UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-37624
EQUITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kansas
72-1532188
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
7701 East Kellogg Drive, Suite 300
Wichita, KS
67207
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 316.612.6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A, Common Stock, par value $0.01 per share
Trading Symbol
EQBK
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of April 29, 2022, the registrant had 16,276,395 shares of Class A common stock, $0.01 par value per share, outstanding.
TABLE OF CONTENTS
Part I
Financial Information
5
Item 1.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
6
Consolidated Statements of Comprehensive Income
7
Consolidated Statements of Stockholders’ Equity
8
Consolidated Statements of Cash Flows
9
Condensed Notes to Interim Consolidated Financial Statements
11
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Overview
41
Critical Accounting Policies
Results of Operations
42
Financial Condition
47
Liquidity and Capital Resources
55
Non-GAAP Financial Measures
56
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
59
Item 4.
Controls and Procedures
61
Part II
Other Information
62
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. 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, 2022, 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;
an economic downturn related to a 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 a pandemic or other 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;
inaccuracies in our assumptions about future events which could result in material differences between our financial projections and actual financial performance;
3
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;
the findings from our investigations into the cyber-attack we suffered in November 2021, including our understanding of the nature, source and duration of the attack, indicate that our products and internal systems are secure and the success of our related mitigation and remediation efforts; 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
March 31, 2022, and December 31, 2021
(Dollar amounts in thousands)
(Unaudited)
March 31,
December 31,
2022
2021
ASSETS
Cash and due from banks
$
89,764
259,131
Federal funds sold
286
823
Cash and cash equivalents
90,050
259,954
Available-for-sale securities
1,352,894
1,327,442
Loans held for sale
1,575
4,214
Loans, net of allowance for credit losses of $47,590 and $48,365
3,194,987
3,107,262
Other real estate owned, net
9,897
9,523
Premises and equipment, net
103,168
104,038
Bank-owned life insurance
120,928
120,787
Federal Reserve Bank and Federal Home Loan Bank stock
19,890
17,510
Interest receivable
16,923
18,048
Goodwill
54,465
Core deposit intangibles, net
13,830
14,879
Other
100,016
99,509
Total assets
5,078,623
5,137,631
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand
1,255,793
1,244,117
Total non-interest-bearing deposits
Savings, NOW and money market
2,511,478
2,522,289
Time
612,399
653,598
Total interest-bearing deposits
3,123,877
3,175,887
Total deposits
4,379,670
4,420,004
Federal funds purchased and retail repurchase agreements
48,199
56,006
Federal Home Loan Bank advances
50,000
—
Subordinated debt
96,010
95,885
Contractual obligations
17,307
17,692
Interest payable and other liabilities
35,422
47,413
Total liabilities
4,626,608
4,637,000
Commitments and contingent liabilities, see Notes 11 and 12
Stockholders’ equity, see Note 7
Common stock
204
203
Additional paid-in capital
480,106
478,862
Retained earnings
102,632
88,324
Accumulated other comprehensive income (loss), net of tax
(50,012
)
1,776
Treasury stock
(80,915
(68,534
Total stockholders’ equity
452,015
500,631
Total liabilities and stockholders’ equity
See accompanying condensed notes to interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended March 31, 2022 and 2021
(Dollar amounts in thousands, except per share data)
Three Months Ended
Interest and dividend income
Loans, including fees
36,306
31,001
Securities, taxable
5,391
3,799
Securities, nontaxable
655
724
Federal funds sold and other
300
288
Total interest and dividend income
42,652
35,812
Interest expense
1,722
2,410
33
22
65
1,599
1,556
Total interest expense
3,363
4,053
Net interest income
39,289
31,759
Provision (reversal) for credit losses
(412
(5,756
Net interest income after provision (reversal) for credit losses
39,701
37,515
Non-interest income
Service charges and fees
2,522
1,596
Debit card income
2,628
2,350
Mortgage banking
562
935
Increase in value of bank-owned life insurance
865
601
Net gain on acquisition
(78
Net gain from securities transactions
40
17
2,405
1,291
Total non-interest income
9,022
6,712
Non-interest expense
Salaries and employee benefits
15,068
12,722
Net occupancy and equipment
3,170
2,368
Data processing
3,769
2,663
Professional fees
1,171
1,073
Advertising and business development
976
682
Telecommunications
470
580
FDIC insurance
180
415
Courier and postage
423
369
Free nationwide ATM cost
501
472
Amortization of core deposit intangibles
1,050
1,034
Loan expense
185
238
Other real estate owned
(1
Merger expenses
323
152
2,174
2,108
Total non-interest expense
29,459
24,881
Income (loss) before income taxes
19,264
19,346
Provision (benefit) for income taxes
3,614
4,271
Net income (loss) and net income (loss) allocable to common stockholders
15,650
15,075
Basic earnings (loss) per share
0.94
1.04
Diluted earnings (loss) per share
0.93
1.02
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period on
available-for-sale securities
(69,339
(10,369
Less: reclassification for net gains included in net income
(79
Unrealized holding gains (losses) arising during the period on cash flow hedges
598
Total other comprehensive income (loss)
(68,820
Tax effect
17,032
2,607
Other comprehensive income (loss), net of tax
(51,788
(7,762
Comprehensive income (loss)
(36,138
7,313
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollar amounts in thousands, except share and per 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 January 1, 2021
14,540,556
174
386,820
50,787
19,781
(43
(49,870
407,649
Implementation of ASU 2016-13,
current expected credit losses
(12,403
Other comprehensive income (loss),
net of tax effects
Stock-based compensation
712
Common stock issued upon
exercise of stock options
11,483
167
Common stock issued under
stock-based incentive plan
47,265
1
employee stock purchase plan
17,621
241
Repayment on employee stock loans
43
Treasury stock purchase
(233,012
(5,907
Balance at March 31, 2021
14,383,913
175
387,939
53,459
12,019
(55,777
397,815
Balance at January 1, 2022
16,760,115
Cash dividends - common stock, $0.08 per share
(1,318
Dividend equivalents - restricted stock units, $0.08 per share
(24
804
3,500
50
61,460
14,274
391
Treasury stock purchases
(384,383
(12,381
Balance at March 31, 2022
16,454,966
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
1,172
1,011
Amortization of operating lease right-of-use asset
100
Amortization of cloud computing implementation costs
30
Net amortization (accretion) of purchase valuation adjustments
(1,430
(361
Amortization (accretion) of premiums and discounts on securities
1,926
2,261
Amortization of intangible assets
1,085
1,045
Deferred income taxes
(226
1,687
Federal Home Loan Bank stock dividends
(18
(2
Loss (gain) on sales and valuation adjustments on other real estate owned
(172
(171
Net loss (gain) on sales and settlements of securities
Change in unrealized (gains) losses on equity securities
(17
Loss (gain) on disposal of premises and equipment
(8
Loss (gain) on sales of foreclosed assets
(49
Loss (gain) on sales of loans
(463
(793
Originations of loans held for sale
(16,193
(27,907
Proceeds from the sale of loans held for sale
19,295
32,485
Increase in the value of bank-owned life insurance
(865
(601
Change in fair value of derivatives recognized in earnings
(810
(350
Gain on acquisition
78
Payments on operating lease payable
(205
(123
Net change in:
1,125
(824
Other assets
(101
7,553
(12,448
(1,407
Net cash provided by (used in) operating activities
7,804
23,726
Cash flows (to) from investing activities
Purchases of available-for-sale securities
(153,850
(242,563
Proceeds from sales, calls, pay-downs and maturities of available-for-sale securities
57,134
103,660
Net change in loans
(85,273
(100,306
Purchase of mortgage loans
(89,450
Purchase of government guaranteed loans
(2,293
Purchase of premises and equipment
(309
(1,921
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
20,063
37
Net redemptions (purchases) of Federal Home Loan Bank and Federal Reserve
Bank stock
(2,362
1,243
Net redemptions (purchases) of correspondent and miscellaneous other stock
(68
Proceeds from sale of other real estate owned
205
1,402
Purchase of bank-owned life insurance
(25,000
Proceeds from bank-owned life insurance death benefits
723
Net cash provided by (used in) investing activities
(165,912
(352,958
Cash flows (to) from financing activities
Net increase (decrease) in deposits
(40,311
186,931
Net change in federal funds purchased and retail repurchase agreements
(7,807
4,310
Net borrowings (repayments) on Federal Home Loan Bank line of credit
20,000
Proceeds from Federal Home Loan Bank term advances
122,128
Principal repayments on Federal Home Loan Bank term advances
(92,128
(214
Proceeds from Federal Reserve Bank discount window
1,000
Principal payments on Federal Reserve Bank discount window
(1,000
Principal payments on employee stock loans
Proceeds from the exercise of employee stock options
Proceeds from employee stock purchase plan
Debt issuance cost
(16
Purchase of treasury stock
Net change in contractual obligations
(385
(333
Dividends paid on common stock
(1,353
Net cash provided by (used in) financing activities
(11,796
185,222
Net change in cash and cash equivalents
(169,904
(144,010
Cash and cash equivalents, beginning of period
280,698
Ending cash and cash equivalents
136,688
Supplemental cash flow information:
Interest paid
4,739
3,035
Income taxes paid, net of refunds
82
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans
555
60
Other repossessed assets acquired in settlement of loans
20
10
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
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, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 9, 2022. Operating results for the three months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other period.
Reclassifications
Some items in prior financial statements were reclassified to conform to the current presentation. Management determined the items reclassified are immaterial to the consolidated financial statements taken as a whole and did not result in a change in equity or net income for the periods reported.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include contract modifications; hedging relationships; and sale or transfer of debt securities classified as held-to-maturity. The guidance was effective immediately for the Company and the amendments may be applied prospectively through December 31, 2022. The Company’s contracts issued prior to December 31, 2021, are primarily LIBOR tenures that will continue to be published until June 30, 2023, and the Company has reviewed the respective fallback language of these contracts and believes that the language is operational. The Company will continually evaluate these contracts until the indexes are no longer published; however, the financial impact on our financial condition, results of operations and cash flows will depend on the population of contracts that are still outstanding on the date the underlying indexes are no longer published.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). ASU 2021-01 clarify that certain optional expedients and exceptions that are noted in Topic 848 apply to derivatives that are affected by the discounting transition. Certain provisions, if elected by the Company, apply to derivative instruments that use an interest rate for managing, discounting or contract price alignment that is modified as a result of reference rate reform. The guidance was effective immediately for the Company and the amendments may be applied prospectively through December 31, 2022. The Company’s contracts issued prior to December 31, 2021, are primarily LIBOR tenures that will continue to be published until June 30, 2023, and the Company has reviewed the respective fallback language of these contracts and believes that the language is operational. The Company will continually evaluate these contracts until the indexes are no longer published; however, the financial impact on the Company’s financial condition, results of operations and cash flows will depend on the population of contracts that are still outstanding on the date the underlying indexes are no longer published.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815), Fair Value Hedging – Portfolio Layer Method. ASU 2022-01 expands the current last-of-layer method to allow multiple hedged layers of a single closed portfolio; expands the scope of the portfolio layer method to include nonprepayable financial assets; addresses the types of hedging instruments that are
eligible in a single-layer hedge; provided additional guidance on the accounting for and disclosure of hedging basis adjustments; and provided guidance on how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. The guidance will be effective for the Company in fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This guidance requires a modified retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings on the initial application date. The Company is currently evaluating the guidance but does not expect it will have a material financial impact on its financial condition, results of operations and cash flows.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Trouble Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for loan restructurings by creditor when a borrower is experiencing financial difficulty. Creditors will be required to apply the refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU 2022-02 requires that public business entities disclose gross write offs by year of origination for financing receivables and net investment in leases within the scope of Financial Instruments – Credit Losses – Measured at Amortized Cost of the Accounting Standards Codification. The guidance is effective for the Company for fiscal years beginning after December 31, 2022, including interim periods within those fiscal years. The Company is permitted to apply the guidance prospectively or through a modified retrospective method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Since the Company had adopted ASU 2016-13 effective January 1, 2021, the Company is permitted to early adopt the guidance in totality or individually for the topics covered in this update. The Company will not be early adopting this guidance and does not expect the guidance to have a material financial impact on our financial condition, results of operations and cash flows, but will impact the Company’s future loan disclosures.
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
123,724
(8,489
115,235
U.S. Treasury securities
257,151
(13,895
243,256
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities
625,214
896
(29,595
596,515
Private label residential mortgage-backed securities
207,043
(10,761
196,282
Corporate
56,576
322
(559
56,339
Small Business Administration loan pools
15,708
(435
15,273
State and political subdivisions
134,469
877
(5,352
129,994
1,419,885
2,095
(69,086
December 31, 2021
124,898
13
(1,504
123,407
157,289
(1,687
155,602
661,584
10,215
(6,912
664,887
173,717
(2,029
171,688
52,555
1,437
(215
53,777
16,568
(106
16,475
138,404
3,618
(416
141,606
1,325,015
15,296
(12,869
12
The fair value and amortized cost of debt securities at March 31, 2022, 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
6,325
6,363
One to five years
235,854
227,053
Five to ten years
263,257
248,913
After ten years
82,192
77,768
832,257
792,797
Total debt securities
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $844,630 at March 31, 2022, and $892,182 at December 31, 2021.
The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2022, and December 31, 2021.
Less Than 12 Months
12 Months or More
Loss
433,989
(19,841
97,065
(9,754
531,054
191,560
(10,490
4,722
(271
26,441
6,431
(374
8,842
(61
61,392
Total temporarily impaired securities
1,078,304
(59,000
110,629
(10,086
1,188,933
117,618
155,601
378,057
(6,860
2,868
(52
380,925
159,381
(1,978
2,208
(51
161,589
4,785
15,459
28,443
859,344
(12,766
5,076
(103
864,420
As of March 31, 2022, the Company held 413 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
3,265
Gross gain
115
Gross losses
36
Income tax expense on net realized gains
There were no proceeds from sales of available-for-sale securities during the three months ended March 31, 2021.
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Types of loans and normal collateral securing those loans are listed below.
Commercial real estate: Commercial real estate loans include all loans secured by nonfarm, nonresidential properties and by multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.
Commercial and industrial: Commercial and industrial loans include loans used to purchase fixed assets, provide working capital or meet other financing needs of the business. Loans are normally secured by the assets being purchased or already owned by the borrower, inventory or accounts receivable. These may include SBA and other guaranteed or partially guaranteed types of loans.
Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences.
Agricultural real estate: Agricultural real estate loans are loans typically secured by farmland.
Agricultural: Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced. These loans may be secured by growing crops, stored crops, livestock, equipment, and miscellaneous receivables.
Consumer: Consumer loans may include installment loans, unsecured and secured personal lines of credit, overdraft protection and letters of credit. These loans are generally secured by consumer assets but may be unsecured.
The following table lists categories of loans at March 31, 2022, and December 31, 2021.
Commercial real estate
1,552,134
1,486,148
Commercial and industrial
629,181
567,497
Residential real estate
613,928
638,087
Agricultural real estate
198,844
198,330
Agricultural
150,077
166,975
Consumer
98,413
98,590
Total loans
3,242,577
3,155,627
Allowance for credit losses
(47,590
(48,365
Net loans
Included in the commercial and industrial loan balances at March 31, 2022, and December 31, 2021, are $20,256 and $44,783 of loans that were originated under the SBA PPP program. At March 31, 2022, and December 31, 2021, unamortized loan fees on these loans were $498 thousand and $1.3 million.
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 March 31, 2022, the Company did not purchase any pools of residential mortgage loans. During the first three months of 2021, the Company purchased two pools of residential real estate loans totaling $89,450. As of March 31, 2022, and December 31, 2021, residential real estate loans include $359,376 and $372,069 of purchased residential real estate loans.
14
The Company occasionally purchases the government guaranteed portion of loans originated by other financial institutions to hold for investment. During the quarter ended March 31, 2022, the Company purchased $2,293 in guaranteed loans from governmental agencies. No such purchases were made in the three months ended March 31, 2021.
The unamortized discount of merger purchase accounting adjustments related to non-purchase credit deteriorated loans included in the loan totals above are $5,687 with related loans of $444,568 at March 31, 2022, and $6,649 with related loans of $527,422 at December 31, 2021.
Overdraft deposit accounts are reclassified and included in consumer loans above. These accounts totaled $516 at March 31, 2022, and $886 at December 31, 2021.
The following tables present the activity in the allowance for credit losses by class for the three-month periods ended March 31, 2022 and 2021.
Commercial
Real Estate
and
Industrial
Residential
Real
Estate
Allowance for credit losses:
Beginning balance
22,478
12,248
5,560
2,235
3,756
2,088
48,365
Provision for credit losses
(492
1,572
402
(700
(1,284
90
Loans charged-off
(283
(44
(534
Recoveries
38
171
Total ending allowance balance
21,764
13,814
5,960
1,542
2,472
2,038
47,590
March 31, 2021
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
(207
(2,877
15,732
Impact of adopting ASC 326 - PCD loans
4,627
1,680
221
1,186
4,306
-
12,020
(4,207
1,646
(2,131
(345
(511
(323
(5,871
(53
(7
(9
(12
(210
(291
127
23
72
226
15,118
19,965
11,511
1,900
4,349
2,682
55,525
The following tables present the recorded investment in loans and the balance in the allowance for credit losses by portfolio and class based on method to determine allowance for credit loss as of March 31, 2022, and December 31, 2021.
Individually evaluated for credit losses
1,078
1,322
852
676
2,178
95
6,201
Collectively evaluated for credit losses
20,686
12,492
5,108
866
294
1,943
41,389
Loan Balance:
3,810
8,263
4,682
5,274
5,649
368
28,046
1,548,324
620,918
609,246
193,570
144,428
98,045
3,214,531
15
4,381
3,650
892
1,488
3,546
75
14,032
18,097
8,598
4,668
747
210
2,013
34,333
45,421
13,786
5,362
14,959
13,049
357
92,934
1,440,727
553,711
632,725
183,371
153,926
98,233
3,062,693
The following table presents information related to nonaccrual loans and the level of collateral that supports the nonaccrual loans at March 31, 2022, and December 31, 2021.
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Credit Losses
Allocated
Average Recorded Investment
Interest Income Recognized
With no related allowance recorded:
1,010
818
409
982
1,466
1,106
767
1,795
1,660
24
Subtotal
4,272
3,584
3,842
With an allowance recorded:
3,386
2,822
1,057
4,827
8,078
3,711
631
4,152
3,760
3,416
846
4,031
3,671
2,419
639
2,579
6,666
4,386
1,832
5,281
430
358
94
316
25,991
17,112
5,099
21,186
30,263
20,696
25,028
16
336
6,060
1,964
521
101
609
429
126
1,725
49
8,513
4,102
4,896
192
7,690
6,833
1,632
6,985
19
4,976
4,593
1,800
25,881
119
5,170
4,646
888
3,204
3,726
2,738
637
3,224
8,836
6,175
2,307
6,028
113
314
274
74
251
30,712
25,259
7,338
45,573
356
39,225
29,361
50,469
548
The following tables present the aging of the recorded investment in past due loans as of March 31, 2022, and December 31, 2021, 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
1,305
304
3,640
1,546,885
1,207
624,255
557
4,522
608,849
886
4,079
193,879
1,571
144,120
160
97,855
5,686
352
3,215,843
4,633
408
256
1,474,018
424
88
6,557
560,428
620
1,126
5,075
631,266
28
57
4,398
193,847
160,795
97,890
6,026
1,740
3,118,244
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship. Loans that participated in the short-term deferral program are not automatically considered classified solely due to a deferral, are subject to ongoing monitoring and will be downgraded or placed on nonaccrual if a noted weakness exists. The Company uses the following definitions for risk ratings.
Pass: Loans classified as pass include all loans that do not fall under one of the three following categories.
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
18
Based on the most recent analysis performed, the risk category of loans, by type and year of origination, at March 31, 2022, is as follows.
2020
2019
2018
Prior
Revolving Loans
Amortized Cost
Converted to Term
Risk rating
Pass
106,730
288,567
202,242
150,844
141,302
215,915
427,111
1,374
1,534,085
Special mention
125
8,648
8,786
Substandard
4,719
398
213
3,247
611
9,263
Doubtful
Total commercial real estate
293,411
202,640
151,057
141,390
227,810
427,722
85,018
146,488
91,722
54,953
9,078
18,481
190,669
2,094
598,503
1,306
4,533
5,839
21
2,920
10,178
1,544
928
5,034
24,839
Total commercial and industrial
85,039
150,702
94,642
65,131
11,928
23,942
195,703
4,913
324,960
23,114
18,512
57,899
127,000
52,613
191
609,202
104
227
4,250
4,702
Total residential real estate
23,218
18,559
58,126
131,274
52,687
5,912
34,360
32,119
16,500
10,971
33,770
52,300
186,232
486
32
948
140
1,789
80
475
1,842
1,312
11,664
Total agricultural real estate
6,482
36,149
32,199
22,526
11,446
36,098
53,644
8,584
16,415
15,857
5,234
3,284
4,059
85,600
139,108
86
3,598
2,219
307
1,083
10,421
Total agricultural
20,013
18,076
7,428
4,422
4,796
86,683
29,616
27,029
12,902
5,867
2,871
5,013
14,755
98,054
136
112
359
Total consumer
29,638
27,059
13,038
5,979
2,890
5,053
240,773
837,819
377,956
251,910
225,405
404,238
823,048
4,035
3,165,184
1,351
14,121
16,145
183
14,350
5,857
18,684
3,446
10,614
8,114
61,248
241,386
852,294
383,813
270,680
230,202
428,973
831,194
Based on the analysis performed at December 31, 2021, the risk category of loans, by type and year of origination is as follows.
2017
301,947
212,444
159,374
134,465
72,249
164,363
409,109
594
1,454,545
885
11,817
1,168
8,705
22,701
401
145
77
828
5,764
8,902
303,760
213,730
159,519
146,359
74,245
178,832
170,263
100,457
57,955
11,019
17,327
8,855
155,181
9,726
530,783
1,958
1,482
284
5,750
9,493
4,200
5,410
10,238
1,417
444
5,469
27,221
174,482
105,867
70,151
13,918
18,055
14,648
160,650
336,775
24,633
22,520
60,461
34,453
102,363
51,584
184
632,973
25
79
48
159
1,909
2,740
154
5,089
24,712
22,568
60,620
36,362
105,128
51,738
38,412
36,667
18,442
12,142
14,432
21,792
42,541
184,428
456
1,210
1,705
206
592
2,530
554
12,692
40,799
36,873
24,462
12,734
17,002
22,802
43,658
27,637
17,393
6,391
2,399
2,930
1,593
93,982
172
152,497
1,299
645
2,034
3,456
2,112
1,414
1,651
137
1,164
2,510
12,444
31,093
19,505
7,895
5,349
3,067
3,402
96,492
40,692
15,171
7,186
2,228
3,551
25,799
98,268
29
40,698
15,325
7,280
3,655
2,252
3,580
915,726
406,765
271,868
224,126
143,619
302,517
778,196
10,677
3,053,494
827
2,048
14,598
1,492
15,581
35,463
11,054
8,362
17,959
3,911
5,872
10,294
9,218
66,670
927,607
416,012
291,875
242,635
150,983
328,392
787,446
Troubled Debt Restructurings (“TDR”)
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 March 31, 2022, and December 31, 2021. The allowance for credit losses on nonaccrual loans represents specific loan reserves, while the allowance on accrual loans represents collectively evaluated estimated losses.
Related
Total TDR
Loan Balance
Total Related
2,567
810
2,976
5,543
914
2,332
327
1,839
4,171
1,529
106
471
1,752
752
1,693
344
3,445
1,096
Total troubled debt restructurings
10,022
2,466
6,508
448
16,530
2,914
5,784
1,370
54
27
1,547
2,122
488
1,292
480
10,799
2,378
At March 31, 2022, and December 31, 2021, there were no commitments to lend additional amounts on these loans.
During the three months ended March 31, 2022, there was a total of $6.3 million 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-month period ended March 31, 2021. There was no interest income recognized on loans modified as TDRs during the three months ended March 31, 2022.
The Company had $752 thousand in agricultural loans that subsequently defaulted on their modified terms within the twelve months preceding March 31, 2022, as compared to no loans at March 31, 2021. Default is determined at 90 or more days past due, charge-off, or foreclosure.
As of March 31, 2022, the Company had no loans deferred as compared to December 31, 2021, with 20 deferrals of either the full loan payment or the principal component of the loan payment on outstanding loan balances of $36.3 million 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, Consolidated Appropriations 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 December 31, 2021. There were no CARES Act deferred loans at March 31, 2022.
3 months principal and interest, then 6 months principal only
31,884
3,052
34,936
6 months principal and interest, then 9 months principal only
971
1,369
32,855
3,450
36,305
The classification status of loans participating in the payment deferral program at December 31, 2021, is listed below. There were no such deferrals at March 31, 2022.
Unclassified
Classified
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit loss expense recognized within other non-interest expense on the consolidated statements of income and included in other liabilities on the consolidated balance sheets. The estimated credit loss includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate of expected credit loss is based on the historical loss rate for the class of loan the commitments would be classified as if funded.
The following table lists allowance for credit losses on off-balance-sheet credit exposures as of March 31, 2022, and December 31, 2021.
450
484
417
1,323
343
397
Total allowance for credit losses
1,229
2,223
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 March 31, 2022, the portfolio of interest rate swaps had a weighted average maturity of 8.6 years, a weighted average pay rate of 4.63% and a weighted average rate received of 3.17%. At December 31, 2021, the portfolio of interest rate swaps had a weighted average maturity of 8.8 years, a weighted average pay rate of 4.63% and a weighted average rate received of 3.11%.
Interest Rate Swaps Designated as Cash Flow Hedges
The Company acquired a swap agreement designed to offset interest expense of acquired subordinated debentures. This agreement is designated as a cash flow hedge and is marked to market through other comprehensive income. At March 31, 2022, this interest rate swap had a maturity of 13.5 years, a pay rate of 2.81% and a rate received of 2.00%. At December 31, 2021, this interest rate swap had a maturity of 13.7 years, a pay rate of 2.81% and a rate received of 1.92%.
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 March 31, 2022, this portfolio of interest rate swaps had a weighted average maturity of 7.8 years, weighted average pay rate of 4.37% and a weighted average rate received of 4.18%. At December 31, 2021, this portfolio of interest rate swaps had a weighted average maturity of 8.2 years, weighted average pay rate of 4.35% and weighted average rate received of 4.16%.
Reconciliation of Derivative Fair Values and Gains/(Losses)
The notional amount of a derivative contract is a factor in determining periodic interest payments or cash flows received or paid. The notional amount of derivatives serves as a level of involvement in various types of derivatives. The notional amount does not represent the Company’s overall exposure to credit or market risk, generally, the exposure is significantly smaller.
The following table shows the notional balances and fair values (including net accrued interest) of the derivatives outstanding by derivative type at March 31, 2022, and December 31, 2021.
Notional
Derivative
Assets
Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps
26,164
1,116
26,663
Derivatives designated as cash flow hedges:
7,500
1,184
602
Total derivatives designated as hedging relationships
33,664
2,300
34,163
Derivatives not designated as hedging instruments:
146,849
1,419
1,499
150,780
4,419
5,184
Total derivatives not designated as hedging
instruments
180,513
3,719
184,943
5,021
5,553
Cash collateral
(4,311
(8,441
Netting adjustments
3,589
2,994
Net amount presented in Balance Sheet
7,308
777
8,015
The table below lists designated and qualifying hedged items in fair value hedges at March 31, 2022, and December 31, 2021.
Carrying Amount
Hedging Fair Value Adjustment
Fair Value Adjustments on Discontinued Hedges
Commercial real estate loans
26,161
(1,145
26,661
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 months period ended March 31, 2022 and 2021, the Company recorded net gains (losses) on derivatives and hedging activities.
Total net gain (loss) related to derivatives designated as hedging instruments
Total net gain (loss) related to derivatives designated as cash flow hedges
Total net gains (losses) related to hedging relationships
Economic hedges:
675
350
Total net gains (losses) related to derivatives not
designated as hedging instruments
Net gains (losses) on derivatives and hedging activities
713
The following table shows the recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Company’s net interest income for the three-month periods ended March 31, 2022 and 2021.
Gain/(Loss)
on Derivatives
on Hedged
Items
Net Fair Value
Hedge
Effect of
Derivatives on
Net Interest
Income
1,396
(1,358
(157
(204
(28
NOTE 5 – LEASE OBLIGATIONS
Right-of-use asset and lease obligations by type of property for the periods ended March 31, 2022, and December 31, 2021, are listed below.
Operating Leases
Right-of-Use
Asset
Lease
Liability
Weighted
Average
Lease Term
in Years
Discount
Rate
Land and building leases
5,805
5,773
13.3
2.31
%
Total operating leases
5,963
5,928
2.30
Operating lease costs for the three months ended March 31, 2022 and 2021, are listed below.
Operating lease cost
208
Short-term lease cost
Variable lease cost
Total operating lease cost
220
135
There were no sales and leaseback transactions, leverage leases, lease transactions with related parties or leases that had not yet commenced during the three months ended March 31, 2022.
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
748
Due after one year through two years
652
Due after two years through three years
553
Due after three years through four years
556
Due after four years through five years
Thereafter
3,869
Total undiscounted cash flows
6,931
Discount on cash flows
(1,158
Total operating lease liability
NOTE 6 – BORROWINGS
Federal funds purchased and retail repurchase agreements as of March 31, 2022, and December 31, 2021, are listed below.
Federal funds purchased
Retail repurchase agreements
Securities sold under agreements to repurchase (retail repurchase agreements) consist of obligations of the Company to other parties. The obligations are secured by residential mortgage-backed securities held by the Company with a fair value of $56,714 and $55,605 at March 31, 2022, and December 31, 2021. The agreements are on a day-to-day basis and can be terminated on demand.
The following table presents the borrowing usage and interest rate information for federal funds purchased and retail repurchase agreements at March 31, 2022, and December 31, 2021.
Average daily balance during the period
54,209
45,819
Average interest rate during the period
0.25
0.23
Maximum month-end balance year-to-date
52,117
Weighted average interest rate at period-end
Federal Home Loan Bank advances as of March 31, 2022, are as follows.
Weighted Average Rate
Weighted Average Term in Years
Federal Home Loan Bank line of credit advances
0.47%
Federal Home Loan Bank fixed-rate term advances
30,000
0.45%
Total Federal Home Loan Bank advances
There were no Federal Home Loan Bank line of credit advances outstanding as of December 31, 2021.
At March 31, 2022, and December 31, 2021, the Company had undisbursed advance commitments (letters of credit) with the Federal Home Loan Bank of $14,575 and $17,025. These letters of credit were obtained in lieu of pledging securities to secure public fund deposits that are over the FDIC insurance limit.
The advances, Mortgage Partnership Finance credit enhancement obligations and letters of credit were collateralized by certain qualifying loans of $520,928 and securities of $13,598 for a total of $534,526 at March 31, 2022, and qualifying loans of $694,892 and securities of $15,409 for a total of $710,302 at December 31, 2021. Based on this collateral and the Company’s holdings of Federal Home Loan Bank stock, the Company was eligible to borrow an additional $467,904 and $691,149 at March 31, 2022, and December 31, 2021.
Federal Reserve Bank discount window
At March 31, 2022, to support the $401,841 borrowing capacity from the Federal Reserve Bank, the Company has pledged loans with an outstanding balance of $472,655 and securities with a fair value of $38,850. No borrowings were secured from this facility at periods ended March 31, 2022, or December 31, 2021.
Bank stock loan
The Company entered into an agreement with an unaffiliated financial institution that provided for a maximum borrowing facility of $40,000, secured by the Company’s stock in Equity Bank. The loan was renewed and amended on June 30, 2020, with a maturity date of August 15, 2021, and was extended to February 11, 2022. 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.
The loan was renewed and amended on February 11, 2022, with a new maturity date of February 11, 2023. With this amendment, the maximum borrowing amount was decreased from $40,000 to $25,000. Each note will bear interest at the greater of a variable interest rate equal to the prime rate published in the “Money Rates” section of The Wall Street Journal (or any generally recognized successor), floating daily, or a floor of 3.25%. The Company is also required to pay an unused commitment fee in an amount equal to 20 basis points per annum on the unused portion of the maximum borrowing facility due on the maturity date of the renewal.
There were no outstanding principal balances on the bank stock loan at March 31, 2022, or December 31, 2021.
The terms of the borrowing facility require the Company and Equity Bank to maintain minimum capital ratios and other covenants. In the event of default, the lender has the option to declare all outstanding balances immediately due. The Company believes it is in compliance with the terms of the borrowing facility and has not been otherwise notified of noncompliance.
Subordinated debt as of March 31, 2022, and December 31, 2021, are listed below.
Subordinated debentures
23,006
22,924
Subordinated notes
73,004
72,961
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.
26
American State Bank Statutory Trust I, (“ASBSTI”): The trust preferred securities issued by ASBSTI accrue and pay distributions quarterly at three-month LIBOR plus 1.80% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on September 15, 2035, or upon earlier redemption.
Subordinated debentures as of March 31, 2022, and December 31, 2021, are listed below.
CTII subordinated debentures
10,310
2.24
13.0
CTIII subordinated debentures
5,155
2.72
15.2
CFSTI subordinated debentures
4.22
10.7
ASBI subordinated debentures
7,732
2.63
13.5
Total contractual balance
28,352
Fair market value adjustments
(5,346
Total subordinated debentures
2.12
2.08
15.5
3.47
11.0
2.00
13.8
(5,428
On June 29, 2020, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and institutional accredited investors pursuant to which the Company issued and sold $42,000 in aggregate principal amount of its 7.00% Fixed-to-Floating Rate Subordinated notes due 2030. The notes were issued under an Indenture, dated as of June 29, 2020 (the “Indenture”), by and between the Company and UMB Bank, N.A., as trustee. The notes will mature on June 30, 2030. From June 29, 2020, through June 29, 2025, the Company will pay interest on the notes semi-annually in arrears on June 30 and December 30 of each year, commencing on December 30, 2020, at a fixed interest rate of 7.00%. Beginning June 30, 2025, the notes convert to a floating interest rate, to be reset quarterly, equal to the then-current Three-Month Term SOFR, as defined in the Indenture, plus 688 basis points. Interest payments during the floating-rate period will be paid quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, commencing on September 30, 2025. On July 23, 2020, the Company closed on an additional $33,000 of subordinated notes with the same terms as the June 29, 2020 issue.
Subordinated notes as of March 31, 2022, are listed below.
75,000
7.00
8.3
Total principal outstanding
(1,996
Total subordinated notes
Subordinated notes as of December 31, 2021, are listed below.
8.5
(2,039
Future principal repayments
Future principal repayments of the March 31, 2022, outstanding balances are as follows.
Retail Repurchase Agreements
FHLB Advances
Subordinated Debentures
Subordinated Notes
98,199
103,352
201,551
NOTE 7 – STOCKHOLDERS’ EQUITY
Preferred stock
The Company’s articles of incorporation provide for the issuance of shares of preferred stock. At March 31, 2022, and December 31, 2021, there was no preferred stock outstanding.
The Company’s articles of incorporation provide for the issuance of 45,000,000 shares of Class A voting common stock (“Class A common stock”) and 5,000,000 shares of Class B non-voting common stock (“Class B common stock”), both of which have a par value of $0.01 per share.
The following table presents shares that were issued, held in treasury or were outstanding at March 31, 2022, and December 31, 2021.
Class A common stock – issued
20,156,293
20,077,059
Class A common stock – held in treasury
(3,701,327
(3,316,944
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 $36 and $25
was recorded for the three months ended March 31, 2022, and March 31, 2021. 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, 2020 to February 14, 2021
13.68
February 15, 2021 to August 14, 2021
16,034
20.50
58
August 15, 2021 to February 14, 2022
27.37
69
Treasury stock is stated at cost, determined by the first-in first-out method.
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 the Company to acquire a specific dollar amount or number of shares and it could be extended, modified or discontinued at any time without notice. Under this program, during the years ended December 31, 2021 and 2020, the Company repurchased a total of 679,557 shares of the Company’s outstanding common stock at an average price paid of $24.12 per share.
In September of 2021, the Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock, from time to time, beginning October 29, 2021, and concluding October 28, 2022. The repurchase program 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. Under this program, during the year ended December 31, 2021, the Company repurchased a total of 132,873 shares of the Company’s outstanding common stock at an average price paid of $32.99 per share. During the three months ended March 31, 2022, the Company repurchased a total of 384,383 shares of the Company’s outstanding common stock at an average price paid of $32.21 per share. At March 31, 2022, there are 482,744 shares remaining available for repurchase under the program.
Accumulated other comprehensive income (loss)
At March 31, 2022, and December 31, 2021, accumulated other comprehensive income (loss) consisted of (i) the after-tax effect of unrealized gains (losses) on available-for-sale securities and (ii) unrealized gains (losses) on cash flow hedges.
Components of accumulated other comprehensive income as of March 31, 2022, and December 31, 2021, are listed below.
Available-for-
Sale
Securities
Cash Flow Hedges
Net unrealized or unamortized gains (losses)
(66,991
540
(66,451
16,574
(135
16,439
(50,417
405
2,427
(58
2,369
(607
(593
1,820
NOTE 8 – REGULATORY MATTERS
Banks and bank holding companies (on a consolidated basis) are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The Basel III rules require banks to maintain a Common Equity Tier 1 capital ratio of 6.5%, a total Tier 1 capital ratio of 8%, a total capital ratio of 10% and a leverage ratio of 5% to be deemed “well capitalized” for purposes of certain rules and prompt corrective action requirements. The risk-based ratios include a “capital conservation buffer” of 2.5% which can limit certain activities of an institution, including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the buffer amount. Management believes as of March 31, 2022, the Company and Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and acquisitions, and capital restoration plans are required.
As of March 31, 2022, the most recent notifications from the federal regulatory agencies categorized Equity Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Equity Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed Equity Bank’s category.
The Company’s and Equity Bank’s capital amounts and ratios at March 31, 2022, and December 31, 2021, 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
Total capital to risk weighted assets
Equity Bancshares, Inc.
576,173
15.88
381,017
10.50
N/A
Equity Bank
549,179
15.15
380,516
362,396
10.00
Tier 1 capital to risk weighted assets
457,767
12.62
308,442
8.50
503,836
13.90
308,037
289,917
8.00
Common equity Tier 1 capital to risk weighted assets
434,762
11.98
254,011
253,678
235,558
6.50
Tier 1 leverage to average assets
9.06
202,096
4.00
9.98
201,890
252,362
5.00
571,514
15.96
376,013
546,503
15.28
375,646
357,758
453,718
12.67
304,391
501,711
14.02
304,094
286,206
430,794
12.03
250,675
250,430
232,543
9.09
199,563
10.07
199,381
249,226
Equity Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.
NOTE 9 – EARNINGS PER SHARE
The following table presents earnings per share for the three months ended March 31, 2022 and 2021.
Three months ended
Basic:
Net income (loss) allocable to common stockholders
Weighted average common shares outstanding
16,647,851
14,455,986
Weighted average vested restricted stock units
4,705
8,305
Weighted average shares
16,652,556
14,464,291
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
102,763
168,846
Dilutive effects of the assumed vesting of restricted stock units
112,195
99,095
Dilutive effects of the assumed exercise of ESPP purchases
1,638
1,851
Average shares and dilutive potential common shares
16,869,152
14,734,083
Diluted earnings (loss) per common share
Average shares not included in the computation of diluted earnings per share because they were antidilutive are shown in the following table as of March 31, 2022 and 2021.
Stock options
201,758
305,493
Restricted stock units
3,505
34,446
Total antidilutive shares
205,263
339,939
NOTE 10 – FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels of inputs that may be used to measure fair values are defined as follows.
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Level 1 inputs are considered to be the most transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although, in some instances, third party price indications may be available, limited trading activity can challenge the implied value of those quotations.
31
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the hierarchy.
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The fair values of securities available-for-sale and equity securities with readily determinable fair value are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as Level 1. For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities, generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The Company’s available-for-sale securities, including U.S. Government sponsored entity securities, residential mortgage-backed securities (all of which are issued or guaranteed by government sponsored agencies), corporate securities, Small Business Administration securities, and State and Political Subdivision securities are classified as Level 2.
The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate yield curves (Level 2 inputs) adjusted for credit risk attributable to the seller of the interest rate derivative. Cash collateral received from or delivered to a derivative counterparty is classified as Level 1.
Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables as of March 31, 2022, and December 31, 2021.
(Level 1)
(Level 2)
(Level 3)
Assets:
Available-for-sale securities:
Derivative assets:
Derivative assets (included in other assets)
Cash collateral held by counterparty and netting adjustments
Total derivative assets
Other assets:
Equity securities with readily determinable fair value
605
Total other assets
247,450
1,113,357
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)
(722
Total derivative liabilities
Government-sponsored residential mortgage-
backed securities
644
159,240
1,176,861
(5,447
There were no material transfers between levels during the three months ended March 31, 2022, or the year ended December 31, 2021. 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 as of March 31, 2022, and December 31, 2021.
Individually evaluated loans:
1,765
3,080
2,570
1,780
2,818
Other real estate owned:
2,175
5,201
2,793
3,758
2,101
4,068
2,043
The Company did not record any liabilities for which the fair value was measured on a non-recurring basis at March 31, 2022, or December 31, 2021.
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 as of March 31, 2022, and December 31, 2021.
Fair Value
Valuation
Technique
Unobservable
Input
Range
(weighted average) or Multiple of Earnings
Individually evaluated real estate loans
12,013
Sales
Comparison
Approach
Adjustments for
differences between
comparable sales
7% - 44%
(25%)
Individually evaluated other real estate owned
3% - 20%
(12%)
17,921
5% - 31%
(18%)
2,234
34
Carrying amount and estimated fair values of financial instruments at period end were as follows for March 31, 2022, and December 31, 2021.
Carrying
Estimated
Financial assets:
1,109,638
Loans, net of allowance for credit losses
3,185,946
Federal Reserve Bank and Federal Home
Loan Bank stock
Derivative assets
Cash collateral held by derivative counterparty
and netting adjustments
4,684,232
4,675,191
337,500
1,151,745
Financial liabilities:
4,381,007
Federal funds purchased and retail
repurchase agreements
76,754
Interest payable
1,714
Derivative liabilities
4,593,677
4,598,764
4,599,486
35
1,171,841
3,100,232
4,743,089
4,736,059
419,193
1,216,634
4,421,441
80,880
3,187
4,592,880
4,602,236
4,607,683
The fair value of off-balance-sheet items is not considered material.
NOTE 11 – COMMITMENTS AND CREDIT RISK
The Company extends credit for commercial real estate mortgages, residential mortgages, working capital financing and loans to businesses and consumers.
Commitments to Originate Loans and Available Lines of Credit
Commitments to originate loans and available lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments and lines of credit may expire without being drawn upon, the total commitment and lines of credit amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days, and which are intended for sale to investors in the secondary market.
The contractual amounts of commitments to originate loans and available lines of credit as of March 31, 2022, and December 31, 2021, were as follows.
Fixed
Variable
Commitments to make loans
95,136
176,994
101,923
173,976
Mortgage loans in the process of origination
8,384
5,253
7,404
2,353
Unused lines of credit
118,300
308,335
106,291
317,249
The fixed rate loan commitments have interest rates ranging from 2.49% to 18.00% and maturities ranging from 1 month to 368 months.
Standby Letters of Credit
Standby letters of credit are irrevocable commitments issued by the Company to guarantee the performance of a customer to a third party once specified pre-conditions are met. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.
The contractual amounts of standby letters of credit as of March 31, 2022, and December 31, 2021, were as follows.
Standby letters of credit
5,735
14,656
5,799
NOTE 12 – LEGAL MATTERS
The Company is party to various matters of litigation in the ordinary course of business. The Company periodically reviews all outstanding pending or threatened legal proceedings and determines if such matters will have an adverse effect on the business, financial condition, results of operations or cash flows. A loss contingency is recorded when the outcome is probable and reasonably able to be estimated. Any loss contingency described below has been identified by the Company as reasonably possible to result in an unfavorable outcome for the Company or the Bank.
Equity Bank is party to a lawsuit was filed on January 28, 2022, in the Sedgwick County Kansas District Court on behalf of one of our customers alleging improperly collected overdraft fees. The plaintiff seeks to have the case certified as a class action. The Bank has filed a motion to dismiss this claim on its merits and on the grounds that the defendant must litigate any such claims in arbitration. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against the claim asserted. At this time, the Company is unable to reasonably estimate the loss amount of this litigation.
Equity Bank is party to a lawsuit was filed on February 2, 2022, in Jackson County, Missouri District Court against the Bank on behalf of a Missouri customers alleging improperly collected overdraft fees. The plaintiff seeks to have the case certified as a class action. The Company intends to file a motion to dismiss the claims. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against the claims now asserted. At this time, the Company is unable to reasonably estimate the loss amount of this litigation.
NOTE 13 – REVENUE RECOGNITION
The majority of the Company’s revenues come from interest income on financial instruments, including loans, leases, securities and derivatives, which are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented with non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services
within the scope of ASC 606 include service charges and fees on deposits, debit card income, investment referral income, insurance sales commissions and other non-interest income related to loans and deposits.
Except for gains or losses from the sale of other real estate owned, all of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income. The following table presents the Company’s sources of non-interest income for the three months ended March 31, 2022 and 2021.
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
143
122
Trust income
Insurance sales commissions
Recovery on zero-basis purchased loans(a)
Income (loss) from equity method investments(a)
(55
Other non-interest income related to loans
and deposits
1,931
968
Other non-interest income not related to
loans and deposits(a)
Total other non-interest income
(a) Not within the scope of ASC 606.
NOTE 14 – BUSINESS COMBINATIONS AND BRANCH SALES
At the close of business on October 1, 2021, the Company acquired the 100% of the outstanding common shares of American State Bancshares, Inc. (“ASBI”), based in Wichita, Kansas. Costs related to this acquisition during the three months ended March 31, 2022, were $187 ($141 on an after-tax basis).
At the close of business on October 25, 2021, the Company announced 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 from Equity Bank. For the quarter ended March 31, 2022, these three branches had average gross loans outstanding of $28.8 million and average deposits outstanding of $68.9 million. This transaction is scheduled to close on June 24, 2022.
At the close of business on December 3, 2021, the Company acquired the assets and assumed the deposits and certain other liabilities of three bank locations in St. Joseph, Missouri, from Security Bank of Kansas City, based in Kansas City Kansas (“Security”). Costs related to this acquisition during the three months ended March 31, 2022, were $136 ($102 on an after-tax basis).
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, 2022, 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:
Table containing selected financial data and ratios for the periods;
Overview – a general description of our business and financial highlights;
Critical Accounting Policies – a discussion of accounting policies that require critical estimates and assumptions;
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.
(Dollars in thousands, except per share data)
September 30,
June 30,
Statement of Income Data (for the quarterly period ended)
40,792
42,446
38,318
3,577
3,471
3,688
37,215
38,975
34,630
(2,125
1,058
(1,657
663
Net gain (loss) from securities transactions
381
Other non-interest income
8,982
9,191
7,450
9,100
6,695
Loss on debt extinguishment
372
4,562
4,015
460
Goodwill impairment
Other non-interest expense
29,136
33,527
26,302
25,346
24,729
10,450
15,059
19,581
Provision for income taxes
3,286
4,415
Net income (loss)
10,466
11,773
15,166
0.62
0.82
1.06
0.61
0.80
1.03
Balance Sheet Data (at period end)
142,318
139,321
1,157,423
1,041,613
998,100
4,108
6,183
8,609
Gross loans held for investment
2,685,911
2,815,061
2,795,740
52,763
51,834
Loans held for investment, net of allowance for credit losses
2,633,148
2,763,227
2,740,215
Goodwill and core deposit intangibles, net
68,295
69,344
44,564
45,594
46,624
Mortgage servicing asset, net
276
Naming rights, net
1,076
1,087
1,098
1,109
1,119
4,263,268
4,268,216
4,196,184
3,662,777
3,687,555
3,634,530
Borrowings
194,209
151,891
127,167
144,300
138,053
3,845,519
3,855,221
3,798,369
417,749
412,995
Tangible common equity*
382,393
429,924
372,087
366,292
350,072
Performance ratios
Return on average assets (ROAA) annualized
1.24
1.09
1.44
1.48
Return on average equity (ROAE) annualized
12.88
7.37
11.05
15.06
15.45
Return on average tangible common equity (ROATCE)
annualized*
15.85
8.97
13.27
17.98
18.57
Yield on loans annualized
4.61
4.36
5.43
4.75
4.59
Cost of interest-bearing deposits annualized
0.22
0.28
0.31
0.36
Net interest margin annualized
3.38
3.13
3.86
3.50
3.31
Efficiency ratio*
60.36
72.25
56.65
58.85
64.18
Non-interest income / average assets annualized
0.72
0.73
0.86
0.66
Non-interest expense / average assets annualized
2.34
2.98
2.85
2.45
2.44
Dividend payout ratio
8.60
13.05
9.96
0.00
Capital Ratios
Tier 1 Leverage Ratio
9.07
9.02
8.88
8.73
Common Equity Tier 1 Capital Ratio
11.81
12.39
12.41
12.53
Tier 1 Risk Based Capital Ratio
12.43
12.90
12.93
13.08
Total Risk Based Capital Ratio
15.66
16.63
16.74
17.02
Equity / Assets
8.90
9.74
9.80
9.68
9.48
Tangible common equity to tangible assets*
7.63
8.48
8.82
8.68
8.44
Book value per share
27.47
29.87
29.08
28.76
27.66
Tangible common book value per share*
23.24
25.65
25.90
25.51
24.34
Tangible common book value per diluted share*
22.95
25.22
25.42
24.98
23.87
* The value noted is considered a Non-GAAP financial measure. For a reconciliation of Non-GAAP financial measures see “Non-GAAP Financial Measures” in this Item 2.
We are a 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 69 full-service banking sites located in Arkansas, Kansas, Missouri, and Oklahoma. As of March 31, 2022, we had consolidated total assets of $5.08 billion, total loans held for investment, net of allowance, of $3.19 billion, total deposits of $4.38 billion, and total stockholders’ equity of $452.0 million. During the three month period ended March 31, 2022, the Company had net income of $15.7 million. The Company had net income of $15.1 million for the three month period ended March 31, 2021.
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, 2021, audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 9, 2022. The preparation of our financial statements in accordance with GAAP requires management to make a number of judgements and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements. Our accounting policies are described in “NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Notes to Interim Consolidated Financial Statements.
The accounting policies that management believes are the most critical to an understanding of our financial condition and results of operations and require complex management judgement are described below.
Allowance for Credit Losses: The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications, and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date; however, determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. The allowance for credit losses for loans, as reported in our consolidated balance sheets, is adjusted by provision for credit losses, which is recognized in earnings and is reduced by the charge-off of loan amounts, net of recoveries.
The allowance represents management’s best estimate, but significant changes in circumstances relating to loan quality and economic conditions could result in significantly different results than what is reflected in the consolidated balance sheet as of March 31, 2022. Likewise, an improvement in loan quality or economic conditions may allow for a further reduction in the required allowance. Changing credit conditions would be expected to impact realized losses, driving variability in specifically assessed allowances, as well as calculated quantitative and more subjectively analyzed qualitative factors. Depending on the volatility in these conditions, material impacts could be realized within the Company’s operations. Likewise, significant changes in economic
conditions, both positive and negative, could result in unexpected realization of provision or reversal of allowance for credit losses due to its impact on the quantitative and qualitative inputs to the Company’s calculation. Under the CECL methodology, the impact of these conditions has the potential to further exacerbate periodic differences due to its life of loan perspective. The life of loans calculated under the methodology is based in contractual duration and modified for prepayment expectations, making significant variation in periodic results possible due to changing contractual or adjusted duration of the assets within the calculation.
Goodwill: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized and expensed in the period identified. Goodwill will be assessed more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired. We have selected December 31 as the date to perform our annual goodwill impairment test. Goodwill is the only intangible asset with an indefinite useful life. For the quarter ended March 31, 2022, based on the improving market conditions and strong earnings performance by the Company, management has determined there was not evidence of a triggering event as of or during the period then ended. Based on this qualitative analysis and conclusion, it was determined that a more robust quantitative assessment was not necessary at our measurement date.
When performing quantitative goodwill impairment assessments, management is required to estimate the fair value of the Company’s equity in a change in control transaction. To complete this valuation, management is required to derive assumptions related to industry performance, reporting unit business performance, economic and market conditions, and various other assumptions, many of which require significant management judgement.
Although management believes that the judgements and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.
We generate our revenue from interest income and fees on loans, interest and dividends on investment securities, and non-interest income, such as service charges and fees, debit card income, trust and 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, occupancy expenses and technology.
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 March 31, 2022, compared with three months ended March 31, 2021: Net income and net income allocable to common stockholders for the three months ended March 31, 2022, was $15.7 million as compared to a net income and net income allocable to common stockholders of $15.1 million for the three months ended March 31, 2021, an increase of $575 thousand. The increase during the three-month period ended March 31, 2022, was largely due to an increase in loan interest income of $5.3 million, taxable securities interest income of $1.6 million, an increase in other non-interest income of $1.1 million and a decrease in provision for income taxes. This increase was partially offset by a lower reversal of provision for credit loss of $5.3 million and an increase in non-interest expense of $4.6 million.
Net Interest Income and Net Interest Margin Analysis
Net interest income is the difference between interest income on interest-earning assets, including loans and securities, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. To evaluate net interest income, management measures and monitors (1) yields on loans and other interest-earning assets, (2) the costs of deposits and other funding sources, (3) the net interest spread, and (4) net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources of funds. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume
change,” and is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “yield/rate change.”
Three months ended March 31, 2022, compared with three months ended March 31, 2021: The following table shows the average balance of each principal category of assets, liabilities, and stockholders’ equity and the average yields on interest-earning assets and average rates on interest-bearing liabilities for the three months ended March 31, 2022 and 2021. The yields and rates are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.
Average Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31,
(Dollars in thousands)
Interest
Income/
Expense
Yield/
Rate(3)(4)
Interest-earning assets:
Loans(1)
575,563
7,761
5.47
803,012
9,234
4.66
1,190,128
13,451
4.58
971,825
11,441
4.77
Real estate construction
342,536
3,299
3.91
255,677
3.45
632,581
5,665
3.63
394,329
4,452
202,145
5.34
140,875
1,696
4.88
149,676
2,316
6.28
94,787
1,037
4.44
103,158
1,151
4.53
76,413
963
5.11
3,195,787
2,736,918
Taxable securities
1,285,942
1.70
839,349
1.84
Nontaxable securities
111,479
2.38
108,104
122,181
1.00
206,769
0.56
Total interest-earning assets
4,715,389
3.67
3,891,140
3.73
Non-interest-earning assets:
9,622
11,123
103,693
89,807
121,033
85,839
Goodwill, core deposit and other intangibles, net
70,181
48,376
Other non-interest-earning assets
88,203
17,467
5,108,121
4,143,752
Interest-bearing liabilities:
Interest-bearing demand deposits
1,213,541
579
0.19
1,029,353
582
Savings and money market
1,320,561
0.13
1,049,704
389
0.15
2,534,102
996
0.16
2,079,057
Certificates of deposit
629,675
726
0.47
611,102
1,439
0.96
3,163,777
2,690,159
FHLB term and line of credit advances
9,943
0.37
10,013
95,931
6.76
87,715
7.19
Other borrowings
54,221
41,632
Total interest-bearing liabilities
3,323,872
0.41
2,829,519
0.58
Non-interest-bearing liabilities and
stockholders’ equity:
Non-interest-bearing checking accounts
1,230,102
887,466
Non-interest-bearing liabilities
61,548
31,129
Stockholders’ equity
492,599
395,638
Interest rate spread
3.26
3.15
Net interest margin(2)
Total cost of deposits, including non-interest
bearing deposits
4,393,879
3,577,625
0.27
Average interest-earning assets to
interest-bearing liabilities
141.86
137.52
(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 March 31, 2022 and 2021.
Analysis of Changes in Net Interest Income
For the Three Months Ended March 31, 2022 and 2021
Increase (Decrease) Due to:
Increase /
Volume(1)
Yield/Rate(1)
(Decrease)
(2,896
1,423
(1,473
2,482
(472
2,010
311
1,121
2,275
(1,062
1,213
795
967
746
533
1,279
308
(120
188
4,520
785
5,305
1,890
(298
1,592
(91
(69
(149
161
6,283
6,840
(98
(3
91
(63
186
(161
(755
(713
228
(916
(688
(56
(97
375
(1,065
(690
Net Interest Income
5,908
1,622
7,530
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.
Interest income on interest-earning assets increased $6.8 million for the quarter ended March 31, 2022, as compared to the quarter ended March 31, 2021. Of this increase, $4.5 million and $1.9 million are attributable to increases in loan and taxable securities volume. Yield on loans increased by 2 basis points and yield on taxable securities decreased by 14 basis points in the first quarter of 2022.
The reduction in expense on interest-bearing deposits was primarily due to a decrease in the cost of certificates of deposits from 0.96% to 0.47%, a 49 basis point decrease, along with a general decrease in the cost of other interest-bearing deposits, partially offset by increases in volume of interest-bearing deposits. 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 the depressed interest rate environment over the past year.
When compared to the quarter ended March 31, 2021, net interest margin increased 7 basis points during the quarter ended March 31, 2022. Comparing the same periods, net interest spread increased by 11 basis points to 3.26% from 3.15%, largely due to lower cost of interest-bearing deposits and subordinated debt.
44
Provision for Credit Losses
We maintain an allowance for credit losses for estimated losses in our loan portfolio. The allowance for credit losses is increased by a provision for credit losses, which is a charge to earnings, and subsequent recoveries of amounts previously charged-off, but is decreased by charge-offs when the collectability of a loan balance is unlikely. Management estimates the allowance balance required using past loan loss experience within the Company’s portfolio. This historical loss calculation is then modified to reflect quantitative economic circumstances based on evidenced economic conditions and regression formulas, which incorporate lag factors in identifying a sufficiently predictive adjusted-R square, as well as qualitative factors not inherently reflected in our historical loss or quantitative economic inputs. Included in our qualitative assessment is the consideration of a prospective adjustment based on economic conditions over the preceding 12 months, which is considered the Company’s reasonable, supportable forecast period. As these factors change, the amount of the credit loss provision changes.
Three months ended March 31, 2022, compared with three months ended March 31, 2021
The reversal of provision for credit losses for the three months ended March 31, 2022 and 2021, was $412 thousand and $5.8 million. The provision reversal for the quarter ending March 31, 2022, was largely due to release of reserves on specifically analyzed loans, partially offset by increased perceived economic risk due to recent periods of inflation, geopolitical uncertainty, and impacts of monetary policy. The large reversal of provision in the quarter ended March 31, 2021, was primarily due to improvements in economic inputs to the CECL model at that time, along with improvements in historical loss experience. Net charge-offs for the three months ended March 31, 2022, were $363 thousand compared to net charge-offs of $65 thousand for the three months ended March 31, 2021. For the three months ended March 31, 2022, gross charge-offs were $534 thousand, offset by gross recoveries of $171 thousand. In comparison, gross charge-offs were $291 thousand for the three months ended March 31, 2021, offset by gross recoveries of $226 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.
The following table provides a comparison of the major components of non-interest income for the three months ended March 31, 2022 and 2021.
2022 vs. 2021
Change
926
58.0
278
11.8
(373
(39.9
)%
264
43.9
17.2
134
83.8
Recovery on zero-basis purchased loans
(14
(41.2
Income (loss) from equity method investments
1,938
970
99.8
Total other
1,114
86.3
6,773
2,209
32.6
Net gain (loss) on acquisition
(100.0
135.3
2,310
34.4
Other non-interest income increased $2.3 million during the three months ended March 31, 2022, as compared to the same period in 2021. The increase is largely attributable to increases in services charges and fees of $926 thousand and other non-interest income of $968 thousand. Included in service charges and fees were increases in non-sufficient funds fees of $369 thousand and
45
statement fees of $154 thousand, with the remaining increase primarily from service charges. Included in other non-interest income were increases in credit card fees of $135 thousand, loan repurchase obligation reversal of $502, and increases in derivatives not designated as hedging relationships of $325 thousand.
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.
Non-Interest Expense
For the three months ended March 31, 2022, non-interest expense totaled $29.5 million, an increase of $4.6 million, when compared to the three months ended March 31, 2021. Changes in the various components of non-interest expense for the three months ended March 31, 2022 and 2021, are discussed in more detail in the following table.
2,346
18.4
802
33.9
41.5
98
9.1
43.1
(110
(19.0
(235
(56.6
14.6
6.1
Amortization of core deposit intangible
1.5
(22.3
(6
(120.0
66
3.1
4,407
17.8
112.5
4,578
Salaries and employee benefits: There was a $2.3 million increase in salaries for the period ended March 31, 2022, as compared to the same period in 2021. The increase was primarily due to the addition of staff related to the ASBI acquisition in October 2021 and the Security acquisition in December 2021.
Data processing: Data processing costs increased $1.1 million for the period ended March 31, 2022, as compared to the same period in 2021. The increase in expense was primarily from the additional accounts added as part of the merger with ASBI and Security, and the expense categories are comprised of debit card processing, software licensing, and online banking services.
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 $66 thousand increase, or 3.1%, between quarters ending March 31, 2022 and 2021.
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.
46
The efficiency ratio was 60.4% for the three months ended March 31, 2022, compared with 64.2% for the three months ended March 31, 2021. 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 March 31, 2022, compared with three months ended March 31, 2021: The effective income tax rate for the 3-month period ended March 31, 2022 was 18.8% as compared to 22.1% for the three-month period ended March 31, 2021. Income tax expense for the three-month period ended March 31, 2022, includes $96 thousand of tax benefit attributable to the settlement in stock of restricted stock units and the exercise of options and $941 thousand of benefit related to the recognition of federal tax credits.
Total assets decreased $59.0 million from December 31, 2021, to $5.08 billion at March 31, 2022. This variance was primarily due to decreases of $169.4 million in cash and due from banks, partially offset by increases of $87.7 million of loans, net of allowance for credit losses, and $25.5 million in securities. Total liabilities decreased $10.4 million to $4.6 billion at March 31, 2022. The change in total liabilities is mostly due to a decline in total deposits of $40.3 million and a $12.0 million reduction in interest payable and other liabilities, partially offset by an additional $50.0 million in Federal Home Loan Bank advances. Total stockholders’ equity decreased $48.6 million from $500.6 million at December 31, 2021, to $452.0 million at March 31, 2022, principally due to unrealized holding losses, net of tax, in the investment securities portfolio.
Loan Portfolio
The following table summarizes our loan portfolio by type of loan as of the dates indicated.
Composition of Loan Portfolio
Percent
19.4
18.0
61,684
10.9
Real estate loans:
48.0
47.1
65,986
4.4
18.9
20.2
(24,159
(3.8
6.3
514
0.3
Total real estate loans
2,364,906
73.0
2,322,565
73.6
42,341
1.8
4.6
5.3
(16,898
(10.1
3.0
(177
(0.2
Total loans held for investment
100.00
100.0
86,950
2.8
Total loans held for sale
(2,639
(62.6
Total loans held for investment (net of allowances)
87,725
Our commercial loan portfolio consists of various types of loans, most of which are generally made to borrowers located in the Wichita, Kansas City, and Tulsa Metropolitan Statistical Areas (“MSAs”), as well as various community markets throughout Arkansas, Kansas, Missouri, and Oklahoma. Most of our loan portfolio consists of commercial and industrial and commercial real estate loans and a substantial portion of our borrowers’ ability to honor their obligations is dependent on local economies in which they operate.
At March 31, 2022, gross total loans, including loans held for sale, were 74.1% of deposits and 63.9% of total assets. At December 31, 2021, gross total loans, including loans held for sale, were 71.5% of deposits and 61.5% of total assets.
We provide commercial lines of credit, working capital loans, commercial real estate loans (including loans secured by owner-occupied commercial properties), term loans, equipment financing, aircraft financing, real property acquisition and development loans, borrowing base loans, real estate construction loans, homebuilder loans, SBA loans, agricultural and agricultural real estate loans, letters of credit and other loan products to national and regional companies, real estate developers, mortgage lenders, manufacturing and industrial companies and other businesses. The types of loans we make to consumers include residential real estate loans, home equity loans, home equity lines of credit, installment loans, unsecured and secured personal lines of credit, overdraft protection, and letters of credit.
Commercial and industrial: Commercial and industrial loans include loans used to purchase fixed assets, to provide working capital or meet other financing needs of the business.
Commercial real estate: Commercial real estate loans include all loans secured by nonfarm nonresidential properties and multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.
Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences. Pools of mortgages are occasionally purchased to expand our loan portfolio and provide additional loan income.
Agricultural real estate, Agricultural, Consumer and other: Agricultural real estate loans are loans related to farmland. Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced. Consumer loans are generally secured by consumer assets but may be unsecured.
The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of March 31, 2022, are summarized in the following table.
Loan Maturity and Sensitivity to Changes in Interest Rates
As of March 31, 2022
One year
or less
After one year
through five
years
After five
years through fifteen years
After fifteen years
183,757
353,078
85,747
6,599
Real Estate:
262,545
904,694
325,625
59,270
4,370
12,797
135,739
461,022
59,388
88,276
39,454
11,726
Total real estate
326,303
1,005,767
500,818
532,018
103,339
36,318
4,690
5,730
33,438
41,016
20,852
3,107
646,837
1,436,179
612,107
547,454
Loans with a predetermined fixed interest rate
271,659
891,914
220,225
328,551
1,712,349
Loans with an adjustable/floating interest rate
375,178
544,265
391,882
218,903
1,530,228
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, 2021, are summarized in the following table.
As of December 31, 2021
172,409
300,312
88,124
6,652
247,339
834,277
355,479
49,053
6,594
14,066
136,994
480,433
53,703
83,861
47,176
13,590
307,636
932,204
539,649
543,076
113,138
41,003
6,809
6,025
36,714
40,361
18,352
3,163
629,897
1,313,880
652,934
558,916
258,334
875,796
235,609
334,122
1,703,861
371,563
438,084
417,325
224,794
1,451,766
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, current economic trends, and other factors. Loans are analyzed individually and classified based on credit risk. Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship.
For additional information, see “NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES” in the Condensed Notes to Interim Consolidated Financial Statements.
Nonperforming Assets
The following table presents information regarding nonperforming assets at the dates indicated.
Nonaccrual loans
Accruing loans 90 or more days past due
OREO acquired through foreclosure, net
7,957
7,582
Other repossessed assets
8,805
28,799
Total nonperforming assets
37,458
65,998
Ratios:
Nonperforming assets to total assets
0.74
1.28
Nonperforming assets to total loans plus OREO and repossessed assets
1.15
2.07
Generally, loans are designated as nonaccrual when either principal or interest payments are 90 days or more past due based on contractual terms, unless the loan is well secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual, or charged off, at an earlier date if collection of principal or interest is considered doubtful. When a loan is placed on nonaccrual status, unpaid interest credited to income earned in the current year is reversed against income and unpaid interest earned in prior years is charged off. Future interest income may be recorded on a
cash basis after recovery of principal is reasonably assured. Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The nonperforming loans at March 31, 2022, consisted of 168 separate credits and 129 separate borrowers. We had 7 non-performing loan relationships, totaling $10.0 million, with an outstanding balance in excess of $1.0 million as of March 31, 2022.
There are several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by lenders and we also monitor delinquency levels for any negative or adverse trends. In accordance with applicable regulation, appraisals or evaluations are required to independently value real estate and are an important element to consider when underwriting loans secured in part or in whole by real estate. The value of real estate collateral provides additional support to the borrower’s credit capacity. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
Potential Problem Loans
Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which management has concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. Potential problem loans are assigned a grade of special mention or substandard. At March 31, 2022, the Company had $49.3 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $32.6 million at December 31, 2021.
With respect to potential problem loans, all monitored and under-performing loans are reviewed and evaluated to determine if they are impaired. If we determine that a loan is impaired, then we evaluate the borrower’s overall financial condition to determine the need, if any, for possible write downs or appropriate additions to the allowance for credit losses based on the unlikelihood of full repayment of principal and interest in accordance with the contractual terms or the net realizable value of the pledged collateral.
Allowance for Credit Losses
Please see “Critical Accounting Policies – Allowance for Credit Losses” for additional discussion of our allowance policy.
In connection with our review of the loan portfolio, risk elements attributable to particular loan types or categories are considered when assessing the quality of individual loans. Some of the risk elements include the following items.
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 is 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 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.
The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data.
For the Quarters Ended,
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Agricultural Real Estate
Allowance for credit losses (ACL)
Total loans outstanding (1)
Net (charge-offs) recoveries
(222
(140
(363
Average loan balance (1)
1,532,664
630,387
3,193,593
Non-accrual loan balance
3,712
4,078
Loans to total loans outstanding
ACL to total loans
1.4
2.2
1.0
0.8
1.6
2.1
Net charge-offs to average loans
(0.1
Non-accrual loans to total loans
0.2
0.6
0.7
2.9
0.4
ACL to non-accrual loans
597.9
372.1
131.8
37.8
56.4
569.3
229.9
1,218,537
820,736
438,503
134,944
93,764
89,256
(138
(65
1,227,501
383,951
2,726,539
7,978
28,559
2,879
7,458
10,356
57,506
43.5
29.4
15.7
4.8
3.4
3.2
1.2
2.4
2.6
2.0
3.5
5.5
189.5
69.9
399.8
25.5
42.0
971.7
96.6
(1)Excluding loans held for sale.
Management believes that the allowance for credit losses at March 31, 2022, was adequate to cover current expected credit losses in the loan portfolio as of such date. There can be no assurance, however, that we will not sustain losses in future periods, which could be substantial in relation to the size of the allowance at March 31, 2022.
The allowance for credit losses on loans measured on a collective basis totaled $41.4 million, or 1.33% of the $3.11 billion in loans measured on a collective basis at March 31, 2022, compared to an allowance for credit losses of $34.3 million, or 1.12%, of the $3.06 billion in loans measured on a collective basis at December 31, 2021. The total reserve percentage held constant at 1.5% from December 31, 2021, to March 31, 2022.
We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk, to meet pledging requirements and to meet regulatory capital requirements. At March 31, 2022, securities represented 26.6% of total assets compared with 25.8% at December 31, 2021.
At the date of purchase, debt securities are classified into one of two categories: held-to-maturity or available-for-sale. We do not purchase securities for trading purposes. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held-to-maturity, carried at cost, and adjusted for the amortization of premiums and the accretion of discounts, only if management has the positive intent and ability to hold those securities to maturity. Debt securities not
51
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
At March 31, 2022, and December 31, 2021, we did not own any securities classified as held-to-maturity.
At March 31, 2022, and December 31, 2021, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which aggregate par value exceeded 10% of consolidated stockholders’ equity at the reporting dates noted.
The following tables summarize the contractual maturity of debt securities and their weighted average yields as of March 31, 2022, and December 31, 2021. 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.
52
Due in one year
Due after one
year through
five years
Due after five
years through
10 years
Due after 10
Yield
47,203
0.70
60,712
7,320
1.89
1.18
141,722
1.25
101,534
1.10
—%
1.19
Government-sponsored residential
mortgage-backed securities
70,249
1.42
194,706
1.68
331,560
2.26
1.97
Private label residential
2.09
18,175
34,172
4.23
3,992
4.02
Small Business
Administration loan pools
9,635
5,638
1.75
1.29
State and political subdivisions(1)
2.68
19,952
2.40
42,861
2.25
60,818
2.37
2.35
297,301
443,620
605,610
2.22
The calculated yield is not presented on a tax equivalent basis.
1,001
2.78
29,524
0.50
84,810
1.37
8,072
1.21
48,008
1.14
107,594
1.11
69,734
1.35
211,965
1.65
383,188
2.05
1.85
1.62
4.18
9,669
6,806
1.76
1.27
7,259
2.60
21,038
2.43
44,640
68,669
2.36
8,260
2.62
168,304
512,455
1.79
638,423
1.96
1.81
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 March 31, 2022, and December 31, 2021, 66.6% and 66.3% of the residential
53
mortgage-backed securities held by us had contractual final maturities of more than ten years, with a weighted average life of 5.0 years and 4.4 years and a modified duration of 4.4 years and 4.1 years.
Goodwill Impairment Assessment
At March 31, 2022, we performed an interim qualitative analysis and concluded there were no indications that goodwill was impaired.
Our lending and investing activities are primarily funded by deposits. A variety of deposit accounts are offered with a wide range of interest rates and terms including demand, savings, money market, and time deposits. We rely primarily on competitive pricing policies, convenient locations, comprehensive marketing strategy, and personalized service to attract and retain these deposits.
The following table shows our composition of deposits at March 31, 2022, and December 31, 2021.
Composition of Deposits
of Total
Non-interest-bearing demand
28.7
28.1
Interest-bearing demand and NOW accounts
1,179,381
26.9
1,202,408
27.2
1,332,097
30.4
1,319,881
29.9
14.0
14.8
Total deposits at March 31, 2022, were $4.38 billion, a decrease of $40.3 million, or 0.9%, compared to total deposits of $4.42 billion at December 31, 2021.
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 at March 31, 2022, and December 31, 2021.
Interest-bearing demand
Reciprocal
284,139
308,374
Total interest-bearing demand
9,106
52,173
Total savings and money market
22,722
2,969
Non-reciprocal brokered
10,000
Total time
12,969
Total reciprocal and brokered deposits
315,967
373,516
The following table provides information on the maturity distribution of time deposits of $250 thousand or more as of March 31, 2022, and December 31, 2021.
3 months or less
98,245
88,969
9,276
10.4
Over 3 through 6 months
49,264
115,063
(65,799
(57.2
Over 6 through 12 months
38,974
14,047
24,927
177.5
Over 12 months
21,395
15,381
6,014
39.1
Total Time Deposits
207,878
233,460
(25,582
(11.0
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 Statement.
Liquidity
Market and public confidence in our financial strength and financial institutions in general will largely determine access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.
Liquidity is defined as the ability to meet anticipated customer demands for future funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure our liquidity position by considering both on and off-balance sheet sources of and demands for funds on a daily, weekly, and monthly basis.
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations in a cost-effective manner and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, we focus on both assets and liabilities, and the way they combine to provide adequate liquidity to meet our needs.
During the three months ended March 31, 2022 and 2021, 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 $3.20 billion for the three months ended March 31, 2022, an increase of 0.5% over the December 31, 2021, average balance. Excess deposits are primarily invested in our interest-bearing deposit account with the Federal Reserve Bank of Kansas City, investment securities, federal funds sold or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio has a weighted average life of 5.2 years and a modified duration of 4.7 years at March 31, 2022.
Cash and cash equivalents were $90.1 million at March 31, 2022, a decrease of $169.9 million from the $260.0 million cash and cash equivalents at December 31, 2021. The decrease in cash and cash equivalents is driven primarily by $165.9 million net cash used in investing activities and $11.8 used financing activities, partially offset by $7.8 million provided by operating activities. Cash and cash equivalents at January 1, 2022, plus liquidity provided by operating activities, pay downs, sales, and maturities of investment securities and FHLB borrowings during the first three months of 2022 were used to originate or purchase loans and to purchase investment securities. We believe that our daily funding needs can be met through cash provided by operating activities, payments and maturities on loans and investment securities, the core deposit base and FHLB advances and other borrowing relationships.
Off-Balance-Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Our exposure to credit loss is
represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments.
Standby and Performance Letters of Credit: For additional information see “NOTE 11 – COMMITMENTS AND CREDIT RISK” in the Condensed Notes to Interim Consolidated Financial Statement.
Commitments to Extend Credit: For additional information see “NOTE 11 – COMMITMENTS AND CREDIT RISK” in the Condensed Notes to Interim Consolidated Financial Statement.
Capital Resources
Capital management consists of providing equity to support our current and future operations. The federal bank regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As a 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 March 31, 2022, and December 31, 2021, the Company and Equity Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized; although, these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and acquisitions, and capital restoration plans are required.
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver. As of March 31, 2022, 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 to, or with names like, the non-GAAP financial measures we have discussed in this Quarterly Report when comparing such non-GAAP financial measures.
Tangible Book Value Per Common Share and Tangible Book Value Per Diluted Common Share: Tangible book value is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate: (a) tangible common equity as total stockholders’ equity less preferred stock, goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); (b) tangible book value per common share as tangible common equity (as described in clause (a)) divided by shares of common stock outstanding; and (c) tangible book value per diluted
common share as tangible common equity (as described in clause (a)) divided by diluted shares of common stock outstanding. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value.
Management believes that these measures are important to many investors who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.
The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity, tangible book value per common share, and tangible book value per diluted common share and compares these values with book value per common share.
As of the period ended
Less: goodwill
31,601
Less: core deposit intangibles, net
12,963
13,993
15,023
Less: mortgage servicing asset, net
Less: naming rights, net
Tangible common equity
Common shares issued at period end
14,365,785
14,360,172
Diluted common shares outstanding at period end
16,662,779
17,050,115
14,637,306
14,664,603
14,668,287
Book value per common share
Tangible book value per common share
Tangible book value per diluted common share
Tangible Common Equity to Tangible Assets: Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (a) tangible common equity as total stockholders’ equity less preferred stock, goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); (b) tangible assets as total assets less goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); and (c) tangible common equity to tangible assets as tangible common equity (as described in clause (a)) divided by tangible assets (as described in clause (b)). For tangible common equity to tangible assets, the most directly comparable financial measure calculated in accordance with GAAP is total stockholders’ equity to total assets.
Management believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total stockholders’ equity and total assets while not increasing tangible common equity or tangible assets.
The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets.
Tangible assets
5,009,001
5,066,924
4,217,606
4,221,513
4,148,441
Equity to assets
Tangible common equity to tangible assets
Return on Average Tangible Common Equity: Return on average tangible common equity is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (a) average tangible common equity as total average stockholders’ equity less average goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); (b) adjusted net income allocable to common stockholders as net income allocable to common stockholders plus intangible asset amortization (net of taxes); and (c) return on average tangible common equity as annualized adjusted net income allocable to common stockholders (as described in clause (b)) divided by average tangible common equity (as described in clause (a)). For return on average tangible common equity, the most directly comparable financial measure calculated in accordance with GAAP is return on average equity.
Management believes that this measure is important to many investors in the marketplace who are interested in earnings quality on tangible common equity. Goodwill and other intangible assets have the effect of increasing total stockholders’ equity while not increasing tangible common equity.
The following table reconciles, as of the dates set forth below, return on average stockholders’ equity and return on average tangible common equity.
For the three months ended
Total average stockholders’ equity
563,046
422,879
404,039
Less: average intangible assets
61,186
46,335
47,334
Average tangible common equity
422,418
501,860
376,544
356,705
347,262
1,040
1,041
Less: tax effect
234
218
219
Adjusted net income allocable to common
stockholders
16,507
11,348
12,595
15,988
15,901
Return on total average stockholders’ equity
(ROAE) annualized
Return on average tangible common equity
(ROATCE) annualized
Efficiency Ratio: The efficiency ratio is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate the efficiency ratio by dividing non-interest expense, excluding merger expenses and loss on debt extinguishment, 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.
38,089
30,689
25,806
Less: loss on debt extinguishment
Less: merger expense
Non-interest expense, excluding loss on
debt extinguishment and merger expense
9,199
7,831
Less: net gain on acquisition
Less: net gain (loss) from securities transactions
Non-interest income, excluding net gain (loss) from securities transactions and net gain on acquisition
8,437
Net interest income plus non-interest income,
excluding net gain on acquisition and net gain
(loss) from securities transactions
48,271
46,406
46,425
43,067
38,532
Non-interest expense to net interest income
plus non-interest income
60.98
82.06
65.57
59.01
64.67
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 March 31, 2022, and December 31, 2021, 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 March 31, 2022, and December 31, 2021, 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 March 31, 2022, non-interest-bearing deposits were approximately $11.7 million or 1.0% higher than that deposit type at December 31, 2021. Substantially all investments and approximately 53.1% 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
(5.1
(4.4
+200 basis points
(3.1
(2.4
+100 basis points
(1.5
(1.0
0 basis points
-100 basis points
(2.7
The following table summarizes the simulated immediate impact on economic value of equity as of the dates indicated.
Impact on Economic Value
of Equity
(2.8
(4.3
(1.9
2.7
(14.8
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, 2022.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Common Stock
In September of 2021, the Company’s Board of Directors authorized an additional repurchase of up to 1,000,000 shares of the Company’s outstanding common stock, from time to time, beginning October 29, 2021, and concluding October 28, 2022. The repurchase program 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. On October 20, 2021, the Federal Reserve Bank of Kansas City advised the Company that it had no objection to the Company’s authorization to repurchase of up to an additional 1,000,000 shares of the Company’s Class A Voting Common Stock.
The following table presents shares that have been repurchased under the program during the first quarter of 2022.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
January 1, 2022 through January 31, 2022
80,864
33.50
786,263
February 1, 2022 through February 28, 2022
113,659
32.04
672,604
March 1, 2022 through March 31, 2022
189,860
31.76
482,744
384,383
32.21
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
Fifth Amendment to Loan and Security Agreement, dated February 11, 2022, by and between Equity Bancshares, Inc and ServisFirst Bank (incorporated by reference to Exhibit 10.1 to Equity Bancshares, Inc.’s Current Report on Form 8-K, filed with the SEC on February 18, 2022).
10.2
Equity Bancshares, Inc 2022 Omnibus Equity Incentive Plan (incorporated by reference to Appendix A to Equity Bancshares, Inc.’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on March 17, 2022).
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.
63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 5, 2022
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
64