UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 001-37624

 

EQUITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Kansas		72-1532188
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
7701 East Kellogg Drive, Suite 300 Wichita, KS		67207
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 316.612.6000

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Class A, Common Stock, par value $0.01 per share	Trading Symbol EQBK	Name of each exchange on which registered New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐		Accelerated filer	☒
Non-accelerated filer	☐		Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

 

As of October 31, 2023, the registrant had 15,413,064 shares of Class A common stock, $0.01 par value per share, outstanding.

 

 

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TABLE OF CONTENTS

 

Part I	Financial Information	5
Item 1.	Financial Statements	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Comprehensive Income	7
	Consolidated Statements of Stockholders’ Equity	8
	Consolidated Statements of Cash Flows	10
	Condensed Notes to Interim Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
	Overview	49
	Critical Accounting Policies	50
	Results of Operations	51
	Financial Condition	60
	Liquidity and Capital Resources	69
	Non-GAAP Financial Measures	71
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
Item 4.	Controls and Procedures	75
Part II	Other Information	76
Item 1.	Legal Proceedings	76
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 3.	Defaults Upon Senior Securities	77
Item 4.	Mine Safety Disclosures	77
Item 5.	Other Information	77
Item 6.	Exhibits	78

 

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.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Item 1A - Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 9, 2023, and in Item 1A – Risk Factors of this Quarterly Report.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

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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.

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PART I

 

 

Item 1: Financial Statements

EQUITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2023, and December 31, 2022

(Dollar amounts in thousands)

See accompanying condensed notes to interim consolidated financial statements.

		(Unaudited) September 30,				December 31,
		2023				2022
ASSETS
Cash and due from banks		$	183,404			$	104,013
Federal funds sold			15,613				415
Cash and cash equivalents			199,017				104,428
Available-for-sale securities			1,057,009				1,184,390
Held-to-maturity securities, fair value of $2,124 and $1,973			2,212				1,948
Loans held for sale			627				349
Loans, net of allowance for credit losses of $44,186 and $45,847			3,237,932				3,265,701
Other real estate owned, net			3,369				4,409
Premises and equipment, net			110,271				101,492
Bank-owned life insurance			124,245				123,176
Federal Reserve Bank and Federal Home Loan Bank stock			20,780				21,695
Interest receivable			23,621				20,630
Goodwill			53,101				53,101
Core deposit intangibles, net			7,961				10,596
Other			105,122				89,736
Total assets		$	4,945,267			$	4,981,651
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand		$	936,217			$	1,097,899
Total non-interest-bearing deposits			936,217				1,097,899
Demand, savings and money market			2,397,003				2,329,584
Time			748,950				814,324
Total interest-bearing deposits			3,145,953				3,143,908
Total deposits			4,082,170				4,241,807
Federal funds purchased and retail repurchase agreements			39,701				46,478
Federal Home Loan Bank advances			100,000				138,864
Federal Reserve Bank borrowings			140,000				—
Subordinated debt			96,787				96,392
Contractual obligations			29,019				15,218
Interest payable and other liabilities			39,460				32,834
Total liabilities			4,527,137				4,571,593
Commitments and contingent liabilities, see Notes 11 and 12
Stockholders’ equity, see Note 7
Common stock			207				205
Additional paid-in capital			488,137				484,989
Retained earnings			171,188				140,095
Accumulated other comprehensive income (loss)			(122,047	)			(113,511	)
Treasury stock			(119,355	)			(101,720	)
Total stockholders’ equity			418,130				410,058
Total liabilities and stockholders’ equity		$	4,945,267			$	4,981,651

 

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EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months ended September 30, 2023, and 2022

(Dollar amounts in thousands, except per share data)

		(Unaudited) Three Months Ended September 30,								(Unaudited) Nine Months Ended September 30,
		2023				2022				2023				2022
Interest and dividend income
Loans, including fees		$	55,152			$	41,555			$	156,281			$	114,710
Securities, taxable			5,696				5,792				17,456				16,767
Securities, nontaxable			369				687				1,606				2,020
Federal funds sold and other			3,822				514				7,075				1,327
Total interest and dividend income			65,039				48,548				182,418				134,824
Interest expense
Deposits			19,374				4,403				50,399				8,308
Federal funds purchased and retail repurchase agreements			246				71				633				150
Federal Home Loan Bank advances			968				409				2,939				594
Federal Reserve Bank borrowings			1,546				—				3,209				—
Subordinated debt			1,893				1,721				5,687				4,973
Total interest expense			24,027				6,604				62,867				14,025
Net interest income			41,012				41,944				119,551				120,799
Provision (reversal) for credit losses			1,230				(136	)			1,162				276
Net interest income after provision (reversal) for credit losses			39,782				42,080				118,389				120,523
Non-interest income
Service charges and fees			2,690				2,788				7,888				7,927
Debit card income			2,591				2,682				7,798				8,120
Mortgage banking			226				310				527				1,300
Increase in value of bank-owned life insurance			794				754				3,134				2,355
Net gain on acquisition and branch sales			—				—				—				540
Net gain (loss) from securities transactions			(1	)			(17	)			(1,291	)			(9	)
Other			2,435				2,452				6,229				7,395
Total non-interest income			8,735				8,969				24,285				27,628
Non-interest expense
Salaries and employee benefits			15,857				15,442				47,786				45,893
Net occupancy and equipment			3,262				3,127				9,081				9,304
Data processing			4,553				4,138				12,962				11,549
Professional fees			1,312				1,265				4,341				3,547
Advertising and business development			1,419				1,191				3,827				3,139
Telecommunications			502				487				1,503				1,399
FDIC insurance			660				340				1,535				780
Courier and postage			548				436				1,469				1,348
Free nationwide ATM cost			516				551				1,565				1,593
Amortization of core deposit intangibles			799				957				2,635				3,118
Loan expense			132				174				385				566
Other real estate owned			128				188				318				201
Merger expenses			—				115				—				526
Other			4,556				3,825				13,196				10,168
Total non-interest expense			34,244				32,236				100,603				93,131
Income (loss) before income tax			14,273				18,813				42,071				55,020
Provision (benefit) for income taxes			1,932				3,642				5,951				8,940
Net income (loss) and net income (loss) allocable to common stockholders		$	12,341			$	15,171			$	36,120			$	46,080
Basic earnings (loss) per share		$	0.80			$	0.94			$	2.32			$	2.83
Diluted earnings (loss) per share		$	0.80			$	0.93			$	2.30			$	2.79

 

 

See accompanying condensed notes to interim consolidated financial statements.

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EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months ended September 30, 2023, and 2022

(Dollar amounts in thousands)

		(Unaudited) Three Months Ended September 30,								(Unaudited) Nine Months Ended September 30,
		2023				2022				2023				2022
Net income		$	12,341			$	15,171			$	36,120			$	46,080
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period on    available-for-sale securities			(17,654	)			(55,639	)			(16,982	)			(160,342	)
Reclassification for net (gains) losses included in net income			—				—				1,330				(77	)
Unrealized holding gains (losses) arising during the period on cash flow hedges			1,994				(2,149	)			4,908				(2,616	)
Total other comprehensive income (loss)			(15,660	)			(57,788	)			(10,744	)			(163,035	)
Tax effect			3,838				14,296				2,208				40,341
Other comprehensive income (loss), net of tax			(11,822	)			(43,492	)			(8,536	)			(122,694	)
Comprehensive income (loss)		$	519			$	(28,321	)		$	27,584			$	(76,614	)

See accompanying condensed notes to interim consolidated financial statements.

 

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EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended September 30, 2023, and 2022

(Unaudited)

(Dollar amounts in thousands, except share and per share data)

		Common Stock								Additional								Accumulated Other								Total
		Shares Outstanding				Amount				Paid-In Capital				Retained Earnings				Comprehensive Income (Loss)				Treasury Stock				Stockholders’ Equity
Balance at July 1, 2022			16,106,818			$	204			$	480,897			$	116,576			$	(77,426	)		$	(92,136	)		$	428,115
Net income			—				—				—				15,171				—				—				15,171
Other comprehensive income (loss),    net of tax effects			—				—				—				—				(43,492	)			—				(43,492	)
Cash dividends - common stock, $0.10 per share			—				—				—				(1,600	)			—				—				(1,600	)
Dividend equivalents - restricted stock units, $0.10 per share			—				—				—				(33	)			—				—				(33	)
Stock-based compensation			—				—				888				—				—				—				888
Common stock issued upon    exercise of stock options			21,500				—				482				—				—				—				482
Common stock issued under    stock-based incentive plan			1,861				—				—				—				—				—				—
Common stock issued under    employee stock purchase plan			14,555				—				401				—				—				—				401
Treasury stock purchase			(126,900	)			—				—				—				—				(4,126	)			(4,126	)
Balance at September 30, 2022			16,017,834			$	204			$	482,668			$	130,114			$	(120,918	)		$	(96,262	)		$	395,806
Balance at July 1, 2023			15,412,139			$	207			$	487,225			$	160,715			$	(110,225	)		$	(119,487	)		$	418,435
Net income			—				—				—				12,341				—				—				12,341
Other comprehensive income (loss),    net of tax effects			—				—				—				—				(11,822	)			—				(11,822	)
Cash dividends - common stock, $0.12 per share			—				—				—				(1,851	)			—				—				(1,851	)
Dividend equivalents-    restricted stock units and restricted stock awards, $0.12 per share			—				—				—				(17	)			—				—				(17	)
Stock-based compensation			—				—				571				—				—				—				571
Common stock issued upon    exercise of stock options			657				—				15				—				—				—				15
Common stock issued under    stock-based incentive plan			1,120				—				—				—				—				—				—
Common stock issued under    employee stock purchase plan			14,548				—				326																326
Treasury stock purchases			—				—				—				—				—				132				132
Balance at September 30, 2023			15,428,464			$	207			$	488,137			$	171,188			$	(122,047	)		$	(119,355	)		$	418,130

See accompanying condensed notes to interim consolidated financial statements.

 

 

 

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EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months ended September 30, 2023, and 2022

(Unaudited)

(Dollar amounts in thousands, except share and per share data)

 

		Common Stock								Additional								Accumulated Other								Total
		Shares Outstanding				Amount				Paid-In Capital				Retained Earnings				Comprehensive Income (Loss)				Treasury Stock				Stockholders’ Equity
Balance at January 1, 2022			16,760,115			$	203			$	478,862			$	88,324			$	1,776			$	(68,534	)		$	500,631
Net income			—				—				—				46,080				—				—				46,080
Other comprehensive income (loss),    net of tax effects			—				—				—				—				(122,694	)			—				(122,694	)
Cash dividends - common stock, $0.26 per share			—				—				—				(4,208	)			—				—				(4,208	)
Dividend equivalents-    restricted stock units, $0.26 per share			—				—				—				(82	)			—				—				(82	)
Stock-based compensation			624				—				2,436				—				—				—				2,436
Common stock issued upon    exercise of stock options			28,656								579				—				—				—				579
Common stock issued under    stock-based incentive plan			66,737				1				(1	)			—				—				—				—
Common stock issued under    employee stock purchase plan			28,829								792				—				—				—				792
Repayment on employee stock loans			—								—				—				—								—
Treasury stock purchases			(867,127	)			—				—				—				—				(27,728	)			(27,728	)
Balance at September 30, 2022			16,017,834			$	204			$	482,668			$	130,114			$	(120,918	)		$	(96,262	)		$	395,806
Balance at January 1, 2023			15,930,112			$	205			$	484,989			$	140,095			$	(113,511	)		$	(101,720	)		$	410,058
Net income			—				—				—				36,120				—				—				36,120
Other comprehensive income (loss),    net of tax effects			—				—				—				—				(8,536	)			—				(8,536	)
Cash dividends - common stock, $0.32 per share			—				—				—				(4,965	)			—				—				(4,965	)
Dividend equivalents-    restricted stock units and restricted stock awards, $0.32  per share			—				—				—				(62	)			—				—				(62	)
Stock-based compensation			—				—				2,351				—				—				—				2,351
Common stock issued upon    exercise of stock options			657				—				15				—				—				—				15
Common stock issued under    stock-based incentive plan			134,805				2				(2	)			—				—				—				—
Common stock issued under    employee stock purchase plan			32,056				—				784				—				—				—				784
Treasury stock purchases			(669,166	)			—				—				—				—				(17,635	)			(17,635	)
Balance at September 30, 2023			15,428,464			$	207			$	488,137			$	171,188			$	(122,047	)		$	(119,355	)		$	418,130

 

See accompanying condensed notes to interim consolidated financial statements.

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EQUITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months ended September 30, 2023, and 2022
(Dollar amounts in thousands)
		(Unaudited) September 30,
		2023				2022
Cash flows from operating activities
Net income		$	36,120			$	46,080
Adjustments to reconcile net income to net cash from operating activities:
Stock-based compensation			2,351				2,436
Depreciation			3,338				3,391
Amortization of operating lease right-of-use asset			472				533
Amortization of cloud computing implementation costs			141				141
Provision (reversal) for credit losses			1,162				276
Net amortization (accretion) of purchase valuation adjustments			(649	)			(3,437	)
Amortization (accretion) of premiums and discounts on securities			3,384				5,059
Amortization of intangible assets			2,743				3,225
Deferred income taxes			953				484
Federal Home Loan Bank stock dividends			(446	)			(181	)
Loss (gain) on sales and valuation adjustments on other real estate owned			44				(202	)
Net loss (gain) on sales and settlements of securities			1,330				(78	)
Change in unrealized (gains) losses on equity securities			(39	)			87
Loss (gain) on disposal of premises and equipment			(16	)			(83	)
Loss (gain) on sales of foreclosed assets			14				(355	)
Loss (gain) on sales of loans			(385	)			(994	)
Originations of loans held for sale			(20,279	)			(42,443	)
Proceeds from the sale of loans held for sale			20,387				45,925
Increase in the value of bank-owned life insurance			(3,134	)			(2,355	)
Change in fair value of derivatives recognized in earnings			334				(1,684	)
Gain on acquisition and branch sales			—				(540	)
Payments on operating lease payable			(588	)			(622	)
Net change in:
Interest receivable			(2,991	)			(840	)
Other assets			13,727				21,614
Interest payable and other liabilities			5,582				(17,741	)
Net cash provided by operating activities			63,555				57,696
Cash flows (to) from investing activities
Purchases of available-for-sale securities			(2,249	)			(178,313	)
Purchases of held-to-maturity securities			(275	)			—
Proceeds from sales, calls, pay-downs and maturities of available-for-sale securities			109,261				141,392
Proceeds from calls, pay-downs and maturities of held-to-maturity securities			13				—
Net change in loans			28,380				(126,122	)
Purchase of mortgage loans			—				(794	)
Purchase of USDA guaranteed loans			(1,235	)			(2,293	)
Capitalized construction cost of other real estate owned			(561	)			—
Purchase of premises and equipment			(12,141	)			(1,199	)
Proceeds from sale of premises and equipment			40				139
Proceeds from sale of foreclosed assets			141				29,678
Net redemptions (purchases) of Federal Home Loan Bank and Federal Reserve     Bank stock			1,361				(6,736	)
Net redemptions (purchases) of correspondent and miscellaneous other stock			(6,033	)			(3,673	)
Proceeds from sale of other real estate owned			1,833				3,518
Proceeds from bank-owned life insurance death benefits			2,071				723
Net cash paid from branch sale to United Bank and Trust			—				(22,940	)
Net cash (used in) provided by investing activities			120,606				(166,620	)
Cash flows (to) from financing activities
Net increase (decrease) in deposits			(159,734	)			(140,607	)
Net change in federal funds purchased and retail repurchase agreements			(6,777	)			(8,563	)
Net borrowings (repayments) on Federal Home Loan Bank line of credit			(138,864	)			186,001

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Proceeds from Federal Home Loan Bank term advances			1,066,091				403,501
Principal repayments on Federal Home Loan Bank term advances			(966,091	)			(403,501	)
Proceeds from Federal Reserve Bank borrowings			141,000				1,000
Principal payments on Federal Reserve Bank borrowings			(1,000	)			(1,000	)
Proceeds from the exercise of employee stock options			15				579
Proceeds from employee stock purchase plan			784				792
Purchase of treasury stock			(17,635	)			(27,728	)
Net change in contractual obligations			(2,599	)			(2,130	)
Dividends paid on common stock			(4,762	)			(3,961	)
Net cash (used in) provided by financing activities			(89,572	)			4,383
Net change in cash and cash equivalents			94,589				(104,541	)
Cash and cash equivalents, beginning of period			104,428				259,954
Ending cash and cash equivalents		$	199,017			$	155,413
Supplemental cash flow information:
Interest paid		$	52,730			$	14,471
Income taxes paid, net of refunds			3,406				666
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans			476				2,224
Other repossessed assets acquired in settlement of loans			176				771
Other real estate owned recorded as a result of transferring non-operational branch right-of-use-asset			—				2,210
Purchase of investments in tax credit structures and resulting contractual obligations			16,400				—

 

See accompanying condensed notes to interim consolidated financial statements.

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EQUITY BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

(Dollar amounts in thousands, except per share data)

 

 

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NOTE 2 – INVESTMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K filed with the SEC on March 9, 2023, and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See “Cautionary Note Regarding Forward-Looking Statements.” Also, see the risk factors and other cautionary statements described under the heading “Item 1A: Risk Factors” included in the Annual Report on Form 10-K and in Item 1A of this Quarterly Report. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

This discussion and analysis of our financial condition and results of operation includes the following sections:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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(Dollars in thousands, except per share data)		September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
Statement of Income Data (for the quarterly period ended)
Interest and dividend income		$	65,039			$	61,256			$	56,123			$	53,424			$	48,548
Interest expense			24,027				21,827				17,013				11,393				6,604
Net interest income			41,012				39,429				39,110				42,031				41,944
Provision (reversal) for credit losses			1,230				298				(366	)			(151	)			(136	)
Net gain on acquisition and branch sales			—				—				—				422				—
Net gain (loss) from securities transactions			(1	)			(1,322	)			32				14				(17	)
Other non-interest income			8,736				8,272				8,568				7,893				8,986
Merger expenses			—				—				—				68				115
Other non-interest expense			34,244				33,130				33,229				35,181				32,121
Income (loss) before income taxes			14,273				12,951				14,847				15,262				18,813
Provision for income taxes			1,932				1,495				2,524				3,654				3,642
Net income (loss)			12,341				11,456				12,323				11,608				15,171
Net income (loss) allocable to common stockholders			12,341				11,456				12,323				11,608				15,171
Basic earnings (loss) per share		$	0.80			$	0.74			$	0.78			$	0.73			$	0.94
Diluted earnings (loss) per share		$	0.80			$	0.74			$	0.77			$	0.72			$	0.93
Balance Sheet Data (at period end)
Cash and cash equivalents		$	199,017			$	278,099			$	250,366			$	104,428			$	155,413
Securities available-for-sale			1,057,009				1,094,748				1,183,247				1,184,390				1,198,962
Securities held-to-maturity			2,212				2,216				1,944				1,948				—
Loans held for sale			627				2,456				648				349				1,518
Gross loans held for investment			3,282,118				3,322,670				3,330,618				3,311,548				3,255,023
Allowance for credit losses			44,186				44,544				45,103				45,847				46,499
Loans held for investment, net of allowance for credit losses			3,237,932				3,278,126				3,285,515				3,265,701				3,208,524
Goodwill and core deposit intangibles, net			61,062				61,861				62,779				63,697				64,699
Mortgage servicing asset, net			100				126				151				176				201
Naming rights, net			1,011				1,022				1,033				1,044				1,054
Total assets			4,945,267				5,094,883				5,156,716				4,981,651				5,000,415
Total deposits			4,082,170				4,230,950				4,286,933				4,241,807				4,226,611
Borrowings			376,488				381,423				392,842				281,734				329,707
Total liabilities			4,527,137				4,676,448				4,731,593				4,571,593				4,604,609
Total stockholders’ equity			418,130				418,435				425,123				410,058				395,806
Tangible common equity*			355,957				355,426				361,160				345,141				329,852
Performance ratios
Return on average assets (ROAA) annualized			0.97	%			0.91	%			1.00	%			0.93	%			1.21	%
Return on average equity (ROAE) annualized			11.49	%			10.82	%			11.89	%			11.57	%			13.80	%
Return on average tangible common equity    (ROATCE) annualized			14.18	%			13.55	%			14.89	%			14.74	%			17.12	%
Yield on loans annualized			6.67	%			6.34	%			5.94	%			5.59	%			5.09	%
Cost of interest-bearing deposits annualized			2.40	%			2.14	%			1.73	%			1.05	%			0.57	%
Net interest margin annualized			3.51	%			3.38	%			3.44	%			3.67	%			3.62	%
Efficiency ratio*			68.83	%			69.45	%			69.69	%			70.47	%			63.07	%
Non-interest income / average assets annualized			0.69	%			0.55	%			0.70	%			0.67	%			0.71	%
Non-interest expense / average assets annualized			2.69	%			2.62	%			2.70	%			2.84	%			2.56	%
Capital Ratios
Tier 1 Leverage Ratio			9.77	%			9.54	%			9.60	%			9.61	%			9.46	%
Common Equity Tier 1 Capital Ratio			12.65	%			12.23	%			12.21	%			12.26	%			12.21	%
Tier 1 Risk Based Capital Ratio			13.27	%			12.84	%			12.83	%			12.88	%			12.84	%
Total Risk Based Capital Ratio			16.42	%			15.96	%			15.98	%			16.08	%			16.06	%
Equity / Assets			8.46	%			8.21	%			8.24	%			8.23	%			7.92	%
Tangible common equity to tangible assets*			7.29	%			7.06	%			7.09	%			7.02	%			6.68	%
Dividend payout ratio			15.13	%			13.53	%			13.07	%			14.01	%			10.78	%
Book value per share		$	27.13			$	27.18			$	27.03			$	25.74			$	24.71
Tangible common book value per share*		$	23.09			$	23.08			$	22.96			$	21.67			$	20.59
Tangible common book value per diluted share*		$	22.96			$	22.98			$	22.83			$	21.35			$	20.33

* 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.

Overview

We are a financial holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 65 full-service banking sites located in Arkansas, Kansas, Missouri, and Oklahoma. As of September 30, 2023, we had consolidated total assets of $4.95 billion, total loans held for investment, net of allowance, of $3.24 billion, total deposits of $4.08 billion, and total stockholders’ equity of $418.1 million. During the three and nine month periods ended September 30, 2023, the Company had net income of $12.3 million and $36.1 million.

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The Company had net income of $15.2 million and $46.1 million for the three and nine month periods ended September 30, 2022.

Critical Accounting Policies

Our significant accounting policies are integral to understanding the results reported. Our accounting policies are described in detail in Note 1 to the December 31, 2022, audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 9, 2023. The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements. Our accounting policies are described in “NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Notes to Interim Consolidated Financial Statements.

The accounting policies that management believes are the most critical to an understanding of our financial condition and results of operations and require complex management judgment are described below.

Allowance for Credit Losses: The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications, and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date; however, determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. The actual realized facts and circumstances may be different than those currently estimated by management and may result in significant changes in the allowance for credit losses in future periods. The allowance for credit losses for loans, as reported in our consolidated balance sheets, is adjusted by provision for credit losses, which is recognized in earnings and is reduced by the charge-off of loan amounts, net of recoveries.

The allowance represents management’s best estimate, but significant changes in circumstances relating to loan quality and economic conditions could result in significantly different results than what is reflected in the consolidated balance sheet as of September 30, 2023. Likewise, an improvement in loan quality or economic conditions may allow for a further reduction in the required allowance. Changing credit conditions would be expected to impact realized losses, driving variability in specifically assessed allowances, as well as calculated quantitative and more subjectively analyzed qualitative factors. Depending on the volatility in these conditions, material impacts could be realized within the Company’s operations. 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 September 30, 2023, management conducted the quarterly qualitative assessment and has determined there was no evidence of a triggering event as of or during the period then ended. Based on this qualitative analysis and conclusion, it was determined that a more robust quantitative assessment was not necessary at our measurement date.

When performing quantitative goodwill impairment assessments, management is required to estimate the fair value of the Company’s equity in a change in control transaction. To complete this valuation, management is required to derive assumptions related to industry performance, reporting unit business performance, economic and market conditions, and various other assumptions, many of which require significant management judgment.

Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.

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Results of Operations

We generate our revenue from interest income and fees on loans, interest and dividends on investment securities, and non-interest income, such as service charges and fees, debit card income, trust and mortgage banking income. We incur interest expense on deposits and other borrowed funds and non-interest expense, such as salaries and employee benefits and occupancy expenses.

Changes in interest rates earned on interest-earning assets or incurred on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic change in net interest income. Fluctuations in interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international circumstances and domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Arkansas, Kansas, Missouri and Oklahoma, as well as developments affecting the consumer, commercial and real estate sectors within these markets.

Net Income

Three months ended September 30, 2023, compared with three months September 30, 2022: Net income allocable to common stockholders for the three months ended September 30, 2023, was $12.3 million, or $0.80 diluted earnings per share as compared to $15.2 million, or $0.93 diluted earnings per share for the three months ended September 30, 2022, a decrease of $2.9 million. The decrease was largely due to a decrease in net interest income of $1.0 million, an increase in the provision for loan losses of $1.4 million and an increase in non-interest expense of $2.0 million, offset by a decrease in the provision for Income taxes of $1.7 million.

Nine months ended September 30, 2023, compared with nine months ended September 30, 2022: Net income allocable to common stockholders for the nine months ended September 30, 2023, was $36.1 million, or $2.30 diluted earnings per share as compared to $46.1 million, or $2.79 diluted earnings per share for the nine months ended September 30, 2022, a decrease of $10.0 million. The decrease was largely due to a decrease in net interest income of $1.2 million, a decrease in other income of $3.3 million, an increase in non-interest expense of $7.5 million, offset by a decrease in the provision for income taxes of $3.0 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 September 30, 2023, compared with three months ended September 30, 2022: The following table shows the average balance of each principal category of assets, liabilities, and stockholders’ equity and the average yields on interest-earning assets and average rates on interest-bearing liabilities for the three months ended September 30, 2023, and 2022. The yields and rates are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.

 

 

 

 

 

 

 

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Average Balance Sheets and Net Interest Analysis

		For the Three Months Ended September 30,
		2023												2022
(Dollars in thousands)		Average Outstanding Balance				Interest Income/ Expense				Average Yield/ Rate(3)(4)				Average Outstanding Balance				Interest Income/ Expense				Average Yield/ Rate(3)(4)
Interest-earning assets:
Loans(1)
Commercial and industrial		$	573,039			$	10,984				7.60	%		$	575,149			$	7,750				5.35	%
Commercial real estate			1,253,362				20,824				6.59	%			1,307,244				18,023				5.47	%
Real estate construction			480,355				9,838				8.13	%			360,579				4,847				5.33	%
Residential real estate			564,138				6,085				4.28	%			582,938				5,464				3.72	%
Agricultural real estate			203,399				3,898				7.60	%			200,534				2,740				5.42	%
Agricultural			99,773				1,856				7.38	%			113,351				1,406				4.92	%
Consumer			107,417				1,667				6.16	%			101,203				1,325				5.20	%
Total loans			3,281,483				55,152				6.67	%			3,240,998				41,555				5.09	%
Taxable securities			1,027,889				5,696				2.20	%			1,164,697				5,792				1.97	%
Nontaxable securities			58,016				369				2.52	%			107,717				687				2.53	%
Total Securities			1,085,905				6,065				2.22	%			1,272,414				6,479				2.02	%
Federal funds sold and other			267,996				3,822				5.66	%			89,156				514				2.29	%
Total interest-earning assets			4,635,384				65,039				5.57	%			4,602,568				48,548				4.18	%
Non-interest-earning assets:
Other real estate owned, net			4,206												11,914
Premises and equipment, net			108,869												101,035
Bank-owned life insurance			123,790												121,970
Goodwill, core deposit and other intangibles, net			62,635												66,445
Other non-interest-earning assets			111,295												84,823
Total assets		$	5,046,179											$	4,988,755
Interest-bearing liabilities:
Interest-bearing demand deposits		$	1,014,956				6,223				2.43	%		$	1,112,901				2,257				0.80	%
Savings and money market			1,408,424				7,108				2.00	%			1,312,923				861				0.26	%
Demand, savings and money market			2,423,380				13,331				2.18	%			2,425,824				3,118				0.51	%
Certificates of deposit			782,920				6,043				3.06	%			655,421				1,285				0.78	%
Total interest-bearing deposits			3,206,300				19,374				2.40	%			3,081,245				4,403				0.57	%
FHLB term and line of credit advances			100,000				968				3.84	%			71,415				409				2.27	%
Subordinated debt			96,712				1,893				7.77	%			96,200				1,721				7.10	%
Federal Reserve Bank borrowings			140,000				1,546				4.38	%			—				—				—
Other borrowings			48,413				246				2.02	%			53,899				71				0.52	%
Total interest-bearing liabilities			3,591,425				24,027				2.65	%			3,302,759				6,604				0.79	%
Non-interest-bearing liabilities and    stockholders’ equity:
Non-interest-bearing checking accounts			971,032												1,202,610
Non-interest-bearing liabilities			57,462												47,195
Stockholders’ equity			426,260												436,191
Total liabilities and stockholders’ equity		$	5,046,179											$	4,988,755
Net interest income						$	41,012											$	41,944
Interest rate spread											2.92	%											3.39	%
Net interest margin(2)											3.51	%											3.62	%
Total cost of deposits, including non-interest    bearing deposits		$	4,177,332			$	19,374				1.84	%		$	4,283,855			$	4,403				0.41	%
Average interest-earning assets to    interest-bearing liabilities											129.07	%											139.36	%

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Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest yields/rates. The following table analyzes the change in volume variances and yield/rate variances for the three month periods ended September 30, 2023, and 2022.

Analysis of Changes in Net Interest Income

For the Three Months Ended September 30, 2023, and 2022

 

		Increase (Decrease) Due to:								Total Increase /
(Dollars in thousands)		Volume(1)				Yield/Rate(1)				(Decrease)
Interest-earning assets:
Loans
Commercial and industrial		$	(29	)		$	3,263			$	3,234
Commercial real estate			(768	)			3,569				2,801
Real estate construction			1,937				3,054				4,991
Residential real estate			(181	)			802				621
Agricultural real estate			40				1,118				1,158
Agricultural			(185	)			635				450
Consumer			86				256				342
Total loans			900				12,697				13,597
Taxable securities			(719	)			623				(96	)
Nontaxable securities			(315	)			(3	)			(318	)
Total securities			(1,034	)			620				(414	)
Federal funds sold and other			1,908				1,400				3,308
Total interest-earning assets			1,774				14,717				16,491
Interest-bearing liabilities:
Interest-bearing demand deposits			(215	)			4,181				3,966
Savings and money market			68				6,179				6,247
Demand, savings and money market			(147	)			10,360				10,213
Certificates of deposit			294				4,464				4,758
Total interest-bearing deposits			147				14,824				14,971
FHLB term and line of credit advances			204				355				559
Subordinated debt			10				162				172
Federal Reserve Bank borrowings			1,546				—				1,546
Other borrowings			(8	)			183				175
Total interest-bearing liabilities			1,899				15,524				17,423
Net Interest Income		$	(125	)		$	(807	)		$	(932	)

 

Interest income increased $16.5 million for the quarter ended September 30, 2023, as compared to the quarter ended September 30, 2022. Of this increase, $12.7 million is attributable to increases in loan rate/yield. Yield on loans increased by 158 basis points for the quarter ended September 30, 2023, as compared quarter ended to September 30, 2022. The increase in interest income on loans is primarily due to higher yields on the entire loan portfolio, offset by decrease due to volume on commercial and industrial, commercial real estate, residential real estate and agricultural. Overall, the increase in interest income on interest earning assets is due to the increase in market interest rates.

Increase in interest expense of $17.4 million was due to a general increase in market interest rates and to a lesser extent an increase in volume on borrowing, primarily from the Federal Reserve Bank. The increase in the cost of interest-bearing deposits, from 0.57% for the quarter ended September 30, 2022 to 2.40% for the quarter ended September 30, 2023, was primarily the result the Federal Reserve raising the federal funds target rate in response to inflationary concerns.

During the quarter ended September 30, 2023, when compared to the quarter ended September 30, 2022, net interest margin decreased 11 basis points and net interest spread decreased by 47 basis points to 2.92% from 3.39%. The decrease in net interest margin is primarily due to the increase in yield earned on interest-earning asset, which was outpaced by increases in the cost of interest-bearing liabilities. The decrease in interest spread is primarily due to the increase in volume of interest bearing liabilities at current market rates.

Nine months ended September 30, 2023, compared with nine months ended September 30, 2022: The following table shows the average balance of each principal category of assets, liabilities, and stockholders’ equity and the average yields on interest-earning assets and average rates on interest-bearing liabilities for the nine months ended September 30, 2023, and 2022. The yields and rates are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.

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Average Balance Sheets and Net Interest Analysis
 

		For the Nine Months Ended September 30,
		2023												2022
(Dollars in thousands)		Average Outstanding Balance				Interest Income/ Expense				Average Yield/ Rate(3)(4)				Average Outstanding Balance				Interest Income/ Expense				Average Yield/ Rate(3)(4)
Interest-earning assets:
Loans(1)
Commercial and industrial		$	580,359			$	31,503				7.26	%		$	579,610			$	22,994				5.30	%
Commercial real estate			1,300,202				61,811				6.36	%			1,236,282				45,995				4.97	%
Real estate construction			450,147				24,764				7.36	%			362,543				12,443				4.59	%
Residential real estate			567,169				17,933				4.23	%			604,218				16,336				3.61	%
Agricultural real estate			202,963				10,399				6.85	%			201,566				8,046				5.34	%
Agricultural			100,450				5,039				6.71	%			132,485				5,254				5.30	%
Consumer			106,841				4,832				6.05	%			101,341				3,642				4.80	%
Total loans			3,308,131				156,281				6.32	%			3,218,045				114,710				4.77	%
Taxable securities			1,059,858				17,456				2.20	%			1,220,045				16,767				1.84	%
Nontaxable securities			82,230				1,606				2.61	%			109,142				2,020				2.47	%
Total securities			1,142,088				19,062				2.23	%			1,329,187				18,787				1.89	%
Federal funds sold and other			191,585				7,075				4.94	%			116,997				1,327				1.52	%
Total interest-earning assets			4,641,804				182,418				5.25	%			4,664,229				134,824				3.86	%
Non-interest-earning assets:
Other real estate owned, net			4,226												10,377
Premises and equipment, net			105,980												102,491
Bank-owned life insurance			123,409												121,398
Goodwill, core deposit and other intangibles, net			63,505												68,521
Other non-interest-earning assets			96,435												87,399
Total assets		$	5,035,359											$	5,054,415
Interest-bearing liabilities:
Interest-bearing demand deposits		$	1,021,163				16,651				2.18	%		$	1,158,343				3,702				0.43	%
Savings and money market			1,344,809				15,637				1.55	%			1,321,770				1,759				0.18	%
Demand, savings and money market			2,365,972				32,288				1.82	%			2,480,113				5,461				0.29	%
Certificates of deposit			856,862				18,111				2.83	%			638,692				2,847				0.60	%
Total interest-bearing deposits			3,222,834				50,399				2.09	%			3,118,805				8,308				0.36	%
FHLB term and line of credit advances			97,014				2,939				4.05	%			54,100				594				1.47	%
Subordinated debt			96,584				5,687				7.87	%			96,067				4,973				6.92	%
Federal Reserve Bank borrowings			97,952				3,209				4.38	%			4				—				0.25	%
Other borrowings			48,471				633				1.75	%			56,611				150				0.35	%
Total interest-bearing liabilities			3,562,855				62,867				2.36	%			3,325,587				14,025				0.56	%
Non-interest-bearing liabilities and    stockholders’ equity:
Non-interest-bearing checking accounts			997,165												1,220,073
Non-interest-bearing liabilities			51,443												53,510
Stockholders’ equity			423,895												455,245
Total liabilities and stockholders’ equity		$	5,035,358											$	5,054,415
Net interest income						$	119,551											$	120,799
Interest rate spread											2.89	%											3.30	%
Net interest margin(2)											3.44	%											3.46	%
Total cost of deposits, including non-interest    bearing deposits		$	4,219,999			$	50,399				1.60	%		$	4,338,878			$	8,308				0.26	%
Average interest-earning assets to    interest-bearing liabilities											130.28	%											140.25	%

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest yields/rates. The following table analyzes the change in volume variances and yield/rate variances for the nine month periods ended September 30, 2023, and 2022.

 

 

Analysis of Changes in Net Interest Income

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For the Nine Months Ended September 30, 2023, and 2022

		Increase (Decrease) Due to:								Total Increase /
(Dollars in thousands)		Volume(1)				Yield/Rate(1)				(Decrease)
Interest-earning assets:
Loans
Commercial and industrial		$	30			$	8,479			$	8,509
Commercial real estate			2,482				13,334				15,816
Real estate construction			3,525				8,796				12,321
Residential real estate			(1,047	)			2,644				1,597
Agricultural real estate			56				2,297				2,353
Agricultural			(1,431	)			1,216				(215	)
Consumer			207				983				1,190
Total loans			3,822				37,749				41,571
Taxable securities			(2,375	)			3,064				689
Nontaxable securities			(520	)			106				(414	)
Total securities			(2,895	)			3,170				275
Federal funds sold and other			1,266				4,482				5,748
Total interest-earning assets			2,193				45,401				47,594
Interest-bearing liabilities:
Interest-bearing demand deposits			(489	)			13,438				12,949
Savings and money market			31				13,847				13,878
Demand, savings and money market			(458	)			27,285				26,827
Certificates of deposit			1,277				13,987				15,264
Total interest-bearing deposits			819				41,272				42,091
FHLB term and line of credit advances			728				1,617				2,345
Subordinated debt			27				687				714
Federal Reserve Bank borrowings			3,207				2				3,209
Other borrowings			(25	)			508				483
Total interest-bearing liabilities			4,756				44,086				48,842
Net Interest Income		$	(2,563	)		$	1,315			$	(1,248	)

 

Interest income on interest-earning assets increased $47.6 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. Of this increase, $37.7 million is attributable to increases in loan yields by 155 basis points for the nine months ended September 30, 2023, as compared to the nine months September 30, 2022. The increase in yields on interest-earning assets is due to the overall increase in market interest rates which is driven by the monetary policy of the Federal Reserve.

The increase in interest expense on total interest-bearing deposits of $42.1 million was due to a general increase in market interest rates. The increase in the cost of interest-bearing deposits increased from 0.36% for the nine months ended September 30, 2022 to 2.09% for the nine months ended September 30, 2023, was primarily the result the Federal Reserve raising federal funds target rate in response to inflationary concerns.

When compared to the nine months ended September 30, 2022, net interest margin decreased 2 basis points during the nine months ended September 30, 2023. Comparing the same periods, net interest spread decreased by 41 basis points to 2.89% from 3.30%. The decrease in both net interest margin and net interest spread can be attributed to the increase in yield on interest-earning assets being out paced by increases in the cost of interest-bearing liabilities.

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.

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Included in our qualitative assessment is the consideration of prospective economic conditions over the next 12 months, considered the Company’s reasonable and supportable forecast period. As these factors change, the amount of the credit loss provision changes.

Three months ended September 30, 2023, compared with three months ended September 30, 2022: During the three months ended September 30, 2023, there was a provision for credit losses of $1.2 million compared to a reversal of provision for credit losses of $136 thousand during the three months ended September 30, 2022. The provision for the quarter is the result of extended duration within the portfolio as well as realized charge-offs; however, overall we continue to experience positive credit trends The Company continues to estimate the allowance for credit losses with assumptions that anticipate slowing prepayment rates and continued market disruption caused by elevated inflation, supply chain issues and the impact of monetary policy on consumers and businesses. Net charge-offs for both the three months ended September 30, 2023, and 2022, were $1.6 million. For the three months ended September 30, 2023, gross charge-offs were $1.7 million, offset by gross recoveries of $65 thousand. In comparison, gross charge-offs were $1.7 million for the three months ended September 30, 2022, offset by gross recoveries of $76 thousand.

Nine months ended September 30, 2023, compared with nine months ended September 30, 2022: During the nine months ended September 30, 2023, there was a provision for credit losses of $1.2 million compared to a provision of $276 thousand during the nine months ended September 30, 2022. The increase in the provision for the nine months ended September 30, 2023, is the result of an increase in realized charge-offs and extension of duration in the portfolio. Net charge-offs for the nine months ended September 30, 2023, were $2.8 million compared to net charge-offs of $2.1 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, gross charge-offs were $3.4 million, offset by gross recoveries of $536 thousand. In comparison, gross charge-offs were $2.6 million for the nine months ended September 30, 2022, offset by gross recoveries of $453 thousand.

Non-Interest Income

The primary sources of non-interest income are service charges and fees, debit card income, mortgage banking income, and increases in the value of bank-owned life insurance. Non-interest income does not include loan origination or other loan fees, which are recognized as an adjustment to yield using the interest method.

Three months ended September 30, 2023, compared with three months ended September 30, 2022: The following table provides a comparison of the major components of non-interest income for the three months ended September 30, 2023, and 2022.

 

Non-Interest Income

For the Three Months Ended September 30,

										2023 vs. 2022
(Dollars in thousands)		2023				2022				Change				%
Service charges and fees		$	2,690			$	2,788			$	(98	)			(3.5	)%
Debit card income			2,591				2,682				(91	)			(3.4	)%
Mortgage banking			226				310				(84	)			(27.1	)%
Increase in value of bank-owned life insurance			794				754				40				5.3	%
Other
Investment referral income			101				137				(36	)			(26.3	)%
Trust income			291				249				42				16.9	%
Insurance sales commissions			264				242				22				9.1	%
Recovery on zero-basis purchased loans			2				129				(127	)			(98.4	)%
Income (loss) from equity method investments			(56	)			(56	)			—				—	%
Other non-interest income			1,833				1,751				82				4.7	%
Total other			2,435				2,452				(17	)			(0.7	)%
Subtotal			8,736				8,986				(250	)			(2.8	)%
Net gain (loss) on acquisition and branch sales			—				—				—				—	%
Net gain (loss) from securities transactions			(1	)			(17	)			16				(94.1	)%
Total non-interest income		$	8,735			$	8,969			$	(234	)			(2.6	)%

 

Total non-interest income decreased $234 thousand during the three months ended September 30, 2023, as compared to the same period in 2022. The decrease is largely attributable to decreases in recovery on zero-basis purchased loans of $127 thousand, service charges and fees of $98 thousand, debit card income of $91 thousand and mortgage banking income of $84 thousand. The decrease in mortgage banking income is due to decreased activity in held for sale mortgage portfolio primarily due to increases in mortgage interest rates.

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The increase in other non-interest income was primarily due to increases in loan repurchase obligation reversal which was partially offset by decreased gains from economic derivatives.

Nine months ended September 30, 2023, compared with nine months ended September 30, 2022: The following table provides a comparison of the major components of non-interest income for the nine months ended September 30, 2023, and 2022.

 

Non-Interest Income

For the Nine Months Ended September 30,

										2023 vs. 2022
(Dollars in thousands)		2023				2022				Change				%
Service charges and fees		$	7,888			$	7,927			$	(39	)			(0.5	)%
Debit card income			7,798				8,120				(322	)			(4.0	)%
Mortgage banking			527				1,300				(773	)			(59.5	)%
Increase in value of bank-owned life insurance			3,134				2,355				779				33.1	%
Other
Investment referral income			307				420				(113	)			(26.9	)%
Trust income			799				806				(7	)			(0.9	)%
Insurance sales commissions			405				354				51				14.4	%
Recovery on zero-basis purchased loans			515				163				352				216.0	%
Income from equity method investments			(167	)			(167	)			—				—	%
Other non-interest income			4,370				5,819				(1,449	)			(24.9	)%
Total other			6,229				7,395				(1,166	)			(15.8	)%
Subtotal			25,576				27,097				(1,521	)			(5.6	)%
Net gain (loss) on acquisition and branch sales			—				540				(540	)			(100.0	)%
Net gain (loss) from securities transactions			(1,291	)			(9	)			(1,282	)			14244.4	%
Total non-interest income		$	24,285			$	27,628			$	(3,343	)			(12.1	)%

 

Total non-interest income decreased $3.3 million during the nine months ended September 30, 2023, as compared to the same period in 2022. The decrease is largely attributable to $1.3 million net loss on the sale of available-for-sale securities, a $1.2 million decrease in other income and a $540 thousand gain on branch sale in 2022. The investment securities sold were lower yielding AFS securities and the proceeds from the sale were reinvested in higher yielding interest-earning assets and to paydown higher cost interest-bearing liabilities to enhance future earnings. The calculated earn-back is expected to be less than 12 months. The decrease in mortgage banking income is due to decreased activity in held for sale mortgage portfolio. The decrease in other non-interest income was primarily due to decreases in loan repurchase obligation reversal and reduced gains on economic derivatives.

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Non-Interest Expense

Three months ended September 30, 2023, compared with three months ended September 30, 2022: For the three months ended September 30, 2023, non-interest expense totaled $34.2 million, an increase of $2.0 million, when compared to the three months ended September 30, 2022. Changes in the various components of non-interest expense for the three months ended September 30, 2023, and 2022, are discussed in more detail in the following table.

Non-Interest Expense

For the Three Months Ended September 30,

										2023 vs. 2022
(Dollars in thousands)		2023				2022				Change				%
Salaries and employee benefits		$	15,857			$	15,442			$	415				2.7	%
Net occupancy and equipment			3,262				3,127				135				4.3	%
Data processing			4,553				4,138				415				10.0	%
Professional fees			1,312				1,265				47				3.7	%
Advertising and business development			1,419				1,191				228				19.1	%
Telecommunications			502				487				15				3.1	%
FDIC insurance			660				340				320				94.1	%
Courier and postage			548				436				112				25.7	%
Free nationwide ATM cost			516				551				(35	)			(6.4	)%
Amortization of core deposit intangible			799				957				(158	)			(16.5	)%
Loan expense			132				174				(42	)			(24.1	)%
Other real estate owned			128				188				(60	)			(31.9	)%
Other			4,556				3,825				731				19.1	%
Subtotal			34,244				32,121				2,123				6.6	%
Merger expenses			—				115				(115	)			(100.0	)%
Total non-interest expense		$	34,244			$	32,236			$	2,008				6.2	%

Salaries and employee benefits: There was an increase in salaries and employee benefits of $415 thousand for the period ended September 30, 2023, as compared to the same period in 2022. The increase is primarily due to increases in employee salaries and employee insurance cost, off-set by decreases in share-based compensation expense. The decrease in share-based compensation is due to the reversal of share-based compensation expense associated with the departure of senior management team members.

Data processing: There was an increase in data processing costs of $415 thousand for the period ended September 30, 2023, as compared to the same period in 2022. The increase is primarily due to inflationary effects on data processing vendor contracts.

FDIC insurance: FDIC insurance costs increased $320 thousand for the period ended September 30, 2023, as compared to the same period in 2022. The increase was primarily due to an increase in FDIC assessment rates.

Advertising and business development: There was an increase in advertising and business development costs of $228 thousand for the period ended September 30, 2023, as compared to the same period in 2022. The increase was primarily driven by additional expense to attract new deposit customers.

Other: Other non-interest expenses consists of subscriptions, memberships and dues, employee expenses, including travel, meals, entertainment and education, supplies, printing, insurance, account related losses, correspondent bank fees, customer program expenses, losses net of gains on the sale of fixed assets, losses net of gains on the sale of repossessed assets other than real estate, other operating expenses, such as settlement of claims, losses from limited partnerships entered into for tax credits and provision for unfunded commitments. The increase in the other expense category includes a loss of $335 thousand on the disposal of other assets, an increase of $266 thousand of recruiting expenses, and an increase in travel related expenses of $130 thousand.

 

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Nine months ended September 30, 2023, compared with nine months ended September 30, 2022: For the nine months ended September 30, 2023, non-interest expense totaled $100.6 million, an increase of $7.5 million, when compared to the nine months ended September 30, 2022. Changes in the various components of non-interest expense for the nine months ended September 30, 2023, and 2022, are discussed in more detail in the following table.

Non-Interest Expense

For the Nine Months Ended September 30,

 

										2023 vs. 2022
(Dollars in thousands)		2023				2022				Change				%
Salaries and employee benefits		$	47,786			$	45,893			$	1,893				4.1	%
Net occupancy and equipment			9,081				9,304				(223	)			(2.4	)%
Data processing			12,962				11,549				1,413				12.2	%
Professional fees			4,341				3,547				794				22.4	%
Advertising and business development			3,827				3,139				688				21.9	%
Telecommunications			1,503				1,399				104				7.4	%
FDIC insurance			1,535				780				755				96.8	%
Courier and postage			1,469				1,348				121				9.0	%
Free nationwide ATM cost			1,565				1,593				(28	)			(1.8	)%
Amortization of core deposit intangibles			2,635				3,118				(483	)			(15.5	)%
Loan expense			385				566				(181	)			(32.0	)%
Other real estate owned			318				201				117				58.2	%
Other			13,196				10,168				3,028				29.8	%
Sub-Total			100,603				92,605				7,998				8.6	%
Merger expenses			—				526				(526	)			(100.0	)%
Total non-interest expense		$	100,603			$	93,131			$	7,472				8.0	%

Salaries and employee benefits: There was a $1.9 million increase in salaries and employee benefits for the nine month period ended September 30, 2023, as compared to the same period in 2022. Salaries increased $2.1 million from September 30, 2022 and share-based compensation expense decreased by $505 thousand for the same period. The decrease in share-based compensation is due to the reversal of share-based compensation expense associated with the departure of senior management team members.

Data processing: There was an increase in data processing costs of $1.4 million for the nine month period ended September 30, 2023, as compared to the same period in 2022. The increase was primarily due to increases in data processing fees of $794 thousand, software license expenses of $259 thousand, credit card processing fees of $205 thousand, and debit card expenses of $200 thousand.

Professional fees: Costs of professional fees increased $794 thousand for the nine month period ended September 30, 2023, as compared to the same period in 2022. The increase was primarily due to increases in consulting fees of $636 thousand and attorney fees of $168 thousand.

FDIC insurance: FDIC insurance costs increased $755 thousand for the nine month period ended September 30, 2023, as compared to the same period in 2022. The increase was primarily due to an increase in FDIC assessment rates.

Advertising and business development: There was an increase in advertising and business development costs of $688 thousand for the nine month period ended September 30, 2023, as compared to the same period in 2022. The increase was primarily driven by additional expense to attract new deposit customers.

Other: Other non-interest expenses consists of subscriptions, memberships and dues, employee expenses, including travel, meals, entertainment and education, supplies, printing, insurance, account related losses, correspondent bank fees, customer program expenses, losses net of gains on the sale of fixed assets, losses net of gains on the sale of repossessed assets other than real estate, other operating expenses, such as settlement of claims, losses from limited partnerships entered into for tax credits and provision for unfunded commitments. In the other expense category, there was a net $3.0 million increase, or 29.8%, between the nine months ending September 30, 2023, and 2022. The increase was primarily due to additional amortization of solar tax credits of $1.0 million, $825 thousand increase in the estimated credit loss on unfunded commitments and an increase in travel related expenses $704 thousand.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in the internal evaluation of performance and is not defined under GAAP. For a reconciliation of non-GAAP financial measures see “Non-GAAP Financial Measures” in this Item 2. Our efficiency ratio is computed by dividing non-interest expense, excluding merger expenses, by the sum of net interest income and non-interest income, excluding net gain or loss from securities transactions.

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Generally, an increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources.

The efficiency ratio was 68.8% for the three months ended September 30, 2023, compared with 63.1% for the three months ended September 30, 2022. The increase was primarily due to an increase in non-interest expense as well as a decrease in net interest income.

The efficiency ratio was 69.3% for the nine months ended September 30, 2023, compared with 62.6% for the nine months ended September 30, 2022. The increase was primarily due to an increase in non-interest expense as well as a decrease in net interest income.

Income Taxes

 

In general, the Company records income tax expense each quarter based on its estimate as to the full year’s effective tax rate which includes, in addition to statutory rates, estimated amounts for tax-exempt interest income, non-taxable life insurance income, non-deductible executive compensation, valuation allowance on deferred assets, other non-deductible expense, and federal and state income tax credits anticipated to be available in proportion to anticipated annual income before income taxes. Certain items, however, are given discrete period treatment and the tax effects for such items are therefore reported in the quarter that an event arises. Events or items that may give rise to discrete recognition include excess tax benefits or shortfalls with respect to share-based compensation, changes in tax law, and non-deductible merger expense.

 

Three months ended September 30, 2023, compared with three months ended September 30, 2022: The effective income tax rate for the three month period ended September 30, 2023, was 13.5% as compared to 19.4% for the three month period ended September 30, 2022. Income tax expense for the three month period ended September 30, 2023, includes $4 thousand of tax benefit attributable to the settlement in stock of restricted stock units and the exercise of options and $476 thousand of benefit related to the recognition of federal tax credits net of related proportional amortization adjustments consistent with ASU 2023-02.

 

Nine months ended September 30, 2023, compared with nine months ended September 30, 2022: The effective income tax rate for the nine month period ended September 30, 2023, was 14.1% as compared to 16.2% for the nine month period ended September 30, 2022. Income tax expense for the nine month period ended September 30, 2023, includes $79 thousand of tax benefit attributable to the settlement in stock of restricted stock units and the exercise of options and $1.9 million of benefit related to the recognition of federal tax credits net of related proportional amortization adjustments consistent with ASU 2023-02.

 

Financial Condition

Total assets decreased $36.4 million from December 31, 2022, to $4.95 billion at September 30, 2023. This variance was primarily due to a decrease of available-for-sale securities of $127.4 and loans held for investment of $29.4 million, partially offset by an increase in cash and cash equivalents of $94.6 million. Total liabilities decreased $44.5 million to $4.53 billion at September 30, 2023. The change in total liabilities is mostly due to a decrease in total deposits of $159.6 million, partially offset by an increase in Federal Reserve Bank borrowings of $140.0 million. Total stockholders’ equity increased $8.0 million from $410.1 million at December 31, 2022, to $418.1 million at September 30, 2023, principally due to net income for the nine months ended September 30, 2023, offset by the increase in treasury stock and unrealized losses on available for sale securities, net of tax.

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Loan Portfolio

The following table summarizes our loan portfolio by type of loan as of the dates indicated.

Composition of Loan Portfolio

		September 30, 2023								December 31, 2022
		Amount				Percent				Amount				Percent				Change				%
		(Dollars in thousands)
Commercial and industrial		$	585,129				17.8	%		$	594,863				18.0	%		$	(9,734	)			(1.6	)%
Real estate loans:
Commercial real estate			1,721,761				52.5	%			1,721,268				52.0	%			493				0.0	%
Residential real estate			558,188				17.0	%			570,550				17.2	%			(12,362	)			(2.2	)%
Agricultural real estate			205,865				6.3	%			199,189				6.0	%			6,676				3.4	%
Total real estate loans			2,485,814				75.8	%			2,491,007				75.2	%			(5,193	)			(0.2	)%
Agricultural			103,352				3.1	%			120,003				3.6	%			(16,651	)			(13.9	)%
Consumer			107,823				3.3	%			105,675				3.2	%			2,148				2.0	%
Total loans held for investment		$	3,282,118				100.0	%		$	3,311,548				100.0	%		$	(29,430	)			(0.9	)%
Total loans held for sale		$	627				100.0	%		$	349				100.0	%		$	278				79.7	%
Total loans held for investment (net of allowances)		$	3,237,932				100.0	%		$	3,265,701				100.0	%		$	(27,769	)			(0.9	)%

Our commercial loan portfolio consists of various types of loans, most of which are generally made to borrowers located in the Wichita, Kansas City, and Tulsa Metropolitan Statistical Areas (“MSAs”), as well as various community markets throughout Arkansas, Kansas, Missouri, and Oklahoma. The majority of our portfolio consists of commercial and industrial and commercial real estate loans, and a substantial portion of our borrowers’ ability to honor their obligations is dependent on local economies in which they operate.

At September 30, 2023, gross total loans, including loans held for sale, were 80.4% of deposits and 66.4% of total assets. At December 31, 2022, gross total loans, including loans held for sale, were 78.1% of deposits and 66.5% of total assets.

We provide commercial lines of credit, working capital loans, commercial real estate loans (including loans secured by owner-occupied commercial properties), term loans, equipment financing, aircraft financing, real property acquisition and development loans, borrowing base loans, real estate construction loans, homebuilder loans, SBA loans, agricultural and agricultural real estate loans, letters of credit and other loan products to national and regional companies, real estate developers, mortgage lenders, manufacturing and industrial companies and other businesses. The types of loans we make to consumers include residential real estate loans, home equity loans, home equity lines of credit, installment loans, unsecured and secured personal lines of credit, overdraft protection, and letters of credit.

 

Commercial and industrial: Commercial and industrial loans include loans used to purchase fixed assets, to provide working capital or meet other financing needs of the business.

Commercial real estate: Commercial real estate loans include all loans secured by nonfarm nonresidential properties and multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.

Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences. Pools of mortgages are occasionally purchased to expand our loan portfolio and provide additional loan income.

Agricultural real estate, Agricultural, Consumer and other: Agricultural real estate loans are loans related to farmland. Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced. Consumer loans are generally secured by consumer assets but may be unsecured.

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The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of September 30, 2023, are summarized in the following table.

Loan Maturity and Sensitivity to Changes in Interest Rates

		As of September 30, 2023
		One year or less				After one year through five years				After five years through fifteen years				After fifteen years				Total
		(Dollars in thousands)
Commercial and industrial		$	163,001			$	343,980			$	74,825			$	3,323			$	585,129
Real Estate:
Commercial real estate			320,478				1,072,841				250,242				78,200				1,721,761
Residential real estate			1,256				10,008				126,656				420,268				558,188
Agricultural real estate			78,654				89,312				27,967				9,932				205,865
Total real estate			400,388				1,172,161				404,865				508,400				2,485,814
Agricultural			70,362				25,739				3,088				4,163				103,352
Consumer			32,391				51,529				21,890				2,013				107,823
Total		$	666,142			$	1,593,409			$	504,668			$	517,899			$	3,282,118
Loans with a predetermined fixed interest rate		$	249,721			$	720,631			$	135,580			$	293,296			$	1,399,228
Loans with an adjustable/floating interest rate			416,421				872,778				369,088				224,603				1,882,890
Total		$	666,142			$	1,593,409			$	504,668			$	517,899			$	3,282,118

The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of December 31, 2022, are summarized in the following table.

Loan Maturity and Sensitivity to Changes in Interest Rates

		As of December 31, 2022
		One year or less				After one year through five years				After five years through fifteen years				After fifteen years				Total
		(Dollars in thousands)
Commercial and industrial		$	194,487			$	310,839			$	84,930			$	4,607			$	594,863
Real Estate:
Commercial real estate			331,226				1,042,683				279,759				67,600				1,721,268
Residential real estate			1,293				9,647				122,509				437,101				570,550
Agricultural real estate			47,696				112,387				31,295				7,811				199,189
Total real estate			380,215				1,164,717				433,563				512,512				2,491,007
Agricultural			79,055				32,688				3,714				4,546				120,003
Consumer			35,026				45,258				23,091				2,300				105,675
Total		$	688,783			$	1,553,502			$	545,298			$	523,965			$	3,311,548
Loans with a predetermined fixed interest rate		$	218,417			$	771,980			$	181,239			$	306,537			$	1,478,173
Loans with an adjustable/floating interest rate			470,366				781,522				364,059				217,428				1,833,375
Total		$	688,783			$	1,553,502			$	545,298			$	523,965			$	3,311,548

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Credit Quality Indicators

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.

Nonperforming Assets

		September 30, 2023				December 31, 2022
		(Dollars in thousands)
Nonaccrual loans		$	19,435			$	17,601
Accruing loans 90 or more days past due			834				—
OREO acquired through foreclosure, net			214				600
Other repossessed assets			64				47
Total nonperforming assets		$	20,547			$	18,248
Ratios:
Nonperforming assets to total assets			0.42	%			0.37	%
Nonperforming assets to total loans plus OREO and repossessed assets			0.63	%			0.55	%

 

Generally, loans are designated as nonaccrual when either principal or interest payments are 90 days or more past due based on contractual terms, unless the loan is well secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual, or charged off, at an earlier date if collection of principal or interest is considered doubtful. When a loan is placed on nonaccrual status, unpaid interest credited to income earned in the current year is reversed against income and unpaid interest earned in prior years is charged off. Future interest income may be recorded on a cash basis after recovery of principal is reasonably assured. Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The nonperforming loans at September 30, 2023, consisted of 219 separate credits and 188 separate borrowers. We had 4 non-performing loan relationships, totaling $7.5 million, with an outstanding balance in excess of $1.0 million as of September 30, 2023.

There are several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by lenders and we also monitor delinquency levels for any negative or adverse trends. In accordance with applicable regulation, appraisals or evaluations are required to independently value real estate and are an important element to consider when underwriting loans secured in part or in whole by real estate. The value of real estate collateral provides additional support to the borrower’s credit capacity. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

Potential Problem Loans

Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which management has concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. Potential problem loans are assigned a grade of special mention or substandard. At September 30, 2023, the Company had $14.5 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $37.6 million at December 31, 2022.

With respect to potential problem loans, all monitored and under-performing loans are reviewed and evaluated to determine if they are impaired. If we determine that a loan is impaired, then we evaluate the borrower’s overall financial condition to determine the need, if any, for possible write downs or appropriate additions to the allowance for credit losses based on the unlikelihood of full repayment of principal and interest in accordance with the contractual terms or the net realizable value of the pledged collateral.

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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.

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The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data.

Allowance for Credit Losses
For the Quarters Ended,
(Dollars in thousands)
September 30, 2023		Commercial Real Estate				Commercial and Industrial				Residential Real Estate				Agricultural Real Estate				Agricultural				Consumer				Total
Allowance for credit losses (ACL)		$	13,696			$	18,960			$	7,336			$	1,200			$	1,324			$	1,670			$	44,186
Total loans outstanding (1)			1,721,761				585,129				558,188				205,865				103,352				107,823				3,282,118
Net (charge-offs) recoveries QTD			(2	)			(1,397	)			2				(3	)			—				(188	)			(1,588	)
Net (charge-offs) recoveries YTD			65				(2,421	)			3				—				47				(517	)			(2,823	)
Average loan balance QTD (1)			1,733,717				573,039				563,081				203,399				99,773				107,417				3,280,426
Average loan balance YTD (1)			1,750,349				580,359				566,080				202,963				100,450				106,841				3,307,042
Non-accrual loan balance			3,087				5,619				3,124				4,364				2,585				656				19,435
Loans to total loans outstanding			52.5	%			17.8	%			17.0	%			6.3	%			3.1	%			3.3	%			100.0	%
ACL to total loans			0.8	%			3.2	%			1.3	%			0.6	%			1.3	%			1.5	%			1.3	%
Net charge-offs to average loans QTD			—	%			(0.2	)%			—	%			—	%			—	%			(0.2	)%			—	%
Net charge-offs to average loans YTD			—	%			(0.4	)%			—	%			—	%			—	%			(0.5	)%			(0.1	)%
Non-accrual loans to total loans			0.2	%			1.0	%			0.6	%			2.1	%			2.5	%			0.6	%			0.6	%
ACL to non-accrual loans			443.7	%			337.4	%			234.8	%			27.5	%			51.2	%			254.6	%			227.4	%
September 30, 2022		Commercial Real Estate				Commercial and Industrial				Residential Real Estate				Agricultural Real Estate				Agricultural				Consumer				Total
Allowance for credit losses (ACL)		$	20,348			$	13,415			$	7,260			$	1,048			$	2,043			$	2,385			$	46,499
Total loans outstanding (1)			1,655,646				607,722				573,431				200,415				115,048				102,760				3,255,022
Net (charge-offs) recoveries QTD			(605	)			(705	)			(44	)			1				(44	)			(206	)			(1,603	)
Net (charge-offs) recoveries YTD			(837	)			(666	)			(58	)			8				(45	)			(544	)			(2,142	)
Average loan balance QTD (1)			1,667,823				575,149				581,389				200,534				113,351				101,205				3,239,451
Average loan balance YTD (1)			1,598,825				579,610				602,271				201,566				132,485				101,340				3,216,097
Non-accrual loan balance			5,341				7,536				3,269				3,268				3,441				274				23,129
Loans to total loans outstanding			50.9	%			18.7	%			17.6	%			6.2	%			3.5	%			3.2	%			100.0	%
ACL to total loans			1.2	%			2.2	%			1.3	%			0.5	%			1.8	%			2.3	%			1.4	%
Net charge-offs to average loans QTD			—	%			(0.1	)%			—	%			—	%			—	%			(0.2	)%			—	%
Net charge-offs to average loans YTD			(0.1	)%			(0.1	)%			—	%			—	%			—	%			(0.5	)%			(0.1	)%
Non-accrual loans to total loans			0.3	%			1.2	%			0.6	%			1.6	%			3.0	%			0.3	%			0.7	%
ACL to non-accrual loans			381.0	%			178.0	%			222.1	%			32.1	%			59.4	%			870.4	%			201.0	%

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Management believes that the allowance for credit losses at September 30, 2023, was adequate to cover current expected credit losses in the loan portfolio as of such date. There can be no assurance, however, that we will not sustain losses in future periods, which could be substantial in relation to the size of the allowance at September 30, 2023.

The allowance for credit losses on loans measured on a collective basis totaled $39.8 million, or 1.2% of the $3.26 billion in loans measured on a collective basis at September 30, 2023, compared to an allowance for credit losses of $40.9 million, or 1.2%, of the $3.29 billion in loans measured on a collective basis at December 31, 2022. The total reserve percentage to total loans was 1.3% at September 30, 2023, and 1.4% at December 31, 2022.

Securities

We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk, to meet pledging requirements and to meet regulatory capital requirements. At September 30, 2023, securities represented 21.4% of total assets, slightly decreasing from 23.8% at December 31, 2022.

At the date of purchase, debt securities are classified into one of two categories: held-to-maturity or available-for-sale. We do not purchase securities for trading purposes. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities that are classified as held-to-maturity are carried at cost, and adjusted for the amortization of premiums and the accretion of discounts, only if management has the positive intent and ability to hold those securities to maturity. Debt securities that are not classified as held-to-maturity are classified as available-for-sale and are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in total interest and dividend income. Also included in total interest and dividend income are dividends received on stock investments in the Federal Reserve Bank of Kansas City and the FHLB of Topeka. These stock investments are stated at cost.

The following table summarizes the amortized cost and fair value by classification of available-for-sale securities as of the dates shown.

Available-For-Sale Securities

		September 30, 2023								December 31, 2022
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(Dollars in thousands)
U.S. Government-sponsored entities		$	122,665			$	105,586			$	123,196			$	106,406
U.S. Treasury securities			259,253				233,912				257,690				232,158
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities			512,980				442,421				560,776				498,606
Private label residential mortgage-backed securities			173,876				144,835				190,889				163,560
Corporate			56,702				49,701				56,642				52,374
Small Business Administration loan pools			10,953				10,148				12,915				12,181
State and political subdivisions			84,261				70,406				130,311				119,105
Total available-for-sale securities		$	1,220,690			$	1,057,009			$	1,332,419			$	1,184,390

 

Held-To-Maturity Securities

 

		September 30, 2023								December 31, 2022
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(Dollars in thousands)
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		$	1,097			$	1,043			$	1,108			$	1,108
State and political subdivisions			1,115				1,081				840				865
Total held-to-maturity securities		$	2,212			$	2,124			$	1,948			$	1,973

At September 30, 2023, and December 31, 2022, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which aggregate par value exceeded 10% of consolidated stockholders’ equity at the reporting dates noted.

The following tables summarize the contractual maturity of debt securities and their weighted average yields as of September 30, 2023, and December 31, 2022. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without call or prepayment penalties.

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Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Available-for-sale securities are shown at fair value and held-to-maturity securities are shown at cost, adjusted for the amortization of premiums and the accretion of discounts.

		September 30, 2023
		Due in one year or less								Due after one year through five years								Due after five years through 10 years								Due after 10 years								Total
		Carrying Value				Yield				Carrying Value				Yield				Carrying Value				Yield				Carrying Value				Yield				Carrying Value				Yield
		(Dollars in thousands)
Available-for-sale securities:
U.S. Government-sponsored entities		$	19,029				0.50	%		$	47,935				1.00	%		$	36,995				1.66	%		$	1,627				2.02	%		$	105,586				1.15	%
U.S. Treasury securities			1,020				4.73	%			232,892				1.19	%			—				—	%			—				—	%			233,912				5.92	%
Mortgage-backed securities
Government-sponsored residential    mortgage-backed securities			—				—	%			101,071				1.43	%			136,864				1.93	%			204,486				2.62	%			442,421				2.13	%
Private label residential    mortgage-backed securities			—				—	%			—				—	%			—				—	%			144,835				2.19	%			144,835				2.19	%
Corporate			—				—	%			7,994				7.47	%			41,707				4.63	%			—				—	%			49,701				5.08	%
Small Business    Administration loan pools			—				—	%			—				—	%			6,795				4.91	%			3,353				1.87	%			10,148				3.91	%
State and political subdivisions(1)			3,364				1.99	%			8,458				2.40	%			28,934				2.02	%			29,650				2.34	%			70,406				2.20	%
Total available-for-sale securities			23,413				0.90	%			398,350				1.38	%			251,295				2.43	%			383,951				2.43	%			1,057,009				2.00	%
Held-to-maturity securities:
Mortgage-backed securities
Government-sponsored residential    mortgage-backed securities			—				—	%			—				—	%			—				—	%			1,097				4.92	%			1,097				4.92	%
State and political subdivisions(1)			—				—	%			—				—	%			—				—	%			1,115				4.62	%			1,115				4.62	%
Total held-to-maturity securities			—				—	%			—				—	%			—				—	%			2,212				4.77	%			2,212				4.77	%
Total debt securities		$	23,413				0.90	%		$	398,350				1.38	%		$	251,295				2.43	%		$	386,163				2.44	%		$	1,059,221				2.00	%

 

		December 31, 2022
		Due in one year or less								Due after one year through five years								Due after five years through 10 years								Due after 10 years								Total
		Carrying Value				Yield				Carrying Value				Yield				Carrying Value				Yield				Carrying Value				Yield				Carrying Value				Yield
		(Dollars in thousands)
Available-for-sale securities:
U.S. Government-sponsored entities		$	—				—	%		$	49,100				0.74	%		$	54,094				1.51	%		$	3,212				1.96	%		$	106,406				1.17	%
U.S. Treasury securities			—				—	%			222,552				1.18	%			9,606				1.32	%			—				—	%			232,158				1.19	%
Mortgage-backed securities
Government-sponsored residential    mortgage-backed securities			—				—	%			89,698				1.44	%			161,354				1.86	%			247,554				2.50	%			498,606				2.10	%
Private label residential    mortgage-backed securities			—				—	%			—				—	%			—				—	%			163,560				2.21	%			163,560				2.21	%
Corporate			—				—	%			7,904				6.20	%			44,470				4.65	%			—				—	%			52,374				4.88	%
Small Business    Administration loan pools			—				—	%			—				—	%			7,676				3.53	%			4,505				1.79	%			12,181				2.89	%
State and political subdivisions(1)			4,958				2.61	%			18,601				2.42	%			42,088				2.31	%			53,458				2.50	%			119,105				2.43	%
Total available-for-sale securities			4,958				2.61	%			387,855				1.35	%			319,288				2.27	%			472,289				2.39	%			1,184,390				2.02	%
Held-to-maturity securities:
Mortgage-backed securities
Government-sponsored residential    mortgage-backed securities			—				—	%			—				—	%			—				—	%			1,108				4.96	%			1,108				4.96	%
State and political subdivisions(1)			—				—	%			—				—	%			—				—	%			840				4.57	%			840				4.57	%
Total held-to-maturity securities			—				—	%			—				—	%			—				—	%			1,948				4.79	%			1,948				4.79	%
Total debt securities		$	4,958				2.61	%		$	387,855				1.35	%		$	319,288				2.27	%		$	474,237				2.40	%		$	1,186,338				2.02	%

Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages which are principally issued by federal agencies such as Ginnie Mae, Fannie Mae, and Freddie Mac. Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Premiums and discounts on mortgage-backed securities are amortized and accreted over the expected life of the security and may be impacted by prepayments.

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As such, mortgage-backed securities which are purchased at a premium will generally produce decreasing net yields as interest rates drop because homeowners tend to refinance their mortgages, resulting in prepayments and an acceleration of premium amortization. Securities purchased at a discount will reflect higher net yields in a decreasing interest rate environment, as prepayments result in an acceleration of discount accretion.

The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected lives because borrowers have the right to prepay their obligations at any time. Monthly pay downs on mortgage-backed securities cause the average lives of these securities to be much different than their stated lives. At September 30, 2023, and December 31, 2022, 59.6% and 62.1% of the residential mortgage-backed securities held by us had contractual final maturities of more than ten years, with a weighted average life of 5.2 years and 5.1 years and a modified duration of 4.4 years and 4.3 years.

Goodwill Impairment Assessment

At September 30, 2023, we performed an interim qualitative analysis and concluded there were no indications that goodwill was impaired.

Deposits

Our lending and investing activities are primarily funded by deposits. A variety of deposit accounts are offered with a wide range of interest rates and terms including demand, savings, money market, and time deposits. We rely primarily on competitive pricing policies, convenient locations, comprehensive marketing strategy, and personalized service to attract and retain these deposits.

The following table shows our composition of deposits at September 30, 2023, and December 31, 2022.

Composition of Deposits

		September 30, 2023								December 31, 2022
		Amount				Percent of Total				Amount				Percent of Total
		(Dollars in thousands)
Non-interest-bearing demand		$	936,217				22.9	%		$	1,097,899				25.9	%
Interest-bearing demand			947,464				23.2	%			1,061,264				25.0	%
Savings and money market			1,449,539				35.5	%			1,268,320				29.9	%
Time			748,950				18.4	%			814,324				19.2	%
Total deposits		$	4,082,170				100.0	%		$	4,241,807				100.0	%

Total deposits at September 30, 2023, were $4.08 billion, an decrease of $159.6 million, or 3.8%, compared to total deposits of $4.24 billion at December 31, 2022.

Equity Bank participates in the Insured Cash Sweep (“ICS”) service that allows the Bank to break large non-time deposits into smaller amounts and place them in a network of other ICS banks to ensure FDIC insurance coverage on the entire deposit. These deposits are placed through ICS services, but are Equity Bank’s customer relationships that management views as core funding. The Bank also participates in the Certificate of Deposit Account Registry Service (“CDARS”) program. CDARS allows the bank to break large time deposits into smaller amounts and place them in a network of other CDARS banks to ensure FDIC insurance coverage on the entire deposit. Reciprocal deposits are not considered brokered deposits as long as the aggregate balance is less than the lesser of 20% of total liabilities or $5.0 billion and Equity Bank is well capitalized and well rated. All non-reciprocal deposits and reciprocal deposits in excess of regulatory limits are considered brokered deposits.

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The following table lists reciprocal and brokered deposits included in total deposits categorized by type at September 30, 2023, and December 31, 2022.

		September 30, 2023				December 31, 2022
Interest-bearing demand		(Dollars in thousands)
Reciprocal		$	124,398			$	17,717
Total interest-bearing demand			124,398				17,717
Savings and money market
Reciprocal			323,308				282,705
Total savings and money market			323,308				282,705
Time
Reciprocal			20,739				11,764
Non-reciprocal brokered			149,930				251,799
Total time			170,669				263,563
Total reciprocal and brokered deposits		$	618,375			$	563,985

The following table provides information on the maturity distribution of time deposits of $250 thousand or more as of September 30, 2023, and December 31, 2022.

		September 30, 2023				December 31, 2022				Change				%
		(Dollars in thousands)
3 months or less		$	49,614			$	40,578			$	9,036				22.3	%
Over 3 through 6 months			58,772				51,365				7,407				14.4	%
Over 6 through 12 months			83,895				19,191				64,704				337.2	%
Over 12 months			25,895				34,586				(8,691	)			(25.1	)%
Total Time Deposits		$	218,176			$	145,720			$	72,456				49.7	%

Other Borrowed Funds

We utilize borrowings to supplement deposits to fund our lending and investing activities. Short-term borrowings and long-term borrowings include federal funds purchased and retail repurchase agreements, FHLB advances, Federal Reserve Bank borrowings, a bank stock loan, and subordinated debt. For additional information see “NOTE 6 – BORROWINGS” in the Condensed Notes to Interim Consolidated Financial Statement.

Liquidity and Capital Resources

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. Recent issues in the banking sector that stem from the failures of several banks has caused banks to increase available liquidity sources and more closely monitor deposit runoff. Prior to the quarter ending March 31, 2023, Equity Bank pledged additional investments to the Federal Reserve Bank and borrowed $140 million under the Bank Term Funding Program as a precaution; however, the Company did not experience the same level of deposit runoff which, the Company believes, is due to the difference in the types of deposits being offered, deposit concentration and ALM management practices as compared to the recent failed financial institutions.

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During the nine months ended September 30, 2023, and 2022, our liquidity needs have primarily been met by core deposits, security and loan maturities, and amortizing investment and loan portfolios. Other funding sources include federal funds purchased, brokered certificates of deposit, borrowings from the FHLB, and the Federal Reserve Bank borrowings.

Our largest sources of funds are deposits, Federal Reserve Bank borrowings and FHLB borrowings and largest uses of funds are loans, securities and debt repayment. Average loans were $3.31 billion for the nine months ended September 30, 2023, an increase of 2.3% over the December 31, 2022, average balance. Excess deposits are primarily invested in our interest-bearing deposit account with the Federal Reserve Bank of Kansas City, investment securities, federal funds sold or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio has a weighted average life of 5.2 years and a modified duration of 4.5 years at September 30, 2023.

Cash and cash equivalents were $199.0 million at September 30, 2023, an increase of $94.6 million from the $104.4 million cash and cash equivalents at December 31, 2022. The increase in cash and cash equivalents is driven by $120.6 million net cash provided by investing activities, $63.6 million net cash provided by operating activities, offset by $89.6 million net cash used in financing activities. The $89.6 million net change in cash provided by financing activities includes increases in FHLB term advances of $1.1 billion and federal reserve bank borrowings of $141.0 million, offset by net outflows of $966.1 million for paydown of FHLB term advances, $159.7 million in outflows for the decrease in deposits, $138.9 million outflow for net borrowings on the FHLB line of credit and $17.6 million outflow for the repurchase of treasury stock. Cash and cash equivalents at January 1, 2023, plus liquidity provided by operating activities, pay downs, sales, and maturities of investment securities, Federal Reserve Bank borrowings and FHLB borrowings during the first nine months of 2023 were used to originate or purchase loans and to purchase investment securities. We believe that our daily funding needs can be met through cash provided by operating activities, payments and maturities on loans and investment securities, the core deposit base and FHLB advances and other borrowing relationships.

Off-Balance-Sheet Items

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments.

Standby and Performance Letters of Credit: For additional information see “NOTE 11 – COMMITMENTS AND CREDIT RISK” in the Condensed Notes to Interim Consolidated Financial Statement.

Commitments to Extend Credit: For additional information see “NOTE 11 – COMMITMENTS AND CREDIT RISK” in the Condensed Notes to Interim Consolidated Financial Statement.

 

Capital Resources

Capital management consists of providing equity to support our current and future operations. The federal bank regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As a financial holding company and a state-chartered-Fed-member bank, the Company and Equity Bank are subject to regulatory capital requirements.

Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of September 30, 2023, and December 31, 2022, the Company and Equity Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized; although, these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and acquisitions, and capital restoration plans are required.

Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver. As of September 30, 2023, the most recent notifications from the federal regulatory agencies categorized Equity Bank as “well capitalized” under the regulatory framework for prompt corrective action.

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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.

Non-GAAP Financial Measures

We identify certain financial measures discussed in this Quarterly Report as being “non-GAAP financial measures.” In accordance with SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios, or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Quarterly Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the way we calculate the non-GAAP financial measures that we discuss in this Quarterly Report may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar to, or with names like, the non-GAAP financial measures we have discussed in this Quarterly Report when comparing such non-GAAP financial measures.

Tangible Book Value Per Common Share and Tangible Book Value Per Diluted Common Share: Tangible book value is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate: (a) tangible common equity as total stockholders’ equity less preferred stock, goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); (b) tangible book value per common share as tangible common equity (as described in clause (a)) divided by shares of common stock outstanding; and (c) tangible book value per diluted common share as tangible common equity (as described in clause (a)) divided by diluted shares of common stock outstanding. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value.

Management believes that these measures are important to many investors who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity, tangible book value per common share, and tangible book value per diluted common share and compares these values with book value per common share.

										As of the period ended
		September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
		(Dollars in thousands, except per share data)
Total stockholders’ equity		$	418,130			$	418,435			$	425,123			$	410,058			$	395,806
Less: goodwill			53,101				53,101				53,101				53,101				53,101
Less: core deposit intangibles, net			7,961				8,760				9,678				10,596				11,598
Less: mortgage servicing asset, net			100				126				151				176				201
Less: naming rights, net			1,011				1,022				1,033				1,044				1,054
Tangible common equity		$	355,957			$	355,426			$	361,160			$	345,141			$	329,852
Common shares issued at period end			15,413,064				15,396,739				15,730,257				15,930,112				16,017,834
Diluted common shares outstanding at period end			15,500,749				15,468,319				15,822,536				16,163,253				16,225,591
Book value per common share		$	27.13			$	27.18			$	27.03			$	25.74			$	24.71
Tangible book value per common share		$	23.09			$	23.08			$	22.96			$	21.67			$	20.59
Tangible book value per diluted common share		$	22.96			$	22.98			$	22.83			$	21.35			$	20.33

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)).

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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.

		As of the period ended
		September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
		(Dollars in thousands)
Total stockholders’ equity		$	418,130			$	418,435			$	425,123			$	410,058			$	395,806
Less: goodwill			53,101				53,101				53,101				53,101				53,101
Less: core deposit intangibles, net			7,961				8,760				9,678				10,596				11,598
Less: mortgage servicing asset, net			100				126				151				176				201
Less: naming rights, net			1,011				1,022				1,033				1,044				1,054
Tangible common equity		$	355,957			$	355,426			$	361,160			$	345,141			$	329,852
Total assets		$	4,945,267			$	5,094,883			$	5,156,716			$	4,981,651			$	5,000,415
Less: goodwill			53,101				53,101				53,101				53,101				53,101
Less: core deposit intangibles, net			7,961				8,760				9,678				10,596				11,598
Less: mortgage servicing asset, net			100				126				151				176				201
Less: naming rights, net			1,011				1,022				1,033				1,044				1,054
Tangible assets		$	4,883,094			$	5,031,874			$	5,092,753			$	4,916,734			$	4,934,461
Equity to assets			8.46	%			8.21	%			8.24	%			8.23	%			7.92	%
Tangible common equity to tangible assets			7.29	%			7.06	%			7.09	%			7.02	%			6.68	%

Return on Average Tangible Common Equity: Return on average tangible common equity is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (a) average tangible common equity as total average stockholders’ equity less average goodwill, core deposit intangibles (net of accumulated amortization), and other intangible assets (net of accumulated amortization); (b) adjusted net income allocable to common stockholders as net income allocable to common stockholders plus intangible asset amortization (net of taxes); and (c) return on average tangible common equity as annualized adjusted net income allocable to common stockholders (as described in clause (b)) divided by average tangible common equity (as described in clause (a)). For return on average tangible common equity, the most directly comparable financial measure calculated in accordance with GAAP is return on average equity.

Management believes that this measure is important to many investors in the marketplace who are interested in earnings quality on tangible common equity. Goodwill and other intangible assets have the effect of increasing total stockholders’ equity while not increasing tangible common equity.

The following table reconciles, as of the dates set forth below, return on average stockholders’ equity and return on average tangible common equity.

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		For the three months ended
		September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
		(Dollars in thousands)
Total average stockholders’ equity		$	426,260			$	424,862			$	420,500			$	398,270			$	436,191
Less: average intangible assets			62,635				63,453				64,447				65,450				66,445
Average tangible common equity		$	363,625			$	361,409			$	356,053			$	332,820			$	369,746
Net income (loss) allocable to common stockholders		$	12,341			$	11,456			$	12,323			$	11,608			$	15,171
Amortization of intangible assets			835				954				954				961				992
Less: tax effect			175				200				200				202				208
Adjusted net income allocable to common    stockholders		$	13,001			$	12,210			$	13,077			$	12,367			$	15,955
Return on total average stockholders’ equity    (ROAE) annualized			11.49	%			10.82	%			11.89	%			11.57	%			13.80	%
Return on average tangible common equity    (ROATCE) annualized			14.18	%			13.55	%			14.89	%			14.74	%			17.12	%

Efficiency Ratio: The efficiency ratio is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate the efficiency ratio by dividing non-interest expense, excluding merger expenses, by the sum of net interest income and non-interest income, excluding net gain on acquisition and branch sales, and net gain (loss) from securities transactions. The GAAP-based efficiency ratio is non-interest expense divided by net interest income plus non-interest income.

In management’s judgment, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess operating expenses in relation to operating revenue by removing merger expenses, net gain (loss) from securities transactions, and net gain in acquisition and branch sales.

The following table reconciles, as of the dates set forth below, the efficiency ratio to the GAAP-based efficiency ratio.

		For the three months ended
		September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
		(Dollars in thousands)
Non-interest expense		$	34,244			$	33,130			$	33,229			$	35,249			$	32,236
Less: merger expense			—				—				—				68				115
Non-interest expense, excluding loss on    debt extinguishment and merger expense		$	34,244			$	33,130			$	33,229			$	35,181			$	32,121
Net interest income		$	41,012			$	39,429			$	39,110			$	42,031			$	41,944
Non-interest income		$	8,735			$	6,950			$	8,600			$	8,329			$	8,969
Less: net gain on acquisition and branch sales			—				—				—				422				—
Less: net gain (loss) from securities transactions			(1	)			(1,322	)			32				14				(17	)
Non-interest income, excluding net gain (loss) from    securities transactions and net gain on acquisition and branch sales		$	8,736			$	8,272			$	8,568			$	7,893			$	8,986
Net interest income plus non-interest income,    excluding net gain on acquisition and branch sales and net gain    (loss) from securities transactions		$	49,748			$	47,701			$	47,678			$	49,924			$	50,930
Non-interest expense to net interest income    plus non-interest income			68.84	%			71.43	%			69.65	%			69.99	%			63.32	%
Efficiency Ratio			68.83	%			69.45	%			69.69	%			70.47	%			63.07	%

 

 

 

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.

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As a financial institution, the primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short-term maturity. Interest rate risk is the potential of economic gains or losses due to future interest rate changes. These changes can be reflected in future net interest income and/or fair market values. The objective is to measure the effect on net interest income (“NII”) and economic value of equity (“EVE”) and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage interest rate exposure by structuring the balance sheet in the ordinary course of business. We have the ability to enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial futures contracts or forward delivery contracts for the purpose of reducing interest rate risk. Currently, we do not have a material exposure to these instruments. We also have the ability to enter into interest rate swaps as an accommodation to our customers in connection with an interest rate swap program. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Our exposure to interest rate risk is managed by the Asset Liability Committee (“ALCO”), which is composed of certain members of senior management, in accordance with policies approved by the Board of Directors. ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. ALCO meets monthly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, securities purchased and sale activities, commitments to originate loans and the maturities of investment securities and borrowings. Additionally, the ALCO reviews liquidity, projected cash flows, maturities of deposits and consumer and commercial deposit activity.

ALCO uses a simulation analysis to monitor and manage the pricing and maturity of assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The simulation tests the sensitivity of NII and EVE. Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options within the investment securities portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. All assumptions are as of the base period without consideration of preceding market rate changes and any lag in impact to NII. The depicted expectations are management's estimate exclusive of any non-contractual lagging impacts that have not yet been realized in income from preceding changes to interest rates. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the future NII and EVE. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

The change in the impact of net interest income from the base case for September 30, 2023, and December 31, 2022, was primarily driven by the rate and mix of variable and fixed rate financial instruments, the underlying duration of the financial instruments and the level of response to changes in the interest rate environment.

 

The increase in the level of positive impact to net interest income in the up interest rate shock scenarios is due to the level of adjustable rate loans receivable that will reprice to higher interest rates, non-term deposits that will adjust to higher rates but at a slower pace, the use of derivatives to hedge borrowing costs, reduced levels of fixed rate investments, reduced duration of asset based cash flow hedges, and elevated levels of cash on the balance sheet compared to December 31, 2022. These factors result in the positive impacts to net interest income in the up interest rate shock scenarios that are detailed in the table below. In the down interest rate shock scenario, the main drivers of the negative impact on net interest income are the downward pricing of variable rate loans receivable and the level of term deposit repricing; and the assumed prepayment and scheduled repayment of existing fixed rate loans receivable and fixed rate investments. These factors result in the negative impact to net interest income in the down interest rate shock scenario.

 

The change in the economic value of equity from the base case for September 30, 2023, and December 31, 2022 is due to being in a liability sensitive position and the level of convexity in our pre-payable assets. Generally, with a liability sensitive position, as interest rates increase, the value of your assets decrease faster than the value of liabilities and, as interest rates decrease, the value of your assets increase at a faster rate than liabilities. Due to the level of convexity in our fixed rate pre-payable assets, we do not experience a similar change in the value of assets in a down interest rate shock scenario; however, due to the current level of convexity in our fixed rate pre-payable assets becoming less negative and positive, in some cases, on a portion of or portfolio has resulted in the overall value of assets increasing more than liabilities. In addition, the mix of interest-bearing deposit and non-interest-bearing deposits impact the level of deposit decay and the resulting benefit of discounting from the non-interest-bearing deposits. At September 30, 2023, non-interest-bearing deposits were approximately $161.7 million, or 14.73%, lower than that deposit type at December 31, 2022. Substantially all investments and approximately 42.5% of loans are prepayable and fixed rate and as rates decrease the level of modeled prepayments increase.

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The prepaid principal is assumed to reprice at the assumed current rates, resulting in a smaller positive impact to the economic value of equity.

Management utilizes static balance sheet rate shocks to estimate the potential impact on various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet. The following table summarizes the simulated immediate change in net interest income for twelve months as of the dates indicated.

Market Risk

		Impact on Net Interest Income
Change in prevailing interest rates		September 30, 2023				December 31, 2022
+300 basis points			7.3	%			5.0	%
+200 basis points			4.8	%			3.3	%
+100 basis points			2.4	%			1.6	%
0 basis points			—				—
-100 basis points			(1.3	)%			(2.3	)%
-200 basis points			(2.3	)%			(6.0	)%

The following table summarizes the simulated immediate impact on economic value of equity as of the dates indicated.

 

		Impact on Economic Value of Equity
Change in prevailing interest rates		September 30, 2023				December 31, 2022
+300 basis points			(10.2	)%			(10.7	)%
+200 basis points			(6.3	)%			(6.6	)%
+100 basis points			(3.2	)%			(3.3	)%
0 basis points			—				—
-100 basis points			1.5	%			0.7	%
-200 basis points			1.9	%			(0.5	)%

 

Item 4: Controls and Procedures

Evaluation of disclosure controls and procedures

An evaluation of the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply judgment in evaluating its controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms.

Changes in internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

 

 

Item 1: Legal Proceedings

From time to time, we are a party to various litigation matters incidental to the conduct of our business. See “NOTE 12 – LEGAL MATTERS” of the Condensed Notes to Interim Consolidated Financial Statements under Item 1 to this Quarterly report for a complete discussion of litigation matters.

 

Item 1A: Risk Factors

Other than the risk factors set forth below, there have been no material changes in the Company’s risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 9, 2023.

 

Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.

The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank and First Republic Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks like Equity Bank. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact Equity Bank's liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.

Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.

The Company and Equity Bank anticipate increased regulatory scrutiny and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community. Equity Bank's level of uninsured deposits as a percentage of non-brokered deposits was 36.4% at September 30, 2023, and 25.3% at December 31, 2022.

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

Repurchase of Common Stock

In September of 2022, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's outstanding common stock, from time to time, beginning October 1, 2022, and concluded on September 30, 2023. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and it could be extended, modified or discontinued at any time without notice. Under this program, during the years ended December 31, 2022, and 2023, the Company repurchased a total of 832,893 shares of the Company’s outstanding common stock at an average price paid of $27.89 per share. At September 30, 2023, there are 167,107 shares remaining under the program that expired on September 30, 2023.

 

On July 26, 2023, the Board of Directors of Equity Bancshares, Inc. approved a share repurchase plan for up to 1,000,000 shares of outstanding common stock beginning on October 1, 2023, and concluding on September 30, 2024. The repurchase program does not obligate Equity to acquire a specific dollar amount or number of shares, and it may be extended, modified or discontinued at any time without notice. Non-objection from the Federal Reserve Bank of Kansas City related to this repurchase plan was received September 27, 2023.

No shares were repurchased under the program during the third quarter of 2023.

 

 

 

 

 

 

 

 

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Item 3: Defaults Upon Senior Securities

None

 

Item 4: Mine Safety Disclosures

Not applicable.

 

Item 5: Other Information

 

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

 

Appointment of Chris M. Navratil as Executive Vice President and Chief Financial Officer of Equity Bank

 

On August 4, 2023, the Company announced the appointment of Chris M. Navratil as Executive Vice President and Chief Financial Officer of the Company.

 

In connection with his appointment, Mr. Navratil entered into an employment agreement, dated November 6, 2023, by and among the Company, Equity Bank and Mr. Navratil. The initial term of the employment agreement is three years and will automatically renew for successive one-year periods thereafter, unless the agreement is terminated in accordance with its terms. Under the terms of the employment agreement, Mr. Navratil will receive a base salary of $275,000 and a target annual incentive bonus of 50% of his base salary. Mr. Navratil will also be eligible to receive an annual equity award with a target grant date fair value equal to 50% of his base salary, which may be subject to certain vesting, performance and other conditions.

 

Mr. Navratil’s employment agreement provides that upon the termination of his employment by Mr. Navratil for good reason or by Equity Bank without cause, Mr. Navratil will be entitled to receive his base salary for a period of twelve months following such termination, subject to compliance with the terms of the employment agreement and execution of a general release in favor of the Company and Equity Bank.

 

Mr. Navratil’s employment agreement contains a change in control provision that provides for a payment to him if his employment is terminated by Mr. Navratil for good reason, by Equity Bank (or its successor) without cause, or due to Equity Bank’s (or its successor’s) nonrenewal of the employment agreement within 24 months after a qualifying change in control. Upon a qualifying change in control and termination of his employment, Mr. Navratil would be entitled to a payment equal to 2.99 times the sum of (i) his prior year’s base salary and (ii) all other cash compensation paid to him and received during such year. Any payments pursuant to the change in control provision are subject to compliance with restrictions imposed by the Internal Revenue Code. Additionally, Mr. Navratil is bound by the restrictive covenants set forth in his employment agreement.

 

 

 

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Item 6: Exhibits

 

Exhibit No.		Description
10.1†*		Employment Agreement, dated November 6, 2023, by and between Equity Bank and Chris M. Navratil.
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*		Inline XBRL Taxonomy Extension Schema Document.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

 

* Filed herewith.

** These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

† Represents a management contract or a compensatory plan or arrangement.

 

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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.

		Equity Bancshares, Inc.
November 9, 2023		By:		/s/ Brad S. Elliott
Date				Brad S. Elliott
				Chairman and Chief Executive Officer
November 9, 2023		By:		/s/ Chris M. Navratil
Date				Chris M. Navratil
				Executive Vice President and Chief Financial Officer

 

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