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, 2024
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
New York Stock Exchange
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 30, 2024, the registrant had 15,252,852 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
10
Condensed Notes to Interim Consolidated Financial Statements
12
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
52
Overview
53
Critical Accounting Policies
54
Results of Operations
55
Financial Condition
60
Liquidity and Capital Resources
69
Non-GAAP Financial Measures
71
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
73
Item 4.
Controls and Procedures
75
Part II
Other Information
76
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
77
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 7, 2024, 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, 2024, and December 31, 2023
(Dollar amounts in thousands)
See accompanying condensed notes to interim consolidated financial statements.
(Unaudited)March 31,
December 31,
2024
2023
ASSETS
Cash and due from banks
$
217,611
363,289
Federal funds sold
17,407
15,810
Cash and cash equivalents
235,018
379,099
Available-for-sale securities
1,091,717
919,648
Held-to-maturity securities, fair value of $2,210 and $2,250
2,205
2,209
Loans held for sale
1,311
476
Loans, net of allowance for credit losses of $44,449 and $43,520
3,437,714
3,289,381
Other real estate owned, net
1,465
1,833
Premises and equipment, net
116,792
112,632
Bank-owned life insurance
125,693
124,865
Federal Reserve Bank and Federal Home Loan Bank stock
27,009
20,608
Interest receivable
27,082
25,497
Goodwill
53,101
Core deposit intangibles, net
17,854
7,222
Other
102,075
98,021
Total assets
5,239,036
5,034,592
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand
981,623
898,129
Total non-interest-bearing deposits
Demand, savings and money market
2,574,871
2,483,807
Time
814,532
763,519
Total interest-bearing deposits
3,389,403
3,247,326
Total deposits
4,371,026
4,145,455
Federal funds purchased and retail repurchase agreements
43,811
43,582
Federal Home Loan Bank advances
219,931
100,000
Federal Reserve Bank borrowings
—
140,000
Subordinated debt
97,058
96,921
Contractual obligations
18,493
19,315
Interest payable and other liabilities
31,941
36,459
Total liabilities
4,782,260
4,581,732
Commitments and contingent liabilities, see Notes 11 and 12
Stockholders’ equity, see Note 7
Common stock
208
207
Additional paid-in capital
490,533
489,187
Retained earnings
153,201
141,006
Accumulated other comprehensive income (loss)
(60,788
)
(57,920
Treasury stock
(126,378
(119,620
Total stockholders’ equity
456,776
452,860
Total liabilities and stockholders’ equity
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended March 31, 2024, and 2023
(Dollar amounts in thousands, except per share data)
(Unaudited)Three Months EndedMarch 31,
Interest and dividend income
Loans, including fees
58,829
48,381
Securities, taxable
9,877
5,947
Securities, nontaxable
391
669
Federal funds sold and other
2,670
1,126
Total interest and dividend income
71,767
56,123
Interest expense
22,855
13,821
326
195
1,144
1,018
1,361
135
1,899
1,844
Total interest expense
27,585
17,013
Net interest income
44,182
39,110
Provision (reversal) for credit losses
1,000
(366
Net interest income after provision (reversal) for credit losses
43,182
39,476
Non-interest income
Service charges and fees
2,569
2,545
Debit card income
2,447
2,554
Mortgage banking
188
88
Increase in value of bank-owned life insurance
828
1,583
Net gain on acquisition and branch sales
1,239
Net gain (loss) from securities transactions
43
32
4,417
1,798
Total non-interest income
11,731
8,600
Non-interest expense
Salaries and employee benefits
18,097
16,692
Net occupancy and equipment
3,535
2,879
Data processing
4,828
3,916
Professional fees
1,392
1,384
Advertising and business development
1,238
1,159
Telecommunications
655
485
FDIC insurance
571
360
Courier and postage
606
458
Free nationwide ATM cost
494
525
Amortization of core deposit intangibles
899
918
Loan expense
109
117
Other real estate owned
(84
119
Merger expenses
1,556
3,256
4,217
Total non-interest expense
37,152
33,229
Income (loss) before income tax
17,761
14,847
Provision (benefit) for income taxes
3,693
2,524
Net income (loss) and net income (loss) allocable to common stockholders
14,068
12,323
Basic earnings (loss) per share
0.91
0.78
Diluted earnings (loss) per share
0.90
0.77
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period on available-for-sale securities
(6,180
16,018
Reclassification for net (gains) losses included in net income
252
Unrealized holding gains (losses) arising during the period on cash flow hedges
2,134
799
Total other comprehensive income (loss)
(3,794
16,817
Tax effect
926
(4,544
Other comprehensive income (loss), net of tax
(2,868
12,273
Comprehensive income (loss)
11,200
24,596
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, 2023
15,930,112
205
484,989
140,095
(113,511
(101,720
410,058
Other comprehensive income (loss), net of tax effects
Cash dividends - common stock, $0.10 per share
(1,573
Dividend equivalents - restricted stock units, $0.10 per share
(35
Stock-based compensation
1,212
Common stock issued under stock-based incentive plan
102,687
1
(1
Common stock issued under employee stock purchase plan
17,508
Treasury stock purchase
(320,050
(9,593
Balance at March 31, 2023
15,730,257
206
486,658
150,810
(101,238
(111,313
425,123
Balance at January 1, 2024
15,443,651
Cash dividends - common stock, $0.12 per share
(1,843
Dividend equivalents- restricted stock units and restricted stock awards, $0.12 per share
(30
950
Common stock issued upon exercise of stock options
1,250
29
91,005
16,884
368
Treasury stock purchases
(209,591
(6,758
Balance at March 31, 2024
15,343,199
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
1,325
1,087
Amortization of operating lease right-of-use asset
92
166
Amortization of cloud computing implementation costs
35
47
Net amortization (accretion) of purchase valuation adjustments
(436
(163
Amortization (accretion) of premiums and discounts on securities
(821
1,172
Amortization of intangible assets
935
954
Deferred income taxes
(1,633
(255
Federal Home Loan Bank stock dividends
(142
(140
Loss (gain) on sales and valuation adjustments on other real estate owned
(109
34
Net loss (gain) on sales and settlements of securities
Change in unrealized (gains) losses on equity securities
(32
Loss (gain) on disposal of premises and equipment
(7
(15
Loss (gain) on sales of foreclosed assets
(3
Loss (gain) on sales of loans
565
(62
Originations of loans held for sale
(8,234
(3,391
Proceeds from the sale of loans held for sale
10,511
3,154
Increase in the value of bank-owned life insurance
(828
(1,583
Change in fair value of derivatives recognized in earnings
57
176
Gain on acquisition
(1,239
Payments on operating lease payable
(136
(262
Net change in:
493
169
Other assets
1,936
4,216
(6,001
694
Net cash provided by operating activities
12,639
19,132
Cash flows (to) from investing activities
Purchases of available-for-sale securities
(120,451
(1,840
Proceeds from sales, calls, pay-downs and maturities of available-for-sale securities
107,651
17,828
Proceeds from calls, pay-downs and maturities of held-to-maturity securities
Net change in loans
(30,566
(18,019
Purchase of USDA guaranteed loans
(4,180
(802
Purchase of premises and equipment
(2,012
(4,408
Proceeds from sale of premises and equipment
39
Proceeds from sale of foreclosed assets
228
38
Net redemptions (purchases) of Federal Home Loan Bank and Federal Reserve Bank stock
(6,259
(11,524
Net redemptions (purchases) of correspondent and miscellaneous other stock
(622
(1,526
Proceeds from sale of other real estate owned
574
172
Proceeds from bank-owned life insurance death benefits
1,794
Purchase of Net Assets of Rockhold BanCorp, Net of cash acquired
60,914
Net cash (used in) provided by investing activities
5,289
(18,244
Cash flows (to) from financing activities
Net increase (decrease) in deposits
(124,244
45,095
Net change in federal funds purchased and retail repurchase agreements
(8,589
(1,380
Net borrowings (repayments) on Federal Home Loan Bank line of credit
119,931
(127,642
Proceeds from Federal Home Loan Bank term advances
300,000
466,091
Principal repayments on Federal Home Loan Bank term advances
(300,000
(366,091
Proceeds from Federal Reserve Bank borrowings
141,000
Principal payments on Federal Reserve Bank borrowings
(140,000
(1,000
Proceeds from the exercise of employee stock options
Proceeds from employee stock purchase plan
Purchase of treasury stock
Net change in contractual obligations
(822
(246
Dividends paid on common stock
(1,924
(1,642
Net cash (used in) provided by financing activities
(162,009
145,050
Net change in cash and cash equivalents
(144,081
145,938
Cash and cash equivalents, beginning of period
104,428
Ending cash and cash equivalents
250,366
Supplemental cash flow information:
Interest paid
30,647
12,966
Income taxes paid, net of refunds
27
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans
101
Other repossessed assets acquired in settlement of loans
247
46
Purchase of investments in tax credit structures and resulting contractual obligations
4,400
Total fair value of assets acquired in purchase of Rockhold BanCorp, net of cash
300,957
Total fair value of liabilities assumed in purchase of Rockhold BanCorp
360,632
11
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2024
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"), SA Property LLC ("SA Property"), and EQBK Investments, LLC. ("EQBK Investments"). SA Holdings and SA Property were 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, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 7, 2024. Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, 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.
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. The amendments in ASU 2023-07 provide for new disclosures which: (1) require that a public entity disclose on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss; (2) require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition; (3) require that a public entity provide all annual disclosures about a reportable segment's profit or loss and assets currently required by Topic 280 in interim periods; (4) allows more than one measure of segment profit or loss used by the CODM when assessing segment performance and deciding how to allocate resources to be disclosed; (5) require disclosure of title and position of CODM and explain how the CODM uses the disclosed reported measures to assess segment performance; and (6) require that a public entity that has a single reportable segment provide all the disclosures required by the amended Topic 280. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments in this update are required to be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories and the amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company adopted this accounting standard effective January 1, 2024, and the Company's financial condition, results of operations and cash flows were not impacted by this guidance. The Company has provided the required disclosures for its single reportable segment.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. The amendments in ASU 2023-09 require public business entities on an annual basis to disclose: (1) specific categories in the rate reconciliation; (2) provide additional information for reconciling items that meet a quantitative threshold of five percent of pretax income multiplied by the statutory rate; (3) provide a qualitative description of the state and local jurisdictions that make up a majority of the state and local income tax category; (4) requires the entity to provide an explanation of the nature, effect and underlying causes of the reconciling items disclosed and the judgment used in categorizing the reconciling items; (5) requires that all entities disclose on an annual basis income taxes paid (net of refunds received) disaggregated by federal, state and foreign taxes, and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than five percent of total income taxes paid (net of refunds); (6) requires disclosure of income from continuing operations before income tax expense to be disaggregated between domestic and foreign, and income tax expense disaggregated by federal, state and foreign; and (7) removes the disclosures of estimating the range of reasonably possible change in unrecognized tax benefits balance in the next 12 months and removes the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures. The amendments in this update are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this update should be applied on a prospective basis; however, retrospective application is permitted. The Company's financial condition, results of operations and cash flows will not be impacted by this guidance; however, this guidance will impact the Company's financial statement disclosures.
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
81,606
(6,534
75,077
U.S. Treasury securities
121,106
14
(871
120,249
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities
661,713
1,929
(39,060
624,582
Private label residential mortgage-backed securities
158,225
(23,167
135,058
Corporate
56,742
(5,959
50,791
Small Business Administration loan pools
7,457
(355
7,102
State and political subdivisions
88,344
(9,539
78,858
1,175,193
2,009
(85,485
December 31, 2023
39,103
(6,016
33,087
89,999
28
(771
89,256
560,674
3,872
(35,403
529,143
161,174
(23,333
137,841
56,722
(7,039
49,683
8,066
(339
7,727
81,458
74
(8,621
72,911
997,196
3,974
(81,522
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.
13
GrossUnrecognizedGains
GrossUnrecognizedLosses
Held-to-maturity securities
1,090
(14
1,076
1,115
20
1,134
2,210
1,094
1,097
1,153
41
2,250
The fair value and amortized cost of debt securities at March 31, 2024, 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
113,506
112,741
One to five years
70,836
70,130
Five to ten years
129,232
113,798
After ten years
41,681
35,408
819,938
759,640
Total debt securities
The following table shows the carrying value and fair value of securities pledged as collateral to secure public fund deposits, borrowings from the Federal Home Loan Bank and Federal Reserve Bank and retail repurchase obligations at March 31, 2024, and December 31, 2023.
Book Value
Fair Value
Public fund deposits
545,903
503,619
509,010
488,270
Federal Home Loan Bank pledging
82,606
70,588
84,421
72,293
12,110
11,831
158,382
141,125
Retail repurchase agreements
52,191
47,363
51,548
47,282
Total securities pledged
692,810
633,401
803,361
748,970
The following tables show gross unrealized losses or unrecognized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position or unrecognized loss position at March 31, 2024, and December 31, 2023.
Less Than 12 Months
12 Months or More
UnrealizedLoss
35,692
(201
32,566
(6,333
68,258
64,773
(194
19,468
(677
84,241
112,236
(868
296,481
(38,192
408,717
47,882
4,631
(17
2,471
(338
14,924
58,921
(8,718
73,845
232,256
(2,101
592,847
(83,384
825,103
19,413
7,799
(5
306,858
(35,398
314,657
5,097
2,630
(325
11,386
(768
57,326
(7,853
68,712
24,282
(787
606,838
(80,735
631,120
UnrecognizedLoss
Residential mortgage-backed (issued by government-sponsored entities)
274
1,350
The tables above present unrealized losses on available-for-sale securities and unrecognized losses on 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, 2024, the Company held 524 available-for-sale in an unrealized loss position and two held-to-maturity securities in an unrecognized loss position.
Unrealized losses on available-for-sale securities and unrecognized losses on held-to-maturity 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.
15
The Company's available-for-sale and held-to-maturity 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, 2024, 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, 2024, 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 174 positions of which 86% of the positions are rated "A" or better by a Nationally Recognized Statistical Ratings Organization ("NRSRO"), and 62% of the overall 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, 2024, 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
726
Gross gain
Gross losses
255
Income tax expense/(benefit)
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, 2024, and December 31, 2023.
Investments in stocks
Accounted for at fair value through net income
675
674
Accounted for at amortized cost assessed for impairment
1,981
1,397
Total investments in stocks
2,656
2,071
Investments in partnerships
Accounted for under the equity method
2,369
2,345
Accounted for under the hypothetical liquidation book value
2,424
2,403
Accounted for under proportional amortization
23,372
24,296
Total investments in partnerships
28,165
29,044
Total other investments
30,821
31,115
16
The following table discloses the financial statement impact of tax credit investments for the three month period ended March 31, 2024, and 2023.
Income Tax Credits Recognized During Period (a)
Other Income Tax Benefits (a)
Total Tax Benefits
Investment Amortization Included in Income Tax Expense
Investments and tax credit structures:
Included in proportional amortization
(826
(225
(1,051
924
Not included in proportional amortization
23
March 31, 2023
(482
(144
(626
587
(232
(1,034
(a) Reported in income tax expense on statements of income and reported in net change in other assets on statements of cash flows.
Contingent contributions for investment tax credit structures not subject to proportional amortization were zero and $3.6 million for the three month period ended March 31, 2024, and 2023.
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 non-farm, 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, 2024, and December 31, 2023.
Commercial real estate
1,797,192
1,759,855
Commercial and industrial
649,035
598,327
Residential real estate
581,988
556,328
Agricultural real estate
198,291
196,114
Agricultural
149,312
118,587
Consumer
106,345
103,690
Total loans
3,482,163
3,332,901
Allowance for credit losses
(44,449
(43,520
Net loans
17
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, 2024, and 2023, the Company did not purchase any pools of residential loans. As of March 31, 2024, and December 31, 2023, residential real estate loans include $288,632 and $299,448 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, 2024 the Company purchased $4,180 in loans guaranteed by governmental agencies. During the first three months of 2023, the Company purchased $802 in loans guaranteed by governmental agencies.
The unamortized purchase accounting discounts related to non-purchase credit deteriorated loans included in the loan totals above are $5,093 with related loans of $311,049 at March 31, 2024, and $2,424 with related loans of $209,662 at December 31, 2023.
Overdraft deposit accounts are reclassified and included in consumer loans above. These accounts totaled $3,162 at March 31, 2024, and $387 at December 31, 2023.
The following tables present the activity in the allowance for credit losses by class for the three month periods ended March 31, 2024, and 2023.
CommercialReal Estate
Commercialand Industrial
ResidentialRealEstate
AgriculturalRealEstate
Allowance for credit losses:
Beginning balance
13,476
17,954
7,784
1,718
995
1,593
43,520
Provision for credit losses
116
67
367
(31
359
122
Initial PCD on Acquired loans
184
284
596
Loans charged-off
(631
(27
(26
(181
(882
Recoveries
142
215
Total ending allowance balance
13,582
17,651
8,319
1,688
1,612
1,597
44,449
16,731
14,951
8,608
819
2,457
2,281
45,847
(126
1,100
132
(233
(1,065
(174
(435
(197
(638
155
78
260
16,611
15,620
8,751
586
1,547
1,988
45,103
The following tables present the recorded investment in loans and the balance in the allowance for credit losses by portfolio and class based on the method to determine allowance for credit loss as of March 31, 2024, and December 31, 2023.
CommercialandIndustrial
Individually evaluated for credit losses
729
1,989
1,148
658
1,112
189
5,825
Collectively evaluated for credit losses
12,853
15,662
7,171
1,030
500
1,408
38,624
Loan Balance:
7,192
8,266
5,889
4,888
6,425
904
33,564
1,790,000
640,769
576,099
193,403
142,887
105,441
3,448,599
18
582
1,644
1,113
598
154
4,765
12,894
16,310
6,671
1,044
397
1,439
38,755
6,031
5,498
7,495
4,672
3,598
27,963
1,753,824
592,829
548,833
191,442
114,989
103,021
3,304,938
The following tables present information related to nonaccrual loans at March 31, 2024, and December 31, 2023.
UnpaidPrincipalBalance
RecordedInvestment
Allowance forCredit LossesAllocated
With no related allowance recorded:
3,938
3,368
4,915
1,992
1,332
945
40
Subtotal
10,245
6,305
With an allowance recorded:
2,898
2,666
599
8,352
4,753
1,558
4,173
3,769
936
4,771
3,282
620
2,679
860
772
179
24,208
17,921
4,368
34,453
24,226
3,948
3,376
2,925
21
1,342
948
2,303
10,562
4,324
2,297
455
8,452
5,041
1,335
7,605
7,251
1,086
3,266
660
2,946
2,470
481
689
603
150
26,742
20,702
4,167
37,304
25,026
19
The tables below present average recorded investment and interest income related to nonaccrual loans for the three months ended March 31, 2024, and 2023. 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
573
2,441
841
5,660
3,135
1,421
3,195
382
14,634
17,075
The following tables present the aging of the recorded investment in past due loans as of March 31, 2024, and December 31, 2023, by portfolio and class of loans.
30 - 59DaysPast Due
60 - 89DaysPast Due
GreaterThan90 DaysPastDue Still OnAccrual
Nonaccrual
Loans NotPast Due
4,254
1,574
413
6,034
1,784,917
388
6,745
640,108
2,456
492
575,271
535
61
4,227
193,468
1,450
42
145,141
554
145
104,874
11,043
2,702
3,443,779
2,397
198
5,447
1,751,624
1,853
2,713
588,649
1,444
676
546,957
949
4,214
190,951
559
65
115,474
443
118
102,526
7,645
3,770
279
3,296,181
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. 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.
Based on the analysis performed at March 31, 2024, the risk category of loans by type and year of origination is as follows.
2022
2021
2020
Prior
Revolving LoansAmortized Cost
Revolving LoansConverted to Term
Risk rating
Pass
64,642
215,317
361,943
237,075
169,563
248,288
488,533
735
1,786,096
Special mention
385
502
Substandard
2,883
3,417
258
3,686
103
10,594
Doubtful
Total commercial real estate
215,524
364,826
240,609
169,821
252,359
488,636
775
28,847
113,685
101,217
52,112
49,311
44,371
246,034
1,758
637,335
98
159
253
1,147
1,657
1,123
349
2,285
3,042
10,043
Total commercial and industrial
114,906
101,941
52,714
51,990
47,803
249,076
5,898
37,547
38,314
278,758
9,215
152,438
54,187
1,040
577,397
468
209
412
2,829
588
64
4,123
Total residential real estate
38,523
279,170
9,236
155,735
54,775
1,104
6,461
22,294
25,021
16,874
16,643
29,168
76,119
277
192,857
444
433
127
800
1,804
3,508
37
3,630
Total agricultural real estate
22,778
25,472
16,901
32,803
76,956
6,381
17,081
12,876
7,403
11,668
16,405
72,651
144,540
407
589
366
167
626
629
2,242
153
4,183
Total agricultural
17,447
13,193
8,029
12,297
18,679
73,211
29,390
25,046
21,952
9,079
4,207
3,734
12,152
105,561
89
235
220
82
691
93
Total consumer
25,135
22,187
9,299
4,272
3,909
141,619
430,970
561,323
601,301
260,607
494,404
949,676
3,886
3,443,786
542
742
370
2,159
1,207
5,020
1,825
4,077
5,051
3,652
14,632
3,923
104
33,264
433,337
566,142
606,722
264,259
511,288
954,806
3,990
22
Based on the analysis performed at December 31, 2023, the risk category of loans by type and year of origination is as follows.
2019
212,229
379,233
253,837
179,935
75,472
186,073
461,346
753
1,748,878
257
399
84
2,501
3,481
256
1,463
2,336
81
10,202
212,570
381,734
257,437
180,191
76,935
188,808
461,427
128,598
110,817
54,416
49,557
29,931
7,293
204,237
1,780
586,629
992
1,007
1,317
230
2,922
237
2,171
3,346
10,691
129,915
111,285
54,661
52,479
30,168
10,456
207,583
35,040
29,766
277,611
5,183
12,506
130,144
57,699
1,065
549,014
213
187
156
1,960
4,710
66
7,314
29,979
277,798
5,205
12,662
132,104
62,409
1,131
22,368
26,762
17,987
18,551
10,653
20,039
74,010
289
190,659
903
158
164
605
1,830
24
3,423
3,625
23,311
26,920
18,011
10,754
23,626
74,652
12,424
7,363
4,815
7,148
1,385
3,809
78,285
115,284
33
464
1,861
3,261
12,463
7,373
5,279
7,777
3,246
3,894
78,500
47,019
24,620
10,384
4,841
1,281
2,885
12,035
103,066
50
241
163
49
624
47,069
24,861
10,547
4,939
1,330
2,908
457,678
578,561
619,050
265,215
131,228
350,243
887,612
3,943
3,293,530
1,160
134
1,588
614
3,654
1,530
3,433
4,549
3,927
3,867
9,965
8,380
35,717
460,368
582,152
623,733
269,142
135,095
361,796
896,606
4,009
The following table discloses the charge-off and recovery activity by loan type and year of origination for the three month period ending March 31, 2024.
Gross charge-offs
(16
Gross recoveries
Net charge-offs
(10
(168
(40
(104
(316
(64
(75
(308
(489
(2
(4
(25
(19
(45
(28
(34
(18
(44
(22
(127
(237
(37
(47
(153
(344
110
(43
(71
(333
(667
The following table discloses the charge-off and recovery activity by loan type and year of origination for the three month period ending March 31, 2023.
March 31 2023
(431
(51
(12
(20
(53
(13
(24
(119
(52
(23
(55
(448
211
(48
(445
(378
25
Modifications to Debtors Experiencing Financial Difficulty
The following table presents the amortized cost basis of loans at March 31, 2024, and 2023, that were both experiencing financial difficulty and modified during the three months ended March 31, 2024, and 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
%
457
0.23
1,223
0.82
496
1,740
0.05
8,794
9,052
1.49
0.01
0.11
0.02
281
8,808
0.28
At March 31, 2024, and 2023, there were $235 thousand and $129 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 twelve months ended March 31, 2024, and 2023.
26
30 - 59 Days Past Due
60 - 89 Days Past Due
Greater Than 89 days Past Due
Total Past Due
2,224
2,249
2,236
2,301
The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three months ended March 31, 2024, and 2023.
Principal Forgiveness
Weighted Average Interest Rate Reduction
Weighted Average Term Extension in Years
0.67
3.00
1.89
0.88
Weighted Average Term Extension
0.25
0.14
6.20
(0.24
2.16
0.16
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 cancelable 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, 2024, and December 31, 2023.
Allowance forCredit Losses
351
285
1,188
1,053
243
Total allowance for credit losses
1,829
1,625
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 or one-month SOFR plus a spread to the index and pays a fixed-rate cash flow equal to the customer loan rate. At March 31, 2024, the portfolio of interest rate swaps had a weighted average maturity of 6.71 years, a weighted average pay rate of 4.60% and a weighted average rate received of 8.48%. At December 31, 2023, the portfolio of interest rate swaps had a weighted average maturity of 6.9 years, a weighted average pay rate of 4.60% and a weighted average rate received of 8.50%.
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 and Federal Home Loan Bank advance 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.
The following table lists the cash flow hedges at March 31, 2024, and December 31, 2023.
Weighted averageMaturity in years
Weighted average pay rate
Weighted average rate received
Subordinated note hedges
11.5
2.80
7.44
11.7
7.43
Variable rate FHLB advance hedges
2.0
3.60
5.60
2.2
3.58
5.35
Prime based receivable loan hedges
8.50
0.2
Total cash flow hedges
1.1
6.43
5.54
1.4
5.56
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, 2024, this portfolio of interest rate swaps had a weighted average maturity of 4.57 years, weighted average pay rate of 8.36% and a weighted average rate received of 8.51%. At December 31, 2023, this portfolio of
interest rate swaps had a weighted average maturity of 4.6 years, weighted average pay rate of 8.31% and weighted average rate received of 8.46%.
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, 2024, and December 31, 2023.
NotionalAmount
DerivativeAssets
DerivativeLiabilities
Derivatives designated as hedging instruments:
Interest rate swaps
15,078
1,639
15,461
1,580
Derivatives designated as cash flow hedges:
257,500
3,479
1,976
631
Total derivatives designated as hedging relationships
272,578
5,118
272,961
3,556
Derivatives not designated as hedging instruments:
172,570
4,154
3,715
180,911
3,446
3,025
Total derivatives not designated as hedging instruments
445,148
9,272
453,872
7,002
3,656
Cash collateral
8,708
5,952
Netting adjustments
(8,513
(6,406
Net amount presented in Balance Sheet
759
3,910
3,202
The table below lists designated and qualifying hedged items in fair value hedges at March 31, 2024, and December 31, 2023.
Carrying Amount
Hedging Fair Value Adjustment
Fair Value Adjustments on Discontinued Hedges
Commercial real estate loans
15,232
(1,959
(434
15,795
(1,826
(446
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, 2024, and 2023, 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:
Total net gains (losses) related to derivatives not designated as hedging instruments
Net gains (losses) on derivatives and hedging activities
The following tables show 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, 2024, and 2023.
Gain/(Loss)on Derivatives
Gain/(Loss)on HedgedItems
Net Fair ValueHedgeGain/(Loss)
Effect ofDerivatives onNet InterestIncome
146
(145
161
(367
375
149
The following tables show 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, 2024, and 2023.
30
Gain/(Loss)onDerivatives
Gain/(Loss)Recorded in Accumulated Other Comprehensive Income
749
(1,098
FHLB advance hedges
981
741
436
(574
923
686
(780
123
(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, 2024, and December 31, 2023, are listed below.
Right-of-UseAsset
Lease Liability
WeightedAverageLease Termin Years
WeightedAverageDiscountRate
Operating Leases
Land and building leases
3,930
3,929
12.7
3.29
Total operating leases
3,291
3,307
14.8
Operating lease costs for the three months ended March 31, 2024, and 2023, are listed below.
Operating lease cost
120
196
Short-term lease cost
Variable lease cost
Total operating lease cost
210
31
There were no sale and leaseback transactions, leverage leases, lease transactions with related parties or leases that had not yet commenced during the three month periods ended March 31, 2024.
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 31,2024
Due in one year or less
572
Due after one year through two years
619
Due after two years through three years
602
Due after three years through four years
536
Due after four years through five years
364
Thereafter
2,156
Total undiscounted cash flows
4,849
Discount on cash flows
(920
Total operating lease liability
NOTE 6 – BORROWINGS
Federal funds purchased and retail repurchase agreements as of March 31, 2024, and December 31, 2023, are listed below.
December 31,2023
Federal funds purchased
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 $47,363 and $47,282 at March 31, 2024, and December 31, 2023. 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, 2024, and December 31, 2023.
Average daily balance during the period
47,772
43,469
Average interest rate during the period
1.13
Maximum month-end balance year-to-date
47,312
46,798
Weighted average interest rate at period-end
1.66
1.69
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, 2024, and December 31, 2023, are as follows.
Federal Home Loan Bank line of credit advances
Federal Home Loan Bank fixed-rate term advances
Total Federal Home Loan Bank advances
At March 31, 2024, and December 31, 2023, the Company had undisbursed advance commitments (letters of credit) with the Federal Home Loan Bank of $47,861 and $39,922. 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 $890,390 and securities of $63,789 for a total of $954,179 at March 31, 2024, and qualifying loans of $846,601 and securities of $65,209 for a total of $911,810 at December 31, 2023. Based on this collateral and the Company’s holdings of Federal Home Loan Bank stock, the Company was eligible to borrow an additional $685,211 and $770,711 at March 31, 2024, and December 31, 2023.
At March 31, 2024, and December 31, 2023, the Company had a borrowing capacity of $345,460 and $471,569, for which the Company has pledged loans with an outstanding balance of $393,887 and $394,810 and securities with a fair value of $147,642 and $9,620. At December 31, 2023 the Company held $140,000 in borrowings secured from this facility under the Federal Reserve's Bank Term Funding Program with a rate of 4.38% and maturity date of March 22, 2024. The Company repaid this borrowing at maturity and there were no outstanding borrowings at March 31, 2024.
Bank stock loan
The Company entered into an agreement with an unaffiliated financial institution that provided for an initial 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 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.
The loan was renewed and amended on February 10, 2024, with the same terms as the previous renewal and a new maturity date of February 10, 2025.
There were no outstanding principal balances on the bank stock loan at March 31, 2024, and December 31, 2023.
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, 2024, and December 31, 2023, are listed below.
Subordinated debentures
23,681
23,594
Subordinated notes
73,377
73,327
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 were initially issued to accrue and pay distributions quarterly at three-month LIBOR plus 2.00%; however on July 12, 2023, after the LIBOR transition it will now accrue and pay distributions quarterly at three-month CME term SOFR plus a tenor spread adjustment of 0.26% 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 were initially issued to accrue and pay distributions quarterly at three-month LIBOR plus 1.89%; however on September 15, 2023, after the LIBOR transition it will now accrue and pay distributions quarterly at three-month CME term SOFR plus a tenor spread adjustment of 0.26% 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 were initially issued to accrue and pay distributions quarterly at three-month LIBOR plus 3.25%; however on September 26, 2023, after the LIBOR transition it will now accrue and pay distributions quarterly at three-month CME term SOFR plus a tenor spread adjustment of 0.26% 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 were initially issued to accrue and pay distributions quarterly at three-month LIBOR plus 1.80%; however on September 15, 2023, after the LIBOR transition it will now accrue and pay distributions quarterly at three-month CME term SOFR plus a tenor spread adjustment of 0.26% 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, 2024, and December 31, 2023, are listed below.
Weighted Average Rate
Weighted Average Term in Years
CTII subordinated debentures
10,310
7.58
11.0
CTIII subordinated debentures
5,155
7.48
13.2
CFSTI subordinated debentures
8.82
8.7
ASBSTI subordinated debentures
7,732
7.39
Total contractual balance
28,352
Fair market value adjustments
(4,671
Total subordinated debentures
7.66
11.3
7.54
13.5
8.87
9.0
7.45
(4,758
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, 2024, are listed below.
75,000
7.00
6.3
Total principal outstanding
Debt issuance cost
(1,623
Total subordinated notes
Subordinated notes as of December 31, 2023, are listed below.
6.5
(1,673
Future principal repayments
Future principal repayments of the March 31, 2024, outstanding balances are as follows.
Retail Repurchase Agreements
FHLB Advances
Subordinated Debentures
Subordinated Notes
FRB Borrowings
263,742
103,352
367,094
NOTE 7 – STOCKHOLDERS’ EQUITY
Preferred stock
The Company’s articles of incorporation provide for the issuance of shares of preferred stock. At March 31, 2024, and December 31, 2023, 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, 2024, and December 31, 2023.
Class A common stock – issued
20,569,754
20,460,615
Class A common stock – held in treasury
(5,226,555
(5,016,964
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 $35 and $39 was recorded for the three months ended March 31, 2024, and 2023. 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
14,274
27.37
February 15, 2022 to August 14, 2022
14,555
27.61
August 15, 2022 to February 14, 2023
26.18
February 15, 2023 to August 14, 2023
14,548
22.34
August 15, 2023 to February 14, 2024
21.79
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, 2023, and 2022, the Company repurchased a total of 832,893 shares of the Company’s outstanding common stock at an average price paid of $27.89 per share.
On July 26, 2023, the Company’s Board of Directors approved a share repurchase plan for up to 1,000,000 shares of outstanding common stock beginning on October 1, 2023, and concluding on September 30, 2024. The repurchase program does 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. Non-objection from the Federal Reserve Bank of Kansas City related to this repurchase plan was received September 27, 2023. Under this program, during the quarter ended March 31, 2024, the Company repurchased a total of 209,591 shares of the Company’s outstanding common stock at an average price paid of $32.24 per share. At March 31, 2024, there are 790,409 shares remaining available for repurchase under the program.
At March 31, 2024, and December 31, 2023, 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.
36
Components of accumulated other comprehensive income as of March 31, 2024, and December 31, 2023, are listed below.
Available-for-SaleSecurities
Cash Flow Hedges
AccumulatedOtherComprehensiveIncome (Loss)
Net unrealized or unamortized gains (losses)
(83,476
2,973
(80,503
20,443
(728
19,715
(63,033
2,245
(77,548
839
(76,709
18,995
(206
18,789
(58,553
633
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 judgments 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, 2024, 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, 2024, 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, 2024, and December 31, 2023, are presented in the table below. The Company was able to take advantage of the accumulated other comprehensive income exception on capital 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.
589,681
14.71
420,797
10.50
N/A
Equity Bank
572,236
14.30
420,102
400,097
10.00
Tier 1 capital to risk weighted assets
470,026
11.73
340,645
525,958
13.15
340,083
320,078
8.00
Common equity Tier 1 capital to risk weighted assets
446,345
11.14
280,531
280,068
260,063
6.50
Tier 1 leverage to average assets
9.10
206,687
4.00
10.20
206,242
257,802
5.00
589,131
15.48
399,729
571,938
15.05
399,006
380,006
470,659
12.36
323,590
526,793
13.86
323,005
304,004
447,064
11.74
266,486
266,004
247,004
9.46
199,112
10.60
198,782
248,477
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, 2024, and 2023.
Three months ended
March 31,2023
Basic:
Net income (loss) allocable to common stockholders
Weighted average common shares outstanding
15,416,060
15,843,147
Weighted average vested restricted stock units
9,649
15,661
Weighted average shares
15,425,709
15,858,808
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
52,609
54,491
Dilutive effects of the assumed vesting of restricted stock units
89,685
110,526
Dilutive effects of the assumed exercise of ESPP purchases
1,222
4,226
Average shares and dilutive potential common shares
15,569,225
16,028,051
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, 2024, and 2023.
Stock options
177,563
255,510
Restricted stock units
5,177
9,980
Total antidilutive shares
182,740
265,490
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), private-label residential mortgage-backed securities, 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, 2024, and December 31, 2023.
March 31. 2024
(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
112,411
980,740
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)
Total derivative liabilities
Government-sponsored residential mortgage- backed securities
83,524
837,394
(454
There were no material transfers between levels during the three months ended March 31, 2024, or the year ended December 31, 2023. 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, 2024, and December 31, 2023.
Loans individually evaluated for credit losses:
2,067
2,833
2,662
2,796
Other real estate owned:
1,061
170
1,616
3,706
6,165
2,606
2,442
The Company did not record any liabilities for which the fair value was measured on a non-recurring basis at March 31, 2024, or December 31, 2023.
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 judgment 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, 2024, and December 31, 2023.
ValuationTechnique
UnobservableInput
Range(weighted average) or Multiple of Earnings
Individually evaluated real estate loans
13,553
SalesComparisonApproach
Adjustments fordifferences betweencomparable sales
5% - 56% (30%)
Individually evaluated other real estate owned
1,231
5% - 23% (14%)
16,535
3% - 34% (19%)
7% - 28% (18%)
Carrying amount and estimated fair values of financial instruments at period end were as follows for March 31, 2024, and December 31, 2023.
CarryingAmount
EstimatedFair Value
Financial assets:
971,468
Loans, net of allowance for credit losses
3,375,009
Derivative assets
Cash collateral held by derivative counterparty and netting adjustments
4,823,490
4,760,790
347,429
1,038,352
Financial liabilities:
4,365,528
72,064
Interest payable
6,525
Derivative liabilities
4,760,754
4,753,943
4,753,748
830,392
3,227,789
4,638,188
4,576,637
462,623
886,225
4,140,501
Federal Reserve Bank Borrowings
71,827
9,180
4,557,655
4,551,201
4,551,655
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, 2024, and December 31, 2023, were as follows.
44
FixedRate
VariableRate
Commitments to make loans
50,859
364,978
47,465
343,715
Mortgage loans in the process of origination
3,223
1,079
4,574
357
Unused lines of credit
154,247
372,769
124,893
355,270
At March 31, 2024, the fixed rate loan commitments have interest rates ranging from 3.95% to 18.00% and maturities ranging from 1 month to 129 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, 2024, and December 31, 2023, were as follows.
Standby letters of credit
16,905
29,196
18,145
30,680
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 28, 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.
45
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, 2024, and 2023.
Mortgage banking(a)
Increase in bank-owned life insurance(a)
Net gain (loss) on acquisitions(a)
Net gain (loss) from securities transactions(a)
Investment referral income
138
Trust income
319
240
Insurance sales commissions
113
Recovery on zero-basis purchased loans(a)
3,345
Income (loss) from equity method investments(a)
(56
Other non-interest income related to loans and deposits
1,362
Other non-interest income not related to loans and deposits(a)
635
532
Total other non-interest income
2,287
9,089
(a) Not within the scope of ASC 606.
NOTE 14 – BUSINESS COMBINATIONS AND BRANCH SALES
At close of business on February 9, 2024, the Company acquired 100% of the outstanding common shares of Rockhold BanCorp ("Rockhold"), the holding company of the Bank of Kirksville (“BOK”), based in Kirksville, Missouri. Results of operations of BOK were included in the Company’s results of operations beginning February 10, 2024. Acquisition-related costs associated with this acquisition were $1,556 ($1,233 on an after-tax basis) and are included in merger expense in the Company’s income statement for the year quarter March 31, 2024.
Information necessary to recognize the fair value of assets acquired and liabilities assumed is currently still on-going. The acquisition was an expansion to the Company’s current footprint in Missouri with the addition of eight branch locations in the Kirksville area.
The following table summarizes the amounts of assets acquired and liabilities assumed recognized at the acquisition date.
Fair value of consideration:
Cash
44,304
Recognized amounts of identifiable assets acquired and
liabilities assumed:
105,218
164,629
Loans
118,131
Premises and equipment
3,473
Core deposit intangible
11,530
3,194
Total assets acquired
406,175
349,777
8,818
2,037
Total liabilities assumed
Total identifiable net assets
45,543
Bargain purchase gain
The following tables reconcile the par value of BOK loan portfolio as of the purchase date to the fair value indicated in the table above. For non-purchase credit deteriorated assets, the entire fair value adjustment including both interest and credit related components is recorded as an adjustment to par (“Fair Value Marks”) and reflected as an adjustment to the carrying value of that asset within the Consolidated Balance Sheet. Following purchase, an ACL is also established for these non-purchase credit deteriorated assets which is not reflected in this table as it is accounted for outside of the business combination. For purchase-credit deteriorated assets, as required by CECL, the difference between par value and purchase price is divided between a (discount)/premium related to all other factors except ACL referred to as ("Discounts from Other Factors Excluding ACL") and an ACL at the acquisition date referred to as (“Credit Marks in ACL”). The addition to ACL is based on the application of management’s CECL methodology to the individual loans.
Non-Purchase Credit Deteriorated Loans
Loan Par Value
Fair Value Marks
Purchase Price
1,959
(85
1,874
32,300
(578
31,722
42,318
(1,182
41,136
37,641
(949
36,692
1,373
(36
1,337
Total non-PCD loans
115,591
(2,830
112,761
Purchase Credit Deteriorated Loans
Discounts from Other Factors Excluding ACL
Credit Marksin ACL
1,366
(178
1,069
2,044
(210
(183
1,651
3,316
(472
(284
2,560
115
90
Total PCD loans
6,841
(875
(596
5,370
Total Purchased Loans
Assuming the Rockhold acquisition would have taken place on January 1, 2023, total combined revenue would have been $86,834 for the quarter ended March 31, 2024, and $244,365 for the year ended December 31, 2023. Net income would have been
$18,230 at March 31, 2024, and $20,850 at December 31, 2023. The pro forma amounts disclosed exclude merger expense from non-interest expense, which is considered a non-recurring adjustment. Separate revenue and earnings of the former Rockhold locations are not available subsequent to the acquisition.
NOTE 15 – SEGMENT REPORTING
Equity Bancshares, Inc. is a financial holding company, whose principal activity is the ownership and management of its wholly-owned subsidiaries, including Equity Bank (“Equity Bank”). As a community-oriented financial institution, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these banking operations, which constitute the Company’s only operating segment for financial reporting purposes.
The Company’s chief operating decision maker is comprised of the executive leadership team. For Equity Bancshares Inc., the executive leadership team uses gross profit and profit or loss from operations before interest and income taxes to allocate resources for in the annual budget and forecasting process. The chief operating decision maker considers budget-to-actual variances on a monthly basis for profit measures when making decisions about allocating capital and personnel to the operating segment. For Equity Bank, the executive leadership team uses net-interest income and non-interest income to allocate resources (including employees, financial, or capital resources) to that segment in the annual budget and forecasting process and uses that measure as a basis for evaluating lending terms for customer loans.
The following tables present information about reported segment revenue, measures of a segment’s profit or loss, significant segment expenses, and measure of a segment’s assets for the three months ended March 31, 2024, and March 31, 2023. The Company does not allocate all holding company expenses, income taxes or unusual items to the reportable segment. The following tables present the reconciliations of reportable segment revenues and measures of profit or loss and line item reconciliation to the Company’s consolidated financial statement totals.
48
Unallocated Holding
Company
Amounts
Eliminations
71,590
177
25,662
1,923
45,928
(1,746
44,928
(251
294
16,303
(16,303
(a)
11,437
16,597
18,049
1,230
162
1,237
996
560
2,555
701
Intersegment service charges
345
(345
36,025
1,127
20,340
13,724
4,171
(478
Total segment profit/(loss)
16,169
14,202
(a) Elimination of equity in earnings of subsidiary
56,105
15,133
1,880
40,972
(1,862
41,338
1,310
14,785
(14,297
8,112
16,649
1,279
105
3,955
262
324
(324
33,143
86
16,307
12,837
2,804
(280
13,503
13,117
Administrative
Adjustments
1,329
1,374
Amortization of operating lease right-of-use-asset
Purchase of long lived assets
5,464
1,132
4,414
March 31,
Assets
Total assets for reportable segments
5,228,133
5,148,761
Holding company administrative adjustments
565,381
531,376
Elimination of bank cash and equity in earnings of subsidiaries
(13,813
(10,970
Elimination of investment in subsidiaries
(540,665
(512,451
Consolidated total
5,156,716
NOTE 16 – SUBSEQUENT EVENTS
On April 18, 2024, the Company entered into an agreement and plan of reorganization with KansasLand Bancshares, Inc. ("KansasLand"). KansasLand is the holding company of KansasLand Bank, which has two branch locations in Quinter and Americus, Kansas. This transaction is subject to approval by regulators. Assuming approval it is expected to close in the second quarter of 2024. In their December 31, 2023, unaudited Consolidated Report of Condition, KansasLand reported total assets of $54,457, which included total loans of $28,803. At December 31, 2023, total liabilities of $51,499 were reported by KansasLand, which included deposits of $43,376. KansasLand reported $611 in net loss before income taxes for the year ended December 31, 2023. The Company anticipates there will be core deposit intangible recorded with this acquisition.
51
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 7, 2024, 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 30,2023
June 30,2023
Statement of Income Data (for the quarterly period ended)
64,294
65,039
61,256
24,827
24,027
21,827
39,467
41,012
39,429
711
298
1,240
(50,618
(1,322
Other non-interest income
10,448
7,204
8,736
8,272
8,568
Other non-interest expense
35,596
34,998
34,244
33,130
Income (loss) before income taxes
(39,656
14,273
12,951
Provision for income taxes
(11,357
1,932
1,495
Net income (loss)
(28,299
12,341
11,456
(1.84
0.80
0.74
Balance Sheet Data (at period end)
199,017
278,099
Securities available-for-sale
1,057,009
1,094,748
1,183,247
Securities held-to-maturity
2,212
2,216
1,944
627
648
Gross loans held for investment
3,282,118
3,322,670
3,330,618
44,186
44,544
Loans held for investment, net of allowance for credit losses
3,237,932
3,278,126
3,285,515
Goodwill and core deposit intangibles, net
70,955
60,323
61,062
61,861
62,779
Mortgage servicing asset, net
100
126
151
Naming rights, net
989
1,011
1,022
1,033
4,945,267
5,094,883
4,082,170
4,230,950
4,286,933
Borrowings
360,800
380,503
376,488
381,423
392,842
4,527,137
4,676,448
4,731,593
418,130
418,435
Tangible common equity*
384,782
391,462
355,957
355,426
361,160
Performance ratios
Return on average assets (ROAA) annualized
1.10
(2.29
)%
0.97
1.00
Return on average equity (ROAE) annualized
12.29
(26.53
11.49
10.82
11.89
Return on average tangible common equity (ROATCE) annualized
14.96
(30.39
14.18
13.55
14.89
Yield on loans annualized
6.85
6.62
6.67
6.34
5.94
Cost of interest-bearing deposits annualized
2.77
2.58
2.40
2.14
1.73
Net interest margin annualized
3.75
3.49
3.51
3.38
3.44
Efficiency ratio*
65.16
74.35
68.83
69.45
69.69
Non-interest income / average assets annualized
0.92
(3.52
0.69
0.55
0.70
Non-interest expense / average assets annualized
2.90
2.84
2.69
2.62
2.70
Capital Ratios
Tier 1 Leverage Ratio
9.77
9.54
9.60
Common Equity Tier 1 Capital Ratio
12.65
12.23
12.21
Tier 1 Risk Based Capital Ratio
13.27
12.84
12.83
Total Risk Based Capital Ratio
16.42
15.96
15.98
Equity / Assets
8.72
8.99
8.46
8.21
8.24
Tangible common equity to tangible assets*
7.87
7.29
7.06
7.09
Dividend payout ratio
13.31
(6.65
15.13
13.53
13.07
Book value per share
29.80
29.35
27.13
27.18
27.03
Tangible common book value per share*
25.10
25.37
23.09
23.08
22.96
Tangible common book value per diluted share*
24.87
25.05
22.98
22.83
* 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 72 full-service banking sites located in Arkansas, Kansas, Missouri, and Oklahoma. As of March 31, 2024, we had consolidated total assets of $5.24 billion, total loans held for investment, net of allowance, of $3.44 billion, total deposits of $4.37 billion, and total stockholders’ equity of $456.8 million. During the three months ended March 31, 2024, the Company had net income of $14.1 million. The Company had net income of $12.3 million for the three month period ended March 31, 2023.
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, 2023, audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 7, 2024. The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments 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 judgment 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 judgment 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, 2024. 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. 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, 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, 2024, 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 judgment.
Although management believes that the judgments 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, 2024, compared with three months ended March 31, 2023: Net income allocable to common stockholders for the three months ended March 31, 2024, was $14.1 million, or $0.90 diluted earnings per share as compared to $12.3 million, or $0.77 diluted earnings per share for the three months ended March 31, 2023, an increase of $1.7 million. The increase was largely due to an increase in net interest income of $5.1 million, an increase in non-interest income of $3.1 million, offset by an increase in the provision for loan losses of $1.4 million, an increase in non-interest expense of $3.9 million and an increase in the provision for Income taxes of $1.2 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, 2024, compared with three months ended March 31, 2023: 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, 2024, and 2023. 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)
634,638
12,412
577,452
9,634
6.77
1,449,177
24,601
6.83
1,344,727
20,112
6.07
Real estate construction
354,801
7,775
8.81
404,016
6,695
6.72
580,426
4.48
570,141
5,802
4.13
197,023
3,468
7.08
202,901
3,114
6.22
131,035
2,391
7.34
100,251
1,478
5.98
105,453
1,721
6.56
106,193
1,546
5.91
3,452,553
3,305,681
Taxable securities
1,011,466
3.93
1,083,645
2.23
Nontaxable securities
62,635
2.51
101,837
2.67
Total Securities
1,074,101
10,268
3.84
1,185,482
6,616
2.26
215,546
4.98
119,856
3.81
Total interest-earning assets
4,742,200
6.09
4,611,019
4.94
Non-interest-earning assets:
1,768
4,283
115,758
103,394
125,181
123,430
Goodwill, core deposit and other intangibles, net
62,203
64,447
Other non-interest-earning assets
105,804
87,845
5,152,914
4,994,418
Interest-bearing liabilities:
Interest-bearing demand deposits
1,082,620
7,447
1,035,053
4,829
Savings and money market
1,437,901
8,213
2.30
1,314,989
3,624
1.12
2,520,521
15,660
2.50
2,350,042
8,453
1.46
Certificates of deposit
799,386
7,195
3.62
885,515
5,368
2.46
3,319,907
3,235,557
FHLB term and line of credit advances
113,348
4.06
89,078
4.64
96,991
7.88
96,457
7.75
124,615
4.39
12,456
4.38
Other borrowings
55,212
2.37
49,941
1.58
Total interest-bearing liabilities
3,710,073
2.99
3,483,489
1.98
Non-interest-bearing liabilities and stockholders’ equity:
Non-interest-bearing checking accounts
934,976
1,043,894
Non-interest-bearing liabilities
47,621
46,535
Stockholders’ equity
460,244
420,500
Interest rate spread
3.10
2.96
Net interest margin(2)
Total cost of deposits, including non-interest bearing deposits
4,254,883
4,279,451
1.31
Average interest-earning assets to interest-bearing liabilities
127.82
132.37
56
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, 2024, and 2023.
Analysis of Changes in Net Interest Income
For the Three Months Ended March 31, 2024, and 2023
Increase (Decrease) Due to:
TotalIncrease /
Volume(1)
Yield/Rate(1)
(Decrease)
1,014
1,764
2,778
2,850
4,489
(888
1,968
1,080
106
553
659
(92
446
354
515
398
913
185
175
2,284
8,164
(421
4,351
(245
(33
(278
Total securities
(666
4,318
1,103
441
1,544
2,721
12,923
15,644
231
2,387
2,618
4,221
4,589
6,608
7,207
(565
2,392
1,827
9,000
9,034
(129
1,224
1,226
108
131
9,026
10,572
Net Interest Income
1,175
3,897
5,072
Interest income increased $15.6 million for the quarter ended March 31, 2024, as compared to the quarter ended March 31, 2023. Of this increase, $8.2 million is attributable to increases in loan rate/yield. Yield on loans increased by 91 basis points for the quarter ended March 31, 2024, as compared quarter ended to March 31, 2023. The increase in interest income on loans is primarily due to increases in loan coupon and the addition of $118.1 million in balances from the merger of Rockhold, offset by decrease due to volume on real estate construction, agricultural and consumer loans. Also during the first quarter, the Company realized expanded earnings on securities following our portfolio re-positioning in late 2023. As compared to the quarter ended March 31, 2023, improved yield on the securities portfolio contributed $4.3 million to the current quarter.
The increase in interest expense of $10.6 million was due to a general increase in market interest rates on the deposit portfolio and to a lesser extent the increase in volume on borrowing, primarily from the Federal Reserve Bank. The cost of interest-bearing deposits increased from 1.73% for the quarter ended March 31, 2023 to 2.77% for the quarter ended March 31, 2024.
During the quarter ended March 31, 2024, when compared to the quarter ended March 31, 2023, net interest margin increased 31 basis points and net interest spread increased by 14 basis points to 3.10% from 2.96%. The increase in net interest margin is primarily due to the increase in yield earned on interest-earning assets, which outpaced the increases in the cost of interest-bearing liabilities. The increase in interest spread is primarily due to the increase in the yield on interest-earning assets to current market rates.
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, 2024, compared with three months ended March 31, 2023: During the three months ended March 31, 2024, there was a provision for credit losses of $1.0 million compared to a reversal of provision for credit losses of $366 thousand during the three months ended March 31, 2023. The provision for the quarter is attributable to the establishment of reserves on non-PCD loans acquired in the Rockhold acquisition. The Company continues to estimate the allowance for credit losses with assumptions that anticipate low 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, 2024 were $668 thousand compared to net charge-offs of $378 thousand for the three months ended March 31, 2023. For the three months ended March 31, 2024, gross charge-offs were $882 thousand, offset by gross recoveries of $215 thousand. In comparison, gross charge-offs were $638 thousand for the three months ended March 31, 2023, offset by gross recoveries of $260 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, 2024, compared with three months ended March 31, 2023: The following table provides a comparison of the major components of non-interest income for the three months ended March 31, 2024, and 2023.
2024 vs. 2023
Change
0.9
(107
(4.2
113.6
(755
(47.7
55.1
79
32.9
(77
(68.1
Recovery on zero-basis purchased loans
3,339
NM
Income (loss) from equity method investments
1.8
1,405
(770
(54.8
Total other
2,619
145.7
10,449
1,881
22.0
Net gain (loss) on acquisition and branch sales
100.0
34.4
3,131
36.4
58
Total non-interest income increased $3.1 million during the three months ended March 31, 2024, as compared to the same period in 2023. The increase is largely attributable to increases in recovery on zero-basis purchased loans of $3.3 million, mortgage banking income of $100 thousand and trust income of $79 thousand, offset by decreases in bank owned life insurance of $755 thousand, other income of $771 thousand and debit card income of $107 thousand. The decrease in other non-interest income was primarily due to decreases in loan repurchase obligation reversal. Additionally, we recorded a gain on acquisition of $1.2 million on the Rockhold merger.
Non-Interest Expense
Three months ended March 31, 2024, compared with three months ended March 31, 2023: For the three months ended March 31, 2024, non-interest expense totaled $37.2 million, an increase of $3.9 million, when compared to the three months ended March 31, 2023. Changes in the various components of non-interest expense for the three months ended March 31, 2024, and 2023, are discussed in more detail in the following table.
8.4
656
22.8
912
23.3
0.6
6.8
35.1
58.6
148
32.3
(5.9
Amortization of core deposit intangible
(2.1
(8
(6.8
(203
(170.6
(961
(22.8
2,367
7.1
(100.0
11.8
Salaries and employee benefits: There was an increase in salaries and employee benefits of $1.4 million for the period ended March 31, 2024, as compared to the same period in 2023. The increase is primarily due to increases in employee salaries and incentive compensation, additional payroll cost from the Rockhold merger, off-set by decreases in share-based compensation expense. The decrease in share-based compensation is due to the reversal of share-based compensation expense associated with the departure of senior management team members.
Data processing: There was an increase in data processing costs of $912 thousand for the period ended March 31, 2024, as compared to the same period in 2023. The increase is primarily due to the renewal of software licenses.
Net occupancy and equipment: There was an increase in net occupancy and equipment costs of $656 thousand for the period ended March 31, 2024, as compared to the same period in 2023. The increase is primarily due to increases in repairs and maintenance expense and utilities expense.
FDIC insurance: FDIC insurance costs increased $211 thousand for the period ended March 31, 2024, as compared to the same period in 2023. The increase was primarily due to an increase in FDIC assessment rates.
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. The primary driver of the decline from the comparative period is a reduction in amortization of investments in tax credit partnerships.
59
Merger expenses: To facilitate the Rockhold merger the Company realized expense of $1.6 million for the period ended March 31, 2024, as compared to the same period in 2023.
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.
The efficiency ratio was 65.2% for the three months ended March 31, 2024, compared with 70.0% for the three months ended March 31, 2023. The improvement was primarily due to an increase in net interest income offset slightly by an increase in non-interest expense net of merger related expenses.
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, 2024, compared with three months ended March 31, 2023: The effective income tax rate for the three month period ended March 31, 2024, was 20.8% as compared to 17.0% for the three month period ended March 31, 2023. The increase in rate at quarter ended March 31, 2024 as compared to the quarter ended March 31, 2023, was the result of a reduction in the tax benefit related to investments in tax credit structures offset by the tax benefit recognize in the current quarter related to the bargain purchase gain recorded on the acquisition completed during the quarter.
Total assets increased $204.4 million from December 31, 2023, to $5.24 billion at March 31, 2024. This variance was primarily due to a increase of available-for-sale securities of $172.1 and loans held for investment of $148.3 million, including $118.1 million from the Rockhold merger at March 31, 2024, partially offset by a decrease in cash and cash equivalents of $144.1 million. Total liabilities increased $200.5 million to $4.78 billion at March 31, 2024. The change in total liabilities is mostly due to increases in total deposits of $225.6 million and Federal Home Loan bank advances of $119.9 million, partially offset by a decrease in Federal Reserve Bank borrowings of $140.0 million. Total stockholders’ equity increased $3.9 million from $452.9 million at December 31, 2024, to $456.8 million at March 31, 2024, principally due to net income for the three months ended March 31, 2024, offset by the increase in treasury stock and unrealized losses on available for sale securities, net of tax.
Loan Portfolio
The following table summarizes our loan portfolio by type of loan as of the dates indicated.
Composition of Loan Portfolio
Percent
18.6
17.9
50,708
8.5
Real estate loans:
51.6
52.8
37,337
2.1
16.7
25,660
4.6
5.7
5.9
2,177
Total real estate loans
2,577,471
74.0
2,512,297
75.4
65,174
2.6
4.3
3.6
30,725
25.9
3.1
2,655
Total loans held for investment
149,262
4.5
Total loans held for sale
835
175.4
Total loans held for investment (net of allowances)
148,333
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. The majority of our 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, 2024, gross total loans, including loans held for sale, were 79.7% of deposits and 66.5% of total assets. At December 31, 2023, gross total loans, including loans held for sale, were 80.4% of deposits and 66.2% 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, 2024, are summarized in the following table.
Loan Maturity and Sensitivity to Changes in Interest Rates
As of March 31, 2024
One yearor less
After one yearthrough fiveyears
After fiveyears through fifteen years
After fifteen years
223,514
332,920
76,881
15,720
Real Estate:
497,106
973,385
244,109
82,592
10,961
133,250
435,922
100,897
61,061
25,161
11,172
Total real estate
599,858
1,045,407
402,520
529,686
91,582
23,763
8,942
25,025
37,573
50,119
16,640
2,013
952,527
1,452,209
504,983
572,444
Loans with a predetermined fixed interest rate
358,849
619,318
128,003
267,600
1,373,770
Loans with an adjustable/floating interest rate
593,678
832,891
376,980
304,844
2,108,393
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, 2023, are summarized in the following table.
As of December 31, 2023
171,879
345,693
77,886
2,869
369,311
1,063,226
247,300
80,018
1,447
10,091
128,077
416,713
73,882
84,802
27,559
9,871
444,640
1,158,119
402,936
506,602
80,659
30,948
2,851
4,129
31,832
50,779
19,077
2,002
729,010
1,585,539
502,750
515,602
289,816
685,903
127,602
273,488
1,376,809
439,194
899,636
375,148
242,114
1,956,092
62
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
404
Other repossessed assets
393
380
Total nonperforming assets
25,436
26,457
Ratios:
Nonperforming assets to total assets
0.49
0.53
Nonperforming assets to total loans plus OREO and repossessed assets
0.73
0.79
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, 2024, consisted of 249 separate credits and 218 separate borrowers. We had 5 non-performing loan relationships, totaling $9.5 million, with an outstanding balance in excess of $1.0 million as of March 31, 2024.
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, 2024, the Company had $4.4 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $11.1 million at December 31, 2023.
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.
63
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)
8,318
1,598
Total loans outstanding (1)
Net (charge-offs) recoveries QTD
Average loan balance QTD (1)
1,803,978
634,637
579,434
3,451,560
Non-accrual loan balance
Loans to total loans outstanding
ACL to total loans
0.8
2.7
1.5
1.3
Net charge-offs to average loans QTD
(0.1
Non-accrual loans to total loans
0.3
1.0
0.7
ACL to non-accrual loans
225.1
261.7
220.7
39.9
60.2
207.0
183.5
1,746,834
605,576
563,791
202,274
106,169
105,974
1,748,743
569,732
3,305,272
2,703
5,482
3,088
1,937
2,923
417
16,550
52.4
18.2
16.9
6.1
3.2
1.6
1.9
0.5
2.8
0.4
614.5
284.9
283.4
30.3
52.9
476.7
272.5
Management believes that the allowance for credit losses at March 31, 2024, 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, 2024.
The allowance for credit losses on loans measured on a collective basis totaled $38.6 million, or 1.2% of the $3.45 billion in loans measured on a collective basis at March 31, 2024, compared to an allowance for credit losses of $38.8 million, or 1.2%, of the $3.33 billion in loans measured on a collective basis at December 31, 2023. The total reserve percentage to total loans was 1.3% at March 31, 2024, and 1.3% at December 31, 2023.
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, 2024, securities represented 20.9% of total assets, slightly increasing from 18.3% at December 31, 2023.
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 that are classified as held-to-maturity are 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 that are not classified as held-to-maturity are classified as available-for-sale and are 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, 2024, and December 31, 2023, 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, 2024, and December 31, 2023. 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
11,669
5.20
28,685
4.43
32,996
1.84
1,727
2.02
3.35
96,877
4.44
4.46
49,376
4.03
158,781
3.03
416,425
8,157
42,634
4.62
5.07
5,064
5.53
2,038
2.11
4.55
State and political subdivisions(1)
4,195
2.88
9,916
33,104
2.04
31,643
2.45
2.32
119,506
4.32
272,579
3.06
586,891
3.86
3.77
Held-to-maturity securities:
4.92
4.77
589,096
1,093,922
31,337
1.65
1,750
1.67
69,843
5.39
1.18
4.47
40,978
3.78
137,929
350,236
4.26
3.80
2.27
8,001
7.49
41,682
4.63
5.09
5,587
5.44
2,140
2.08
4.51
3,963
2.09
6,138
2.34
30,789
2.00
32,021
2.38
2.20
73,806
5.21
74,530
247,324
2.82
523,988
4.93
526,197
3.61
921,857
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
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, 2024, and December 31, 2023, 72.6% and 73.2% of the residential mortgage-backed securities held by us had contractual final maturities of more than ten years, with a weighted average life of 5.6 years and 5.3 years and a modified duration of 4.5 years and 4.4 years.
Goodwill Impairment Assessment
At March 31, 2024, we performed an interim qualitative analysis and concluded there were no indications that goodwill was impaired. For additional information, see “Goodwill” under "Critical Accounting Policies" in the Management's Discussion and Analysis of Financial Condition and Results of Operation.
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, 2024, and December 31, 2023.
Composition of Deposits
Percentof Total
Non-interest-bearing demand
22.5
21.7
Interest-bearing demand
1,107,175
25.3
998,822
24.1
1,467,696
33.6
1,484,985
35.8
18.4
Total deposits at March 31, 2024, were $4.37 billion, an increase of $225.6 million, or 5.4%, compared to total deposits of $4.15 billion at December 31, 2023.
Equity Bank participates in the Insured Cash Sweep (“ICS”) service that allows the Bank to break large non-time 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.
68
The following table lists reciprocal and brokered deposits included in total deposits categorized by type at March 31, 2024, and December 31, 2023.
Reciprocal
371,831
382,614
Total interest-bearing demand
99,321
230,750
Total savings and money market
21,598
21,841
Non-reciprocal brokered
199,938
199,940
Total time
221,536
221,781
Total reciprocal and brokered deposits
692,688
835,145
The following table provides information on the maturity distribution of time deposits of $250 thousand or more as of March 31, 2024, and December 31, 2023.
3 months or less
68,907
65,449
3,458
5.3
Over 3 through 6 months
77,828
94,459
(16,631
(17.6
Over 6 through 12 months
77,718
18,082
59,636
329.8
Over 12 months
15,590
18,777
(3,187
(17.0
Total Time Deposits
240,043
196,767
43,276
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.
During the three months ended March 31, 2024, and 2023, our liquidity needs have primarily been met by core deposits, security and loan maturities, and amortizing security and loan portfolios. Other funding sources include federal funds purchased, brokered certificates of deposit, borrowings from the FHLB, and Federal Reserve Bank borrowings.
Our largest sources of funds are deposits and FHLB borrowings and largest uses of funds are loans and securities and debt servicing. Average loans were $3.45 billion for the three months ended March 31, 2024, an increase of 4.8% over the December 31, 2023, 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 4.2 years at March 31, 2024.
Cash and cash equivalents were $235.0 million at March 31, 2024, a decrease of $144.1 million from the $379.1 million cash and cash equivalents at December 31, 2023. The decrease in cash and cash equivalents is driven by $162.0 million net cash used in financing activities offset by $12.6 million net cash provided by operating activities, $5.3 million net cash provided by investing activities. The $162.0 million net change in cash provided by financing activities includes increases in FHLB advances of $119.9 million, offset by net outflows of $300.0 million for paydown of FHLB term advances, $140.0 million in outflows for Federal Reserve borrowings, $124.2 million in outflows for the decrease in deposits, $6.8 million outflow for the repurchase of treasury stock and $1.9 million for the payment of dividends on common stock. Cash and cash equivalents at January 1, 2024, plus liquidity provided by operating activities, pay downs, sales, and maturities of investment securities and FHLB borrowings during the first three months of 2024 were primarily used to originate or purchase loans, to purchase investment securities and to facilitate the Rockhold merger. 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 judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of March 31, 2024, and December 31, 2023, 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, 2024, 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 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.
70
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
Less: core deposit intangibles, net
7,961
8,760
9,678
Less: mortgage servicing asset, net
Less: naming rights, net
Tangible common equity
Common shares issued at period end
15,327,799
15,428,251
15,413,064
15,396,739
Diluted common shares outstanding at period end
15,469,531
15,629,185
15,500,749
15,468,319
15,822,536
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
5,167,042
4,973,194
4,883,094
5,031,874
5,092,753
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.
For the three months ended
Total average stockholders’ equity
423,207
426,260
424,862
Less: average intangible assets
61,756
63,453
Average tangible common equity
398,041
361,451
363,625
361,409
356,053
Less: tax effect
200
Adjusted net income allocable to common stockholders
14,807
(27,687
13,001
12,210
13,077
Return on total average stockholders’ equity (ROAE) annualized
72
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 judgment, 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.
Less: merger expense
297
Non-interest expense, excluding loss on debt extinguishment and merger expense
34,701
(43,414
8,735
6,950
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
54,631
46,671
49,748
47,701
47,678
Non-interest expense to net interest income plus non-interest income
66.45
(886.70
68.84
71.43
69.65
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, 2024, and December 31, 2023, 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 decrease 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, non-term deposits that will adjust to higher rates, the use of derivatives to hedge borrowing costs, and decreased levels of cash on the balance sheet compared to December 31, 2023. These factors result in an overall positive impact to net interest income at March 31, 2024, but at a reduced level from the December 31, 2023, simulation 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. 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, 2024, and December 31, 2023, 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 pre-payable 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 pre-payable 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, 2024, non-interest-bearing deposits were approximately $83.5 million, or 9.30%, higher than that deposit type at December 31, 2023. Substantially all investments and approximately 40.0% 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
7.4
10.3
+200 basis points
5.0
+100 basis points
2.5
3.3
0 basis points
-100 basis points
(1.5
-200 basis points
(3.1
(4.3
-300 basis points
(5.1
(7.3
The following table summarizes the simulated immediate impact on economic value of equity as of the dates indicated.
Impact on Economic Valueof Equity
(7.0
(7.4
(2.2
(0.2
(2.8
(7.6
(5.3
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 judgment 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
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 7, 2024.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Common Stock
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 concluded 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, and 2023, the Company repurchased a total of 832,893 shares of the Company’s outstanding common stock at an average price paid of $27.89 per share. At September 30, 2023, there are 167,107 shares remaining under the program that expired on September 30, 2023.
On July 26, 2023, the Board of Directors of Equity Bancshares, Inc. approved a share repurchase plan for up to 1,000,000 shares of outstanding common stock beginning on October 1, 2023, and concluding on September 30, 2024. The repurchase program does not obligate Equity to acquire a specific dollar amount or number of shares, and it may be extended, modified or discontinued at any time without notice. Non-objection from the Federal Reserve Bank of Kansas City related to this repurchase plan was received September 27, 2023.
Date
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, 2024 through January 31, 2024
1,000,000
February 1, 2024 through February 29, 2024
89,443
32.16
910,557
March 1, 2024 through March 31, 2024
120,148
32.30
790,409
209,591
32.24
Item 3: Defaults Upon Senior Securities
None
Item 4: Mine Safety Disclosures
Not applicable.
Item 5: Other Information
During the three months ended March 31, 2024, none of the Company's directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such defined in Item 408 of Regulation S-K of the Securities Act of 1933).
Item 6: Exhibits
Exhibit
No.
Description
10.1
Seventh Amendment to Loan and Security Agreement, dated February 12, 2024, by and between Equity Bancshares, Inc. and ServisFirst Bank (incorporated by reference to Exhibit 10.1 to Equity Bancshares, Inc.'s Current Report on Form 8-K, filed with the SEC on February 14, 2024.)
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.
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 9, 2024
By:
/s/ Brad S. Elliott
Brad S. Elliott
Chairman and Chief Executive Officer
/s/ Chris M. Navratil
Chris M. Navratil
Executive Vice President and Chief Financial Officer