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 September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-37624
EQUITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kansas
72-1532188
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
7701 East Kellogg Drive, Suite 300
Wichita, KS
67207
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 316.612.6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A, Common Stock, par value $0.01 per share
Trading Symbol
EQBK
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of October 31, 2021, the registrant had 16,851,049 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
8
Consolidated Statements of Stockholders’ Equity
9
Consolidated Statements of Cash Flows
11
Condensed Notes to Interim Consolidated Financial Statements
13
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
50
Overview
Critical Accounting Policies
52
Results of Operations
53
Financial Condition
64
Liquidity and Capital Resources
73
Non-GAAP Financial Measures
75
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
78
Item 4.
Controls and Procedures
80
Part II
Other Information
81
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
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, particularly with regard to developments related to the COVID-19 pandemic. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Item 1A - Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 9, 2021, 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:
•
external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System, or the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits which may have an adverse impact on our financial condition;
losses resulting from a decline in the credit quality of the assets that we hold;
the occurrence of various events that negatively impact the real estate market, since a significant portion of our loan portfolio is secured by real estate;
inaccuracies or changes in the appraised value of real estate securing the loans we originate that could lead to losses if the real estate collateral is later foreclosed upon and sold at a price lower than the appraised value;
the loss of our largest loan and depositor relationships;
limitations on our ability to lend and to mitigate the risks associated with our lending activities as a result of our size and capital position;
differences in our qualitative factors used in our calculation of the allowance for credit losses from actual results;
inadequacies in our allowance for credit losses which could require us to take a charge to earnings and thereby adversely affect our financial condition;
interest rate fluctuations which could have an adverse effect on our profitability;
the impact of the transition from London Interbank Offered Rate (“LIBOR”) and our ability to adequately manage such transition;
a continued economic downturn related to the COVID-19 pandemic, especially one affecting our core market areas;
inability of borrowers on deferral to make payments on their loans following the end of the deferral period;
potential fraud related to Small Business Administration (“SBA”) loan applications through the Paycheck Protection Program (“PPP”) as part of the U.S. Coronavirus Aid, Relief and Economic Security Act (“CARES Act”);
the effects of pandemic and widespread public health emergencies;
the costs of integrating the businesses we acquire, which may be greater than expected;
the departure of key members of our management personnel or our inability to hire qualified management personnel;
challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;
a lack of liquidity resulting from decreased loan repayment rates, lower deposit balances, or other factors;
3
inaccuracies in our assumptions about future events which could result in material differences between our financial projections and actual financial performance;
an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;
unauthorized access to nonpublic personal information of our customers, which could expose us to litigation or reputational harm;
disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;
required implementation of new accounting standards that significantly change our existing recognition practices;
additional regulatory requirements and restrictions on our business, which could impose additional costs on us;
an increase in FDIC deposit insurance assessments, which could adversely affect our earnings;
increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;
restraints on the ability of Equity Bank to pay dividends to us, which could limit our liquidity;
a failure in the internal controls we have implemented to address the risks inherent to the banking industry;
continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;
costs arising from the environmental risks associated with making loans secured by real estate;
the occurrence of adverse weather or manmade events, which could negatively affect our core markets or disrupt our operations;
the effects of new federal tax laws, or changes to existing federal tax laws;
the obligation associated with being a public company requires significant resources and management attention; and
other factors, if any, or changes to previously disclosed risk factors are discussed in “Item 1A - Risk Factors.”
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
September 30, 2021 and December 31, 2020
(Dollar amounts in thousands)
(Unaudited)
September 30,
December 31,
2021
2020
ASSETS
Cash and due from banks
$
141,645
280,150
Federal funds sold
673
548
Cash and cash equivalents
142,318
280,698
Interest-bearing time deposits in other banks
—
249
Available-for-sale securities
1,157,423
871,827
Loans held for sale
4,108
12,394
Loans, net of allowance for credit losses of $52,763 and $33,709
2,633,148
2,557,987
Other real estate owned, net
10,267
11,733
Premises and equipment, net
90,727
89,412
Bank-owned life insurance
103,431
77,044
Federal Reserve Bank and Federal Home Loan Bank stock
14,540
16,415
Interest receivable
15,519
15,831
Goodwill
31,601
Core deposit intangibles, net
12,963
16,057
Other
47,223
32,108
Total assets
4,263,268
4,013,356
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand
984,436
791,639
Total non-interest-bearing deposits
Savings, NOW and money market
2,092,849
2,029,097
Time
585,492
626,854
Total interest-bearing deposits
2,678,341
2,655,951
Total deposits
3,662,777
3,447,590
Federal funds purchased and retail repurchase agreements
39,137
36,029
Federal Home Loan Bank advances
10,144
Subordinated debt
88,030
87,684
Contractual obligations
18,771
5,189
Interest payable and other liabilities
36,804
19,071
Total liabilities
3,845,519
3,605,707
Commitments and contingent liabilities, see Notes 11 and 12
Stockholders’ equity, see Note 7
Common stock
178
174
Additional paid-in capital
392,321
386,820
Retained earnings
79,226
50,787
Accumulated other comprehensive income, net of tax
9,475
19,781
Employee stock loans
(43
)
Treasury stock
(63,451
(49,870
Total stockholders’ equity
417,749
407,649
Total liabilities and stockholders’ equity
See accompanying condensed notes to interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months ended September 30, 2021 and 2020
(Dollar amounts in thousands, except per share data)
Three Months Ended
Nine Months Ended
Interest and dividend income
Loans, including fees
37,581
32,278
102,392
99,281
Securities, taxable
3,920
3,476
11,242
12,113
Securities, nontaxable
655
923
2,096
2,769
Federal funds sold and other
290
405
846
1,409
Total interest and dividend income
42,446
37,082
116,576
115,572
Interest expense
1,881
3,064
6,316
13,827
24
25
72
10
471
155
2,198
Federal Reserve Bank discount window
Bank stock loan
415
1,556
1,415
4,669
1,953
Total interest expense
3,471
4,975
11,212
18,479
Net interest income
38,975
32,107
105,364
97,093
Provision (reversal) for credit losses
1,058
815
(6,355
23,255
Net interest income after provision (reversal) for credit losses
37,917
31,292
111,719
73,838
Non-interest income
Service charges and fees
2,360
1,706
6,125
5,097
Debit card income
2,574
2,491
7,603
6,735
Mortgage banking
801
877
2,584
2,298
Increase in value of bank-owned life insurance
1,169
489
2,446
1,452
Net gain on acquisition
585
Net gain from securities transactions
381
398
12
546
922
3,902
1,929
Total non-interest income
7,831
6,485
23,643
17,523
Non-interest expense
Salaries and employee benefits
13,588
13,877
39,079
40,076
Net occupancy and equipment
2,475
2,224
7,170
6,578
Data processing
3,257
2,817
9,394
8,243
Professional fees
1,076
3,148
3,187
Advertising and business development
760
598
2,241
1,697
Telecommunications
439
486
1,531
1,363
FDIC insurance
465
360
1,305
1,291
Courier and postage
344
366
1,040
1,103
Free nationwide ATM cost
519
1,504
1,186
Amortization of core deposit intangibles
1,030
3,094
2,806
Loan expense
207
107
626
628
Other real estate owned
(342
133
(805
710
Loss on debt extinguishment
372
Merger expenses
4,015
4,627
Goodwill impairment
104,831
2,484
2,690
7,050
6,831
Total non-interest expense
30,689
130,835
81,376
180,530
Income (loss) before income taxes
15,059
(93,058
53,986
(89,169
Provision (benefit) for income taxes
3,286
(2,653
11,972
(1,711
Net income (loss) and net income (loss) allocable to common
stockholders
11,773
(90,405
42,014
(87,458
Basic earnings (loss) per share
0.82
(6.01
2.92
(5.75
Diluted earnings (loss) per share
0.80
2.86
7
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during the period on
available-for-sale securities
(5,683
(1,843
(14,141
2,321
Less: reclassification for net gains included in net income
373
Unrealized holding gain arising from the transfer of
held-to-maturity securities to available-for-sale
24,848
Amortization of unrealized loss on held-to-maturity securities
620
988
Total other comprehensive income (loss)
(5,310
23,625
(13,768
28,157
Tax effect
1,335
(5,941
3,462
(7,080
Other comprehensive income (loss), net of tax
(3,975
17,684
(10,306
21,077
Comprehensive income
7,798
(72,721
31,708
(66,381
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months ended September 30, 2021 and 2020
(Dollar amounts in thousands, except share data)
Common Stock
Additional
Accumulated
Employee
Total
Shares
Outstanding
Amount
Paid-In
Capital
Retained
Earnings
Comprehensive
Income (Loss)
Stock
Loans
Treasury
Stockholders’
Equity
Balance at July 1, 2020
15,218,301
384,955
128,704
3,390
(37,414
479,766
Other comprehensive income,
net of tax effects
Stock-based compensation
812
Common stock issued upon
exercise of stock options
500
Common stock issued under
stock-based incentive plan
380
employee stock purchase plan
17,829
242
Treasury stock purchase
(383,523
(5,935
Balance at September 30, 2020
14,853,487
386,017
38,299
21,074
(43,349
402,172
Balance at July 1, 2021
14,360,172
176
389,394
68,625
13,450
(58,650
412,995
Other comprehensive income (loss),
Cash dividends declared at $0.08 per
common share
(1,172
891
566
139,456
1
2,032
2,033
16,034
329
330
Treasury stock purchases
(151,148
(4,801
Balance at September 30, 2021
14,365,785
For the Nine Months ended September 30, 2021 and 2020
Income (loss)
Balance at January 1, 2020
15,444,434
382,731
125,757
(3
(77
(30,522
478,060
17,703
2,670
1,150
20
34,591
34,593
596
Repayment on employee stock loans
34
(678,984
(12,827
Balance at January 1, 2021
14,540,556
10,242
2,226
188,692
2,706
2,708
72,804
(1
33,655
570
571
43
(480,164
(13,581
Implementation of ASU 2016-13,
Current Expected Credit Losses
(12,403
See accompanying condensed notes to interim consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
3,038
2,780
Amortization of operating lease right-of-use asset
302
462
Amortization of cloud computing implementation costs
124
Net (accretion) amortization of premiums, discounts and deferred fees
and costs on loans
16,405
(1,627
Amortization (accretion) of premiums and discounts on securities
7,275
4,406
Amortization of intangibles
3,126
2,843
Deferred income taxes
(2,311
(5,015
Federal Home Loan Bank stock dividends
(23
(585
Loss (gain) on sales and valuation adjustments on other real estate owned
(1,263
120
Net loss (gain) on securities transactions
(373
Change in unrealized loss (gain) on equity securities
(25
(12
Loss (gain) on disposal of premises and equipment
(18
Loss (gain) on lease termination
(2
Loss (gain) on sale of foreclosed assets
(28
280
Loss (gain) on sales of loans
(2,205
(1,895
Originations of loans held for sale
(76,982
(87,429
Proceeds from the sale of loans held for sale
87,325
85,780
Increase in the value of bank-owned life insurance
(2,446
(1,452
Change in fair value of derivatives recognized in earnings
(197
411
Gain on acquisition
Payments on operating lease payable
(374
(544
Net change in:
312
(2,371
Other assets
10,113
(5,729
562
2,627
Net cash provided by (used in) operating activities
79,635
36,430
Cash flows from (to) investing activities
Purchases of available-for-sale securities
(633,884
(91,495
Purchases of held-to-maturity securities
(2,754
Proceeds from sales, calls, pay-downs and maturities of available-for-sale securities
339,702
73,588
Proceeds from calls, pay-downs and maturities of held-to-maturity securities
156,963
Net change in interest-bearing time deposits in other banks
1,999
Net change in loans
127,770
(172,154
Purchases of mortgage loans
(214,181
Purchases of government guaranteed loans
(10,958
Capitalized construction cost of other real estate owned
(62
Purchase of premises and equipment
(4,358
(6,388
Proceeds from sale of premises and equipment
16
Proceeds from sale of foreclosed assets
152
1,991
Net redemption (purchase) of Federal Home Loan Bank and Federal Reserve
Bank stock
1,898
(823
Net redemption (purchase) of correspondent and miscellaneous other stock
(68
Proceeds from sale of other real estate owned
3,102
3,947
Purchase of bank-owned life insurance
(25,000
Proceeds from bank-owned life insurance death benefits
1,059
Net cash provided by (used in) investing activities
(414,493
(35,172
Cash flows from (to) financing activities
Net increase (decrease) in deposits
215,171
70,019
Net change in federal funds purchased and retail repurchase agreements
3,108
10,587
Net borrowings (payments) on Federal Home Loan Bank line of credit
(157,223
Proceeds from Federal Home Loan Bank term advances
70,000
253,000
Principal payments on Federal Home Loan Bank term advances
(80,107
(252,273
Proceeds from Federal Reserve Bank discount window
1,000
62,000
Principal payments on Federal Reserve Bank discount window
(1,000
(62,000
Proceeds from bank stock loan
38,354
Principal payments on bank stock loan
(47,344
Principal payments on employee stock loans
Proceeds from the exercise of employee stock options
Proceeds from employee stock purchase plan
Proceeds from subordinated notes
75,000
Debt issuance cost
(16
(2,295
Purchase of treasury stock
Net change in contractual obligations
(1,419
(358
Net cash provided by (used in) financing activities
196,478
(24,710
Net change in cash and cash equivalents
(138,380
(23,452
Cash and cash equivalents, beginning of period
89,291
Ending cash and cash equivalents
65,839
Supplemental cash flow information:
Interest paid
10,228
19,730
Income taxes paid, net of refunds
11,990
2,208
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans
876
2,456
Other real estate owned transferred from premise and equipment
1,982
Other repossessed assets acquired in settlement of loans
68
2,035
Investment securities purchased but not settled
12,084
Purchase of low-income tax credit investment and resulting
contractual obligations
15,000
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
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, EBAC, LLC and Equity Bank and Equity Bank’s wholly-owned subsidiaries, EBHQ, LLC and SA Holdings, Inc. 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, 2020, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 9, 2021. Operating results for the nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or any other period.
Reclassifications
Some items in prior financial statements were reclassified to conform to the current presentation. Management determined the items reclassified are immaterial to the consolidated financial statements taken as a whole and did not result in a change in equity or net income for the periods reported.
Risk and Uncertainties
The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities could be impacted, to varying degrees, with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout from COVID-19.
The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. It is not possible to know the full universe or extent of impact to the Company’s operations brought about from COVID-19 and resulting measures to curtail its spread.
Financial position and results of operations
The Company’s interest income and fees could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest and fees. While interest and fees will still accrue to income through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.
Asset valuation
Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
Credit
As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in frequent communication with borrowers to better understand their situation and the challenges faced, allowing the Company to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses and record additional provision for credit losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
Many industries have and will continue to experience adverse impacts as a result of COVID-19. Our exposure from outstanding loans and commitments to industries which we consider a higher risk totaled approximately $306,174 in hospitality and $36,031 in aircraft manufacturing at September 30, 2021.
Allowance for Credit Losses - Loans
As described below under Recently Adopted Accounting Pronouncements, the Company adopted the FASB ASU 2016-13 effective January 1, 2021, which requires the estimation of an allowance for credit losses in accordance with the current expected credit loss (“CECL”) methodology. Management assesses the adequacy of the allowance on a quarterly basis. 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. The allowance is adjusted through provision for credit losses and charge-offs, net of recoveries of amounts previously charged off. The Company adopted ASC Topic 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2021, are presented under ASC Topic 326, while prior amounts continue to be reported in accordance with previously applicable GAAP.
The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $10,438 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021.
The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses.
• Commercial real estate mortgage loans – Owner occupied commercial real estate mortgage loans are secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. For such loans, repayment is largely dependent upon the operation of the borrower's business.
• Commercial and industrial loans – Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. These loans are generally secured by equipment, inventory and accounts receivable of the borrower and repayment is primarily dependent on business cash flows.
• Residential real estate mortgage loans – Residential real estate mortgage consists primarily of loans secured by 1-4 family residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower.
14
• Agricultural real estate loans – Agricultural real estate loans are secured by real estate related to farmland and are affected by the value of farmland. Generally, the borrower’s ability to repay is based on the value of farmland and cash flows from farming operations.
• Agricultural production loans – Agricultural production loans are primarily operating lines subject to annual farming revenues, including productivity and yield of farm products and market pricing at the time of sale.
• Consumer – Consumer loans include all loans issued to individuals not included in the categories above. Examples of consumer and other loans are automobile loans, consumer credit cards and loans to finance education, among others. Many consumer loans are unsecured. Repayment is primarily dependent on the personal cash flow of the borrower.
The Company primarily utilizes a probability of default (“PD”) and loss given default (“LGD”) modeling approach for historical loss coupled with a macroeconomic factor analysis derived from a statistical regression of loss experience correlated to changes in economic factors for all commercial banks operating within our geographical footprint. The macroeconomic regression is based on a multivariate approach and includes key indicators that provide the highest cumulative adjusted R-square figure. Economic factors include, but are not limited to, national unemployment, gross domestic product, market interest rates and property pricing indices. To arrive at the most predictive calculation, a lag factor was applied to these inputs, resulting in current and historic economic inputs driving the projection of loss over our reasonable, supportable forecast period which management has defined as 12 months for all portfolio segments. Following the reasonable and supportable forecast period loss experience immediately reverts to the longer run historical loss experience of the Company. The resultant loss rates are applied to the estimated future exposure at default (“EAD”), as determined based on contractual amortization terms through an average default month and estimated prepayment experience in arriving at the quantitative reserve within our allowance for credit losses.
The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in projective economic sentiment, portfolio concentrations, policy exceptions, personnel retention, independent loan review results, collateral considerations, risk ratings and competition. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors. Due to the inclusion of a lag factor in our quantitative economic analysis discussed above, the allowance for credit losses, as of implementation and through the reporting date, is heavily influenced by the qualitative economic factor considered by management to be reflective of risk associated with the COVID-19 pandemic.
Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated loan pools. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral, less selling costs. For loans for which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral, the Company has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, with selling costs considered in the event sale of the collateral is expected. Loans for which terms have been modified in a troubled debt restructuring (“TDR”) are evaluated using these same individual evaluation methods. In the event the discounted cash flow method is used for a TDR, the original interest rate is used to discount expected cash flows.
In assessing the adequacy of the allowance for credit losses, the Company considers the results of the Company’s ongoing, independent loan review process. The Company undertakes this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in its overall evaluation of the risk characteristics of the entire loan portfolio. Its loan review process includes the judgment of management, independent internal loan reviewers and reviews that may have been conducted by third-party reviewers including regulatory examiners. The Company incorporates relevant loan review results when determining the allowance.
In accordance with CECL, losses are estimated over the remaining contractual terms of loans, adjusted for estimated prepayments. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed or such renewals, extensions or modifications are included in the original loan agreement and are not unconditionally cancellable by the Company. Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums and loan fees and costs. Accrued interest receivable, as allowed under ASU 2016-13, is excluded from the credit loss estimate. In addition, accrued interest receivable is presented separately on the balance sheets and is excluded from the tabular loan disclosures in Note 3.
15
The Company’s policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are inherently approximate estimates and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.
Allowance for Credit Losses – Off-Balance-Sheet Credit Exposures
The Company estimates expected credit losses over the contractual term of obligations to extend credit, unless the obligation is unconditionally cancellable. The allowance for off-balance-sheet exposures is adjusted through other noninterest expense. The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions used to estimate credit losses on existing funded loans.
Allowance for Credit Losses – Securities Available-for-Sale
For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis. If either criterion is met, the security's amortized cost basis is written down to fair value through net income. If neither criterion is met, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. If the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses, which changed how the Company measures credit losses for most of its financial assets. This guidance is applicable to loans held for investment, off-balance-sheet credit exposures, such as loan commitments and standby letters of credit, and held-to-maturity investment securities. The Company is required to use a new forward-looking current expected credit losses (CECL) model that will result in the earlier recognition of allowances for credit losses. For available-for-sale securities with unrealized losses, the Company will measure credit losses in a manner similar to current practice but will recognize those credit losses as allowances rather than reductions in the amortized cost of the securities. In addition, the ASU requires significantly more disclosure including information about credit quality by year of origination for most loans. Generally, the amendments will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The ASU was originally effective for the Company beginning in the first quarter of 2020; however, the CARES Act, issued in 2020, provided temporary relief related to the implementation of this accounting guidance until the earlier of the date on which the national emergency concerning the COVID-19 virus terminates or December 31, 2020. The Company elected to utilize this relief and has calculated the allowance for loan losses and the resulting provision for loan losses using the prior incurred loss method through December 31, 2020. Further implementation relief for this standard was provided on December 27, 2020, by section 540 of the Consolidated Appropriations Act (“CAA”) which allowed for an additional extension to the earlier of 60 days after the national emergency termination date or January 1, 2022. The Company has elected not to extend the implementation any further and has adopted effective January 1, 2021. The adoption of CECL resulted in an increase to our total allowance for credit losses (“ACL”) on loans held for investment of $15,732, an increase in allowance for credit losses on unfunded loan commitments of $838, a reclassification of purchased credit-impaired discount from loans to the ACL of $10,438, an increase in deferred tax asset of $4,167 and a decrease in retained earnings of $12,403. The increase in the ACL is largely attributable to moving to a life of loan allowance methodology and the transition of certain purchase discounts from an adjustment to amortized cost into the ACL.
In March 2020, various regulatory agencies, including the Federal Reserve and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. This interagency statement was later revised in April 2020 to clarify the interaction between the original interagency statement and section 4013 of the CARES Act, as well as the agencies’ views on consumer protection considerations. Under Accounting Standards Codification 310-40, Receivables – Troubled Debt Restructurings by Creditors, (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term
modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The CARES Act provisions were further extended to the earlier of 60 days after the national emergency termination date or January 1, 2022, by section 541 of the CAA. In addition, loan deferrals can be qualified under section 4013 of the CARES Act during the extended relief period if certain criteria are met. This interagency guidance and CARES Act provisions have had a material impact on the Company’s financial statements as reflected in Note 3.
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include contract modifications; hedging relationships; and sale or transfer of debt securities classified as held-to-maturity. The guidance was effective immediately for the Company and the amendments may be applied prospectively through December 31, 2022. The Company is in the process of evaluating the guidance and its effect on the Company’s financial condition, results of operations and cash flows has not yet been determined.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). ASU 2021-01 clarify that certain optional expedients and exceptions that are noted in Topic 848 apply to derivatives that are affected by the discounting transition. Certain provisions, if elected by the Company, apply to derivative instruments that use an interest rate for managing, discounting or contract price alignment that is modified as a result of reference rate reform. The guidance was effective immediately for the Company and the amendments may be applied prospectively through December 31, 2022. The Company is in the process of evaluating the guidance and its effect on the Company’s financial condition, results of operations and cash flows has not yet been determined.
NOTE 2 – SECURITIES
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.
Amortized
Cost
Gross
Unrealized
Gains
Losses
Allowance
for Credit
Fair
Value
U.S. Government-sponsored entities
100,259
(527
99,740
U.S. Treasury securities
87,416
58
(668
86,806
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities
639,254
13,485
(3,714
649,025
Private label residential mortgage-backed securities
148,631
(696
147,948
Corporate
52,535
1,636
(100
54,071
Small Business Administration loan pools
10,485
27
(47
10,465
State and political subdivisions
106,185
3,501
(318
109,368
1,144,765
18,728
(6,070
17
December 31, 2020
996
1,023
4,024
4,025
630,485
21,049
(109
651,425
44,302
(129
44,178
52,503
1,153
(6
53,650
1,226
44
1,270
111,865
4,391
116,256
845,401
26,670
(244
The fair value and amortized cost of debt securities at September 30, 2021, 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
Within one year
6,328
6,394
One to five years
53,951
54,610
Five to ten years
252,325
253,518
After ten years
44,276
45,928
787,885
796,973
Total debt securities
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $746,496 at September 30, 2021, and $713,001 at December 31, 2020.
18
The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021, and December 31, 2020.
Less Than 12 Months
12 Months or More
Loss
88,733
57,921
277,959
130,944
(650
2,752
(46
133,696
4,900
9,466
13,935
Total temporarily impaired securities
583,858
(6,024
586,610
28,770
28,367
3,908
61,045
As of September 30, 2021, the Company held 73 available-for-sale securities in an unrealized loss position.
Unrealized losses on securities have not been recognized into income because the security issuers are of high credit quality, management does not intend to sell, it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recovery and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.
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.
Proceeds
7,347
Gross gain
Gross losses
Income tax expense on net realized gains
94
There were no sales of available-for-sale securities during the nine months ended September 30, 2020.
19
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Types of loans and normal collateral securing those loans are listed below.
Commercial real estate: Commercial real estate loans include all loans secured by nonfarm, nonresidential properties and by multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.
Commercial and industrial: Commercial and industrial loans include loans used to purchase fixed assets, provide working capital or meet other financing needs of the business. Loans are normally secured by the assets being purchased or already owned by the borrower, inventory or accounts receivable. These may include SBA and other guaranteed or partially guaranteed types of loans.
Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences.
Agricultural real estate: Agricultural real estate loans are loans typically secured by farmland.
Agricultural: Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced. These loans may be secured by growing crops, stored crops, livestock, equipment and miscellaneous receivables.
Consumer: Consumer loans may include installment loans, unsecured and secured personal lines of credit, overdraft protection and letters of credit. These loans are generally secured by consumer assets but may be unsecured.
The following table lists categories of loans at September 30, 2021, and December 31, 2020.
Commercial real estate
1,308,707
1,188,696
Commercial and industrial
569,513
734,495
Residential real estate
490,633
381,958
Agricultural real estate
138,793
133,693
Agricultural
93,767
94,322
Consumer
84,498
58,532
Total loans
2,685,911
2,591,696
Allowance for credit losses
(52,763
(33,709
Net loans
Included in the commercial and industrial loan balances at September 30, 2021 and December 31, 2020, are $95,764 and $253,741 of loans that were originated under the SBA PPP program.
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 quarter ended September 30, 2021, the Company purchased one pool of residential real estate loans totaling $26,148. During the first nine months of 2021, the Company purchased five pools of residential real estate loans totaling $214,181. As of September 30, 2021, and December 31, 2020, residential real estate loans include $248,903 and $86,093 of purchased residential real estate loans.
The unamortized discount of merger purchase accounting adjustments related to non-purchase credit impaired loans included in the loan totals above are $6,622 with related loans of $272,223 at September 30, 2021. At December 31, 2020, excluding purchased credit impaired loans, there were $380,058 of loans with a related discount of $5,510 that were purchased as part of a merger. Effective January 1, 2021, with the adoption of CECL, amortizable non-credit discounts on purchase credit impaired loans are included in unamortized discount of merger purchase accounting adjustments.
Overdraft deposit accounts are reclassified and included in consumer loans above. These accounts totaled $372 at September 30, 2021, and $597 at December 31, 2020.
The Company adopted ASU 2016-13, also referred to as CECL, effective January 1, 2021, and with that adoption the Company’s method for estimating the allowance for credit losses has changed. The Company estimates the allowance for credit losses under CECL using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Internal historical loss experience provides the basis for the estimation of expected credit losses.
Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels or loan terms, as well as, for changes in environmental conditions, such as changes in unemployment rates, property values, consumer price index, gross domestic product, housing starts or relevant index, US personal income, U.S. housing price indexes, federal funds target and various U.S. government interest rates.
The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. The Company has identified commercial real estate, commercial and industrial, residential real estate, agricultural real estate, agricultural production and consumer as portfolio segments and measures the allowance for credit losses using a historical loss rate method for each segment to estimate credit losses on a collective basis. The Company’s CECL calculation utilizes historical loss rates, average default month, average prepayment rates and exposure at default as assumptions to calculate an unadjusted historical loss estimate for the contractual term of the loans adjusted for prepayment. The historical loss estimate is then adjusted for the anticipated changes in the Company’s historical loss rate using a regression analysis and current economic variables over the next 12 months. The Company has selected 12 months as its reasonable and supportable forecast period and has selected an immediate reversion back to unadjusted historical loss rates for periods beyond the reasonable and supportable forecast period. The calculated historical loss estimate, and the economic qualitative adjustment are further evaluated for change via a management qualitative adjustment factor. Management qualitative adjustments typically are anticipated changes in loss trends that are not reflected in the historical data to be used in forecasting.
The Company evaluates all loans that do not share risk characteristics on an individual basis for estimating the allowance for credit loss. Loans evaluated on an individual basis are not included in the collective basis. The Company currently reviews all loans that are classified as non-accrual on an individual basis. The Company typically elects the collateral-dependent practical expedient on all individual impairment assessments and expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs as appropriate.
The Company’s ACL is highly dependent on credit quality, macroeconomic forecasts and conditions, the composition of our loan portfolio and other management judgements. The current management adjustment represents a significant portion of the Company’s ACL and is comprised of the estimated impact to ACL from the COVID-19 pandemic and associated response.
During the nine months ended September 30, 2021, the Company updated the purchase accounting conclusions related to PCD assets acquired through the Almena State Bank transaction and the adjustment is reflected in the table below within “Impact of adopting ASC 326 – PCD loans.” Additional information was obtained, and additional analysis was performed by the management team which led to a modification of purchase date accounting. The adjustment resulted in a reduction in the allowance for credit losses offset by an increase in loan repurchase obligation, which is reported in interest payable and other liabilities in the consolidated balance sheets, combined with a decrease in deferred tax asset and an increase in gain on acquisition.
The following tables present the activity in the allowance for credit losses by class for the three-month periods ended September 30, 2021 and 2020.
Commercial
Real Estate
and
Industrial
Residential
Real
Estate
Allowance for credit losses:
Beginning balance
15,225
18,690
9,808
847
4,695
2,569
51,834
Provision for credit losses
(2,723
5,473
(1,473
145
(366
Loans charged-off
(116
(37
(200
(356
Recoveries
96
111
227
Total ending allowance balance
12,482
24,127
8,339
1,004
4,329
2,482
52,763
September 30, 2020
Allowance for loan losses:
9,467
10,168
5,315
975
810
7,343
34,078
Provision for loan losses
(218
1,361
(591
468
(158
(308
(153
(167
(875
22
33
69
8,942
11,529
4,593
1,281
768
6,974
34,087
21
The following tables present the activity in the allowance for credit losses by class for the nine-month periods ended September 30, 2021 and 2020.
Beginning balance, prior to adoption
of ASC 326
9,012
12,456
4,559
904
758
6,020
33,709
Cumulative effect adjustment of adopting
ASC 326
5,612
4,167
8,870
167
(207
(2,877
15,732
Impact of adopting ASC 326 - PCD loans
4,571
220
960
4,905
10,438
(6,767
7,749
(5,307
(555
(1,130
(345
(169
(98
(505
(575
(1,360
223
71
259
599
3,919
3,061
2,676
608
1,422
12,232
8,711
2,203
859
217
6,076
(367
(259
(312
(191
(697
(1,827
201
26
173
427
The following tables present the recorded investment in loans and the balance in the allowance for credit losses by portfolio and class based on method to determine allowance for credit loss as of September 30, 2021, and December 31, 2020.
Individually evaluated for impairment
2,141
15,323
800
720
4,037
48
23,069
Collectively evaluated for impairment
10,341
8,804
7,539
284
292
2,434
29,694
Loan Balance:
6,595
49,168
3,279
5,140
7,532
200
71,914
1,302,112
520,345
487,354
133,653
86,235
84,298
2,613,997
2,159
5,457
485
595
8,860
6,472
5,985
3,949
266
586
5,952
23,210
Purchased credit impaired loans
1,014
125
76
1,639
4,752
20,421
1,939
2,711
2,201
272
32,296
1,176,403
710,038
377,331
126,256
87,158
58,242
2,535,428
7,541
4,036
2,688
4,726
4,963
23,972
The following table presents information related to nonaccrual loans at September 30, 2021.
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Credit Losses
Allocated
With no related allowance recorded:
1,795
1,719
Subtotal
1,849
With an allowance recorded:
6,794
6,171
2,059
51,369
43,929
13,795
3,240
765
3,697
2,791
703
9,710
7,078
3,926
231
75,041
63,263
21,296
76,890
64,982
The following table presents information related to impaired loans, excluding purchased credit impaired loans which have not deteriorated since acquisition, by class of loans as of December 31, 2020. The recorded investment in loans excludes accrued interest receivable due to immateriality.
Loan Losses
6,279
1,683
2,087
643
270
180
3,408
1,090
11,326
4,492
23,370
8,088
7,134
5,899
2,540
29,245
22,814
6,471
3,023
2,775
610
3,474
3,021
638
1,330
820
172
294
44,500
35,601
10,499
67,870
43,689
23
The table below presents average recorded investment and interest income related to nonaccrual loans for the three and nine months ended September 30, 2021 and 2020. 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
Interest
Income
Recognized
35
13,857
4,262
3,022
884
3,906
18,137
49
7,107
6,324
36,720
15,483
190
2,870
3,586
2,501
5,356
28
7,576
1,435
215
271
56,989
95
32,455
240
60,895
50,592
289
As of and for the nine months ended
421
556
36
161
14,229
51
4,299
2,307
82
2,156
5,096
122
19,650
7,022
5,667
31,203
119
9,507
362
3,573
3,346
54
3,534
5,991
113
1,401
245
318
50,650
333
24,000
440
55,746
455
43,650
518
The following tables present the aging of the recorded investment in past due loans as of September 30, 2021, and December 31, 2020, by portfolio and class of loans.
30 - 59
Days
Past Due
60 - 89
Greater
Than
90 Days
Past
Due Still On
Accrual
Nonaccrual
Loans Not
2,910
1,332
1,298,294
3,015
736
521,833
827
486,301
183
4,510
134,100
86,675
148
45
84,070
6,681
2,930
2,611,273
1,374
7,582
1,179,568
261
23,457
710,777
377
4,712
2,955
373,914
260
98
4,111
129,224
196
5,312
88,814
336
60
57,819
2,804
4,944
143
2,540,116
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship. Loans that participated in the short-term deferral program are not automatically considered classified solely due to a deferral, are subject to ongoing monitoring and will be downgraded or placed on nonaccrual if a noted weakness exists. The Company uses the following definitions for risk ratings.
Pass: Loans classified as pass include all loans that do not fall under one of the three following categories. These loans are considered unclassified.
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. These loans are considered classified.
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. These loans are considered classified.
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. These loans are considered classified.
Based on the most recent analysis performed, the risk category of loans, by type and year of origination, at September 30, 2021, is as follows.
2019
2018
2017
Prior
Revolving Loans
Amortized Cost
Converted to Term
Risk rating
Pass
223,015
206,840
159,859
116,392
76,883
142,200
373,962
1,299,231
Special mention
126
1,174
307
1,620
Substandard
1,781
400
225
112
5,338
7,856
Doubtful
Total commercial real estate
224,922
207,240
160,084
116,517
78,057
147,845
184,422
97,754
61,162
10,682
14,276
9,892
108,501
9,966
496,655
992
1,502
5,802
8,606
4,175
5,891
24,390
5,485
9,838
11,697
2,624
64,252
Total commercial and industrial
188,617
103,645
86,544
17,669
24,404
15,846
120,198
12,590
203,231
7,086
24,441
66,398
37,495
102,332
46,225
198
487,406
147
55
850
1,802
Total residential real estate
24,588
66,453
38,345
104,267
46,465
24,730
26,364
12,834
10,743
6,318
13,535
37,188
131,712
41
456
542
558
65
127
1,830
2,577
487
895
6,539
Total agricultural real estate
25,288
26,429
12,961
12,573
8,936
14,478
38,128
17,446
12,508
2,976
1,723
3,433
1,571
43,784
83,519
84
1,345
2,324
497
2,123
1,987
1,799
153
639
726
7,924
Total agricultural
17,943
14,631
5,047
4,867
3,105
44,510
33,000
12,047
7,337
3,722
1,525
914
25,706
84,252
105
246
Total consumer
12,152
7,410
3,749
1,558
685,844
362,599
268,609
209,660
139,930
270,444
635,366
10,323
2,582,775
146
2,860
1,505
7,593
13,225
7,011
8,584
26,949
9,308
13,451
8,426
13,558
89,911
693,001
371,183
296,634
221,828
154,886
286,463
648,969
12,947
The classification status of loans by class of loans is as follows at December 31, 2020.
Unclassified
Classified
1,171,961
16,735
674,392
60,103
378,868
3,090
125,425
8,268
86,629
7,693
58,253
279
2,495,528
96,168
Purchased Credit Impaired Loans
The Company has acquired loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Upon the Company’s adoption of ASU 2016-13, remaining credit-related discount on these assets was re-classified to the allowance for credit losses. The Company elected the prospective transition approach and all loans previously considered purchased credit impaired are now classified as purchased with credit deterioration. The remaining non-credit discount will continue to be accreted into income over the remaining lives of the assets.
The table below lists recorded investments in purchased credit impaired loans as of December 31, 2020.
Contractually required principal payments
41,658
Discount
(17,686
Recorded investment
The accretable yield associated with these loans was $2,630 as of December 31, 2020. The interest income recognized on these loans for the three and nine-month periods ended September 30, 2020, was $402 and $1,263. For the three and nine-month periods ended September 30, 2020, there was a provision for loan losses of $54 and $2,072 recorded for these loans.
Troubled Debt Restructurings
Consistent with accounting and regulatory guidance, the Company recognizes a TDR when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Company’s objective in offering a TDR is to increase the probability of repayment of the borrower’s loans.
The following table summarizes the Company’s TDRs by accrual status at September 30, 2021, and December 31, 2020.
Related
1,786
849
12,404
869
932
285
528
Total troubled debt restructurings
15,650
2,084
1,167
342
13,613
1,954
14,780
2,296
At September 30, 2021, and December 31, 2020, there were no commitments to lend additional amounts on these loans.
During the three and nine-month periods ended September 30, 2021, there was a total of $1,460 in loan modifications considered to be troubled debt restructurings. There were no loan modifications considered to be troubled debt restructurings that occurred during the three or nine-month period ended September 30, 2020.
No restructured loans that were modified within the twelve months preceding September 30, 2021 or 2020, have subsequently had a payment default. Default is determined at 90 or more days past due, charge-off or foreclosure.
As of September 30, 2021, and December 31, 2020, we had 27 and 28 deferrals of either the full loan payment or the principal component of the loan payment on outstanding loan balances of $59,451 and $60,880 in connection with the COVID-19 relief provided by the CARES Act. These deferrals were not considered troubled debt restructurings based on the CARES Act, CAA or regulatory guidance.
The following table lists loans included in the payment deferral program under the Cares Act by deferment type and category at September 30, 2021, and December 31, 2020.
12 months partial principal only
1,890
9 months principal only
11,196
12 months principal only
9,341
3,484
12,937
6 months principal and interest, then 9 months principal only
30,815
2,613
33,428
51,352
7,987
59,451
1,965
6 months principal only
2,262
6,437
2,459
10,092
3,675
13,767
3 months principal and interest, then 6 months principal only
2,824
45,628
15,252
60,880
The classification status of loans participating in the payment deferral program at September 30, 2021, and December 31, 2020, is listed below.
4,920
3,067
5,095
10,157
56,384
50,723
While all industries have and will continue to experience adverse impacts as a result of COVID-19, the Company had exposures (on balance sheet loans and commitments to lend) in the following loan categories that are considered to be most at-risk of a significant impact as of September 30, 2021.
Hospitality Lending – The Company’s exposure to the hospitality sector at September 30, 2021, was $306.2 million, or 11.8%, of total loans excluding PPP loans. As of September 30, 2021, $20.5 million of these loans were actively participating in a deferral program.
The top 20 loans within this portfolio comprise $231.1 million, or 75.8%, of the total exposure. These loans are geographically diversified and well secured. The borrowers are well known to the Company and experienced hoteliers who have evidenced efforts to enhance profitability in the current economic environment by driving down costs and creatively occupying their properties, including arrangements with medical professionals and others on the front line of this pandemic. Historically, the portfolio has exhibited strong operational cash flows. The remainder of the portfolio is comprised of many smaller balance loans.
Aircraft Manufacturing – The Company’s exposure to the aircraft manufacturing category at September 30, 2021, was $36.0 million, or 1.4%, of total loans excluding PPP loans. As of September 30, 2021, none of these loans were actively participating in a deferral program. The portfolio is comprised of experienced industry operators who have historically performed without exception; however, at September 30, 2021, two related entities reported in this loan category with balances totaling $20.4 million were moved to nonaccrual and classified as substandard.
The Company has worked with customers directly affected by COVID-19 and is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in frequent communication with borrowers to better understand their situation and the challenges faced, allowing us to respond proactively as needs and issues arise.
While management is optimistic about the performance of the above addressed portions of the portfolio as a whole, the Company acknowledges the risks associated with the current economic conditions and related unknowns. These risks are believed to have been addressed and reserved for through our allowance for credit losses and associated provision for credit losses as of and for the period ended September 30, 2021.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit loss expense recognized within other non-interest expense on the consolidated statements of income and included in other liabilities on the consolidated balance sheets. The estimated credit loss includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate of expected credit loss is based on the historical loss rate for the class of loan the commitments would be classified as if funded.
The following table lists allowance for credit losses on off-balance sheet credit exposures as of September 30, 2021.
395
Total allowance for credit losses
1,324
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 London Interbank Offered Rate (“LIBOR”) plus a spread to this index and pays a fixed-rate cash flow equal to the customer loan rate. At September 30, 2021, the portfolio of interest rate swaps had a weighted average maturity of 5.0 years, a weighted average pay rate of 5.06% and a weighted average rate received of 2.83%. At December 31,
29
2020, the portfolio of interest rate swaps had a weighted average maturity of 6.3 years, a weighted average pay rate of 5.19% and a weighted average rate received of 3.21%.
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. Neither swap is designated as a hedge and both are marked to market through earnings. At September 30, 2021, this portfolio of interest rate swaps had a weighted average maturity of 9.0 years, weighted average pay rate of 4.32% and a weighted average rate received of 4.32%. At December 31, 2020, this portfolio of interest rate swaps had a weighted average maturity of 7.9 years, weighted average pay rate of 4.34% and weighted average rate received of 4.34%.
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 September 30, 2021, and December 31, 2020.
Notional
Derivative
Assets
Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps
4,323
5,585
Total derivatives designated as hedging relationships
Derivatives not designated as hedging instruments:
137,277
5,074
5,525
119,341
7,172
7,820
Total derivatives not designated as hedging
instruments
141,600
5,797
124,926
8,317
Cash collateral
(5,550
(8,440
Netting adjustments
248
123
Net amount presented in Balance Sheet
5,322
495
7,295
The table below lists designated and qualifying hedged items in fair value hedges at September 30, 2021, and December 31, 2020.
Carrying Amount
Hedging Fair Value Adjustment
Fair Value Adjustments on Discontinued Hedges
Commercial real estate loans
5,583
491
30
The Company reports hedging derivative gains (losses) as adjustments to loan interest income along with the related net interest settlements and the derivative gains (losses) and net interest settlements for economic derivatives are reported in other income. For the three and nine-month periods ended September 30, 2021 and 2020, the Company recorded net gains (losses) on derivatives and hedging activities.
Total net gain (loss) related to fair value hedges
Economic hedges:
(49
77
(407
Total net gains (losses) related to derivatives not
designated as hedging instruments
Net gains (losses) on derivatives and hedging activities
The following table shows the recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Company’s net interest income for the three-month periods ended September 30, 2021 and 2020.
Gain/(Loss)
on Derivatives
on Hedged
Items
Net Fair Value
Hedge
Effect of
Derivatives on
Net Interest
(20
(27
The following table shows the recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Company’s net interest income for the nine-month periods ended September 30, 2021 and 2020.
191
(81
(409
409
(61
31
NOTE 5 – LEASE OBLIGATIONS
Right-of-use asset and lease obligations by type of property for the periods ended September 30, 2021, and December 31, 2020, are listed below.
Operating Leases
Right-of-Use
Asset
Lease
Liability
Weighted
Lease Term
in Years
Rate
Land and building leases
3,228
3,215
17.1
2.99
%
Total operating leases
3,540
3,524
16.9
Operating lease costs for the three and nine-month periods ended September 30, 2021 and 2020, are listed below.
Operating lease cost
184
378
549
Short-term lease cost
Variable lease cost
Total operating lease cost
135
187
399
There were no sales and leaseback transactions, leverage leases, lease transactions with related parties or leases that had not yet commenced during the three or nine-month periods ended September 30, 2021.
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
Due in one year or less
460
Due after one year through two years
431
Due after two years through three years
237
Due after three years through four years
214
Due after four years through five years
210
Thereafter
2,675
Total undiscounted cash flows
4,227
Discount on cash flows
(1,012
Total operating lease liability
32
NOTE 6 – BORROWINGS
Federal funds purchased and retail repurchase agreements as of September 30, 2021, and December 31, 2020, are listed below.
Federal funds purchased
Retail repurchase agreements
The Company has available federal funds lines of credit with its correspondent banks.
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 $51,032 and $47,113 at September 30, 2021, and December 31, 2020. 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 September 30, 2021, and December 31, 2020.
Year-to-date average daily balance during the period
43,673
45,041
Maximum month-end balance year-to-date
47,184
53,543
Weighted average interest rate at period-end
0.24
0.22
Federal Home Loan Bank advances include both draws against the Company’s line of credit and fixed rate term advances. In July 2021, all the Company’s Federal Home Loan Bank term advances were prepaid. The Company recorded a loss on debt extinguishment related to this prepayment of $372 for the nine months ended September 30, 2021. There were no Federal Home Loan Bank line of credit advances outstanding as of September 30, 2021.
Federal Home Loan Bank advances as of December 31, 2020, are listed below.
Weighted Average Rate
Weighted Average Term in Years
Federal Home Loan Bank line of credit advances
Federal Home Loan Bank fixed-rate term advances
10,107
2.79
2.3
Total principal outstanding
Merger purchase accounting adjustment
37
Total Federal Home Loan Bank advances
The advances, Mortgage Partnership Finance credit enhancement obligations and letters of credit were collateralized by certain qualifying loans totaling $742,792 and $763,506 at September 30, 2021, and December 31, 2020. Based on this collateral and the Company’s holdings of Federal Home Loan Bank stock, the Company was eligible to borrow an additional $723,708 and $661,490 at September 30, 2021, and December 31, 2020.
At September 30, 2021, to support the $267,098 borrowing capacity from the Federal Reserve Bank, the Company has pledged loans with an outstanding balance of $328,596 and securities with a fair value of $46,935. No borrowings were secured from this facility at periods ended September 30, 2021 or 2020.
The Company entered into an agreement with an unaffiliated financial institution that provided for a maximum borrowing facility of $40,000, secured by the Company’s stock in Equity Bank. The loan was renewed and amended on June 30, 2020, with a maturity date of August 15, 2021, and was extended to November 13, 2021. 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 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.
There were no outstanding principal balances on the bank stock loan at September 30, 2021, or December 31, 2020.
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 September 30, 2021, and December 31, 2020, are listed below.
Subordinated debentures
15,111
14,872
Subordinated notes
72,919
72,812
In conjunction with prior acquisitions, the Company assumed certain subordinated debentures owed to special purpose unconsolidated subsidiaries that are controlled by the Company. These subordinated debentures have the same terms as the trust preferred securities issued by the special purpose unconsolidated subsidiaries.
FCB Capital Trust II (“CTII”): The trust preferred securities issued by CTII accrue and pay distributions quarterly at three-month LIBOR plus 2.00% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on April 15, 2035, or upon earlier redemption.
FCB Capital Trust III (“CTIII”): The trust preferred securities issued by CTIII accrue and pay distributions quarterly at three-month LIBOR plus 1.89% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on June 15, 2037, or upon earlier redemption.
Community First (AR) Statutory Trust I (“CFSTI”): The trust preferred securities issued by CFSTI accrue and pay distributions quarterly at three-month LIBOR plus 3.25% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on December 26, 2032, or upon earlier redemption.
Subordinated debentures as of September 30, 2021, and December 31, 2020, are listed below.
CTII subordinated debentures
10,310
2.13
13.5
CTIII subordinated debentures
5,155
2.01
15.7
CFSTI subordinated debentures
3.38
11.2
Total contractual balance
20,620
Fair market value adjustments
(5,509
Total subordinated debentures
2.24
14.3
2.11
16.5
3.50
12.0
(5,748
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 September 30, 2021, are listed below.
7.00
8.8
(2,081
Total subordinated notes
Subordinated notes as of December 31, 2020, are listed below.
9.5
(2,188
Future principal repayments
Future principal repayments of the September 30, 2021, outstanding balances are as follows.
Retail Repurchase Agreements
Subordinated Debentures
Subordinated Notes
95,620
134,757
NOTE 7 – STOCKHOLDERS’ EQUITY
Preferred stock
The Company’s articles of incorporation provide for the issuance of 10,000,000 shares of preferred stock. At September 30, 2021, and December 31, 2020, 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 September 30, 2021, and December 31, 2020.
Class A common stock – issued
17,530,223
17,224,830
Class A common stock – held in treasury
(3,164,438
(2,684,274
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
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 $33 and $88 was recorded for the three and nine-month periods ended September 30, 2021. ESPP compensation expense of $19 and $69 was recorded for the three and nine-month periods ended September 30, 2020. 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, 2019 to February 14, 2020
16,764
21.11
63
February 15, 2020 to August 14, 2020
13.61
August 15, 2020 to February 14, 2021
17,621
13.68
42
February 15, 2021 to August 14, 2021
20.50
Treasury stock is stated at cost, determined by the first-in first-out method.
On April 18, 2019, the Company’s Board of Directors authorized the repurchase of up to 1,100,000 shares of the Company’s outstanding common stock, from time to time, beginning April 29, 2019, and concluding October 30, 2020. The repurchase program did 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. The Company repurchased the total authorized amount of 1,100,000 shares at a weighted average price paid of $21.54 under the repurchase program authorized in April 2019.
In September of 2020, the Company’s Board of Directors authorized an additional repurchase of up to 800,000 shares of the Company’s outstanding common stock, from time to time, beginning October 30, 2020, and concluding October 29, 2021. 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 year ended December 31, 2020, the Company repurchased a total of 313,231 shares of the Company’s outstanding common stock at an average price paid of $20.82 per share. During the three and nine-months ended September 30, 2021, the Company repurchased a total of 57,239 and 363,321 shares of the Company’s outstanding common stock at an average price paid of $30.64 and $26.90 per share. At September 30, 2021, there are 123,448 shares remaining available for repurchase under the program.
In September of 2021, the Company’s Board of Directors authorized the repurchase of up to an additional 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 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. On October 20, 2021, the Federal Reserve Bank of Kansas City advised the Company that it had no objection to the authorization of this repurchase plan.
Accumulated other comprehensive income (loss)
At September 30, 2021, and December 31, 2020, accumulated other comprehensive income consisted of (i) the after-tax effect of unrealized gains on available-for-sale securities and (ii) the after-tax effect of unamortized unrealized gains (losses) on securities transferred from the available-for-sale designation to the held-to-maturity designation.
Components of accumulated other comprehensive income as of September 30, 2021, and December 31, 2020, are listed below.
Available-for-
Sale
Securities
Net unrealized or unamortized gains
12,658
(3,183
26,426
(6,645
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 final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 and became fully phased in January 1, 2019. 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 September 30, 2021, 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 September 30, 2021, 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 September 30, 2021, and December 31, 2020, are presented in the table below. Ratios provided for Equity Bancshares, Inc. represent the ratios of the Company on a consolidated basis.
Actual
Minimum Required for
Capital Adequacy Under Basel III
To Be Well
Capitalized Under
Prompt Corrective
Provisions
Ratio
Septembert 30, 2021
Total capital to risk weighted assets
Equity Bancshares, Inc.
489,725
16.63
309,171
10.50
N/A
Equity Bank
463,171
15.74
308,881
294,172
10.00
Tier 1 capital to risk weighted assets
379,787
12.90
250,281
8.50
426,186
14.49
250,046
235,338
8.00
Common equity Tier 1 capital to risk weighted assets
364,676
12.39
206,114
205,920
191,212
6.50
Tier 1 leverage to average assets
9.02
168,368
4.00
10.13
168,241
210,302
5.00
462,865
17.35
280,072
418,992
15.73
279,646
266,329
356,707
13.37
226,725
385,696
14.48
226,380
213,064
341,835
12.82
186,714
186,431
173,114
9.30
153,490
10.07
153,276
191,595
Equity Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.
38
NOTE 9 – EARNINGS PER SHARE
The following table presents earnings per share for the three and nine-month periods ended September 30, 2021 and 2020.
Three months ended
Nine months ended
Basic:
Net income (loss) allocable to common stockholders
Weighted average common shares outstanding
14,384,285
15,040,386
14,393,853
15,210,856
Weighted average vested restricted stock units
3,293
1,045
Weighted average shares
14,384,302
15,040,407
14,397,146
15,211,901
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
158,768
178,314
Dilutive effects of the assumed vesting of restricted stock units
125,321
110,617
Dilutive effects of the assumed exercise of ESPP purchases
921
2,015
Average shares and dilutive potential common shares
14,669,312
14,688,092
Diluted earnings (loss) per common share
Dilutive shares not included above due to the net loss in the period.
50,376
96,125
32,428
29,486
2,043
3,289
Total dilutive shares
84,847
128,900
Average shares not included in the computation of diluted earnings per share because they were antidilutive are shown in the following table.
Stock options
291,680
483,181
298,629
408,300
Restricted stock units
226,139
181,344
Total antidilutive shares
709,320
589,644
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.
39
Level 1 inputs are considered to be the most transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although, in some instances, third party price indications may be available, limited trading activity can challenge the implied value of those quotations.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the hierarchy.
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The fair values of securities available-for-sale and equity securities with readily determinable fair value are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as Level 1. For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities, generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The Company’s available-for-sale securities, including U.S. Government sponsored entity securities, residential mortgage-backed securities (all of which are issued or guaranteed by government sponsored agencies), corporate securities, Small Business Administration securities, and State and Political Subdivision securities are classified as Level 2.
The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate yield curves (Level 2 inputs) adjusted for credit risk attributable to the seller of the interest rate derivative. Cash collateral received from or delivered to a derivative counterparty is classified as Level 1.
40
Assets and liabilities measured at fair value on a recurring basis are summarized in the following table.
(Level 1)
(Level 2)
(Level 3)
Assets:
Available-for-sale securities:
Mortgage backed securities
Government-sponsored residential mortgage backed securities
Private label residential mortgage backed 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
1,162,497
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)
(5,302
Total derivative liabilities
Government-sponsored residential mortgage
backed securities
506
629
878,999
(8,317
There were no material transfers between levels during the nine months ended September 30, 2021, or the year ended December 31, 2020. 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 impairment. The fair value of individually evaluated securities is determined as discussed previously for available-for-sale securities. The fair values of individually evaluated loans with specific allocations of the allowance for credit losses are generally based on recent real estate appraisals of the collateral less estimated cost to sell. 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. We routinely value loans other than real estate as multiples of earnings or with the discounted cash flow approach and adjustments are made to observable market data to make the valuation consistent with the underlying credit. 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.
Individually evaluated loans:
4,454
33,845
2,480
2,700
3,647
Other real estate owned:
2,274
433
3,359
16,343
2,165
2,383
852
3,882
469
The Company did not record any liabilities for which the fair value was measured on a non-recurring basis at September 30, 2021, or December 31, 2020.
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 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.
Fair Value
Valuation
Technique
Unobservable
Input
Range
(weighted average) or Multiple of Earnings
Individually evaluated real estate loans
35,591
Sales
Comparison
Approach
Adjustments for
differences between
comparable sales
4% - 37%
(21%)
Individually evaluated other loans
11,535
Multiple of Earnings
Multiples of earnings for comparable entities
4.5X - 5.5X
(5X)
Individually evaluated other real estate owned
2,707
8% - 24%
(16%)
13,443
2% - 22%
(12%)
11,659
4,351
16% - 42%
(29%)
Carrying amount and estimated fair values of financial instruments at period end were as follows.
Carrying
Estimated
Financial assets:
Loans, net of allowance for credit losses
2,619,364
Federal Reserve Bank and Federal Home
Loan Bank stock
Derivative assets
Cash collateral held by derivative counterparty
and netting adjustments
3,972,976
3,959,192
143,164
1,196,664
Financial liabilities:
3,682,101
Federal funds purchased and retail
repurchase agreements
82,294
Interest payable
1,850
Derivative liabilities
3,811,060
3,839,759
3,845,061
2,430,325
3,763,202
3,635,540
281,327
923,888
3,451,366
10,656
80,448
1,231
3,587,867
3,599,791
3,608,108
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 September 30, 2021, and December 31, 2020, were as follows.
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Fixed
Variable
Commitments to make loans
59,847
177,414
50,123
129,860
Mortgage loans in the process of origination
12,259
4,781
13,826
1,713
Unused lines of credit
98,497
239,224
120,720
226,731
The fixed rate loan commitments have interest rates ranging from 2.49% to 8.00% and maturities ranging from 1 month to 370 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 September 30, 2021, and December 31, 2020, were as follows.
Standby letters of credit
9,936
2,225
9,020
3,314
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 or results of operations or cash flows. A loss contingency is recorded when the outcome is probable and reasonably able to be estimated. The 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 a party to a lawsuit filed on November 5, 2020, in Missouri federal court on behalf of one of our customers, alleging improperly collected overdraft fees on two separate legal theories. The plaintiff seeks to have the case certified as a class action. The Bank was served on February 2, 2021. The Company filed a motion to dismiss the claims on April 26, 2021. In response, the Plaintiff amended its lawsuit and dropped one of the two claims. The Company filed a motion to dismiss the remaining claim in the Amended Complaint on June 26, 2021 and continues to defend against the claim now asserted. The Company believes that the lawsuit is without merit and it intends to vigorously defend against the claim now asserted. At this time, the Company is unable to reasonably estimate the outcome 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.
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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 is recognized in non-interest income. The following table presents the Company’s sources of non-interest income for the three and nine-month periods ended September 30, 2021 and 2020.
Mortgage banking(a)
Increase in bank-owned life insurance(a)
Net gain (loss) on acquisition(a)
Net gain (loss) from securities transactions(a)
Investment referral income
189
163
461
Trust income
340
128
836
283
Insurance sales commissions
323
Recovery on zero-basis purchased loans(a)
62
116
Income (loss) from equity method investments(a)
(56
Other non-interest income related to loans
and deposits
(178
539
2,270
756
Other non-interest income not related to
loans and deposits(a)
239
Total other non-interest income
(a) Not within the scope of ASC 606.
NOTE 14 – BUSINESS COMBINATIONS
At the close of business on October 23, 2020, the Company acquired the assets and assumed the deposit liabilities of Almena State Bank (“Almena”), based in Norton, Kansas, pursuant to a Purchase and Assumption Agreement facilitated by the Federal Deposit Insurance Corporation (“FDIC”). Acquisition costs related to this acquisition during the nine months ended September 30, 2021 were $237 ($177 on an after-tax basis).
During the nine months ended September 30, 2021, the Company updated the valuation for certain Almena loans which at acquisition showed evidence of credit quality deterioration since origination. The net result of this valuation was a $585 addition to the gain on acquisition recorded during the fourth quarter of 2020.
NOTE 15 – SUBSEQUENT EVENTS
On October 1, 2021, the Company completed its acquisition of American State Bancshares, Inc. (“ASB”) pursuant to the terms of the Agreement and Plan of Reorganization, dated May 14, 2021 (the “Merger Agreement”), by and among the Company, Greyhounds Merger Sub, Inc., and ASB. At the effective time of the merger (the “Effective Time”), Greyhounds Merger Sub, Inc. merged with and into ASB, with ASB surviving the merger as a wholly-owned subsidiary of the Company. Following the Effective Time, ASB merged with and into the Company, with the Company surviving the merger. Subsequently, American State Bank & Trust Company (“American State Bank”), ASB’s wholly-owned banking subsidiary, merged into Equity Bank, with Equity Bank surviving the merger. American State Bank had a total of seventeen locations in Kansas prior to its merger with Equity Bank. Results of operations of ASB were included in the Company’s results of operations beginning October 2, 2021. Acquisition costs related to this acquisition during the nine months ended September 30, 2021, were $4,390 ($3,401 on an after-tax basis).
In connection with the merger, the Company assumed ASB’s rights, title and obligations under the indenture, dated as of September 15, 2005 (the “Indenture”), by and between ASB and the Wilmington Trust Company (the “Trustee”), pursuant to that certain First Supplemental Indenture, dated as of October 1, 2021 (the “Supplemental Indenture”), by and among the Company, ASB and the Trustee. ASB had issued $7,732 principal amount of its Floating Rate Junior Subordinated Deferrable Interest notes due 2035 under the Indenture.
In their September 30, 2021, unaudited Consolidated Report of Condition, American State Bank reported total assets of $788,452, which included total loans of $452,690 and securities of $177,207. At September 30, 2021, total liabilities of $690,098 were reported by American State Bank, which included deposits of $659,072. American State Bank reported $5,388 in net income before income taxes for the nine months ended September 30, 2021. The Company anticipates there will be goodwill and core deposit
intangibles recorded with this acquisition. Goodwill is calculated as the excess of the cash consideration transferred over the net of the acquisition-date fair value of identifiable assets acquired and liabilities assumed.
On July 19, 2021, the Company announced that Equity Bank signed a definitive branch purchase and assumption agreement to acquire the assets and assume the deposits of three bank locations in St. Joseph, Missouri, from Security Bank of Kansas City, a subsidiary of Valley View Financial Co. of Overland Park, Kansas. The Company anticipates closing the transaction in the fourth quarter of 2021, subject to customary closing conditions, including the receipt of regulatory approval.
On October 25, 2021, the Company announced that Equity Bank signed a definitive purchase and assumption agreement with United Bank & Trust in Marysville, Kansas, (“UBT”) with UBT acquiring certain assets and assuming deposits of bank locations in Concordia, Belleville and Clyde, Kansas, which were previously acquired in the ASB acquisition, from Equity Bank. UBT and Equity anticipate completing the acquisition in the second quarter of 2022.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K filed with the SEC on March 9, 2021, 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:
Overview – a general description of our business and financial highlights;
Critical Accounting Policies – a discussion of accounting policies that require critical estimates and assumptions;
Recent Developments – a discussion of COVID-19 and the CARES Act
Results of Operations – an analysis of our operating results, including disclosures about the sustainability of our earnings;
Financial Condition – an analysis of our financial position;
Liquidity and Capital Resources – an analysis of our cash flows and capital position; and
Non-GAAP Financial Measures – a reconciliation of non-GAAP measures.
We are a bank 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 51 full-service banking sites located in Arkansas, Kansas, Missouri and Oklahoma. As of September 30, 2021, we had consolidated total assets of $4.26 billion, total loans held for investment, net of allowance, of $2.63 billion, total deposits of $3.66 billion and total stockholders’ equity of $417.7 million. During the three and nine-month periods ended September 30, 2021, the Company had net income of $11.8 million and $42.0 million. Due primarily to a goodwill impairment charge of $104.8 million during the three-month period ended September 30, 2020, there was a net loss of $90.4 million and $87.5 million for the three and nine-month periods ended September 30, 2020.
Selected Financial Data for the periods indicated (dollars in thousands, except per share amounts).
June 30,
March 31,
Statement of Income Data (for the quarterly period ended)
38,318
35,812
39,989
3,688
4,053
4,430
34,630
31,759
35,559
(1,657
(5,756
Net gain (loss) from securities transactions
Other non-interest income
7,450
9,100
6,695
8,501
299
Other non-interest expense
26,302
25,346
24,729
28,161
26,004
19,581
19,346
14,599
Provision for income taxes
4,415
4,271
2,111
Net income (loss)
15,166
15,075
12,488
1.06
1.04
0.85
1.03
1.02
0.84
Balance Sheet Data (at period end)
139,321
136,688
1,041,613
998,100
798,576
6,183
8,609
9,053
Gross loans held for investment
2,815,061
2,795,740
2,725,713
55,525
Loans held for investment, net of allowance for credit
losses
2,763,227
2,740,215
2,691,626
Goodwill and core deposit intangibles, net
44,564
45,594
46,624
47,658
48,702
Other intangible assets, net
1,098
1,109
1,119
1,130
1,142
4,268,216
4,196,184
3,865,571
3,687,555
3,634,530
3,133,618
Borrowings
127,167
144,300
138,053
133,857
301,694
3,855,221
3,798,369
3,463,399
397,815
Tangible common equity*
372,087
366,292
350,072
358,861
352,328
Performance ratios
Return on average assets (ROAA) annualized
1.09
1.44
1.48
1.27
(8.90
)%
Return on average equity (ROAE) annualized
11.05
15.06
15.45
12.13
(74.45
Return on average tangible common equity (ROATCE)
annualized*
13.27
17.98
18.57
14.93
(108.31
Yield on loans annualized
5.43
4.75
4.59
5.23
4.65
Cost of interest-bearing deposits annualized
0.28
0.31
0.36
0.43
0.50
Net interest margin annualized
3.86
3.31
3.88
3.47
Efficiency ratio*
56.65
58.85
64.18
67.19
67.38
Non-interest income / average assets annualized
0.73
0.86
0.66
0.64
Non-interest expense / average assets annualized
2.85
2.45
2.44
2.90
12.88
Capital Ratios
Tier 1 Leverage Ratio
8.88
8.73
8.76
Common Equity Tier 1 Capital Ratio
12.41
12.53
12.76
Tier 1 Risk Based Capital Ratio
12.93
13.08
13.32
Total Risk Based Capital Ratio
16.74
17.02
Equity / Assets
9.80
9.68
9.48
10.16
10.40
Tangible common equity to tangible assets*
8.82
8.68
8.44
9.05
9.23
Book value per share
29.08
28.76
27.66
28.04
27.08
Tangible common book value per share*
25.90
25.51
24.34
24.68
23.72
Tangible common book value per diluted share*
25.42
24.98
23.87
24.32
23.57
* 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.
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, 2020, audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 9, 2021. We adopted ASU 2016-13 effective January 1, 2021, prior to that we utilized the probable incurred loss method for determining the allowance for loan losses. Other than the adoption of ASU 2016-13 we have not had any changes in our critical accounting policies. We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our financial statements to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate. For additional information, see “NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Condensed Notes to Interim Consolidated Financial Statements.
Allowance for Credit Losses for Loans: 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. 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 Company utilizes primarily two methods for estimating the allowance for credit losses. Non-performing loans primarily utilize a collateral specific fair value impairment method and performing loans primarily utilize a historical loss method. The performing loan method utilizes a probability of default (PD) and loss given default (LGD) modeling approach for historical loss coupled with a macroeconomic factor analysis derived from a statistical regression of loss experience correlated to changes in economic factors for all commercial banks operating within our geographical footprint. The macroeconomic regression is based on a multivariate approach and includes key indicators that provide the highest cumulative adjusted R-square figure. Economic factors include, but are not limited to, national unemployment, gross domestic product, market interest rates and property pricing indices. The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management but measured by objective measurements period over period. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in projective economic sentiment, portfolio concentrations, policy exceptions, personnel retention, independent loan review results, collateral considerations, risk ratings and competition. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors. To arrive at the most predictive calculation, a lag factor was applied to these inputs, resulting in current and historic economic inputs driving the projection of loss over our reasonable and supportable forecast period, which management has defined as 12 months for all portfolio segments. Following the reasonable and supportable forecast period, loss experience immediately reverts to the current historical loss experience of the Company. The resultant loss rates are applied to the estimated future exposure at default (EAD), as determined based on contractual amortization terms through an average default month and estimated prepayment experience in arriving at the quantitative reserve within our allowance for credit losses.
The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations.
Goodwill Impairment: For a business combination, we are required to record the assets acquired, including identified intangible assets, and the liabilities assumed at fair value. Estimating fair value often involves estimates based on third party valuations, such as appraisals, internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, interest rates, asset growth rates or other relevant factors. Goodwill recorded must be reviewed for impairment on an annual basis, as well as on an interim basis, if triggering events indicate that the asset might be impaired. An impairment loss must be recognized for any excess of carrying value over the fair value of the goodwill.
Significant downturns in economic or business conditions could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financial statements.
Income Taxes: We are subject to the income tax laws of the U.S., its states and the municipalities in which we operate. These laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We review income tax expense and the carrying value of deferred tax assets quarterly, and as new information becomes available, the balances are adjusted as appropriate. The FASB ASC 740-10 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.
In establishing a provision for income tax expense, we must make judgements and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the tax authority upon examination or audit.
Although management believes that the judgements and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.
Recent Developments
The Company has been, and may continue to be, impacted by the COVID-19 pandemic. In recent months, vaccination rates have been increasing and restrictive measures have eased in certain areas. However, uncertainty remains about the duration of the pandemic and the timing and strength of the global economy’s recovery. To address the economic impact of the pandemic in the U.S., multiple stimulus packages have been enacted to provide economic relief to individuals and businesses, including the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), and the American Rescue Plan Act of 2021, enacted in March 2021.
As the pandemic evolves, we continue to evaluate protocols and processes in place to execute our business continuity plans while promoting the health and safety of our employees and continuing to support our customers and communities.
We have been an active participant in all phases of the PPP, administered by the SBA, and have helped many of our customers obtain loans through the program. PPP loans have a two or five-year term and earn interest at 1.0%. As of September 30, 2021, the Company has 443 loans, with an outstanding balance of $95.8 million that were originated under this program. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government.
The Company also participates in the Main Street Lending Program (“MSL Program”), created by the Federal Reserve to support lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. There was a total of $14.2 million outstanding under the MSL Program for the period ended September 30, 2021.
For additional information, see “NOTE 15 – SUBSEQUENT EVENTS” in the Condensed Notes to Interim Consolidated Financial Statements.
We generate the majority of 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 wealth management fees 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. On October 23, 2020, we completed our acquisition of the assets and assumption of the deposits and certain other liabilities for two branches in Almena and Norton, Kansas (“Almena acquisition”), pursuant to a Purchase and Assumption Agreement facilitated by the Federal Deposit Insurance Corporation (“FDIC”). Results of operations from our Almena acquisition were included in our financial results beginning October 24, 2020.
Changes in interest rates on interest-earning assets or on interest-bearing liabilities, as well as the volume and types of interest-earning assets and interest-bearing liabilities are 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 environments and conditions in 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 commercial, consumer and real estate sectors within these markets.
Net Income
Three months ended September 30, 2021, compared with three months ended September 30, 2020: Net income and net income allocable to common stockholders for the three months ended September 30, 2021, was $11.8 million as compared to a net loss and net loss allocable to common stockholders of $90.4 million for the three months ended September 30, 2020, an increase of $102.2 million. During the three-month period ended September 30, 2021, a decrease in non-interest expense of $100.1 million, primarily due to a $104.8 million charge to goodwill impairment in the third quarter of 2020, an increase in net interest income of $6.9 million, primarily due to fees related to PPP loans and an increase in non-interest income of $1.3 million were partially offset by increases of $5.9 million in provision for income taxes and $243 thousand in provision for credit losses when compared with the three months ended September 30, 2020. The changes in the components of net income are discussed in more detail in the following “Results of Operations” sections.
Nine months ended September 30, 2021, compared with nine months ended September 30, 2020: Net income and net income allocable to common stockholders for the nine months ended September 30, 2021, was $42.0 million as compared to a net loss and net loss allocable to common stockholders of $87.5 million for the nine months ended September 30, 2020, an increase of $129.5 million. During the nine-month period ended September 30, 2021, a decrease in non-interest expense of $99.2 million, primarily due to a $104.8 million charge to goodwill impairment during the nine months ended September 30, 2020, a decrease in provision for credit losses of $29.6 million, an increase in net interest income of $8.3 million and an increase in non-interest income of $6.1 million were partially offset by an increase in provision for income taxes of $13.7 million when compared with the nine months ended September 30, 2020. The changes in the components of net income are discussed in more detail in the following “Results of Operations” sections.
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 September 30, 2021, compared with three months ended September 30, 2020: 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 September 30, 2021 and 2020. 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 September 30,
(Dollars in thousands)
Income/
Expense
Yield/
Rate(3)(4)
Interest-earning assets:
Loans(1)
630,622
13,646
8.59
848,096
8,400
3.94
1,009,141
12,072
979,775
12,886
Real estate construction
283,106
2,664
3.73
214,775
2,233
4.14
512,135
5,073
3.93
429,965
4,733
4.38
134,673
1,819
5.36
131,725
1,718
5.19
91,878
1,370
5.92
84,859
1,204
5.65
86,647
937
4.29
69,485
1,104
6.32
2,748,202
2,758,680
Taxable securities
966,651
1.61
683,630
2.02
Nontaxable securities
94,527
2.75
118,895
3.09
196,129
0.59
117,963
1.36
Total interest-earning assets
4,005,509
4.20
3,679,168
4.01
Non-interest-earning assets:
10,395
7,332
90,911
87,344
103,425
76,235
Goodwill, core deposit and other intangibles, net
46,335
154,049
Other non-interest-earning assets
18,723
37,060
4,275,298
4,041,188
Interest-bearing liabilities:
Interest-bearing demand deposits
989,798
503
0.20
827,190
501
Savings and money market
1,092,717
359
0.13
957,701
374
0.16
2,082,515
862
1,784,891
875
0.19
Certificates of deposit
619,525
1,019
0.65
645,516
2,189
1.35
2,702,040
2,430,407
FHLB term and line of credit advances
2.78
248,437
0.75
87,960
7.02
79,947
7.04
Other borrowings
43,220
0.23
48,774
Total interest-bearing liabilities
2,834,621
0.49
2,807,565
0.70
Non-interest-bearing liabilities and
stockholders’ equity:
Non-interest-bearing checking accounts
984,129
715,403
Non-interest-bearing liabilities
33,669
35,132
Stockholders’ equity
422,879
483,088
Interest rate spread
3.71
Net interest margin(2)
Total cost of deposits, including non-interest
bearing deposits
3,686,169
3,145,810
0.39
Average interest-earning assets to
interest-bearing liabilities
141.31
131.04
(1)
Average loan balances include nonaccrual loans.
(2)
Net interest margin is calculated by dividing annualized net interest income by average interest-earnings assets for the period.
(3)
Tax exempt income is not included in the above table on a tax equivalent basis.
(4)
Actual unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.
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 September 30, 2021 and 2020.
Analysis of Changes in Net Interest Income
For the Three Months Ended September 30, 2021 and 2020
Increase (Decrease) Due to:
Increase /
Volume(1)
Yield/Rate(1)
(Decrease)
(2,608
7,854
5,246
(1,192
(814
658
(227
(506
101
104
166
235
(402
(348
5,651
5,303
1,242
(798
444
(177
(91
(268
186
(301
(115
903
4,461
5,364
139
(152
(13
(85
(1,085
(1,170
(1,237
(1,183
(808
347
(461
142
141
(4
(616
(888
(1,504
Net Interest Income
1,519
5,349
6,868
The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior year’s volume. The changes attributable to both volume and rate, which cannot be segregated, have been allocated to the volume variance and the rate variance in proportion to the relationship of the absolute dollar amount of the change in each.
The yield on loans increased by 78 basis points to 5.43% for the quarter ended September 30, 2021, when compared to the quarter ended September 30, 2020. This increase was primarily driven by the forgiveness of SBA PPP loans during the quarter, which led to an increase of $5.5 million in loan fee income. This positive factor was partially offset by a $10.5 million reduction in average loan volume.
The reduction in expense on interest-bearing deposits was primarily due to a decrease of 22 basis points in cost on these deposits from 0.50% for the three months ended September 30, 2020, to 0.28% for the three months ended September 30, 2021. Average borrowings from the FHLB decreased by $247.0 million from an average balance of $248.4 million for the three months ended September 30, 2020, to an average balance of $1.4 million for the three months ended September 30, 2021, due to the extinguishment of outstanding FHLB fixed term advances in early July 2021. Costs associated with interest-bearing liabilities decreased 21 basis points in the quarter as compared to the quarter ended September 30, 2020. The reduction is reflective of the Company’s continued efforts to attract and retain strong, low-cost deposit relationships, excess liquidity in the economy leading to higher carrying balances and less demand for loan volume and the Company’s prudent efforts to decrease leverage while managing our balance sheet position. The positive factors were partially offset by the cost of the Company’s subordinated debt issuance which solidified capital and positioned the Company to be able to take advantage of potential growth opportunities coming out of the COVID economic cycle.
When compared to the quarter ended September 30, 2020, net interest margin increased 39 basis points during the quarter ended September 30, 2021, mainly due to the above mentioned $5.5 million increase in loan fees
56
Nine months ended September 30, 2021, compared with nine months ended September 30, 2020: 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 nine months ended September 30, 2021 and 2020. The yields and rates are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.
For the Nine Months Ended September 30,
752,795
34,609
6.15
757,773
26,789
4.72
990,803
34,943
942,478
36,533
5.18
264,344
7,195
3.64
245,167
8,644
4.71
457,761
14,167
464,340
14,528
4.18
135,795
5,203
5.12
133,302
5,574
5.59
93,680
3,432
4.90
86,873
3,752
5.77
84,285
4.51
67,255
3,461
6.87
2,779,463
4.93
2,697,188
4.92
898,461
1.67
737,009
2.20
100,495
125,352
2.95
175,761
102,202
1.84
3,954,180
3,661,751
4.22
10,659
7,054
90,483
85,862
97,445
75,755
47,341
155,774
17,204
43,422
4,217,312
4,029,618
1,007,582
1,608
0.21
764,477
2,618
0.46
1,069,061
1,120
0.14
990,282
2,305
2,076,643
2,728
0.18
1,754,759
4,923
0.37
606,151
3,588
0.79
728,083
8,904
1.63
2,682,794
2,482,842
0.74
16,325
271,548
1.08
0.25
3,288
0.00
16,111
3.44
87,839
7.11
36,712
44,754
2,830,635
0.53
2,855,255
947,185
658,714
31,874
32,562
407,618
483,087
3.41
3.36
3.56
3.54
3,629,979
3,141,556
57
Average interest-earning assets to interest-bearing
liabilities
139.69
128.25
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 nine-month periods ended September 30, 2021 and 2020.
For the Nine Months Ended September 30, 2021 and 2020
7,997
1,812
(3,402
(1,590
637
(2,086
(1,449
(205
(156
(361
103
(474
(371
(599
(320
748
(1,366
(618
3,197
(86
3,111
2,350
(3,221
(871
(526
(147
(673
668
(1,231
(563
5,689
(4,685
838
(3,033
(2,195
(1,303
(4,013
(5,316
(465
(7,046
(7,511
(2,365
322
(2,043
(415
2,718
2,716
(8
(535
(6,732
(7,267
6,224
2,047
8,271
The increase in loan interest income, including loan fees, was driven by an increase of $12.2 million in loan fees during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the forgiveness of SBA PPP loans. In addition, average loan volume increased $82.3 million during the first nine months of 2021, as compared to the first nine months of 2020. Overall average balances on interest-earning assets were slightly higher but were partially offset by a reduction in average rates during the nine months period ended September 30, 2021, as compared to the same nine-month period in 2020.
The reduction in expense on interest-bearing deposits was due to a decrease of 43 basis points in cost on these deposits from 0.74% for the nine months ended September 30, 2020, to 0.31% for the nine months ended September 30, 2021. Average borrowings from the FHLB decreased by $255.2 million from an average balance of $271.5 million for the nine months ended September 30, 2020, to an average balance of $16.3 million for the nine months ended September 30, 2021. During July 2021, the Company paid off outstanding FHLB fixed term advances. The bank stock loan did not carry an outstanding balance during the first nine months of 2021 and therefore there was no interest expense on our bank stock loan for the nine months ended September 30, 2021, as compared
to $415 thousand for the same time period in 2020. Total cost of interest-bearing liabilities decreased 33 basis points for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The reduction is reflective of the Company’s continued efforts to attract and retain strong, low-cost deposit relationships, excess liquidity in the economy leading to higher carrying balances and less demand for loan volume and the Company’s prudent efforts to decrease leverage while managing our balance sheet position.
Provision for Credit Losses and Provision for Loan Losses
The Company adopted the FASB ASU 326 effective January 1, 2021, which requires the estimation of an allowance for credit losses in accordance with the CECL methodology. The allowance for credit losses is increased by a provision for credit losses, 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 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, as described in “Part I – Item 2 – Financial Condition – Allowance for Credit Losses.” As these factors change, the amount of the credit loss provision changes. Prior to the adoption of CECL we maintained an allowance for loan losses for probable incurred credit losses.
Three months ended September 30, 2021, compared with three months ended September 30, 2020: The provision for credit losses for the three months ended September 30, 2021, was $1.1 million compared with a provision for loan losses of $815 thousand for the three months ended September 30, 2020. Net charge-offs for the three months ended September 30, 2021, were $129 thousand compared to net charge-offs of $806 thousand for the three months ended September 30, 2020. For the three months ended September 30, 2021, gross charge-offs were $356 thousand offset by gross recoveries of $227 thousand. In comparison, gross charge-offs were $875 thousand for the three months ended September 30, 2020, offset by gross recoveries of $69 thousand.
Nine months ended September 30, 2021, compared with nine months ended September 30, 2020: The reversal of provision for credit losses for the nine months ended September 30, 2021, was $6.4 million compared with a provision for loan losses of $23.3 million for the nine months ended September 30, 2020. Subsequent to the January 1, 2021, adoption of CECL, the reversal of provision for credit losses in the first nine months of 2021 is attributed primarily to improved economic inputs into the CECL model, a decrease in specific reserves on loans individually assessed for impairment and, to a lesser extent, an improvement in historical loss experience and its associated impact on the allowance for credit losses. Net charge-offs for the nine months ended September 30, 2021, were $761 thousand compared to net charge-offs of $1.4 million for the nine months ended September 30, 2020. Following CECL adoption, PCD assets are now shown gross of credit-related discount and associated charge-offs are reflected in periodic results irrespective of purchase discounts. During the nine-month period, we recognized $490 thousand in charge-offs on these assets. Excluding this charge-off for comparative purposes, net charge-offs for the period would have been $271 thousand. For the nine months ended September 30, 2021, gross charge-offs were $1.4 million offset by gross recoveries of $599 thousand. In comparison, gross charge-offs were $1.8 million for the nine months ended September 30, 2020, offset by gross recoveries of $427 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.
59
Three months ended September 30, 2021, compared with three months ended September 30, 2020: The following table provides a comparison of the major components of non-interest income for the three months ended September 30, 2021 and 2020.
2021 vs. 2020
Change
654
38.3
83
3.3
(76
(8.7
680
139.1
16.0
212
165.6
175
416.7
Recovery on zero-basis purchased loans
(10.0
Income (loss) from equity method investments
(59
(1966.7
576
(729
(126.6
Total other
(376
(40.8
965
14.9
100.0
1,346
20.8
Other non-interest income decreased $729 thousand during the three months ended September 30, 2021, as compared to the same time period in 2020, primarily from a $771 thousand valuation adjustment related to Almena. When comparing the three months ended September 30, 2021, to the same three month period in 2020, the balance of the increase in non-interest income came principally from increases of $680 thousand in increase in value of bank-owned life insurance, $654 thousand in service charges and fees, $212 thousand in trust income and $175 thousand in insurance sales commissions. During the quarter, management’s continued focus on relationship development and provision of value to our customer base, resulted in a comparative increase in service charges and fees, debit card income and trust income through increasing product adoption and utilization. Additionally, as the real estate market continues to carry high demand, mortgage banking revenue has remained relatively constant.
Nine months ended September 30, 2021, compared with nine months ended September 30, 2020: The following table provides a comparison of the major components of non-interest income for the nine months ended September 30, 2021 and 2020.
1,028
20.2
868
12.9
286
12.4
994
68.5
9.8
553
195.4
252
354.9
(54
(46.6
Income from equity method investments
(170
(5666.7
2,342
995
1,347
135.4
1,973
102.3
22,660
17,511
5,149
29.4
Net gain (loss) on acquisition
386
3216.7
6,120
34.9
Other non-interest income increased $1.3 million during the nine months ended September 30, 2021, as compared to the same time period in 2020, primarily from derivative mark-to-market valuation changes and increases of $449 thousand in loan servicing fees and $317 thousand in credit card fees. Other changes contributing to the increase in non-interest income when comparing the first nine months of 2021 to the same time period in 2020, are increases of $1.0 million in service charges and fees, $994 thousand increase in the value of bank-owned life insurance, $868 thousand in debit card income, $585 thousand from the net gain on acquisition, $553 thousand in trust income, $386 thousand in gain from securities transactions, $286 thousand in mortgage banking and $252 thousand in insurance sales commissions.
61
Non-Interest Expense
Three months ended September 30, 2021, compared with three months ended September 30, 2020: For the three months ended September 30, 2021, non-interest expense totaled $30.7 million, a decrease of $100.1 million, when compared to the three months ended September 30, 2020. Changes in the various components of non-interest expense for the three months ended September 30, 2021 and 2020, are discussed in more detail in the following table.
(289
(2.1
251
11.3
15.6
199
22.7
162
27.1
(9.7
29.2
(22
(6.0
18.2
Amortization of core deposit intangible
-
100
93.5
(475
(357.1
(206
(7.7
298
1.1
(104,831
(100.0
(100,146
(76.5
Data processing: Data processing costs increased $440 thousand for the period ended September 30, 2021, as compared to the same time period in 2020. The increase was primarily related to increases in expense related to higher debit card transactions and software licensing expense.
Other real estate owned: Other real estate owned includes operating expenses, provision for unrealized losses, initial valuation gains on acquisition, gains or losses on sales and other operating income. For the three months ended September 30, 2021, there was $390 thousand of net gains on sales, $126 thousand initial valuation gains on acquisition and $116 thousand from other operating income, partially offset by $262 thousand in operating expenses and $28 thousand in provision for unrealized losses. For the three months ended September 30, 2020, there was $321 thousand in operating expenses and $58 thousand provision for unrealized losses, partially offset by $187 thousand of other operating income and $59 thousand of net gains on sales.
Other: Other non-interest expenses consist 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 and other operating expenses. Overall, in the other expense category, there was a net $206 thousand variance, or 7.7%, between quarters ending September 30, 2021 and 2020. Included in other non-interest expense for the three months ended September 30, 2021, is $322 thousand provision for loss on unfunded commitments.
Nine months ended September 30, 2021, compared with nine months ended September 30, 2020: For the nine months ended September 30, 2021, non-interest expense totaled $81.4 million, a decrease of $99.2 million, when compared to the nine months ended September 30, 2020. Changes in the various components of non-interest expense for the nine months ended September 30, 2021 and 2020 are discussed in more detail in the following table.
(997
(2.5
592
9.0
1,151
14.0
(39
(1.2
544
32.1
168
12.3
(63
(5.7
26.8
288
10.3
(0.3
(1,515
(213.4
219
3.2
Sub-Total
76,377
75,699
678
0.9
(99,154
(54.9
Data processing: Data processing costs increased $1.2 million for the period ended September 30, 2021, as compared to the same time period in 2020. The increase was primarily related to increases in expense related to higher debit card transactions and software licensing expense.
Other real estate owned: Other real estate owned includes operating expenses, provision for unrealized losses, initial valuation gains on acquisition, gains or losses on sales and other operating income. For the nine months ended September 30, 2021, there was $788 thousand of net gains on sales, $505 thousand of initial valuation gains on acquisition and a net $343 thousand from other operating income, partially offset by $801 thousand in operating expenses and $30 thousand of provision for unrealized losses. For the nine months ended September 30, 2020, there was $959 thousand provision for unrealized losses and $792 thousand in operating expenses, partially offset by $840 thousand of net gains on sales and $201 thousand of other operating income.
Other: Other non-interest expense 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 and other operating expenses. Overall, in the other expense, category there was a net $219 thousand variance, or 3.2%, between the nine-month periods ending September 30, 2021 and 2020, with the largest variance being a $485 thousand provision for loss on unfunded commitments.
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 loss on debt extinguishment, merger expenses and goodwill impairment, by the sum of net interest income and non-interest income, excluding net gain on acquisition and 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 56.7% for the three months ended September 30, 2021, compared with 67.4% for the three months ended September 30, 2020. The decrease was primarily due to increases in net interest income and non-interest income, partially offset by an increase in non-interest expense.
The efficiency ratio was 59.7% for the nine months ended September 30, 2021, compared with 66.1% for the nine months ended September 30, 2020. The decrease was primarily due to increases in net interest income and non-interest income, partially offset by an increase in non-interest expense.
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 & 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, non-deductible merger expense, and benefits related to tax credits secured within the quarter.
Three months ended September 30, 2021, compared with three months ended September 30, 2020: The effective income tax rate for the quarter ended September 30, 2021 was 21.8% as compared to 2.9% for the quarter ended September 30, 2020. The increase in the current year rate compared to the prior year was driven primarily by the impairment of goodwill for the period ending September 30, 2020 which was reflected on a discrete basis.
Nine months ended September 30, 2021, compared with nine months ended September 30, 2020: The effective income tax rate for the 9-month period ended September 30, 2021 was 22.2% as compared to 1.9% for the nine-month period ended September 30, 2020. Income tax expense for the nine-month period ended September 30, 2021, includes $678 thousand of tax benefit attributable to the settlement in stock of restricted stock units and the exercise of options. The income tax benefit recorded for the nine months ended September 30, 2020 reflects income tax expense provided at an estimated annual effective tax rate of 22.5% on income before taxes and total goodwill impairment net of a deferred income tax benefit of $5.3 million associated with the portion of the goodwill impairment which will continue to be amortized for tax purposes. Additional tax expense associated with the settlement of restricted stock units and the exercise of stock options recorded in the nine months ended September 2020 was $70 thousand.
Total assets increased $249.9 million from December 31, 2020, to $4.26 billion at September 30, 2021. This variance was primarily due to increases of $285.6 million in total securities, $75.2 million in loans, net of allowance for credit losses and $26.4 million in bank-owned life insurance, partially offset by a decrease of $138.4 million in cash and cash equivalents. Total liabilities increased $239.8 million to $3.85 billion at September 30, 2021. The change in total liabilities came primarily from an increase in total deposits of $215.2 million. Total stockholders’ equity increased $10.1 million from $407.6 million at December 31, 2020, to $417.7 million at September 30, 2021.
Loan Portfolio
The following table summarizes our loan portfolio by type of loan as of the dates indicated.
Composition of Loan Portfolio
Percent
21.2
28.3
(164,982
(22.5
Real estate loans:
1,047,039
39.0
986,288
38.1
60,751
6.2
261,668
9.7
202,408
7.8
59,260
29.3
18.3
14.7
108,675
28.5
5.2
5,100
3.8
Total real estate loans
1,938,133
72.2
1,704,347
65.8
233,786
13.7
3.5
3.6
(0.6
3.1
25,966
44.4
Total loans held for investment
94,215
Total loans held for sale
(8,286
(66.9
Total loans held for investment (net of allowances)
75,161
2.9
Our commercial loan portfolio consists of various types of loans, most of which are generally made to borrowers located in the Wichita, Kansas City and Tulsa Metropolitan Statistical Areas (“MSAs”), as well as various community markets throughout Arkansas, Kansas, Missouri and Oklahoma. Most of our loan portfolio consists of commercial and industrial and commercial real estate loans and a substantial portion of our borrowers’ ability to honor their obligations is dependent on local economies in which they operate.
At September 30, 2021, gross total loans, including loans held for sale, were 73.4% of deposits and 63.1% of total assets. At December 31, 2020, gross total loans, including loans held for sale, were 75.5% of deposits and 64.9% of total assets.
We provide commercial lines of credit, working capital loans, commercial real estate-backed 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.
Real estate construction: Real estate construction loans include loans made for the purpose of acquisition, development or construction of real property, both commercial and consumer.
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.
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 September 30, 2021, are summarized in the following table.
Loan Maturity and Sensitivity to Changes in Interest Rates
As of September 30, 2021
One year
or less
After one year
through five
years
After five
150,121
329,072
90,320
Real Estate:
134,809
624,920
287,310
60,870
134,441
66,357
4,215
9,429
476,989
52,548
62,492
23,753
Total real estate
252,442
831,282
854,409
58,875
26,633
8,259
38,591
35,460
10,447
500,029
1,222,447
963,435
Loans with a predetermined fixed interest rate
256,619
802,935
399,130
1,458,684
Loans with an adjustable/floating interest rate
243,410
419,512
564,305
1,227,227
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, 2020, are summarized in the following table.
As of December 31, 2020
157,313
487,729
89,453
144,627
569,366
272,295
75,659
76,295
50,454
5,048
9,848
367,062
50,527
56,514
26,652
275,861
712,023
716,463
62,804
25,911
5,607
13,804
37,599
7,129
509,782
1,263,262
818,652
261,736
896,899
291,649
1,450,284
248,046
366,363
527,003
1,141,412
66
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 and current economic trends, among 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. Loans that participated in the short-term deferral program are not automatically considered classified solely due to a deferral, are subject to ongoing monitoring and will be downgraded or placed on nonaccrual if a noted weakness exists.
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
Restructured loans-accruing
OREO acquired through foreclosure, net
9,232
10,698
Other repossessed assets
67
Total nonperforming assets
74,269
54,597
Ratios:
Nonperforming assets to total assets
1.74
Nonperforming assets to total loans plus OREO
2.76
2.10
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. Prior to January 1, 2021, nonaccrual loans include purchased loans that were identified upon acquisition as having experienced credit deterioration since origination (“purchased credit impaired loans”). However, if the purchased credit impaired loan included in nonaccrual loans has not experienced further deterioration since acquisition the loan is not considered impaired for purposes of determining the allowance for credit losses.
The nonperforming loans at September 30, 2021, consisted of 187 separate credits and 126 separate borrowers. We had 12 non-performing loan relationships, totaling $54.2 million, with an outstanding balance in excess of $1.0 million as of September 30, 2021.
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, as 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 September 30, 2021, the Company had $31.2 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $52.3 million at December 31, 2020.
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.
The Company also monitors the aging of loans less than 90 days past due and the loans that have been deferred under the Company’s COVID-19 related payment deferral program as reported in “NOTE 1 – BASIS OF PRESENTATION” and “NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES” in the Condensed Notes to Interim Consolidated Financial Statements.
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.
Commercial and industrial loans are dependent on the strength of the industries of the related borrowers and the success of their businesses. Commercial and industrial loans are advanced for equipment purchases, to provide working capital or to meet other financing needs of the business. These loans may be secured by accounts receivable, inventory, equipment or other business assets. Financial information is obtained from the borrower to evaluate the debt service coverage and ability to repay the loans.
Commercial real estate loans are dependent on the industries tied to these loans as well as the local commercial real estate market. The loans are secured by the real estate and appraisals are obtained to support the loan amount. An evaluation of the project’s cash flows is performed to evaluate the borrower’s ability to repay the loan at the time of origination and periodically updated during the life of the loan.
Residential real estate loans are affected by the local residential real estate market, the local economy and movement in interest rates. We evaluate the borrower’s repayment ability through a review of credit reports and debt to income ratios. Appraisals are obtained to support the loan amount.
Agricultural real estate loans are real estate loans related to farmland and are affected by the value of farmland. We evaluate the borrower’s ability to repay based on cash flows from farming operations.
Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced and the market pricing at the time of sale.
Consumer loans are dependent on the local economy. Consumer loans are generally secured by consumer assets but may be unsecured. We evaluate the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios.
Analysis of allowance for credit losses: At September 30, 2021, the allowance for credit losses totaled $52.8 million, or 1.96% of total loans. At December 31, 2020, the allowance for loan losses totaled $33.7 million, or 1.30% of total loans.
The allowance for credit losses on loans measured on a collective basis totaled $29.7 million, or 1.14% of the $2.61 billion in loans measured on a collective basis at September 30, 2021, compared to an allowance for credit losses of $23.2 million, or 0.92% of the $2.54 billion in loans measured on a collective basis at December 31, 2020. Exclusive of PPP loan balances, the reserve percentage increased to 1.18% as of September 30, 2021, compared to 1.02% as of December 31, 2020. The increase in the allowance for credit losses and of loans measured on a collective basis principally reflect the adoption of CECL.
The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data.
As of and for the Three Months
Ended September 30,
As of and for the Nine Months
Average loans outstanding
Gross loans outstanding at end of period(1)
Allowance for credit losses at beginning of
the period
ASC 326 implementation:
Real estate:
8,617
1,566
9,090
1,127
4,698
Total ASC 326 implementation
26,170
Charge-offs:
(119
(174
(193
(150
(243
Total charge-offs
Recoveries:
194
Total recoveries
Net recoveries (charge-offs)
(806
(761
(1,400
Allowance for credit losses at end of the
period
Ratio of allowance to period-end loans
1.96
1.25
Annualized ratio of net charge-offs
(recoveries) to average loans
0.02
0.12
0.04
0.07
(1)Excluding loans held for sale.
The following table shows the allocation of the allowance for credit losses among our loan categories and certain other information as of the dates indicated. The total allowance is available to absorb losses from any loan category.
Analysis of the Allowance for Credit Losses
% of
Balance of allowance for credit losses applicable to:
45.7
37.0
11,024
20.9
8,776
26.0
1,458
2.8
236
0.7
15.8
1.9
2.7
8.2
2.2
4.7
17.9
Management believes that the allowance for credit losses at September 30, 2021, 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 September 30, 2021.
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 September 30, 2021, the carrying amount of investment securities totaled $1.16 billion, an increase of $285.6 million compared with December 31, 2020. At September 30, 2021, securities represented 27.1% of total assets compared with 21.7% at December 31, 2020.
At the date of purchase, debt securities are classified into one of two categories, held-to-maturity or available-for-sale. We do not purchase securities for trading purposes. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held-to-maturity and carried at cost, adjusted for the amortization of premiums and the accretion of discounts, only if management has the positive intent and ability to hold those securities to maturity. Debt securities not classified as held-to-maturity are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in total interest and dividend income. Also included in total interest and dividend income are dividends received on stock investments in the Federal Reserve Bank of Kansas City and the FHLB of Topeka. These stock investments are stated at cost.
The following table summarizes the amortized cost and fair value by classification of available-for-sale securities as of the dates shown.
Available-For-Sale Securities
Total available-for-sale securities
70
At September 30, 2021, and December 31, 2020, we did not own any securities classified as held-to-maturity.
At September 30, 2021, and December 31, 2020, 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 September 30, 2021, and December 31, 2020. 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.
Due in one year
Due after one
year through
five years
Due after five
years through
10 years
Due after 10
Yield
1,006
29,939
68,794
1.31
—%
99,739
1.07
Government-sponsored residential
mortgage-backed securities
53,474
1.55
179,926
1.62
415,626
1.91
649,026
1.80
Private label residential
147,949
1.24
54,070
Small Business
Administration loan pools
9,956
0.90
509
2.15
0.96
State and political subdivisions(1)
5,387
2.67
24,670
2.51
33,892
2.60
45,419
2.71
6,393
2.69
108,083
433,444
609,503
1.82
The calculated yield is not presented on a tax equivalent basis.
2,093
3.26
101,352
2.12
547,975
5,050
2.17
48,600
4.25
4.05
2.38
3,765
2.41
26,679
24,212
2.93
61,600
3.17
12,845
29,795
2.52
174,164
2.83
655,023
2.07
2.23
Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages and 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 September 30, 2021, and December 31, 2020, 64.0% and 84.1% of the government-sponsored residential mortgage-backed securities held by us had contractual final maturities of more than ten years with a weighted average life of 4.1 years and 2.5 years and a modified duration of 3.8 years and 2.5 years. At September 30, 2021, and December 31, 2020, 100.0% and 100.0% of the private label residential mortgage-backed securities held by us had contractual final maturities of more than ten years with a weighted average life of 3.0 years and 2.2 years and a modified duration of 2.8 years and 2.1 years.
Goodwill Impairment Assessment
At September 30, 2021, we performed an interim qualitative analysis and concluded there were not any indications that goodwill was impaired.
Our lending and investing activities are primarily funded by deposits. A variety of deposit accounts are offered with a wide range of interest rates and terms including demand, savings, money market and time deposits. We rely primarily on competitive pricing policies, convenient locations, comprehensive marketing strategy and personalized service to attract and retain these deposits.
The following table shows our composition of deposits at September 30, 2021, and December 31, 2020.
Composition of Deposits
of Total
Non-interest-bearing demand
26.9
22.9
Interest-bearing demand
992,773
1,016,424
29.5
1,100,076
30.0
1,012,673
Total deposits at September 30, 2021, were $3.66 billion, an increase of $215.2 million, or 6.2%, compared to total deposits of $3.45 billion at December 31, 2020.
Equity Bank participates in the Insured Cash Sweep (“ICS”) service that allows the bank to break large money market deposits into smaller amounts and place them in a network of other ICS banks to ensure FDIC insurance coverage on the entire deposit. These deposits are placed through ICS services, but are Equity Bank’s customer relationships that management views as core funding. The bank also participates in the Certificate of Deposit Account Registry Service (“CDARS”) program. CDARS allows the bank to break large time deposits into smaller amounts and place them in a network of other CDARS banks to ensure FDIC insurance coverage on the entire deposit. Reciprocal deposits are not considered brokered deposits as long as the aggregate balance is less than the lesser of 20% of total liabilities or $5.0 billion and Equity Bank is well capitalized and well rated. All non-reciprocal deposits and reciprocal deposits in excess of regulatory limits are considered brokered deposits.
The following table lists reciprocal and brokered deposits included in total deposits categorized by type.
Reciprocal
263,301
256,037
Total interest-bearing demand
49,830
23,733
Total savings and money market
3,982
14,859
Non-reciprocal brokered
10,000
Total time
13,982
Total reciprocal and brokered deposits
327,113
294,629
The following table provides information on the maturity distribution of time deposits of $100 thousand or more as of September 30, 2021, and December 31, 2020.
3 months or less
97,048
93,025
4,023
4.3
Over 3 through 6 months
86,258
70,737
15,521
21.9
Over 6 through 12 months
141,100
120,006
21,094
17.6
Over 12 months
47,657
100,877
(53,220
(52.8
Total Time Deposits
372,063
384,645
(12,582
(3.3
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 discount window, a bank stock loan and subordinated debt. For additional information see “NOTE 6 – BORROWINGS” in the Condensed Notes to Interim Consolidated Financial Statements for additional information.
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 nine-month periods ended September 30, 2021 and 2020, our liquidity needs have primarily been met by core deposits, security and loan maturities and amortizing investment and loan portfolios. Other funding sources include federal funds purchased, brokered certificates of deposit, borrowings from the FHLB and the Federal Reserve discount window.
Our largest sources of funds are deposits and FHLB borrowings and largest uses of funds are loans and securities. Average loans were $2.78 billion for the nine months ended September 30, 2021, an increase of 3.1% over the December 31, 2020, 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 4.3 years and a modified duration of 4.0 years at September 30, 2021.
Cash and cash equivalents were $142.3 million at September 30, 2021, a decrease of $138.4 million from the $280.7 million cash and cash equivalents at December 31, 2020. The decrease in cash and cash equivalents is driven primarily by $414.5 million net cash used in investing activities, partially offset by $196.5 provided by financing activities and $79.6 million provided by operating activities. Cash and cash equivalents at January 1, 2021, plus liquidity provided by operating activities, pay downs, sales and maturities of investment securities and FHLB borrowings during the first nine months of 2021 were used to originate or purchase loans and to purchase investment securities. We believe that our daily funding needs can be met through cash provided by operating activities, payments and maturities on loans and investment securities, the core deposit base and FHLB advances and other borrowing relationships.
Off-Balance-Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments.
Our commitments associated with outstanding standby and performance letters of credit and commitments to extend credit expiring by period as of September 30, 2021, are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
Credit Extensions Commitments
1 Year
or Less
More Than
1 Year but
Less Than
3 Years
3 Years or
More but
5 Years
or More
Standby and performance letters of credit
11,704
12,161
Commitments to extend credit
308,198
86,400
104,208
93,216
592,022
319,902
86,589
104,469
93,223
604,183
Standby and Performance Letters of Credit: Standby letters of credit are irrevocable commitments issued by us 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.
Commitments to Extend 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. Commitments to extend credit include mortgage loans in the process of origination that we plan to fund within a normal period of 60 to 90 days, and which are intended for sale to investors in the secondary market.
74
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 bank 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 September 30, 2021, and December 31, 2020, 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 September 30, 2021, 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.
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 as in effect from time to time in the United States 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 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.
For the three months ended
(Dollars in thousands, except per share data)
Less: goodwill
Less: core deposit intangibles, net
13,993
15,023
17,101
Less: mortgage servicing asset, net
Less: naming rights, net
1,141
Tangible common equity
Common shares issued at period end
14,383,913
Diluted common shares outstanding at period end
14,637,306
14,664,603
14,668,287
14,756,378
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
4,217,606
4,221,513
4,148,441
3,964,568
3,815,727
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 less tax effect on intangible assets amortization; 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.
Total average stockholders’ equity
404,039
395,638
409,572
Less: average intangible assets
47,334
48,376
54,547
Average tangible common equity
376,544
356,705
347,262
355,025
329,039
Amortization of intangible assets
1,041
1,055
1,043
Less: tax effect
218
222
5,539
Adjusted net income allocable to common
12,595
15,988
15,901
13,321
9,930
Return on total average stockholders’ equity
(ROAE) annualized
Return on average tangible common equity
(ROATCE) annualized
12.01
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 and goodwill impairment, by the sum of net interest income and non-interest income, excluding net gain on acquisition 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 and net gain (loss) from securities transactions.
The following table reconciles, as of the dates set forth below, the efficiency ratio to the GAAP-based efficiency ratio.
25,806
24,881
28,460
Less: goodwill impairment
Less: loss on debt extinguishment
Less: merger expense
Non-interest expense, excluding goodwill
impairment, loss on debt extinguishment
and merger expense
6,712
8,500
Less: net gain on acquisition
663
(78
2,145
Less: net gain (loss) from securities transactions
Non-interest income, excluding net gain (loss) from
securities transactions and net gain on acquisition
8,437
6,773
6,356
Net interest income plus non-interest income,
excluding net gain on acquisition and net gain
(loss) from securities transactions
46,425
43,067
38,532
41,915
38,592
Non-interest expense to net interest income
plus non-interest income
65.57
59.01
64.67
64.60
339.02
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 purchase and sale activities, commitments to originate loans and the maturities of investment securities and borrowings. Additionally, 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. 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 September 30, 2021, and December 31, 2020, was primarily driven by the rate and mix of variable and fixed rate financial instruments, the underlying duration of the financial instruments and the level of response to changes in the interest rate environment. The increase in the level of negative impact to net interest income in the up interest rate shock scenarios is due to the assumed migration of non-term deposit liabilities to higher rate term deposits; the level of fixed rate investments and loans receivable that will not reprice to higher rates; advances; the variable rate subordinated debentures and the non-term deposits that are assumed not to migrate to term deposits that are variable rate and will reprice to the higher rates; and a portion of our portfolio of variable rate loans contain restrictions on the amount of repricing and frequency of repricing that limit the amount of repricing to the current higher rates. These factors result in the negative impacts to net interest income in the up-interest rate shock scenarios that are detailed in the table below. In the down interest rate shock scenario, the main drivers of the negative impact on net interest income are the decrease in investment income due to the negative convexity features of the fixed rate mortgage backed securities, assumed prepayment of existing fixed rate loans receivable, the downward pricing of variable rate loans receivable, the constraint of the shock on non-term deposits and the level of term deposit repricing. Our mortgage backed security portfolio is primarily comprised of fixed rate investments and as rates decrease, the level of prepayments is assumed to increase and cause the current higher rate investments to prepay and the assumed reinvestment will be at lower interest rates. Similar to our mortgage backed securities, the model assumes that our fixed rate loans receivable will prepay at a faster rate and reinvestment will occur at lower rates. The level of downward shock on the non-term deposits is constrained to limit the downward shock to a non-zero rate which results in a minimal reduction in the average rate paid. Term deposits repricing will only decrease the average cost paid by a minimal amount due to the assumed repricing occurring at maturity. These factors result in the negative impact to net interest income in the down interest rate shock scenario.
The change in the EVE from the base case for September 30, 2021, and December 31, 2020, is due to being in a liability sensitive position and the level of convexity in pre-payable assets. Generally, with a liability sensitive position, as interest rates increase, the value of assets decrease faster than the value of liabilities and as interest rates decrease, the value of assets increase at a faster rate than liabilities. However, due to the level of convexity in fixed rate pre-payable assets, we do not experience a similar change in the value of assets in a down interest rate shock scenario. 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 September 30, 2021, non-interest-bearing deposits were approximately $192.8 million or 24.4% higher than that deposit type at December 31, 2020. Substantially all investments and approximately 54.3% of loans are pre-payable 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 EVE.
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
(4.6
+200 basis points
(2.3
0.4
+100 basis points
(0.9
1.0
0 basis points
-100 basis points
(5.1
79
The following table summarizes the simulated immediate impact on economic value of equity as of the dates indicated.
Impact on Economic Value
of Equity
(0.5
12.8
4.2
14.4
9.2
(16.9
(21.2
Item 4: Controls and Procedures
Evaluation of disclosure controls and procedures
An evaluation of the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply judgement in evaluating its controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms.
Changes in internal control over financial reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1: Legal Proceedings
From time to time, we are a party to various litigation matters incidental to the conduct of our business. See “NOTE 12 – LEGAL MATTERS” of the Condensed Notes to Interim Consolidated Financial Statements under Item 1 to this Quarterly report for a complete discussion of litigation matters.
Item 1A: Risk Factors
There have been no material changes in the Company’s risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 9, 2021.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Common Stock
In September of 2020, the Company’s Board of Directors authorized the repurchase of up to 800,000 shares of the Company’s outstanding common stock, from time to time, beginning October 30, 2020, and concluding October 29, 2021. The repurchase program does not obligate us to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice.
The following table presents shares that have been repurchased under the program during the third quarter of 2021.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
July 1, 2021 through July 31, 2021
8,439
29.75
172,248
August 1, 2021 through August 31, 2021
14,000
29.96
158,248
September 1, 2021 through September 30, 2021
34,800
31.14
123,448
57,239
30.64
Item 3: Defaults Upon Senior Securities
None
Item 4: Mine Safety Disclosures
Not applicable.
Item 5: Other Information
Item 6: Exhibits
Exhibit
No.
Description
10.1*†
Employment Agreement, dated November 1, 2021, between Equity Bank, Equity Bancshares, Inc. and Brad S. Elliott.
10.2*†
Employment Agreement, dated November 1, 2021, between Equity Bank, Equity Bancshares, Inc. and Gregory Kossover.
10.3*†
Employment Agreement dated November 1, 2021, between Equity Bank, Equity Bancshares, Inc. and Craig L. Anderson.
10.4*†
Employment Agreement dated November 1, 2021, between Equity Bank, Equity Bancshares, Inc. and Julie Huber.
10.5*†
Employment Agreement dated November 1, 2021, between Equity Bank, Equity Bancshares, Inc. and Brett A. Reber.
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
*
Filed herewith.
**
These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
†
Represents a management contract or a compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 8, 2021
By:
/s/ Brad S. Elliott
Date
Brad S. Elliott
Chairman and Chief Executive Officer
/s/ Eric R. Newell
Eric R. Newell
Executive Vice President and Chief Financial Officer