UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-37624
EQUITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kansas
72-1532188
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
7701 East Kellogg Drive, Suite 300
Wichita, KS
67207
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 316.612.6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A, Common Stock, par value $0.01 per share
Trading Symbol
EQBK
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of April 28, 2023, the registrant had 15,480,961 shares of Class A common stock, $0.01 par value per share, outstanding.
TABLE OF CONTENTS
Part I
Financial Information
5
Item 1.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
6
Consolidated Statements of Comprehensive Income
7
Consolidated Statements of Stockholders’ Equity
8
Consolidated Statements of Cash Flows
9
Condensed Notes to Interim Consolidated Financial Statements
12
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
Overview
46
Critical Accounting Policies
47
Results of Operations
48
Financial Condition
53
Liquidity and Capital Resources
61
Non-GAAP Financial Measures
63
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
66
Item 4.
Controls and Procedures
67
Part II
Other Information
68
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
69
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
71
Important Notice about Information in this Quarterly Report
Unless we state otherwise or the context otherwise requires, references in this Quarterly Report to “we,” “our,” “us,” “the Company” and “Equity” refer to Equity Bancshares, Inc. and its consolidated subsidiaries, including Equity Bank, which we sometimes refer to as “Equity Bank,” “the Bank” or “our Bank.”
The information contained in this Quarterly Report is accurate only as of the date of this Quarterly Report on Form 10-Q and as of the dates specified herein.
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Item 1A - Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 9, 2023, and in Item 1A – Risk Factors of this Quarterly Report.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:
3
The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this Quarterly Report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or verbal forward-looking statements that we or persons acting on our behalf may issue.
4
PART I
Item 1: Financial Statements
CONSOLIDATED BALANCE SHEETS
March 31, 2023, and December 31, 2022
(Dollar amounts in thousands)
(Unaudited)March 31,
December 31,
2023
2022
ASSETS
Cash and due from banks
$
249,982
104,013
Federal funds sold
384
415
Cash and cash equivalents
250,366
104,428
Available-for-sale securities
1,183,247
1,184,390
Held-to-maturity securities, fair value of $1,995 and $1,973
1,944
1,948
Loans held for sale
648
349
Loans, net of allowance for credit losses of $45,103 and $45,847
3,285,515
3,265,701
Other real estate owned, net
4,171
4,409
Premises and equipment, net
104,789
101,492
Bank-owned life insurance
122,971
123,176
Federal Reserve Bank and Federal Home Loan Bank stock
33,359
21,695
Interest receivable
20,461
20,630
Goodwill
53,101
Core deposit intangibles, net
9,678
10,596
Other
86,466
89,736
Total assets
5,156,716
4,981,651
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand
1,012,671
1,097,899
Total non-interest-bearing deposits
Demand, savings and money market
2,334,463
2,329,584
Time
939,799
814,324
Total interest-bearing deposits
3,274,262
3,143,908
Total deposits
4,286,933
4,241,807
Federal funds purchased and retail repurchase agreements
45,098
46,478
Federal Home Loan Bank advances
111,222
138,864
Federal Reserve Bank borrowings
140,000
—
Subordinated debt
96,522
96,392
Contractual obligations
19,372
15,218
Interest payable and other liabilities
32,446
32,834
Total liabilities
4,731,593
4,571,593
Commitments and contingent liabilities, see Notes 11 and 12
Stockholders’ equity, see Note 7
Common stock
206
205
Additional paid-in capital
486,658
484,989
Retained earnings
150,810
140,095
Accumulated other comprehensive income (loss)
(101,238
)
(113,511
Treasury stock
(111,313
(101,720
Total stockholders’ equity
425,123
410,058
Total liabilities and stockholders’ equity
See accompanying condensed notes to interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended March 31, 2023, and 2022
(Dollar amounts in thousands, except per share data)
(Unaudited)Three Months EndedMarch 31,
Interest and dividend income
Loans, including fees
48,381
36,306
Securities, taxable
5,947
5,391
Securities, nontaxable
669
655
Federal funds sold and other
1,126
300
Total interest and dividend income
56,123
42,652
Interest expense
13,821
1,722
195
33
1,018
135
1,844
1,599
Total interest expense
17,013
3,363
Net interest income
39,110
39,289
Provision (reversal) for credit losses
(366
(412
Net interest income after provision (reversal) for credit losses
39,476
39,701
Non-interest income
Service charges and fees
2,545
2,522
Debit card income
2,554
2,628
Mortgage banking
88
562
Increase in value of bank-owned life insurance
1,583
865
Net gain (loss) from securities transactions
32
40
2,287
2,405
Total non-interest income
9,089
9,022
Non-interest expense
Salaries and employee benefits
16,692
15,068
Net occupancy and equipment
2,879
3,170
Data processing
3,916
3,769
Professional fees
1,384
1,171
Advertising and business development
1,159
976
Telecommunications
485
470
FDIC insurance
360
180
Courier and postage
458
423
Free nationwide ATM cost
525
501
Amortization of core deposit intangibles
918
1,050
Loan expense
117
185
Other real estate owned
119
(1
Merger expenses
323
4,706
2,174
Total non-interest expense
33,718
29,459
Income (loss) before income tax
14,847
19,264
Provision (benefit) for income taxes
2,524
3,614
Net income (loss) and net income (loss) allocable to common stockholders
12,323
15,650
Basic earnings (loss) per share
0.78
0.94
Diluted earnings (loss) per share
0.77
0.93
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period on available-for-sale securities
16,018
(69,339
Reclassification for net gains included in net income
(79
Unrealized holding gains (losses) arising during the period on cash flow hedges
799
598
Total other comprehensive income (loss)
16,817
(68,820
Tax effect
(4,544
17,032
Other comprehensive income (loss), net of tax
12,273
(51,788
Comprehensive income (loss)
24,596
(36,138
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
Common Stock
Additional
AccumulatedOther
Total
SharesOutstanding
Amount
Paid-InCapital
RetainedEarnings
ComprehensiveIncome (Loss)
TreasuryStock
Stockholders’Equity
Balance at January 1, 2022
16,760,115
203
478,862
88,324
1,776
(68,534
500,631
Other comprehensive income (loss), net of tax effects
Cash dividends - common stock, $0.08 per share
(1,318
Dividend equivalents - restricted stock units, $0.08 per share
(24
Stock-based compensation
804
Common stock issued upon exercise of stock options
3,500
50
Common stock issued under stock-based incentive plan
61,460
1
Common stock issued under employee stock purchase plan
14,274
391
Treasury stock purchase
(384,383
(12,381
Balance at March 31, 2022
16,454,966
204
480,106
102,632
(50,012
(80,915
452,015
Balance at January 1, 2023
15,930,112
Cash dividends - common stock, $0.10 per share
(1,573
Dividend equivalents- restricted stock units, $0.10 per share
(35
1,212
102,687
17,508
Treasury stock purchases
(320,050
(9,593
Balance at March 31, 2023
15,730,257
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
1,087
1,172
Amortization of operating lease right-of-use asset
166
175
Amortization of cloud computing implementation costs
Net amortization (accretion) of purchase valuation adjustments
(163
(1,430
Amortization (accretion) of premiums and discounts on securities
1,926
Amortization of intangible assets
954
1,085
Deferred income taxes
(255
(226
Federal Home Loan Bank stock dividends
(140
(18
Loss (gain) on sales and valuation adjustments on other real estate owned
34
(172
Net loss (gain) on sales and settlements of securities
Change in unrealized (gains) losses on equity securities
(32
39
Loss (gain) on disposal of premises and equipment
(15
(43
Loss (gain) on sales of foreclosed assets
(3
(49
Loss (gain) on sales of loans
(62
(463
Originations of loans held for sale
(3,391
(16,193
Proceeds from the sale of loans held for sale
3,154
19,295
Increase in the value of bank-owned life insurance
(1,583
(865
Change in fair value of derivatives recognized in earnings
176
(810
Payments on operating lease payable
(262
(205
Net change in:
169
1,125
Other assets
4,216
(101
694
(12,448
Net cash provided by operating activities
19,132
7,804
Cash flows (to) from investing activities
Purchases of available-for-sale securities
(1,840
(153,850
Proceeds from sales, calls, pay-downs and maturities of available-for-sale securities
17,828
57,134
Proceeds from calls, pay-downs and maturities of held-to-maturity securities
Net change in loans
(18,019
(85,273
Purchase of USDA guaranteed loans
(802
(2,293
Purchase of premises and equipment
(4,408
(309
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
38
20,063
Net redemptions (purchases) of Federal Home Loan Bank and Federal Reserve Bank stock
(11,524
(2,362
Net redemptions (purchases) of correspondent and miscellaneous other stock
(1,526
Proceeds from sale of other real estate owned
172
Proceeds from bank-owned life insurance death benefits
1,794
723
Net cash (used in) provided by investing activities
(18,244
(165,912
Cash flows (to) from financing activities
Net increase (decrease) in deposits
45,095
(40,311
Net change in federal funds purchased and retail repurchase agreements
(1,380
(7,807
Net borrowings (repayments) on Federal Home Loan Bank line of credit
(127,642
20,000
Proceeds from Federal Home Loan Bank term advances
466,091
122,128
Principal repayments on Federal Home Loan Bank term advances
(366,091
(92,128
Proceeds from Federal Reserve Bank borrowings
141,000
1,000
Principal payments on Federal Reserve Bank borrowings
(1,000
10
Proceeds from the exercise of employee stock options
Proceeds from employee stock purchase plan
Purchase of treasury stock
Net change in contractual obligations
(246
(385
Dividends paid on common stock
(1,642
(1,353
Net cash (used in) provided by financing activities
145,050
(11,796
Net change in cash and cash equivalents
145,938
(169,904
Cash and cash equivalents, beginning of period
259,954
Ending cash and cash equivalents
90,050
Supplemental cash flow information:
Interest paid
12,966
4,739
Income taxes paid, net of refunds
27
82
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans
555
Other repossessed assets acquired in settlement of loans
20
Purchase of investment in tax credit structures
4,400
11
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements include the accounts of Equity Bancshares, Inc., its wholly-owned subsidiaries, Equity Bank (“Equity Bank”), EBAC, LLC (“EBAC”) and Equity Risk Management, Inc. ("ERMI"). ERMI provides property and casualty insurance coverage to Equity Bancshares and Equity Bank and reinsurance to other third party insurance captives for which insurance may not be currently available or economically feasible in today's insurance marketplace. The wholly-owned subsidiaries of Equity Bank are comprised of SA Holdings, Inc.("SA Holdings") and EQBK Investments, LLC. ("EQBK Investments"). SA Holdings was established for the purpose of holding and selling other real estate owned. EQBK Investments was established for the purpose to hold Equity Bank's investment in a real estate investment trust. These entities are collectively referred to as the “Company”. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial information. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are of a normal recurring nature. These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 9, 2023. Operating results for the three months ended March 31, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or any other period.
Reclassifications
Some items in prior financial statements were reclassified to conform to the current presentation. Management determined the items reclassified are immaterial to the consolidated financial statements taken as a whole and did not result in a change in equity or net income for the periods reported.
Risk and Uncertainties
The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank and First Republic Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks like Equity Bank. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact Equity Bank's liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly. Prior to the end of the quarter, Equity Bank pledged additional investments to the FRB to increase liquidity under the Bank Term Funding Program as a precaution; however, the Company did not experience the same level of deposit runoff as compared to the recent failed financial institutions which, the Company believes, is due to the difference in the types of deposits being offered, deposit concentration and ALM management practices.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include contract modifications; hedging relationships; and sale or transfer of debt
securities classified as held-to-maturity. The guidance was effective immediately for the Company and the amendments may be applied prospectively through December 31, 2022. The Company’s contracts issued prior to December 31, 2021, are primarily LIBOR tenures that will continue to be published until June 30, 2023, and the Company has reviewed the respective fallback language of these contracts and believes that the language is operational. The Company will continually evaluate these contracts until the indexes are no longer published or final contract modifications are completed; however, the financial impact on our financial condition, results of operations and cash flows will depend on the population of contracts that are still outstanding on the date the underlying indexes are no longer published.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). ASU 2021-01 clarify that certain optional expedients and exceptions that are noted in Topic 848 apply to derivatives that are affected by the discounting transition. Certain provisions, if elected by the Company, apply to derivative instruments that use an interest rate for managing, discounting or contract price alignment that is modified as a result of reference rate reform. The guidance was effective immediately for the Company and the amendments may be applied prospectively through December 31, 2022. The Company’s contracts issued prior to December 31, 2021, are primarily LIBOR tenures that will continue to be published until June 30, 2023, and the Company has reviewed the respective fallback language of these contracts and believes that the language is operational. The Company will continually evaluate these contracts until the indexes are no longer published or final contract modifications are completed; however, the financial impact on the Company’s financial condition, results of operations and cash flows will depend on the population of contracts that are still outstanding on the date the underlying indexes are no longer published.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Trouble Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for loan restructurings by creditor when a borrower is experiencing financial difficulty. Creditors will be required to apply the refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU 2022-02 requires that public business entities disclose gross write offs by year of origination for financing receivables and net investment in leases within the scope of Financial Instruments – Credit Losses – Measured at Amortized Cost of the Accounting Standards Codification. The guidance was effective for the Company on January 1, 2023 and the Company was permitted to apply the guidance prospectively or through a modified retrospective method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Since the Company had adopted ASU 2016-13 effective January 1, 2021, the Company was permitted to early adopt the guidance in totality or individually for the topics covered in this update. The Company did not early adopt this guidance and the implementation of this guidance did not have a material financial impact on our financial condition, results of operations or cash flows, but impacted the Company’s loan disclosures.
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848. ASU 2022-06 extends the current sunset date of Topic 848 from December 31, 2022, to December 31, 2024, to allow for contracts tied to certain tenors of USD LIBOR that have cessation dates of June 30, 2023 to apply the relief of Topic 848. The Company will continually evaluate contracts subject to this guidance until the indexes are no longer published or final contract indexes modifications are completed; however, the financial impact on our financial condition, results of operations and cash flows will depend on the population of contracts that are still outstanding on the date the underlying indexes are no longer published.
In March 2023, the FASB issued ASU 2023-02, Investments-Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, a consensus of the Emerging Issues Task Force. The amendments in ASU 2023-02 permit all reporting entities that hold tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or investments in Low Income Housing Tax Credit ("LIHTC") structure through a limited liability entity that is not accounted for using the proportional amortization method and was previously applying LIHTC specific guidance which has been removed by ASU 2023-02. The election to apply the proportional amortization election is a program-by-program election rather than at a reporting entity or individual investment level. The amendments require specific disclosures that must be provided for all investments that generate income tax credits and other income tax benefits from a tax program for which the entity elected to apply the proportional amortization method which must be provided in both annual and interim financial statements. This guidance will be effective for the Company for fiscals years beginning after December 31, 2023, including interim periods within those fiscal years and early adoption is permitted in any interim period. If the Company adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period. The amendments in this update must be applied using a modified retrospective method or a retrospective method through a cumulative-effect adjustment to the opening balance of retained earnings for the period adoption for the modified retrospective method or the earliest period presented for the retrospective method. The Company is currently evaluating the guidance but does not expect the financial impact to be material on our financial condition, results of operations or cash flows, but will impact the Company's disclosures relating to income tax expense and investments in tax credit structures.
13
NOTE 2 – INVESTMENTS
The amortized cost and fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) are listed below.
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Allowancefor CreditLosses
FairValue
U.S. Government-sponsored entities
123,019
(14,605
108,414
U.S. Treasury securities
259,664
(21,621
238,045
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities
547,198
(54,784
492,414
Private label residential mortgage-backed securities
186,924
(25,749
161,180
Corporate
56,662
(5,731
50,931
Small Business Administration loan pools
12,327
(648
11,679
State and political subdivisions
129,464
165
(9,045
120,584
1,315,258
(132,183
December 31, 2022
123,196
(16,790
106,406
257,690
(25,532
232,158
560,776
(62,170
498,606
190,889
17
(27,346
163,560
56,642
(4,268
52,374
12,915
(734
12,181
130,311
55
(11,261
119,105
1,332,419
72
(148,101
The amortized cost and fair value of held-to-maturity securities and the related gross unrecognized gains and losses are listed in the following tables.
Held-to-maturity securities
1,104
14
1,118
840
37
877
51
-
1,995
1,108
25
1,973
The fair value and amortized cost of debt securities at March 31, 2023, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Available-for-Sale
Held-to-Maturity
Within one year
8,359
8,329
One to five years
336,533
310,203
Five to ten years
170,171
152,150
After ten years
66,073
58,971
734,122
653,594
Total debt securities
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $795,161 at March 31, 2023, and $820,751 at December 31, 2022.
15
The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2023, and December 31, 2022.
Less Than 12 Months
12 Months or More
UnrealizedLoss
236,248
55,546
(2,277
436,868
(52,507
157,781
27,816
(1,846
23,115
(3,885
6,734
(8
4,945
(640
42,911
(268
53,386
(8,778
96,297
Total temporarily impaired securities
133,007
(4,399
1,020,757
(127,785
1,153,764
3,936
(913
102,470
(15,877
92,896
(6,866
139,262
(18,666
203,416
(15,511
295,190
(46,659
43,610
(7,227
116,410
(20,119
160,020
48,199
(3,443
4,175
(825
7,676
(60
4,505
(674
88,713
(5,463
19,671
(5,798
108,384
488,446
(39,483
681,683
(108,618
1,170,129
The tables above present unrealized losses on available-for-sale and held-to-maturity securities since the date of purchase, independent of the impact associated with changes in cost basis upon transfer from the available-for-sale designation to the held-to-maturity designation. As of March 31, 2023, the Company held 409 available-for-sale securities in an unrealized loss position.
Unrealized losses on securities have not been recognized into income because the security issuers are of high credit quality, management does not intend to sell and it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and the fair value is expected to recover as the securities approach maturity.
The Company's available-for-sale investments that carry some form of credit risk are the investments in private label residential mortgage-backed securities, corporate securities and state and political subdivisions securities.
All private label residential mortgage-backed securities held by the Company are senior in the capital structure, carry substantial credit enhancement and are 20% risk weighted by the Simplified Supervisory Formula Approach ("SSFA"). At March 31, 2023, the Company does not anticipate any credit losses in the private label residential mortgage-backed securities portfolio.
The Company's corporate debt exposure consists of 14 separate positions in U.S. financial institutions, all of which the Company has determined to be investment grade. Substantially all of the positions are subordinated debt issued by bank holding companies. The Company periodically reviews financial data of the issuers to ensure their continued investment grade status. At March 31, 2023, the Company does not anticipate any credit losses in the corporate debt securities portfolio.
The Company's portfolio of state and political subdivisions securities is comprised of 197 positions of which 86% of the positions are rated "A" or better by a Nationally Recognized Statistical Ratings Organization ("NRSRO"), and 70% of the overall
16
portfolio is made up of general obligation bonds. The Company periodically reviews financial data of the entities and regularly monitors credit ratings changes of the entities. At March 31, 2023, the Company does not anticipate any credit losses in the state and political subdivisions securities portfolio.
The proceeds from sales and the associated gains and losses on available-for-sale securities reclassified from other comprehensive income to income are listed below.
Three Months EndedMarch 31,
Proceeds
3,265
Gross gain
115
Gross losses
36
Income tax expense on net realized gains
The Company also invests in several other investments, including investments in stocks and partnerships, which are included in other assets. The following table shows the various investment balances and method of accounting at March 31, 2023, and December 31, 2022.
Investments in stocks
Accounted for at fair value through net income
602
570
Accounted for at amortized cost assessed for impairment
1,397
1,398
Total investments in stocks
1,999
1,968
Investments in partnerships
Accounted for at equity method
1,807
1,816
Accounted for at hypothetical liquidation book value
1,440
980
Accounted for at proportional amortization
23,608
19,794
Total investments in partnerships
26,855
22,590
Total other investments
28,854
24,558
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Types of loans and normal collateral securing those loans are listed below.
Commercial real estate: Commercial real estate loans include all loans secured by nonfarm, nonresidential properties and by multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.
Commercial and industrial: Commercial and industrial loans include loans used to purchase fixed assets, provide working capital or meet other financing needs of the business. Loans are normally secured by the assets being purchased or already owned by the borrower, inventory or accounts receivable. These may include SBA and other guaranteed or partially guaranteed types of loans.
Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences.
Agricultural real estate: Agricultural real estate loans are loans typically secured by farmland.
Agricultural: Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced. These loans may be secured by growing crops, stored crops, livestock, equipment, and miscellaneous receivables.
Consumer: Consumer loans may include installment loans, unsecured and secured personal lines of credit, overdraft protection and letters of credit. These loans are generally secured by consumer assets but may be unsecured.
The following table lists categories of loans at March 31, 2023, and December 31, 2022.
Commercial real estate
1,746,834
1,721,268
Commercial and industrial
605,576
594,863
Residential real estate
563,791
570,550
Agricultural real estate
202,274
199,189
Agricultural
106,169
120,003
Consumer
105,974
105,675
Total loans
3,330,618
3,311,548
Allowance for credit losses
(45,103
(45,847
Net loans
From time to time, the Company has purchased pools of residential real estate loans originated by other financial institutions to hold for investment with the intent to diversify the residential real estate portfolio. During the quarters ended March 31, 2023 and 2022, the Company did not purchase any pools of residential loans. As of March 31, 2023, and December 31, 2022, residential real estate loans include $321,094 and $327,309 of purchased residential real estate loans.
The Company occasionally purchases the government guaranteed portion of loans originated by other financial institutions to hold for investment. During the quarter ended March 31, 2023, the Company purchased $802 in loans guaranteed by governmental agencies. During the first three months of 2022, the Company purchased $2,293 in loans guaranteed by governmental agencies.
The unamortized discount of merger purchase accounting adjustments related to non-purchase credit deteriorated loans included in the loan totals above are $3,314 with related loans of $273,286 at March 31, 2023, and $3,632 with related loans of $286,538 at December 31, 2022.
Overdraft deposit accounts are reclassified and included in consumer loans above. These accounts totaled $367 at March 31, 2023, and $475 at December 31, 2022.
18
The following tables present the activity in the allowance for credit losses by class for the three month periods ended March 31, 2023 and 2022.
CommercialReal Estate
Commercialand Industrial
ResidentialRealEstate
AgriculturalRealEstate
Allowance for credit losses:
Beginning balance
16,731
14,951
8,608
819
2,457
2,281
45,847
Provision for credit losses
(126
1,100
132
(233
(1,065
(174
Loans charged-off
(435
(5
(197
(638
Recoveries
155
78
260
Total ending allowance balance
16,611
15,620
8,751
586
1,547
1,988
45,103
March 31, 2022
22,478
12,248
5,560
2,235
3,756
2,088
48,365
(492
1,572
402
(700
(1,284
90
(283
(44
(2
(534
65
171
21,764
13,814
5,960
1,542
2,472
2,038
47,590
The following tables present the recorded investment in loans and the balance in the allowance for credit losses by portfolio and class based on method to determine allowance for credit loss as of March 31, 2023, and December 31, 2022.
CommercialandIndustrial
Individually evaluated for credit losses
294
1,139
772
110
1,320
107
3,742
Collectively evaluated for credit losses
16,317
14,481
7,979
476
227
1,881
41,361
Loan Balance:
2,878
6,269
3,226
2,489
4,030
19,350
1,743,956
599,307
560,565
199,785
102,139
105,516
3,311,268
285
1,433
795
221
2,125
87
4,946
16,446
13,518
7,813
332
2,194
40,901
2,867
6,653
3,344
2,606
4,576
379
20,425
1,718,401
588,210
567,206
196,583
115,427
105,296
3,291,123
19
The following table presents information related to nonaccrual loans at March 31, 2023, and December 31, 2022.
UnpaidPrincipalBalance
RecordedInvestment
Allowance forCredit LossesAllocated
With no related allowance recorded:
2,443
24
1,535
565
2,303
Subtotal
6,336
2,409
With an allowance recorded:
1,060
859
215
10,829
5,482
839
3,375
3,088
763
1,899
1,372
106
3,861
2,923
1,054
417
103
21,509
14,141
3,080
27,845
16,550
1,866
21
54
1,518
583
4,042
2,474
1,011
823
10,758
5,838
1,091
3,488
3,181
786
1,956
1,469
216
6,272
3,468
1,860
412
348
85
23,897
15,127
4,244
27,939
17,601
The table below presents average recorded investment and interest income related to nonaccrual loans for the three months ended March 31, 2023, and 2022. Interest income recognized in the following table was substantially recognized on the cash basis. The recorded investment in loans excludes accrued interest receivable due to immateriality.
As of and for the three months ended
Average Recorded Investment
Interest Income Recognized
1,855
409
982
767
573
1,660
2,441
3,842
841
4,827
5,660
4,152
3,135
4,031
1,421
2,579
3,195
5,281
382
316
14,634
21,186
17,075
25,028
The following tables present the aging of the recorded investment in past due loans as of March 31, 2023, and December 31, 2022, by portfolio and class of loans.
30 - 59DaysPast Due
60 - 89DaysPast Due
GreaterThan90 DaysPastDue Still OnAccrual
Nonaccrual
Loans NotPast Due
836
276
2,703
1,743,019
659
599,232
1,245
104
23
559,331
552
1,937
1,098
102,148
354
105,148
4,744
638
3,308,663
1,526
2,689
1,716,984
232
588,598
1,133
1,993
3,206
564,218
569
2,052
196,568
212
116,323
246
105,026
3,918
2,312
3,287,717
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship. Loans that participated in the short-term deferral program are not automatically considered classified solely due to a deferral, are subject to ongoing monitoring and will be downgraded or placed on nonaccrual if a noted weakness exists. The Company uses the following definitions for risk ratings.
Pass: Loans classified as pass include all loans that do not fall under one of the three following categories.
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
22
Based on the most recent analysis performed, the risk category of loans, by type and year of origination, at March 31, 2023, is as follows.
2021
2020
2019
Prior
Revolving LoansAmortized Cost
Revolving LoansConverted to Term
Risk rating
Pass
53,613
429,072
248,286
185,445
85,580
260,508
472,469
728
1,735,701
Special mention
3,304
122
413
3,839
Substandard
3,003
241
1,537
2,513
7,294
Doubtful
Total commercial real estate
432,376
251,411
185,686
87,117
263,434
49,592
157,541
75,736
62,241
37,381
14,295
180,636
6,581
584,003
1,102
3,023
4,125
6,516
2,131
4,166
2,226
2,168
17,448
Total commercial and industrial
164,057
75,977
64,372
41,547
17,623
185,827
9,976
31,494
294,422
5,752
12,789
146,032
59,742
183
560,390
56
238
2,498
480
3,401
Total residential real estate
31,550
294,504
5,799
13,027
148,530
60,222
5,227
32,617
19,959
23,646
12,115
22,955
68,888
289
185,696
4,865
874
599
7,880
14,218
194
114
2,015
2,360
Total agricultural real estate
10,092
33,491
20,153
12,229
25,569
76,805
7,511
12,644
6,312
8,132
1,829
4,131
59,182
75
99,816
1,024
1,003
1,839
1,888
405
5,329
Total agricultural
7,316
9,971
3,805
4,674
60,173
29,191
34,984
15,295
7,307
2,560
4,128
12,093
105,559
58
43
Total consumer
35,071
15,475
7,353
2,618
12,094
155,110
698,352
660,010
292,523
152,254
452,049
853,010
7,857
3,271,165
4,178
123
2,463
11,489
23,206
6,659
4,703
4,304
8,001
9,489
3,091
36,247
159,975
709,189
664,836
296,827
160,343
464,001
867,590
Based on the analysis performed at December 31, 2022, the risk category of loans, by type and year of origination is as follows.
2018
432,196
252,616
188,897
92,290
114,415
171,498
462,140
741
1,714,793
401
523
3,049
244
144
2,515
5,952
255,787
189,141
92,434
174,414
172,912
79,782
65,915
39,487
6,712
5,089
189,998
6,654
566,549
674
3,851
4,525
283
4,316
2,167
10,127
1,460
783
4,653
23,789
173,195
84,098
68,082
49,614
8,846
9,723
194,651
34,705
299,840
5,939
13,073
47,986
102,871
62,494
271
567,179
86
209
239
2,633
98
3,371
34,763
299,926
5,987
13,282
48,225
105,504
62,592
33,586
20,712
26,408
12,754
5,608
18,882
68,510
186,760
2,493
604
5,983
9,954
1,635
2,475
34,460
20,915
28,901
12,869
6,093
21,121
74,530
23,917
7,778
9,437
2,642
2,250
2,134
64,647
112,880
92
375
556
1,045
1,838
2,044
386
213
594
6,078
8,781
11,275
4,778
2,658
2,722
65,797
56,497
17,460
8,415
3,235
1,370
3,396
14,955
105,328
148
81
347
56,514
17,608
8,469
3,316
1,383
3,430
753,813
678,188
305,011
163,481
178,341
303,870
862,744
8,041
3,253,489
696
5,231
6,539
16,047
358
8,805
4,351
12,720
2,583
5,382
42,012
755,045
687,115
311,855
176,293
181,620
316,914
874,665
The following tables disclose the charge-off and recovery activity by loan type and year of origination for the periods ending March 31, 2023.
Gross charge-offs
Gross recoveries
Net charge-offs
(431
(4
(16
(51
(12
(20
(53
(13
29
(47
(7
(17
(10
(119
(52
(23
(55
(448
211
(48
156
(445
(378
Modifications to Debtors Experiencing Financial Difficulty
The Company adopted ASU 2022-02 Troubled Debt Restructurings and Vintage Disclosures, effective January 1, 2023, and this accounting guidance is applied prospectively. The following table presents the amortized cost basis of loans at March 31, 2023 that were both experiencing financial difficulty and modified during the quarter ended March 31, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.
Payment Delay
Term Extension
Combination Rate Change and Term Extension
Combination Payment Delay and Term Extension
Total Modifications
Total Class of Financing Receivable
0.00
%
258
8,794
9,052
1.49
0.01
0.11
0.02
281
8,808
9,236
0.28
At March 31, 2023, there were $128 thousand in commitments to lend additional amounts on these loans.
The Company considers loans modified to borrowers in financial distress as loans that do not share similar risk characteristics with collectively evaluated loans at modification date for the purposes of calculating the allowance for credit losses. These loans will be evaluated for credit losses based on either discounted cash flows or the fair value of collateral at modification date; however, subsequent to the modification date these loans will be evaluated for credit losses as part of the collectively evaluated pools after a period of ongoing performance under the terms of the modified loan.
The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified during the quarter ended March 31, 2023.
30 - 59 Days Past Due
60 - 89 Days Past Due
Greater Than 89 days Past Due
Total Past Due
The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the quarter ended March 31, 2023.
Principal Forgiveness
Weighted Average Interest Rate Reduction
Weighted Average Term Extension in Years
0.25
0.14
6.20
(0.24
2.16
0.16
During the quarter ended March 31, 2023, there were no loans that had a payment default and were modified prior to that default to borrowers experiencing financial difficulty.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit loss expense recognized within other non-interest expense on the consolidated statements of income and included in other liabilities on the consolidated balance sheets. The estimated credit loss includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate of expected credit loss is based on the historical loss rate for the class of loan the commitments would be classified as if funded.
The following table lists allowance for credit losses on off-balance-sheet credit exposures as of March 31, 2023, and December 31, 2022.
26
Allowance forCredit Losses
336
821
700
268
269
Total allowance for credit losses
1,485
1,353
NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and its sources of funding these assets. The Company will periodically enter into interest rate swaps or interest rate caps/floors to manage certain interest rate risk exposure.
Interest Rate Swaps Designated as Fair Value Hedges
The Company periodically enters into interest rate swaps to hedge the fair value of certain commercial real estate loans. These transactions are designated as fair value hedges. In this type of transaction, the Company typically receives from the counterparty a variable-rate cash flow based on the one-month LIBOR plus a spread to this index and pays a fixed-rate cash flow equal to the customer loan rate. At March 31, 2023, the portfolio of interest rate swaps had a weighted average maturity of 8.3 years, a weighted average pay rate of 4.53% and a weighted average rate received of 7.67%. At December 31, 2022, the portfolio of interest rate swaps had a weighted average maturity of 8.5 years, a weighted average pay rate of 4.53% and a weighted average rate received of 7.13%.
Interest Rate Swaps Designated as Cash Flow Hedges
The Company has entered into cash flow hedges to hedge future cash flows related to subordinated notes interest expense and prime rate adjustable rate loans interest income. These agreements are designated as cash flow hedges and are marked to market through other comprehensive income.
Weighted averageMaturity in years
Weighted average pay rate
Weighted average rate received
Subordinated note hedges
12.5
2.81
6.57
12.7
Variable rate FHLB advance hedges
3.0
4.78
3.59
Prime based receivable loan hedges
1.0
7.89
5.60
1.3
7.50
Total cash flow hedges
2.1
6.54
4.85
1.8
7.28
5.65
Stand-Alone Derivatives
The Company periodically enters into interest rate swaps with our borrowers and simultaneously enters into swaps with a counterparty with offsetting terms for the purpose of providing our borrowers long-term fixed rate loans, in addition to stand alone interest-rate swaps designed to offset the economic impact of fixed rate loans. Neither swap is designated as a hedge, and both are marked to market through earnings. At March 31, 2023, this portfolio of interest rate swaps had a weighted average maturity of 5.5 years, weighted average pay rate of 7.12% and a weighted average rate received of 7.23%. At December 31, 2022, this portfolio of interest rate swaps had a weighted average maturity of 5.6 years, weighted average pay rate of 6.96% and weighted average rate received of 7.06%.
Reconciliation of Derivative Fair Values and Gains/(Losses)
The notional amount of a derivative contract is a factor in determining periodic interest payments or cash flows received or paid. The notional amount of derivatives serves as a level of involvement in various types of derivatives. The notional amount does not represent the Company’s overall exposure to credit or market risk, generally, the exposure is significantly smaller.
The following table shows the notional balances and fair values (including net accrued interest) of the derivatives outstanding by derivative type at March 31, 2023, and December 31, 2022.
NotionalAmount
DerivativeAssets
DerivativeLiabilities
Derivatives designated as hedging instruments:
Interest rate swaps
21,092
2,078
21,528
2,425
Derivatives designated as cash flow hedges:
250,000
1,873
3,405
157,500
2,120
4,457
Total derivatives designated as hedging relationships
271,092
3,951
179,028
4,545
Derivatives not designated as hedging instruments:
197,178
3,529
3,105
184,277
4,191
3,555
Total derivatives not designated as hedging instruments
468,270
7,480
6,510
363,305
8,736
8,012
Cash collateral
2,285
2,860
Netting adjustments
(6,043
(7,336
Net amount presented in Balance Sheet
1,437
2,752
1,400
3,536
The table below lists designated and qualifying hedged items in fair value hedges at March 31, 2023, and December 31, 2022.
Carrying Amount
Hedging Fair Value Adjustment
Fair Value Adjustments on Discontinued Hedges
Commercial real estate loans
17,158
(2,008
17,202
(2,384
The Company reports hedging derivative gains (losses) as adjustments to loan interest income and loan interest expense along with the related net interest settlements. The non-hedging derivative gains (losses) and related net interest settlements for economic derivatives are reported in other income. For the three months period ended March 31, 2023, and 2022, the Company recorded net gains (losses) on derivatives and hedging activities as shown in the table below.
Total net gain (loss) related to derivatives designated as hedging instruments
Total net gain (loss) related to derivatives designated as cash flow hedges
Total net gains (losses) related to hedging relationships
Economic hedges:
675
Total net gains (losses) related to derivatives not designated as hedging instruments
Net gains (losses) on derivatives and hedging activities
713
28
The following table shows the recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Company’s net interest income for the three-month periods ended March 31, 2023 and 2022.
Gain/(Loss)on Derivatives
Gain/(Loss)on HedgedItems
Net Fair ValueHedgeGain/(Loss)
Effect ofDerivatives onNet InterestIncome
(367
149
1,396
(1,358
(157
The following table shows the recorded net gains or (losses) on derivatives and the related hedged items in cash flow hedging relationships and the impact of those derivatives on the Company's net interest income for the three-month periods ended March 31, 2023 and 2022.
Gain/(Loss)onDerivatives
Gain/(Loss)Recorded in Accumulated Other Comprehensive Income
923
686
(780
FHLB advance hedges
(247
(185
593
(676
NOTE 5 – LEASE OBLIGATIONS
Right-of-use asset and lease obligations by type of property for the periods ended March 31, 2023, and December 31, 2022, are listed below.
Right-of-UseAsset
Lease Liability
WeightedAverageLease Termin Years
WeightedAverageDiscountRate
Operating Leases
Land and building leases
5,090
5,062
13.1
2.32
Total operating leases
Right-of-use-asset reported in other assets
3,078
Right-of-use-asset not in operation, reported in other real estate owned
2,012
5,256
5,294
13.2
3,185
2,071
During the quarter ended June 30, 2022, one of our bank locations became non-operational. The right-of-use-asset for this location was transferred to other real estate owned, the weighted average lease term is 8 years.
Operating lease costs for the three months ended March 31, 2023 and 2022, are listed below.
Operating lease cost
196
208
Short-term lease cost
Variable lease cost
Total operating lease cost
210
220
There were no sale and leaseback transactions, leverage leases, lease transactions with related parties or leases that had not yet commenced during the three months ended March 31, 2023.
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is listed below.
Lease Payments
March 31,2023
Due in one year or less
568
Due after one year through two years
550
Due after two years through three years
554
Due after three years through four years
553
Due after four years through five years
Thereafter
Total undiscounted cash flows
6,094
Discount on cash flows
(1,032
Total operating lease liability
30
NOTE 6 – BORROWINGS
Federal funds purchased and retail repurchase agreements as of March 31, 2023, and December 31, 2022, are listed below.
December 31,2022
Federal funds purchased
Retail repurchase agreements
Securities sold under agreements to repurchase (retail repurchase agreements) consist of obligations of the Company to other parties. The obligations are secured by residential mortgage-backed securities held by the Company with a fair value of $52,810 and $55,289 at March 31, 2023, and December 31, 2022. The agreements are on a day-to-day basis and can be terminated on demand.
The following table presents the borrowing usage and interest rate information for federal funds purchased and retail repurchase agreements at March 31, 2023, and December 31, 2022.
Average daily balance during the period
45,932
53,337
Average interest rate during the period
1.33
0.42
Maximum month-end balance year-to-date
46,798
64,323
Weighted average interest rate at period-end
1.28
0.72
Federal Home Loan Bank advances include both draws against the Company’s line of credit and fixed rate term advances.
Federal Home Loan Bank advances as of March 31, 2023, and December 31, 2022, are as follows.
Federal Home Loan Bank line of credit advances
11,222
Federal Home Loan Bank fixed-rate term advances
100,000
Total principal outstanding
Total Federal Home Loan Bank advances
At March 31, 2023, and December 31, 2022, the Company had undisbursed advance commitments (letters of credit) with the Federal Home Loan Bank of $45,275 and $18,305. These letters of credit were obtained in lieu of pledging securities to secure public fund deposits that are over the FDIC insurance limit.
The advances, Mortgage Partnership Finance credit enhancement obligations and letters of credit were collateralized by certain qualifying loans of $960,383 and securities of $73,104 for a total of $1,033,487 at March 31, 2023, and qualifying loans of $744,125 and securities of $74,083 for a total of $818,208 at December 31, 2022. Based on this collateral and the Company’s holdings of Federal Home Loan Bank stock, the Company was eligible to borrow an additional $875,813 and $659,695 at March 31, 2023, and December 31, 2022.
At March 31, 2023, and December 31, 2022, the Company had a borrowing capacity of $452,773 and $330,077, for which the Company has pledged loans with an outstanding balance of $526,349 and $390,102 and securities with a fair value of $32,795 and $33,235. There was $140,000 in borrowings secured from this facility under the Federal Reserve's Bank Term Funding Program with a rate of 4.38% and a term of one year at March 31, 2023. The Company can repay this borrowing at any time without penalties or fees. There were no outstanding borrowings at December 31, 2022.
Bank stock loan
The Company entered into an agreement with an unaffiliated financial institution that provided for a maximum borrowing facility of $40,000, secured by the Company’s stock in Equity Bank. Each draw of funds on the facility will create a separate note that
31
is repayable over a term of five years. Each note will bear interest at the greater of a variable interest rate equal to the prime rate published in the “Money Rates” section of The Wall Street Journal (or any generally recognized successor), floating daily, or a floor of 3.50%. Accrued interest and principal payments will be due quarterly with one final payment of unpaid principal and interest due at the end of the five-year term of each separate note.
The loan was renewed and amended on February 11, 2022, with a new maturity date of February 11, 2023. With this amendment, the maximum borrowing amount was decreased from $40,000 to $25,000. Each note will bear interest at the greater of a variable interest rate equal to the prime rate published in the “Money Rates” section of The Wall Street Journal (or any generally recognized successor), floating daily, or a floor of 3.25%. The Company is also required to pay an unused commitment fee in an amount equal to 20 basis points per annum on the unused portion of the maximum borrowing facility due on the maturity date of the renewal.
The loan was renewed on February 10, 2023, with a new maturity date of February 10, 2024. With this renewal, the maximum borrowing amount will remain at $25,000. Each note will bear interest at the greater of a variable interest rate equal to the prime rate published in the “Money Rates” section of The Wall Street Journal (or any generally recognized successor), floating daily, or a floor of 3.25%. The Company is also required to pay an unused commitment fee in an amount equal to 20 basis points per annum on the unused portion of the maximum borrowing facility due on the maturity date of the renewal.
There were no outstanding principal balances on the bank stock loan at March 31, 2023, and December 31, 2022.
The terms of the borrowing facility require the Company and Equity Bank to maintain minimum capital ratios and other covenants. In the event of default, the lender has the option to declare all outstanding balances immediately due. The Company believes it is in compliance with the terms of the borrowing facility and has not been otherwise notified of noncompliance.
Subordinated debt as of March 31, 2023, and December 31, 2022, are listed below.
Subordinated debentures
23,338
23,255
Subordinated notes
73,184
73,137
In conjunction with prior acquisitions, the Company assumed certain subordinated debentures owed to special purpose unconsolidated subsidiaries that are controlled by the Company. These subordinated debentures have the same terms as the trust preferred securities issued by the special purpose unconsolidated subsidiaries.
FCB Capital Trust II (“CTII”): The trust preferred securities issued by CTII accrue and pay distributions quarterly at three-month LIBOR plus 2.00% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on April 15, 2035, or upon earlier redemption.
FCB Capital Trust III (“CTIII”): The trust preferred securities issued by CTIII accrue and pay distributions quarterly at three-month LIBOR plus 1.89% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on June 15, 2037, or upon earlier redemption.
Community First (AR) Statutory Trust I (“CFSTI”): The trust preferred securities issued by CFSTI accrue and pay distributions quarterly at three-month LIBOR plus 3.25% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on December 26, 2032, or upon earlier redemption.
American State Bank Statutory Trust I (“ASBSTI”): The trust preferred securities issued by ASBSTI accrue and pay distributions quarterly at three-month LIBOR plus 1.80% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on September 15, 2035, or upon earlier redemption.
Subordinated debentures as of March 31, 2023, and December 31, 2022, are listed below.
Weighted Average Rate
Weighted Average Term in Years
CTII subordinated debentures
10,310
6.83
12.0
CTIII subordinated debentures
5,155
6.76
14.2
CFSTI subordinated debentures
8.38
9.7
ASBII subordinated debentures
7,732
6.67
Total contractual balance
28,352
Fair market value adjustments
(5,014
Total subordinated debentures
6.08
12.3
6.66
14.5
7.97
10.0
(5,097
On June 29, 2020, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and institutional accredited investors pursuant to which the Company issued and sold $42,000 in aggregate principal amount of its 7.00% Fixed-to-Floating Rate Subordinated notes due 2030. The notes were issued under an Indenture, dated as of June 29, 2020 (the “Indenture”), by and between the Company and UMB Bank, N.A., as trustee. The notes will mature on June 30, 2030. From June 29, 2020, through June 29, 2025, the Company will pay interest on the notes semi-annually in arrears on June 30 and December 30 of each year, commencing on December 30, 2020, at a fixed interest rate of 7.00%. Beginning June 30, 2025, the notes convert to a floating interest rate, to be reset quarterly, equal to the then-current Three-Month Term SOFR, as defined in the Indenture, plus 688 basis points. Interest payments during the floating-rate period will be paid quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, commencing on September 30, 2025. On July 23, 2020, the Company closed on an additional $33,000 of subordinated notes with the same terms as the June 29, 2020, issue.
Subordinated notes as of March 31, 2023, are listed below.
75,000
7.00
7.3
Debt issuance cost
(1,816
Total subordinated notes
Subordinated notes as of December 31, 2022, are listed below.
7.5
(1,863
Future principal repayments
Future principal repayments of the March 31, 2023, outstanding balances are as follows.
Retail Repurchase Agreements
FHLB Advances
Subordinated Debentures
Subordinated Notes
FRB Borrowings
296,320
103,352
399,672
NOTE 7 – STOCKHOLDERS’ EQUITY
Preferred stock
The Company’s articles of incorporation provide for the issuance of shares of preferred stock. At March 31, 2023, and December 31, 2022, there was no preferred stock outstanding.
The Company’s articles of incorporation provide for the issuance of 45,000,000 shares of Class A voting common stock (“Class A common stock”) and 5,000,000 shares of Class B non-voting common stock (“Class B common stock”), both of which have a par value of $0.01 per share.
The following table presents shares that were issued, held in treasury or were outstanding at March 31, 2023, and December 31, 2022.
Class A common stock – issued
20,398,105
20,277,910
Class A common stock – held in treasury
(4,667,848
(4,347,798
Class A common stock – outstanding
Class B common stock – issued
234,903
Class B common stock – held in treasury
(234,903
Class B common stock – outstanding
Treasury stock is stated at cost, determined by the first-in first-out method.
In 2019, the Company’s Board of Directors adopted the Equity Bancshares, Inc. 2019 Employee Stock Purchase Plan (“ESPP”). The ESPP enables eligible employees to purchase the Company’s common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each offering period. ESPP compensation expense of $39 and $36 was recorded for the three months ended March 31, 2023 and March 31, 2022. The following table presents the offering periods and costs associated with this program during the reporting period.
Offering Period
Shares Purchased
Cost Per Share
Compensation Expense
August 15, 2021 to February 14, 2022
27.37
February 15, 2022 to August 14, 2022
14,555
27.61
84
August 15, 2022 to February 14, 2023
17,058
26.18
In September of 2021, the Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock, from time to time, beginning October 29, 2021, and concluding October 28, 2022. The repurchase program did not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or
discontinued at any time without notice. Under this program, during the years ended December 31, 2022 and 2021, the Company repurchased a total of 1,000,000 shares of the Company’s outstanding common stock at an average price paid of $32.11 per share.
In September of 2022, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's outstanding common stock, from time to time, beginning October 1, 2022, and concluding on September 30, 2023. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and it could be extended, modified or discontinued at any time without notice. Under this program, during the years ended December 31, 2022, the Company repurchased a total of 163,727 shares of the Company’s outstanding common stock at an average price paid of $33.33 per share. During the three months ended March 31, 2023, the Company repurchased a total of 320,050 shares of the Company's outstanding common stock at an average price paid of $29.97 per share. At March 31, 2023, there are 459,488 shares remaining available for repurchase under the program.
At March 31, 2023, and December 31, 2022, accumulated other comprehensive income (loss) consisted of (i) the after-tax effect of unrealized gains (losses) on available-for-sale securities and (ii) unrealized gains (losses) on cash flow hedges.
Components of accumulated other comprehensive income as of March 31, 2023, and December 31, 2022, are listed below.
Available-for-SaleSecurities
Cash Flow Hedges
AccumulatedOtherComprehensiveIncome (Loss)
Net unrealized or unamortized gains (losses)
(132,011
(2,064
(134,075
32,335
502
32,837
(99,676
(1,562
(148,029
(2,863
(150,892
36,673
708
(111,356
(2,155
NOTE 8 – REGULATORY MATTERS
Banks and bank holding companies (on a consolidated basis) are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet capital requirements can initiate regulatory action. The Basel III rules require banks to maintain a Common Equity Tier 1 capital ratio of 6.5%, a total Tier 1 capital ratio of 8%, a total capital ratio of 10% and a leverage ratio of 5% to be deemed “well capitalized” for purposes of certain rules and prompt corrective action requirements. The risk-based ratios include a “capital conservation buffer” of 2.5% which can limit certain activities of an institution, including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the buffer amount. Management believes as of March 31, 2023, the Company and Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and acquisitions, and capital restoration plans are required.
As of March 31, 2023, the most recent notifications from the federal regulatory agencies categorized Equity Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Equity Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed Equity Bank’s category.
The Company’s and Equity Bank’s capital amounts and ratios at March 31, 2023, and December 31, 2022, are presented in the table below. The Company was able to take advantage of the accumulated other comprehensive income exception on capital
35
calculations that was made available by regulators in order to maintain strong regulatory ratios. Ratios provided for Equity Bancshares, Inc. represent the ratios of the Company on a consolidated basis.
Actual
Minimum Required forCapital Adequacy Under Basel III
To Be WellCapitalized UnderPrompt CorrectiveProvisions
Ratio
Total capital to risk weighted assets
Equity Bancshares, Inc.
607,809
15.98
398,796
10.50
N/A
Equity Bank
593,794
15.66
398,200
379,238
10.00
Tier 1 capital to risk weighted assets
487,149
12.83
322,835
8.50
547,206
14.43
322,352
303,390
8.00
Common equity Tier 1 capital to risk weighted assets
463,811
12.21
265,864
265,466
246,505
6.50
Tier 1 leverage to average assets
9.60
202,969
4.00
10.80
202,605
253,257
5.00
603,593
16.08
394,072
588,165
15.71
393,168
374,445
483,539
12.88
319,011
541,354
14.46
318,279
299,556
460,285
12.26
262,715
262,112
243,390
9.61
201,288
10.77
201,066
251,332
Equity Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.
NOTE 9 – EARNINGS PER SHARE
The following table presents earnings per share for the three months ended March 31, 2023 and 2022.
Three months ended
March 31,2022
Basic:
Net income (loss) allocable to common stockholders
Weighted average common shares outstanding
15,843,147
16,647,851
Weighted average vested restricted stock units
15,661
4,705
Weighted average shares
15,858,808
16,652,556
Basic earnings (loss) per common share
Diluted:
Weighted average common shares outstanding for:
Basic earnings per common share
Dilutive effects of the assumed exercise of stock options
54,491
102,763
Dilutive effects of the assumed vesting of restricted stock units
110,526
112,195
Dilutive effects of the assumed exercise of ESPP purchases
4,226
1,638
Average shares and dilutive potential common shares
16,028,051
16,869,152
Diluted earnings (loss) per common share
Average shares not included in the computation of diluted earnings per share because they were antidilutive are shown in the following table as of March 31, 2023 and 2022.
Stock options
255,510
201,758
Restricted stock units
9,980
3,505
Total antidilutive shares
265,490
205,263
NOTE 10 – FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels of inputs that may be used to measure fair values are defined as follows.
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Level 1 inputs are considered to be the most transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although, in some instances, third party price indications may be available, limited trading activity can challenge the implied value of those quotations.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the hierarchy.
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The fair values of securities available-for-sale and equity securities with readily determinable fair value are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as Level 1. For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities, generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The Company’s available-for-sale securities, including U.S. Government sponsored entity securities, residential mortgage-backed securities (all of which are issued or guaranteed by government sponsored agencies), corporate securities, Small Business Administration securities, and State and Political Subdivision securities are classified as Level 2.
The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate yield curves (Level 2 inputs) adjusted for credit risk attributable to the seller of the interest rate derivative. Cash collateral received from or delivered to a derivative counterparty is classified as Level 1.
Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables as of March 31, 2023, and December 31, 2022.
(Level 1)
(Level 2)
(Level 3)
Assets:
Available-for-sale securities:
Derivative assets:
Derivative assets (included in other assets)
Cash collateral held by counterparty and netting adjustments
Total derivative assets
Other assets:
Equity securities with readily determinable fair value
Total other assets
232,604
952,682
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)
(3,758
Total derivative liabilities
Government-sponsored residential mortgage- backed securities
225,392
960,968
(4,476
There were no material transfers between levels during the three months ended March 31, 2023, or the year ended December 31, 2022. The Company’s policy is to recognize transfers into or out of a level as of the end of a reporting period.
Fair Value of Assets and Liabilities Measured on a Non-recurring Basis
Certain assets are measured at fair value on a non-recurring basis when there is evidence of loans individually assessed for credit losses. The fair value of loans individually assessed for credit losses with specific allowance for credit losses are generally based on recent real estate appraisals of the collateral. Declines in the fair values of other real estate owned, subsequent to their initial acquisitions, are also based on recent real estate appraisals less estimated selling costs.
Real estate appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments made to real estate appraisals and other loan valuations are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Assets measured at fair value on a non-recurring basis are summarized below as of March 31, 2023, and December 31, 2022.
Loans individually evaluated for credit losses:
644
4,643
2,325
1,266
2,183
Other real estate owned:
926
617
4,747
2,395
1,253
1,871
792
170
The Company did not record any liabilities for which the fair value was measured on a non-recurring basis at March 31, 2023, or December 31, 2022.
Valuations of individually evaluated loans and other real estate owned utilize third party appraisals or broker price opinions and were classified as Level 3 due to the significant judgement involved. Appraisals may include the utilization of unobservable inputs, subjective factors and utilize quantitative data to estimate fair market value.
The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a nonrecurring basis that were categorized with Level 3 of the fair value hierarchy as of March 31, 2023, and December 31, 2022.
Fair Value
ValuationTechnique
UnobservableInput
Range(weighted average) or Multiple of Earnings
Individually evaluated real estate loans
11,061
SalesComparisonApproach
Adjustments fordifferences betweencomparable sales
10% - 51%(31%)
Individually evaluated other real estate owned
964
3% - 24%(13%)
10,883
10% - 51% (31%)
962
3% - 24% (13%)
Carrying amount and estimated fair values of financial instruments at period end were as follows for March 31, 2023, and December 31, 2022.
CarryingAmount
EstimatedFair Value
Financial assets:
945,202
Loans, net of allowance for credit losses
3,199,083
Derivative assets
Cash collateral held by derivative counterparty and netting adjustments
4,777,579
4,691,198
482,970
1,009,145
Financial liabilities:
4,279,060
70,934
Interest payable
6,487
Derivative liabilities
4,708,386
4,698,263
4,702,021
41
952,232
3,251,129
4,601,111
4,586,564
329,820
1,005,615
4,232,948
70,887
2,462
4,544,757
4,533,648
4,538,124
The fair value of off-balance-sheet items is not considered material.
NOTE 11 – COMMITMENTS AND CREDIT RISK
The Company extends credit for commercial real estate mortgages, residential mortgages, working capital financing and loans to businesses and consumers.
Commitments to Originate Loans and Available Lines of Credit
Commitments to originate loans and available lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments and lines of credit may expire without being drawn upon, the total commitment and lines of credit amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days, and which are intended for sale to investors in the secondary market.
The contractual amounts of commitments to originate loans and available lines of credit as of March 31, 2023, and December 31, 2022, were as follows.
42
FixedRate
VariableRate
Commitments to make loans
67,149
271,420
73,185
210,266
Mortgage loans in the process of origination
2,385
5,600
2,130
3,480
Unused lines of credit
141,115
357,582
130,843
354,408
At March 31, 2023 the fixed rate loan commitments have interest rates ranging from 3.25% to 9.97% and maturities ranging from 1 month to 222 months.
Standby Letters of Credit
Standby letters of credit are irrevocable commitments issued by the Company to guarantee the performance of a customer to a third party once specified pre-conditions are met. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.
The contractual amounts of standby letters of credit as of March 31, 2023, and December 31, 2022, were as follows.
Standby letters of credit
16,023
26,776
16,358
25,791
NOTE 12 – LEGAL MATTERS
The Company is party to various matters of litigation in the ordinary course of business. The Company periodically reviews all outstanding pending or threatened legal proceedings and determines if such matters will have an adverse effect on the business, financial condition, results of operations or cash flows. A loss contingency is recorded when the outcome is probable and reasonably able to be estimated. Any loss contingency described below has been identified by the Company as reasonably possible to result in an unfavorable outcome for the Company or the Bank.
Equity Bank is party to a lawsuit filed on January 28, 2022, in the Sedgwick County Kansas District Court on behalf of one of our customers alleging improperly collected overdraft fees. The plaintiff seeks to have the case certified as a class action. The Bank has filed a motion to dismiss this claim on its merits and on the grounds that the defendant must litigate any such claims in arbitration. The trial court ruling denying the requirement of arbitration is currently on appeal. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against the claim asserted. At this time, the Company is unable to reasonably estimate the loss amount of this litigation.
Equity Bank is party to a lawsuit filed on February 2, 2022, in Jackson County, Missouri District Court against the Bank on behalf of one of our Missouri customers alleging improperly collected overdraft fees. The plaintiff seeks to have the case certified as a class action of Missouri customers only. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against the claims now asserted. At this time, the Company is unable to reasonably estimate the loss amount of this litigation.
Equity Bank is party to a lawsuit filed on February 18, 2023, in Saline County, Missouri District Court against the Bank on behalf of one of our Missouri customers alleging improperly collected overdraft fees. The plaintiff seeks to have the case certified as a class action for Missouri customers only. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against the claims now asserted. At this time, the Company is unable to reasonably estimate the loss amount of this litigation.
NOTE 13 – REVENUE RECOGNITION
The majority of the Company’s revenues come from interest income on financial instruments, including loans, leases, securities and derivatives, which are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented with non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges and fees on deposits, debit card income, investment referral income, insurance sales commissions and other non-interest income related to loans and deposits.
Except for gains or losses from the sale of other real estate owned, all of the Company’s revenue from contracts with customers within the scope of ASC 606 are recognized in non-interest income. The following table presents the Company’s sources of non-interest income for the three months ended March 31, 2023 and 2022.
Mortgage banking(a)
Increase in bank-owned life insurance(a)
Net gain (loss) from securities transactions(a)
Investment referral income
89
143
Trust income
240
Insurance sales commissions
113
Recovery on zero-basis purchased loans(a)
Income (loss) from equity method investments(a)
Other non-interest income related to loans and deposits
1,362
1,931
Other non-interest income not related to loans and deposits(a)
532
Total other non-interest income
(a) Not within the scope of ASC 606.
NOTE 14 – BUSINESS COMBINATIONS AND BRANCH SALES
At the close of business on June 24, 2022, the Company sold three branch locations located in Belleville, Clyde and Concordia, Kansas to United Bank and Trust (UBT). Results of the branch sale were included in the Company's results of operations beginning June 27, 2022. Branch sale costs were $18 ($14 on an after-tax basis) and are included in merger expense in the Company's income statement for the year ended December 31, 2022. Costs related to this acquisition during the three months ended March 31, 2023 were $0.
At the close of business on November 10, 2022, the Company sold one branch location located in Cordell, Oklahoma to High Plains Bank (HPB). Results of the branch sale were included in the Company's results of operations beginning November 14, 2022. There were not branch sale related costs on the Company's income statement for the year ended December 31, 2022. At March 31, 2023, there were no costs related to this branch sale.
44
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K filed with the SEC on
March 9, 2023, and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See “Cautionary Note Regarding Forward-Looking Statements.” Also, see the risk factors and other cautionary statements described under the heading “Item 1A: Risk Factors” included in the Annual Report on Form 10-K and in Item 1A of this Quarterly Report. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
This discussion and analysis of our financial condition and results of operation includes the following sections:
(Dollars in thousands, except per share data)
September 30,2022
June 30,2022
Statement of Income Data (for the quarterly period ended)
53,424
48,548
43,624
11,393
6,604
4,058
42,031
41,944
39,566
(151
(136
824
Net gain on acquisition and branch sales
422
540
Other non-interest income
9,057
7,893
8,986
9,129
8,982
Other non-interest expense
35,181
32,121
31,348
29,136
Income (loss) before income taxes
15,262
18,813
16,943
Provision for income taxes
3,654
3,642
1,684
Net income (loss)
11,608
15,171
15,259
0.73
0.95
Balance Sheet Data (at period end)
155,413
103,584
Securities available-for-sale
1,198,962
1,288,180
1,352,894
Securities held-to-maturity
1,714
1,575
Gross loans held for investment
3,255,023
3,223,446
3,242,577
46,499
48,238
Loans held for investment, net of allowance for credit losses
3,208,524
3,175,208
3,194,987
Goodwill and core deposit intangibles, net
62,779
63,697
64,699
65,655
68,295
Mortgage servicing asset, net
151
201
226
251
Naming rights, net
1,033
1,044
1,065
1,076
5,000,415
5,002,156
5,078,623
4,226,611
4,291,771
4,379,670
Borrowings
392,842
281,734
329,707
228,885
194,209
4,604,609
4,574,041
4,626,608
395,806
428,115
Tangible common equity*
361,160
345,141
329,852
361,169
382,393
Performance ratios
Return on average assets (ROAA) annualized
1.00
1.21
1.24
Return on average equity (ROAE) annualized
11.89
11.57
13.80
13.99
Return on average tangible common equity (ROATCE) annualized
14.89
14.74
17.12
17.60
15.85
Yield on loans annualized
5.94
5.59
5.09
4.59
4.61
Cost of interest-bearing deposits annualized
1.73
1.05
0.57
0.22
Net interest margin annualized
3.44
3.67
3.62
3.39
3.38
Efficiency ratio*
70.00
70.47
63.07
64.38
60.36
Non-interest income / average assets annualized
0.74
0.67
0.71
0.76
Non-interest expense / average assets annualized
2.74
2.84
2.56
2.49
2.34
Capital Ratios
Tier 1 Leverage Ratio
9.46
9.11
9.07
Common Equity Tier 1 Capital Ratio
12.08
11.81
Tier 1 Risk Based Capital Ratio
12.84
12.71
12.43
Total Risk Based Capital Ratio
16.06
15.97
Equity / Assets
8.24
8.23
7.92
8.56
8.90
Tangible common equity to tangible assets*
7.09
7.02
6.68
7.32
7.63
Dividend payout ratio
13.07
14.01
10.78
8.61
8.58
Book value per share
27.03
25.74
24.71
26.58
27.47
Tangible common book value per share*
22.96
21.67
20.59
22.42
23.24
Tangible common book value per diluted share*
22.83
21.35
20.33
22.17
22.95
* The value noted is considered a Non-GAAP financial measure. For a reconciliation of Non-GAAP financial measures see “Non-GAAP Financial Measures” in this Item 2.
We are a financial holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 64 full-service banking sites located in Arkansas, Kansas, Missouri, and Oklahoma. As of March 31, 2023, we had consolidated total assets of $5.16 billion, total loans held for investment, net of allowance, of $3.28 billion, total deposits of $4.29 billion, and total
stockholders’ equity of $425.1 million. During the three month period ended March 31, 2023, the Company had net income of $12.3 million. The Company had net income of $15.7 million for the three month period ended March 31, 2022.
Our significant accounting policies are integral to understanding the results reported. Our accounting policies are described in detail in Note 1 to the December 31, 2022, audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 9, 2023. The preparation of our financial statements in accordance with GAAP requires management to make a number of judgements and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements. Our accounting policies are described in “NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Notes to Interim Consolidated Financial Statements.
The accounting policies that management believes are the most critical to an understanding of our financial condition and results of operations and require complex management judgement are described below.
Allowance for Credit Losses: The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications, and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date; however, determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain. The actual realized facts and circumstances may be different than those currently estimated by management and may result in significant changes in the allowance for credit losses in future periods. The allowance for credit losses for loans, as reported in our consolidated balance sheets, is adjusted by provision for credit losses, which is recognized in earnings and is reduced by the charge-off of loan amounts, net of recoveries.
The allowance represents management’s best estimate, but significant changes in circumstances relating to loan quality and economic conditions could result in significantly different results than what is reflected in the consolidated balance sheet as of March 31, 2023. Likewise, an improvement in loan quality or economic conditions may allow for a further reduction in the required allowance. Changing credit conditions would be expected to impact realized losses, driving variability in specifically assessed allowances, as well as calculated quantitative and more subjectively analyzed qualitative factors. Depending on the volatility in these conditions, material impacts could be realized within the Company’s operations. Likewise, significant changes in economic conditions, both positive and negative, could result in unexpected realization of provision or reversal of allowance for credit losses due to its impact on the quantitative and qualitative inputs to the Company’s calculation. Under the CECL methodology, the impact of these conditions has the potential to further exacerbate periodic differences due to its life of loan perspective. The life of loans calculated under the methodology is based in contractual duration and modified for prepayment expectations, making significant variation in periodic results possible due to changing contractual or adjusted duration of the assets within the calculation.
Goodwill: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized and expensed in the period identified. Goodwill will be assessed more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired. We have selected December 31 as the date to perform our annual goodwill impairment test. Goodwill is the only intangible asset with an indefinite useful life. For the quarter ended March 31, 2023, management conducted the quarterly qualitative assessment and has determined there was no evidence of a triggering event as of or during the period then ended. Based on this qualitative analysis and conclusion, it was determined that a more robust quantitative assessment was not necessary at our measurement date.
When performing quantitative goodwill impairment assessments, management is required to estimate the fair value of the Company’s equity in a change in control transaction. To complete this valuation, management is required to derive assumptions related to industry performance, reporting unit business performance, economic and market conditions, and various other assumptions, many of which require significant management judgement.
Although management believes that the judgements and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.
We generate our revenue from interest income and fees on loans, interest and dividends on investment securities, and non-interest income, such as service charges and fees, debit card income, trust and mortgage banking income. We incur interest expense on deposits and other borrowed funds and non-interest expense, such as salaries and employee benefits and occupancy expenses.
Changes in interest rates earned on interest-earning assets or incurred on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic change in net interest income. Fluctuations in interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international circumstances and domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Arkansas, Kansas, Missouri and Oklahoma, as well as developments affecting the consumer, commercial and real estate sectors within these markets.
Net Income
Three months ended March 31, 2023, compared with three months ended March 31, 2022: Net income allocable to common stockholders for the three months ended March 31, 2023, was $12.3 million, or $0.77 diluted earnings per share as compared to $15.7 million, or $0.93 diluted earnings per share for the three months ended March 31, 2022, a decrease of $3.4 million. The decrease during the three month period ended March 31, 2023, was largely due to an increase in non-interest expense of $4.3 million, offset by a decrease in income tax expense of $1.1 million.
Net Interest Income and Net Interest Margin Analysis
Net interest income is the difference between interest income on interest-earning assets, including loans and securities, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. To evaluate net interest income, management measures and monitors (1) yields on loans and other interest-earning assets, (2) the costs of deposits and other funding sources, (3) the net interest spread, and (4) net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources of funds. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change,” and is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “yield/rate change.”
Three months ended March 31, 2023, compared with three months ended March 31, 2022: The following table shows the average balance of each principal category of assets, liabilities, and stockholders’ equity and the average yields on interest-earning assets and average rates on interest-bearing liabilities for the three months ended March 31, 2023, and 2022. The yields and rates are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.
Average Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31,
(Dollars in thousands)
AverageOutstandingBalance
InterestIncome/Expense
AverageYield/Rate(3)(4)
Interest-earning assets:
Loans(1)
577,452
9,634
6.77
575,563
7,761
5.47
1,344,727
20,112
6.07
1,190,128
13,451
4.58
Real estate construction
404,016
6,695
6.72
342,536
3,299
3.91
570,141
5,801
4.13
632,581
5,665
3.63
202,901
3,114
6.22
202,145
2,663
5.34
100,251
1,478
5.98
149,676
2,316
6.28
106,193
5.91
103,158
1,151
4.53
3,305,681
3,195,787
Taxable securities
1,083,645
2.23
1,285,942
1.70
Nontaxable securities
101,837
2.67
111,479
2.38
Total Securities
1,185,482
6,616
2.26
1,397,421
6,046
1.75
119,856
3.81
122,181
Total interest-earning assets
4,611,019
4.94
4,715,389
Non-interest-earning assets:
4,283
9,622
103,394
103,693
123,430
121,033
Goodwill, core deposit and other intangibles, net
64,447
70,181
Other non-interest-earning assets
87,845
88,203
4,994,418
5,108,121
Interest-bearing liabilities:
Interest-bearing demand deposits
1,035,053
4,829
1.89
1,213,541
579
0.19
Savings and money market
1,314,989
3,624
1.12
1,320,561
0.13
2,350,042
8,453
1.46
2,534,102
996
Certificates of deposit
885,515
5,368
2.46
629,675
726
0.47
3,235,557
3,163,777
FHLB term and line of credit advances
89,078
4.64
9,943
0.37
96,457
7.75
95,931
12,456
4.38
0
Other borrowings
49,941
1.58
54,210
Total interest-bearing liabilities
3,483,489
1.98
3,323,872
0.41
Non-interest-bearing liabilities and stockholders’ equity:
Non-interest-bearing checking accounts
1,043,894
1,230,102
Non-interest-bearing liabilities
46,535
61,548
Stockholders’ equity
420,500
492,599
Interest rate spread
2.96
3.26
Net interest margin(2)
Total cost of deposits, including non-interest bearing deposits
4,279,451
1.31
4,393,879
Average interest-earning assets to interest-bearing liabilities
132.37
141.86
49
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest yields/rates. The following table analyzes the change in volume variances and yield/rate variances for the three month periods ended March 31, 2023, and 2022.
Analysis of Changes in Net Interest Income
For the Three Months Ended March 31, 2023, and 2022
Increase (Decrease) Due to:
TotalIncrease /
Volume(1)
Yield/Rate(1)
(Decrease)
Loans
1,847
1,909
4,752
6,661
677
2,719
(592
136
441
451
(733
(105
(838
361
396
1,332
10,743
12,075
(936
1,492
74
Total securities
(996
1,566
831
826
331
13,140
13,471
(97
4,347
4,250
3,209
3,207
(99
7,556
7,457
4,237
4,642
306
11,793
12,099
587
1,009
236
245
133
167
162
12,785
13,650
Net Interest Income
355
(179
Interest income on interest-earning assets increased $13.5 million for the quarter ended March 31, 2023, as compared to the quarter ended March 31, 2022. Of this increase, $12.1 million and $0.6 million are attributable to12.1 million increases in loan and taxable securities rate/yield. Yield on loans increased by 133 basis points and yield on taxable securities increased by 53 basis points for the quarter ended March 31, 2023, as compared to March 31, 2022. The increase in interest income on loans is primarily due to higher yields on commercial and industrial, commercial real estate, real estate construction and agricultural real estate loans, offset by decreases in volume and yield on agricultural loans.
There was an increase in interest expense on Total interest-bearing deposits of $12.1 million due to a general increase in market interest rates. The increase in the cost of interest-bearing deposits from 0.22% for the quarter ended March 21, 2022 to 1.73% for the quarter ended March 31, 2023, was primarily the result the Federal Reserve raising federal funds target rate in response to inflation concerns, with more interest rate increases expected.
When compared to the quarter ended March 31, 2022, net interest margin increased 6 basis points during the quarter ended March 31, 2023. Comparing the same periods, net interest spread decreased by 30 basis points to 2.96% from 3.26%. The increase in net interest margin can be attributed to an increase in the rate/yield earned on interest-earning asset, offset by an increase in the cost of interest-bearing liabilities portfolio. While the net interest spread decreased over the comparative period as the re-pricing of our
interest-bearing liabilities and the increase in the average balance of interest-bearing liabilities outpaced the re-pricing of our interest-earning asset portfolio coupled with the decrease in the average balance of the interest-earning asset portfolio.
Provision for Credit Losses
We maintain an allowance for credit losses for estimated losses in our loan portfolio. The allowance for credit losses is increased by a provision for credit losses, which is a charge to earnings, and subsequent recoveries of amounts previously charged-off, but is decreased by charge-offs when the collectability of a loan balance is unlikely. Management estimates the allowance balance required using past loan loss experience within the Company’s portfolio. This historical loss calculation is then modified to reflect quantitative economic circumstances based on evidenced economic conditions and regression formulas, which incorporate lag factors in identifying a sufficiently predictive adjusted-R square, as well as qualitative factors not inherently reflected in our historical loss or quantitative economic inputs. Included in our qualitative assessment is the consideration of prospective economic conditions over the next 12 months, considered the Company’s reasonable and supportable forecast period. As these factors change, the amount of the credit loss provision changes.
Three months ended March 31, 2023, compared with three months ended March 31, 2022: During the three months ended March 31, 2023, there was a reversal for credit losses of $366 thousand compared to a reversal for credit losses of $412 thousand during the three months ended March 31, 2022. The release of provision for the quarter is the result of continued positive credit trends without realization of meaningful losses; however, the Company continues to estimate the allowance for credit losses with assumptions that anticipate slowing prepayment rates and continued market disruption caused by elevated inflation, supply chain issues and the impact of monetary policy on consumers and businesses. Net charge-offs for the three months ended March 31, 2023, were $378 thousand compared to net charge-offs of $363 thousand for the three months ended March 31, 2022. For the three months ended March 31, 2023, gross charge-offs were $638 thousand, offset by gross recoveries of $260 thousand. In comparison, gross charge-offs were $534 thousand for the three months ended March 31, 2022, offset by gross recoveries of $171 thousand.
Non-Interest Income
The primary sources of non-interest income are service charges and fees, debit card income, mortgage banking income, and increases in the value of bank-owned life insurance. Non-interest income does not include loan origination or other loan fees, which are recognized as an adjustment to yield using the interest method.
Three months ended March 31, 2023, compared with three months ended March 31, 2022: The following table provides a comparison of the major components of non-interest income for the three months ended March 31, 2023, and 2022.
2023 vs. 2022
Change
0.9
(74
(2.8
)%
(474
(84.3
718
83.0
(54
(37.8
(18.4
73.8
Recovery on zero-basis purchased loans
(14
(70.0
Income (loss) from equity method investments
1,894
1,938
(2.3
Total other
(118
(4.9
0.8
(20.0
0.7
Total non-interest income increased $67 thousand during the three months ended March 31, 2023, as compared to the same period in 2022. The increase is largely attributable to increases in bank-owned life insurance of $718 thousand, offset by a decrease in Mortgage banking income of $474. The decrease in mortgage banking income is due to decreased activity in held for sale mortgage activity primarily due to increases in mortgage interest rates.
Non-Interest Expense
Three months ended March 31, 2023, compared with three months ended March 31, 2022: For the three months ended March 31, 2023, non-interest expense totaled $33.7 million, an increase of $4.3 million, when compared to the three months ended March 31, 2022. Changes in the various components of non-interest expense for the three months ended March 31, 2023 and 2022, are discussed in more detail in the following table.
1,624
10.8
(291
(9.2
147
3.9
18.2
18.8
3.2
100.0
8.3
4.8
Amortization of core deposit intangible
(132
(12.6
(68
(36.8
120
(12000.0
2,532
116.5
4,582
15.7
(323
(100.0
4,259
Salaries and employee benefits: There was a $1.6 million increase in salaries for the period ended March 31, 2023, as compared to the same period in 2022. Employee salaries increased $824 thousand from March 31, 2022 and share-based compensation expense increased by $444 thousand for the same period.
Other: Other non-interest expenses consists of subscriptions, memberships and dues, employee expenses, including travel, meals, entertainment and education, supplies, printing, insurance, account related losses, correspondent bank fees, customer program expenses, losses net of gains on the sale of fixed assets, losses net of gains on the sale of repossessed assets other than real estate, other operating expenses, such as settlement of claims, losses from limited partnerships entered into for tax credits and provision for unfunded commitments. Overall, in the other expense category, there was a net $2.5 million increase, or 116.5%, between the quarters ending March 31, 2023, and 2022. The increase was primarily due to increases in provision for credit losses for unfunded commitments of $1.1 million, loss in solar tax credits of $609 thousand and ERMI premium expense of $488 thousand.
Efficiency Ratio
The efficiency ratio is a supplemental financial measure utilized in the internal evaluation of performance and is not defined under GAAP. For a reconciliation of non-GAAP financial measures see “Non-GAAP Financial Measures” in this Item 2. Our efficiency ratio is computed by dividing non-interest expense, excluding merger expenses, by the sum of net interest income and non-interest income, excluding net gain or loss from securities transactions. Generally, an increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources.
52
The efficiency ratio was 70.0% for the three months ended March 31, 2023, compared with 60.4% for the three months ended March 31, 2022. The increase was primarily due to an increase in non-interest expense as well as a decrease in net interest income primarily due to the volume of interest-bearing liabilities and the increase in the cost of interest-bearing liabilities outpacing the increase in yield of interest-bearing assets.
Income Taxes
In general, the Company records income tax expense each quarter based on its estimate as to the full year’s effective tax rate which includes, in addition to statutory rates, estimated amounts for tax-exempt interest income, non-taxable life insurance income, non-deductible executive compensation, valuation allowance on deferred assets, other non-deductible expense, and federal and state income tax credits anticipated to be available in proportion to anticipated annual income before income taxes. Certain items, however, are given discrete period treatment and the tax effects for such items are therefore reported in the quarter that an event arises. Events or items that may give rise to discrete recognition include excess tax benefits or shortfalls with respect to share-based compensation, changes in tax law, and non-deductible merger expense.
Three months ended March 31, 2023, compared with three months ended March 31, 2022: The effective income tax rate for the three month period ended March 31, 2023, was 17.0% as compared to 18.8% for the three month period ended March 31, 2022. Income tax expense for the three month period ended March 31, 2023, includes $69 thousand of tax benefit attributable to the settlement in stock of restricted stock units and the exercise of options and $686 thousand of benefit related to the recognition of federal tax credits.
Total assets increased $175.1 million from December 31, 2022, to $5.16 billion at March 31, 2023. This variance was primarily due to increases of $146.0 million in cash and due from banks and a $19.8 million in loans, net of allowance for credit losses. Total liabilities increased $160.0 million to $4.73 billion at March 31, 2023. The change in total liabilities is mostly due to an increase in Federal Reserve Bank borrowings of $140.0 million and total deposits of $45.1 million, partially offset by a decrease of $27.6 million in Federal Home Loan Bank advances. Total stockholders’ equity increased $15.1 million from $410.1 million at December 31, 2022, to $425.1 million at March 31, 2023, principally due to a decrease in unrealized holding losses, net of tax, in the investment securities portfolio and net income for three months ended March 31, 2023.
Loan Portfolio
The following table summarizes our loan portfolio by type of loan as of the dates indicated.
Composition of Loan Portfolio
Percent
18.0
10,713
Real estate loans:
52.4
52.0
25,566
1.5
16.9
17.2
(6,759
(1.2
6.1
6.0
3,085
Total real estate loans
2,512,899
75.4
2,491,007
75.2
21,892
3.6
(13,834
(11.5
299
0.3
Total loans held for investment
19,070
0.6
Total loans held for sale
85.7
Total loans held for investment (net of allowances)
19,814
Our commercial loan portfolio consists of various types of loans, most of which are generally made to borrowers located in the Wichita, Kansas City, and Tulsa Metropolitan Statistical Areas (“MSAs”), as well as various community markets throughout Arkansas, Kansas, Missouri, and Oklahoma. Most of our loan portfolio consists of commercial and industrial and commercial real estate loans, and a substantial portion of our borrowers’ ability to honor their obligations is dependent on local economies in which they operate.
At March 31, 2023, gross total loans, including loans held for sale, were 77.7% of deposits and 64.6% of total assets. At December 31, 2022, gross total loans, including loans held for sale, were 78.1% of deposits and 66.5% of total assets.
We provide commercial lines of credit, working capital loans, commercial real estate loans (including loans secured by owner-occupied commercial properties), term loans, equipment financing, aircraft financing, real property acquisition and development loans, borrowing base loans, real estate construction loans, homebuilder loans, SBA loans, agricultural and agricultural real estate loans, letters of credit and other loan products to national and regional companies, real estate developers, mortgage lenders, manufacturing and industrial companies and other businesses. The types of loans we make to consumers include residential real estate loans, home equity loans, home equity lines of credit, installment loans, unsecured and secured personal lines of credit, overdraft protection, and letters of credit.
Commercial and industrial: Commercial and industrial loans include loans used to purchase fixed assets, to provide working capital or meet other financing needs of the business.
Commercial real estate: Commercial real estate loans include all loans secured by nonfarm nonresidential properties and multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.
Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences. Pools of mortgages are occasionally purchased to expand our loan portfolio and provide additional loan income.
Agricultural real estate, Agricultural, Consumer and other: Agricultural real estate loans are loans related to farmland. Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced. Consumer loans are generally secured by consumer assets but may be unsecured.
The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of March 31, 2023, are summarized in the following table.
Loan Maturity and Sensitivity to Changes in Interest Rates
As of March 31, 2023
One yearor less
After one yearthrough fiveyears
After fiveyears through fifteen years
After fifteen years
187,912
333,821
80,061
3,782
Real Estate:
329,469
1,053,825
291,554
71,986
843
9,792
120,323
432,833
51,425
113,558
29,663
7,628
Total real estate
381,737
1,177,175
441,540
512,447
70,772
27,776
3,201
4,420
31,944
48,174
23,654
2,202
672,365
1,586,946
548,456
522,851
Loans with a predetermined fixed interest rate
226,816
768,934
161,984
304,333
1,462,067
Loans with an adjustable/floating interest rate
445,549
818,012
386,472
218,518
1,868,551
The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of December 31, 2022, are summarized in the following table.
As of December 31, 2022
194,487
310,839
84,930
4,607
331,226
1,042,683
279,759
67,600
1,293
9,647
122,509
437,101
47,696
112,387
31,295
7,811
380,215
1,164,717
433,563
512,512
79,055
32,688
3,714
4,546
35,026
45,258
23,091
2,300
688,783
1,553,502
545,298
523,965
218,417
771,980
181,239
306,537
1,478,173
470,366
781,522
364,059
217,428
1,833,375
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, current economic trends, and other factors. Loans are analyzed individually and classified based on credit risk. Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship.
For additional information, see “NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES” in the Condensed Notes to Interim Consolidated Financial Statements.
Nonperforming Assets
The following table presents information regarding nonperforming assets at the dates indicated.
Nonaccrual loans
Accruing loans 90 or more days past due
OREO acquired through foreclosure, net
420
600
Other repossessed assets
57
Total nonperforming assets
17,050
18,248
Ratios:
Nonperforming assets to total assets
0.33
Nonperforming assets to total loans plus OREO and repossessed assets
0.51
0.55
Generally, loans are designated as nonaccrual when either principal or interest payments are 90 days or more past due based on contractual terms, unless the loan is well secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual, or charged off, at an earlier date if collection of principal or interest is considered doubtful. When a loan is placed on nonaccrual status, unpaid interest credited to income earned in the current year is reversed against income and unpaid interest earned in prior years is charged off. Future interest income may be recorded on a
cash basis after recovery of principal is reasonably assured. Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The nonperforming loans at March 31, 2023, consisted of 172 separate credits and 151 separate borrowers. We had 5 non-performing loan relationships, totaling $7.1 million, with an outstanding balance in excess of $1.0 million as of March 31, 2023.
There are several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by lenders and we also monitor delinquency levels for any negative or adverse trends. In accordance with applicable regulation, appraisals or evaluations are required to independently value real estate and are an important element to consider when underwriting loans secured in part or in whole by real estate. The value of real estate collateral provides additional support to the borrower’s credit capacity. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
Potential Problem Loans
Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which management has concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. Potential problem loans are assigned a grade of special mention or substandard. At March 31, 2023, the Company had $40.1 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $37.6 million at December 31, 2022.
With respect to potential problem loans, all monitored and under-performing loans are reviewed and evaluated to determine if they are impaired. If we determine that a loan is impaired, then we evaluate the borrower’s overall financial condition to determine the need, if any, for possible write downs or appropriate additions to the allowance for credit losses based on the unlikelihood of full repayment of principal and interest in accordance with the contractual terms or the net realizable value of the pledged collateral.
Allowance for Credit Losses
Please see “Critical Accounting Policies – Allowance for Credit Losses” for additional discussion of our allowance policy.
In connection with our review of the loan portfolio, risk elements attributable to particular loan types or categories are considered when assessing the quality of individual loans. Some of the risk elements include the following items.
The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data.
For the Quarters Ended,
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Agricultural Real Estate
Allowance for credit losses (ACL)
Total loans outstanding (1)
Net (charge-offs) recoveries QTD
Average loan balance (1) QTD
1,748,743
569,732
3,305,272
Non-accrual loan balance
Loans to total loans outstanding
ACL to total loans
2.6
1.6
1.9
1.4
Net charge-offs to average loans QTD
0.0
(0.1
0.2
Non-accrual loans to total loans
0.5
2.8
0.4
ACL to non-accrual loans
614.5
284.9
283.4
30.3
52.9
476.7
272.5
1,552,134
629,181
613,928
198,844
150,077
98,413
(222
(6
(363
1,532,664
630,387
3,193,593
3,640
3,712
4,522
4,078
4,386
20,696
48.0
19.4
18.9
4.6
2.2
2.9
597.9
372.1
131.8
37.8
56.4
569.3
229.9
Management believes that the allowance for credit losses at March 31, 2023, was adequate to cover current expected credit losses in the loan portfolio as of such date. There can be no assurance, however, that we will not sustain losses in future periods, which could be substantial in relation to the size of the allowance at March 31, 2023.
The allowance for credit losses on loans measured on a collective basis totaled $41.4 million, or 1.2% of the $3.31 billion in loans measured on a collective basis at March 31, 2023, compared to an allowance for credit losses of $40.9 million, or 1.2%, of the $3.29 billion in loans measured on a collective basis at December 31, 2022. The total reserve percentage was 1.4% at March 31, 2023 and December 31, 2022.
Securities
We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk, to meet pledging requirements and to meet regulatory capital requirements. At March 31, 2023, securities represented 23.0% of total assets, slightly decreasing from 23.8% at December 31, 2022.
At the date of purchase, debt securities are classified into one of two categories: held-to-maturity or available-for-sale. We do not purchase securities for trading purposes. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held-to-maturity, carried at cost, and adjusted for the amortization of premiums and the accretion of discounts, only if management has the positive intent and ability to hold those securities to maturity. Debt securities not classified as held-to-maturity are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in total interest and dividend income. Also included in total interest and dividend income are dividends received on stock investments in the Federal Reserve Bank of Kansas City and the FHLB of Topeka. These stock investments are stated at cost.
The following table summarizes the amortized cost and fair value by classification of available-for-sale securities as of the dates shown.
Available-For-Sale Securities
Total available-for-sale securities
Held-To-Maturity Securities
Total held-to-maturity securities
At March 31, 2023, and December 31, 2022, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which aggregate par value exceeded 10% of consolidated stockholders’ equity at the reporting dates noted.
The following tables summarize the contractual maturity of debt securities and their weighted average yields as of March 31, 2023, and December 31, 2022. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Available-for-sale securities are shown at fair value and held-to-maturity securities are shown at cost, adjusted for the amortization of premiums and the accretion of discounts.
Due in one yearor less
Due after oneyear throughfive years
Due after fiveyears through10 years
Due after 10years
CarryingValue
Yield
50,020
55,887
1.52
2,507
1.99
1.17
1,796
4.73
235,137
1.19
1,112
1.27
—%
1.22
92,875
1.47
165,318
1.88
234,221
2.57
2.13
7,858
6.69
43,073
4.66
4.98
7,972
4.36
3,707
1.85
3.56
State and political subdivisions(1)
6,533
2.27
17,188
44,105
2.30
52,758
2.50
2.41
2.80
403,078
1.36
317,467
2.31
454,373
2.43
2.04
Held-to-maturity securities:
4.95
4.57
456,317
2.44
1,185,191
49,100
54,094
1.51
3,212
1.96
222,552
1.18
9,606
1.32
89,698
1.44
161,354
1.86
247,554
2.10
2.21
7,904
44,470
4.65
4.88
3.53
1.79
2.89
4,958
2.61
18,601
2.42
42,088
53,458
387,855
1.35
319,288
472,289
2.39
2.02
4.96
4.79
474,237
2.40
1,186,338
Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages which are principally issued by federal agencies such as Ginnie Mae, Fannie Mae, and Freddie Mac. Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Premiums and discounts on mortgage-backed securities are amortized and accreted over the expected life of the security and may be impacted by prepayments. As such, mortgage-backed securities which are purchased at a premium will generally produce decreasing net yields as interest rates drop because homeowners tend to refinance their mortgages, resulting in prepayments and an acceleration of premium amortization. Securities
59
purchased at a discount will reflect higher net yields in a decreasing interest rate environment, as prepayments result in an acceleration of discount accretion.
The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected lives because borrowers have the right to prepay their obligations at any time. Monthly pay downs on mortgage-backed securities cause the average lives of these securities to be much different than their stated lives. At March 31, 2023, and December 31, 2022, 60.6% and 62.1% of the residential mortgage-backed securities held by us had contractual final maturities of more than ten years, with a weighted average life of 5.1 years and 5.1 years and a modified duration of 4.3 years and 4.3 years.
Goodwill Impairment Assessment
At March 31, 2023, we performed an interim qualitative analysis and concluded there were no indications that goodwill was impaired.
Our lending and investing activities are primarily funded by deposits. A variety of deposit accounts are offered with a wide range of interest rates and terms including demand, savings, money market, and time deposits. We rely primarily on competitive pricing policies, convenient locations, comprehensive marketing strategy, and personalized service to attract and retain these deposits.
The following table shows our composition of deposits at March 31, 2023, and December 31, 2022.
Composition of Deposits
Percentof Total
Non-interest-bearing demand
23.6
25.9
Interest-bearing demand
992,736
23.2
1,061,264
25.0
1,341,727
31.3
1,268,320
29.9
21.9
19.2
Total deposits at March 31, 2023, were $4.29 billion, an increase of $45.1 million, or 1.1%, compared to total deposits of $4.24 billion at December 31, 2022.
Equity Bank participates in the Insured Cash Sweep (“ICS”) service that allows the Bank to break large money market deposits into smaller amounts and place them in a network of other ICS banks to ensure FDIC insurance coverage on the entire deposit. These deposits are placed through ICS services, but are Equity Bank’s customer relationships that management views as core funding. The Bank also participates in the Certificate of Deposit Account Registry Service (“CDARS”) program. CDARS allows the bank to break large time deposits into smaller amounts and place them in a network of other CDARS banks to ensure FDIC insurance coverage on the entire deposit. Reciprocal deposits are not considered brokered deposits as long as the aggregate balance is less than the lesser of 20% of total liabilities or $5.0 billion and Equity Bank is well capitalized and well rated. All non-reciprocal deposits and reciprocal deposits in excess of regulatory limits are considered brokered deposits.
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The following table lists reciprocal and brokered deposits included in total deposits categorized by type at March 31, 2023, and December 31, 2022.
Reciprocal
38,359
17,717
Total interest-bearing demand
257,859
282,705
Total savings and money market
27,605
11,764
Non-reciprocal brokered
301,792
251,799
Total time
329,397
263,563
Total reciprocal and brokered deposits
625,615
563,985
The following table provides information on the maturity distribution of time deposits of $250 thousand or more as of March 31, 2023, and December 31, 2022.
3 months or less
54,325
40,578
13,747
33.9
Over 3 through 6 months
37,907
51,365
(13,458
(26.2
Over 6 through 12 months
65,541
19,191
46,350
241.5
Over 12 months
44,161
34,586
9,575
27.7
Total Time Deposits
201,934
145,720
56,214
38.6
Other Borrowed Funds
We utilize borrowings to supplement deposits to fund our lending and investing activities. Short-term borrowings and long-term borrowings include federal funds purchased and retail repurchase agreements, FHLB advances, Federal Reserve Bank borrowings, a bank stock loan, and subordinated debt. For additional information see “NOTE 6 – BORROWINGS” in the Condensed Notes to Interim Consolidated Financial Statement.
Liquidity
Market and public confidence in our financial strength and financial institutions in general will largely determine access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.
Liquidity is defined as the ability to meet anticipated customer demands for future funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure our liquidity position by considering both on and off-balance sheet sources of and demands for funds on a daily, weekly, and monthly basis.
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations in a cost-effective manner and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, we focus on both assets and liabilities, and the way they combine to provide adequate liquidity to meet our needs. With the recent issues in the banking sector that stem from the failures of several banks has caused banks to increase available liquidity sources and more closely monitor deposit runoff. Prior to the end of the quarter, Equity Bank pledged additional investments to the FRB and borrowed $140 million under the Bank Term Funding Program as a precaution; however, the Company did not experience the same level of deposit runoff which, the Company believes, is due to the difference in the types of deposits being offered, deposit concentration and ALM management practices as compared to the recent failed financial institutions.
During the three months ended March 31, 2023, and 2022, our liquidity needs have primarily been met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. Other funding sources include federal funds purchased, brokered certificates of deposit, borrowings from the FHLB, and the Federal Reserve Bank borrowings.
Our largest sources of funds are deposits, Federal Reserve Bank borrowings and FHLB borrowings and largest uses of funds are loans, securities and debt repayment. Average loans were $3.31 billion for the three months ended March 31, 2023, an increase of 0.93% over the December 31, 2022, average balance. Excess deposits are primarily invested in our interest-bearing deposit account with the Federal Reserve Bank of Kansas City, investment securities, federal funds sold or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio has a weighted average life of 5.1 years and a modified duration of 4.3 years at March 31, 2023.
Cash and cash equivalents were $250.4 million at March 31, 2023, an increase of $145.9 million from the $104.4 million cash and cash equivalents at December 31, 2022. The increase in cash and cash equivalents is driven primarily by $145.1 million net cash provided by financing activities and $19.1 million net cash provided by operating activities, partially offset by $18.2 million net cash used in investing activities. Cash and cash equivalents at January 1, 2023, plus liquidity provided by operating activities, pay downs, sales, and maturities of investment securities, FRB borrowings and FHLB borrowings during the first three months of 2023 were used to originate or purchase loans and to purchase investment securities. We believe that our daily funding needs can be met through cash provided by operating activities, payments and maturities on loans and investment securities, the core deposit base and FHLB advances and other borrowing relationships.
Off-Balance-Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments.
Standby and Performance Letters of Credit: For additional information see “NOTE 11 – COMMITMENTS AND CREDIT RISK” in the Condensed Notes to Interim Consolidated Financial Statement.
Commitments to Extend Credit: For additional information see “NOTE 11 – COMMITMENTS AND CREDIT RISK” in the Condensed Notes to Interim Consolidated Financial Statement.
Capital Resources
Capital management consists of providing equity to support our current and future operations. The federal bank regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As a financial holding company and a state-chartered-Fed-member bank, the Company and Equity Bank are subject to regulatory capital requirements.
Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of March 31, 2023, and December 31, 2022, the Company and Equity Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized; although, these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and acquisitions, and capital restoration plans are required.
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver. As of March 31, 2023, the most recent notifications from the federal regulatory agencies categorized Equity Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Equity Bank must maintain minimum Total capital, Tier 1 capital, Common Equity Tier 1 capital, and Tier 1 leverage ratios. For
62
additional information, see “NOTE 8 – REGULATORY MATTERS” in the Condensed Notes to Interim Consolidated Financial Statements. There are no conditions or events since that notification that management believes have changed Equity Bank’s category.
We identify certain financial measures discussed in this Quarterly Report as being “non-GAAP financial measures.” In accordance with SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios, or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this Quarterly Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the way we calculate the non-GAAP financial measures that we discuss in this Quarterly Report may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar to, or with names like, the non-GAAP financial measures we have discussed in this Quarterly Report when comparing such non-GAAP financial measures.
Tangible Book Value Per Common Share and Tangible Book Value Per Diluted Common Share: Tangible book value is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate: (a) tangible common equity as total stockholders’ equity less preferred stock, goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); (b) tangible book value per common share as tangible common equity (as described in clause (a)) divided by shares of common stock outstanding; and (c) tangible book value per diluted common share as tangible common equity (as described in clause (a)) divided by diluted shares of common stock outstanding. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value.
Management believes that these measures are important to many investors who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.
The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity, tangible book value per common share, and tangible book value per diluted common share and compares these values with book value per common share.
As of the period ended
Less: goodwill
54,465
Less: core deposit intangibles, net
11,598
12,554
13,830
Less: mortgage servicing asset, net
Less: naming rights, net
Tangible common equity
Common shares issued at period end
16,017,834
16,106,818
Diluted common shares outstanding at period end
15,822,536
16,163,253
16,225,591
16,289,635
16,662,779
Book value per common share
Tangible book value per common share
Tangible book value per diluted common share
Tangible Common Equity to Tangible Assets: Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (a) tangible common equity as total stockholders’ equity less preferred stock, goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); (b) tangible assets as total assets less goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); and (c) tangible common equity to tangible assets as tangible common equity (as described in clause (a)) divided by tangible assets (as described in clause (b)). For tangible common
equity to tangible assets, the most directly comparable financial measure calculated in accordance with GAAP is total stockholders’ equity to total assets.
Management believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total stockholders’ equity and total assets while not increasing tangible common equity or tangible assets.
The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets.
Tangible assets
5,092,753
4,916,734
4,934,461
4,935,210
5,009,001
Equity to assets
Tangible common equity to tangible assets
Return on Average Tangible Common Equity: Return on average tangible common equity is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (a) average tangible common equity as total average stockholders’ equity less average goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); (b) adjusted net income allocable to common stockholders as net income allocable to common stockholders plus intangible asset amortization (net of taxes); and (c) return on average tangible common equity as annualized adjusted net income allocable to common stockholders (as described in clause (b)) divided by average tangible common equity (as described in clause (a)). For return on average tangible common equity, the most directly comparable financial measure calculated in accordance with GAAP is return on average equity.
Management believes that this measure is important to many investors in the marketplace who are interested in earnings quality on tangible common equity. Goodwill and other intangible assets have the effect of increasing total stockholders’ equity while not increasing tangible common equity.
The following table reconciles, as of the dates set forth below, return on average stockholders’ equity and return on average tangible common equity.
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For the three months ended
Total average stockholders’ equity
398,270
436,191
437,483
Less: average intangible assets
65,450
66,445
68,978
Average tangible common equity
356,053
332,820
369,746
368,505
422,418
961
992
1,148
Less: tax effect
200
202
228
Adjusted net income allocable to common stockholders
13,077
12,367
15,955
16,166
16,507
Return on total average stockholders’ equity (ROAE) annualized
Efficiency Ratio: The efficiency ratio is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate the efficiency ratio by dividing non-interest expense, excluding merger expenses, by the sum of net interest income and non-interest income, excluding net gain on acquisition and branch sales, and net gain (loss) from securities transactions. The GAAP-based efficiency ratio is non-interest expense divided by net interest income plus non-interest income.
In management’s judgement, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess operating expenses in relation to operating revenue by removing merger expenses, net gain (loss) from securities transactions, and net gain in acquisition and branch sales.
The following table reconciles, as of the dates set forth below, the efficiency ratio to the GAAP-based efficiency ratio.
35,249
32,236
31,436
Less: merger expense
Non-interest expense, excluding loss on debt extinguishment and merger expense
8,969
9,637
Less: net gain on acquisition and branch sales
Less: net gain (loss) from securities transactions
Non-interest income, excluding net gain (loss) from securities transactions and net gain on acquisition and branch sales
Net interest income plus non-interest income, excluding net gain on acquisition and branch sales and net gain (loss) from securities transactions
48,167
49,924
50,930
48,695
48,271
Non-interest expense to net interest income plus non-interest income
69.96
69.99
63.32
63.89
60.98
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Our asset-liability policy provides guidelines for effective funds management and management has established a measurement system for monitoring net interest rate sensitivity position within established guidelines.
As a financial institution, the primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short-term maturity. Interest rate risk is the potential of economic gains or losses due to future interest rate changes. These changes can be reflected in future net interest income and/or fair market values. The objective is to measure the effect on net interest income (“NII”) and economic value of equity (“EVE”) and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage interest rate exposure by structuring the balance sheet in the ordinary course of business. We have the ability to enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial futures contracts or forward delivery contracts for the purpose of reducing interest rate risk. Currently, we do not have a material exposure to these instruments. We also have the ability to enter into interest rate swaps as an accommodation to our customers in connection with an interest rate swap program. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is managed by the Asset Liability Committee (“ALCO”), which is composed of certain members of senior management, in accordance with policies approved by the Board of Directors. ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. ALCO meets monthly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, securities purchased and sale activities, commitments to originate loans and the maturities of investment securities and borrowings. Additionally, the ALCO reviews liquidity, projected cash flows, maturities of deposits and consumer and commercial deposit activity.
ALCO uses a simulation analysis to monitor and manage the pricing and maturity of assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The simulation tests the sensitivity of NII and EVE. Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options within the investment securities portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. All assumptions are as of the base period without consideration of preceding market rate changes and any lag in impact to NII. The depicted expectations are management's estimate exclusive of any non-contractual lagging impacts that have not yet been realized in income from preceding changes to interest rates. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the future NII and EVE. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
The change in the impact of net interest income from the base case for March 31, 2023, and December 31, 2022, was primarily driven by the rate and mix of variable and fixed rate financial instruments, the underlying duration of the financial instruments and the level of response to changes in the interest rate environment.
The increase in the level of positive impact to net interest income in the up interest rate shock scenarios is due to the level of adjustable rate loans receivable that will reprice to higher interest rates[EK1] , non-term deposits that will adjust to higher rates but at a slower pace, the use of derivatives to hedge borrowing costs, and elevated levels of cash on the balance sheet compared to the previous quarter. These factors result in the positive impacts to net interest income in the up interest rate shock scenarios that are detailed in the table below. In the down interest rate shock scenario, the main drivers of the negative impact on net interest income are the downward pricing of variable rate loans receivable and the level of term deposit repricing; and the assumed prepayment and scheduled repayment of existing fixed rate loans receivable and fixed rate investments. Term deposits repricing will only decrease the average cost paid by some amount due to the assumed repricing occurring at maturity. These factors result in the negative impact to net interest income in the down interest rate shock scenario.
The change in the economic value of equity from the base case for March 31, 2023 and December 31, 2022 is due to being in a liability sensitive position and the level of convexity in our pre-payable assets. Generally, with a liability sensitive position, as interest rates increase, the value of your assets decrease faster than the value of liabilities and, as interest rates decrease, the value of your assets increase at a faster rate than liabilities. Due to the level of convexity in our fixed rate prepayable assets, we do not experience a similar change in the value of assets in a down interest rate shock scenario; however, due to the current level of convexity in our fixed
rate prepayable assets becoming less negative and positive, in some cases, on a portion of or portfolio has resulted in the overall value of assets increasing more than liabilities. In addition, the mix of interest-bearing deposit and non-interest-bearing deposits impact the level of deposit decay and the resulting benefit of discounting from the non-interest-bearing deposits. At March 31, 2023, non-interest-bearing deposits were approximately $85.2 million, or 7.8%, lower than that deposit type at December 31, 2022. Substantially all investments and approximately 43.9% of loans are prepayable and fixed rate and as rates decrease the level of modeled prepayments increase. The prepaid principal is assumed to reprice at the assumed current rates, resulting in a smaller positive impact to the economic value of equity.
Management utilizes static balance sheet rate shocks to estimate the potential impact on various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet. The following table summarizes the simulated immediate change in net interest income for twelve months as of the dates indicated.
Market Risk
Impact on Net Interest Income
Change in prevailing interest rates
+300 basis points
8.8
5.0
+200 basis points
5.8
3.3
+100 basis points
0 basis points
-100 basis points
(2.7
-200 basis points
(5.5
(6.0
The following table summarizes the simulated immediate impact on economic value of equity as of the dates indicated.
Impact on Economic Valueof Equity
(11.3
(10.7
(6.8
(6.6
(3.4
(3.3
1.2
(0.5
Item 4: Controls and Procedures
Evaluation of disclosure controls and procedures
An evaluation of the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply judgement in evaluating its controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms.
Changes in internal control over financial reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1: Legal Proceedings
From time to time, we are a party to various litigation matters incidental to the conduct of our business. See “NOTE 12 – LEGAL MATTERS” of the Condensed Notes to Interim Consolidated Financial Statements under Item 1 to this Quarterly report for a complete discussion of litigation matters.
Item 1A: Risk Factors
Other than the risk factors set forth below, there have been no material changes in the Company’s risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 9, 2023.
Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.
The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank and First Republic Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks like Equity Bank. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact Equity Bank's liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.
Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.
The Company and Equity Bank anticipate increased regulatory scrutiny and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community. Equity Bank's level of uninsured deposits as a percentage of non-brokered deposits was 23.4% at March 31, 2023 and 25.3% at December 31, 2022.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Common Stock
In September of 2021, the Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock, from time to time, beginning October 29, 2021, and concluding October 28, 2022. The repurchase program did not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice. Under this program, during the years ended December 31, 2022 and 2021, the Company repurchased a total of 1,000,000 shares of the Company’s outstanding common stock at an average price paid of $32.11 per share.
In September of 2022, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's outstanding common stock, from time to time, beginning October 1, 2022, and concluding on September 30, 2023. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and it could be extended, modified or discontinued at any time without notice. Under this program, during the years ended December 31, 2022, the Company repurchased a total of 163,727 shares of the Company’s outstanding common stock at an average price paid of $33.33 per share. During the three months ended March 31, 2023, the Company repurchased a total of 320,050 shares of the Company's outstanding common stock at an average price paid of $29.97 per share. At March 31, 2023, there are 516,223 shares remaining available for repurchase under the program.
The following table presents shares that have been repurchased under the program during the first quarter of 2023.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
January 1, 2023 through January 31, 2023
836,273
February 1, 2022 through February 28, 2023
218,700
30.77
617,573
March 1, 2023 through March 31, 2023
101,350
28.25
516,223
320,050
29.97
Item 3: Defaults Upon Senior Securities
None
Item 4: Mine Safety Disclosures
Not applicable.6
Item 5: Other Information
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Hire of Richard M. Sems as President of Equity Bank
On May 2, 2023, Equity Bancshares, Inc. (the “Company”) announced the hire of Richard M. Sems as President of Equity Bank effective May 15, 2023. Mr. Sems will also join the board of directors of Equity Bank.
Mr. Sems, age 51, joins the Company from First Bank of St. Louis, Missouri where he most recently served as Chief Banking Officer and previously served as President of First Bank’s Midwest Region since 2016. Mr. Sems holds a Master of Business Administration from the University of Michigan and is a graduate of Grove City College.
In connection with his appointment, Mr. Sems entered into an employment agreement, dated May 2, 2023, by and among the Company, Equity Bank and Mr. Sems. The initial term of the employment agreement is three years and will automatically renew for successive one-year periods thereafter, unless the agreement is terminated in accordance with its terms. Under the terms of the employment agreement, Mr. Sems will receive a base salary of $600,000 and a target annual incentive bonus of 65% of his base salary, which shall be payable in cash. Mr. Sems will also be eligible to receive an annual equity award with a target grant date fair value equal to 55% of his base salary, which may be subject to certain vesting, performance and other conditions.
Mr. Sems will receive an equity award in connection with his hire with a target grant date fair value equal to approximately $500,000, which will be comprised of time-based stock options that will vest in five equal annual installments, subject to his continuing employment through each such vesting date. He will also be paid a $250,000 signing bonus that is subject to repayment on a pro rata basis if his employment is terminated within the initial three-year term of the employment agreement.
Mr. Sems’s employment agreement provides that upon the termination of his employment by Mr. Sems for good reason or by Equity Bank without cause, Mr. Sems will be entitled to receive his base salary for a period of twelve months following such termination, subject to compliance with the terms of the employment agreement and execution of a general release in favor of the Company and Equity Bank.
Mr. Sems’s employment agreement contains a change in control provision that provides for a payment to him if his employment is terminated by Mr. Sems for good reason, by Equity Bank (or its successor) without cause, or due to Equity Bank’s (or its successor’s) nonrenewal of the employment agreement within twelve months after a qualifying change in control. Upon a qualifying change in control and termination of his employment, Mr. Sems would be entitled to a payment equal to 2.99 times the sum of (i) his prior year’s base salary and (ii) all other cash compensation paid to him and received during such year. Any payments pursuant to the change in control provision are subject to compliance with restrictions imposed by the Internal Revenue Code. Additionally, Mr. Sems is bound by the restrictive covenants set forth in his employment agreement.
There are no family relationships between Mr. Sems and any director or other executive officer of the Company, or with any person selected to become an officer or a director of the Company, nor are there any arrangements or understandings between Mr. Sems and other persons pursuant to which he was appointed as an executive officer of the Company. The Company has had no
transactions since the beginning of its last fiscal year, and has no transactions proposed, in which Mr. Sems, or any member of his immediate family, has a direct or indirect material interest.
The foregoing description of Mr. Sem’s employment agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the employment agreement, which is attached hereto as Exhibits 10.2 and is incorporated herein by reference.
Resignation of Craig L. Anderson as President of Equity Bank
On May 3, 2023, the Company also announced that Craig L. Anderson resigned from his role as the President of Equity Bank effective June 2, 2023.
70
Item 6: Exhibits
Exhibit
No.
Description
10.1
Sixth Amendment to Loan and Security Agreement dated February 10, 2023, by and between Equity Bancshares, Inc. and Servis First Bank (incorporated by reference to Exhibit 10.1 to Equity Bancshares, Inc. Current Report on Form 8-K, filed with the SEC on March 6, 2023).
10.2†*
Employment Agreement, dated May 2, 2023, by and between Equity Bank and Richard M. Sems.
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
* Filed herewith.
** These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
† Represents a management contract or a compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 4, 2023
By:
/s/ Brad S. Elliott
Date
Brad S. Elliott
Chairman and Chief Executive Officer
/s/ Eric R. Newell
Eric R. Newell
Executive Vice President and Chief Financial Officer