10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2016

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 200

Wichita, KS

  67207
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: 316.612.6000

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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x  Yes    ¨  No

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

     Shares outstanding as of
April 30, 2016

Class A Common Stock, par value $0.01 per share

       7,154,705  

Class B Non-Voting Common Stock, par value $0.01 per share

       1,061,710  

 

 

 


Table of Contents

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

     9   
 

Condensed Notes to Interim Consolidated Financial Statements

     10   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   
 

Overview

     29   
 

Critical Accounting Policies

     30   
 

Results of Operations

     33   
 

Financial Condition

     39   
 

Liquidity and Capital Resources

     51   
 

Non-GAAP Financial Measures

     53   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     56   
Item 4.  

Controls and Procedures

     57   
Part II  

OTHER INFORMATION

     57   
Item 1.  

Legal Proceedings

     57   
Item 1A.  

Risk Factors

     58   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     58   
Item 3.  

Defaults Upon Senior Securities

     58   
Item 4.  

Mine Safety Disclosures

     58   
Item 5.  

Other Information

     58   
Item 6.  

Exhibits

     58   

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 17, 2016, 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 are not limited to, the following:

 

    an economic downturn, especially one affecting our core market areas;

 

    the occurrence of various events that negatively impact the real estate market, since a significant portion of our loan portfolio is secured by real estate;

 

    difficult or unfavorable conditions in the market for financial products and services generally;

 

    interest rate fluctuations, which could have an adverse effect on our profitability;

 

    external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System, or the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;

 

    continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;

 

    costs arising from the environmental risks associated with making loans secured by real estate;

 

    losses resulting from a decline in the credit quality of the assets that we hold;

 

    inadequacies in our allowance for loan losses, which could require us to take a charge to earnings and thereby adversely affect our financial condition;

 

    inaccuracies or changes in the appraised value of real estate securing the loans that we originate, which could lead to losses if the real estate collateral is later foreclosed upon and sold at a price lower than the appraised value;

 

    the costs of integrating the businesses we acquire, which may be greater than expected;

 

    challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;

 

    a lack of liquidity resulting from decreased loan repayment rates, lower deposit balances, or other factors;

 

    restraints on the ability of Equity Bank to pay dividends to us, which could limit our liquidity;

 

    the loss of our largest loan and depositor relationships;

 

    limitations on our ability to lend and to mitigate the risks associated with our lending activities as a result of our size and capital position;

 

    additional regulatory requirements and restrictions on our business, which could impose additional costs on us;

 

    increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;

 

    a failure in the internal controls we have implemented to address the risks inherent to the business of banking;

 

    inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;

 

    the departure of key members of our management personnel or our inability to hire qualified management personnel;

 

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    disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;

 

    unauthorized access to nonpublic personal information of our customers, which could expose us to litigation or reputational harm;

 

    disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;

 

    the occurrence of adverse weather or manmade events, which could negatively affect our core markets or disrupt our operations;

 

    an increase in FDIC deposit insurance assessments, which could adversely affect our earnings;

 

    an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies; and

 

    other factors that are discussed in “Risk Factors.”

The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this Quarterly Report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral 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

March 31, 2016 and December 31, 2015

(Dollar amounts in thousands, except per share data)

 

     (Unaudited)
March 31,
    December 31,  
     2016     2015  

ASSETS

    

Cash and due from banks

   $ 23,926      $ 36,276   

Federal funds sold

     20,660        20,553   
  

 

 

   

 

 

 

Cash and cash equivalents

     44,586        56,829   

Interest-bearing time deposits in other banks

     5,245        5,245   

Available-for-sale securities

     113,821        130,810   

Held-to-maturity securities, fair value of $306,840 and $312,802

     301,931        310,539   

Loans held for sale

     3,200        3,504   

Loans, net of allowance for loan losses of $5,980 and $5,506

     932,075        954,849   

Other real estate owned, net

     5,894        5,811   

Premises and equipment, net

     38,871        39,147   

Bank owned life insurance

     32,806        32,555   

Federal Reserve Bank and Federal Home Loan Bank stock

     14,974        11,013   

Interest receivable

     4,353        4,540   

Goodwill

     18,130        18,130   

Core deposit intangible, net

     1,462        1,549   

Other

     11,381        11,206   
  

 

 

   

 

 

 

Total assets

   $ 1,528,729      $ 1,585,727   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

    

Demand

   $ 162,528      $ 157,834   
  

 

 

   

 

 

 

Total non-interest-bearing deposits

     162,528        157,834   
  

 

 

   

 

 

 

Savings, NOW, and money market

     641,125        619,468   

Time

     430,512        438,612   
  

 

 

   

 

 

 

Total interest-bearing deposits

     1,071,637        1,058,080   
  

 

 

   

 

 

 

Total deposits

     1,234,165        1,215,914   

Federal funds purchased and retail repurchase agreements

     21,802        20,762   

Federal Home Loan Bank advances

     99,538        145,439   

Bank stock loan

     —          18,612   

Subordinated debentures

     9,311        9,251   

Contractual obligations

     3,079        3,093   

Interest payable and other liabilities

     5,742        5,423   
  

 

 

   

 

 

 

Total liabilities

     1,373,637        1,418,494   

Commitments and contingent liabilities, see Notes 10 and 11

    

Stockholders’ equity, see Note 6

    

Preferred stock, Series C (liquidation preference of $16,372)

     —          16,372   

Common stock

     97        97   

Additional paid-in capital

     138,292        138,077   

Retained earnings

     38,394        34,955   

Accumulated other comprehensive loss

     (1,794     (2,371

Employee stock loans

     (242     (242

Treasury stock

     (19,655     (19,655
  

 

 

   

 

 

 

Total stockholders’ equity

     155,092        167,233   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,528,729      $ 1,585,727   
  

 

 

   

 

 

 

See accompanying condensed notes to interim consolidated financial statements.

 

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EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

Three Months ended March 31, 2016 and 2015

(Dollar amounts in thousands, except per share data)

 

     (Unaudited)
Three Months Ended
March 31,
 
     2016     2015  

Interest and dividend income

    

Loans, including fees

   $ 11,841      $ 10,412   

Securities, taxable

     2,209        1,733   

Securities, nontaxable

     328        190   

Federal funds sold and other

     484        97   
  

 

 

   

 

 

 

Total interest and dividend income

     14,862        12,432   

Interest expense

    

Deposits

     1,607        1,036   

Federal funds purchased and retail repurchase agreements

     12        16   

Federal Home Loan Bank advances

     332        38   

Bank stock loan

     —          151   

Subordinated debentures

     153        158   
  

 

 

   

 

 

 

Total interest expense

     2,104        1,399   

Net interest income

     12,758        11,033   

Provision for loan losses

     723        725   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     12,035        10,308   

Non-interest income

    

Service charges and fees

     779        555   

Debit card income

     677        441   

Mortgage banking

     242        203   

Increase in value of bank owned life insurance

     251        235   

Net gain on sale of available-for-sale securities

     420        368   

Other

     329        595   
  

 

 

   

 

 

 

Total non-interest income

     2,698        2,397   

Non-interest expense

    

Salaries and employee benefits

     5,212        4,722   

Net occupancy and equipment

     1,094        1,106   

Data processing

     838        654   

Professional fees

     449        471   

Advertising and business development

     218        291   

Telecommunications

     231        181   

FDIC insurance

     258        176   

Courier and postage

     145        137   

Amortization of core deposit intangible

     87        60   

Loan expense

     92        60   

Other real estate owned

     66        65   

Loss on debt extinguishment

     58        316   

Other

     941        779   
  

 

 

   

 

 

 

Total non-interest expense

     9,689        9,018   
  

 

 

   

 

 

 

Income before income taxes

     5,044        3,687   

Provision for income taxes

     1,604        1,246   
  

 

 

   

 

 

 

Net income

     3,440        2,441   

Dividends and discount accretion on preferred stock

     (1     (43
  

 

 

   

 

 

 

Net income allocable to common stockholders

   $ 3,439      $ 2,398   
  

 

 

   

 

 

 

Basic earnings per share

   $ 0.42      $ 0.38   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 0.41      $ 0.38   
  

 

 

   

 

 

 

See accompanying condensed notes to interim consolidated financial statements.

 

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EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months ended March 31, 2016 and 2015

(Dollar amounts in thousands)

 

     (Unaudited)
Three Months Ended
March 31,
 
     2016     2015  

Net income

   $ 3,440      $ 2,441   

Other comprehensive income:

    

Unrealized holding gains (losses) arising during the period on available-for-sale securities

     1,208        379   

Amortization of unrealized losses on held-to-maturity securities

     140        263   

Reclassification adjustment for net gains included in net income

     (420     (368
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     928        274   

Tax effect

     (351     (104
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     577        170   
  

 

 

   

 

 

 

Comprehensive income

   $ 4,017      $ 2,611   
  

 

 

   

 

 

 

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 March 31, 2016 and 2015

(Unaudited)

(Dollar amounts in thousands, except per share data)

 

     Preferred
Stock
    Common Stock         
     Series C     Shares
Outstanding
     Amount      Additional
Paid-In
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (loss)
    Employee
Stock
Loans
    Treasury
Stock
    Total
Stockholders’
Equity
 

Balance at January 1, 2015

   $ 16,359        6,067,511       $ 76       $ 98,398       $ 24,832      $ (2,281   $ —        $ (19,655   $ 117,729   

Net income

     —          —           —           —           2,441        —          —          —          2,441   

Other comprehensive income, net of tax effects

     —          —           —           —           —          170        —          —          170   

Accretion of discount on preferred stock

     2        —           —           —           (2     —          —          —          —     

Stock based compensation

     —          —           —           175         —          —          —          —          175   

Cash dividends declared and accrued on preferred stock

     —          —           —           —           (41     —          —          —          (41
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

   $ 16,361        6,067,511       $ 76       $ 98,573       $ 27,230      $ (2,111   $ —        $ (19,655   $ 120,474   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2016

   $ 16,372        8,211,727       $ 97       $ 138,077       $ 34,955      $ (2,371   $ (242   $ (19,655   $ 167,233   

Net income

     —          —           —           —           3,440        —          —          —          3,440   

Other comprehensive income, net of tax effects

     —          —           —           —           —          577        —          —          577   

Retirement of preferred stock

     (16,372     —           —           —           —          —          —          —          (16,372

Stock based compensation

     —          —           —           215         —          —          —          —          215   

Cash dividends declared and accrued on preferred stock

     —          —           —           —           (1     —          —          —          (1
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ —          8,211,727       $ 97       $ 138,292       $ 38,394      $ (1,794   $ (242   $ (19,655   $ 155,092   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying condensed notes to interim consolidated financial statements.

 

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EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months ended March 31, 2016 and 2015

(Dollar amounts in thousands, except per share data)

 

     (Unaudited)
March 31,
 
     2016     2015  

Cash flows from operating activities

    

Net income

   $ 3,440      $ 2,441   

Adjustments to reconcile net income to net cash from operating activities:

    

Stock based compensation

     215        175   

Depreciation

     425        400   

Provision for loan losses

     723        725   

Net accretion (amortization) of purchase valuation adjustments

     28        (371

Amortization of premiums and discounts on securities

     564        457   

Amortization of intangibles

     88        60   

Deferred income taxes

     (22     (28

FHLB stock dividends

     (162     (13

Loss (gain) on sales and valuation adjustments on other real estate owned

     (2     24   

Net loss (gain) on sales of securities

     (420     (368

Loss (gain) on disposal of premise and equipment

     —          (9

Loss (gain) on sales of loans

     (199     (176

Originations of loans held for sale

     (8,651     (8,675

Proceeds from the sale of loans held for sale

     9,154        7,640   

Increase in the value of bank owned life insurance

     (251     (235

Change in fair value of derivatives recognized in earnings

     4        6   

Net change in:

    

Interest receivable

     187        (103

Other assets

     (510     216   

Interest payable and other liabilities

     (167     1,172   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     4,444        3,338   

Cash flows to investing activities

    

Purchases of available-for-sale securities

     (10,200     (24,230

Purchases of held-to-maturity securities

     (1,042     (62,904

Proceeds from sales, calls, pay-downs, and maturities of available-for-sale securities

     28,292        18,325   

Proceeds from calls, pay-downs and maturities of held-to-maturity securities

     9,331        12,211   

Net change in interest-bearing time deposits in other banks

     —          2,727   

Net change in loans

     22,280        (18,770

Purchase of premises and equipment

     (149     (92

Proceeds from sale of premise and equipment

     —          15   

Net purchases of FHLB and FRB stock

     (3,799     (3,017

Proceeds from sale of other real estate owned

     252        444   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     44,965        (75,291

Cash flows (to) from financing activities

    

Net increase (decrease) in deposits

     18,249        (14,439

Net change in federal funds purchased and retail repurchase agreements

     1,040        177   

Net borrowings (payments) on Federal Home Loan Bank line of credit

     (45,901     72,197   

Principal payments on Federal Home Loan Bank term advances

     —          (4,432

Principal payments on bank stock loan

     (18,612     (389

Redemption of Series C preferred stock

     (16,372     —     

Net change in contractual obligations

     (14     (41

Dividends paid on preferred stock

     (42     (41
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (61,652     53,032   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (12,243     (18,921

Cash and cash equivalents, beginning of period

     56,829        31,707   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 44,586      $ 12,786   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 2,044      $ 1,471   

Income taxes paid, net of refunds

     86        600   

Supplemental noncash disclosures:

    

Other real estate owned acquired in settlement of loans

     333        475   

Preferred stock dividends payable at period end

     —          41   

Securities purchased but not settled

     —          2,477   

Loans purchased but not settled

     —          5,000   

See accompanying condensed notes to interim consolidated financial statements.

 

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EQUITY BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

(Dollar amounts in thousands, except per share data)

NOTE 1 – BASIS OF PRESENTATION

The interim consolidated financial statements include the accounts of Equity Bancshares, Inc., its wholly owned subsidiary, Equity Bank and Equity Bank’s wholly owned subsidiary, SA Holdings, Inc. These entities are collectively referred to as the “Company”. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are of a normal recurring nature. These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2016. Operating results for three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other period.

Recent Accounting Pronouncements:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The amendments should be applied retrospectively to all periods presented or retrospectively with the cumulative effect recognized at the date of initial application. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

In January 2016, FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The main provisions of the update are to eliminate the available-for-sale classification of accounting for equity securities and to adjust fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Generally, early adoption of the amendments in this update is not permitted. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

In February 2016, FASB issued ASU 2016-02, Leases, with the intention of improving financial reporting about leasing transactions. The ASU requires all lessees to recognize lease assets and lease liabilities on the balance sheet. Lessor accounting is largely unchanged by the ASU, however disclosures about the amount, timing, and uncertainty of cash flows arising from leases are required of both lessees and lessors. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach provides for optional practical expedients when applying the ASU to leases that commenced before the effective date of the ASU. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements but expects that assets and liabilities will increase to reflect the impact of this standard.

In March 2016, FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which will change how the Company accounts for certain aspects of share-based payments to employees. Under the guidance, excess tax benefits generated when the tax-return deductible compensation expense for the award exceeds the cumulative compensation cost recognized for financial reporting purposes will be recorded as an income tax benefit in the income statement rather than being recognized directly to additional paid-in capital. The accounting for an employee’s use of shares to satisfy the Company’s statutory income tax withholding obligation and for forfeitures is also changing. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and all guidance will be applied prospectively. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

 

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NOTE 2 – SECURITIES

The amortized cost and fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

March 31, 2016

           

Available-for-sale securities

           

U.S. government-sponsored entities

   $ 12,102       $ 36       $ (60    $ 12,078   

Residential mortgage-backed securities (issued by government-sponsored entities)

     97,021         512         (10      97,523   

Corporate

     3,000         —           (60      2,940   

Small Business Administration loan pools

     250         21         —           271   

State and political subdivisions

     503         6         —           509   

Equity securities

     500         —           —           500   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 113,376       $ 575       $ (130    $ 113,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

Available-for-sale securities

           

U.S. government-sponsored entities

   $ 17,090       $ 23       $ (77    $ 17,036   

Residential mortgage-backed securities (issued by government-sponsored entities)

     109,784         234         (497      109,521   

Corporate

     3,000         —           (46      2,954   

Small Business Administration loan pools

     275         22         —           297   

State and political subdivisions

     504         4         —           508   

Equity securities

     500         —           (6      494   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 131,153       $ 283       $ (626    $ 130,810   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of held-to-maturity securities and the related gross unrecognized gains and losses were as follows:

 

     Amortized
Cost
     Gross
Unrecognized
Gains
     Gross
Unrecognized
Losses
     Fair
Value
 

March 31, 2016

           

Held-to-maturity securities

           

U.S. Government-sponsored entities

   $ 2,636       $ —         $ (5    $ 2,631   

Residential mortgage-backed (securities issued by government sponsored entities)

     223,033         3,169         (63      226,139   

Corporate

     12,984         211         (921      12,274   

Small Business Administration loan pools

     2,636         52         —           2,688   

State and political subdivisions

     60,642         2,478         (12      63,108   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 301,931       $ 5,910       $ (1,001    $ 306,840   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

Held-to-maturity securities

           

U.S. Government-sponsored entities

   $ 2,669       $ —         $ (26    $ 2,643   

Residential mortgage-backed (securities issued by government sponsored entities)

     230,554         1,208         (769      230,993   

Corporate

     12,983         135         (360      12,758   

Small Business Administration loan pools

     2,863         17         (5      2,875   

State and political subdivisions

     61,470         2,077         (14      63,533   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 310,539       $ 3,437       $ (1,174    $ 312,802   
  

 

 

    

 

 

    

 

 

    

 

 

 

The tables above present unrecognized losses on held-to-maturity securities since date of designation.

 

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The fair value and amortized cost of debt securities at March 31, 2016, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

     Available-for-Sale      Held-to-Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Within one year

   $ 100       $ 101       $ 2,458       $ 2,479   

One to five years

     7,770         7,811         14,799         15,224   

Five to ten years

     7,735         7,615         27,776         29,389   

After ten years

     250         271         33,865         33,609   

Mortgage-backed securities

     97,021         97,523         223,033         226,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

   $ 112,876       $ 113,321       $ 301,931       $ 306,840   
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $329,380 at March 31, 2016 and $368,926 at December 31, 2015.

The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015:

 

     Less Than 12 Months     12 Months or More     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

March 31, 2016

               

Available-for-sale securities

               

U.S. Government-sponsored entities

   $ 4,675       $ (60   $ —         $ —        $ 4,675       $ (60

Residential mortgage-backed (issued by government-sponsored entities)

     14,534         (10     —           —          14,534         (10

Corporate

     2,940         (60     —           —          2,940         (60
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 22,149       $ (130   $ —         $ —        $ 22,149       $ (130
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2015

               

Available-for-sale securities

               

U.S. Government-sponsored entities

   $ 9,923       $ (77   $ —         $ —        $ 9,923       $ (77

Residential mortgage-backed (issued by government-sponsored entities)

     89,235         (497     —           —          89,235         (497

Corporate

     2,954         (46     —           —          2,954         (46

Equity securities

     —           —          494         (6     494         (6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 102,112       $ (620   $ 494       $ (6   $ 102,606       $ (626
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Less Than 12 Months     12 Months or More     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

March 31, 2016

               

Held-to-maturity securities

               

U.S. Government-sponsored entities

   $ 2,631       $ (5   $ —         $ —        $ 2,631       $ (5

Residential mortgage-backed (issued by government-sponsored entities)

     59,953         (168     51,571         (447     111,524         (615

Corporate

     —           —          6,710         (921     6,710         (921

Small Business Administration loan pools

     —           —          1,461         (14     1,461         (14

State and political subdivisions

     5,785         (32     520         (7     6,305         (39
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 68,369       $ (205   $ 60,262       $ (1,389   $ 128,631       $ (1,594
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2015

               

Held-to-maturity securities

               

U.S. Government-sponsored entities

   $ 2,643       $ (26   $ —         $ —        $ 2,643       $ (26

Residential mortgage-backed (issued by government-sponsored entities)

     99,181         (1,077     87,992         (1,629     187,173         (2,706

Corporate

     5,505         (12     7,253         (360     12,758         (372

Small Business Administration loan pools

     1,315         (5     1,560         (40     2,875         (45

State and political subdivisions

     3,180         (29     6,300         (77     9,480         (106
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 111,824       $ (1,149   $ 103,105       $ (2,106   $ 214,929       $ (3,255
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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As of March 31, 2016, the Company held 5 available-for-sale securities and 64 held-to-maturity securities in an unrealized loss position. The tables above present unrealized losses on held-to maturity securities since the date of the securities purchases, independent of the impact associated with changes in cost basis upon transfer from the available-for-sale designation to the held-to-maturity designation.

Unrealized losses on securities have not been recognized into income because the security issuers are of high credit quality, management does not intend to sell and it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.

The proceeds from sales and the associated gains and losses on available-for-sale securities reclassified from other comprehensive income to income are listed below:

 

     Three Months Ended
March 31,
 
     2016      2015  

Proceeds

   $ 20,459       $ 17,105   

Gross gains

     420         368   

Gross losses

     —           —     

Income tax expense on net realized gains

     161         141   

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Categories of loans at March 31, 2016 and December 31, 2015 include:

 

     March 31,
2016
     December 31,
2015
 

Commercial real estate

   $ 397,501       $ 397,017   

Commercial and industrial

     247,097         262,032   

Residential real estate

     243,727         250,216   

Agricultural real estate

     16,749         18,180   

Consumer

     17,487         17,103   

Agricultural

     15,494         15,807   
  

 

 

    

 

 

 

Total loans

     938,055         960,355   

Allowance for loan losses

     (5,980      (5,506
  

 

 

    

 

 

 

Net loans

   $ 932,075       $ 954,849   
  

 

 

    

 

 

 

In 2015, the Company began to participate in mortgage finance loans with another institution, “the originator.” These mortgage finance loans consist of ownership interests purchased in single family residential mortgages funded through the originator’s mortgage finance group. These loans are typically on the Company’s balance sheet for 10 to 20 days. As of March 31, 2016 and December 31, 2015, the Company had balances of $2,605 and $18,852 in mortgage finance loans classified as commercial and industrial.

From time to time the Company has purchased pools of residential real estate loans originated by other financial institutions to hold for investment with the intent to diversify the residential real estate portfolio. As of March 31, 2016 and December 31, 2015, residential real estate loans include $72,621 and $74,738 of purchased residential real estate loans from these pools of residential real estate loans.

Over-draft deposit accounts are reclassified and included in consumer loans above. These accounts totaled $246 at March 31, 2016 and $280 at December 31, 2015.

 

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The following tables present the activity in the allowance for loan losses by class for the three-month periods ended March 31, 2016 and 2015:

 

March 31, 2016

   Commercial
Real Estate
    Commercial
and Industrial
    Residential
Real
Estate
    Agricultural
Real
Estate
    Consumer     Agricultural     Total  

Allowance for loan losses:

              

Beginning balance

   $ 2,051      $ 1,366      $ 1,824      $ 29      $ 187      $ 49      $ 5,506   

Provision for loan losses

     253        245        158        35        (3     35        723   

Loans charged-off

     (34     (55     (48     (23     (128     (3     (291

Recoveries

     5        7        6               23        1        42   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 2,275      $ 1,563      $ 1,940      $ 41      $ 79      $ 82      $ 5,980   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

March 31, 2015

   Commercial
Real Estate
    Commercial
and Industrial
    Residential
Real
Estate
    Agricultural
Real
Estate
    Consumer     Agricultural     Total  

Allowance for loan losses:

              

Beginning balance

   $ 2,897      $ 1,559      $ 1,190      $ 148      $ 81      $ 88      $ 5,963   

Provision for loan losses

     174        403        160        (10     20        (22     725   

Loans charged-off

     (28     (6     (84            (60            (178

Recoveries

     36        3        1               15               55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 3,079      $ 1,959      $ 1,267      $ 138      $ 56      $ 66      $ 6,565   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present the recorded investment in loans and the balance in the allowance for loan losses by portfolio and class based on impairment method as of March 31, 2016 and December 31, 2015:

 

March 31, 2016

   Commercial
Real Estate
     Commercial
and Industrial
     Residential
Real
Estate
     Agricultural
Real
Estate
     Consumer      Agricultural      Total  

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 325       $ 26       $ 60       $       $ 18       $ 25       $ 454   

Collectively evaluated for impairment

     1,950         1,537         1,880         41         61         57         5,526   

Purchase credit impaired loans

                                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,275       $ 1,563       $ 1,940       $ 41       $ 79       $ 82       $ 5,980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan Balance:

                    

Individually evaluated for impairment

   $ 3,561       $ 854       $ 1,363       $ 744       $ 179       $ 92       $ 6,793   

Collectively evaluated for impairment

     389,990         246,243         241,015         16,005         17,299         15,402         925,954   

Purchase credit impaired loans

     3,950                 1,349                 9                 5,308   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 397,501       $ 247,097       $ 243,727       $ 16,749       $ 17,487       $ 15,494       $ 938,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

   Commercial
Real Estate
     Commercial
and Industrial
     Residential
Real
Estate
     Agricultural
Real
Estate
     Consumer      Agricultural      Total  

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 190       $ 6       $ 66       $       $ 7       $       $ 269   

Collectively evaluated for impairment

     1,861         1,360         1,758         29         180         49         5,237   

Purchase credit impaired loans

                                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,051       $ 1,366       $ 1,824       $ 29       $ 187       $ 49       $ 5,506   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan Balance:

                    

Individually evaluated for impairment

   $ 2,893       $ 1,182       $ 1,491       $       $ 72       $ 95       $ 5,733   

Collectively evaluated for impairment

     389,756         260,850         247,368         18,180         17,000         15,712         948,866   

Purchase credit impaired loans

     4,368                 1,357                 31                 5,756   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 397,017       $ 262,032       $ 250,216       $ 18,180       $ 17,103       $ 15,807       $ 960,355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents information related to impaired loans, excluding purchased credit impaired loans which have not deteriorated since acquisition, by class of loans as of and for the three months ended March 31, 2016:

 

     March 31, 2016      December 31, 2015  
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

With no related allowance recorded:

                 

Commercial real estate

   $ 1,868       $ 1,502       $ —         $ 563       $ 536       $ —     

Commercial and industrial

     1,668         720         —           2,668         1,119         —     

Residential real estate

     1,159         699         —           984         585         —     

Agricultural real estate

     744         744         —           —           —           —     

Consumer

     —           —           —           —           —           —     

Agricultural

     —           —           —           95         95         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     5,439         3,665         —           4,310         2,335         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                 

Commercial real estate

     3,673         2,891         325         4,217         3,176         190   

Commercial and industrial

     136         134         26         93         63         6   

Residential real estate

     706         664         60         697         660         66   

Agricultural real estate

     —           —           —           —           —           —     

Consumer

     187         179         18         75         72         7   

Agricultural

     94         92         25         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     4,796         3,960         454         5,082         3,971         269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,235       $ 7,625       $ 454       $ 9,392       $ 6,306       $ 269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents average recorded investment and interest income related to impaired loans for the three months ended March 31, 2016 and 2015. Interest income recognized in the following table was substantially recognized on the cash basis. The recorded investment in loans excludes accrued interest receivable due to immateriality.

 

     As of the three months ended  
     March 31, 2016      March 31, 2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial real estate

   $ 1,068       $ —         $ 1,380       $ 1   

Commercial and industrial

     944         —           507         —     

Residential real estate

     681         —           547         —     

Agricultural real estate

     186         —           110         —     

Consumer

     13         —           7         —     

Agricultural

     71         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,963         —           2,551         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Commercial real estate

     3,091         —           5,694         —     

Commercial and industrial

     107         —           1,340         4   

Residential real estate

     789         —           845         —     

Agricultural real estate

     —           —           148         —     

Consumer

     139         —           24         —     

Agricultural

     23         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     4,149         —           8,051         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,112       $ —         $ 10,602       $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following tables present the aging of the recorded investment in past due loans as of March 31, 2016 and December 31, 2015, by portfolio and class of loans:

 

March 31, 2016

   30 - 59
Days
Past Due
     60 - 89
Days
Past Due
     Greater Than
90 Days Past
Due Still On
Accrual
     Nonaccrual      Loans Not
Past Due
     Total  

Commercial real estate

   $ 354       $ —         $ —         $ 4,960       $ 392,187       $ 397,501   

Commercial and industrial

     9         17         —           854         246,217         247,097   

Residential real estate

     156         671         —           2,200         240,700         243,727   

Agricultural real estate

     —           —           —           744         16,005         16,749   

Consumer

     66         63         —           188         17,170         17,487   

Agricultural

     —           152         —           92         15,250         15,494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 585       $ 903       $ —         $ 9,038       $ 927,529       $ 938,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

   30 - 59
Days
Past Due
     60 - 89
Days
Past Due
     Greater Than
90 Days Past
Due Still On
Accrual
     Nonaccrual      Loans Not
Past Due
     Total  

Commercial real estate

   $ 645       $ 108       $ —         $ 4,448       $ 391,816       $ 397,017   

Commercial and industrial

     2         164         —           1,182         260,684         262,032   

Residential real estate

     166         545         35         2,369         247,101         250,216   

Agricultural real estate

     138         —           —           —           18,042         18,180   

Consumer

     96         97         —           103         16,807         17,103   

Agricultural

     —           —           —           95         15,712         15,807   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,047       $ 914       $ 35       $ 8,197       $ 950,162       $ 960,355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The risk category of loans by class of loans is as follows as of March 31, 2016 and December 31, 2015:

 

March 31, 2016

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial real estate

   $ 388,722       $ —         $ 8,779       $ —         $ 397,501   

Commercial and industrial

     246,078         —           1,019         —           247,097   

Residential real estate

     241,198         —           2,529         —           243,727   

Agricultural real estate

     15,636         —           1,113         —           16,749   

Consumer

     17,299         —           188         —           17,487   

Agricultural

     15,397         —           97         —           15,494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 924,330       $ —         $ 13,725       $ —         $ 938,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2015

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial real estate

   $ 386,917       $ —         $ 10,100       $ —         $ 397,017   

Commercial and industrial

     260,669         —           1,363         —           262,032   

Residential real estate

     246,901         —           3,315         —           250,216   

Agricultural real estate

     17,810         —           370         —           18,180   

Consumer

     17,000         —           103         —           17,103   

Agricultural

     15,707         —           100         —           15,807   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 945,004       $ —         $ 15,351       $ —         $ 960,355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Purchased Credit Impaired Loans

The Company has acquired loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investments in purchase credit impaired loans as of March 31, 2016 and December 31, 2015 were as follows:

 

     March 31,
2016
     December 31,
2015
 

Contractually required principal payments

   $ 6,962       $ 7,550   

Discount

     (1,654      (1,794
  

 

 

    

 

 

 

Recorded investment

   $ 5,308       $ 5,756   
  

 

 

    

 

 

 

The accretable yield associated with these loans was $838 and $935 as of March 31, 2016 and December 31, 2015. The interest income recognized on these loans for the three-month periods ended March 31, 2016 and 2015 was $152 and $166. For the three- month periods ended March 31, 2016 and 2015, no provision for loan losses was recorded for these loans.

Troubled Debt Restructurings

The Company had no loans modified under troubled debt restructurings as of March 31, 2016 or December 31, 2015.

NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and its sources of funding these assets. The Company will periodically enter into interest rate swaps or interest rate caps/floors to manage certain interest rate risk exposure.

Interest Rate Swaps Designated as Fair Value Hedges:

The Company periodically enters into interest rate swaps to hedge the fair value of certain commercial real estate loans. These transactions are designated as fair value hedges. In this type of transaction, the Company typically receives from the counterparty a variable-rate cash flow based on the one-month London Interbank Offered Rate (“LIBOR”) plus a spread to this index and pays a fixed-rate cash flow equal to the customer loan rate. At March 31, 2016, the portfolio of interest rate swaps had a weighted average maturity of 8.2 years, a weighted average pay rate of 3.82% and a weighted average rate received of 2.94%. At December 31, 2015, the portfolio of interest rate swaps had a weighted average maturity of 10.0 years, a weighted average pay rate of 4.45% and a weighted average rate received of 2.37%.

Stand-Alone Derivatives:

In 2009, the Company purchased an interest rate cap derivative to assist with interest rate risk management. This derivative is not designated as a hedging instrument but rather as a stand-alone derivative. At March 31, 2016, the interest rate cap had a term of 3.7 years and a cap rate of 4.50%. At December 31, 2015, the interest rate cap had a term of 3.9 years and a cap rate of 4.50%.

Reconciliation of Derivative Fair Values and Gains/(Losses):

The notional amount of a derivative contract is a factor in determining periodic interest payments or cash flows received or paid. The notional amount of derivatives serves as a level of involvement in various types of derivatives. The notional amount does not represent the Company’s overall exposure to credit or market risk, generally, the exposure is significantly smaller.

 

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Table of Contents

The following table shows the notional balances and fair values (including net accrued interest) of the derivatives outstanding by derivative type at March 31, 2016 and December 31, 2015:

 

     March 31, 2016     December 31, 2015  
     Notional
Amount
     Derivative
Assets
     Derivative
Liabilities
    Notional
Amount
     Derivative
Assets
     Derivative
Liabilities
 

Derivatives designated as hedging instruments:

                

Interest rate swaps

   $ 21,242       $ —         $ 774      $ 12,284       $ —         $ 246   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging relationships

     21,242         —           774        12,284         —           246   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

                

Interest rate caps/floors

     3,072         1         —          3,140         2         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

     3,072         1         —          3,140         2         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 24,314         1         774      $ 15,424         2         246   
  

 

 

         

 

 

       

Cash collateral

        —           (610        —           (270

Netting adjustments

        —           —             24         24   
     

 

 

    

 

 

      

 

 

    

 

 

 

Net amount presented in Balance Sheet

      $ 1       $ 164         $ 26       $ —     
     

 

 

    

 

 

      

 

 

    

 

 

 

For the three-month periods ended March 31, 2016 and 2015, the Company recorded net losses on derivatives and hedging activities:

 

     March 31,
2016
     March 31,
2015
 

Derivatives designated as hedging instruments:

     

Interest rate swaps

   $ —         $ —     
  

 

 

    

 

 

 

Total net gain (loss) related to fair value hedge ineffectiveness

     —           —     
  

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

     

Economic hedges:

     

Interest rate caps/floors

     (1      (5
  

 

 

    

 

 

 

Total net gains (losses) related to derivatives not designated as hedging instruments

     (1      (5
  

 

 

    

 

 

 

Net gains (losses) on derivatives and hedging activities

   $ (1    $ (5
  

 

 

    

 

 

 

The following table shows the recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Company’s net interest income for the three-month period ended March 31, 2016. No fair value hedging relationships were outstanding at March 31, 2015.

 

     March 31, 2016  
     Gain/(Loss)
on
Derivatives
     Gain/(Loss)
on Hedged
Items
     Net Fair Value
Hedge
Ineffectiveness
     Effect of
Derivatives on
Net Interest
Income
 

Commercial real estate loans

   $ (525    $ 525       $ —         $ (39
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (525    $ 525       $ —         $ (39
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTE 5 – BORROWINGS

Federal funds purchased and retail repurchase agreements

Federal funds purchased and retail repurchase agreements as of March 31, 2016 and December 31, 2015 were as follows:

 

     March 31,
2016
     December 31,
2015
 

Federal funds purchased

   $ —         $ —     

Retail repurchase agreements

     21,802         20,762   

The Company has available federal funds lines of credit with its correspondent banks.

Securities sold under agreements to repurchase (retail repurchase agreements) consist of obligations of the Company to other parties. The obligations are secured by residential mortgage-backed securities held by the Company with a fair value of $23,415 and $25,756 at March 31, 2016 and December 31, 2015. The agreements are on a day-to-day basis and can be terminated on demand.

 

     March 31,
2016
    December 31,
2015
 

Average daily balance during the period

   $ 21,254      $ 24,853   

Average interest rate during the period

     0.24     0.24

Maximum month-end balance during the period

   $ 21,802      $ 27,951   

Weighted average interest rate at period-end

     0.24     0.24

Federal Home Loan Bank advances

Federal Home Loan Bank advances as of March 31, 2016 and December 31, 2015 were as follows:

 

     March 31,
2016
     December 31,
2015
 

Federal Home Loan Bank line of credit advances

   $ 99,538       $ 145,439   

Federal Home Loan Bank fixed rate term advances

     —           —     
  

 

 

    

 

 

 

Total Federal Home Loan Bank advances

   $ 99,538       $ 145,439   
  

 

 

    

 

 

 

At March 31, 2016, the Company had $99,538 drawn against its line of credit at a weighted average rate of 0.54%. At December 31, 2015, the $145,439 drawn against the Federal Home Loan Bank line of credit was at a weighted average rate of 0.48%.

In February 2015, all of the Company’s Federal Home Loan Bank term advances were prepaid. The Company recorded a loss on debt extinguishment of $316 for the three months ended March 31, 2015 in connection with the prepayment of the Federal Home Loan Bank term advances.

At March 31, 2016 and December 31, 2015, the Company had undisbursed advance commitments (letters of credit) with the Federal Home Loan Bank of $5,000 and $0. These letters of credit were obtained in lieu of pledging securities to secure public fund deposits that are over the FDIC insurance limit. The letter of credit outstanding at March 31, 2016 matures on July 25, 2016.

The advances and letters of credit were collateralized by certain qualifying loans totaling $306,864 and $318,759 at March 31, 2016 and December 31, 2015. Based on this collateral and the Company’s holdings of Federal Home Loan Bank stock, the Company was eligible to borrow an additional $201,563 and $172,557 at March 31, 2016 and December 31, 2015.

Bank stock loan

In July 2014, the Company borrowed $15,540 from an unaffiliated financial institution, secured by the Company’s stock in Equity Bank. In September 2015, the Company amended and restated the loan agreement and borrowed an additional $5,014. At December 31, 2015, $18,612 was outstanding on the bank stock loan at a fixed rate of 4.00% (computed on the basis of a 360-day year and the actual number of days elapsed) until July 2019. This borrowing was repaid on January 4, 2016 using proceeds from the Company’s initial public offering (“IPO”).

On January 28, 2016, the Company entered into a new agreement with the same lender that provides for a maximum borrowing facility of $20,000, secured by the Company’s stock in Equity Bank. The borrowing facility will mature on January 26, 2017. Each draw of funds on the facility will create a separate note that is repayable over a term of five years. Each note will bear interest at a variable interest rate equal to the prime rate published in the “Money Rates” section of The Wall Street Journal (or any generally

 

19


Table of Contents

recognized successor), floating daily. Accrued interest and principal payments will be due quarterly with one final payment of unpaid principal and interest due at the end of the five year term of each separate note. The Company is also required to pay an unused commitment fee in an amount equal to twenty basis points per annum on the unused portion of the maximum borrowing facility.

The terms of the borrowing facility require the Company and Equity Bank to maintain minimum capital ratios and other covenants. The Company believes it is in compliance with the terms of the borrowing facility and has not been otherwise notified of noncompliance.

NOTE 6 – STOCKHOLDERS’ EQUITY

On November 16, 2015, the Company completed an IPO of 2,231,000 shares of Class A common stock, $0.01 par value. The Company sold 1,941,000 shares and selling stockholders sold 290,000 shares, which included 273,000 shares of Class A common stock that were issued upon the automatic conversion of an equal number of shares of Class B common stock as a result of the offering. All shares issued and sold in the IPO were registered under the Securities Act pursuant to a Registration Statement on Form S-1, which was declared effective by the SEC on November 10, 2015. The Company’s net proceeds were $38,945 after subtraction of underwriting discounts and commissions and offering expenses.

Preferred stock

The Company’s articles of incorporation provide for the issuance of 10,000,000 shares of preferred stock. At December 31, 2015 the Company had 16,372 shares of Series C, senior non-cumulative perpetual preferred stock (“Series C preferred stock”) with a par value of $0.01 per share and a dividend rate of 1.0% issued and outstanding. The Company issued the Series C preferred stock having a per share liquidation amount of $1,000 per share to the United States Treasury as part of the Small Business Lending Fund. The Series C preferred stock qualified as Tier 1 capital. A portion of the proceeds of the IPO were used to redeem the Series C preferred stock on January 4, 2016 at liquidation amount of $16,372.

Common stock

The Company’s articles of incorporation provide for the issuance of 45,000,000 shares of Class A voting common stock (“Class A common stock”) and 5,000,000 shares of Class B non-voting common stock (“Class B common stock”), both of which have a par value of $0.01. The following table presents shares that were issued and were held in treasury or were outstanding at March 31, 2016 and December 31, 2015:

 

     March 31,
2016
     December 31,
2015
 

Class A common stock – issued

     8,421,060         8,421,060   

Class A common stock – held in treasury

     (1,271,043      (1,271,043
  

 

 

    

 

 

 

Class A common stock – outstanding

     7,150,017         7,150,017   
  

 

 

    

 

 

 

Class B common stock – issued

     1,296,613         1,296,613   

Class B common stock – held in treasury

     (234,903      (234,903
  

 

 

    

 

 

 

Class B common stock – outstanding

     1,061,710         1,061,710   
  

 

 

    

 

 

 

Agreements with certain owners of Class B common stock require the Company to issue Class A common stock to replace an equal number of Class B common stock in the event of a future transfer from the owner to an unaffiliated party. The Class B common stock owner may require this exchange in certain stipulated transactions including the transfer of shares of Class B common stock to: (1) the Company or its bank subsidiary, (2) in a widespread public distribution, (3) a transfer in which no transferee receives two percent or more of any class of the Company’s voting securities, or (4) to a transferee that would control more than fifty percent of the Company’s voting securities without any transfer from the purchaser.

Restricted stock unit plan termination loans

In connection with the termination of the Company’s restricted stock unit plan (“RSUP”), 203,216 shares of Class A common stock were issued in May 2015 to employees with vested restricted stock units. Additional paid-in capital includes $224 of tax benefits in excess of those previously provided in connection with stock compensation expense. Also in connection with the termination of the RSUP, the Company agreed to loan electing participants an amount equal to each participant’s federal and state income tax withholding obligation associated with the stock issuance. These loans totaling $242 at March 31, 2016 and $242 at December 31, 2015, are collateralized with the shares received, have a maturity date of December 31, 2016 and an interest rate of 0.56%.

 

20


Table of Contents

Accumulated other comprehensive income (loss)

At March 31, 2016 and December 31, 2015, accumulated other comprehensive income consisted of (i) the after tax effect of unrealized gains (losses) on available-for-sale securities and (ii) the after tax effect of unamortized unrealized gains (losses) on securities transferred from the available-for-sale designation to the held-to-maturity designation.

Components of accumulated other comprehensive income as of March 31, 2016 and December 31, 2015 were as follows:

 

     Available-
for-Sale
Securities
     Held-to-
Maturity
Securities
     Accumulated
Other
Comprehensive
Income
 
March 31, 2016         

Net unrealized or unamortized gains (losses)

   $ 445       $ (3,351    $ (2,906

Tax effect

     (170      1,282         1,112   
  

 

 

    

 

 

    

 

 

 
   $ 275       $ (2,069    $ (1,794
  

 

 

    

 

 

    

 

 

 
December 31, 2015         

Net unrealized or unamortized gains (losses)

   $ (343    $ (3,491    $ (3,834

Tax effect

     128         1,335         1,463   
  

 

 

    

 

 

    

 

 

 
   $ (215    $ (2,156    $ (2,371
  

 

 

    

 

 

    

 

 

 

NOTE 7 – REGULATORY MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company and Equity Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Beginning in January 2016, the implementation of the capital conservation buffer was effective for the Company and Equity Bank starting at the 0.625% level and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. Management believes as of March 31, 2016 and December 31, 2015, that the Company and Equity Bank meet all capital adequacy requirements to which they are subject, including the capital conservation buffer requirement.

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

As of March 31, 2016, the most recent notifications from the federal regulatory agencies categorized Equity Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Equity Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed Equity Bank’s category.

The Company’s and Equity Bank’s capital amounts and ratios at March 31, 2016 and December 31, 2015 are presented in the tables below. Ratios provided for Equity Bancshares, Inc. represent the ratios of the Company on a consolidated basis.

 

     Actual     Minimum
Required for

Capital
Adequacy

Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

March 31, 2016

               

Total capital to risk weighted assets

               

Equity Bancshares, Inc.

   $ 155,025         14.57   $ 85,119         8.0   $ N/A         N/A   

Equity Bank

     145,085         13.62     85,228         8.0     106,535         10.0

Tier 1 capital to risk weighted assets

               

Equity Bancshares, Inc.

     149,045         14.01     63,839         6.0     N/A         N/A   

Equity Bank

     139,105         13.06     63,921         6.0     85,228         8.0

 

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Table of Contents
     Actual     Minimum
Required for

Capital
Adequacy

Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Common equity Tier 1 capital to risk weighted assets

               

Equity Bancshares, Inc.

     139,734         13.13     47,879         4.5     N/A         N/A   

Equity Bank

     139,105         13.06     47,941         4.5     69,248         6.5

Tier 1 leverage to average assets

               

Equity Bancshares, Inc.

     149,045         9.10     65,531         4.0     N/A         N/A   

Equity Bank

     139,105         8.48     65,587         4.0     81,984         5.0
December 31, 2015                

Total capital to risk weighted assets

               

Equity Bancshares, Inc.

   $ 156,358         14.35   $ 87,146         8.0   $ N/A         N/A   

Equity Bank

     139,275         12.77     87,256         8.0     109,070         10.0

Tier 1 capital to risk weighted assets

               

Equity Bancshares, Inc.

     150,852         13.85     65,359         6.0     N/A         N/A   

Equity Bank

     133,769         12.26     65,442         6.0     87,256         8.00

Common equity Tier 1 capital to risk weighted assets

               

Equity Bancshares, Inc.

     134,480         12.35     49,019         4.5     N/A         N/A   

Equity Bank

     133,769         12.26     49,082         4.5     70,896         6.5

Tier 1 leverage to average assets

               

Equity Bancshares, Inc.

     150,852         9.47     63,728         4.0     N/A         N/A   

Equity Bank

     133,769         8.39     63,790         4.0     79,737         5.0

Equity Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.

NOTE 8 – EARNINGS PER SHARE

The following table presents earnings per share for the three months ended March 31, 2016 and 2015:

 

     March 31,
2016
     March 31,
2015
 

Basic:

     

Net income allocable to common stockholders

   $ 3,439       $ 2,398   
  

 

 

    

 

 

 

Weighted average common shares outstanding

     8,211,727         6,067,511   

Weighted average vested restricted stock units

     —           203,216   
  

 

 

    

 

 

 

Weighted average shares

     8,211,727         6,270,727   
  

 

 

    

 

 

 

Basic earnings per common share

   $ 0.42       $ 0.38   
  

 

 

    

 

 

 

Diluted:

     

Net income allocable to common stockholders

   $ 3,439       $ 2,398   
  

 

 

    

 

 

 

Weighted average common shares outstanding for:

     

Basic earnings per common share

     8,211,727         6,270,727   

Dilutive effects of the assumed exercise of stock options

     112,201         16,145   

Dilutive effects of the assumed redemption of RSU’s

     —           —     
  

 

 

    

 

 

 

Average shares and dilutive potential common shares

     8,323,928         6,286,872   
  

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.41       $ 0.38   
  

 

 

    

 

 

 

Average outstanding stock options of 133,025 and 209,332 for the three-month periods ended March 31, 2016 and 2015 were not included in the computation of diluted earnings per share because the options were antidilutive.

 

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NOTE 9 – FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels of inputs that may be used to measure fair values are defined as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Level 1 inputs are considered to be the most transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although, in some instances, third party price indications may be available, limited trading activity can challenge the implied value of those quotations.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the hierarchy:

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The fair values of securities available-for-sale are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as Level 1. For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities, generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The Company’s available-for-sale securities, including U.S. Government sponsored agencies, residential mortgage-backed securities (all of which are issued or guaranteed by government sponsored agencies), corporate securities, Small Business Administration securities, State and Political Subdivision securities, and equity securities are classified as Level 2.

The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate yield curves (Level 2 inputs) adjusted for credit risk attributable to the seller of the interest rate derivative. Cash collateral received from or delivered to a derivative counterparty is classified as Level 1.

 

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Table of Contents

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

     March 31, 2016  
     (Level 1)      (Level 2)      (Level 3)  

Assets:

        

Available-for-sale securities:

        

U.S. government-sponsored entities

   $ —         $ 12,078       $  —     

Residential mortgage-backed securities (issued by government-sponsored entities)

     —           97,523         —     

Corporate

     —           2,940         —     

Small Business Administration loan pools

     —           271         —     

State and political subdivisions

     —           509         —     

Equity securities

     500         —           —     

Derivative assets:

        

Derivative assets (included in other assets)

     —           1         —     
  

 

 

    

 

 

    

 

 

 

Total derivative assets

     —           1         —     
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 500       $ 113,322       $ —     
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Derivative liabilities:

        

Interest rate swaps (included in other liabilities)

   $ —         $ 774       $ —     

Cash collateral held by counterparty

     (610      —           —     
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     (610      774         —     
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ (610    $ 774       $ —     
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2015  
     (Level 1)      (Level 2)      (Level 3)  

Assets:

        

Available-for-sale securities:

        

U.S. government-sponsored entities

   $ —         $ 17,036       $  —     

Residential mortgage-backed securities (issued by government-sponsored entities)

     —           109,521         —     

Corporate

     —           2,954         —     

Small Business Administration loan pools

     —           297         —     

State and political subdivisions

     —           508         —     

Equity securities

     —           494         —     

Derivative assets:

        

Derivative assets (included in other assets)

     —           2         —     

Cash collateral held by counterparty

     24         —           —     
  

 

 

    

 

 

    

 

 

 

Total derivative assets

     24         2         —     
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 24       $ 130,812       $ —     
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Derivative liabilities:

        

Interest rate swaps (included in other liabilities)

   $ —         $ 246       $ —     

Cash collateral held by counterparty

     (246      —           —     
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     (246      246         —     
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ (246    $ 246       $ —     
  

 

 

    

 

 

    

 

 

 

There were no material transfers between Levels during the three months ended March 31, 2016 or the year ended December 31, 2015. The Company’s policy is to recognize transfers into or out of a level as of the end of a reporting period.

Fair Value of Assets and Liabilities Measured on a Non-recurring Basis

Certain assets are measured at fair value on a non-recurring basis when there is evidence of impairment. The fair values of impaired loans with specific allocations of the allowance for loan losses are generally based on recent real estate appraisals of the collateral less estimated cost to sell. Declines in the fair values of other real estate owned subsequent to their initial acquisitions are also based on recent real estate appraisals less selling costs.

 

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Table of Contents

Real estate appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets measured at fair value on a non-recurring basis are summarized below:

 

     March 31, 2016  
     (Level 1)      (Level 2)      (Level 3)  

Impaired loans:

        

Commercial real estate

   $ —         $ —         $ 2,566   

Commercial and industrial

     —           —           108   

Residential real estate

     —           —           604   

Other

     —           —           227   

Other real estate owned:

        

Commercial real estate

     —           —           524   

Residential real estate

     —           —           234   

 

     December 31, 2015  
     (Level 1)      (Level 2)      (Level 3)  

Impaired loans:

        

Commercial real estate

   $ —         $ —         $ 2,986   

Commercial and industrial

     —           —           57   

Residential real estate

     —           —           594   

Other

     —           —           65   

Other real estate owned:

        

Commercial real estate

     —           —           524   

Residential real estate

     —           —           387   

The Company did not record any liabilities for which the fair value was measured on a non-recurring basis at March 31, 2016 or at December 31, 2015.

Valuations of impaired loans and other real estate owned utilize third party appraisals or broker price opinions, and were classified as Level 3 due to the significant judgment involved. Appraisals may include the utilization of unobservable inputs, subjective factors, and utilize quantitative data to estimate fair market value.

The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a nonrecurring basis that were categorized with Level 3 of the fair value hierarchy:

 

     Fair Value      Valuation
Technique
   Unobservable
Input
   Range
(weighted average)

March 31, 2016

           

Impaired loans

   $ 3,505       Sales Comparison

Approach

   Adjustments for
differences between
comparable sales
   6% -23% (17%)

December 31, 2015

           

Impaired loans

   $ 3,702       Sales Comparison

Approach

   Adjustments for
differences between
comparable sales
   7% - 29% (18%)

Measurable inputs for other real estate owned were not material.

 

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Table of Contents

Carrying amount and estimated fair values of financial instruments at period end were as follows as of the date indicated:

 

     March 31, 2016  
     Carrying
Amount
    Estimated
Fair Value
    Level 1     Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 44,586      $ 44,586      $ 44,586      $ —         $ —     

Interest bearing deposits

     5,245        5,245        —          5,245         —     

Available-for-sale securities

     113,821        113,821        500        113,321         —     

Held-to-maturity securities

     301,931        306,840        —          306,840         —     

Loans held for sale

     3,200        3,200        —          3,200         —     

Loans, net of allowance for loan losses

     932,075        931,204        —          —           931,204   

Federal Reserve Bank and Federal Home Loan Bank stock

     14,974        N/A        N/A        N/A         N/A   

Interest receivable

     4,353        4,353        —          4,353         —     

Derivative assets

     1        1        —          1         —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total derivative assets

     1        1        —          1         —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

   $ 1,420,186      $ 1,409,250      $ 45,086      $ 432,960       $ 931,204   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financial liabilities:

           

Deposits

   $ 1,234,165      $ 1,240,322      $ —        $ 1,240,322       $ —     

Federal funds purchased and retail repurchase agreements

     21,802        21,802        —          21,802         —     

Federal Home Loan Bank advances

     99,538        99,538        —          99,538         —     

Subordinated debentures

     9,311        9,311        —          9,311         —     

Contractual obligations

     3,079        3,079        —          3,079         —     

Interest payable

     588        588        —          588         —     

Derivative liabilities

     774        774        —          774         —     

Cash collateral held by derivative counterparty

     (610     (610     (610     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total derivative liabilities

     164        164        (610     774         —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

   $ 1,368,647      $ 1,374,804      $ (610   $ 1,375,414       $ —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2015  
     Carrying
Amount
    Estimated
Fair Value
    Level 1     Level 2      Level 3  

Financial assets:

           

Cash and cash equivalents

   $ 56,829      $ 56,829      $ 56,829      $ —         $ —     

Interest bearing deposits

     5,245        5,245        —          5,245         —     

Available-for-sale securities

     130,810        130,810        —          130,810         —     

Held-to-maturity securities

     310,539        312,802        —          312,802         —     

Loans held for sale

     3,504        3,504        —          3,504         —     

Loans, net of allowance for loan losses

     954,849        957,039        —          —           957,039   

Federal Reserve Bank and Federal Home Loan Bank stock

     11,013        N/A        N/A        N/A         N/A   

Interest receivable

     4,540        4,540        —          4,540         —     

Derivative assets

     2        2        —          2         —     

Cash collateral held by derivative counterparty

     24        24        24        —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total derivative assets

     26        26        24        2         —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

   $ 1,477,355      $ 1,470,795      $ 56,853      $ 456,903       $ 957,039   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financial liabilities:

           

Deposits

   $ 1,215,914      $ 1,220,657      $ —        $ 1,220,657       $ —     

Federal funds purchased and retail repurchase agreements

     20,762        20,762        —          20,762         —     

Federal Home Loan Bank advances

     145,439        145,439        —          145,439         —     

Bank stock loan

     18,612        18,612        —          18,612         —     

Subordinated debentures

     9,251        9,251        —          9,251         —     

Contractual obligations

     3,093        3,093        —          3,093         —     

Interest payable

     737        737        —          737         —     

Derivative liabilities

     246        246        —          246         —     

Cash collateral held by derivative counterparty

     (246     (246     (246     —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total derivative liabilities

     —          —          (246     246         —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

   $ 1,413,808      $ 1,418,551      $ (246   $ 1,418,797       $ —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and cash equivalents and interest-bearing deposits: The carrying amounts of cash and short-term instruments approximate fair values.

Held-to-maturity securities: The fair value of held-to-maturity securities are determined in a manner consistent with available-for-sale securities which has been previously discussed.

Loans held for sale: The fair values of loans held for sale are based on quoted market prices for loans with similar characteristics.

Loans: Fair values of variable rate loans that reprice frequently and with no significant change in credit risk are based on carrying values. Fair values of other loans are estimated using discounted cash flows analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Federal Reserve Bank and Federal Home Loan Bank stock: It is not practical to determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to restrictions placed on its transferability.

Interest receivable and interest payable: The carrying amounts of accrued interest receivable and payable approximate their fair values.

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount). The carrying amount of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered.

Federal funds purchased and retail repurchase agreements: Federal funds purchased and retail repurchase agreements mature daily and may be terminated at any time. The carrying amounts of these financial instruments approximate their fair values.

Federal Home Loan Bank Advances: The carrying amounts of draws against the Company’s line of credit at the Federal Home Loan Bank approximate their fair values. The fair values of fixed rate term advances are determined using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements.

 

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Table of Contents

Bank stock loan: The fair value of the bank stock loan was estimated using a discounted cash flow analysis based on current borrowing rates for similar types of borrowing arrangements.

Subordinated debentures: Subordinated debentures are carried at the outstanding principal balance less an unamortized fair value adjustment from the date of assumption. The outstanding principal balance, net of this adjustment, approximates their fair value.

Contractual obligations: The carrying value of contractual obligations approximates their fair value.

The fair value of off-balance-sheet items is not considered material.

NOTE 10 – COMMITMENTS AND CREDIT RISK

The Company extends credit for commercial real estate mortgages, residential mortgages, working capital financing and loans to businesses and consumers.

Commitments to Originate Loans and Available Lines of Credit: Commitments to originate loans and available lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments and lines of credit may expire without being drawn upon, the total commitment and lines of credit amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate. Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days, and which are intended for sale to investors in the secondary market.

The contractual amounts of commitments to originate loans and available lines of credit as of March 31, 2016 and December 31, 2015 were as follows:

 

     March 31, 2016      December 31, 2015  
     Fixed
Rate
     Variable
Rate
     Fixed
Rate
     Variable
Rate
 

Commitments to make loans

   $ 27,413       $ 50,002       $ 30,261       $ 55,694   

Mortgage loans in the process of origination

     10,185         3,744         5,116         1,941   

Unused lines of credit

     43,815         60,236         44,392         55,769   

The fixed rate loan commitments have interest rates ranging from 2.15% to 8.50% and maturities ranging from 4 months to 60 months.

Standby Letters of Credit: Standby letters of credit are irrevocable commitments issued by the Company to guarantee the performance of a customer to a third party once specified pre-conditions are met. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The contractual amounts of standby letters of credit as of March 31, 2016 and December 31, 2015 were as follows:

 

     March 31, 2016      December 31, 2015  
     Fixed
Rate
     Variable
Rate
     Fixed
Rate
     Variable
Rate
 

Standby letters of credit

   $ 3,890       $ 1,083       $ 3,588       $ 1,253   

NOTE 11 – LEGAL MATTERS

The Company is party to various matters of litigation in the ordinary course of business. The Company periodically reviews all outstanding pending or threatened legal proceedings and determines if such matters will have an adverse effect on the business, financial condition or results of operations or cash flows. A loss contingency is recorded when the outcome is probable and reasonably able to be estimated. The following loss contingency has been identified by the Company as reasonably possible to result in an unfavorable outcome for the Company or the Bank.

Equity Bank is a party to a February 3, 2015 lawsuit filed against it by CitiMortgage, Inc. The lawsuit involves an alleged breach of contract related to loan repurchase obligations and damages of $2,700 plus pre-judgment and post-judgment interest. At this stage of the litigation it is difficult to estimate any potential loss, however Equity Bank believes it has numerous and meritorious defenses to the claims and anticipates contesting the matter vigorously. The Company currently does not believe that it is probable that this legal matter will result in an unfavorable outcome for the Company or Equity Bank.

 

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Table of Contents

Except for the above mentioned lawsuit, there are no other outstanding claims for potential repurchase or indemnification demands regarding mortgage loans originated by Equity Bank and sold to investors. However, the Company believes there is possible risk it may face similar demands based on comparable demands loan aggregators are facing from their investors, including Government Sponsored Entities such as Freddie Mac and Fannie Mae, and or settlement agreements loan aggregators have entered into with those investors. The amount of potential loss and outcome of such possible litigation, if it were commenced, is uncertain and the Company would vigorously contest any claims.

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 17, 2016 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 Statement Regarding Forward-Looking statements.” Also, see the risk factors and other cautionary statements described under the heading “Item 1A – Risk Factors” included in the Annual Report on Form 10-K and in Item 1A of this Quarterly Report. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

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

 

    Overview – a general description of our business and financial highlights;

 

    Critical Accounting Policies – a discussion of accounting policies that require critical estimates and assumptions;

 

    Results of Operations – an analysis of our operating results, including disclosures about the sustainability of our earnings;

 

    Financial Condition – an analysis of our financial position;

 

    Liquidity and Capital Resources – an analysis of our cash flows and capital position; and

 

    Non-GAAP Financial Measures – a reconciliation of non-GAAP measures.

Overview

We are a bank holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 29 full service branches located in Kansas and Missouri. As of March 31, 2016, we had consolidated total assets of $1.53 billion, total loans held for investment of $932.1 million (net of allowances), total deposits of $1.07 billion and total stockholders’ equity of $155.1 million. During the three-month periods ended March 31, 2016 and March 31, 2015, net income was $3.4 million and $2.4 million.

Selected Financial Data for the periods indicated (dollars in thousands, except per share amounts):

 

     March 31,
2016
    December 31,
2015
    September 30,
2015
    June 30,
2015
    March 31,
2015
 

Statement of Income Data (for the quarterly period ended)

          

Interest and dividend income

   $ 14,862      $ 14,430      $ 13,199      $ 12,967      $ 12,432   

Interest expense

     2,104        2,117        1,749        1,501        1,399   

Net interest income

     12,758        12,313        11,450        11,466        11,033   

Provision for loan losses

     723        1,180        537        605        725   

Net gain on acquisition

     —          682        —          —          —     

Net gain on sales of and settlement of securities

     420        386        —          2        368   

Other non-interest income

     2,278        2,257        2,032        2,046        2,029   

Merger expenses

     —          1,614        77        —          —     

Loss on debt extinguishment

     58        —          —          —          316   

Other non-interest expense

     9,631        10,050        8,789        9,027        8,702   

Income before income taxes

     5,044        2,794        4,079        3,882        3,687   

Provision for income taxes

     1,604        240        1,343        1,313        1,246   

Net income

     3,440        2,554        2,736        2,569        2,441   

Dividends and discount accretion on preferred

Stock

     (1     (48     (43     (43     (43

Net income allocable to common stockholders

     3,439        2,506        2,693        2,526        2,398   

Basic earnings per share

   $ 0.42      $ 0.35      $ 0.43      $ 0.40      $ 0.38   

Diluted earnings per share

   $ 0.41      $ 0.34      $ 0.43      $ 0.40      $ 0.38   

Balance Sheet Data (at period end)

          

Cash and cash equivalents

   $ 44,586      $ 56,829      $ 23,193      $ 19,626      $ 12,786   

Available-for-sale securities

     113,821        130,810        109,906        72,103        59,245   

Held-to-maturity securities

     301,931        310,539        303,695        306,100        311,541   

 

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Loans held for sale

    3,200        3,504        1,948        2,251        2,108   

Gross loans held for investment

    938,055        960,355        855,676        834,740        749,350   

Allowance for loan losses

    5,980        5,506        5,038        5,643        6,565   

Loans held for investment, net of allowance for loan losses

    932,075        954,849        850,638        829,097        742,785   

Goodwill and core deposit intangibles, net

    19,592        19,679        19,056        19,116        19,177   

Mortgage servicing asset

    28        29        —          —          —     

Total assets

    1,528,729        1,585,727        1,413,355        1,350,719        1,238,913   

Total deposits

    1,234,165        1,215,914        1,027,650        1,003,919        966,592   

Borrowings

    130,651        194,064        241,254        214,566        138,001   

Total liabilities

    1,373,637        1,418,494        1,287,301        1,228,971        1,118,439   

Total stockholders’ equity

    155,092        167,233        126,054        121,748        120,474   

Tangible common equity*

    135,472        131,153        90,633        86,269        84,936   

Performance ratios

         

Return on average assets (ROAA) annualized

    0.83     0.63     0.77     0.80     0.84

Return on average equity (ROAE) annualized

    8.99     7.23     8.78     8.58     8.31

Return on average tangible common equity (ROATCE) annualized*

    10.55     9.18     12.26     12.02     11.83

Yield on loans annualized

    5.04     4.95     5.11     5.58     5.72

Cost of interest-bearing deposits annualized

    0.61     0.61     0.57     0.52     0.49

Net interest margin annualized

    3.33     3.26     3.48     3.89     4.13

Efficiency ratio*

    64.05     68.98     65.19     66.81     66.62

Non-interest income / average assets annualized

    0.65     0.82     0.57     0.64     0.82

Non-interest expense / average assets annualized

    2.35     2.87     2.49     2.82     3.09

Capital Ratios

         

Tier 1 Leverage Ratio

    9.10     9.47     7.94     8.44     9.03

Common Equity Tier 1 Capital Ratio

    13.13     12.35     9.44     9.47     10.21

Tier 1 Risk Based Capital Ratio

    14.01     13.85     11.08     11.17     12.08

Total Risk Based Capital Ratio

    14.57     14.35     11.58     11.76     12.83

Equity / Assets

    10.15     10.55     8.92     9.01     9.72

Tangible common equity to tangible assets*

    8.98     8.37     6.50     6.48     6.96

Book value per share

  $ 18.89      $ 18.37      $ 17.49      $ 16.81      $ 17.16   

Tangible common book value per share*

  $ 16.50      $ 15.97      $ 14.45      $ 13.76      $ 14.00   

* 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.

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, 2015 audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 17, 2016. We believe that of our significant accounting policies, the following may involve a higher degree of judgement and complexity.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of previous charge-offs and an allowance for loan losses, and for purchased loans, net of unamortized purchase premiums and discounts. Interest income is accrued on the unpaid principal balance.

Purchased Credit Impaired Loans: As a part of acquisitions, we acquired certain loans for which there was, at acquisition, evidence of deterioration of credit quality since origination. These purchased credit impaired loans were recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased credit impaired loans are accounted for individually. We estimate the amount and timing of expected cash flows for each loan, and the expected cash flows in excess of the amount paid are recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of the expected cash flows is less than the carrying amount, a loss is recorded. If the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Nonaccrual Loans: 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 is

 

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reversed against income. 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.

Impaired Loans: A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all contractual principal and interest due according to the terms of the loan agreement. All loans are individually evaluated for impairment. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or on the value of the underlying collateral if the loan is collateral dependent. We evaluate the collectability of both principal and interest when assessing the need for a loss accrual.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Troubled Debt Restructurings: In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructured loan and classified as impaired. Generally, a nonaccrual loan that is a troubled debt restructuring remains on nonaccrual until such time that repayment of the remaining principal and interest is not in doubt, and the borrower has a period of satisfactory repayment performance.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. A loan review process, independent of the loan approval process, is utilized by management to verify loans are being made and administered in accordance with company policy, to review loan risk grades and potential losses, to verify that potential problem loans are receiving adequate and timely corrective measures to avoid or reduce losses, and to assist in the verification of the adequacy of the loan loss reserve. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the sale of the collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, we determine the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio and class and is based on the actual loss history experienced by us. This actual loss experience is then adjusted by comparing current conditions to the conditions that existed during the loss history. We consider the changes related to (i) lending policies, (ii) economic conditions, (iii) nature and volume of the loan portfolio and class, (iv) lending staff, (v) volume and severity of past due, non-accrual, and risk graded loans, (vi) loan review system, (vii) value of underlying collateral for collateral dependent loans, (viii) concentration levels, and (ix) effects of other external factors.

Goodwill and Core Deposit Intangibles: 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. Core deposit intangibles are acquired customer relationships arising from whole bank and branch acquisitions. Core deposit intangibles are initially measured at fair value and then are amortized over their estimated useful lives using an accelerated method. The useful lives of the core deposits are estimated to generally be between seven and ten years. Goodwill and core deposit intangibles are assessed at least annually for impairment and any such impairment is recognized and expensed in the period identified. 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.

Fair Value: Fair values of assets and liabilities are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, collateral values and other factors, especially in the absence of broad markets for particular assets and liabilities. Changes in assumptions or in market conditions could materially affect the estimates.

Emerging Growth Company: Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by the Financial Accounting Standards Board (“FASB”) or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have irrevocably elected to adopt new accounting standards within the public company adoption period.

 

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We may take advantage of some of the reduced regulatory and reporting requirements that are available to us so long as the Company qualifies as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.

There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 17, 2016.

 

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Results of Operations

We generate most of our revenue from interest income and fees on loans, interest and dividends on investment securities and non-interest income, such as service charges and fees, debit card income and mortgage banking income. We incur interest expense on deposits and other borrowed funds and non-interest expense, such as salaries and employee benefits and occupancy expenses. On October 9, 2015 we completed our acquisition of First Independence Corporation and its subsidiary, First Federal Savings & Loan of Independence, Kansas, collectively referred to as “First Independence”. The acquisition of First Independence added four branch locations in southeast Kansas. Results of operations of First Independence were included in our financial results beginning October 10, 2015.

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 conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Kansas and Missouri, as well as developments affecting the commercial, consumer and real estate sectors within these markets.

Net Income

Three months ended March 31, 2016 compared with three months ended March 31, 2015:

Net income for the three months ended March 31, 2016 was $3.4 million as compared to net income of $2.4 million for the three months ended March 31, 2015. Net income allocable to common stockholders also was $3.4 million for the three months ended March 31, 2016, compared to $2.4 million for the three months ended March 31, 2015, an increase of $1.0 million, or 43.4%. On January 4, 2016, we redeemed the Series C preferred stock initially issued to the U.S. Treasury in 2011 as part of the Small Business Lending Fund. During 2015, the Series C preferred stock paid dividends at a rate of 1.0% on the $16.4 million outstanding. Net income allocable to common stock holders for the first quarter of 2016 increased $42 thousand due to redemption of the preferred stock. Also, during the three-month period ended March 31, 2016, increases in net interest income of $1.7 million and non-interest income of $301 thousand were partially offset by an increase in non-interest expense of $671 thousand when compared to the three-month period ended March 31, 2015. The changes in the components of net income are discussed in more detail in the following sections of “Results of Operations.”

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 it 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.”

 

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Three months ended March 31, 2016 compared with three months ended March 31, 2015: 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-month periods ended March 31, 2016 and 2015. The yields and rates are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.

Average Balance Sheets and Net Interest Analysis

 

     For the Three Months Ended March 31,  
     2016     2015  

(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)

   $ 944,366       $ 11,841         5.04   $ 738,451       $ 10,412         5.72

Taxable securities

     376,406         2,209         2.36     285,457         1,733         2.46

Nontaxable securities

     49,028         328         2.69     36,055         190         2.14

Federal funds sold and other

     172,994         484         1.12     22,668         97         1.73
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,542,794       $ 14,862         3.87     1,082,631       $ 12,432         4.66
     

 

 

         

 

 

    

Non-interest-earning assets:

                

Other real estate owned, net

     5,799              4,892         

Premises and equipment, net

     39,016              33,775         

Bank owned life insurance

     32,642              28,811         

Goodwill and core deposit intangible, net

     19,664              19,203         

Other non-interest-earning assets

     17,740              13,727         
  

 

 

         

 

 

       

Total assets

   $ 1,657,655            $ 1,183,039         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Interest-bearing demand deposits

   $ 317,052       $ 204         0.26   $ 274,082       $ 180         0.27

Savings and money market

     305,986         301         0.39     245,302         172         0.28
  

 

 

    

 

 

      

 

 

    

 

 

    

Savings, NOW and money market

     623,038         505         0.33     519,384         352         0.27

Certificates of deposit

     437,580         1,102         1.01     337,308         684         0.82
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     1,060,618         1,607         0.61     856,692         1,036         0.49

FHLB term and line of credit advances

     248,952         332         0.54     23,329         38         0.68

Bank stock loan

     613                 0.09     14,893         151         4.12

Subordinated borrowings

     9,278         153         6.65     8,985         158         7.15

Other borrowings

     21,254         12         0.24     26,146         16         0.24
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,340,715       $ 2,104         0.63     930,045       $ 1,399         0.61
     

 

 

         

 

 

    

Non-interest-bearing liabilities and stockholders’ equity:

                

Non-interest-bearing checking accounts

     154,120              128,389         

Non-interest-bearing liabilities

     8,891              5,448         

Stockholders’ equity

     153,929              119,157         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 1,657,655            $ 1,183,039         
  

 

 

         

 

 

       

Net interest income

      $ 12,758            $ 11,033      
     

 

 

         

 

 

    

Interest rate spread

           3.24           4.05
        

 

 

         

 

 

 

Net interest margin(2)

           3.33           4.13
        

 

 

         

 

 

 

Total cost of deposits, including non-interest bearing deposits

   $ 1,214,738       $ 1,607         0.53   $ 985,081       $ 1,036         0.43
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Average interest-earning assets to interest-bearing liabilities

           115.07           116.41
        

 

 

         

 

 

 

 

(1) Average loan balances include nonaccrual loans.
(2) Net interest margin is calculated by dividing annualized net interest income by average interest-earnings assets for the period.
(3) Tax exempt income is not included in the above table on a tax equivalent basis.
(4) Actual unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

 

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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 March 31, 2016 and 2015.

Analysis of Changes in Net Interest Income

For the Three Months Ended March 31, 2016 and 2015

 

     Increase (Decrease) Due to:      Total Increase /
(Decrease)
 

(Dollars in thousands)

   Volume(1)      Yield/Rate(1)     

Interest-earning assets:

        

Loans

   $ 2,673       $ (1,244    $ 1,429   

Taxable securities

     535         (59      476   

Nontaxable securities

     79         59         138   

Federal funds sold and other

     431         (44      387   
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

   $ 3,718       $ (1,288    $ 2,430   
  

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

        

Savings, NOW and money market

   $ 77       $ 76       $ 153   

Certificates of deposit

     231         187         418   
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     308         263         571   

FHLB term and line of credit advances

     303         (9      294   

Bank stock loan

     (75      (76      (151

Subordinated borrowings

     5         (10      (5

Other borrowings

     (3      (1      (4
  

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

   $ 538       $ 167       $ 705   
  

 

 

    

 

 

    

 

 

 

Net Interest Income

   $ 3,180       $ (1,455    $ 1,725   
  

 

 

    

 

 

    

 

 

 

 

(1) The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior year’s volume. The changes attributable to both volume and rate, which cannot be segregated, have been allocated to the volume variance and the rate variance in proportion to the relationship of the absolute dollar amount of the change in each.

Net interest income before the provision for loan losses for the three months ended March 31, 2016 was $12.8 million compared with $11.0 million for the three months ended March 31, 2015, an increase of $1.7 million, or 15.6%. Interest income for the three months ended March 31, 2016 was $14.9 million, an increase of $2.4 million, or 19.5%, from $12.4 million for the three months ended March 31, 2015. Interest income increased primarily due to an increase in the average volume of interest-earning assets due in large part to growth in loan balances during the period. Interest expense for the three months ended March 31, 2016 was $2.1 million, an increase of $705 thousand, or 50.4%, from $1.4 million for the three months ended March 31, 2015. The increase in interest expense was primarily due to an increase in the average volume of interest-bearing liabilities.

Interest income on loans, including loan fees which consist of fees for loan origination, renewal, prepayment, covenant breakage and loan modification, was $11.8 million for the three months ended March 31, 2016, an increase of $1.4 million, or 13.7%, compared with the three months ended March 31, 2015. This increase was due to an increase in average loans, partially offset by a decrease in the average yield on the loan portfolio. The increase in average loan volume was primarily from increases in average loan volume of $137.3 million in mortgage loans, $47.9 million in commercial and industrial loans, $12.9 million in commercial real estate loans and $9.2 million in consumer loans which were partially offset by a decrease of $1.0 million in average loan volume of agricultural loans. The average yield on loans was 5.04% for the three months ended March 31, 2016 and 5.72% for the three months ended March 31, 2015. The average yield on loans excluding loan fees was 4.75% for the three months ended March 31, 2016 and 5.04% for the three months ended March 31, 2015. The decrease in yield excluding loan fees was primarily due to decreases in average yields on commercial loans, mortgage loans and agricultural loans. The decrease in yield on commercial loans was the result of loan growth in a lower interest rate environment and the payoff of older higher yielding loans. The decrease in the yield on mortgage loans is due to the pay down of higher-rate older loans and origination of new loans in a low interest rate environment. The decrease in yield on agricultural loans was the result of pay downs of higher-rate, higher-credit-risk loans. Interest income on all securities was $2.5 million for the quarter ended March 31, 2016, an increase of $614 thousand when compared to the quarter ended March 31, 2015. The increase was due to the increase in average total securities of $103.9 million, partially offset by a three basis point decrease in the average yield on the securities portfolio. The increase in the average volume of securities was due to the purchase of additional mortgage-backed securities.

Interest expense was $2.1 million for the three months ended March 31, 2016, an increase of $705 thousand over interest expense of $1.4 million for the three months ended March 31, 2015. The change in interest expense was primarily due to an increase of $410.7 million in the average volume of interest-bearing liabilities. Average savings, NOW and money market deposits increased $103.7

 

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million for the three months ended March 31, 2016 when compared to the three months ended March 31, 2015, and the average rate on these interest-bearing deposits increased from 0.27% to 0.33% for the same periods. The average balance increase in interest-bearing deposits is the result of actively managing deposits as a funding vehicle and expansion of our customer base. The increase in rate on interest-bearing deposits is the result of actively managing the rates on this funding source to remain competitive in the market place. Average certificates of deposit increased $100.3 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, and the average rate increased from 0.82% to 1.01% for the same period. The increase in interest expense on certificates of deposit was primarily due to the increase in longer term higher rate certificates of deposits. In February 2015, we prepaid older higher cost FHLB term advances and began using the FHLB line of credit or LOC advance option, which is pre-payable without a fee and resulted in a much lower funding cost. In January 2016, we repaid our bank stock loan using $18.6 million of the proceeds from the 2015 IPO. Total cost of funds increased two basis points to 0.63% for the three months ended March 31, 2016 from 0.61% for the three months ended March 31, 2015.

Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.33% for the three months ended March 31, 2016, a decrease of 80 basis points when compared with net interest margin of 4.13% for the three months ended March 31, 2015. The decline in our net interest margin for the three months ended March 31, 2016 is primarily due to the decrease in overall yield on interest-earnings assets and the continued utilization of an existing “leverage” or “spread” opportunity. The decrease in yield on interest-earning assets is primarily due to growth in a continually low interest rate environment and the pay down of older higher yielding assets. The spread opportunity involves borrowing overnight on our line of credit with the FHLB and investing the proceeds in FHLB stock, federal funds sold and other overnight assets, such as money market accounts in other financial institutions, resulting in a positive spread of approximately 43 basis points. We utilize the spread opportunity to generate additional income. We can reduce or terminate the spread opportunity each business day and we do not presently anticipate that this opportunity would be part of our core earnings stream or strategy. Our net interest margin without the spread opportunity would have been approximately 3.63% for the three months ended March 31, 2016. The spread opportunity did not begin until late June of 2015 and would not have impacted the net interest margin reported for the three months ended March 31, 2015. These changes, including the spread opportunity, resulted in an increase in net interest income of $1.7 million, an increase in average interest-earning assets of $460.2 million and a decrease in net interest margin of 80 basis points when comparing the three-month periods ended March 31, 2016 and 2015.

Provision for Loan Losses

We maintain an allowance for loan losses for probable incurred credit losses. The allowance for loan losses is increased by a provision for loan 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, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, discounted cash flows, economic conditions, and other factors including regulatory guidance. As these factors change, the amount of the loan loss provision changes.

Three months ended March 31, 2016 compared with three months ended March 31, 2015: The provision for loan losses for the three months ended March 31, 2016 was $723 thousand compared with $725 thousand for the three months ended March 31, 2015. Net charge-offs for the three months ended March 31, 2016 were $249 thousand compared to net charge-offs of $123 thousand for the three months ended March 31, 2015. For the three months ended March 31, 2016, gross charge-offs were $291 thousand offset by gross recoveries of $42 thousand. In comparison, gross charge-offs were $178 thousand for the three months ended March 31, 2015 offset by gross recoveries of $55 thousand.

Non-Interest Income

The primary sources of non-interest income are service charges and fees, debit card income, mortgage banking income, increases in the value of bank owned life insurance, the recovery of zero-basis purchased loans, investment referral income and net gains on the sale of available-for-sale securities. Non-interest income does not include loan origination or other loan fees which are recognized as an adjustment to yield using the interest method.

 

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Three months ended March 31, 2016 compared with three months ended March 31, 2015: The following table provides a comparison of the major components of non-interest income for the three months ended March 31, 2016 and 2015:

Non-Interest Income

For the Three Months Ended March 31,

 

                   2016 vs. 2015  

(Dollars in thousands)

   2016      2015      Change      %  

Service charges and fees

   $ 779       $ 555       $ 224         40.4

Debit card income

     677         441         236         53.5

Mortgage banking

     242         203         39         19.2

Increase in value of bank owned life insurance

     251         235         16         6.8

Investment referral income

     123         156         (33      (21.2 )% 

Recovery on zero-basis purchased loans

     27         338         (311      (92.0 )% 

Other

     179         101         78         77.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-Total

     2,278         2,029         249         12.3

Net gains on sales of and settlement of securities

     420         368         52         14.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 2,698       $ 2,397       $ 301         12.6
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2016, non-interest income totaled $2.7 million, an increase of $301 thousand, or 12.6%, compared with the three months ended March 31, 2015. The increase was primarily due to increases in service charges and fees and debit card income, partially offset by a decrease in recovery on zero-basis purchased loans. In connection with acquisitions, we receive the rights to certain loans that were previously charged off by the acquired bank. At acquisition, there was no expectation of future cash flows from these previously charged-off loans and thus they were assigned a zero basis. Subsequent to acquisition we have received cash payments on such loans. The level of cash payments on these zero-basis loans is decreasing and this trend is expected to continue. Service charges and fees increased $224 thousand from $555 thousand at March 31, 2015 to $779 thousand at March 31, 2016, and debit card income increased $236 thousand for the same period from $441 thousand at March 31, 2015 to $677 thousand at March 31, 2016. Our principal source of service charges and fees is non-sufficient funds charges, which are cyclical in nature and generally fluctuate with the change in volume of transaction deposit accounts and economic conditions impacting our customers. In addition, $161 thousand of the increase in service charges and fees and $173 thousand of the increase in debit card income are attributable to the addition of accounts and higher transaction volumes associated with the First Independence acquisition.

Non-Interest Expense

Three months ended March 31, 2016 compared with three months ended March 31, 2015: For the three months ended March 31, 2016, non-interest expense totaled $9.7 million, an increase of $671 thousand, or 7.4%, compared with the three months ended March 31, 2015. The overall increase was primarily due to an increase in salaries and employee benefits of $490 thousand, an increase in data processing of $184 thousand and an increase in other expense of $162 thousand, partially offset by a decrease in loss on debt extinguishment of $258 thousand. Non-interest expense for the three-month period ended March 31, 2016 includes $456 thousand of incremental operating expenses attributable to the four branch locations acquired with the First Independence acquisition. These items and other changes in the various components of non-interest expense are discussed in more detail below.

The following table provides a comparison of the major components of non-interest expense for the three months ended March 31, 2016 and 2015.

Non-Interest Expense

For the Three Months Ended March 31,