | $46.1 million | $42.0 million |
| Diluted earnings per share | $0.93 | $0.80 | $2.79 | $2.86 |
| Net interest margin | 3.62% | 3.86% | 3.46% | 3.56% |
| Efficiency ratio | 63.07% | 56.65% | 62.6% | 59.7% |
Q3 net income increased approximately 29% year over year, while nine-month net income increased approximately 10%. Revenue benefited from higher loan interest income, securities income, service charges and other non-interest income. Results were partly offset by higher operating expenses and rising deposit funding costs.
- Total assets were $5.00 billion at September 30, 2022, down from $5.14 billion at December 31, 2021.
- Gross loans held for investment were $3.26 billion, up 3.1% from year-end 2021; net loans were $3.21 billion.
- Commercial real estate loans increased 11.4% to $1.66 billion and represented 50.9% of gross loans. Residential real estate loans declined 10.1% to $573.4 million.
- Total deposits declined 4.4% to $4.23 billion. Non-interest-bearing demand deposits were $1.22 billion, or 28.8% of deposits.
- Federal Home Loan Bank advances were $186.0 million at quarter-end versus none at December 31, 2021. Total borrowings were $329.7 million.
- Cash and cash equivalents were $155.4 million, compared with $260.0 million at year-end 2021.
- Stockholders’ equity fell to $395.8 million from $500.6 million, primarily because of after-tax unrealized losses in the available-for-sale securities portfolio. Accumulated other comprehensive loss was $120.9 million.
- Available-for-sale securities had a fair value of $1.20 billion and gross unrealized losses of $158.0 million, principally reflecting higher interest rates. Management stated it did not expect credit losses in the identified securities portfolios.
- The allowance for credit losses was $46.5 million, or 1.4% of gross loans, compared with $48.4 million, or 1.5%, at year-end 2021.
- Nonaccrual loans were $23.1 million, and total nonperforming assets were $29.7 million, or 0.59% of total assets, versus $66.0 million and 1.28%, respectively, at year-end 2021.
- Equity Bank remained classified as well capitalized. At September 30, 2022, its total risk-based capital ratio was 15.45%, common equity Tier 1 ratio was 14.20%, and Tier 1 leverage ratio was 10.47%.
Material changes versus comparable periods
- Net interest income rose 7.6% in Q3 and 14.6% for the first nine months. Higher loan and securities volumes more than offset lower loan yields and higher funding costs.
- Q3 net interest margin declined 24 basis points to 3.62%; the nine-month margin declined 10 basis points to 3.46%. Interest-bearing deposit costs increased materially as rates rose.
- Q3 non-interest income increased 14.5%, led by service charges, debit card income and other income. Mortgage banking income declined 61.3% because of lower mortgage activity.
- Nine-month non-interest expense increased 14.4%, primarily due to higher salaries, occupancy, data processing, integration-related operating costs and losses from tax-credit limited partnerships. Merger expense declined substantially from 2021.
- Credit costs shifted from a $6.4 million provision reversal in the first nine months of 2021 to a $0.3 million provision in 2022. Nine-month net charge-offs increased to $2.1 million from $0.8 million.
- Loans increased despite the June 2022 sale of three Kansas branches to United Bank & Trust. That transaction produced a $0.5 million gain and transferred approximately $26.1 million of loans and $52.7 million of deposits.
- The company repurchased 867,127 shares for $27.7 million during the first nine months and authorized a new program for up to 1.0 million additional shares through September 30, 2023.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management indicated that higher interest rates, inflation, supply-chain disruption and monetary-policy effects remain relevant to credit-loss assumptions and funding costs. Management also stated that the allowance for credit losses was adequate at September 30, 2022, while cautioning that future losses could be substantial and that changing economic conditions could produce materially different provisions or reversals.
- Interest-rate sensitivity modeling indicated a projected 1.5% decline in 12-month net interest income under an immediate 300-basis-point increase and a 3.0% decline under a 100-basis-point decrease. Economic value of equity was projected to decline 8.6% under a 300-basis-point increase.
- The securities portfolio had significant unrealized losses due to rate increases, creating pressure on reported equity and tangible book value, although management did not anticipate credit-related losses.
- At September 30, 2022, the company had no COVID-19 payment-deferral loans, compared with $36.3 million at December 31, 2021.
- Two putative class-action lawsuits in Kansas and Missouri allege improperly collected overdraft fees. The company disputes the claims and is seeking dismissal or arbitration; potential losses cannot currently be reasonably estimated.
- The company identified risks from credit deterioration, commercial and real estate concentration, deposit outflows, liquidity, interest-rate changes, cybersecurity, regulatory requirements, LIBOR transition, acquisitions and technology or third-party service disruptions.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit declines and increased FHLB borrowings continue, and the resulting effect on liquidity and funding costs.
- Whether higher rates further reduce the fair value of securities and tangible common equity.
- Commercial real estate concentration, loan growth quality, nonaccrual trends, charge-offs and adequacy of the allowance for credit losses.
- Whether deposit repricing causes further compression of net interest margin.
- The sustainability of non-interest income increases, particularly other income, service charges and derivative-related gains, versus lower mortgage banking activity.
- Operating expense trends following the ASBI and Security acquisitions and the effect on the efficiency ratio.
- Developments in the two overdraft-fee lawsuits and any other contingent liabilities.
- Capital and liquidity headroom after share repurchases, unrealized securities losses and potential future balance-sheet growth.