A N N U A L
R E P O R T
2 0 1 8
E V E R Y P I E C E C O U N T S
2018
Guymon Main
Cordell
Guymon & Cordell,
Oklahoma
Equity acquired City Bank & Trust Company of Guymon,
Oklahoma, in August 2018. Equity added two additional
Guymon bank offices and a location in Cordell, Oklahoma
from MidFirst Bank in early 2019, announcing the
acquisition in September 2018.
Liberal
Liberal & Hugoton,
Kansas
Equity entered Southwest Kansas
in May, completing its merger with
Kansas Bank Corporation, adding
four banks in Liberal, Kansas, and
one location in Hugoton, Kansas.
Entrepreneur of the Year
Equity Chairman and CEO Brad Elliott was named as
one of EY’s Entrepreneur of the Year National Finalists,
a select group of entrepreneurs representing EY’s
Midwest region. Elliott was honored at a gala in June,
and attended the national finals for EY’s Entrepreneur
of the Year in November.
2003
2005
2007
2008
2009
2011
Equity purchases
Equity expands into
Equity merges with
Equity expands
Equity opens two
Equity acquires
National Bank of
Wichita, acquiring
Signature Bancshares,
to Hays and Ellis,
Overland Park locations,
four bank locations
Andover in Andover,
two bank locations
Inc. in Spring Hill,
KS, acquiring Ellis
completes $20 million
in Topeka, Kansas
Kansas.
from Hillcrest Bank.
Kansas.
State Bank; opens
capital raise.
full-service bank in
Lee's Summit, Mo.
from Citizens
Bank & Trust.
2 Timeline
Online Banking
Equity Bank launched the all-new, all-improved
online banking platform for consumers,
businesses, and mobile users in January 2019,
undergoing an online facelift that began in early
2018. More than 40,000 customers use Equity Bank’s
online or mobile banking each day.
Blue Springs, Missouri
Equity adds seventh location in metropolitan Kansas
City, completing its merger with Adams Dairy
Bancshares, Inc. of Blue Springs, Missouri in May.
2018 Annual Report
4
Letter to Shareholders
6
Selected Financial Highlights
8
Board of Directors, Leadership
9
Leadership
10
Equity Spirit
11
Annual Report on Form 10-K
Bank Network
Enhancement
In 2018, Equity began improvements to bank locations in Wichita and
Andover, Kansas, repurposing facilities to enhance the environment for
its growing team, appeal to customers, reduce occupancy expense and
upgrade the data storage and security center at its Kellogg and Rock
Road location in Wichita.
2012
2014
2015
2016
2017
Equity acquires
Equity completes repayment
Equity enters Southeast
Equity merges with
Equity completes mergers with
First Community
of acquired TARP funds,
Kansas, merges with
Community First
State Bank in Hoxie, Kansas;
Bancshares, Inc.
repurchases 1.3 million
First Independence
Bancshares, Inc.
Eastman National Bank of
with 15 locations in
shares, opens new Wichita
Corporation. Equity
of Harrison, AR.
Ponca City, OK, and Patriot Bank
Kansas & Missouri.
bank office.
completes IPO in
Equity completes
of Tulsa, OK.
November.
$35.4 million private
placement.
Timeline 3
To my fellow Shareholders,
The central theme of our annual All-Employee
Day on January 21, 2019, was “Every Piece Counts.”
When I look back at our successful
2018 — featuring milestones throughout our
footprint, throughout our product and service
offerings, and throughout our sales, service, and
operational teams —truly, every piece made a
difference to our customers, communities and
colleagues, in our most profitable year for the
Company. We thank all of you for your support.
Our strategy as a community bank is twofold. First,
to add solid and strong
banks to our franchise
in proximity to our
footprint. We consider
merger partners based
on cultural fit first, and
enhancement for
our customers. In 2018, we
completed combinations
with First National Bank
of Liberal and Hugoton,
Kansas and Adams Dairy
Bank of Blue Springs,
$4.1B
A S S E T S
( 1 2 / 3 1 / 2 0 1 8 )
Mergers are a
core competency
of ours, and we
strive to complete
each within
approximately
three months.
I’m proud of each
member of our
merger teams, led
by Julie Huber,
Brad Elliott, Chairman & CEO
Equity Bancshares, Inc.
John Blakeney, Jennifer Johnson, Patrick Salmans
and Patrick Harbert, and their ability to work
together to continue to empower new
employees within our Company.
The second element of our strategy is
organic growth: Delivering customized,
sophisticated banking solutions to
customers in a diverse range of markets.
In 2018, our retail and commercial teams
did an excellent job growing core deposits
— with 8 percent organic deposit growth
throughout our regions. Deposits are the
lifeblood of our business as a community
bank, and our sales teams, led by Wendell
Missouri in May. In August we added City Bank
Bontrager and Craig Anderson, have worked
and Trust Company of Guymon, Oklahoma to our
efficiently and intelligently to ensure Equity Bank
footprint. We announced Equity Bank's acquisition
is a great choice for businesses and consumers. Our
of two additional branches in Guymon and one in
retail sales teams focus on One More a Day: one more
Cordell, Oklahoma in September, and completed
checking account, one more service, one more
that transaction in
February of 2019.
conversation with customers, every day.
52
Each of these combinations
featured an addition of
B A N K L O C A T I O N S
convenience to our Western
696
E M P L O Y E E S
Kansas, Kansas City, and
Our experienced and seasoned lenders in
Oklahoma franchises. New
metropolitan and community markets have provided
team members led by Tina Call
an engine for growth while continuing to adhere to
in Liberal, Amada Alvidrez in
our credit standards. Craig and Wendell continue
Guymon, and additional talent
to work with talented bankers throughout our
in Blue Springs have helped
footprint to control risk and fulfill our pipeline.
us continue to deliver services and products above
Our loan portfolio grew organically by 6 percent
and beyond customer expectation — as well as
from 2017, including an average of 17 percent in
results to our shareholders.
our metro markets.
4 Letter to Shareholders
I consider the element of customer experience
improve financial planning, private banking, and
crucial to our strategy, and we made important
enhanced trust services for our customers — it’s
improvements. We enhanced online and mobile
another piece that customers count on.
banking for our entire customer base, relaunching
our online banking product for consumers and
business customers. This is an undertaking on par
In my opinion, talent, drive and focus are what
propel Equity Bank to our success, and what bodes
well for our continued growth. Our 700-plus team
“More than anything, it’s the entrepreneurial
mindset that has allowed us to successfully
welcome talented, driven bankers...”
members embody the
company’s core values:
Integrity, Community
Focus, Accountability,
Respect and Entrepreneurial
Spirit. More than anything,
it's the
$2.6B
L O A N S
( 1 2 / 3 1 / 2 0 1 8 )
$3.1B
D E P O S I T S
( 1 2 / 3 1 / 2 0 1 8 )
with a bank combination — more than 40,000
households access online banking each day, often
multiple times, from multiple devices.
entrepreneurial mindset
that has allowed us to
successfully welcome talented,
We believe our online platform is now on par with
driven bankers from commnity
the best in banking. Our customer engagement team
banks joining our team. It’s
of Julie Huber, John Blakeney, Jennifer Johnson and
allowed us to manage a merger
John Hanley led our operations, marketing, systems,
pipeline, customer experience
and customer testing groups through a rigorous
projects, and customer growth
process testing the platform and communicating to
simultaneously. It’s allowed us to
our customers.
In 2019 we intend to continue to recruit top talent,
expand our product
offerings, and expand
our services to our
business clientele.
Recently, we
announced the
launch of Equity Trust and Wealth Management,
our full service trust division. Gaylyn McGregor
has joined our team in Wichita, to lead and grow
our trust platform with the help of our current
associates, including those from the former City
National Bank and Trust Company. We’re eager to
Special Note Concerning Forward-Looking Statements
continue to remember: Every piece
counts. Every piece is big. Every
piece makes a difference. As I look
forward to a robust 2019, it’s our
Equity team spirit that will help
us continue to deliver results.
Sincerely,
Brad S. Elliott
Chairman & Chief Executive Officer
Equity Bancshares, Inc.
Certain statements contained herein may be considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon the belief of Equity Bancshares, Inc.
(“the Company”) management, as well as assumptions made beyond information currently available to the Company's management, and may be, but not necessarily are, identified by such words as “will,” "expect,” "plan,”
"anticipate,” "target,” "forecast" and "goal.” Because such "forward-looking statements" are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from the Company's expectations include competition from other financial institutions and bank holding companies; the effects of and changes in trade,
monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; changes in the demand for loans; fluctuations in value of collateral and loan reserves; inflation, interest rate, market and
monetary fluctuations; changes in consumer spending, borrowing and savings habits; and acquisitions and integration of acquired businesses, and similar variables. The foregoing list of factors is not exhaustive. Except as
otherwise stated in this annual report, the Company does not undertake any obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise.
For discussion of these and other risks that may cause actual results to differ from expectations, please refer to "Cautionary Note Regarding Forward-looking Statements" and "Risk Factors" in our most recent Form 10-K, or
other SEC filings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed
in, or implied by, forward-looking information and statements contained herein. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. The Company
assumes no obligation to update or revise any forward-looking statements that are made from time to time.
Letter to Shareholders 5
Selected Financial Highlights (unaudited)
(Dollars in thousands, except per share data)
See also: "Selected Financial Data," in our Annual Report on Form 10-K.
Statement of Income Data
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Non-interest income**
Merger expense
Other non-interest expense
Income before income taxes
Provision for income taxes
Net income
Dividends and discount accretion on preferred Stock
Net income allocable to common stockholders
Basic earnings per share
Diluted earnings per share
Balance Sheet Data (at period end)
Cash and cash equivalents
Securities available-for-sale
Securities held-to-maturity
Loans held for sale
Gross loans held for investment
Allowance for loan losses
Years Ended December 31
2018
2017
2016
2015
2014
$
161,556
$
102,693
$
61,799
$
53,028
$
46,794
36,758
16,691
124,798
86,002
3,961
19,734
7,462
86,925
46,175
10,350
35,825
-
2,953
15,169
5,352
62,111
31,026
10,377
20,649
-
35,825
20,649
2.33
2.28
1.66
1.62
9,202
52,597
2,119
9,987
5,294
41,723
13,869
4,495
9,374
(1)
9,373
1.09
1.07
6,766
46,262
3,047
8,364
1,691
36,568
14,442
4,142
10,300
(177)
10,123
1.55
1.54
5,433
41,361
1,200
7,688
-
35,645
13,190
4,203
8,987
(708)
8,279
1.31
1.30
$
192,818
$
52,195
$
35,095
$
56,829
$
31,707
168,875
162,272
95,732
130,810
52,985
748,356
535,462
465,709
310,539
261,017
2,972
2,353
4,830
3,504
897
2,575,408
2,117,270
1,383,605
960,355
725,876
11,454
8,498
6,432
5,506
5,963
Loans held for investment, net of allowance for loan losses
2,563,954
2,108,772
1,377,173
954,849
719,913
Goodwill and core deposit intangibles, net
153,437
115,645
63,589
19,679
19,237
Total assets
Total deposits
Borrowings
Total liabilities
Total stockholders' equity
Tangible common equity*
Performance Ratios
Return on average assets (ROAA)
Return on average equity (ROAE)
Return on average tangible common equity (ROATCE)*
Yield on loans
Cost of interest-bearing deposits
Net interest margin
Efficiency ratio*
Non-interest income/average assets
Non-interest expense/average assets
Capital Ratios
Tier 1 Leverage Ratio
Common Equity Tier 1 Captial Ratio
Tier 1 Risk Based Capital Ratio
Total Risk Based Capital Ratio
Equity/Assets
Book value per share
Tangible book value per share*
Tangible common equity to tangible assets*
4,061,716
3,170,509
2,192,192
1,585,727
1,174,515
3,123,447
2,382,013
1,630,451
1,215,914
981,177
464,676
401,652
293,909
194,064
70,370
3,605,775
2,796,365
1,934,228
1,418,494
1,056,786
455,941
374,144
257,964
167,233
117,729
301,276
257,222
194,352
131,153
82,133
1.00%
8.52%
13.43%
5.74%
1.15%
3.81%
0.84%
7.03%
9.81%
5.43%
0.79%
3.83%
0.55%
5.55%
6.75%
4.98%
0.65%
3.30%
0.75%
8.19%
9.66%
5.31%
0.55%
3.65%
0.78%
7.30%
9.99%
5.63%
0.49%
3.92%
60.14%
61.39%
66.67%
66.94%
72.67%
0.55%
2.62%
0.63%
2.74%
8.60%
10.33%
11.02%
11.52%
11.92%
11.23%
28.87
19.08
7.71%
$
$
11.56%
12.17%
12.54%
11.80%
25.62
17.61
8.42%
$
$
$
$
0.61%
2.74%
11.81%
13.34%
14.25%
14.67%
11.77%
22.09
16.64
9.13%
0.71%
2.81%
9.47%
12.35%
13.85%
14.35%
10.55%
18.37
15.97
8.37%
0.75%
3.08%
9.62%
N/A
13.16%
13.86%
10.02%
16.71
13.54
7.11%
$
$
$
$
6 Selected Financial Highlights
**Does not include gains on sales and settlement of securities or bargain purchase gains associated with acquisitions.
*Indicates non-GAAP financial measure. Please see “Item 7 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Non-GAAP Financial Measures” for reconciliation to the most directly comparable GAAP measure.
Tangible Common Book Value*
And Total Assets
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
)
S
N
O
I
L
L
I
M
$
(
S
T
E
S
S
A
L
A
T
O
T
$15.97
$16.64
$13.54
$3,171
$2,192
$1,586
$1,175
Total Assets
TCBV per Share
$17.61
$19.08
$20.00
$4,062
$15.00
$10.00
$5.00
T
C
B
V
P
E
R
S
H
A
R
E
(
$
)
2014
2015
2016
2017
2018
Return on Average Tangible
Common Equity*
Revenue** And
Net Interest Margin
Net Interest Income
Non-interest Income**
Net Interest Margin
13.43%
9.99%
9.66%
9.81
6.75%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
2014
2015
2016
2017
2018
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
)
S
0
0
0
$
(
E
U
N
E
V
E
R
L
A
T
O
T
3.92%
3.65%
3.83%
3.81%
4.00%
3.50%
$19,734
3.30%
$15,169
$7,688
$8,364
$9,987
,
1
6
3
1
4
$
,
2
6
2
6
4
$
,
7
9
5
2
5
$
,
2
0
0
6
8
$
,
8
9
7
4
2
1
$
2014
2015
2016
2017
2018
3.00%
2.50%
2.00%
1.50%
N
E
T
I
N
T
E
R
E
S
T
M
A
R
G
I
N
(
%
)
Efficiency Ratio*, ** And
NIE/Average Assets
(cid:40)(cid:73)(cid:868)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:53)(cid:68)(cid:87)(cid:76)(cid:82)
Noninterest Expense/
Average Assets
Diluted EPS
And Net Income
Net Income Allocable to
Common Stockholders
Diluted EPS
3.30%
2.90%
80.0%
3.08%
)
%
(
O
I
T
A
R
Y
C
N
E
I
C
I
F
F
E
60.0%
40.0%
20.0%
2.81%
2.74% 2.74%
2.62%
2.50%
%
7
.
2
7
%
9
.
6
6
%
7
.
6
6
%
4
.
1
6
%
1
.
0
6
2014
2015
2016
2017
2018
2.10%
1.70%
$50,000
$40,000
$30,000
$20,000
$1.30
$1.54
$2.28
$1.62
$1.07
$35,825
$20,649
$10,000
$8,279
$10,123
$9,373
D
I
L
U
T
E
D
E
P
S
(
$
)
A
V
G
.
A
S
S
E
T
S
(
%
)
N
O
N
-
I
N
T
E
R
E
S
T
E
X
P
.
/
E
M
O
C
N
I
T
E
N
)
S
0
0
0
$
(
N
O
M
M
O
C
O
T
2014
2015
2016
2017
2018
*Indicates non-GAAP financial measure. Please see “Item 7 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Non-GAAP Financial Measures” for reconciliation to the most directly comparable GAAP measure.
**Does not include gains on sales and settlement of securities or bargain purchase gains associated with acquisitions.
Selected Financial Highlights 7
Board of Directors
Members of the Equity Bancshares, Inc. Board of Directors
and the Equity Bank Board of Directors are listed below.
Brad S. Elliott
Chairman & CEO
Equity Bancshares, Inc.; Equity Bank
Gary C. Allerheiligen
CPA/Consultant
Equity Bancshares, Inc.; Equity Bank
James L. Berglund
Retired President & CEO, Sunflower Bank
Equity Bancshares, Inc.; Equity Bank
Jeff A. Bloomer
President & COO, Sunrise Oilfield Supply
Equity Bancshares, Inc.; Equity Bank
Gregory L. Gaeddert
Managing Partner, B12 Capital Partners, LLC
Equity Bancshares, Inc.; Equity Bank
Randee R. Koger
Attorney & Partner, Wise & Reber L.C.
Equity Bancshares, Inc.; Equity Bank
Gregory H. Kossover
Chief Financial Officer
Equity Bancshares, Inc.; Equity Bank
Jerry P. Maland
Retired Chairman & CEO, Community First Bancshares, Inc.
Equity Bancshares, Inc.; Equity Bank
Shawn D. Penner
Owner, Shamrock Development, LLC
Equity Bancshares, Inc.; Equity Bank
Harvey R. Sorensen
Attorney & Partner, Foulston Siefkin LLP
Equity Bancshares, Inc.; Equity Bank
Craig L. Anderson
Chief Operating Officer
Equity Bank
Wendell L. Bontrager
President
Equity Bank
Dan R. Bowers
Attorney
Equity Bank
Roger A. Buller
SVP & Regional Manager, Benjamin F. Edwards & Co.
Equity Bank
P. John Eck
Owner, AGV Corp., Eck Agency, Inc.
Equity Bank
Members of the Equity Bancshares and Equity Bank Board of Directors. Back row, left to right: Jim Berglund, Greg Gaeddert, Wendell Bontrager, Shawn Penner, Brad
Elliott, Roger Buller, Jeff Bloomer, Jerry Maland, Craig Anderson. Front row, left to right: John Eck, Dan Bowers, Randee Koger, Greg Kossover, Gary Allerheiligen, Harvey
Sorensen
Senior Leadership
Brad S. Elliott
Chairman & Chief
Executive Officer
Gregory H.
Kossover
Chief Financial Officer
Wendell L.
Bontrager
President, Equity Bank
Craig L.
Anderson
Chief Operating Officer
Julie A. Huber
EVP, Strategic Initiatives
Craig P. Mayo
Chief Credit Officer
John M. Blakeney
Chief Information Officer
Rolando Mayans
Chief Risk Officer
Brett A. Reber
General Counsel
Gaylyn K. McGregor
Director of Trust & Wealth
Management
Patrick L. Salmans
SVP, Human Resources
Director
Patrick J. Harbert
Community Markets
President
Jennifer A. Johnson
Chief Services Officer
John J. Hanley
SVP, Senior Marketing
Director
Mark C. Parman
President, Kansas City
Michael E. Bezanson
Tulsa CEO
Timothy A. Kerr
SVP, Community Markets
Manager
8 Leadership
Market Leadership
Wichita
David A. King
Shawna K. Palmieri
Andrew L. Chaney
Chris A. Riedel
David R. Schaefer
Randy R. Summers
Senior Lending Officer (cid:120) Wichita
SVP, Director of Treasury Management (cid:120) Wichita
VP, Commercial Banking (cid:120) Wichita
VP, Retail Sales Manager (cid:120) Wichita
VP, Commercial Loan Officer (cid:120) Wichita
VP, Commercial Loan Officer (cid:120) Wichita
Ozark Mountain
David C. Morton
Elizabeth S. Kelley
Wade S. Robson
Deretha K. Walker
Rick C. Daniel
Jay B. Ertel
Rita M. Herrmann
Burnetta K. Bauer
Janet D. David
Connie K. Featherstone
James A. Huffman
Amanda L. Lowry
Harry H. "Mel" Melhorn
Karlea B. Newberry
Carla K. Riley
Shannon M. Snow
Dustin A. Walker
Ozark Mountain CEO (cid:120) Harrison
President (cid:120) Eureka Springs
President (cid:120) Pea Ridge
President (cid:120) Berryville
Commercial Loan Officer (cid:120) Pea Ridge
Commercial Loan Officer (cid:120) Eureka Springs
SVP, Credit Analyst (cid:120) Harrison
Mortgage Loan Officer (cid:120) Harrison
Bank Manager (cid:120) Pea Ridge
Commercial Loan Officer (cid:120) Eureka Springs
Commercial Loan Officer (cid:120) Eureka Springs
Retail Sales Manager (cid:120) Harrison
Mortgage Loan Officer (cid:120) Harrison
Bank Manager (cid:120) Harrison
Teller Supervisor (cid:120) Harrison
VP, Information Technology (cid:120) Harrison
Commercial Loan Officer (cid:120) Berryville
Southwest
Amada G. Alvidrez
Scarlette N. Diseker
Jana K. Jantzen
Tammy J. Slocum
Michael J. Brond
Larry A. Dalvine
Lanny D. Drummond
Charles C. Field
Rene R. Higgins
Adria L. Kaiser
Jimmy D. LeGrange
Charles D. Payne
Tomas Reynaga-Luna
Tulsa
Ryan K. Schrieber
Kimberly D. Edwards
Robert T. Potts
Market President (cid:120) Guymon
Bank Manager (cid:120) Liberal
Customer Service Manager (cid:120) Liberal
Bank Manager (cid:120) Hugoton
Commercial Loan Officer (cid:120) Liberal
Commercial Loan Officer (cid:120) Guymon
Commercial Loan Officer (cid:120) Liberal
Commercial Loan Officer (cid:120) Liberal
Loan Assistant (cid:120) Liberal
Loan Officer (cid:120) Hugoton
Commercial Loan Officer (cid:120) Guymon
Personal Banker (cid:120) Liberal
Commercial Loan Officer (cid:120) Liberal
Commercial Loan Officer (cid:120) Tulsa
Bank Manager (cid:120) Tulsa
Treasury Management Officer (cid:120) Tulsa
Western Missouri
Cheryl A. Barnson
Mark L. Davis
W. Sue Hook
Rhonda R. Scott
Mark L. Smith
Terry L. Thompson
Gregory N. Hall
Sandra J. Rice
Jill K. Warren
Topeka
Jason L. Pickerell
Sara E. Lies
Janet A Thayer
President (cid:120) Sedalia
President (cid:120) Clinton
President (cid:120) Warrensburg
President (cid:120) Windsor
President (cid:120) Warsaw
President (cid:120) Higginsville
Commercial Loan Officer (cid:120) Warrensburg
Financial Advisor (cid:120) Sedalia
Registered Sales Assistant (cid:120) Higginsville
President (cid:120) Topeka
Commercial Loan Officer (cid:120) Topeka
Bank Manager (cid:120) Topeka
Bruce W. Wiley
Regional President,
Ozark Mountain
Tina M. Call
Regional President,
Southwest
Joshua J. Means
Regional President,
Western Missouri
Southeast Kansas
Jim L. Clubine
Lori L. Kelley
Commercial Loan Officer (cid:120) Independence
Treasury Management Officer (cid:120) Independence
David A. Wright
Regional President,
Southeast Kansas
Kansas City
Peter W. Shriver
J. Chris Ryan
Michael H. Doyle
Alex L. Goodpaster
Larry W. Hillier
Sharon R. Holmes
Sherri L. Howard
Mark S. Janczewski
Justin N. Kelly
Robert H. Markey
Brady M. Rodgers
Ronan J. Sramek
Mark W. Steinman
SVP, Senior Lending Officer (cid:120) Overland Park
SVP, Commercial Loan Officer (cid:120) Lee's Summit
VP, Commercial Loan Officer (cid:120) Overland Park
VP, Commercial Loan Officer (cid:120) Overland Park
VP, Commercial Loan Officer (cid:120) Lee's Summit
VP, Retail Sales Manager (cid:120) Lee's Summit
VP, Treasury Management Officer (cid:120) Lee's Summit
VP, Director of Government Banking (cid:120) Lee's Summit
VP, Commercial Loan Officer (cid:120) Overland Park
VP, Commercial Loan Officer (cid:120) Blue Springs
VP, Commercial Loan Officer (cid:120) Overland Park
VP, Mortgage Manager (cid:120) Overland Park
VP, Commercial Loan Officer (cid:120) Overland Park
Northern Oklahoma
Darin A. Kirchenbauer
Erin M. Liberton
Gary W. Scott
Mary M. Austin
SVP, Commercial Loan Officer (cid:120) Ponca City
SVP, Retail Sales Manager (cid:120) Ponca City
SVP, Commercial Loan Officer (cid:120) Newkirk
Bank Manager (cid:120) Newkirk
Mark T. Detten
Regional President,
Northern Oklahoma
Quality Care
Jeremiah B. Allen
Monique C. Kittle
Chris M. Navratil
Barbara M. Noyes
Robert E. Quaney
Beverly D. Axmann
Evette P. Beckman
Bradley D. Bischoff
J. Matthew Brewer
James R. Brunsell
Kristi M. Bueno
Stephen L. Fisher
Kenneth W. Furgason
Brent V. Koehn
Julie K. Magee
Mandi R. Martinson
Barbara K. Mize
Jesse A. Nienke
June K. Pressnell
Mark W. Taylor
SVP, Loan Operations Director (cid:120) Wichita
SVP, Director of Enterprise Risk (cid:120) Wichita
SVP, Finance (cid:120) Wichita
SVP, Controller (cid:120) Wichita
SVP, Finance (cid:120) Wichita
Internal Financial Reporting Manager (cid:120) Wichita
Deposit Operations Manager (cid:120) Wichita
Compliance Officer (cid:120) Wichita
Corporate Training Manager (cid:120) Wichita
IT Director (cid:120) Wichita
Lending Compliance & Operational Risk (cid:120) Wichita
Senior Accountant (cid:120) Wichita
External Financial Reporting Manager (cid:120) Wichita
Loan Review Officer (cid:120) Wichita
Treasury Management (cid:120) Wichita
Talent Development Specialist (cid:120) Wichita
Senior Credit Manager (cid:120) Wichita
Systems Operations Manager (cid:120) Wichita
Senior Credit Officer (cid:120) Wichita
Human Resources Manager (cid:120) Wichita
Western Kansas
Dale F. Gottschalk
Michael C. Mense
Allen Weber
Cheri L. Mense
Steven L. Schoendaler
Jeff T. Torluemke
Randy K. Farber
Harold W. Sulzman
President (cid:120) Hays
President (cid:120) Hoxie
President (cid:120) Ellis
Retail Sales Manager (cid:120) Hoxie
Commercial Loan Officer (cid:120) Grinnell
Commercial Loan Officer (cid:120) Hoxie
Commercial Loan Officer (cid:120) Hoxie
Commercial Loan Officer (cid:120) Hoxie
Levi D. Getz
Regional President,
Western Kansas
Leadership 9
Equity Spirit
On January 21, 2019, Equity Bank
team members joined together in
Overland Park, Kansas, for our annual
All-Employee Day. Team members new
and seasoned learned leadership tactics
from Dan Meers, the Kansas City Chiefs'
"KC Wolf." More than 50 Equity Bank
team members earned performance
awards amid applause from peers.
CEO Brad Elliott reviewed past
accomplishments and the Company’s
future. Annually, we recognize the
graduates of our Equity University
program, with the following class
earning its place as future leaders of
the Company: Chris Wassel, Terry
Thompson, Mark Taylor, Mark Steinman,
Sara Lies, Erin Liberton, Levi Getz, Jay
Ertel, Kirby Coale, Evette Beckman, and
Beverly Axmann.
Dan Meers
Equity University
Brad Elliott
10 Equity Spirit
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
(cid:4)(cid:4) 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
(State or other jurisdiction of
gorganization)
incorporation or
p
7701 East Kellogg Drive, Suite 300
Wichita, KS
principal executive offices)
p
(Address of p
72-1532188
(I.R.S. Employer
Identification No.)
67207
p(Zip Code)
Registrants telephone number, including area code: 316.612.6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, ppar value $0.01 pper share
Name of exchange on which registered
NASDAQ Stock Market LLC
g
g
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in RuleRR
405 of the Securities Act. Yes (cid:3) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:3) No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ⌧ No (cid:3)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. (cid:5)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
(cid:3)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:4)
☐
(cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:3) No ⌧
As of June 30, 2018, the last business day of the registrants most recently completed second fiscal quarter, the aggregate market
non-voting common stock held by non-affiliates was $621.3 million.
r
value of the registrants voting and
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.
Class A Common Stock, par value $0.01 per share
Class B Non-Voting Common Stock, par value $0.01 per share
Shares outstanding as of
March 12, 2019
15,803,587
0
Portions of the registrants Proxy Statement relating to the 2019 Annual Meeting of Stockholders, which will be filed within 120 days after December 31, 2018, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
Part I
Item 1.
Business...........................................................................................................................................................................
Item 1A. Risk Factors .....................................................................................................................................................................
Item 1B. Unresolved Staff Comments............................................................................................................................................
Item 2.
Properties.........................................................................................................................................................................
Item 3.
Legal Proceedings ...........................................................................................................................................................
Item 4.
Mine Safety Disclosures..................................................................................................................................................
Part II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .....
Item 6.
Selected Financial Data ...................................................................................................................................................
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations .........................................
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..........................................................................................
Item 8.
Financial Statements and Supplementary Data ...............................................................................................................
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45
46
48
48
49
52
54
83
86
Report of Independent Registered Public Accounting Firm ........................................................................................... F-1
Consolidated Balance Sheets........................................................................................................................................... F-2
Consolidated Statements of Income ................................................................................................................................ F-3
Consolidated Statements of Comprehensive Income ...................................................................................................... F-4
Consolidated Statements of Stockholders Equity .......................................................................................................... F-5
Consolidated Statements of Cash Flows ......................................................................................................................... F-7
Notes to Consolidated Financial Statements ................................................................................................................... F-9
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ........................................
Item 9A. Controls and Procedures..................................................................................................................................................
Item 9B. Other Information............................................................................................................................................................
Part III
Item 10. Directors, Executive Officers and Corporate Governance ..............................................................................................
Item 11.
Executive Compensation .................................................................................................................................................
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......................
Item 13.
Certain Relationships and Related Transactions, and Director Independence................................................................
Item 14.
Principal Accounting Fees and Services .........................................................................................................................
Part IV
87
87
87
88
88
88
88
88
Item 15.
Exhibits, Financial Statement Schedules.........................................................................................................................
89
Important Notice about Information in this Annual Report on Form 10-K
Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K 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 Annual Report on Form 10-K is accurate only as of the date of this annual report and as of the
dates specified herein.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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, managements 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 in Item 1A Risk Factors of
this Annual Report on Form 10-K.
rr
There are or will be important factors that could cause our actual results to differ materially from those indicated in these
forward-looking statements, including, but not limited to, the following:
ff
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an economic downturn, especially one affecff
ting 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 effecff
t 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;
the adoption of ASU 2016-13, Financial Instruments Credit Losses, and its impact on our allowance for loan losses and
capital;
the effects of new federal tax laws, or changes to existing federal tax laws;
inadequacies in our allowance for loan losses which could require us to take a charge to earnings and thereby adversely
affect our financial condition;
differences in our qualitative factors used in our calculation of the allowance for loan losses from actual results;
inaccuracies or changes in the appraised value of real estate securing the loans we originate that could lead to losses if the
real estate collateral is later foreclosed upon and sold at a price lower than the appraised value;
the costs of integrating the businesses we acquire which may be greater than expected;
1
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•
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•
challenges arising from unsuccessful attempts to expand into new geographic
a
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
is not available on favorable terms or at all;
a
requirements imposed by banking regulators which may require us to raise capital at a time when capital
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;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information
technology systems;
unauthorized access to nonpublic personal information of our customers, which could expose us to litigation or
reputational harm;
disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical
processing functions;
required implementation of new accounting standards that significantly change certain of our existing recognition
practices;
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 Item 1A Risk Factors.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements
that are included in this Annual Report on Form 10-K. 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 when 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 Annual
Report on Form 10-K 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.
2
Part I
Item 1: Business
Our Company
We are a bank holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank,
t
provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network
49 full service branches located in Arkansas, Kansas, Missouri and Oklahoma, as of December 31, 2018. As of December 31, 2018,
we had, on a consolidated basis, total assets of $4.06 billion, total deposits of $3.12 billion, total loans (net of allowances) of $2.56
billion and total stockholders equity of $455.9 million.
of
Our principal objective is to increase stockholder value and generate consistent earnings growth by expanding our commercial
banking franchise both organically and through strategic acquisitions. We strive to provide an enhanced banking experience for our
customers by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs,
while delivering the high-quality, relationship-based customer service of a community bank.
Our History and Growth
We were founded in November 2002 by our Chairman and CEO, Brad S. Elliott. Mr. Elliott believed that, as a result of in-
market consolidation, there existed an opportunity to build an attractive commercial banking franchise and create long-term value for
our stockholders. Following thirteen years experience as a finance executive, including serving as a Regional President for a Kansas
bank with over $1.0 billion in assets, Mr. Elliott implemented his banking vision of developing a strategic consolidator of community
banks and a destination for seasoned bankers and business persons who share our entrepreneurial spirit. In 2003, we raised capia tal
from 23 local investors to finance the acquisition of National Bank of Andover in Andover, Kansas. At the time of our acquisition,
National Bank of Andover had $32 million in assets and was subject to a regulatory enforcement agreement with the Office of the
Comptroller of the Currency (OCC). Subsequent to our acquisition of National Bank of Andover, we changed its name to Equity
Bank and instilled in its commercial and retail staff our entrepreneurial spirit and disciplined credit culture. Within eight months of
the acquisition, the enforcement action with the OCC was terminated.
We believe we have a successful track record of selectively acquiring, integrating and consolidating community banks and
branch networks. Our acquisition activity includes the following transactions.
•
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June 2003 Acquired National Bank of Andover in Andover, Kansas for $3 million. At the time of our acquisition,
National Bank of Andover had $32 million in total assets.
February 2005 Acquired two branches of Hillcrest Bank, N.A. in Wichita, Kansas, which increased our deposits by $66
million. In conjunction with this acquisition, we relocated our headquarters to our current principal executive offices in
Wichita.
June 2006 Acquired the Mortgage Centre of Wichita and integrated it into our Bank as a department to expand our
mortgage loan platform.
October 2006 Acquired a Missouri charter from First National Bank in Sarcoxie, Missouri, which allowed us to
subsequently open a full service branch in Lees Summit, Missouri in 2007.
November 2007 Acquired Signature Bancshares, Inc. in Spring Hill, Kansas, which provided us entry into the Overland
Park, Kansas market.
August 2008 Acquired Ellis State Bank with locations in Ellis and Hays, Kansas.
December 2011 Acquired four branches of Citizens Bank and Trust in Topeka, Kansas, which increased our deposits by
$110 million.
October 2012 Acquired First Community Bancshares, Inc. in Overland Park, Kansas, which increased our deposits by
approximately $515 million. At the time of acquisition, First Community had total assets of approximately $595 million,
which significantly increased our total asset size and provided us with ten additional branches in Western Missouri and
five additional branches in Kansas City.yy
October 2015 Acquired First Independence Corporation of Independence, the registered savings and loan holding
company for First Federal Savings & Loan of Independence, based in Independence, Kansas. First Independence
operated four full service branches in Southeastern Kansas. At the time of acquisition, First Independence had
consolidated total assets of $135.0 million, total deposits of $87.1 million and total loans of $89.9 million.
3
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November 2016 Acquired Community First Bancshares, Inc. in Harrison, Arkansas, which increased our deposits by
$375.4 million. At the time of acquisition, Community First had total assets of $462.9 million and five locations in
Arkansas.
March 2017 Acquired Prairie State Bancshares, Inc. (Prairie) in Hoxie, Kansas, which increased our deposits by
$125.4 million. At the time of acquisition, Prairie had total assets of $153.1 million and three locations in western
Kansas.
November 2017 Acquired Eastman National Bancshares, Inc. (Eastman), which had a total of four branches in Ponca
City and Newkirk, Oklahoma. The acquisition increased our deposits by $224.1 million, our loans by $177.9 million and
our total assets by $259.7 million. In addition, at the same time, we acquired Cache Holdings, Inc. (Cache) in Tulsa,
Oklahoma. Cache was the holding company for Patriot Bank and had one branch in Tulsa. The acquisition of Cache
added $278.7 million in deposits, $300.7 million in loans and $324.6 in total assets.
May 2018 Acquired Kansas Bank Corporation (KBC), which had a total of five branches in Liberal and Hugoton,
Kansas. The acquisition increased our deposits by $288.4 million, our loans by $159.4 million and our total assets by
$336.1 million. On the same day we acquired Adams Dairy Bancshares, Inc. (Adams), which had one branch located in
Blue Springs, Missouri. The acquisition of Adams added $97.1 million in deposits, $82.7 million in loans and $119.8
million in total assets.
August 2018 Acquired City Bank and Trust Company (City Bank), with one branch in Guymon, Oklahoma, from
Docking Bancshares, Inc. This acquisition increased our deposits by $126.9 million, our loans by $77.1 million and our
total assets by $163.3 million.
In conjunction with our strategic acquisition growth, we strive to reposition and improve the loan portfolio and deposit mix of
the banks we acquire. Following our acquisitions, we focus on identifying and disposing of problematic loans and replacing them
with higher quality loans generated organically. In addition, we have focused on growth in our commercial loan portfolio, which we
believe generally offers higher return opportunities than our consumer loan portfolio, primarily by hiring additional talented bankers,
particularly in our metropolitan markets, and incentivizing our bankers to expand their commercial banking relationships. We also
seek to increase our most attractive deposit accounts, primarily by growing deposits in our community markets and cross-selling our
depository products to our loan customers.
As a result of these strategic and organic growth efforts, since our inception through December 31, 2018, we have expanded our
team of full-time equivalent employees from 19 to 627, and our network of branches from two to 49. We believe that we are well
positioned to continue to be a strategic consolidator of community banks, while maintaining our history of attracting experienced and
entrepreneurial bankers and organically growing our loans and deposits.
Our Initial Public Offering
We completed the underwritten initial public offering (IPO) of our common stock on November 16, 2015, where we sold an
aggregate of 2,231,000 shares of our common stock at a price to the public of $22.50 per share. Our common stock began trading on
the NASDAQ Global Select Market on November 11, 2015 under the ticker symbol EQBK.
4
Our Strategies
We believe we are a leading provider of commercial and personal banking services to businesses and business owners as well as
individuals in our targeted Midwestern markets. Our strategy is to continue strategically consolidating community banks within such
markets and maintaining our organic growth, while preserving our asset quality through disciplined lending practices.
•
Strategic Consolidation of Community Banks. We believe our strategy of selectively acquiring and integrating
community banks has provided us with economies of scale and improved our overall franchise efficiency. We expect to
continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied
acquisition opportunities. The following map illustrates the headquarters of potential acquisition opportunities broken out
by asset size between $50.0 million and $1.5 billion within our target footprint.
We believe many of these banks will continue to be burdened by new and more complex banking regulations, resource
constraints, competitive limitations, rising technological and other business costs, management succession issues and liquidity
concerns.
Despite the significant number of opportunities, we intend to continue to employ a disciplined approach to our acquisition
strategy and only seek to identify and partner with financial institutions that possess attractive market share, low-cost deposit funding
and compelling noninterest income-generating businesses. We believe consolidation will lead to organic growth opportunities for us
following the integration of businesses we acquire. We also expect to continue to manage our branch network in order to ensure
effective coverage for customers while minimizing any geographic overlap and driving corporate efficiency.
•
Enhance the Performance of the Banks We Acquire. We strive to successfully integrate the banks we acquire into our
existing operational platform and enhance stockholder value through the creation of efficiencies within the combined
operations. As a result of our acquisition history, we believe we have developed an experienced approach to integration
that seeks to identify and execute on such synergies, particularly in the areas of technology, data processing, compliance
and human resources, while generating earnings growth. We believe that our experience and reputation as a successful
integrator and acquirer will allow us to continue to capitalize
on additional opportunities within our markets in the future.
a
5
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o
Focus on Lending Growth in Our Metrott politan
Markets While Increasing Deposits in Our Community Markets. We
are focused on continuing to grow organically and believe the markets in which we operate currently provide meaningful
opportunities to expand our commercial customer base and increase our current market share. We believe our branch
network is strategically split between growing metropolitan markets, such as Kansas City, Wichita and Tulsa, and stable
community markets within Western Kansas, Western Missouri, Topeka, Northern Arkansas and Northern Oklahoma. We
believe this diverse geographic footprint provides us with access to low cost, stable core deposits in community markets
that we can use to fund commercial loan growth in our metropolitan markets. The following table shows our total
deposits and loans (net of allowances) in our community markets and our metropolitan markets as of December 31, 2018,
which we believe illustrates our execution of this strategy.
Metropolitan markets(2)
Community markets(3)
Deposits
Loans
Amount(1)
$ 1,016,214
$ 2,107,233
Overall %
Amount(1)
Overall %
33% $ 1,481,921
67% $ 1,093,487
58%
42%
(1) Amounts in thousands.
(2) Represents 12 branches located in the Wichita, Kansas City and Tulsa metropolitan statistical areas (MSAs).
(3) Represents 37 branches located outside of the Wichita, Kansas City and Tulsa MSAs.
Our team of seasoned bankers represents an important driver of our organic growth by expanding banking relationships with
current and potential customers. We expect to continue to make opportunistic hires of talented and entrepreneurial bankers,
particularly in our metropolitan markets, to further augment our growth. Our bankers are incentivized to increase the size of their loan
and deposit portfolios and generate fee income while maintaining strong credit quality. We also seek to cross-sell our various banking
products, including our deposit and treasury wealth management products, to our commercial loan customers, which we believe
provides a basis for expanding our banking relationships as well as a stable, low-cost deposit base. We believe we have built a
scalable platform that will support this continued organic growth.
•
Preserve Our Asset Quality Through Disciplined Lending Practices. Our approach to credit management uses well-
defined policies and procedures, disciplined underwriting criteria and ongoing risk management. We believe we are a
competitive and effective commercial and industrial lender, supplementing ongoing and active loan servicing with early-
stage credit review provided by our bankers. This approach has allowed us to maintain loan growth with a diversified
portfolio of high quality assets. We believe our credit culture supports accountable bankers, who maintain an ability to
expand our customer base as well as make sound decisions for our Company. We believe our success in managing asset
quality is illustrated by our aggregate net charge-off history.
Our Competitive Strengths
We believe the following competitive strengths will allow us to continue to achieve our principal objective of increasing
stockholder value and generating consistent earnings growth through the organic and strategic expansion of our commercial banking
franchise.
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Experienced Leadership and Management Team. Our seasoned and experienced executive management team, senior
leaders and board of directors have exhibited the ability to deliver stockholder value by consistently growing profitably
while expanding our commercial banking franchise through acquisition and integration. Our executive management team
has, on average, more than twenty years of experience working for large, billion-dollar-plus financial institutions in our
markets during various economic cycles along with significant merger and acquisition experience in the financial services
industry. Our executive management team has instilled a transparent and entrepreneurial culture that rewards leadership,
innovation and problem solving.
Focus on Commercial Banking. We are primarily a commercial bank. As measured by outstanding balances at
December 31, 2018, commercial loans composed over 71.2% of our loan portfolio and within our commercial loan
portfolio, 68.2% of such loans were commercial real estate loans and 31.8% were commercial and industrial loans. We
believe we have developed strong commercial relationships in our markets across a diversified range of sectors including
key areas supporting regional and local economic activity and growth, such as manufacturing, freight/transportation,
consumer services, franchising and commercial real estate. We believe we have also been successful in attracting
customers from larger competitors because of our flexible and responsive approach in providing banking solutions
tailored to meet our customers needs while maintaining disciplined underwriting standards. Our relationship-based
approach seeks to grow lending relationships with our customers as they expand their businesses, including
geographically and through cross-selling our various other banking products, such as our deposit and treasury
6
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management products. We have a growing presence in attractive commercial banking markets, such as Wichita, Kansas
City and Tulsa, which we believe present significant opportunities to continue to increase our business banking activities.
Our Ability to Consolidate. Our branches are strategically located within metropolitan markets, Kansas City, Tulsa and
Wichita, as well as stable community markets that present opportunities to expand our market share. Our executive
management team has identified significant acquisition and consolidation opportunities ranging from small to large
community banking institutions. We believe our track record of strategic acquisitions and effective integrations,
combined with our expertise in our markets and scalable platform, will allow us to capitalize on these growth
opportunities.
Disciplined Acquisition Approach. Our disciplined approach to acquisitions, consolidations and integrations includes the
following: (i) selectively acquiring community banking franchises only at appropriate valuations, after taking into account
risks that we perceive with respect to the targeted bank; (ii) completing comprehensive due diligence and developing an
appropriate plan to address any legacy credit problems of the targeted institution; (iii) identifying an achievable cost
savings estimate and holding our management accountable for achieving such estimates; (iv) executing definitive
acquisition agreements that we believe provide adequate protections to us; (v) installing our credit procedures, audit and
risk management policies and procedures and compliance standards upon consummation of the acquisition;
(vi) collaborating with the targets management team to execute on synergies and cost saving opportunities related to the
acquisition; (vii) involving a broader management team across multiple departments in order to help ensure the successful
integration of all business functions; and (viii) scheduling the acquisition closing date to occur simultaneously with the
platform conversion date. We believe this approach allows us to realize the benefits of the acquisition and create
stockholder value while appropriately managing risk.
with Capacitytt
to Support Our Growth. Through significant investments in technology
Efficient and Scalable Platftt ormff
and staff, our management team has built an efficient and scalable corporate infrastructure within our commercial banking
franchise, including in the areas of banking processes, technology, data processing, underwriting and risk management,
which we believe will support our continued growth. While expanding our infrastructure, several departmental functions
have been outsourced to gain the experience of outside professionals while at the same time achieving more favorable
economics and cost-effective solutions. Such outsourced areas include the internal audit function, investment securities
management and select loan review. This outsourcing strategy has proven to control costs while adding enhanced controls
and/or service levels. We believe that this scalable infrastructure will continue to allow us to efficiently and effectively
manage our anticipated growth.
ll
Transparency and Accountability. We have invested in professional talent
Culture Committed to Talent Development,
since our inception by building a team of business persons first and bankers second and economically aligned them with
our stockholders, primarily through our stock purchase opportunities. In our efforts to become a destination for seasoned
bankers with an entrepreneurial spirit, we have developed numerous leadership development programs. For example,
Equity University is a year-long program we designed for our promising company-wide leaders. Additionally, the
Wichita Business Journal named Equity Bank one of the Best Places to Work in 2014 and a Best in Business winner
in 2015. We believe our well-trained and motivated professionals work most effectively in a corporate environment that
emphasizes transparency, respect, innovation and accountability. Our culture provides our professionals with the
empowerment to better serve our clients and our communities.
Sophisticated and Customized Banking Products with High-Quality Customer Service. We strive to offer our customers
the sophisticated commercial banking products of large financial institutions
with the personalized service of a community
bank. Our management teams significant banking and lending experience in our markets has provided us with an
understanding of the commercial banking needs of our customers that allows us to tailor our products and services to meet
our customers needs. In addition to offering a diverse array of banking products and services, we offer our customers the
high-touch, relationship-based customer service experience of a community bank. For example, we utilize Flight, a
customized customer relationship management system, to assign relationship officers to enhance relationships with our
customers and identify and meet their particular needs.
t
Strong Risk Management Practices. We place significant emphasis on risk management as an integral component of our
organizational culture without sacrificing growth. We believe our comprehensive risk management system is designed to
make sure that we have sound policies, procedures and practices for the management of key risks under our risk
framework (which includes market, operational, liquidity, interest rate sensitivity, credit, insurance, regulatory, legal and
reputational risk) and that any exceptions are reported by senior management to our board of directors or audit committee.
Our risk management practices are overseen by the Chairmen of our audit and risk committees, who have many years of
combined banking experience, and our Chief Risk Officer, who has more than 30 years of banking experience. We
believe that our enterprise risk management philosophy has been important in gaining and maintaining the confidence of
our various constituencies and growing our business and footprint within our markets. We also believe our strong risk
management practices are manifested in our asset quality statistics.
7
2018 Acquisitions
On May 4, 2018, we completed our acquisition of KBC pursuant to the terms of the Agreement and Plan of Reorganization,
dated December 16, 2017, by and between the Company, Oz Merger Sub, Inc., a wholly-owned subsidiary of the Company (Oz
Merger Sub), and KBC (the KBC Merger Agreement). At the effective time of the merger (the KBC Effective Time), Oz
Merger Sub merged with and into KBC, with KBC surviving the merger as a wholly-owned subsidiary of the Company. Following
the KBC Effective Time, KBC merged with and into the Company, with the Company surviving the merger. Subsequently, The First
National Bank of Liberal, KBCs wholly-owned banking subsidiary, merged into Equity Bank, with Equity Bank surviving the
merger. Pursuant to the KBC Merger Agreement, at the KBC Effective Time the Company issued an aggregate of 820,849 shares of
its Class A common stock and paid $14.9 million in cash to the stockholders of KBC as consideration under the terms of the KBC
Merger Agreement.
Also on May 4, 2018, we completed our acquisition of Adams pursuant to the terms of the Agreement and Plan of
Reorganization, dated December 16, 2017, by and between the Company, Abe Merger Sub, Inc., a wholly-owned subsidiary of the
Company (Abe Merger Sub), and Adams (the Adams Merger Agreement). At the effective time of the merger (the Adams
Effective Time), Abe Merger Sub merged with and into Adams, with Adams surviving the merger as a wholly-owned subsidiary of
the Company. Following the Adams Effective Time, Adams merged with and into the Company, with the Company surviving the
merger. Subsequently, Adams Dairy Bank, Adams wholly-owned banking subsidiary, merged with and into Equity Bank, with
Equity Bank surviving the merger. Pursuant to the Adams Merger Agreement, at the Adams Effective Time the Company issued an
aggregate of 344,063 shares of its Class A common stock and paid $4.0 million in cash to the stockholders of Adams as consideration
under the terms of the Adams Merger Agreement.
On August 23, 2018, we completed our acquisition of City Bank pursuant to the terms of the Agreement and Plan of Merger,
dated June 12, 2018, by and between the Company, Equity Bank, Docking Bancshares, Inc. (Docking), the sole shareholder of Citytt
Bank and City Bank (the City Bank Merger Agreement). At the effective time of the merger (the City Bank Effective Time), City
Bank merged with and into Equity Bank, with Equity Bank surviving the merger. Pursuant to the City Bank Merger Agreement, at the
City Bank Effective Time the Company paid $18.9 million to Docking as consideration under the terms of the City Bank Merger
Agreement.
Subsequent Events
On February 8, 2019, we completed our acquisition of three branch locations from MidFirst Bank pursuant to a Branch Purchase
and Assumption Agreement, dated September 21, 2018 (the MidFirst Agreement), between Equity Bank and MidFirst Bank.
Pursuant to the MidFirst Agreement, Equity Bank assumed the deposits and certain other liabilities and acquired the loans and certain
other assets associated with the three branch locations. For more information, see Note 25 SUBSEQUENT EVENTS in the Notes
to Consolidated Financial Statements.
Our Banking Services
A general description of the range of commercial banking products and other services we offer follows.
Lending Activities
We offer a variety of loans, including commercial and industrial, commercial real estate-backed loans (including loans secured
by owner occupied commercial properties), commercial lines of credit, working capital loans, term loans, equipment financing,
acquisition, expansion and development loans, borrowing base loans, real estate construction loans, homebuilder loans, agricultural,
government guaranteed loans, letters of credit and other loan products to national and regional companies, restaurant franchisees,
hoteliers, real estate developers, manufacturing and industrial companies, agribusiness companies and other businesses. We also offer
various consumer loans to individuals and professionals including residential real estate loans, home equity loans, home equity lines of
credit (HELOCs), installment loans, unsecured and secured personal lines of credit, overdraft protection and letters of credit.
Lending activities originate from the relationships and efforts of our bankers, with an emphasis on providing banking solutions
tailored to meet our customers needs while maintaining our underwriting standards.
At December 31, 2018, we had total loans of $2.56 billion (net of allowances), representing 63.1% of our total assets. For
additional information
and Results of Operations Financial Condition Loan Portfolio.
ff
concerning our loan portfolio, see Item 7 Managements Discussion and Analysis of Financial Condition
Concentrations of Credit Risk. Most of our lending activity is conducted with businesses and individuals in metropolitan
Kansas City, Tulsa and Wichita. Our loan portfolio consists primarily of commercial and industrial loans, which were $582.5 million
8
and constituted 22.7% of our total loans net of allowances as of December 31, 2018, commercial real estate loans, which were $1.25
billion and constituted 48.8% of our total loans net of allowances as of December 31, 2018, and residential real estate loans, which
were $444.5 million and constituted 17.3% of our total loans net of allowances as of December 31, 2018. Our commercial real estate
loans are generally secured by first liens on real property. The remaining commercial and industrial
general business assets, accounts receivable, inventory and/or the corporate
principals. The geographic concentration subjects the loan portfolio to the general economic conditions within Arkansas, Kansas,
Missouri and Oklahoma. The risks created by such concentrations have been considered by management in the determination of the
adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover incurred losses in
our loan portfolio as of December 31, 2018.
guaranty of the borrower and/or personal guaranty of its
loans are typically secured by
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Sound risk management practices and appropriate levels of capital are essential elements of a sound commercial real estate
lending program. Concentrations of commercial real estate exposures add a dimension of risk that compounds the risk inherent in
individual loans. Interagency guidance on commercial real estate concentrations describe sound risk management practices which
include board and management oversight, portfolio management, management information systems, market analysis, portfolio stress
testing and sensitivity analysis, credit underwriting standards and credit risk review functions. Management believes these practices
allow us to appropriately monitor concentrations in commercial real estate in our loan portfolio.
Large Credit Relationships. As of December 31, 2018, the aggregate amount of loans to our ten largest borrowers (including
related entities) amounted to approximately $240.3 million, or 9.3% of total loans. See Item 1A Risk Factors Risks Related to
Our Business Our largest loan relationships currently make up a material percentage of our total loan portfolio.
Loan Underwriting and Approval. Historically, we believe we have made sound, high quality loans while recognizing that
lending money involves a degree of business risk. We have loan policies designed to assist us in managing this business risk. These
policies provide a general framework for our loan origination, monitoring and funding activities, while recognizing that not all risks
can be anticipated. Our board of directors delegates loan authority up to board-approved
hold limits collectively to our Directors
credit committee, which is comprised of members of our board of directors. Our board of directors also delegates limited lending
authority to our internal loan committee, which is comprised of members of our executive management team. In addition, our board
of directors also delegates more limited lending authority to our Chief Executive Officer, Chief Credit Officer, credit risk personnel
and, on a further limited basis, to selected lending managers in each of our target markets. Lending officers and relationship
managers, including our bankers, have further limited individual loan authority. When the total relationship exceeds an individuals
loan authority, a higher authority or credit committee approval is required. The objective of our approval process is to provide a
disciplined, collaborative approach to larger credits while maintaining responsiveness to client needs.
a
Loan decisions are documented as to the borrowers business, purpose of the loan, evaluation of the repayment source and
associated risks, evaluation of collateral, covenants and monitoring requirements and the risk rating rationale. Our strategy for
approving or disapproving loans is to follow conservative loan policies and consistent underwriting practices which include:
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•
maintaining close relationships among our customers and their designated banker to ensure ongoing credit monitoring and
loan servicing;
granting credit on a sound basis with full knowledge of the purpose and source of repayment for such credit;
ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan;
developing and maintaining targeted levels of diversification for our loan portfolio as a whole and forff
category; and
loans within each
ensuring that each loan is properly documented and that any insurance coverage requirements are satisfied.
Managing credit risk is a Company-wide process. Our strategy for credit risk management includes well-defined, centralized
credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for all credit exposures. Our
processes emphasize early-stage review of loans, regular credit evaluations and management reviews of loans, which supplement the
ongoing and proactive credit monitoring and loan servicing provided by our bankers. Our Chief Credit Officer provides Company-
wide credit oversight and periodically reviews all credit risk portfolios to ensure that the risk identification processes are functioning
properly and that our credit standards are followed. In addition, a third-party loan review is performed to assist in the identification of
problem assets and to confirm our internal risk rating of loans. We attempt to identify potential problem loans early in an effort
seek aggressive resolution of these situations before the loans become a loss, record any necessary charge-offs promptly and maintain
adequate allowance levels for probable loan losses incurred in the loan portfolio.
to
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Our loan policies generally include other underwriting guidelines for loans collateralized by real estate. These underwriting
standards are designed to determine the maximum loan amount that a borrower has the capacity to repay based upon the type of
9
collateral securing the loan and the borrowers income. Such loan policies include maximum amortization schedules and loan termsrr
for each category of loans collateralized by liens on real estate.
In addition, our loan policies provide guidelines for personal guarantees; an environmental review; loans to employees,
executive officers and directors; problem loan identification; maintenance of an adequate allowance for loan losses and other matters
relating to lending practices.
Lending Limits. Our lending activities are subject to a variety of lending limits imposed by federal law. In general, the Bank is
subject to a legal lending limit on loans to a single borrower based on the Banks capital level. The dollar amounts of the Banks
lending limit increases or decreases as the Banks capital increases or decreases. The Bank is able to sell participations in its larger
loans to other financial institutions, which allows it to manage the risk involved in these loans and to meet the lending needs of its
customers requiring extensions of credit in excess of these limits.
The Banks legal lending limit as of December 31, 2018 on loans to a single borrower was $84.5 million. However, we
typically maintain an in-house limit of $25.0 million for loans to a single borrower. We have strict policies and procedures in place
for the establishment of hold limits with respect to specific products and businesses and evaluating exceptions to the hold limits for
individual relationships.
Our loan policies provide general guidelines for loan-to-value ratios that restrict the size of loans to a maximum percentage of
the value of the collateral securing the loans, which percentage varies by the type of collateral. Our internal loan-to-value limitations
follow limits established by applicable law.
Loan Types. We provide a variety of loans to meet our customers needs. The section below discusses our general loan
categories.
Commercial and Industrial Loans. We make commercial and industrial loans, including commercial lines of credit, working
capital loans, commercial real estate-backed loans (including loans secured by owner occupied commercial properties), term loans,
equipment financing, acquisition, expansion and development loans, borrowing base loans, real estate construction loans, homebuilder
loans, restaurant franchisees, hoteliers, government guaranteed loans, letters of credit and other loan products, primarily in our target
markets that are underwritten on the basis of the borrowers ability to service the debt from income. We take as collateral a lien on
general business assets including, among other things, available real estate, accounts receivable, inventory and equipment and
generally obtain a personal guaranty of the borrower or principal. Our commercial and industrial loans generally have variable
interest rates and terms that typically range from one to five years depending on factors such as the type and size of the loan, the
financial strength of the borrower/guarantor and the age, type and value of the collateral. Fixed rate commercial and industri
maturities are generally short-term, with three-to-five year maturities, or include periodic interest rate resets. Terms greater than five
years may be appropriate in some circumstances based upon the useful life of the underlying asset being financed or if some formrr
of
credit enhancement, such as a government guarantee is obtained.
al loan
d
We also participate in syndicated loans (loans made by a group of lenders, including us, who share or participate in a specific
loan) with a larger regional financial institution as the lead lender. Syndicated loans are typically made to large businesses (which are
referred to as shared national credits) or middle market companies (which do not meet the regulatory definition of shared national
credits), both of which are secured by business assets or equipment, and also commercial real estate. The syndicate group for both
types of loans usually consists of two to three other financial institutions. In particular, we frequently work with a large regional
financial institution,
which is often the lead lender with respect to these loans. We have developed this portfolio to diversify our
balance sheet, increase our yield and mitigate interest rate risk due to the variable rate pricing structure of the loans. We have a
defined set of credit guidelines that we use when evaluating these credits. Although other large financial institutions are the lead
lenders on these loans, our credit department does its own independent review of these loans and the approval process of these loans is
consistent with our underwriting of loans and our lending policies. We expect to continue our syndicated lending program for the
foreseeable future.
t
In general, commercial and industrial
d
loans may involve increased credit risk and, therefore, typically yield a higher return. The
increased risk in commercial and industrial loans derives from the expectation that such loans generally are serviced principally from
the operations of the business and those operations may not be successful. Any interruption or discontinuance of operating cash flows
from the business, which may be inflff uenced by events not under the control of the borrower such as economic events and changes in
governmental regulations, could materially affect the ability of the borrower to repay the loan. In addition, the collateral securing
commercial and industrial loans generally includes moveable property such as equipment and inventory, which may decline in value
more rapidly than we anticipate exposing us to increased credit risk. As a result of these additional complexities, variables and risks,
commercial and industrial loans require extensive underwriting and servicing.
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Commercial Real Estate Loans. We make commercial mortgage loans collateralized by real estate, which may be owner
occupied or non-owner occupied real estate. Commercial real estate lending typically involves higher loan principal amounts and the
repayment is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt
service. We require our commercial real estate loans to be secured by well-managed property with adequate margins and generally
obtain a guarantee from responsible parties. Our commercial mortgage loans generally are collateralized by first liens on real estate,
have variable or fixed interest rates and amortize over a 10 to 20 year period with balloon payments or rate adjustments due at the end
of three to seven years. Periodically, we will utilize an interest rate swap to hedge against long term fixed rate exposures.
Commercial mortgage loans considered for interest rate swap hedging typically have terms of greater than five years.
Payments on loans secured by such properties are often dependent on the successful operation (in the case of owner-occupied
real estate) or management (in the case of non-owner-occupied real estate) of the properties. Accordingly, repayment of these loans
may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. In
underwriting commercial real estate loans, we seek to minimize these risks in a variety of ways, including giving careful consideration
to the propertys age, condition, operating history, future operating projections, current and projected market rental rates, vacancy
rates, location and physical condition. The underwriting analysis also may include credit verification, reviews of appraisals,
environmental hazards or reports, the borrowers liquidity and leverage, management experience of the owners or principals,
economic condition and industry trends.
Real Estate Construction Loans. We make loans to finance the construction of residential and non-residential properties.
Construction loans generally are collateralized by first liens on real estate and have floating interest rates. We conduct periodic
inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to
those described above also are used in our construction lending activities. Our construction loans have terms that typically range from
six months to two years depending on factors such as the type and size of the development and the financial strength of the
borrower/guarantor. Loans are typically structured with an interest only construction period. Loans are underwritten to either mature
at the completion of construction, or transition to a traditional amortizing commercial real estate facility at the completion of
construction, in line with other commercial real estate loans held at the bank.
Construction loans generally involve additional risks attributable to the fact that loan funds are advanced upon the security of a
project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating
construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be
difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. As a result of these
uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a
project prior to completion, there is no assurance that we will be able to recover the entire unpaid portion of the loan. In addition, we
may be required to fund additional amounts to complete a project and it may be necessary to hold the property for an indeterminate
period of time subject to the regulatory limitations imposed by local, state or federal laws.
1 4 Family Residential Mortgages. We make residential real estate loans collateralized by owner-occupied properties located
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y
in our market areas. We offer a variety of mortgage loan products with amortization periods up to 30 years including traditional 30
year fixed loans and various adjustable rate mortgages. Typically, loans with a fixed interest rate of greater than 10 years are held for
sale and sold on the secondary market, and adjustable rate mortgages are held for investment. Loans collateralized by one-to-four
family residential real estate generally are originated in amounts of no more than 80% of appraised value. Home equity loans and
HELOCs are generally limited to a combined loan-to-value ratio of 80%, including the subordinate lien. We retain a valid lien on real
estate, obtain a title insurance policy that insures that the property is free from encumbrances and require hazard insurance.
ff
From time to time we have purchased pools of residential mortgages originated by other financial institutions to hold for
investment with the intent to diversify our residential mortgage loan portfolio, and increase our yield. These loans purchased typically
have an adjustable rate with a fixed period of no more than 10 years, and are collateralized by one-to-four family residential real
estate. We have a defined set of credit guidelines that we use when evaluating these credits. Although these loans were originated
and underwritten by another institution, our mortgage and credit departments do their own independent review of these loans. These
loans typically are secured by collateral outside of our branch footprint.
g
Agricultural Loans. We offer both fixed-rate and adjustable-rate agricultural real estate loans to our customers. We also make
loans to finance the purchase of machinery, equipment and breeding stock, seasonal crop operating loans used to fund the borrowers
crop production operating expenses, livestock operating and revolving loans used to purchase livestock for resale and related livestock
production expense.
Generally, our agricultural real estate loans amortize over periods not in excess of 20 years and have a loan-to-value ratio of
80%. We also originate agricultural real estate loans directly and through programs sponsored by the Farm Service Agency, an
agency of the United States Department of Agriculture (FSA), which provides a partial guarantee on loans underwritten to FSA
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standards. Agricultural real estate loans generally carry higher interest rates and have shorter terms than 1-4 family residential real
estate loans. Agricultural real estate loans, however, entail additional credit risks compared to one- to four-family residential real
estate loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. We
generally require farmers to obtain multi-peril crop insurance coverage through a program partially subsidized by the Federal
government to help mitigate the risk of crop failures.
Agricultural operating loans may be originated at an adjustable- or fixed-rate of interest and generally for a term of up to 7
years. In the case of agricultural operating loans secured by breeding livestock and/or farm equipment, such loans are originated at
fixed rates of interest for a term of up to 5 years. We typically originate agricultural operating loans on the basis of the borrowers
ability to make repayment from the cash flow of the borrowers agricultural business. As a result, the availability of funds for the
repayment of agricultural operating loans may be substantially dependent on the success of the business itself and the general
economic environment. A significant number of agricultural borrowers with these types of loans may qualify for relief under a
chapter of the U.S. Bankruptcy Code that is designed specifically for the reorganization of financial obligations of family farmers
which provides certain preferential procedures to agricultural borrowers compared to traditional bankruptcy proceedings pursuant to
other chapters of the U.S. Bankruptcy Code.
rr
and
Consumer Loans. We make a variety of loans to individuals for personal and household purposes, including secured and
unsecured term loans and home improvement loans. Consumer loans are underwritten based on the individual borrowers income,
current debt level, past credit history and the value of any available collateral. The terms of consumer loans vary considerably based
upon the loan type, nature of collateral and size of the loan. Consumer loans entail greater risk than do residential real estate loans
because they may be unsecured or, if secured, the value of the collateral, such as an automobile or boat, may be more difficult to
assess and more likely to decrease in value than real estate. In such cases, any repossessed collateral for a defaulted consumer loan
may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often will not warrant
further substantial collection efforts
collections are dependent on the borrowers continuing financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount
which can be recovered on such loans.
against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan
ff
Deposit Products
Our lending and investing activities are primarily funded by deposits. We offer a variety of deposit accounts with a wide range
of interest rates and terms including demand, savings, money market and time deposits with the goal of attracting a wide varietytt of
customers, including small to medium-sized businesses. We employ customer acquisition strategies to generate new account and
deposit growth, such as customer referral incentives, search engine optimization, targeted direct mail and email campaigns, in addition
to conventional marketing initiatives and advertising. Our goal is to emphasize our Signature Deposits and cross-sell our deposit
products to our loan customers.
We design our consumer deposit products specifically for the lifestyles of clients in the communities we serve. Some accounts
emphasize and reward debit card usage, while others appeal to higher deposit customers. We also utilize Equity Connect, which is our
customer relationship management system, to assist our personnel in deepening and expanding current relationships by providing
timely identification of potential needs. It also serves as a methodical tool to track customer onboarding and retention actions by
account officers. We do participate in the CDARS service via Promontory Interfinancial Network as an option for our customers to
place funds and occasionally as a funding source.
We also bid for, and accept, deposits from public entities in our markets.
Other Products and Services
We offer banking products and services that are competitively priced with a focus
on convenience and accessibility. We offer a
full suite of online banking solutions including access to account balances, online transfers, online bill payment and electronic delivery
of customer statements, mobile banking solutions for iPhone and Android phones, including remote check deposit with mobile bill
pay. We offer extended drive-through hours, ATMs and banking by telephone, mail and personal appointment. We offer debit cards
with no ATM surcharges or foreign ATM fees for checking customers, plus night depository, direct deposit, cashiers and travelers
checks and letters of credit, as well as treasury management services, wire transfer services and automated clearing house (ACH)
services.
ff
We offer a full arrayaa of commercial treasury management services designed to be competitive with banks
a
of all sizes. Treasury
Management Services include balance
transfer initiation, ACH origination and stop payments.
positive pay, reverse positive pay, account reconciliation services, zero balance accounts and sweep accounts including loan sweep.
reporting (including current day and previous day activity), transfers between accounts, wire
Cash management deposit products consist of lockbox, remote deposit capture,
aa
aa
a
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Our Markets
As of December 31, 2018, we conducted banking operations through our 49 full service branches located in Arkansas, Kansas,
Missouri and Oklahoma. We believe that an important factor contributing to our historical performance and our ability to execute our
strategy is the attractiveness and specific characteristics of our existing and target markets. In particular, we believe our markets
provide us with access to low cost, stable core deposits in smaller community markets that we can use to fund commercial loan growth
in metropolitan areas.
We believe our existing and target markets are among some of the most attractive in the Midwestern United States. Our markets
a
footprint of our markets provides numerous industrial plants, facilities and
are home to thousands of manufacturing and trade jobs, and have experienced recent growth in the healthcare, consumer services and
technology sectors. We believe the central geographic
manufacturing businesses with a central shipping location from which they can distribute their products. Our markets also serve as the
corporate headquarters for Koch Industries Inc., Hallmark Cards, Inc., H&R Block, Inc., Sprint Corporation, Cerner Corporation,
AMC Entertainment Holdings, Inc., American Century Investments, Garmin International, Inc., Cessna Aircraft Company, Seaboard
Corporation, Cargill Meat Solutions, Spirit AeroSystems, Dairy Farmers of America, Quick Trip, ONEOK, and Williams Companies
and host a major presence for companies across a variety of industries, including Bombardier Learjr et, Collective Brands, Inc., FedEx,
Flexsteel, Hills Pet Nutrition, Inc., Textron Aviation Services, Tyson Foods, Williams Companies, Phillips 66, Rib Crib, Honeywell,
Bayer Corporation and Dean & Deluca, Inc. We understand the community banking needs of the businesses and individuals within
our markets and have focused on developing a commercial and personal banking platform to service such needs.
The markets in which we operate have generally experienced stable population growth over the past five years, with modest
population growth expected over the next five years. Wichita is the largest MSA in Kansas and the No. 89 MSA in the U.S. with a
population of over 648,000. Kansas City, Missouri and Kansas is the No. 30 largest MSA in the U.S. with a population of 2.2 million,
and Tulsa, Oklahoma, is No. 54 with a MSA population of over 1 million. In addition, we believe our markets are stable and have
weathered various economic cycles relatively well. Household income is expected to increase by a five-year growth rate of 4.27%.
Our markets are expected to experience moderate compounded annual growth in consumer and commercial deposits, with a five-year
compounded average growth rate of 3.79% for commercial deposits, according to data from Fiserv BancIntelligence, and 1.90% in
consumer deposits.
We compete for loans, deposits and financial services in our markets against many other bank and nonbank institutions,
including community banks, regional banks, national banks, Internet-based banks, money market and mutual funds, brokerage houses,
credit unions, mortgage companies and insurance companies. We believe that our comprehensive suite of sophisticated banking
products provides us with a competitive advantage over smaller community banks within our markets while our high-quality,
relationship-based customer service will allow us to take market share from larger regional and national banks. In addition, our
markets present significant acquisition, integration and consolidation opportunities, and we expect to continue to pursue strategic
acquisitions in our markets. We believe that many small to mid-sized banking organizations that currently serve our markets are
acquisition opportunities for us, either because of scale and operational challenges, regulatory pressures, management succession
issues or stockholder liquidity needs. We think we offer an attractive solution for such banks because we retain the community
banking feel and services upon which their customers expect and rely.
Information Technology Systems
We continue to make significant investments in our information
ff
technology systems and staff for our banking and lending
operations and treasury management activities. We believe this investment will support our continued growth, permit us to enhance
our capabilities to offer new products and overall customer experience and enable us to provide scale for future growth and
acquisitions. We use nationally recognized software vendors and their support allows us to operate our data processing and core
systems in-house. Our internal network and e-mail systems are maintained in-house and we have enhanced our back-up site at a
decentralized location. This back-up site provides for redundancy and disaster recovery capabilities.
The majority of our other systems, including our electronic funds transfer, transaction processing and online banking services
are hosted by third-party service providers. The scalability of this infrastructure will support our growth strategy. In addition, the
tested capability of these vendors to automatically switch over to standby systems should allow us to recover our systems and provide
business continuity quickly in case of a disaster.
Due to our heavy reliance on the strength and capability
aa
of our technology systems, which we use both to interface witht our
customers and to manage our internal financial reporting and other systems, we utilize a layered cyber security model designed to protect
all systems and sensitive data. This layered model is composed of a vara iety of different components from a range
The various components are centrally managed and monitored creating a multi-layered, interlocking, cybersecurity defense system. We
believe this defense system is dynamic and designed to adjust itself to protect against the latest cyber threats and attack vectors.
of security vendors.
a
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Competition
The financial services industry is highly competitive. We compete for loans, deposits, and financial services in all of our
principal markets. We compete directly with other bank and nonbank institutions located within our markets, Internet-based banks,
out-of-market banks, and bank holding companies that advertise in or otherwise serve our markets, along with money market and
mutual funds, brokerage houses, mortgage companies, and insurance companies or other commercial entities that offer financial
services products. Competition involves efforts to retain current customers, obtain new loans and deposits, increase the scope and
type of services offered, and offer competitive interest rates paid on deposits and charged on loans. Many of our competitors enjoy
competitive advantages, including greater financial resources, a wider geographic presence, more accessible branch office locations,
the ability to offer additional services, more favorable pricing alternatives, and lower origination and operating costs. Some of our
competitors have been in business for a long time and have an established customer base and name recognition. We believe that our
competitive pricing, personalized service, and community involvement enable us to effectively compete in the communities in which
we operate.
Employees
As of December 31, 2018, we had approximately 627 full-time equivalent employees. None of our employees are represented
by any collective bargaining unit or is a party to a collective bargaining agreement.
Available Information
The Company files reports, proxy statements and other information with the Securities and Exchange Commission (SEC)
under the Securities Exchange Act of 1934, as amended (the Exchange Act). The Company makes available, free of charge, on its
website at http://investor.equitybank.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-
K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after the Company electronically files, or furnishes, such materials to the SEC. The SEC also maintains a website at
http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC. The information contained on or accessible from our website does not constitute a part of this Annual
Report on Form 10-K and is not incorporated by reference herein.
Supervision and Regulation
Banking is a complex, highly regulated industry. Consequently, our growth and earnr ings performance can be affected, not only
by management decisions and general and local economic conditions, but also by the statutes administered by and the regulations and
policies of, various governmental regulatory authorities. These authorities include, but are not limited to, the Federal Reserve,
FDIC, the Office of the Comptroller of the Currency (OCC), the Kansas Office of State Bank Commissioner (OSBC), the
Consumer Financial Protection Bureau (CFPB), the IRS, and state taxing authorities. The effect of these statutes, regulations and
policies and any changes to any of them can be significant and cannot be predicted.
the
rr
The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct
of sound monetary policy. In furtherance of those goals, the U.S. Congress and the individual states have created several regulatory
agencies and enacted numerous laws, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Act), that govern banks and the banking industry. The system of supervision and regulation applicable to us establishes a
comprehensive framework for our operations and is intended primarily for the protection of the FDICs deposit insurance funds, our
depositors and the public, rather than the stockholders and creditors.
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions operating in the United States. The federal banking agencies have issued a
number of significant new regulations as a result of the Dodd-Frank Act and a number of additional regulations are pending or may be
proposed. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our
businesses may be affected by any new regulation or statute.
14
The following is an attempt to summarize some of the relevant laws, rules and regulations governing banks and bank holding
companies, but does not purport to be a complete summary of all applicable laws, rules and regulations governing banks. The
descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.
Bank Holding Company Regulation
We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended, or the BHC Act, and
are subject to supervision and regulation by the Federal Reserve. Federal laws subject bank holding companies to particular
restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including
regulatory enforcement actions, for violation of laws and policies.
Activities Closely Related to Banking
The BHC Act prohibits a bank holding company, with certain limited exceptions, from acquiring direct or indirect ownership or
control of more than five percent of the voting shares of any company that is not a bank or from engaging in any activities other than
those of banking, managing or controlling banks and certain other subsidiaries or furnishing services to or performing services for its
subsidiaries. Bank holding companies also may engage in or acquire interests in companies that engage in a limited set of activities
that are so closely related to banking as to be a proper incident thereto. If a bank holding company has become a financial holding
company (FHC), it may engage in a broader set of activities, including insurance underwriting and broker-dealer services as well as
activities that are jointly determined by the Federal Reserve and the U.S. Treasury to be financial in nature or incidental to such
financial activity. FHCs may also engage in activities that are determined by the Federal Reserve to be complementary to financial
activities. We have not elected to be an FHC at this time. To maintain FHC status, the bank holding company and all subsidiaryrr
depository institutions must be well managed and well capitalized. Additionally, all subsidiary depository institutions
received at least a Satisfactory rating on its most recent CRA examination. Failure to meet these requirements may result in
limitations on activities and acquisitions.
must have
t
Safe and Sound Banking Practices
Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve may order
a bank holding company to terminate an activity or control of a non-bank subsidiary if such activity or control constitutes a significant
risk to the financial safety, soundness or stability of a subsidiary bank and is inconsistent with sound banking principles. Regulation Y
also requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities
if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal
to 10% or more of the companys consolidated net worth.
Consistent with the Dodd-Frank Act codification of the Federal Reserves policy that bank holding companies must serve as a
source of financial strength for their subsidiary banks, the Federal Reserve has stated that, as a matter of prudence, a bank holding
company generally should not maintain a rate of distributions to stockholders unless its available net income has been sufficient to
fully fund the distributions and the prospective rate of earnings retention appears consistent with a bank holding companys capital
needs, asset quality and overall financial condition.
a
In addition, the Federal Reserve Supervisory Letter SR 09-4 provides guidance on the declaration and payment of dividends,
capital redemptions and capital repurchases by a bank holding company. Supervisory Letter SR 09-4 provides that, as a general
matter, a bank holding company should eliminate, defer or significantly reduce its dividends if: (i) the bank holding companys net
income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully
fund the dividends, (ii) the bank holding companys prospective rate of earnr ings retention is not consistent with the bank holding
companys capital needs and overall current and prospective financial condition or (iii) the bank holding company will not meet, or is
in danger of not meeting, its minimum regulatory capital adequacy ratios. Failure to do so could result in a supervisory finding that
the bank holding company is operating in an unsafe and unsound manner.
Limitations on Equity Banks ability to pay dividends could, in turn, affect our ability to pay dividends to our stockholders. For
more information concerning Equity Banks ability to pay dividends, see Bank Regulation below.
The Federal Reserve has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries
which represent unsafe and unsound banking practices or which constitute violations of laws or regulations. Notably, the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), provides that the Board of Governors of the Federal
Reserve can assess civil money penalties for such practices or violations which can be as high as $1 million per day. FIRREA
contains expansive provisions regarding the scope of individuals and entities against which such penalties may be assessed.
15
Annual Reporting and Examinations
We are required to file annual and quarterly reports with the Federal Reserve and such additional information as the Federal
Reserve may require pursuant to the BHC Act. The Federal Reserve may examine a bank holding company or any of its subsidiaries
and charge the company for the cost of such an examination. We are also subject to reporting and disclosure requirements under state
and federal securities laws.
Rules on Regulatory Capital
a
criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1
Regulatory capital rules released in July 2013 pursuant to the Basel III requirements (Basel III rules), implement higher
minimum capital requirements for bank holding companies and banks. The Basel III rules include a new common equity Tier 1
capital requirement and establish
capital or Tier 2 capital. These enhancements are designed to both improve the quality and increase the quantity of capital required,
on a fully phased-in basis, to be held by banking organizations, better equipping the U.S. banking system to deal with adverse
economic conditions. The Basel III rules require banks and bank holding companies to maintain a minimum common equity Tier 1
(CET1) capital ratio of 4.5%, a total Tier 1 capital ratio of 6%, a total capital ratio of 8% and a leverage ratio of 4%. Banka
companies are also required to hold a capital conservation buffer of CET1 capital
and executive compensation payments. Under the Basel III rules, bank holding companies must maintain a total risk-based capital
ratio of 10% and a total Tier 1 risk-based capital ratio of 6% to be considered well capitalized for purposes of certain rules and
requirements.
holding
of 2.5% to avoid limitations on capital distributions
a
The Basel III rules also require banks to maintain a CET1 capital
a
ratio of 10% and a leverage ratio of 5% to be deemed well capitalized for purposes of certain rules and prompt corrective action
requirements. The risk-based ratios include a capital conservation buffer of 2.5%. The new capital conservation buffer requirement
started to be phased in beginning January 2016 at 0.625% of risk-weighted assets and increased by that amount each year until it was
fully implemented in January 2019. An institution is subject to limitations on certain activities, including payment of dividends, share
repurchases and discretionary bonuses to executive officers, if its capital level is below the buffer amount.
ratio of 6.5%, a total Tier 1 capital ratio of 8%, a total capiaa tal
The Basel III rules attempt to improve the quality of capital by implementing changes to the definition of capital. Among the
a
most important changes are stricter eligibility criteria for regulatory capital
instruments, such as trust preferred securities, in Tier 1 capital going forward and new constraints on the inclusion of minority
interests, mortgage-servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions.
In addition, the Basel III rules require that most regulatory capital deductions be made from CET1 capital.
instruments that would disallow the inclusion of
Under the Basel III rules, to avoid limitations on capital distributions, including dividend payments and certain discretionary
bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity
Tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve
capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk-
weighted assets.
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For
example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance on intangible assets. At this time, the bank
regulatory agencies are more inclined to impose higher capital requirements to meet well capitalized standards and future regulatory
change could impose higher capital standards as a routine matter. Our regulatory capital ratios and those of Equity Bank are in excess
of the levels established for well capitalized institutions
under the Basel III rules.
t
The Basel III rules also set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn will
affect the calculation of risk-based ratios. Under the Basel III rules, higher or more sensitive risk weights would be assigned to
various categories of assets, including certain credit facilities that finance the acquisition, development or construction of real
property, certain exposures or credits that are 90 days past due or on non-accrual, foreign exposures and certain corporate exposures.
In addition, the Basel III rules include (i) alternative standards of credit worthiness consistent with the Dodd-Frank Act, (ii) greater
recognition of collateral and guarantees and (iii) revised capital treatment for derivatives and repo-style transactions.
In addition, the Basel III rules include certain exemptions to address concerns about the regulatory burden on community banks.
For example, banking organizations with less than $15 billion in consolidated assets as of December 31, 2009, are permitted to include
in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 capital
May 19, 2010, on a permanent basis, without any phase out. Community banks were also permitted to make a one-time election in
their March 31, 2015, quarterly filings to opt-out of the requirement to include most accumulated other comprehensive income
prior to
a
16
(AOCI) components in the calculation of CET1 capital and, in effect, retain the AOCI treatment under the current capital rules.
Under the Basel III rules, we made the one-time, permanent election to continue to exclude AOCI from capital.
The Economic Growth, Regulatory Relief and Consumer Protection Act, which was enacted in May 2018, directs the federal
banking agencies to develop a community bank leverage ratio (CBLR) for certain community banking organizations. Consistent
with this directive, the federal banking agencies issued proposed rules implementing the CBLR in November 2018. Under the
proposed rules, a bank or holding company would be eligible to elect the CBLR framework if the institution had less than $10.0
billion in total consolidated assets, met certain risk-based qualifying criteria and had a CBLR greater than 9%. A qualifying
community banking organization that elected to opt in to the CBLR framework would not be subject to risk-based and leverage capital
requirements under the Basel III rules.
Imposition of Liability for Undercapitalized Subsidiaries
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required each federal banking agency to
revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit
risk and the risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily
mortgages.
Pursuant to FDICIA, each federal banking agency has specified, by regulation, the levels at which an insured institution would
d and critically undercapitalized.
be considered well capitalized, adequately capitalized, undercapitalized, significantly undercapitalize
As of December 31, 2018, Equity Bank exceeded the capital levels required to be deemed well capitalize
d.
aa
a
a
Additionally, FDICIA requires bank regulators to take prompt corrective action to resolve problems associated with insured
depository institutions. In the event an institution
t
becomes undercapitalized, it must submit a capital restoration plan.
Under these prompt corrective action provisions of FDICIA, if a controlled bank is undercapitalized, then the regulators could
require the bank to submit a capital restoration plan. If an institution becomes significantly undercapitalized or critically
undercapitalized, additional and significant limitations are placed on the institution. The capital restoration plan of an
undercapitalized institution will not be accepted by the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiarys compliance with the capital restoration plan until it becomes adequately capitalize
control of Equity Bank for the purpose of this statute.
a
d. We have
Further, by statute and regulation, a bank holding company must serve as a source of financial and managerial strength to each
bank that it controls and, under appropriate circumstances, may be required to commit resources to support each such controlled bank.
This support may be required at times when the bank holding company may not have the resources to provide the support. In
addition, if the Federal Reserve believes that a bank holding companys activities, assets or affiliates represent a significant risk to the
financial safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding company to
terminate the activities, liquidate the assets or divest the affiliates. The regulators may require these and other actions in support of
controlled banks even if such actions are not in the best interests of the bank holding company or its stockholders.
Acquisitions by Bank Holding Companies
The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it may acquire all
or substantially all of the assets of any bank or ownership or control of any voting shares of any bank if aftff er such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank
holding companies, the Federal Reserve is required to consider the financial and managerial resources and future prospects of the bank
holding company and banks concerned, the convenience and needs of the communities to be served, the effect on competition as well
as the financial stability of the United States. The Attorney General of the United States may, within 30 days after approval of an
acquisition by the Federal Reserve, bring an action challenging such acquisition under the federal antitrust laws, in which case the
effectiveness of such approval is stayed pending a final ruling by the courts. Under certain circumstances, the 30-day period may be
shortened to 15 days.
Control Acquisitions
The Change in Bank Control Act (CBCA) prohibits a person or group of persons from acquiring control of a bank holding
company unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption
established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class
of securities registered under Section 12 of the Exchange Act, such as ourselves, would, under the circumstances set forth in the
presumption, constitute acquisition of control of us.
17
In addition, the CBCA prohibits any entity from acquiring 25% (the BHC Act has a lower limit for acquirers that are existing
bank holding companies) or more of a bank holding companys or banks voting securities, or otherwise obtaining control or a
controlling influence over a bank holding company or bank without the approval of the Federal Reserve. On September 22, 2008, the
Board of Managers of the Federal Reserve issued a policy statement on equity investments in bank holding companies and banks,
which states the Federal Reserve generally will not consider an entitys investment to be controlling if the entity owns or controls
less than 25% of the voting shares and less than 33% total equity of the bank holding company or bank and has limited business
relationships, director representation or other indicia of control. Depending on the nature of the overall investment and the capital
structure of the banking organization, the Federal Reserve will permit, based on the policy statement, noncontrolling investments in
the form of voting and nonvoting shares that represent in the aggregate (i) less than one-third of the total equity of the banking
organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held
by the entity) and (ii) less than 15% of any class of voting securities of the banking organization.
Interstate Branching
The Dodd-Frank Act permits a national or state bank, with the approval of its regulator, to open a branch in any state if the law
of the state in which the branch is located would permit the establishment of the branch if the bank were a bank chartered in that state.
Anti-Tying Restrictions
Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Bank Regulation
Equity Bank operates under a Kansas state bank charter and is subject to regulation by the OSBC and the Federal Reserve. The
OSBC and the Federal Reserve regulate or monitor all areas of Equity Banks operations, including capital requirements, issuance of
stock, declaration of dividends, interest rates, deposits, loans, investments, borrowings, record keeping, establishment of branches,
acquisitions, mergers, information technology and employee responsibility and conduct. The OSBC places limitations on activities of
Equity Bank, including the issuance of capital
Equity Bank to maintain a certain ratio of reserves against deposits. The OSBC requires Equity Bank to file a report annually, in
addition to any periodic report requested.
notes or debentures and the holding of real estate and personal property, and requires
a
The Federal Reserve and the OSBC regularly examine Equity Bank and its records. The FDIC may also periodically examine
and evaluate insured banks.
Standards for Safety and Soundness
As part of FDICIAs efforts to promote the safety and soundness of depository institutions
t
and their holding companies,
appropriate federal banking regulators are required to have in place regulations specifying operational and management standards
(addressing internal controls, loan documentation, credit underwriting and interest rate risk), asset quality and earnings. As discussed
above, the Federal Reserve and the FDIC have extensive authority to police unsafe or unsound practices and violations of applicable
laws and regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit
insurance of any institution that it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money
penalties of up to $1 million per day, issue cease-and-desist or removal orders, seek injunctions and publicly disclose such actions.
The ability of Equity Bank, as a Kansas state bank, to pay dividends is restricted under the Kansas Banking Code. Pursuant to
the Kansas Banking Code, a Kansas state bank may declare and pay a dividend out of undivided profits after deducting losses to the
holders of record of the stock outstanding on the date the dividend is declared. However, prior to the declaration of any dividend, a
Kansas state bank must transfer 25% of its net profits since the last preceding dividend to its surplus fund until the surplus fund is
equal to its total capital stock. In addition, no dividend may be declared without the approval of the OSBC, if such dividend would
reduce the surplus fund to an amount less than 30% of the resulting total capital of the bank.
Equity Bank is also subject to certain restrictions on the payment of dividends as a result of the requirement that it maintain an
adequate level of capital in accordance with guidelines promulgated from time to time by the federal regulators.
The present and future dividend policy of Equity Bank is subject to the discretion of its boards of directors. In determining
whether to pay dividends to us and, if made, the amount of the dividends, the board of directors of Equity Bank considers many of the
same factors discussed above. Equity Bank cannot guarantee that it will have the fiff nancial ability to pay dividends to us, or if
18
dividends are paid, that they will be sufficient for us to make distributions to our stockholders. Equity Bank is not obligated to pay
dividends.
Insider Transactions
A bank is subject to certain restrictions on extensions of credit to insiders of the bank or of any affiliate. Insiders include
executive officers, directors, certain principal stockholders, and their related interests. Extensions of credit include derivative
transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the extent that such
transactions cause a bank to have credit exposure to an insider. Any extension of credit to an insider must:
•
•
Be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties; and
Involve no more than the normal risk of repayment or present other unfavorable features.
For loans above certain threshold amounts, board approval is required, and the interested insider may not be involved. In
addition, a bank may purchase an asset from or sell an asset to an insider only if the transaction is on market terms and, if representing
more than 10% of capital, is approved in advance by the majority
of disinterested directors.
a
Additional and more stringent limits apply to a banks transactions with its own executive officers and certain directors. These
limits do not apply
a
to transactions with all directors nor to insiders of the banks affiliates.
Restrictions on Transactions with Affiliates
ff
Section 23A of the Federal Reserve Act imposes quantitative and qualitative limits on transactions between a bank and any
affiliate and requires certain levels of collateral for any such loans. It also limits the amount of advances to third parties which are
collateralized by the securities or obligations of a holding company. Section 23B of the Federal Reserve Act requires that certainrr
transactions between Equity Bank and its affiliates must be on terms substantially the same, or at least as favorable, as those prevailing
at the time for comparable transactions with or involving other nonaffiliated companies. In the absence of such comparable
transactions, any transaction between Equity Bank and its affiliates must be on terms and under circumstances, including credit
standards, which in good faith would be offered to or would apply to nonaffiliated companies.
Capital Adequacy
In addition to the capital rules applicable to both banks and bank holding companies discussed above, under the prompt
corrective action regulations, the federal bank regulators are required and authorized to take supervisory actions against
undercapitalized banks. For this purpose, a bank is placed in one of the following five categories based on the banks capital (as of the
new capital rules discussed above):
•
•
•
•
•
well capitalized (at least 5% leverage capital, 6.5% common equity Tier 1 risk-based capital, 8% Tier 1 risk-based capital
and 10% total risk-based capital);
adequately capitalized (at least 4% leverage capital, 4.5% common equity Tier 1 risk-based capital, 6% Tier 1 risk-based
capital and 8% total risk-based capital);
a
undercapitalized (less than 4% leverage capital, 4.5% common equity Tier 1 risk-based capital,
capital and 8% total risk-based capital);
a
a
6% Tier 1 risk-based
significantly undercapitalized (less than 3% leverage capital, 3% common equity Tier 1 risk-based capital, 4% Tier 1 risk-
based capital and 6% total risk-based capital); and
critically undercapitalized (less than 2% tangible capital).
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other
discretionary actions with respect to institutions
capital category in which the institution is placed. The regulators have the discretion to downgrade a bank from one category to a
lower category. Generally, subject to a narrow exception, banking regulators must appoint a receiver or conservator for an institution
that is critically undercapitalized. An institution that is categorized as undercapitalized, significantly undercapitalized, or
critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate
in the three undercapitalized categories. The severity of the action depends upon the
federal banking agency.
a
t
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Failure to meet capital guidelines could subject Equity Bank to a variety of enforcement remedies, including issuance of a
capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits and other restrictions
on our business.
As of December 31, 2018, Equity Bank exceeded the capital levels required to be deemed well capitalize
a
d.
Deposit Insurance
The FDIC insures the deposits of federally insured banks up to prescribed statutory limits for each depositor, through the
Deposit Insurance Fund (DIF), and safeguards the safety and soundness of the banking and thrift industries. The Dodd-Frank Act
permanently raised the standard maximum deposit insurance amount to $250,000. The amount of FDIC assessments paid by each
insured depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory
factors.
In connection with the Dodd Frank Acts requirement that insurance assessments be based on assets, the FDIC has redefined its
deposit insurance premium assessment base to be an institutions average consolidated total assets minus average tangible equity. The
FDIC also has revised its deposit insurance assessment rate schedule in light of this change to the assessment base. The revised rate
schedule and other revisions to the assessment rules became effective July 1, 2016.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. At least semi-
annually, the FDIC will update its loss and income projections for the DIF and, if needed, will increase or decrease assessment rates,
following notice-and-comment rulemaking, if required. If there are additional bank or financial institution failures or if the FDIC
otherwise determines to increase assessment rates, Equity Bank may be required to pay higher FDIC insurance premiums. Any future
increases in FDIC insurance premiums may have a material and adverse effect on our earnr ings.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued
by the Financing Corporation (FICO), an agency of the federal government established to recapitalize the predecessor to DIF.
These assessments, which are included in Deposit Insurance Premiums on the Consolidated Statements of Income, will continue until
the FICO bonds mature in September 2019.
Consumer Financial Protection Bureau
The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) which is granted broad rulemaking,
supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity
Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer
Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary
enforcement authority with respect to depository institutions with $10 billion or more in assets. Depository institutions with less than
$10 billion in assets, such as Equity Bank, are subject to rules promulgated by the CFPB, which may increase their compliance risk
and the costs associated with their compliance efforts, but such banks will continue to be examined and supervised by federal banking
regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection
with the offering of consumer financial products.
The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages,
including a determination of the borrowers ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain
defenses to foreclosure if they receive any loan other than a qualified mortgage as defined by the CFPB.
The CFPB has issued a number of regulations related to the origination of mortgages, foreclosure and overdrafts as well as
many other consumer issues. Additionally, the CFPB has proposed, or will be proposing, additional regulations on issues that directly
relate to our business. Although it is difficult to predict at this time the extent to which the CFPBs final rules impact the operations
and financial condition of Equity Bank, such rules may have a material impact on Equity Banks compliance costs, compliance risk
and fee income.
Privacyc
Under the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records, financial institutions are required to disclose
their policies for collecting and protecting confiff dential information.
sharing personal financial information with nonaffiliated third parties except for third parties that market the institutions own
Customers generally may prevent financial institutions from
ff
20
products and services. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated
third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers.
Recent cyber attacks against bank and other institutions that resulted in unauthorized access to confidential customer
information have prompted the federal banking agencies to issue extensive guidance on cyber security. The regulatory agencies may
devote more resources to this part of their safety and soundness examination than they may have in the past.
Like other lending institutions, our subsidiary bank uses credit bureau data in its underwriting activities. Use of that data is
regulated under the Federal Credit Reporting Act on a uniform, nationwide basis. The act and its implementing regulation, Regulation
V, cover credit reporting, prescreening, sharing of information
between affiliates, and the use of credit data. The Fair and Accurate
Credit Transactions Act of 2003 allows states to enact identity theft laws that are not inconsistent with the conduct required by the
provisions of the act.
ff
The Patriot Act, International Money Laundering Abatement and Financial Anti-Terrorism Act and Bank Secrecyc Act
A major focus of governmental policy on financial institutions has been aimed at combating money laundering and terrorist
financing. The Patriot Act and the International Money Laundering and Financial Anti-Terrorism Act of 2001 substantially broadened
the scope of U.S. anti-money laundering laws and penalties, specifically related to the Bank Secrecy Act and expanded the extra-
territorial jurisdiction of the United States. The U.S. Treasury has issued a number of implementing regulations that apply various
requirements of the Patriot Act to financial institutions, such as Equity Bank. These regulations impose obligations on financial
institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist
financing and to verify the identity of their customers.
Failure of a financial institution and its holding company to maintain and implement adequate programs to combat money
laundering and terrorist financing, or to comply with relevant laws and regulations, could have serious legal, reputational and financial
consequences for the institution. Because of the significance of regulatory emphasis on these requirements, Equity Bank will continue
to expend significant staffing, technology and financial resources to maintain programs designed to ensure compliance with applicable
for testing of Equity Banks compliance with the Bank Secrecy Act on an ongoing
laws and regulations and an effff eff ctive audit function
basis.
ff
Community Reinvestment Act
The Community Reinvestment Act (CRA) requires that, in connection with examinations of financial institutions within its
jurisdiction, the federal and the state banking regulators, as applicable, evaluate the record of each financial institution in meeting the
credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating
mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional
requirements and limitations on us. Additionally, we must publicly disclose the terms of various CRA-related agreements.
Other Regulations
Interest and other charges that Equity Bank collects or contracts for are subject to state usury laws and federal laws concerning
interest rates. Equity Banks loan operations are also subject to federal laws applicable to credit transactions, such as:
•
•
•
•
•
•
the Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public
officials to determine whether a financial institution
community it serves;
is fulfilling its obligation to help meet the housing needs of the
t
the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit;
the Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
the rules and regulations of the various governmental agencies charged with the responsibility of implementing these
federal laws.
21
In addition, Equity Banks deposit operations are subject to the Electronic Funds Transfer Act and Regulation E issued by the
Federal Reserve to implement such act, which govern automatic deposits to and withdrawals from deposit accounts and customers
rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Concentrated Commercial Real Estate Lending Regulations
e
The Federal Reserve and other federal banking regulatory agencies have promulgated guidance governing financial institutions
with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real
estate lending if (i) total reported loans for construction, land development and other land represent 100% or more of total capital
or
(ii) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development and
other land represent 300% or more of total capital and the banks commercial real estate loan portfolio has increased 50% or more
during the prior 36 months. If a concentration is present, management must employ heightened risk management practices including
board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring
through market analysis and stress testing and increasing capital requirements.
a
All of the above laws and regulations add significantly to the cost of operating the Company and Equity Bank and thus have a
negative impact on profitability. We would also note that there has been a tremendous expansion experienced in recent years by
certain financial service providers that are not subject to the same rules and regulations as the Company and Equity Bank. These
institutions, because they are not so highly regulated, have a competitive advantage over the Company and Equity Bank and may
with a continuing adverse effect on the banking industryrr
t
continue to draw large amounts of funds away from banking institutions,
general.
in
Effect of Governmental Monetary Policies
The commercial banking business is affected not only by general economic conditions but also by both U.S. fiscal policy and
the monetary policies of the Federal Reserve. Some of the instruments of fiscal and monetary policy available to the Federal Reserve
include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the discount window,
open market operations, the imposition of and changes in reserve requirements against member banks deposits and assets of foreign
branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affff iff liates and the
placing of limits on interest rates that member banks may pay on time and savings deposits. Such policies influence, to a significant
extent, the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings
deposits. We cannot predict the nature of future fiscal and monetary policies and the effect of such policies on the future business and
our earnings.
Item 1A: Risk Factors
Our business and results of operations are subject to numerous risks and uncertainties, many of which are beyond our control.
The material risks and uncertainties that management believes affect the Company are described below. Additional risks and
uncertainties that management is not aware of, or that management currently deems immaterial, may also impair the Companys
business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, our
business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of
our securities could decline significantly, and you could lose all or part of your investment. Some statements in the following risk
factors constitute forward-looking statements. Please refer to Cautionary Note Regarding Forward-Looking Statements elsewhere
in this Annual Report on Form 10-K.
Risks Relating to Our Business
Our business is concentrated in, and largely dependent upon, the continued growth and welfare of the general geographic
markets in which we operate.
Our banking operations are concentrated in Arkansas, Kansas, Missouri and Oklahoma. As a result, our financial condition and
results of operations and cash flows are affected by changes in the economic conditions of our markets. Our success depends to a
significant extent upon the business activity, population, income levels, deposits, and real estate activity in these markets. Although
our customers business and financial interests may extend well beyond these market areas, adverse conditions that affect these market
areas could reduce our growth rate, affect the ability of our customers to repay their loans, affect the value of collateral underlying
loans, impact our ability to attract deposits, and generally affect our financial conditions and results of operations. Because of our
geographic concentration, we may be less able than other regional or national financial institutions to diversify our credit risks across
multiple markets.
22
A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduced demand for
our products and services, which could have an adverse effect on our results of operations.
ting the
Economic recession or other economic problems, including those affecting our markets and regions, but also those affecff
U.S. or world economies, could have a material adverse impact on the demand for our products and services. If economic conditions
deteriorate, or if there are negative developments affecting the domestic and international credit markets, the value of our loans and
investments may be harmed, which in turn would have an adverse effect on our financial performance, and our financial condition
may be adversely affecff
of operations, and cash flows, we may not benefit from any market growth or favorable economic conditions, either in our primaryrr
market areas or nationally, even if they do occur.
ted. In addition, although deteriorating market conditions could adversely affect our financial condition, results
Difficult conditions in the market for financial products and services may materially and adversely affect our business and
results of operations.
Dramatic declines in the housing market during the previous recessionary period, along with increased foreclosures and
unemployment, resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities
and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit
default swaps and other derivative securities, caused many financial institutions to seek additional capital, to merge with larger and
stronger institutions, and, in some cases, to fail. This market turmoil and tightening of credit led to an increased level of commercial
and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity
generally. Although conditions have improved, a return of these trends could have a material adverse effecff
operations. Negative market developments may affect consumer confidence levels and may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provisions for loan and credit
losses. Economic deterioration that affects household and/or corporate incomes could also result in reduced demand for credit or fee-
based products and services. These conditions would have adverse effects on us and others in the financial services industry.
t on our business and
We rely heavily on our management team and could be adversely affected by the unexpectedtt
loss of key officers.
We are led by an experienced management team with substantial experience in the markets that we serve and the financial
products that we offer. Our operating strategy focuses on providing products and services through long-term relationship managers.
Accordingly, our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate
and retain highly qualified senior and middle management. Competition for employees is intense, and the process of locating key
personnel with the combination of skills and attributes required to execute our business plan may be lengthy. We may not be
successful in retaining our key employees and the unexpected loss of services of one or more of our key personnel could have a
material adverse effect on our business because of their skills, knowledge of our market and financial products, years of industry
experience, long-term customer relationships and the difficulty of promptly finding qualified replacement personnel. If the services of
any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on
terms acceptable to us, which could have an adverse effect on our business, financial condition and results of operations.
Our ability to grow our loan portfolio may be limitedii
by, among other things, economic conditions, competition within our
market areas, the timing of loan repayments and seasonality.
Our ability to continue to improve our operating results is dependent upon, among other things, growing our loan portfolio.
While we believe that our strategy to grow our loan portfolio is sound and our growth targets are achievable over an extended period
of time, competition within our market areas is significant, particularly for borrowers whose businesses have been less negatively
impacted by the challenging economic conditions of the last few years. We compete with both large regional and national financial
institutions, who are sometimes able to offer more attractive interest rates and other financial terms than we choose to offer, as well as
other community-based banks who seek to offer a similar level of service to that which we offer. This competition can make loana
growth challenging, particularly if we are unwilling to price loans at levels that would cause unacceptable levels of compression of our
net interest margin or if we are unwilling to structure a loan in a manner that we believe results in a level of risk to us that we are not
willing to accept. Moreover, loan growth throughout the year can fluctuate due in part to seasonality of the businesses of our
borrowers and potential borrowers and the timing on loan repayments, particularly those of our borrowers with significant
relationships with us, resulting from, among other things, excess levels of liquidity. To the extent that we are unable to increase loans,
we may be unable to successfully implement our growth strategy, which could materially and adversely affecff
t us.
Our financial performance will be negatively impacted if we are unable to execute our growth strategy.
Our current growth strategy is to grow organically and supplement that growth with select acquisitions. Our ability to grow
organically depends primarily on generating loans and deposits of acceptable risk and expense, and we may not be successful in
23
continuing this organic growth. Our ability to identify appropriate markets for expansion, recruit and retain qualified personnel, and
fund growth at a reasonable cost depends upon prevailing economic conditions, maintenance of sufficient capital, competitive factors,
and changes in banking laws, among other factors. Conversely, if we grow too quickly and are unable to control costs and maintain
asset quality, such growth, whether organic or through select acquisitions, could materially and adversely affect our financial
condition and results of operations.
We may not be able to identify and acquire other financial institii utions, which could hinder our ability to continue
ii
to grow.
A substantial part of our historical growth has been a result of acquisitions of other financial institutions.
t
We intend to continue
our strategy of evaluating and selectively acquiring other financial institutions that serve customers or markets we find desirable.
However, the market for acquisitions remains highly competitive, and we may be unable to find satisfactory acquisition candidates in
the future that fit our acquisition strategy. To the extent that we are unable to find suitable acquisition candidates, an important
component of our strategy may be lost. If we are able to identify attractive acquisition opportunities, we must generally satisfy a
number of conditions prior to completing any such transaction, including certain bank regulatory approval, which has become
substantially more difficult, time-consuming and unpredictable as a result of the recent financial crisis. Additionally, any future
acquisitions may not produce the revenue, earnings or synergies that we anticipated.
Our strategy of pursuing
ff
acquisitions exposes us to financial, execution, compliance and operational risks that could have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
We intend to continue pursuing a strategy that includes acquisitions. An acquisition strategy involves significant risks,
including the following:
•
•
•
•
•
•
•
•
finding suitable candidates for acquisition;
attracting funding to support additional growth within acceptable risk tolerances;
maintaining asset quality;
retaining customers and key personnel, including bankers;
obtaining necessary regulatory approvals, which we may have difficulty obtaining or be unable to obtain;
conducting adequate due diligence and managing known and unknown risks and uncertainties;
integrating acquired businesses; and
maintaining adequate regulatory capital.
The market for acquisition targets is highly competitive, which may adversely affect our ability to find acquisition candidates
that fit our strategy and standards. We face significant competition in pursuing acquisition targets from other banks and financial
institutions, many of which possess greater financial, human, technical and other resources than we do. Our ability to compete in
acquiring target institutions will depend on our available financial resources to fund the acquisitions, including the amount of cash and
cash equivalents we have and the liquidity and market price of our Class A common stock. In addition, increased competition mayaa
also drive up the acquisition consideration that we will be required to pay in order to successfully capitalize on attractive acquisition
opportunities. To the extent that we are unable to find suitable acquisition targets, an important component of our growth strategy
may not be realized.
Acquisitions of financial institutions also involve operational risks and uncertainties, such as unknown or contingent liabilit
with no available manner of recourse, exposure to unexpected problems such as asset quality, the retention of key employees and
customers, and other issues that could negatively affect our business. We may not be able to complete future acquisitions or, if
completed, we may not be able to successfully integrate the operations, technology platforms, management, products and services of
the entities that we acquire or to realize our attempts to eliminate redundancies. The integration process may also require significant
time and attention from our management that would otherwise be directed toward servicing existing business and developing new
business. Failure to successfully integrate the entities we acquire into our existing operations in a timely manner may increase our
operating costs significantly and adversely affect our business, financial condition and results of operations. Further, acquisitions
typically involve the payment of a premium over book and market values and, therefore, some dilution of our tangible book value and
net income per common share may occur in connection with any future acquisition, and the carrying amount of any goodwill that we
currently maintain or may acquire may be subject to impairment in future periods.
ies
a
If we continue to grow, we will face risks arising from our increased size. If we do not manage such growth effectively, we may
be unable to realize the benefit from the investments in technology, infrastructure and personnel that we have made to support our
24
expansion. In addition, we may incur higher costs and realize less revenue growth than we expect, which would reduce our earnings
and diminish our future prospects, and we may not be able to continue to implement our business strategy and successfully conduct
our operations. Risks associated with failing to maintain effective financial and operational controls as we grow, such as maintaining
appropriate loan underwriting procedures, information technology systems, determining adequate allowances for loan losses and
complying with regulatory accounting requirements, including increased loan losses, reduced earnings and potential regulatory
penalties and restrictions on growth, all could have a negative effect on our business, financial condition and results of operations.
Acquisitions may disrupt our business and dilute stockholder value, and integrating acquired companies
m
may be more
difficult, costly,yy or time-consuming than we expect.
Our pursuit of acquisitions may disrupt our business, and any equity that we issue as merger consideration may have the effect
of diluting the value of common stockholders. In addition, we may fail to realize some or all of the anticipated benefits of completed
acquisitions. We anticipate that the integration of businesses that we may acquire in the future will be a time-consuming and
expensive process, even if the integration process is effectively planned and implemented.
In addition, our acquisition activities could be material to our business and involve a number of significant risks, including the
following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential
transactions, resulting in our attention being diverted from the operation of our existing business;
using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the
target company or the assets and liabilities that we seek to acquire;
exposure to potential asset quality issues of the target company;
intense competition from other banking organizations and other potential acquirers, many of which have substantially
greater resources than we do;
potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including, without limitation,
liabilities for regulatory and compliance issues;
inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and other
projected benefits of the acquisition;
incurring time and expense required to integrate the operations and personnel of the combined businesses;
inconsistencies in standards, procedures, and policies that would adversely affeff ct our ability to maintain relationships with
customers and employees;
experiencing higher operating expenses relative to operating income from the new operations;
creating an adverse short-term effect on our results of operations;
losing key employees and customers;
significant problems relating to the conversion of the financial and customer data of the entity;
integration of acquired customers into our financial and customer product systems;
potential changes in banking or tax laws or regulations that may affff eff ct the target company; or
risks of impairment to goodwill.
If difficulties arise with respect to the integration process, the economic benefits expected to result from acquisitions might not
occur. As with any merger of financial institutions, there also may be business disruptions that cause us to lose customers or cause
customers to move their business to other financial institutions. Failure to successfully integrate businesses that we acquire could have
an adverse effect on our profitability, return on equity, return on assets, or our ability to implement our strategy, any of which in turn
could have a material adverse effect on our business, financial condition, and results of operations.
Our largest loan relationships currently make up a material percentage of our total loan portfolio.
As of December 31, 2018, our ten largest loan relationships totaled over $240.3 million in loan exposure, or 9.3% of the total
loan portfolio. The concentration risk associated with having a small number of large loan relationships is that, if one or more of these
relationships were to become delinquent or suffer default, we could be at serious risk of material losses. The allowance for loan losses
25
may not be adequate to cover losses associated with any of these relationships, and any loss or increase in the allowance would
negatively affecff
reputation with our regulators, investors and potential investors and inhibit our ability to execute our business plan.
t our earnings and capital. Even if the loans are collateralized, the large increase in classified assets could harm our
Several of our large depositors have relationships with each other, which createstt
a higher risk that one customers
withdrawal of its deposit could lead to a loss of other deposits from customers within the relationship,
us to fund our business through more expensive and less stable sources.
tt
which, in turn, could force
As of December 31, 2018, our ten largest non-brokered depositors accounted for $322.5 million in deposits, or approximately
10.3% of our total deposits. Further, our non-brokered deposit account balance was $2.97 billion, or approximately 95.1% of our total
deposits, as of December 31, 2018. Several of our large depositors have business, family, or other relationships with each other,
which creates a risk that any one customers withdrawal of its deposit could lead to a loss of other deposits from customers within the
relationship.
Withdrawals of deposits by any one of our largest depositors or by one of our related customer groups could force us to rely
more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net
interest margin and results of operations. We may also be forced, as a result of any withdrawal of deposits, to rely more heavily on
other, potentially more expensive and less stable funding sources. Consequently, the occurrence of any of these events could have a
material adverse effect on our business, results of operations, financial condition, and future prospects.
Our future profitability levels are dependent on our ability to grow and maintain depositstt at competitive costs.
Our ability to fund our lending and investing activities at a reasonable cost depends on our ability to maintain adequate deposit
levels at an economically competitive cost structure. The following risks could impact the cost structures of deposits:
•
•
•
Increased competition over transactional and time deposit accounts could increase the costs of these deposits by increasing
the rate of change and velocity of change in deposit rates, as overall market rates change;
Migration of transactional deposit accounts to time deposit accounts could increase the overall costs of deposits; and
Changes in the mix of retail and public funds deposit customers could increase the costs of deposits. Public funds
deposits are more rate sensitive than retail deposits and if we are forced to rely more heavily on those types of deposits
overall funding cost could increase.
Our ability to retain bankers and recruit additional successful bankers is critical to the success of our business strategy and
any failure to do so could adversely affect our business, financial condition, results of operations and growth prospects.
Our ability to retain and grow our loans, deposits and fee income depends upon the business generation capabilities, reputation
and relationship management skills of our bankers. If we were to lose the services of any of our bankers, including successful bankers
employed by banks that we may acquire, to a new or existing competitor or otherwise, we may not be able to retain valuable
relationships and some of our customers could choose to use the services of a competitor instead of our services.
Our growth strategy also relies on our ability to attract and retain additional profitable bankers. We may face difficulties in
recruiting and retaining bankers of our desired caliber, including as a result of competition from other financial institutions. In
particular, many of our competitors are significantly larger with greater financial resources, and may be able to offer more attractive
compensation packages and broader career opportunities. Additionally, we may incur significant expenses and expend significant
time and resources on training, integration and business development before we are able to determine whether a new banker will be
profitable or effective. If we are unable to attract and retain successful bankers, or if our bankers fail to meet our expectations in terms
of customer relationships and profitability, we may be unable to execute our business strategy and our business, financial condition,
results of operations and growth prospects may be adversely affected.
Any expansion into new markets or new lines of business might not be successful.
As part of our ongoing strategic plan, we may consider expansion into new geographic markets. Such expansion might take the
form of the establishment of de novo branches or the acquisition of existing banks or bank branches. There are considerable costs
associated with opening new branches and new branches generally do not generate sufficient revenues to offset costs until they have
been in operation for some time. Additionally, we may consider expansion into new lines of business through the acquisition of third
parties or organic growth and development. There are substantial
from such activities might not be sufficient to offset the development, compliance, and other implementation costs, (ii) competing
products and services and shifting market preferences might affect the profitability of such activities, and (iii) our internal controls
risks associated with such efforts, including risks that (i) revenues
u
26
might be inadequate to manage the risks associated with new activities. Furthermore, it is possible that our unfamiliarity witht new
markets or lines of business might adversely affect the success of such actions. If any such expansions into new geographic or product
markets are not successful, there could be an adverse effect on our financial condition and results of operations.
Our small to medium-sized business and entrepreneurial customers may have fewer financial resources than larger entities
to weather a downturn in the economy that might
financial condition and results of operations.
i
impair a borrowers ability to repay a loan and could adversely affect our
We focus our business development and marketing strategy primarily to serve the banking and financial services needs of small
to medium-sized businesses and entrepreneurs. These small to medium-sized businesses and entrepreneurs may have fewer financial
resources in terms of capital or borrowing capacity than larger entities. If economic conditions negatively impact our markets
generally, and small to medium-sized businesses are adversely affecff
negatively affected.
ted, our financial condition and results of operations may be
In our business,s we must effectively manage our credit risk.
As a lender, we are exposed to the risk that our loan customers may not repay their loans according to the terms of these loans
and the collateral securing the payment of these loans may be insufficient to fully compensate us for the outstanding balance of the
loan plus the costs to dispose of the collateral. We may experience significant loan losses, which could have a material adverse effect
on our operating results and financial condition. Management makes various assumptions and judgments about the collectability of
our loan portfolio, including the diversification by industry of our commercial loan portfolio, the amount of nonperforming loans and
related collateral, the volume, growth and composition of our loan portfolio, the effects on the loan portfolio of current economic
indicators and their probable impact on borrowers and the evaluation of our loan portfolio through our internal loan review process
and other relevant factors.
ff
and may occur at a rate greater than we have experienced to date. In determining the amount of the
We maintain an allowance for credit losses, which is an allowance established through a provision for loan losses charged to
expense that represents managements best estimate of probable incurred losses in our loan portfolio. Additional credit losses will
likely occur in the future
allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our
assumptions, including our qualitative factors, prove to be incorrect, our current allowance may not be sufficient and adjustments may
be necessary to allow for different economic conditions or adverse developments in our loan portfolio. In addition, as an acquirer of
other banks, our allowance for loan losses may not be sufficient when coupled with purchase discounts on acquired portfolios.
Material additions to the allowance could materially decrease our net income.
In addition, banking regulators periodically review our allowance for credit losses and may require us to increase our provision
for credit losses or recognize further charge-offs, based on judgments different than those of our management. Any increase in our
allowance for credit losses or charge-offs as required by these regulatory agencies could have a material negative effect on our
operating results, financial condition and liquidity.
We may not be able to adequately measure and limit the credit risk associated with our loan portfolio, which could adversely
affect our profitability.
As a part of the products and services that we offer, we make commercial and commercial real estate loans. The principal
economic risk associated with each class of loans is the creditworthiness of the borrower, which is affected by the strength of the
relevant business market segment, local market conditions, and general economic conditions. Additional factors related to the credit
quality of commercial loans include the quality of the management of the business and the borrowers ability both to properly evaluate
changes in the supply and demand characteristics affecting our market for products and services, and to effectively respond to those
changes. Additional factors related to the credit quality of commercial real estate loans include tenant vacancy rates and the quality of
management of the property. A failure to effectively measure and limit the credit risk associated with our loan portfolio could have an
adverse effect on our business, financial condition, and results of operations.
External economic factors,
tt
our business, financial condition and results of operations.
such as changes in monetary policy and inflation and deflation, may have an adverse effect on
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Board of
Governors of the Federal Reserve System, or the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal
Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. The
primary impact of inflation on our operations most likely will be reflected in increased operating costs. Conversely, deflation
generally will tend to erode collateral values and diminish loan quality. Virtually all of our assets and liabilities are monetary in
27
nature. As a result, interest rates have a more significant impact on our performance than general levels of inflation or deflation.
Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.
Our profitability is vulnerable to intett rest rate fluctuations.
Our profitability depends substantially upon our net interest income. Net interest income is the difference between the interest
t on our net interest income.
earned on assets (such as loans and securities held in our investment portfolio) and the interest paid for liabilities (such as interest paid
on savings and money market accounts and time deposits). Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by fluctuations in interest rates. The magnitude and duration of changes in
interest rates are events over which we have no control, and such changes may have an adverse effecff
Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can significantly affecff
liabilities. For example, an increase in interest rates could, among other things, reduce the demand for loans and decrease loan
repayment rates. Such an increase could also adversely affect the ability of our floating-rate borrowers to meet their higher payment
obligations, which could in turn lead to an increase in nonperforming assets and net charge-offs. Conversely, a decrease in the general
level of interest rates could affect us by, among other things, leading to greater competition for deposits and incentivizing borrowers to
prepay or refinance their loans more quickly or frequently than they otherwise would. The primary tool that management uses to
measure interest rate risk is a simulation model that evaluates the impact of varying levels of prevailing interest rates and the impact
on net interest income and the economic value of equity. Generally, the interest rates on our interest-earning assets and interest-
bearing liabilities do not change at the same rate, to the same extent or on the same basis. Even assets and liabilities with similar
maturities or re-pricing periods may react in different degrees to changes in market interest rates. Interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in general market interest rates, while interest rates on other types of assets
and liabilities may lag behind changes in general market rates. Certain assets, such as fixed and adjd ustable rate mortgage loans, have
features that limit changes in interest rates on a short-term basis and over the life of the asset. Changes in interest rates could
materially and adversely affect our financial condition and results of operations. See Item 7A Quantitative and Qualitative
Disclosure About Market Risk for a discussion of interest rate risk modeling and the inherent risks in modeling assumptions.
t our assets and
Market interest rates for loans, investments and deposits are highly sensitive to many factors beyond our control.
Generally, interest rate spreads (the difference between interest rates earned on assets and interest rates paid on liabilities) have
narrowed in recent years as a result of changing market conditions, policies of various government and regulatory authorities, and
competitive pricing pressures, and we cannot predict whether these rate spreads will narrow even further. This narrowing of interest
rate spreads could adversely affect our financial condition and results of operations. In addition, we cannot predict whether interest
rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in our net interest
income.
We attempt to minimize the adverse effects of changes in interest rates by structuring our asset-liability composition in order to
obtain the maximum spread between interest income and interest expense. However, there can be no assurance that we will be
successful in minimizing the adverse effecff
financial condition and results of operations may be adversely affected by changes in interest rates.
ts of changes in interest rates. Depending on our portfolio of loans and investments, our
We may be adversely impacted by the transition from LIBOR as a reference rate.
In 2017, the United Kingdoms Financial Conduct Authority announced that after 2021 it would no longer compel banks to
submit the rates required to calculate the London Interbank Offered Rate (LIBOR). This announcement indicates that the
continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible
to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not
possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become
accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-
indexed financial instruments.
We occasionally have loans, derivative contracts, borrowings and other financial instruments with attributes that are either
directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since
proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing
LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product
design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely
impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be,
failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of
operations.
28
We could suffer losses from a decline in the credit qualityii of the assets that we hold.
We could sustain losses if borrowers, guarantors, and related parties fail to perform in accordance with the terms of their loans.
a
We have adopted underwriting and credit monitoring procedures and policies that we believe are appropriate
including the establishment
tracking loan performance, and diversifying our credit portfolio. These policies and procedures, however, may not prevent
unexpected losses that could materially adversely affecff
quality risks presented by past, current, and potential economic and real estate market conditions.
to minimize this risk,
and review of the allowance for credit losses, periodic assessment of the likelihood of nonperformance,
t our financial condition and results of operations. In particular, we face credit
a
Federal income tax reform could have unforeseen effects on our financial condition and results of operations.
On December 22, 2017, the President of the United States signed into law H.R. 1, originally known as the Tax Cuts and Jobs
Act. The Tax Cuts and Jobs Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35
percent to 21 percent, effective January 1, 2018. There are also provisions that may partially offset the benefit of such rate reduction
through the elimination of deductions allowed under prior law. Financial statement impacts in 2017 principally included the re-
measurement of the Companys net deferred tax asset, which resulted in a $1.2 million re-measurement charge being recognized in
income tax expense. While there are benefits of the lower corporate tax rate beginning in 2018, there is also substantial uncertainty
regarding the details of U.S. Tax Reform. The intended and unintended consequences of the Tax Cuts and Jobs Act on our business
and on holders of our common shares is uncertain and could be adverse. The Company anticipates that the impact of the Tax Cuts and
Jobs Act may be material to our business, financial condition and results of operations.
Changes in economic conditions could cause an increase in delinquencies
ll
and nonperforming assets, including loan charge-
offs, which could depress our net income and growth.
Our loan portfolio includes many real estate secured loans, demand for which may decrease during economic downturns as a
result of, among other things, an increase in unemployment, a decrease in real estate values and, a slowdown in housing. If we see
negative economic conditions develop in the United States as a whole or our Arkansas, Kansas, Missouri and Oklahoma markets, we
could experience higher delinquencies and loan charge-offs, which would reduce our net income and adversely affect our financial
condition. Furthermore, to the extent that real estate collateral is obtained through foreclosure, the costs of holding and marketing the
real estate collateral, as well as the ultimate values obtained from disposition, could reduce our earnings and adversely affect our
financial condition.
The value of real estate collateral
ll
may fluctuate significantly resulting in an under-collateralized loan portfolio.
The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short period of time
as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as
collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could become under-collateralized.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined,
then, in the event of foreclosure, we may not be able to realize the amount of collateral that we anticipated at the time of originating
the loan. This could have a material adverse effect on our provision for loan losses and our operating results and financial condition.
A significant portion of our loan portfolio is secured by real estatett and events that negatively impact the real estate market
could negatively impact our business.
There are significant risks associated with real estate-based lending. Real estate collateral may deteriorate in value during the
time that credit is extended, in which case we might not be able to sell such collateral for an amount necessary to satisfy a defaulting
borrowers obligation to us. In that event, there could be a material adverse effect on our financial condition and results of operations.
Additionally, commercial real estate loans are subject to unique risks. These types of loans are often viewed as having more risks than
residential real estate or other consumer loans, primarily because relatively large amounts are loans to a relatively small numberm of
borrowers. Thus, the deterioration of even a small number of these loans could cause a significant increase in the loan loss allowance
or loan charge-offs, which in turnr could have a material adverse effect on our financial condition and results of operations.
Furthermore, commercial real estate loans depend on cash flows from the property securing the debt. Cash flows may be affeff cted
significantly by general economic conditions and a downturn in a local economy in one of our markets or in occupancy rates where a
property is located could increase the likelihood of default.
The foregoing risks are enhanced as a result of the limited geographic scope of our principal markets. Most of the real estate
securing our loans is located in our Arkansas, Kansas, Missouri and Oklahoma markets. Because the value of this collateral depends
upon local real estate market conditions and is affected by, among other things, neighborhood characteristics, real estate tax rates, the
cost of operating the properties, and local governmental regulation, adverse changes in any of these factors in our markets could cause
29
a decline in the value of the collateral securing a significant portion of our loan portfolio. Further, the concentration of real estate
collateral in these four markets limits our ability to diversify the risk of such occurrences.
A large portion of our loan portfolio is comprised of commercial loans that are secured by accounts receivable, inventory,
could increase our exposure to future
equipment or other asset-based collateral and deterioration in the value of such collateral
probable losses.
ll
These commercial loans are typically larger in amount than loans to individuals, and therefore, have the potential for larger
losses on a single loan basis. Additionally, asset-based borrowers are often highly leveraged and have inconsistent historical earnings
and cash flows. Historically, losses in our commercial credits have been higher than losses in other classes of our loan portfoli
o.
Significant adverse changes in our borrowers industries and businesses could cause rapid declines in values of, and collectability
associated with, those business assets, which could result in inadequate collateral coverage for our commercial loans and expose us to
future losses. An increase in specific reserves and charge-offs related to our commercial loan portfolio could have a material adverse
effect on our business, financial condition, results of operations and future prospects.
ff
Our use of appraisals in deciding whether to make a loan secured by real property does not ensure the value of the real
property collateral.
In considering whether to make a loan secured by real property, we generally require an appraisal. However, an appraisal is
does not reflect the amount that may be
only an estimate of the value of the property at the time the appraisal is made. If the appraisal
obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.
a
A portion of our loan portfolio is comprised of participation
ff
and syndicated transaction interests, which could have an
adverse effect on our ability to monitor the lending relationships
tt
and lead to an increased risk of loss.
We participate in loans originated by other institutions and in syndicated transactions (including shared national credits) in
which other lenders serve as the agent bank. Our reduced control over the monitoring and management of these relationships,
particularly participations in large bank groups, could lead to increased risk of loss, which could have a material adverse effect
business, financial condition, results of operations and future prospects.
ff
on our
A lack of liquidity could adversely affect our financial condition and results of operations.
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and
maturity schedules of our loans to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our most important
source of funds is deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better
risk/return tradeoff. If customers move money out of bank deposits and into other investments such as money market funds, we would
lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities, and
proceeds from the issuance and sale of our equity securities to investors. Additional liquidity is provided by the ability to borrow from
the Federal Home Loan Bank of Topeka. We also may borrow funds from third-party lenders, such as other financial institutions.
Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could
be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the
financial markets or negative views and expectations about the prospects for the financial services industry. Our access to funding
sources could also be affected by a decrease in the level of our business activity as a result of a downturn in our markets or by one or
more adverse regulatory actions against us.
u
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or
to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material
adverse impact on our liquidity, business, financial condition and results of operations.
As a bank holding company, the sources of funds
ff
available to us are limited.
Any future constraints on liquidity at the holding company level could impair our ability to declare and pay dividends on our
Class A common stock. In some instances, notice to, or approval from, the Federal Reserve may be required prior to our declaration
or payment of dividends. Further, our operations are primarily conducted by our subsidiary, Equity Bank, which is subject to
significant regulation. Federal and state banking laws restrict the payment of dividends by banks to their holding companies, and
30
Equity Bank will be subject to these restrictions in paying dividends to us. Because our ability to receive dividends or loans from
Equity Bank is restricted, our ability to pay dividends to our stockholders is also restricted.
Additionally, the right of a bank holding company to participate in the assets of its subsidiary bank in the event of a bank-level
liquidation or reorganization is subject to the claims of the banks creditors, including depositors, which take priority, except to the
extent that the holding company may be a creditor with a recognized claim.
We operate in a highly competitive
tt
industry and face significant competition from other financial institutions and financial
services providers that could decrease our growth or profits.
Consumer and commercial banking are highly competitive industries. Our market areas contain not only a large number of
community and regional banks, but also a significant presence of the countrys largest commercial banks. We compete with other
state and national financial institutions, as well as savings and loan associations, savings banks, and credit unions, for deposits and
loans. In addition, we compete with financial intermediaries, such as consumer finance companies, commercial finance companies,
mortgage banking companies, insurance companies, securities firms, mutual funds, and several government agencies, as well as majora
retailers, all actively engaged in providing various types of loans and other financial services. Some of these competitors mayaa have a
long history of successful operations in our market areas and greater ties to local businesses and more expansive banking relationships,
as well as more established depositor bases, fewer regulatory constraints, and lower cost structures than we do. Competitors with
greater resources may possess an advantage through their ability to maintain numerous banking locations in more convenient sites, to
conduct more extensive promotional and advertising campaigns, or to operate a more developed technology platform. Due to their
size, many competitors may offer a broader range of products and services, as well as better pricing for certain products and services
than we can offer. For example, in the current low interest rate environment, competitors with lower costs of capital may solicit our
customers to refinance their loans with a lower interest rate. Further, increased competition among financial services companies due
to the recent consolidation of certain competing financial institutions may adversely affect our ability to market our products and
services. Technology has lowered barriers to entry and made it possible for banks to compete in our market areas without a retail
footprint by offering competitive rates, and for non-banks to offer products and services traditionally provided by banks.
The financial services industry could become even more competitive as a result of legislative, regulatory, and technological
changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial
holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both
agency and underwriting), and merchant banking.
Our ability to compete successfully depends on a number of factors, including:
•
•
•
•
•
•
•
our ability to develop, maintain, and build upon long-term customer relationships based on quality service and high ethical
standards;
our ability to attract and retain qualified employees to operate our business effectively;
our ability to expand our market position;
the scope, relevance, and pricing of products and services that we offer to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our
growth and profitability, which, in turn, could harm our business, financial condition, and results of operations.
As a community bank, our ability to maintain our reputation is critical to the success of our business, and the failure to do so
may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to
conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring, and retaining employees
who share our core values of being an integral part of the communities we serve, delivering superior service to our customers, and
caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our
business and, therefore, our operating results may be materially adversely affected. Further, negative public opinion can expose us to
litigation and regulatory action as we seek to implement our growth strategy.
31
As a community banking institution, we have lower lending limitsii and different lending risks than certain of our larger,
more diversified competitors.
m
We are a community banking institution that provides banking services to the local communities in the market areas in which
we operate. Our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to
individuals and to small to medium-sized businesses, which may expose us to greater lending risks than those of banks that lend to
larger, better-capitalized businesses with longer operating histories. In addition, our legally mandated lending limits are lower than
those of certain of our competitors that have more capital than we do. These lower lending limits may discourage borrowers witht
lending needs that exceed our limits from doing business with us. We may try to serve such borrowers by selling loan participations
to other financial institutions; however, this strategy may not succeed.
Our financial projections are based upon numerous assumptions about future events and our actual financial performance
may differ materiallyll
from our projections if our assumptions are inaccurate.
If the communities in which we operate do not grow, or if the prevailing economic conditions locally or nationally are less
favorable than we have assumed, then our ability to reduce our nonperforming loans and other real estate owned portfolios and to
implement our business strategies may be adversely affected, and our actual financial performance may be materially different from
our projections.
Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our
market areas even if they do occur. If our senior management team is unable to provide the effective leadership necessary to
implement our strategic plan, our actual financial performance may be materially adversely different from our projections.
Additionally, to the extent that any component of our strategic plan requires regulatory approval, if we are unable to obtain necessary
approval, we will be unable to completely implement our strategy, which may adversely affect our actual financial results. Our
inability to successfully implement our strategic plan could adversely affect the price of our Class A common stock.
Volatilitytt
in commodity prices may adversely affect our financial condition and results of operations.
In addition to the geographic concentration of our markets, certain industry-specific economic factors also affect us. For
example, while we do not have a concentration in energy lending, the industry is cyclical and recently has experienced a significaff
drop in crude oil and natural gas prices. In addition, we make loans to customers involved in the agricultural industry, many of whom
are also impacted by fluctuations in commodity prices. Volatility in commodity prices could adversely impact the ability of borrowers
in these industries to perform under the terms of their borrowing arrangements with us, and as a result, a severe and prolonged decline
in commodity prices may adversely affecff
commodity prices as they are dependent upon many different factors beyond our control.
t our financial condition and results of operations. It is also difficult to project future
nt
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on
information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial
information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that
information and, with respect to financial statements, on reports of independent auditors. In deciding whether to extend credit, we may
rely upon our customers representations that their financial statements conform to GAAP and present fairly, in all material respects,
the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and
certifications, or other audit or accountants reports, with respect to the business and financial condition of our clients. Our financial
condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading,
false, inaccurate, or fraudulent information.
ff
We are subject to environmental risk in our lending activities.
Because a significant portion of our loan portfolio is secured by real property, we may foreclose upon and take title to such
property in the ordinary course of business. If hazardous substances are found on such property, we could be liable for remediation
costs, as well as for personal injury and property damage. Environmental laws might require us to incur substantial expenses,
materially reduce the propertys value, or limit our ability to use or sell the property. Although management has policies requiring
q
environmental reviews before loans secured by real property are made and before foreclosure is commenced, it is still possible that
environmental risks might not be detected and that the associated costs might have a material adverse effect on our financial condition
and results of operations.
32
We continually encounter technological change and may have fewer resources than our competitors to continue
ii
to invest in
technological improvements.
m
The banking and financial services industries are undergoing rapid technological changes, with frequent introductions of new
technology-driven products and services. In addition to enhancing the level of service provided to customers, the effective use of
technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our
ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience
and create additional efficiencies in operations. Many of our competitors have greater resources to invest in technological
improvements, and we may not be able to effff eff ctively implement new technology-driven products and services, which could reduce
our ability to effecff
tively compete.
Our information systems may experience a failure or interruption.
We rely heavily on communications and information systems to conduct our business. Any failure or interruption in the
operation of these systems could impair or prevent the effective operation of our customer relationship management, general ledger,
deposit, lending, or other functions. While we have policies and procedures designed to prevent or limit the effff eff ct of a failure or
interruption in the operation of our information systems, there can be no assurance that any such failures or interruptions will not
occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures or interruptions impacting our
information systems could damage our reputation, result in a loss of customer business, and expose us to additional regulatory
scrutiny, civil litigation, and possible financial liability, any of which could have a material adverse effect on our financial condition
and results of operations.
We use information technology in our operations and offer online banking services to our customers and unauthorized
access to our or our customers confidential or proprietary information as a result of a cyber attack or otherwise could expose us to
reputational harm and litigation and adversely affect our ability to attract and retain customers.
rr
industry
Information security risks for financial institutions have generally increased in recent years, in part because of the proliferation
of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions and the increased
sophistication and activities of organized crime, hackers, terrorists, activists and other external parties. The financial services
has seen increases in electronic fraudulent activity, hacking, security breaches, sophisticated social engineering and cyber attacks,
including in the commercial banking sector, as cyber criminals have been targeting commercial bank and brokerage accounts on an
increasing basis. We are under continuous threat of loss due to fraudulent activity, hacking and cyber attacks, especially as we
continue to expand customer capabilities to utilize internet and other remote channels to transact business. Our risk and exposure to
these matters remains heightened because of the evolving nature and complexity of these threats from cyber criminals and hackers, our
plans to continue to provide internet banking and mobile banking channels and our plans to develop additional remote connectivity
solutions to serve our customers. Therefore, the secure processing, transmission and storage of information in connection with our
online banking services are critical elements of our operations. However, our network could be vulnerable to unauthorized access,
computer viruses and other malware, phishing schemes or other security failures. In addition, our customers may use personal
smartphones, tablet PCs or other mobile devices that are beyond our control systems in order to access our products and services. Our
technologies, systems and networks and our customers devices, may become the target of cyber attacks, electronic fraud or
information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or
our customers confidential, proprietary and other information, or otherwise disrupt our or our customers or other third parties
business operations. As cyber threats continue to evolve, we may be required to spend significant capital and other resources to
protect against these threats or to alleviate or investigate problems caused by such threats. Our business relies on the secure
processing, storage, transmission and retrieval of confidential customer information in our computer and data management systems
and networks, and in the computer and data management systems and networks of third parties, and any breaches or unauthorized
access to such information could present significant regulatory costs and expose us to litigation and other possible liabilitie
s. Any
inability to prevent these types of security threats could also cause existing customers to lose confidence in our systems and could
adversely affect our reputation and ability to generate deposits. While we have not experienced any material losses relating to cyber
attacks or other information
security breaches to date, we may suffer such losses in the future. The occurrence of any cyber attack or
information security breach could result in financial losses or increased costs to us or our clients, disclosure or misuse of confidential
information belonging to us or personal or confidential information belonging to our clients, misappropriation of assets, reputational
damage, damage to our competitive position and the disruption of our operations, all of which could adversely affect our financial
condition or results of operations.
a
ff
33
In addition to well known risks related to fraudulent activity, which take many forms, such as check kiting or fraud, wire
fraud, and other dishonest acts, information security breaches and cybersecurity-related incidents have become a material risk in the
financial services industry. These threats may include fraudulent or unauthorized access to data processing or data storage systems
used by us or by our clients, electronic identity theft, phishing, account takeover, denial or degradation of service attacks and
malware or other cyber attacks. These electronic viruses or malicious code are typically designed to, among other things:
•
•
•
•
obtain unauthorized access to confidential information belonging to us or our clients and customers;
manipulate or destroy data;
disrupt, sabotage or degrade service on a financial institutions systems; or
steal money.
In recent periods, several governmental agencies and large corporations, including financial service organizations and retail
companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate
information, but also sensitive financial and other personal information of their clients or clients and their employees or other third
parties and subjecting those agencies and corporations to potential fraudulent activity and their clients, clients and other third parties to
identity theft and fraudulent activity in their credit card and banking accounts. Therefore, security breaches and cyber-attacks can
cause significant increases in operating costs, including the costs and capital expenditures required to correct the deficiencies in and
strengthen the security of data processing and storage systems.
Unfortunately, it is not always possible to anticipate, detect, or recognize these threats to our systems, or to implement effective
preventative measures against all breaches, whether those breaches are malicious or accidental. Cybersecurity risks for banking
organizations have significantly increased in recent years and have been difficult to detect before they occur because, among other
reasons:
•
•
•
•
•
•
the proliferation of new technologies and the use of the Internet and telecommunications technologies to conduct financial
transactions;
these threats arise from numerous sources, not all of which are in our control, including among others, human error, fraud
or malice on the part of employees or third parties, accidental technological failure, electrical or telecommunication
outages, failures of computer servers or other damage to our property or assets, natural disasters or severe weather
conditions, health emergencies or pandemics, or outbreaks of hostilities or terrorist acts;
the techniques used in cyber attacks change frequently and may not be recognized until launched or until well after the
breach has occurred;
the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign
governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate
r
espionage;
the vulnerability of systems to third parties seeking to gain access to such systems either directly or using equipment or
security passwords belonging to employees, customers, third-party service providers or other users of our systems; and
our frequent transmission of sensitive information to, and storage of such information by, third parties, including our
vendors and regulators, and possible weaknesses that go undetected in our data systems notwithstanding the testing we
conduct of those systems.
Although to date we have not experienced any losses or other material consequences relating to technology failure, cyber attacks
or other information, we may suffer such losses or other consequences in the future.
are designed to detect and prevent security breaches and cyber attacks and we conduct periodic tests of our security systems and
processes, we may not succeed in anticipating or adequately protecting against or preventing all security breaches and cyber attacks
from occurring. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering
attacks are becoming more sophisticated and are extremely difficult to prevent. Additionally, the existence of cyber attacks or security
breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner. Further, we may not
be able to insure against losses related to cyber threats. As cyber threats continue to evolve, we may be required to expend significant
additional resources to continue to modifyff or enhance our protective measures or to investigate and remediate any information security
vulnerabilities or incidents.
While we invest in systems and processes that
ff
As is the case with non-electronic fraudulent activity, cyber attacks or other information or security breaches, whether directed
at us or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber
attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and
third parties with whom we do business. A successful penetration or circumvention of system security could cause us negative
consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or
34
destruction of our confidential information and/or that of our customers, or damage to our customers and/or third parties computers
or systems, and could expose us to additional regulatory scrutiny and result in a violation of applicable privacy laws and other laws,
litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage,
reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations,
liquidity and financial condition.
m
We are dependent upon outside third parties for the processing and handling of our records and data.
We rely on software developed by third-party vendors to process various transactions. In some cases, we have contracted with
third parties to run their proprietary software on our behalf. These systems include, but are not limited to, general ledger, payroll,
employee benefits, loan and deposit processing and securities portfolio accounting. While we perform a review of controls instituted
by the applicable vendors over these programs in accordance with industry standards and perform our own testing of user controls, we
must rely on the continued maintenance of controls by these third-party vendors, including safeguards over the security of customer
data. In addition, we maintain, or contract with third parties to maintain, daily backups of key processing outputs in the event of a
failure on the part of any of these systems. Nonetheless, we may incur a temporary disruption in our ability to conduct business or
process transactions, or incur damage to our reputation, if the third-party vendor fails to adequately maintain internal controls or
institute necessary changes to systems. Such a disruption or breach of security may have a material adverse effect on our business.
We are subject to losses due to the errors or fraudulent behavior of employees or third parties.
We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical record-
keeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to
process a large number of increasingly complex transactions. We could be materially adversely affected if someone causes a
significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or
fraudulently manipulates our operations or systems. When we originate loans, we rely upon information supplied by loan applicants
and third parties, including the information contained in the loan application, property appraisal and title information, if applicable,
and employment and income documentation provided by third parties. If any of this information is misrepresented and such
misrepresentation is not detected prior to loan funding, we generally bear the risk of loss associated with the misrepresentation. Any
of these occurrences could result in a diminished ability of us to operate our business, potential liability to customers, reputational
damage and regulatory intervention, which could negatively impact our business, financial condition and results of operations.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected
losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to
optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report and
analyze the types of risk to which we are subject, including credit, liquidity, operational, regulatory compliance and reputational.
However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist,
or develop in the future, risks that we have not appropriately anticipated or identified. For example, the recent financial and credit
crisis and resulting regulatory reform highlighted both the importance and some of the limitations of managing unanticipated risks. If
our risk management framework proves ineffective, we could suffer unexpected losses and our business and results of operations
could be materially adversely affected.
Changes in accounting standards could materially impact our financial statements.
From time to time, the Financial Accounting Standards Board or the SEC may change the financial accounting and reporting
standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing
accounting and reporting standards. In addition, the bodies that interpret
the accounting standards (such as banking regulators, outside
auditors or management) may change their interpretations or positions on how these standards should be applied. These changes may
be beyond our control, can be hard to predict, and can materially impact how we record and report our financial condition and results
of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard
differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements.
r
A new accounting standard will result in a significant change in how we recognizeii
o
or results of operations.
impact on our financial condition
dd
credit losses and may have a material
tt
In June 2016, the Financial Accounting Standards Board (FASB) issued an accounting standard update, Financial
Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which replaces the current incurred
loss model for recognizing credit losses with an expected loss model referred to as the Current Expected Credit Loss (CECL)
35
model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for
investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit
losses is to be based on information about past events, including historical experience, current conditions, and reasonable and
supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial
asset is first added to the balance sheet and periodically thereafter. This differs significantly from the incurred loss model required
under current general accepted accounting principles (GAAP), which delays recognition until it is probable a loss has been incurred.
Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses
and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our
allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase
could adversely affect our business, financial condition and results of operations.
The new CECL standard will become effective for us the fiscal year beginning after December 15, 2019, and for interim periods
within those fiscal years. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to
recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in
which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of
2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new
standard on our business, financial condition and results of operations.
Adverse weather or man-made events could negatively
tt
affect our markets or disrupt our operations, which could have an
adverse effect upon our business and results of operations.
A significant portion of our business is generated in our Arkansas, Kansas, Missouri and Oklahoma markets, which have been,
and may continue to be, susceptible to natural disasters, such as tornadoes, droughts, floods and other severe weather events. These
natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged
properties and increase the risk of delinquencies, foreclosures, or loss on loans originated by us, damage our banking facilities and
offices and negatively impact our growth strategy. Such weather events could disrupt operations, result in damage to properties, and
negatively affecff
t the local economies in the markets where we operate. We cannot predict whether or to what extent damage that may
be caused by future weather or man-made events will affect our operations or the economies in our current or future market areas, but
such events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan
originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or
loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or man-
made disasters. Further, severe weather, natural disasters, acts of war or terrorism and other external events could adversely affect us
in a number of ways, including an increase in delinquencies, bankruptcies or defaults that could result in a higher level of
nonperforming assets, net charge-offs and provision for loan losses. Such risks could also impair the value of collateral securing loans
and hurt our deposit base.
We are or may become involvedll
from time to timeii
in suits, legal proceedings, information-gathering requests, investigations
and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.
Many aspects of our business involve substantial risk of legal liability. We have been named or threatened to be named as
defendants in various lawsuits arising from our business activities (and in some cases from the activities of companies that we have
acquired), including, but not limited to, consumer residential real estate mortgages. In addition, from time to time, we are, or may
become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and
proceedings, and other forms of regulatory inquiry, including by bank regulatory agencies, the Consumer Financial Protection Bureau,
the SEC, and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties,
including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which we
conduct our business or reputational harm.
We are subject to claims and litigation pertaining to inteltt
lll ell ctual property.yy
We rely on technology companies to provide information technology products and services necessary to support our day-to-day
operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of
intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise
obtained. Competitors of our vendors, or other individuals or companies, have from time to time claimed to hold intellectual property
sold to us by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information
technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.
ff
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential
or actual litigants, we may have to engage in litigation that could be expensive, time-consuming, disruptive to our operations, and
36
distracting to management. If we are found to infringe one or more patents or other intellectual property rights, we may be required to
pay substantial damages or royalties to a third-party. In certain cases, we may consider entering into licensing agreements for disputed
intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will
not occur. These licenses may also significantly increase our operating expenses. If legal matters related to intellectual property
claims were resolved against us or settled, we could be required to make payments in amounts that could have a material adverse
effect on our business, financial condition and results of operations.
If the goodwill that we have recorded or may record in connection with a business acquisition becomes impaired it could
require charges to earnings, which would adversely affect our business, financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in
connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more
frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired.
Our goodwill impairment test involves a two-step process. Under the first step, the estimation of fair value of the reporting unit
is compared to its carrying value including goodwill. If step one indicates a potential impairment, the second step is performed to
measure the amount of impairment, if any. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of
operations in the periods in which they become known. While we have not recorded any impairment charges since we initially
recorded the goodwill, there can be no assurance that our future evaluations of our existing goodwill or goodwill we may acquire in
the future will not result in findings of impairment and related write-downs, which could adversely affect our business, financial
condition and results of operations.
We have pledged all of the stock of Equity Bank as collateral for a loan and if the lender forecloses, you could lose your
investment.
We have pledged all of the stock of Equity Bank as collateral for a third-party loan, which had a balance of $15.5 million as of
December 31, 2018. This loan has a maximum lending commitment of $40.0 million. If we were to default on this indebtedness, the
lender of such loan could foreclose on Equity Banks stock and we would lose our principal asset. In that event, if the value of Equity
Banks stock is less than the amount of the indebtedness, you would lose the entire amount of your investment.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances,
i
which could
harm liquidity, results of operations and financial condition.
tt
When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make customary
representations and warranties to purchasers, guarantors and insurers, including government-sponsored enterprises, about the
mortgage loans and the manner in which they were originated. We may be required to repurchase or substitute mortgage loans, or
indemnify buyers against losses, in the event we breach these representations or warranties. In addition, we may be required to
repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan. With respect to loans that are
originated through Equity Bank or correspondent channels, the remedies available against the originating broker or correspondent, if
any, may not be as broad as the remedies available to purchasers, guarantors and insurers of mortgage loans against us. We face
further risk that the originating broker or correspondent, if any, may not have financial capacity to perform remedies that otherwise
may be available. Therefore, if a purchaser, guarantor or insurer enforces its remedies against us, we may not be able to recover losses
from the originating broker or correspondent. If repurchase and indemnity demands increase and such demands are valid claims and
are in excess of our provision for potential losses, our liquidity, results of operations and financial condition may be adversely
affected.
Risks Related to the Regulation of Our Industry
We are subject to extensive regulation in the conduct of our business, which imposes additional costs on us and adversely
affects our profitability.yy
As a bank holding company, we are subject to federal regulation under the Bank Holding Company Act of 1956, as amended, or
the BHC Act, and the examination and reporting requirements of the Federal Reserve. Federal regulation of the banking industry,
along with tax and accounting laws, regulations, rules, and standards, may limit our operations significantly and control the methods
by which we conduct business, as they limit those of other banking organizations. Banking regulations are primarily intended to
protect depositors, deposit insurance funds and the banking system as a whole and not stockholders or other creditors. These
regulations affect lending practices, capital structure, investment practices, dividend policy and overall growth, among other things.
For example, federal and state consumer protection laws and regulations limit the manner in which we may offer and extend credit. In
37
addition, the laws governing bankruptcy generally favor debtors, making it more expensive and more difficult to collect from
customers who become subject to bankruptcy proceedings.
We also may be required to invest significant management attention and resources to evaluate and make any changes necessary
to comply with applicable laws and regulations, particularly as a result of regulations adopted under the Dodd-Frank Act. This
allocation of resources, as well as any failure to comply with applicablea
and results of operations.
requirements, may negatively impact our financial condition
Changes in laws, government regulation, and monetary policy may have a material effect on our results of operations.
Financial institutions have been the subject of significant legislative and regulatory changes and may be the subject of further
significant legislation or regulation in the future, none of which is within our control. New proposals for legislation continue to be
introduced in the United States Congress that could further substantially increase regulation of the bank and non-bank financial
services industries, impose restrictions on the operations and general ability of firms within the industry to conduct business consistent
with historical practices, including in the areas of compensation, interest rates, financial product offerings, and disclosures and have an
effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things. Federal and state
regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied.
Changes to statutes, regulations, or regulatory policies, including changes in their interpretation
or implementation by regulators,
could affect us in substantial and unpredictable ways. Such changes could, among other things, subject us to additional costs and
lower revenues, limit the types of financial services and products that we may offer, ease restrictions on non-banks and thereby
enhance their ability to offer competing financial services and products, increase compliance costs and require a significant amount of
managements time and attention. Failure to comply with statutes, regulations or policies could result in sanctions by regulatory
agencies, civil monetary penalties or reputational damage, each of which could have a material adverse effect on our business,
financial condition and results of operations.
rr
Banking agencies periodically conduct examinations of our business,s including compliance with laws and regulations, and
our failure to comply withtt any supervisory actions to which we become subject as a result of such examinations could materially
and adversely affect us.
We are subject to supervision and regulation by federal and state banking agencies that periodically conduct examinations of ouru
business, including compliance with laws and regulations specifically, our subsidiary, Equity Bank, is subject to examination by the
Federal Reserve and the OSBC, and we are subject to examination by the Federal Reserve. Accommodating such examinations may
require management to reallocate resources, which would otherwise be used in the day-to-day operation of other aspects of our
business. If, as a result of an examination, any such banking agency was to determine that the financial condition, capital resources,
allowance for loan losses, asset quality, earnings prospects, management, liquidity, or other aspects of our operations had become
unsatisfactory, or that we or our management were in violation of any law or regulation, such banking agency may take a number of
different remedial actions as it deems appropriate. These actions include the power to enjoin unsafe or unsound practices, to require
affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, our officers,
or directors, to remove officers and directors, and, if it is concluded that such conditions cannot be corrected or there is an imminent
risk of loss to depositors, to terminate our deposit insurance. If we become subject to such a regulatory action, it could have a material
adverse effect on our business, financial condition and results of operations.
Our banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may
adversely affect our earnings.
As a member institution of the FDIC, our banking subsidiary, Equity Bank, is assessed a quarterly deposit insurance premium.
We are generally unable to control the amount of premiums or special assessments that Equity Bank is required to pay, future bank
failures may stress the Deposit Insurance Fund and prompt the FDIC to increase its premiums or to issue special assessments. Any
future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effeff ct on our results of
operations, financial condition and our ability to continue to pay dividends on our common stock at the current rate or at all.
We are subject to certain capital
i
requirements by regulators.
Applicable regulations require us to maintain specific capital standards in relation to the respective credit risks of our assets and
off-balance sheet exposures. Various components of these requirements are subject to qualitative judgments by regulators. We
maintain a well capitalized status under the current regulatory framework. Our failure to maintain a well capitalized statustt
affect our customers confidence in us, which could adversely affect our ability to do business. In addition, failure to maintain such
could
38
status could also result in restrictions imposed by our regulators on our growth and other activities. Any such effect on customers or
restrictions by our regulators could have a material adverse effect on our financial condition and results of operations.
We are subject to stringent capitaltt
paying dividends or repurchasing shares.
requirements, which may adversely impact our return on equity or constrain us from
In July 2013, the federal banking agencies published the final Basel III rules (as defined in Item 1 Business Supervision and
Regulation Bank Holding Company Regulation) that revised their risk-based and leverage capital requirements and their method
for calculating risk-weighted assets. The Basel III rules became effective as applied to us on January 1, 2015, with a phase-in period
that generally extended from January 1, 2015 through January 1, 2019. The application of these stringent capital requirements on us
could, among other things, result in lower returns on equity, require the raising of additional capital and result in regulatoryrr actions
such as the inability to pay dividends or repurchase shares if we were to be unable to comply with such requirements.
We may need to raise additional capital in the future, including as a result of potential
ff
increased minimum capital thresholds
established by regulators, but that capitaltt may not be available
ll
when it is needed or may be dilutive tott stockholders.
We are required by federal and state regulatory authorities to maintain adequate capital levels to support our operations. New
regulations implementing minimum capital standards could require financial institutions to maintain higher minimum capital ratios
and may place a greater emphasis on common equity as a component of Tier 1 capital, which consists generally of stockholders
equity and qualifying preferred stock, less certain goodwill items and other intangible assets. In order to support our operations and
will depend on
comply with regulatory standards, we may need to raise capital in the future. Our ability to raise additional capital
conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we
cannot assure you of our ability to raise additional capital, if needed, on favorable terms. The capital and credit markets have
experienced significant volatility in recent years. In some cases, the markets have produced downward pressure on stock prices and
credit availability for certain issuers without regard to those issuers underlying financial strength. If we cannot raise additional
capital when needed, our financial condition and results of operations may be adversely affected, and our banking regulators mayaa
subject us to regulatory enforcement action, including receivership. Furthermore, our issuance of additional shares of our Class A
common stock could dilute the economic ownership interest of our Class A stockholders.
a
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair
lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, or CRA, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending
The U.S. Department of Justice and
laws and regulations impose nondiscriminatory lending requirements on financial institutions.
other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institutions
performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and
civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on
entering new business lines. Private parties may also have the ability to challenge an institutions performance under fair lending laws
in private class action litigation. Such actions could have a material adverse effecff
operations and future prospects.
t on our business, financial condition, results of
t
We are subject to the Bank Secrecy Act and other anti-money laundering statutes and regulations and any deemed deficiency
e
by us with respect to these laws could result in significant liability.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, or the Patriot Act, and other laws and regulations require financial
institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and
currency transaction reports when appropriate. In addition to other bank regulatory agencies, the federal Financial Crimes
Enforcement Network of the U.S. Treasury, is authorized to impose significant civil money penalties for violations of those
requirements and has recently engaged in coordinated enforcement
efforts with the state and federal banking regulators, as well as the
U.S. Department of Justice, Consumer Financial Protection Bureau, Drug Enforcement Administration, and Internal Revenue Service,
or the IRS. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control of
the U.S. Treasury regarding, among other things, the prohibition of transacting business with, and the need to freeze assets of,ff certain
persons and organizations identified as a threat to the national security, foreign policy, or economy of the United States. If our
policies, procedures, and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which
may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain
aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money
laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material
adverse effect on our business, financial condition, results of operations, and future prospects.
ff
39
Many of our new activities and expansion plans require regulatory approvals and failure to obtain them may restrict our
growth.
We intend to complement and expand our business by pursuing strategic acquisitions of financial institutions and other
complementary businesses. Generally, we must receive state and federal regulatory approval before we can acquire an FDIC-insured
depository institution or related business. In determining whether to approve a proposed acquisition, federal banking regulators will
consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects and the impact
of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence,
experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the
communities to be served (including the acquiring institutions record of compliance under the CRA) and the effectiveness of the
acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are
acceptable to us, or at all. We may also be required to sell branches as a condition to receiving regulatory approval, which condition
may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.
The Federal Reserve may require us to commit capital
i
resources to support our subsidiary, Equity Bank.
The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to its subsidiary
banks and to commit resources to support its subsidiary banks. Under the source of strength doctrine, the Federal Reserve may
require a bank holding company to make capital injections into a troubled subsidiary bank at times when the bank holding company
may not be inclined to do so and may charge the bank holding company with engaging in unsafe and unsound practices for failure to
commit resources to such a subsidiary bank. Accordingly, we could be required to provide financial assistance to our subsidiary,rr
Equity Bank, if it experiences financial distress.
Such a capital injection may be required at a time when our resources are limited and we may be required to borrow the funds to
make the required capital injection. In the event of a bank holding companys bankruptcy, the bankruptcy trustee will assume any
commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover,
bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the
holding companys general unsecured creditors, including the holders of any note obligations.
We could be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have
exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial
services industry, including commercial banks, brokers and dealers, investment banks and other institutional
transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be
exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full
credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of operations.
clients. Many of these
amount of the
ff
t
Stockholders may be deemed to be acting in concert or otherwiseii
in control of us and our bank subsidiary, which could
impose prior approval requirements and result in adverse regulatory consequences for such holders.
We are a bank holding company regulated by the Federal Reserve. Any entity (including a group composed of natural
persons) owning 25% or more of a class of our outstanding shares of voting stock, or a lesser percentage if such holder or groupu
otherwise exercises a controlling influence over us, may be subject to regulation as a bank holding company in accordance with
the Bank Holding Company Act of 1956, as amended. In addition, (i) any bank holding company or foreign bank with a U.S.
presence is required to obtain the approval of the Federal Reserve under the Bank Holding Company Act to acquire or retain 5% or
more of a class of our outstanding shares of voting stock, and (ii) any person other than a bank holding company may be required to
obtain prior regulatory approval under the Change in Bank Control Act to acquire or retain 10% or more of our outstanding shares of
voting stock. Any stockholder that is deemed to control the Company for bank regulatory purposes would become subject to prior
approval requirements and ongoing regulation and supervision. Such a holder may be required to divest amounts equal to or
exceeding 5% of the voting shares of investments that may be deemed incompatible with bank holding company status, such as an
investment in a company engaged in non-financial activities. Regulatory determination of control of a depository institution or
holding company is based on all of the relevant facts and circumstances. Potential investors are advised to consult with their legal
counsel regarding the applicable regulations and requirements.
Shares of our common stock owned by holders determined by a bank regulatory agency to be acting in concert would be
aggregated for purposes of determining whether those holders have control of a bank or bank holding company. Each stockholder
obtaining control that is a company would be required to register as a bank holding company. Acting in concert generally means
knowing participation in a joint activity or parallel action towards the common goal of acquiring control of a bank or a parent
40
company, whether or not pursuant to an express agreement. The manner in which this definition is applied in individual
circumstances can vary and cannot always be predicted with certainty. Many factors can lead to a fiff nding of acting in concert,
including where: (i) the stockholders are commonly controlled or managed; (ii) the stockholders are parties to an oral or written
agreement or understanding regarding the acquisition, voting or transfer of control of voting securities of a bank or bank holding
company; (iii) the stockholders are immediate family members; or (iv) both a stockholder and a controlling stockholder, partner,
trustee or management official of such stockholder own equity in the bank or bank holding company.
Risks Related to Our Class A Common Stock
The market price of our Class A common stock may be subject to substantial fluctuations which may make it difficult for you
to sell your shares at the volumes, prices and times desired.
The trading price of our Class A common stock may be volatile, which may make it difficult for you to resell your shares at the
volume, prices and times desired. There are many factors that may impact the market price and trading volume of our Class A
common stock, including:
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results, financial condition, or asset quality;
market conditions in the broader stock market in general, or in our industry in particular;
publication of research reports about us, our competitors, or the bank and non-bank financial services industries generally,
or changes in, or failure to meet, securities analysts estimates of our financial and operating performance, or lack of
research reports by industry analysts or ceasing of coverage;
future issuances of our Class A common stock or other securities;
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital
involving our competitors or us;
a
commitments by or
additions or departures of key personnel;
trades of large blocks of our Class A common stock;
economic and political conditions or events;
regulatory developments; and
other news, announcements, or disclosures (whether by us or others) related to us, our competitors, our core markets, or
the bank and non-bank financial services industries.
The stock market and, in particular, the market for financial institution
t
stocks, have experienced substantial fluctuations in
recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. In
addition, significant fluctuations in the trading volume in our Class A common stock may cause significant price variations to occur.
Increased market volatility may materially and adversely affect the market price of our Class A common stock, which could make it
difficult to sell your shares at the volume, prices and times desired.
The obligations associated withii
being a public company require significant resources and management attention.
As a public company, we face increased legal, accounting, administrative and other costs and expenses that are not incurred by
private companies, particularly after we are no longer an emerging growth company. We are subject to the reporting requirements of
the Exchange Act, which requires that we file annual, quarterly and current reports with respect to our business and financial condition
and proxy and other information statements, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the
Dodd-Frank Act, the PCAOB and the NASDAQ Stock Market LLC, each of which imposes additional reporting and other obligations
on public companies. As a public company, we are required to:
•
•
•
•
•
prepare and distribute periodic reports, proxy statements and other stockholder communications in compliance with the
federal securities laws and rules;
r
expand the roles and duties of our board of directors and committees thereof;
maintain an enhanced internal audit function;
institute more comprehensive financial reporting and disclosure compliance procedures;
involve and retain to a greater degree outside counsel and accountants in the activities listed above;
41
•
•
•
•
•
enhance our investor relations function;
establish new internal policies, including those relating to trading in our securities and disclosure controls and procedures;
retain additional personnel;
comply with the NASDAQ Global Select Market listing standards; and
comply with the Sarbanes-Oxley Act.
We expect these rules and regulations and changes in laws, regulations and standards relating to corporate governance and
public disclosure, which have created uncertainty for public companies, to increase legal and financial compliance costs and make
some activities more time consuming and costly. These laws, regulations and standards are subject to varying interpretations, in many
cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. Our investment in compliance with existing and evolving
regulatory requirements will result in increased administrative expenses and a diversion of managements time and attention from
revenue-generating activities to compliance activities, which could have a material adverse effect on our business, financial condition
and results of operations. These increased costs may require us to divert a significant amount of money that we could otherwise use to
expand our business and achieve our strategic objectives
We have not historically declared or paid cash dividends on our common stock and we do not expect to pay dividends on our
common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment is if the price
of our Class A common stock appreciates.
The holders of our common stock will receive dividends if and when declared by our board of directors out of legally available
funds. Our board of directors has not declared a dividend on our common stock since our inception. Any future determination
relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors,
including our future earnr ings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that
our board of directors may deem relevant.
Our principal business operations are conducted through our subsidiary, Equity Bank. Cash available to pay dividends to our
stockholders is derived primarily, if not entirely, from dividends paid by Equity Bank to us. The ability of Equity Bank to pay
dividends to us, as well as our ability to pay dividends to our stockholders, will continue to be subject to, and limited by, certain legal
and regulatory restrictions. Further, any lenders making loans to us may impose financial covenants that may be more restrictive with
respect to dividend payments than the regulatory requirements.
If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our
Class A common stock could decline.
ii
If our existing stockholders sell substantial amounts of our Class A common stock in the public market, the market price of our
Class A common stock could decrease significantly. The perception in the public market that our existing stockholders might sell
shares of Class A common stock could also depress our market price. A decline in the price of shares of our Class A common stock
might impede our ability to raise capital through the issuance of additional shares of our Class A common stock or other equity
securities and could result in a decline in the value of the shares of our Class A common stock.
Securities analysts may not initiate
tt
or continue coverage on our Class A common stock, which could adversely affect the
market for our Class A common stock.
The trading market for our Class A common stock may depend in part on the research and reports that securities analysts
publish about us and our business. We do not have any control over these securities analysts and they may not cover our Class A
common stock. If securities analysts do not cover our Class A common stock, the lack of research coverage may adversely affect our
market price. If we are covered by securities analysts and our Class A common stock is the subject of an unfavorable report, the price
of our Class A common stock may decline. If one or more of these analysts cease to cover us or fail to publish regular reports on us,
we could lose visibility in the financial markets, which could cause the price or trading volume of our Class A common stock to
decline.
42
The trading volume in our common stock isii
less than other larger financial institutions.
Although our Class A common stock is listed for trading on the Nasdaq Global Select Market, the trading volume in our
common stock is less than that of other, larger financial services companies. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends on the presence in the marketplace
Class A common stock at any given time. This presence depends on the individual decisions of investors and general economic and
market conditions over which we have no control. Given the lower trading volume of our Class A common stock, significant sales of
our Class A common stock, or the expectation of these sales, could cause the price of our Class A common stock to decline.
of willing buyers and sellers of our
t
Use of our common stock for future acquisitions or to raise capital may be dilutive to existing
ii
stockholders.
When we determine that appropriate strategic opportunities exist, we may acquire other financial institutions
t
and related
businesses, subject to applicable regulatory requirements. We may use our common stock for such acquisitions. We may also seek to
raise capital for such acquisitions through selling additional common stock. It is possible that the issuance of additional common
stock in such acquisitions or capital transactions may be dilutive to the interests of our existing stockholders.
A future issuance of stock could dilute the value of our Class A common stock.
We may sell additional shares of Class A common stock, or securities convertible into or exchangeable for such shares, in
subsequent public or private offerings. Future issuance of any new shares could cause further dilution in the value of our outstanding
shares of Class A common stock. We cannot predict the size of future issuances of our Class A common stock, or securities
convertible into or exchangeable for such shares, or the effect, if any, that future issuances and sales of shares of our Class A common
stock will have on the market price of our Class A common stock. Sales of substantial amounts of our Class A common stock
(including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect
prevailing market prices of our Class A common stock.
We have significant institutional investors whose interests may differ from yours.
A significant portion of our outstanding equity is currently held by various investment funds. These funds could have a
significant level of influence because of their level of ownership and representation on our board of directors, including a greater
ability than you and our other stockholders to influence the election of directors and the potential outcome of other matters submitted
to a vote of our stockholders, such as mergers, the sale of substantially all of our assets and other extraordinary corporate matters and
affect the votes of our board of directors. These funds also have certain rights, such as access rights and registration rights that our
other stockholders do not have. The interests of these funds could conflict with the interests of our other stockholders, including you,
and any future transfer by these funds of their shares of Class A common stock to other investors who have different business
objectives could have a material adverse effect on our business, financial condition, results of operations and future prospects, and the
market value of our Class A common stock.
u
Our directors and executive officers beneficially own a significant portion of our Class A common stock and have substantial
influence over us.
Our directors and executive officers, as a group, beneficially owned approximately 5.0% of our outstanding Class A common
stock as of December 31, 2018. As a result of this level of ownership, our directors and executive officers have the ability, by taking
coordinated action, to exercise significant influence over our affairs and policies. The interests of our directors and executive officers
may not be consistent with your interests as a stockholder. This influence may also have the effect of delaying or preventing changes
of control or changes in management, or limiting the ability
be in the best interests of our Company.
of our other stockholders to approve transactions that they may deem to
a
Shares of our Class A common stock are not insured deposits and may lose value.
Shares of our Class A common stock are not savings or deposit accounts and are not insured by the FDICs DIF, or any other
agency or private entity. Such shares are subject to investment risk, including the possible loss of some or all of the value of your
investment.
The laws that regulate our operations are designed for the protectiontt
of depositors and the public, not our stockholders.
The federal and state laws and regulations applicable to our operations give regulatory authorities extensive discretion in
connection with their supervisory and enforcement responsibilities, and generally have been promulgated to protect depositors and the
FDICs DIF and not for the purpose of protecting stockholders. These laws and regulations can materially affect our future business.
43
Laws and regulations now affecting us may be changed at any time, and the interpretation of such laws and regulations by bank
regulatory authorities is also subject to change.
We have the ability to incur debt and pledge our assets, including our stock in Equity Bank, to secure that debt and holders
of any such debt obligations will generally have priority over holders of our Class A common stock with respect to certain payment
obligations.
We have the ability to incur debt and pledge our assets to secure that debt. Absent special and unusual circumstances, a holder
of indebtedness for borrowed money has rights that are superior to those of holders of Class A common stock. For example, interest
must be paid to the lender before dividends can be paid to stockholders, and loans must be paid off before any assets can be distributed
to stockholders if we were to liquidate. Furthermore, we would have to make principal and interest payments on our indebtedness,
which could reduce our profitability or result in net losses on a consolidated basis.
We are an emerging growth company under the JOBS Act and we cannot be certain whether the reduced disclosure
requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.
We are an emerging growth company under the JOBS Act, and we therefore are permitted to, and we intend to, take advantage
of exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of: (i) the last day of the
fiscal year during which we had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year following the
fifth anniversary of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than
$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed a large accelerated filer, as defined under the federal
securities laws. For so long as we remain an emerging growth company, we may take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not
limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on certain executive compensation matters, such as say on pay and say on
frequency. As a result, our stockholders may not have access to certain information
that they may deem important. Although we
intend to rely on certain of the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject
interpretations and guidance by the SEC and other regulatory agencies.
to
u
ff
We cannot predict whether investors will find our Class A common stock less attractive as a result of our taking advantage of
these exemptions. If some investors find our Class A common stock less attractive as a result of these choices, there may be a less
active trading market for our Class A common stock and our stock price may be more volatile.
If we fail to maintainii an effective system of disclosure controls and procedures and internal control over financial reporting
we may not be able to accurately report our financial results or prevent fraud.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for
evaluating and reporting on that system of internal control. Our internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Ensuring that we have adequate disclosure controls and
procedures, including internal control over financial reporting, in place so that we can produce accurate financial statements on a
timely basis is costly and time-consuming and needs to be reevaluated frequently. As a public company, we are required to comply
with the Sarbanes‑Oxley Act and other rules that govern public companies. Our management is required to certify our compliance
with Section 404 of the Sarbanes‑Oxley Act and to make annual assessments of the effectiveness of our internal control over financial
reporting. In addition, when we cease to be an emerging growth company under the JOBS Act, our independent registered public
accounting firm will be required to report on the effectiveness of our internal control over financial reporting.
Our management may conclude that our internal control over financial reporting are not effective due to our failure to cure any
identified material weakness or otherwise. Moreover, even if our management concludes that our internal control over financial
reporting are effective, our independent registered public accounting firm may not conclude that our internal control over financial
reporting are effective. In the future, our independent registered public accounting firm may not be satisfied with our internal control
over financial reporting or the level at which our controls are documented, designed, operated or reviewed, or it may interpret
relevant requirements differently from us. In addition, during the course of the evaluation, documentation and testing of our internal
control over financial reporting, we may identify deficiencies in our internal controls over financial reporting or disclosure controls.
Any such deficiencies may also subject us to adverse regulatory consequences. If we fail to achieve and maintain the adequacy of our
internal control over financial reporting or disclosure controls, as these standards are modififf ed, supplemented or amended from time to
time, we may be unable to report our financial information on a timely basis, we may not be able to conclude on an ongoing basis that
we have effective internal control over financial reporting or disclosure controls, and we may suffer adverse regulatory consequences
the
q
r
44
or violations of listing standards. There could also be a negative reaction in the fiff nancial markets due to a loss of investor confidence
in the reliability of our financial statements.
Our corporate governance documents and certain corporate and banking laws applicable to us could make a takeover more
difficult.
Certain provisions of our Articles of Incorporation and our Bylaws, and applicable corporate
rr
and federal banking laws, could
make it more difficult for a third party to acquire control of us or conduct a proxy contest, even if those events were perceived by
many of our stockholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations
applicable to us, among others:
•
•
•
•
•
•
empower our board of directors, without stockholder approval, to issue preferred stock, the terms of which, including
voting power, are set by our board of directors;
only permit stockholder action to be taken at an annual or special meeting of stockholders and not by written consent in
lieu of such a meeting;
provide for a classified board of directors, so that only approximately one-third of our directors are elected each year;
prohibit us from engaging in certain business combinations with interested stockholders (generally defined as a holder
of 15% or more of the corporations outstanding voting stock);
require at least 120 days advance notice of nominations for the election of directors and the presentation of stockholder
proposals at meetings of stockholders; and
require prior regulatory application and approval of any transaction involving control of our organization.
These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including under
circumstances in which our stockholders might otherwise receive a premium over the market price of our shares.
Our board of directors may issue shares of preferred
ff
stock that would adversely affect the rights of our Class A common
stockholders.
Our authorized capital stock includes 10,000,000 shares of preferred stock of which none were issued and outstanding as of
March 20, 2019. Our board of directors, in its sole discretion, may designate and issue one or more series of preferred stock from the
authorized and unissued shares of preferred stock. Subject to limitations imposed by law or our Articles of Incorporation, our board of
directors is empowered to determine:
•
•
•
•
•
•
the designation of, and the number of, shares constituting each series of preferred stock;
the dividend rate for each series;
the terms and conditions of any voting, conversion and exchange rights for each series;
the amounts payable on each series on redemption or our liquidation, dissolution or winding-up;
the provisions of any sinking fund for the redemption or purchase of shares of any series; and
the preferences and the relative rights among the series of preferred stock.
We could issue preferred stock with voting and conversion rights that could adversely affect the voting power of the shares of
our Class A common stock and with preferences over our Class A common stock with respect to dividends and in liquidation.
The return on your investment in our Class A common stock is uncertain.
We cannot provide any assurance that an investor in our Class A common stock will realize a substantial return on his or her
investment, or any return at all. Further, as a result of the uncertainty and risks associated with our operations, many of which are
described in this Item 1ARisk Factors section, it is possible that an investor could lose his or her entire investment.
Item 1B: Unresolved Staff Comments
None
45
Item 2: Properties
Our principal executive offices are located at 7701 East Kellogg Drive, Wichita, Kansas 67207. Including our principal
executive offices, as of December 31, 2018, we operated a total of 49 branches, consisting of four branches in the Wichita, Kansas
metropolitan area, seven branches in the Kansas City metropolitan area, three branches in Topeka, Kansas, ten branches in Western
Missouri, five branches in Western Kansas, four branches in Southeast Kansas, five branches in Southwest Kansas, five branches in
Northern Arkansas, one branch in the Tulsa, Oklahoma metropolitan area, four branches in Northern Oklahoma and one branch in
Western Oklahoma. Most of Equity Banks branches are equipped with automated teller machines and drive-through facilities. We
believe all of our facilities are suitable for our operational needs. The following table summarizes pertinent details of our principal
executive offices and branches, as of December 31, 2018.
Address
Owned/Leased
Principal Executive Office and Wichita Branch:
7701 East Kellogg Drive
Wichita, Kansas 67207
Other Wichita Area Branches:
345 North Andover Road
Andover, Kansas 67002
1555 North Webb Road
Wichita, Kansas 67206
10222 West Central
Wichita, Kansas 67212
Kansas City Branches:
6200 Northwest 63rd Terrace
Kansas City, Missouri 64151
8880 West 151st Street
Overland Park, Kansas 66221
4551 West 107th Street, Suite 210
Overland Park, Kansas 66207
909 Northeast Rice Road
Lees Summit, Missouri 64086
301 Southeast Main Street
Lees Summit, Missouri 64063
1251 Southwest Oldham Parkway
Lees Summit, Missouri 64081
651 Northeast Coronado Drive
Blue Springs, Missouri 64014
Tulsa Branches:
9292 South Delaware Ave
Tulsa, Oklahoma 74137
Western Missouri Branches:
1919 Highway 13
Higginsville, Missouri 64037
300 South Miller Street
Sweet Springs, Missouri 65351
612 North Maguire
Warrensburg, Missouri 64093
1110 South Mitchell Street
Warrensburg, Missouri 64093
46
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Address
Owned/Leased
200 North State Street
Knob Noster, Missouri 65336
920 Thompson Boulevard
Sedalia, Missouri 65301
504 West Benton Street
Windsor, Missouri 65360
615 East Ohio Street
Clinton, Missouri 64735
100 East Main Street
Warsaw, Missouri 65355
1601 Commercial Street
Warsaw, Missouri 65355
Topeka Branches:
701 South Kansas Avenue
Topeka, Kansas 66603
507 West 8th Street
Topeka, Kansas 66603
3825 Southwest 29th Street
Topeka, Kansas 66614
Western Kansas Branches:
2428 Vine Street
Hays, Kansas 67601
916 Washington Street
Ellis, Kansas 67637
745 Main Street
Hoxie, Kansas 67740
300 Highway 212
Quinter, Kansas 67752
106 South Adams Street
Grinnell, Kansas 67738
Southeast Kansas Branches:
902 McArthur Rd
Coffeyville, Kansas 67337
112 East Myrtle Street
Independence, Kansas 67301
801 Main
Neodesha, Kansas 66757
102 North Broadway Street
Pittsburg, Kansas 66762
Southwest Kansas Branches:
502 South Jackson Street
Hugoton, Kansas 67951
47
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Address
Owned/Leased
1700 North Lincoln Avenue
Liberal, Kansas 67901
23 West 4th Street
Liberal, Kansas 67901
930 South Kansas Avenue
Liberal, Kansas 67901
250 East Tucker Road
Liberal, Kansas 67901
Northernrr Arkansas Branches:
200 East Ridge Avenue
Harrison, Arkansas 72601
1304 Highway 62/65 North(1)
Harrison, Arkansas 72601
911 West Trimble Avenue
Berryville, Arkansas 72616
107 West Van Buren
Eureka Springs, Arkansas 72632
198 Slack Street
Pea Ridge, Arkansas 72751
Northern Oklahoma Branches:
222 East Grand Avenue
Ponca City, Oklahoma 74601
802 East Prospect Avenue
Ponca City, Oklahoma 74601
1417 East Hartford Avenue
Ponca City, Oklahoma 74604
102 South Main Street
Newkirk, Oklahoma 74647
Western Oklahoma Branches:
601 North Main Street
Guymon, Oklahoma 73942
Owned
Owned
Leased
Leased
Owned
Leased
Owned
Leased
Owned
Leased
Owned
Leased
Owned
Owned
(1)The building at this location is owned but the land is on a long term lease expiring in January 2030.
Item 3: Legal Proceedings
From time to time we are party to various litigation matters incidental to the conduct of our business. See NOTE 23 LEGAL
MATTERS of the Notes to Consolidated Financial Statements under Item 8 to this Annual Report on Form 10-K for a complete
discussion of litigation matters.
Item 4: Mine Safety Disclosures
Not applicable.
48
Part II
Item 5: Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Common Equity Holders
Our common stock is listed on the NASDAQ Global Select Markets under the symbol EQBK. At March 12, 2019, there were
15,803,587 shares of our Class A common stock, outstanding and 292 stockholders of record for the Companys Class A common
stock. At March 12, 2019, no shares of our Class B common stock were outstanding.
The following table sets forth, for the periods indicated, the high and low intraday sales prices for our Class A common stock as
reported by the NASDAQ Global Select Market.
Quarter ended March 31, 2017
Quarter ended June 30, 2017
Quarter ended September 30, 2017
Quarter ended December 31, 2017
Quarter ended March 31, 2018
Quarter ended June 30, 2018
Quarter ended September 30, 2018
Quarter ended December 31, 2018
Quarter ended March 31, 2019 (through March 12, 2019)
High
Low
$
$
$
$
$
$
$
$
$
35.24 $
33.11 $
36.30 $
36.99 $
40.77 $
44.26 $
44.30 $
40.00 $
35.96 $
29.82
29.13
30.67
32.93
34.72
36.57
37.11
31.32
30.90
Dividend Policy
We have not historically declared or paid cash dividends on our common stock and we do not expect to pay dividends on our
common stock for the foreseeable future. Instead, we anticipate that all of our future earnings will be retained to support our
operations and to finance the growth and development of our business. Any future determination to pay dividends on our common
stock will be made by our board of directors and will depend on a number of factors, including:
•
•
•
•
•
•
•
•
•
our historical and projected financial condition, liquidity and results of operations;
our capital levels and requirements;
statutory and regulatory prohibitions and other limitations;
any contractual restriction on our ability to pay cash dividends, including pursuant to the terms of any of our credit
agreements or other borrowing arrangements;
our business strategy;
tax considerations;
any acquisitions or potential acquisitions that we may examine;
general economic conditions; and
other factors deemed relevant by our board of directors.
We are not obligated to pay dividends on our common stock.
As a Kansas corporation, we are subject to certain restrictions on dividends under the Kansas General Corporation Code.
Generally, a Kansas corporation may pay dividends to its stockholders out of its surplus or, if there is no surplus, out of its net profits
for the fiscal year in which the dividend is declared or the preceding fiscal year, or both. In addition, if the capital of a Kansas
corporation is diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate
amount of the capital
the directors of such corporation cannot declare and pay out of such net profits any dividends upon any shares of any classes of its
capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets is repaired. We are also subject to certain restrictions on the payment of cash dividends as a
result of banking laws, regulations and policies. For more information, see Item 1 Supervision and Regulation Banking
Regulation Standards for Safety and Soundness.
represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets,
a
49
Since we are a bank holding company and do not engage directly in business activities of a material nature, our ability to pay
dividends to our stockholders depends, in large part, upon our receipt of dividends from Equity Bank, which is also subject to
numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. The present and
future dividend policy of Equity Bank is subject to the discretion of its board of directors. Equity Bank is not obligated to pay
dividends.
If Equity Bank is significantly undercapitalize
a
d under the applicable federal bank capital standards, or if Equity Bank is
undercapitalized and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, the
FDIC may choose to require Equity Bank to receive prior approval for any capital distribution from the Federal Reserve. In addition,
Equity Bank generally is prohibited from making a capital
undercapitalized under applicablea
Banking Regulation Standards for Safety and Soundness.
federal bank capital standards. For more information, see Item 7 Supervision and Regulation
distribution if such a distribution would cause Equity Bank to be
a
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents shares of our common stock that may be issued with respect to compensation plans at
December 31, 2018.
Plan category
Equity compensation plans approved by security
holders - stock options
Equity compensation plans approved by security
holders - restricted stock units
Total Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders(1)
Total
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted average
exercise price
of outstanding
options, warrants
and rights
(b)
Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column a)
(c)
702,556 $
26.04
132,107
834,663
150,000
984,663 $
12.00
23.57
*
*
614,424
614,424
*
(1)
All securities remaining available for future issuance were available under our Amended and Restated 2013 Stock Incentive
Plan as of December 31, 2018.
Includes 150,000 options to purchase common stock outstanding under our 2006 Non-Qualified Stock Option Plan. No
securities remained availablea
for future issuance under our 2006 Non-Qualified Stock Option Plan.
50
Performance Graph
The following performance graph compares total stockholders return on the Companys common stock for the period beginning
at the close of trading November 11, 2015 to December 31, 2018, with the cumulative total return of the NASDAQ Composite Index
and the NASDAQ Bank Index for the same period. Cumulative total return is computed by dividing the difference between the
Companys share price at the end and the beginning of the measurement period by the share price at the beginning of the measurement
period. The performance graph assumes $100 is invested on November 11, 2015, in the Companys common stock, the NASDAQ
Composite Index and the NASDAQ Bank Index. Historical stock price performance is not necessarily indicative of future stock price
performance.
Total Return Performance
180.00
175.00
170.00
165.00
160.00
155.00
150.00
145.00
140.00
135.00
130.00
125.00
120.00
115.00
110.00
105.00
100.00
95.00
90.00
85.00
80.00
11/11/15
12/31/15
3/31/16
6/30/16
9/30/16
12/31/16
3/31/17
6/30/17
9/30/17
12/31/17
3/31/18
6/30/18
9/30/18
12/31/18
Equity Bancshares, Inc.
100.00
Nasdaq Composit Index
100.00
Nasdaq Bank Index
100.00
97.91
98.86
94.92
87.91
96.42
88.72
92.68
95.81
90.95
108.59
140.82
132.99
128.26
148.94
148.23
163.93
173.64
164.35
147.56
104.99
106.37
116.91
121.42
128.46
136.61
134.55
152.14
159.14
131.58
99.80
128.15
124.22
124.93
130.23
132.65
134.90
137.48
134.52
108.90
Recent Sales of Unregistered Equity Securities
None
Purchases of equity securities by the issuer and affiliated purchasers
None
51
Item 6: Selected Financial Data
The following table sets forth selected historical consolidated financial and other data as of and for the years ended
December 31, 2018, 2017, 2016, 2015 and 2014. Our historical results are not necessarily indicative of any future period. The
performance and certain capital ratios are unaudited and derived from our audited and unaudited financial statements as of and for the
periods presented. Average balances have been calculated using daily averages, unless otherwise denoted.
You should read the selected consolidated financial data set forth below in conjunction with Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related
notes included elsewhere in this Annual Report on Form 10-K.
Selected Financial Data for the periods indicated (dollars in thousands, except per share amounts) is listed below.
Statement of Income Data
2018
Years Ended December 31,
2016
2017
2015
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net gain on acquisition
Net gain on sale and settlement of
securities
Other non-interest income
Merger expense
Loss on extinguishment of debt
Other non-interest expense
Income before income taxes
Provision for income taxes
Net income
Dividends and discount accretion
on preferred stock
Net income allocable to common
stockholders
Basic earnings per share
Diluted earnings per share
Balance Sheet Data (at period end)
Cash and cash equivalents
Securities available-for-sale
Securities held-to-maturity
Loans held for sale
Gross loans held for investment
Allowance for loan losses
Loans held for investment, net of
allowance for loan losses
Goodwill and core deposit
intangibles, net
Mortgage servicing asset, net
Naming rights, net
Total assets
Total deposits
Borrowings
Total liabilities
Total stockholders equity
Tangible common equity*
Performance ratios
Return on average assets (ROAA)
Return on average equity (ROAE)
Return on average tangible common
equity (ROATCE)*
Yield on loans
Cost of interest-bearing deposits
$
$ 161,556
36,758
124,798
3,961
$ 102,693
16,691
86,002
2,953
(9)
19,734
7,462
86,925
46,175
10,350
35,825
271
15,169
5,352
62,111
31,026
10,377
20,649
$
61,799
9,202
52,597
2,119
479
9,987
5,294
58
41,723
13,869
4,495
9,374
53,028
6,766
46,262
3,047
682
756
8,364
1,691
316
36,568
14,442
4,142
10,300
$
2014
46,794
5,433
41,361
1,200
986
7,688
35,645
13,190
4,203
8,987
(1)
(177)
(708)
35,825
2.33
2.28
20,649
1.66
1.62
9,373
1.09
1.07
$
$ 192,818
168,875
748,356
2,972
2,575,408
11,454
$
52,195
162,272
535,462
2,353
2,117,270
8,498
$
35,095
95,732
465,709
4,830
1,383,605
6,432
10,123
1.55
1.54
56,829
130,810
310,539
3,504
960,355
5,506
$
8,279
1.31
1.30
31,707
52,985
261,017
897
725,876
5,963
2,563,954
2,108,772
1,377,173
954,849
719,913
153,437
11
1,217
4,061,716
3,123,447
464,676
3,605,775
455,941
301,276
115,645
17
1,260
3,170,509
2,382,013
401,652
2,796,365
374,144
257,222
63,589
23
2,192,192
1,630,451
293,909
1,934,228
257,964
194,352
19,679
29
1,585,727
1,215,914
194,064
1,418,494
167,233
131,153
19,237
1,174,515
981,177
70,370
1,056,786
117,729
82,133
0.84%
7.03%
9.81%
5.43%
0.79%
0.55%
5.55%
6.75%
4.98%
0.65%
0.75%
8.19%
9.66%
5.31%
0.55%
0.78%
7.30%
9.99%
5.63%
0.49%
1.00%
8.52%
13.43%
5.74%
1.15%
52
Net interest margin
Efficiency ratio*
Non-interest income / average assets
Non-interest expense / average
assets
Capital Ratios
Tier 1 Leverage Ratio
Common Equity Tier 1 Capital
Ratio
Tier 1 Risk Based Capital Ratio
Total Risk Based Capital Ratio
Equity / Assets
Book value per share
Tangible book value per share*
Tangible common equity to
tangible assets*
3.81%
60.14%
0.55%
3.83%
61.39%
0.63%
3.30%
66.67%
0.61%
3.65%
66.94%
0.71%
3.92%
72.67%
0.75%
2.62%
2.74%
2.74%
2.81%
3.08%
8.60%
10.33%
11.81%
9.47%
9.62%
11.02%
11.52%
11.92%
11.23%
28.87
19.08
$
$
11.56%
12.17%
12.54%
11.80%
25.62
17.61
$
$
13.34%
14.25%
14.67%
11.77%
22.09
16.64
$
$
12.35%
13.85%
14.35%
10.55%
18.37
15.97
$
$
N/A
13.16%
13.86%
10.02%
16.71
13.54
$
$
7.71%
8.42%
9.13%
8.37%
7.11%
*Indicates non-GAAP financial measure. Please see Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations Non-GAAP Financial Measures for reconciliation to the most directly comparable GAAP measure.
53
Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysisyy
of our financial condition and results of operations should be read in conjunction with
our audited consolidated financial statementstt and the accompanying notes included elsewhere in thisii Annual Report on Form 10-K.
The following discussion contains forward-looking
performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary
from actual results and the differences
see the risk factors and other cautionary statements described under the heading Item
Annual Report on Form 10-K. We do not undertakekk any obligation to publicly update any forward-looking statements except as
otherwise required by applicable law.
can be material. See Cautionary Statement Regarding Forward-Looking Statements. Also,
statements that reflect our future plans, estimates, beliefs and expected
1A Risk Factors included in Item 1A of this
ff
This discussion and analysis of our financial condition and results of operation includes the following sections:
Overview
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
a
Resources an analysis of our cash flows and capital position; and
Non-GAAP Financial Measures 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
t
49 full service branches located in Arkansas, Kansas, Missouri and Oklahoma, as of December 31, 2018. As of December 31, 2018,
we had, on a consolidated basis, total assets of $4.06 billion, total deposits of $3.12 billion, total loans held for investment of $2.56
billion (net of allowances) and total stockholders equity of $455.9 million. Net income for the year ended December 31, 2018 was
$35.8 million compared to $20.6 million for the prior year ended December 31, 2017, an increase of $15.2 million, or 73.5%.
of
History and Background
From 2003 through 2018, we completed a series of sixteen acquisitions and two charter consolidations. We seek to integrate the
banks we acquire into our existing operational platform and enhance stockholder value through the creation of efficiencies within the
combined operations. In conjunction with our strategic acquisition growth, we strive to reposition and improve the loan portfolio and
deposit mix of the banks we acquire. Following our acquisitions, we focus on identifying and disposing of problematic loans and
replacing them with higher quality loans generated organically. In addition, we concentrate on growth in our commercial loan
portfolio, which we believe generally offers higher return opportunities than our consumer loan portfolio, primarily by hiring
additional talented bankers, particularly in our metropolitan markets, and incentivizing our bankers to expand their commercial
banking relationships. We also seek to increase our most attractive deposit accounts primarily by growing deposits in our community
markets and cross-selling our depository products to our loan customers.
Our principal objective is to continually increase stockholder value and generate consistent earnings growth by expanding our
commercial banking franchise both organically and through strategic acquisitions. We believe our strategy of selectively acquiring
and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. We expect
to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition
opportunities. We are also focused on continuing to grow organically and believe the markets in which we operate currently provide
meaningful opportunities to expand our commercial customer base and increase our current market share. We believe our geographic
footprint, which is strategically split between growing metropolitan markets, such as Kansas City, Tulsa and Wichita, and stable
community markets within Western Kansas, Western Missouri, Topeka, Northern Arkansas and Northern Oklahoma, provides us with
access to low cost stable core deposits in community markets that we can use to fund commercial loan growth in our metropolitan
markets. We strive to provide an enhanced banking experience for our customers by providing them with a comprehensive suite of
sophisticated banking products and services tailored to meet their needs, while delivering the high-quality relationship-based customer
service of a community bank.
54
Highlights for the Year Ended December 31, 2018
•
•
•
•
•
•
Net income allocable to common stockholders of $35.8 million for the year ended December 31, 2018, compared to $20.6
million for the year ended December 31, 2017, a 73.5% increase.
Total loans held for investment of $2.58 billion at December 31, 2018, compared to $2.12 billion at December 31, 2017,
an increase of $458.1 million, or 21.6%.
Total deposits of $3.12 billion at December 31, 2018, compared to $2.38 billion at December 31, 2017, an increase of
$741.4 million, or 31.1%.
Total assets of $4.06 billion at December 31, 2018, compared to $3.17 billion at December 31, 2017, an increase of
$891.2 million, or 28.1%.
Book value per common share of $28.87 at December 31, 2018, compared to $25.62 at December 31, 2017, an increase of
$3.25, or 12.7%.
Tangible book value per common share of $19.08 at December 31, 2018, compared to $17.61 at December 31, 2017, an
increase of $1.47, or 8.3%.
We completed our merger with Kansas Bank Corporation (KBC) of Liberal, Kansas on May 4, 2018. KBC had total assets of
$336.1 million, net loans of $159.4 million and total deposits of $288.4 million. Also on May 4, 2018, we completed our merger with
Adams Dairy Bancshares, Inc. (Adams) of Blue Springs, Missouri. Adams had total assets of $119.8 million, net loans of $82.7
million and total deposits of $97.1 million. On August 23, 2018, we completed the merger of City Bank and Trust (City Bank) of
Guymon, Oklahoma, with Equity Bank. City Bank had total assets of $163.3 million, net loans of $77.1 million and total deposits of
$126.9 million.
Critical Accounting Policies
Our significant accounting policies are integral to understanding the results reported. Our accounting policies are described in
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Notes to
Consolidated Financial Statements. 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 previous 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
acquisition date fair value, such that there is no carryover of the sellers 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 loans 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 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.
55
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
loans 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.
t
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
rr
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 borrowers 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
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 forff
allowance is available for any loan that, in managements judgment, should be charged off.
about specific borrower situations and estimated collateral values,
specific loans, but the entire
ff
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 loans 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 loans 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: 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: 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 indefiff nite useful lifeff .
r
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.
56
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.
Results of Operations
We generate most of our revenue from interest income and feff es 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.
Changes in interest rates earned on interest-earning assets or incurred on interest-bearing liabilities, as well as the volume and
types of interest-earning assets, interest-bearing and non-interest-bearing liabilities and stockholders equity, are usually the largest
drivers of periodic change in net interest income. Fluctuations in interest rates are driven by many factors, including governmental
monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and
international circumstances and domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan
portfolio are affected by, among other factors, economic and competitive conditions in Arkansas, Kansas, Missouri and Oklahoma, as
well as developments affecting the consumer, commercial and real estate sectors within these markets.
Net Income
Year ended December 31, 2018 compared with year ended December 31, 2017
Net income for the year ended December 31, 2018 was $35.8 million compared to $20.6 million for year ended December 31,
2017. Net income allocable to common stockholders was $35.8 million for the year ended December 31, 2018, compared to $20.6
million for the year ended December 31, 2017, an increase of $15.2 million, or 73.5%. During the year ended December 31, 2018,
increases in net interest income of $38.8 million and non-interest income of $4.3 million were partially offset by $26.9 million in
higher non-interest expenses and an increase of $1.0 million in the provision for loan loss when compared to the year ended
December 31, 2017. The changes in the components of net income are discussed in more detail in the following sections of Results
of Operations.
Year ended December 31, 2017 compared with year ended December 31, 2016
Net income for the year ended December 31, 2017 was $20.6 million compared to $9.4 million for year ended December 31,
2016. Net income allocable to common stockholders was $20.6 million for the year ended December 31, 2017, compared to $9.4
million for the year ended December 31, 2016, an increase of $11.3 million, or 120.3%. During the year ended December 31, 2017,
increases in net interest income of $33.4 million and non-interest income of $5.0 million were partially offset by $20.4 million in
higher non-interest expenses and an increase of $834 thousand in the provision for loan loss when compared to the year ended
December 31, 2016. 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.
57
The following table shows the average balance of each principal category of assets, liabilities, and stockholders equity and thet
average yields on interest-earning assets and average rates on interest-bearing liabilities
for the years ended December 31, 2018, 2017
and 2016. The yields and rates are calculated by dividing income or expense by the average daily balances of the associated assets or
liabilities.
a
Average Balance Sheets and Net Interest Analysis
December 31, 2018
December 31, 2017
December 31, 2016
Average
Outstanding
Balance
Interest
Income/
Expense
Average
Yield/
Rate(3)(4)
Average
Outstanding
Balance
Interest
Income/
Expense
Average
Yield/
Rate(3)(4)
Average
Outstanding
Balance
Interest
Income/
Expense
Average
Yield/
Rate(3)(4)
$ 2,388,509 $137,048
17,943
4,089
2,476
3,272,045 $161,556
671,817
134,038
77,681
5.74% $ 1,576,364 $ 85,662
12,308
510,165
2.67%
3,375
111,242
3.05%
1,348
47,937
3.19%
4.94% 2,245,708 $102,693
5.43% $ 1,009,918 $50,272
8,111
382,616
2.41%
1,654
59,735
3.03%
1,762
140,415
2.81%
4.57% 1,592,684 $61,799
4.98%
2.12%
2.77%
1.25%
3.88%
(Dollars in thousands)
Interest-earning assets
Loans(1)
Taxable securities
Nontaxable securities
Federal funds sold and other
Total interest-earning assets
Non-interest-earning assets
Other real estate owned, net
Premises and equipment, net
Bank-owned life insurance
Goodwill and core deposit intangible, net
Other non-interest-earning assets
Total assets
7,071
72,390
71,041
139,131
37,235
$ 3,598,913
8,968
55,299
49,409
76,320
26,315
$ 2,462,019
6,167
40,800
33,415
25,749
18,397
$ 1,717,212
Interest-bearing liabilities
Interest-bearing demand deposits
Savings and money market
Savings, NOW and money market
Certificates of deposit
Total interest-bearing deposits
FHLB term and line of credit advances
Bank stock loan
Subordinated borrowings
Other borrowings
Total interest-bearing liabilities
Non-interest-bearing liabilities and
stockholders equity
$
602,506 $
798,820
1,401,326
836,298
2,237,624
430,490
14,241
14,107
43,714
4,623
8,060
12,683
13,004
25,687
9,039
731
1,187
114
2,740,176 $ 36,758
2,299
452,652 $
0.77% $
2,781
501,386
1.01%
5,080
954,038
0.91%
7,642
1.56%
647,998
12,722
1.15% 1,602,036
2,909
258,951
2.10%
16
5.13%
356
980
13,820
8.41%
0.26%
64
25,823
1.34% 1,900,986 $ 16,691
890
314,515 $
0.51% $
1,317
317,394
0.55%
2,207
631,909
0.53%
4,835
1.18%
453,045
7,042
0.79% 1,084,954
1,400
250,282
1.12%
31
989
4.48%
671
9,948
7.09%
0.25%
58
22,599
0.88% 1,368,772 $ 9,202
Non-interest-bearing checking accounts
Non-interest-bearing liabilities
Stockholders equity
Total liabilities and stockholders equity
426,410
11,874
420,453
$ 3,598,913
257,346
9,889
293,798
$ 2,462,019
169,514
10,103
168,823
$ 1,717,212
Net interest income
Interest rate spread
Net interest margin(2)
Total cost of deposits, including
non-interest bearing deposits
Average interest-earning assets to
interest-bearing liabilities
$124,798
$ 86,002
$52,597
3.60%
3.81%
3.69%
3.83%
$ 2,664,034 $ 25,687
0.96% $ 1,859,382 $ 12,722
0.68% $ 1,254,468 $ 7,042
0.56%
119.41%
118.13%
116.36%
0.28%
0.41%
0.35%
1.07%
0.65%
0.56%
3.09%
6.74%
0.26%
0.67%
3.21%
3.30%
(1)
(2)
(3)
(4)
Average loan balances include nonaccrual loans, hedge fair value adjustments and merger fair value adjustments.
Net interest margin is calculated by dividing net interest income by average interest-earning
assets for the period.
Tax exempt income is not included in the above table on a tax equivalent basis.
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.
rr
58
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 year ended December 31, 2018 as compared to the year ended
December 31, 2017, and the year ended December 31, 2017 as compared to the year ended December 31, 2016.
Analysis of Changes in Net Interest Income
(Dollars in thousands)
Interest-earning assets
Loans
Taxable securities
Nontaxable securities
Federal funds sold and other
Total interest-earning assets
Interest-bearing liabilities
Savings, NOW and money market
Certificates of deposit
Total interest-bearing deposits
FHLB term and line of credit advances
Bank stock loan
Subordinated borrowings
Other borrowings
Total interest-bearing liabilities
Net Interest Income
2018 vs. 2017
Increase (Decrease) Due to:
2017 vs. 2016
Increase (Decrease) Due to:
Volume(1)
Yield/Rate(1)
Total
Volume(1)
Yield/Rate(1)
Total
$
$
$
$
$
46,358
4,212
696
928
52,194
3,131
2,558
5,689
2,652
712
21
47
9,121
43,073
$
$
$
$
$
5,028
1,423
18
200
6,669
$
$
$
4,472
2,804
7,276
3,478
3
186
3
10,946
$
(4,277) $
51,386
5,635
714
1,128
58,863
7,603
5,362
12,965
6,130
715
207
50
20,067
38,796
$
$
$
$
$
30,418
2,968
1,549
(1,659)
33,276
1,427
2,256
3,683
50
(25)
273
8
3,989
29,287
$
$
$
$
$
4,972
1,229
172
1,245
7,618
1,446
551
1,997
1,459
10
36
(2)
3,500
4,118
$
$
$
$
35,390
4,197
1,721
(414)
40,894
2,873
2,807
5,680
1,509
(15)
309
6
7,489
33,405
(1)
The effect of changes in volume is determined by multiplying the change in volume by the previous years average rate.
Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior years 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.
Year ended December 31, 2018 compared with year ended December 31, 2017
The increase in net interest income before the provision for loan losses is primarily due to the increase in the volume of interest-
earnings assets and to a lesser extent an increase in yields on interest-earning assets. The increase in average volume of interest-
earning assets was primarily due to increases in loans and investment securities. The increase in interest expense was primarily due to
an increase in the average rates and volume of interest bearing liabilities incurred to fund the increased volume of interest-earning
assets.
The increase in loan interest income was driven by the increase in average loan volume and a 31 basis point increase in yield on
the loan portfolio from 5.43% for the year ended December 31, 2017 to 5.74% for the year ended December 31, 2018. The impact to
net interest income from loan fees for the year ended December 31, 2018, was $6.5 million compared to $3.5 million for the year
ended December 31, 2017.
Average balances of borrowings from the FHLB increased by $171.5 million from an average balance of $259.0 million for the
year ended December 31, 2017 to an average balance of $430.5 million for the year ended December 31, 2018, resulting in an increase
in interest expense of $6.1 million. Interest expense on our bank stock loan for the year ended December 31, 2018 was $731 thousand
compared to $16 thousand for the year ended December 31, 2017. Total cost of interest-bearing liabilities increased 46 basis points to
1.34% for the year ended December 31, 2018 from 0.88% for the year ended December 31, 2017.
The decrease in net interest margin is largely due to the cost of interest-bearing liabilities rising at a faster rate than interest-
earning assets. The increase in cost of funds is primarily from the increase in cost of both retail and public fund deposits. The cost of
retail deposits increased as the general level of interest rates rose and due to an increased level of market competition for these
deposits, which are more desirable due to lower interest rate sensitivity. The cost of public fund deposits increased due to the level of
competition from other financial institutions and state investment funds and due to the timing of the investment of these funds in an
elevated interest rate environment.
59
Year ended December 31, 2017 compared with year ended December 31, 2016
The increase in net interest income is primarily due to the increase in the volume of interest-earnings assets and to a lesser extent
an increase in yields on interest-earning assets. The increase in average volume of interest-earning assets was primarily due to
increases in loans and investment securities partially offset by a decrease in Federal funds sold and other. The increase in interest
expense was primarily due to an increase in the average volume and rates of interest bearing liabilities incurred to fund the increased
volume of interest-earning assets.
The increase in loan interest income was driven by the increase in average loan volume and a 45 basis point increase in yield on
the loan portfolio from 4.98% for the year ended December 31, 2016 to 5.43% for the year ended December 31, 2017. The impact to
net interest income from loan fees for the year ended December 31, 2017 was $3.5 million compared to $2.4 million for the year
ended December 31, 2016.
Average balances of borrowings from the FHLB increased by $8.7 million from an average balance of $250.3 million for the
year ended December 31, 2016 to an average balance of $259.0 million for the year ended December 31, 2017, resulting in an increase
in interest expense of $1.5 million. Interest expense on our bank stock loan for the year ended December 31, 217 was $16 thousand
compared to $31 thousand for the year ended December 31, 2016. Total cost of interest-bearing liabilities increased 21 basis points to
0.88% for the year ended December 31, 2017 from 0.67% for the year ended December 31, 2016.
The increase in net interest margin during 2017 is largely due to the increase in overall yield on interest earnr ing assets. Also,
during the first nine months of 2016, we utilized a leverage or spread opportunity. The spread opportunity involved 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 decrease in net interest margin of 0.21% for 2016. We
terminated the spread opportunity at September 30, 2016. These changes for the year ended December 31, 2017 resulted in an
increase in net interest income of $33.4 million, an increase in average interest-earning assets of $653.0 million and an increase in net
interest margin of 53 basis points.
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.
Year ended December 31, 2018 compared with year ended December 31, 2017
The increased provision of $1.0 million was primarily related to the overall increase in volume in our loan portfolio during
2018. Net charge-offs for the year ended December 31, 2018 were $1.0 million compared to net charge-offs of $887 thousand for the
year ended December 31, 2017. For the year ended December 31, 2018, gross charge-offs were $3.8 million offset by gross
recoveries of $2.8 million. In comparison, gross charge-offs were $2.1 million for the year ended December 31, 2017 offset by gross
recoveries of $1.2 million.
Year ended December 31, 2017 compared with year ended December 31, 2016
The increased provision of $834 thousand was primarily related to the overall increase in volume in our loan portfolio during
2017. Net charge-offs for the year ended December 31, 2017 were $887 thousand compared to net charge-offs of $1.2 million for the
year ended December 31, 2016. For the year ended December 31, 2017, gross charge-offs were $2.1 million offset by gross
recoveries of $1.2 million. In comparison, gross charge-offs were $1.7 million for the year ended December 31, 2016 offset by gross
recoveries of $527 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, investment referral income, the recovery of zero-basis purchased loans, and net
gains on the sale of available-for-sale securities and other securities transactions. Non-interest income does not include loana
origination or other loan fees which are recognized as an adjustment to yield using the interest method.
60
The following table provides a comparison of the major components of non-interest income for the years ended December 31,
2018, 2017 and 2016.
(Dollars in thousands)
Service charges and fees
Debit card income
Mortgage banking
Increase in value of bank-owned life
$
insurance
Investment referral income
Recovery on zero-basis
purchased loans
Other
Sub-Total
Net gains on sales and settlement
of securities
Total non-interest income
Non-Interest Income
For the Years Ended December 31,
2018
2017
2016
Change
%
Change
%
2018 vs. 2017
2017 vs. 2016
$
7,250
6,178
1,298
2,199
395
420
1,994
19,734
$
5,319
4,547
1,955
1,445
353
319
1,231
15,169
3,610
2,898
1,394
1,000
418
102
565
9,987
$
1,931
1,631
(657)
36.3% $
35.9%
(33.6)%
1,709
1,649
561
47.3%
56.9%
40.2%
754
42
101
763
4,565
52.2%
11.9%
31.7%
62.0%
30.1%
445
(65)
44.5%
(15.6)%
217
666
5,182
212.7%
117.9%
51.9%
(9)
19,725
$
271
15,440
$
479
10,466
$
$
(280)
4,285
(103.3)%
27.8% $
(208)
4,974
(43.4)%
47.5%
Year ended December 31, 2018 compared with year ended December 31, 2017
The increase in non-interest income was primarily due to increases in service charges and fees, debit card income, other,
recovery on zero-basis purchased loans and increase in value of bank owned life insurance partially offset by decreases in mortgage
banking fees and net gains on sales of and settlement of securities. Service charges and fees increased $1.9 million during the twelve
months ended December 31, 2018, as compared to the same time period during 2017, mainly due to an increase in non-sufficient fund
charges. Debit card income was $6.2 million for the year ended December 31, 2018, an increase of $1.6 million, or 35.9%, from $4.5
million for the year ended December 31, 2017. Mortgage banking decreased largely due to a decrease in proceeds received from
investors on the sale of mortgage loans. In connection with acquisitions, we received 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 the acquisitions, we have received cash payments on several of these
loans. No interest has been accruedrr
loans totaled $420 thousand and $319 thousand for the years ended December 31, 2018 and 2017.
as cash flow payments have not been expected prior to receipt. Cash receipts on these zero-basis
Year ended December 31, 2017 compared with year ended December 31, 2016
The increase in non-interest income was primarily due to increases in service charges and fees, debit card income, other,
mortgage banking income, increase in value of bank owned life insurance and recovery on zero-basis purchased loans partially offset
by decreases in net gains on sales of and settlement of securities and investment referral income. Service charges and fees increased
$1.7 million during the twelve months ended December 31, 2017, as compared to the same time period during 2016, mainly due to an
increase in non-sufficient fund charges. Debit card income was $4.5 million for the year ended December 31, 2017, an increase of
$1.6 million, or 56.9%, from $2.9 million for the year ended December 31, 2016. Mortgage banking increased largely due to an
increase in proceeds received from investors on the sale of mortgage loans. In connection with acquisitions, we received 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 the acquisitions, we have received
cash payments on several of these loans. No interest has been accrued as cash flow payments have not been expected prior to receipt.
Cash receipts on these zero-basis loans totaled $319 thousand and $102 thousand for the years ended December 31, 2017 and 2016.
For the year ended December 31, 2017 gains on sales of and settlement of securities amounted to $271 thousand. For the year ended
December 31, 2016 gains on sales of and settlement of securities amounted to $893 thousand. During 2016, the Company recorded an
other-than-temporary impairment loss in the amount of $414 thousand, resulting in a net gain on sales of and settlement of securities
of $479 thousand. The impairment loss reflected the difference between the amortized cost of the Companys investment in
AgriBanks 9.125% subordinated notes, due July 2019 and the faff ir value attributed to AgriBanks redemption call of those notes.
ff
61
Non-Interest Expense
The following table provides a comparison of the major components of non-interest expense for the years ended December 31,
2018, 2017 and 2016.
Non-Interest Expense
For the Year Ended December 31,
(Dollars in thousands)
Salaries and employee benefits
Net occupancy and equipment
Data processing
Professional fees
Advertising and business development
Telecommunications
FDIC insurance
Courier and postage
Free nationwide ATM expense
Amortization of core deposit
intangibles
Loan expense
Other real estate owned
Other
Sub-Total
Merger expenses
Loss on extinguishment of debt
Total non-interest expense
$
$
2018
48,018
8,126
8,094
3,402
3,002
1,775
1,536
1,183
1,355
2,443
1,005
(71)
7,057
86,925
7,462
94,387
$
$
2017
33,960
6,305
4,927
2,363
2,105
1,191
945
935
932
1,025
993
523
5,907
62,111
5,352
67,463
2016
21,951
4,586
3,568
2,075
1,198
1,101
894
683
672
413
599
386
3,597
41,723
5,294
58
47,075
$
$
2018 vs. 2017
2017 vs. 2016
Change
%
Change
%
$
$
14,058
1,821
3,167
1,039
897
584
591
248
423
1,418
12
(594)
1,150
24,814
2,110
26,924
41.4% $
28.9%
64.3%
44.0%
42.6%
49.0%
62.5%
26.5%
45.4%
138.3%
1.2%
(113.6)%
19.5%
40.0%
39.4%
%
39.9% $
12,009
1,719
1,359
288
907
90
51
252
260
612
394
137
2,310
20,388
58
(58)
20,388
54.7%
37.5%
38.1%
13.9%
75.7%
8.2%
5.7%
36.9%
38.7%
148.2%
65.8%
35.5%
64.2%
48.9%
1.1%
(100.0)%
43.3%
Year ended December 31, 2018 compared with year ended December 31, 2017
This increase in non-interest expense was primarily due to increases in salaries and employee benefits of $14.1 million, data
processing of $3.2 million, merger expenses of $2.1 million, net occupancy and equipment of $1.8 million, amortization of core
deposit intangible of $1.4 million, other of $1.2 million and professional fees of $1.0 million. These items and other changes in the
various components of non-interest expense are discussed in more detail below.
e
Salaries and employee benefits:
There was a $14.1 million increase in salaries for year ended December 31, 2018 as compared
to year ended December 31, 2017. This increase reflects the full year effect of the addition of staff related to the March 2017 Prairie
State Bancshares, Inc. (Prairie) merger; the addition of staff related to the November 2017 Eastman National Bancshares, Inc.
(Eastman) and Cache Holdings, Inc. (Cache) mergers; the May 2018 addition of staff related to the mergers with KBC and
Adams; the August 2018 addition of staff related to the merger with City Bank, as well as additions to corporate and operations staff
indirectly attributable to acquisitions and our growth. In addition, during the same time period, there was an increase in benefits cost
of $1.1 million. Included in salaries and employee benefits is share-based compensation expense of $2.3 million for the year ended
December 31, 2018 and $552 thousand for the year ended December 31, 2017, largely attributable to organic and acquired growth.
Net occupancy and equipment: Net occupancy and equipment includes expenses related to the use of premises and equipment,
such as depreciation, operating lease payments, repairs and maintenance, insurance, property taxes and utilities, net of incidental rental
income of excess facilities. The majority of the increase is due to a full year of expenses related to the mergers with Prairie, Eastman
and Cache and the subsequent addition of eight branch locations. In addition, due to the mergers of KBC, Adams and City Bank,
there were six additional branches added in May 2018 and one additional branch added in August 2018.
Data processing: The increase was principally due to increased debit card processing costs as usage increased and software
license expense.
Professional fees: The increase of $1.0 million, or 44.0%, principally is due to an increase in legal fees of $415 thousand,
accounting fees of $250 thousand and consulting fees of $243 thousand.
62
Other real estate owned: As detailed in NOTE 5 OTHER REAL ESTATE OWNED in the Notes to Consolidated Financial
Statements other real estate owned expenses, including provision for unrealized losses and loss on sale of other real estate were $849
thousand for the year ended December 31, 2018. For the year ended December 31, 2017, other real estate owned expenses, including
provision for unrealized losses were $644 thousand offset by gains on the sale of other real estate owned of $121 thousand.
Other: Other non-interest expenses consist of subscriptions; memberships and dues; employee expenses including travel, meals,
entertainment and education; supplies; printing; insurance; account related losses; correspondent bank fees; customer program
expenses; losses net of gains on the sale of fixed assets; losses net of gains on the sale of repossessed assets other than real estate; and
other operating expenses such as settlement of claims.
Merger expenses: Merger expenses include legal, advisory and accounting fees associated with services to facilitate the
acquisition of other banks. Merger expenses also include data processing conversion costs and costs associated with the integration of
personnel, processes, facilities and employee bonuses. For the year ended December 31, 2018, merger expenses of $4.4 million are
related to the KBC merger, $1.2 million are related to the Adams merger and $1.4 million are related to the City Bank merger. For the
year ended December 31, 2017, merger expenses of $926 thousand are related to the Prairie merger, $2.9 million are related to the
Eastman merger and $1.5 million are related to the Cache merger.
Year ended December 31, 2017 compared with year ended December 31, 2016
This increase in non-interest expense was primarily due to increases in salaries and employee benefits of $12.0 million, other of
$2.3 million, net occupancy and equipment of $1.7 million, data processing of $1.4 million, advertising and business development of
$907 thousand and amortization of core deposit intangible of $612 thousand. These items and other changes in the various
components of non-interest expense are discussed in more detail below.
Salaries and employee benefits:
e
There was a $8.4 million increase in salaries for year ended December 31, 2017 as compared to
year ended December 31, 2016, which reflects the full year effect of the Community First merger, the March 2017 addition of staff
related to the merger with Prairie, the November 2017 addition of staff related to the mergers with Eastman and Cache, as well as
additions to corporate and operations staff indirectly attributable to acquisitions and our growth. In addition, during the same time
period, there was an increase in benefits cost of $1.1 million. Included in salaries and employee benefits is share-based compensation
expense of $552 thousand in the year ended December 31, 2017 and $268 thousand for the year ended December 31, 2016.
Net occupancy and equipment: Net occupancy and equipment includes expenses related to the use of premises and equipment,
such as depreciation, operating lease payments, repairs and maintenance, insurance, property taxes and utilities, net of incidental rental
income of excess facilities. The majority of the increase is due to a full year of expenses related to the acquisition of Communitm y First
and the subsequent addition of five branches in Northern Arkansas. In addition, due to the acquisitions of Prairie, Eastman and Cache,
there were three additional branches added in March 2017 and five additional branches added in November 2017.
Data processing: The increase was principally due to increased debit card processing costs as usage increased.
Professional fees: The increase of $288 thousand, or 13.9%, principally is due to an increase in consulting fees of $130
thousand, legal fees of $110 thousand and regulatory assessments of $60 thousand partially offset by a decrease in accounting fees of
$12 thousand.
Other real estate owned: As detailed in NOTE 5 OTHER REAL ESTATE OWNED in the Notes to Consolidated Financial
Statements other real estate owned expenses, including provision for unrealized losses were $644 thousand for the year ended
December 31, 2017, offset by gains on the sale of other real estate owned of $121 thousand. For the year ended December 31, 2016
other real estate owned expenses, including provision for unrealized losses were $542 thousand offset by gains on the sale of other real
estate owned of $156 thousand.
Other: Other non-interest expenses consist of subscriptions; memberships and dues; employee expenses including travel, meals,
entertainment and education; supplies; printing; insurance; account related losses; correspondent bank fees; customer program
expenses; losses net of gains on the sale of fixed assets; losses net of gains on the sale of repossessed assets other than real estate; and
other operating expenses such as settlement of claims.
Merger expenses: Merger expenses include legal, advisory and accounting fees associated with services to facilitate the
acquisition of other banks. Merger expenses also include data processing conversion costs and costs associated with the integration of
personnel, processes, facilities and employee bonuses. For the year ended December 31, 2017, merger expenses of $926 thousand are
related to the Prairie merger, $2.9 million are related to the Eastman merger and $1.5 million are related to the Cache merger. For the
63
year ended December 31, 2016, merger expenses of $4.6 million are related to the Community First merger and $678 thousand are
related to the Prairie merger.
Loss on extinguishment of debt: In the first quarter of 2016, we repaid our bank stock loan and wrote off the deferred debt
issuance costs associated with this loan resulting in a $58 thousand loss on debt extinguishment.
Efficiency Ratio
The efficiency ratio is a supplemental financial measure utilized in the internal evaluation of our performance and is not defined
under GAAP. Our efficiency ratio is computed by dividing non-interest expense, excluding merger expenses and loss on debt
extinguishment by the sum of net interest income and non-interest income, excluding net gains on sales of and settlement of securities
and gain on acquisition. Generally, an increase in the efficff
same volume of income, while a decrease would indicate a more efficient allocation of resources. The ratio defined under GAAP that
is most comparable to the efficiency ratio is non-interest expense to net interest income plus non-interest income which is discussed in
Results of Operations Non-GAAP Financial Measures.
iency ratio indicates that more resources are being utilized to generate the
The Companys non-interest expense to net interest income plus non-interest income improved from year ended December 31,
2017 to December 31, 2018 primarily due to increased net interest income and non-interest income, partially offset by increased non-
interest expense as discussed in Results of Operations Non-GAAP Financial Measures. The efficiency ratio improved during the
same time period due to increased net interest income and non-interest income as discussed in Results of Operations Net Interest
Income and Net Interest Margin Analysis and Results of Operations Non-Interest Income.
Improvement in the Companys non-interest expense to net interest income plus non-interest income when comparing year
ended December 31, 2017 to year ended December 31, 2016 was primarily due to increased net interest income and non-interest
income, partially offset by increased non-interest expense as discussed in Results of Operations Non-GAAP Financial Measures.
The improvement in the efficiency ratio from year ended December 31, 2016 to December 31, 2017 was primarily due to increased
net interest income and non-interest income as discussed in Results of Operations Net Interest Income and Net Interest Margin
Analysis and Results of Operations Non-Interest Income.
Income Taxes
The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income, the
amount non-deductible expenses and available tax credits.
Year ended December 31, 2018 compared with year ended December 31, 2017
The effective income tax rate for the year ended December 31, 2018 was 22.4% as compared to the U.S. statutory rate of 21.0%.
The effective income tax rate for the year ended December 31, 2017 was 33.5% as compared to the U.S. statutory rate of 35.0%. As
detailed in NOTE 15 INCOME TAXES in the Notes to Consolidated Financial Statements, the income tax rates differed from the
U.S. statutory rates primarily due to non-taxable income, non-deductible expenses and tax credits. The 2017 provision for income
taxes also includes a fourth quarter charge of $1.1 million related to Tax Reform. In 2017, the reduction of the U.S. statutoryrr
from 35% to 21%, provided for by Tax Reform, resulted in the re-measurement of the Companys net deferred tax assets.
tax rate
Year ended December 31, 2017 compared with year ended December 31, 2016
The effective income tax rates for the years ended December 31, 2017 and 2016 were 33.5% and 32.4%, as compared to the
U.S. statutory rate of 35.0%. The income tax rate differed from the U.S. statutory rate primarily due to non-taxable income, non-
deductible expenses and tax credits. In addition, beginning with the first quarter 2017 adoption of ASU 2016-09, Improvements to
Employee Share-Based Payment Accounting, excess tax benefits, generated when the tax return deductible compensation expense
exceeds cumulative compensation cost recognized for financial reporting purposes, have been recorded in the period in which they
occur. Prior to adoption of ASU 2016-09, excess tax benefits associated with the exercise of stock options were recognized as
additional paid in capital. The 2017 provision for income taxes also includes a fourth quarter charge of $1.1 million related to Tax
Reform. The reduction of the U.S. statutory tax rate from 35% to 21%, provided for by Tax Reform, resulted in the re-measurement
of the Companys net deferred tax assets.
64
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this annual report have been prepared in
accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars,
without considering changes in the relative value of money over time due to inflff ation or recession.
Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates
have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily
move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do
reflect general levels of inflation.
Overview
Financial Condition
Our total assets increased $891.2 million, or 28.1%, from $3.17 billion at December 31, 2017, to $4.06 billion at December 31,
2018. The increase in total assets was primarily from increases in net loans of $455.2 million, $219.5 million in investment securities,
$140.6 million in cash and cash equivalents and $26.8 million in goodwill. Included in the above
Adams and City Bank, which totaled $336.1 million, $119.8 million and $163.3 million at the time of such mergers. Our total
liabilities increased $809.4 million, or 28.9%, from $2.80 billion at December 31, 2017 to $3.61 billion at December 31, 2018. The
increase in total liabilities was primarily from increases in total deposits of $741.4 million and FHLB advances of $37.2 million. Our
total stockholders equity increased $81.8 million, or 21.9%, from $374.1 million at December 31, 2017 to $455.9 million at
December 31, 2018.
changes are the assets of KBC,
a
Loan Portfolio
Loans are our largest category of earning assets and typically provide higher yields than other types of earning assets.
Excluding acquisitions of KBC, Adams and City Bank, gross loans held for investment increased by $138.9 million, or 6.6%,
compared with December 31, 2017. Overall growth consisted of $326.2 million, or 71.2%, from commercial real estate, $67.8
million, or 14.8%, from residential real estate, $61.0 million, or 13.3%, from commercial and industrial,
agricultural real estate, and $13.5 million, or 3.0%, from consumer, partially offset by a reduction of $61.8 million, or 13.5%, from
real estate construction and $1.4 million, or 0.3%, from agricultural. We also had an increase in loans classified as held for sale of
$619 thousand, or 26.3%, from December 31, 2017 to December 31, 2018.
$52.8 million, or 11.5%, from
d
Our loan portfolio consists of various types of loans, most of which are made to borrowers located in the Wichita, Kansas City
and Tulsa MSAs, as well as various community markets throughout Arkansas, Kansas, Missouri and Oklahoma. Although the
portfolio is diversified and generally secured by various types of collateral, the majority of our loan portfolio consists of commercial
and industrial and commercial real estate loans and a substantial portion of our borrowers ability to honor their obligations is
dependent on local economic conditions in Arkansas, Kansas, Missouri and Oklahoma. As of December 31, 2018, there was no
exceeding 10% of total loans.
concentration of loans to any one type of industry
d
At December 31, 2018, gross total loans were 82.5% of deposits and 63.4% of total assets. At December 31, 2017, gross total
loans were 88.9% of deposits and 66.8% of total assets.
The organic, or non-acquired, growth in our loan portfolio is attributable to our ability to attract new customers from other
t
and overall growth in our markets. Our lending staff has been successful in building banking relationships with
financial institutions
new customers. Several new lenders have been hired in our markets, and these employees have been successful in transitioning their
former clients and attracting new clients. Lending activities originate from the effff orts
of our lenders, with an emphasis on lending to
individuals, professionals, small to medium-sized businesses and commercial companies located in the Wichita, Kansas City and
Tulsa MSAs, as well as community markets in Arkansas, Kansas, Missouri and Oklahoma.
ff
65
The following table summarizes our loan portfolio by type of loan as of the dates indicated.
Composition of Loan Portfolio
2018
2017
December 31,
2016
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
2015
Amount Percent
2014
Amount Percent
$ 582,527
22.6% $ 521,510
24.6% $ 348,465
25.2% $262,032
27.3% $183,100
25.2%
1,127,646
124,346
444,540
139,332
1,835,864
62,894
94,123
43.8% 801,491
4.8% 186,170
17.3% 376,705
5.4%
86,486
71.3% 1,450,852
49,361
2.4%
95,547
3.7%
37.8% 478,815
8.8% 114,293
17.8% 338,387
4.1%
38,331
68.5% 969,826
40,902
2.4%
24,412
4.5%
34.6% 343,096
8.3% 53,921
24.4% 250,216
2.8% 18,180
70.1% 665,413
2.9% 17,103
1.8% 15,807
35.7% 323,676
5.6% 40,420
26.1% 134,455
1.9% 17,083
69.3% 515,634
1.8%
7,875
1.6% 19,267
44.6%
5.6%
18.5%
2.3%
71.0%
1.1%
2.7%
Commercial and industrial
Real estate loans:
Commercial real estate
Real estate construction
Residential real estate
Agricultural real estate
Total real estate loans
Consumer
Agricultural
Total loans held for
investment
$2,575,408 100.0% $2,117,270 100.0% $1,383,605 100.0% $960,355 100.0% $725,876 100.0%
Total loans held for
sale
$
2,972 100.0% $
2,353 100.0% $
4,830 100.0% $
3,504 100.0% $
897 100.0%
Total loans held for
investment (net of
allowances)
$2,563,954 100.0% $2,108,772 100.0% $1,377,173 100.0% $954,849 100.0% $719,913 100.0%
Commercial and industrial: Commercial and industrial loans include loans used to purchase fixed assets, to provide working
capital, or meet other financing needs of the business. Of the $61.0 million in growth during 2018, $19.3 million, or 31.6%, was a
result of loans acquired through KBC, $1.6 million, or 2.6%, was a result of loans acquired through Adams and $8.6 million, or
14.1%, was a result of loans acquired through City Bank. The remainder was a combination of loan originations within our target
markets and changes in the balances of revolving lines of credit, partially offset by reductions of broadly syndicated shared national
credit originations and mortgage finance loan participations.
Commercial real estate: Commercial real estate loans include all loans secured by nonfarm nonresidential properties and by
multifamily residential properties, as well as 1-4 family investment-purpose real estate loans. Of the $326.2 million in growtht during
2018, $96.5 million, or 30.0%, was a result of loans acquired through KBC, $78.2 million, or 24.0%, was a result of loans acquired
through Adams and $18.9 million, or 5.8%, was a result of loans acquired through City Bank. The remainder was a combination of
loan originations within our target market and changes in the balances of revolving lines of credit.
Real estate construction: Real estate construction loans include loans made for the purpose of acquisition, development, or
construction of real property, both commercial and consumer.
Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences. The
acquisitions of KBC, Adams and City Bank added $3.0 million, $5.0 million and $28.5 million in residential real estate loans during
the year ended December 31, 2018. During 2017, we purchased one $14.8 million pool of mortgage loans. Pools of mortgages are
occasionally purchased to expand our loan portfolio and provide additional loan income.
Agricultural real estate, Agricultural, Consumer and other: Agricultural real estate loans are loans related to farmland.
Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural
commodities produced. Consumer loans are generally secured by consumer assets, but may be unsecured. These three loan pools
represent 11.7% of our overall loan portfolio.
66
The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with predetermined interest rates and
floating rates in each maturity range as of December 31, 2018 and December 31, 2017 are summarized in the following
ff
tables.
Loan Maturity and Sensitivity to Changes in Interest Rates
As of December 31, 2018
Commercial and industrial
Real Estate:
Commercial real estate
Real estate construction
Residential real estate
Agricultural real estate
Total real estate
Consumer
Agricultural
Total
Loans with a predetermined fixed interest rate
Loans with an adjustable/floating interest rate
Total
Commercial and industrial
Real Estate:
Commercial real estate
Real estate construction
Residential real estate
Agricultural real estate
Total real estate
Consumer
Agricultural
Total
Loans with a predetermined fixed interest rate
Loans with an adjustable/floating interest rate
Total
Total
$
582,527
1,127,646
124,346
444,540
139,332
1,835,864
62,894
94,123
$ 2,575,408
1,296,865
1,278,543
$ 2,575,408
Total
$
521,510
801,491
186,170
376,705
86,486
1,450,852
49,361
95,547
$ 2,117,270
1,016,151
1,101,119
$ 2,117,270
One year
or less
$
246,601
After one year
After five
through five
years
years
(Dollars in thousands)
203,705
$
$
132,221
173,064
59,816
11,712
50,635
295,227
10,879
71,003
623,710
327,086
296,624
623,710
$
$
609,356
42,144
14,888
46,759
713,147
42,570
19,583
979,005
629,327
349,678
979,005
$
$
345,226
22,386
417,940
41,938
827,490
9,445
3,537
972,693
340,452
632,241
972,693
$
$
As of December 31, 2017
One year
or less
$
189,416
After one year
After five
through five
years
years
(Dollars in thousands)
198,951
$
$
133,143
116,797
76,406
14,852
32,241
240,296
9,113
70,427
509,252
271,132
238,120
509,252
$
$
464,987
76,153
12,788
32,354
586,282
31,997
19,746
836,976
532,308
304,668
836,976
$
$
219,707
33,611
349,065
21,891
624,274
8,251
5,374
771,042
212,711
558,331
771,042
$
$
67
Nonperforming Assets
The following table presents information regarding nonperforming assets at the dates indicated.
Nonperforming Assets
2018
2017
Nonaccrual loans
Accruing loans 90 or more days past due
Restructured loans-accruing
OREO acquired through foreclosure, net
Total nonperforming assets
$ 33,203
18
6,372
$ 39,593
2015
2014
As of December 31,
2016
(Dollars in thousands)
$ 22,693
8,656
$ 31,349
$ 8,197
35
5,811
$ 14,043
$ 40,276
7,907
$ 48,183
$ 10,790
39
4,754
$ 15,583
Ratios:
Nonperforming assets to total assets
Nonperforming assets to total loans plus
OREO
0.97%
1.52%
1.43%
0.89%
1.33%
1.53%
2.27%
2.25%
1.45%
2.13%
Nonperforming assets (NPAs) include loans on nonaccrual status, accruing loans 90 or more days past due, restructured loans,
and other real estate acquired through foreclosure.
The nonperforming loans at December 31, 2018 consisted of 357 separate credits and 243 separate borrowers. We had seven
nonperforming loan relationships each with outstanding balances exceeding $1.0 million as of December 31, 2018. Of the increase in
nonperforming assets, $8.4 million was the direct result of the KBC, Adams and City Bank mergers. There are several procedures in
place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed
by lenders, and also monitor delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan
portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
Potential Problem Loans
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such
as: current financial information, historical payment experience, credit documentation, public information, and current economic
trends, among other factors. Loans are analyzed individually and classified based on credit risk. Consumer loans are considered pass
credits unless downgraded due to payment status or reviewed as part of a larger credit relationship. We use the following definitions
for risk ratings:
Pass: Loans classified as pass do not have any noted weaknesses and repayment of the loan is expected. These loans are
considered unclassified.
Special Mention: Loans classified as special mention have a potential weakness that deserves managements close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit
position at some future date. These loans are considered classified.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected. These loans are considered classified.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable. These loans are considered classified.
Potential problem loans consist of loans that are performing in accordance with contractual
terms, but for which management
has concerns about the borrowers ability to comply with repayment terms because of the borrowers potential financial difficulties.
Potential problem loans are assigned a grade of special mention or substandard. At December 31, 2018, the Company had $52.9
million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $21.1
million at December 31, 2017.
t
68
The risk category of loans by class of loans is as follows for December 31, 2018 and December 31, 2017.
Risk Category of Loans by Class
Commercial and industrial
Real estate:
Commercial real estate
Real estate construction
Residential real estate
Agricultural real estate
Total real estate
Consumer
Agricultural
Total
Commercial and industrial
Real estate:
Commercial real estate
Real estate construction
Residential real estate
Agricultural real estate
Total real estate
Consumer
Agricultural
Total
Unclassified
As of December 31, 2018
Classified
(Dollars in thousands)
Total
$
553,045
$
29,482
$
582,527
1,091,577
123,438
439,184
129,285
1,783,484
61,976
90,848
2,489,353
$
36,069
908
5,356
10,047
52,380
918
3,275
86,055
$
1,127,646
124,346
444,540
139,332
1,835,864
62,894
94,123
2,575,408
Unclassified
As of December 31, 2017
Classified
(Dollars in thousands)
Total
500,141
$
21,369
$
521,510
787,894
183,564
370,151
77,084
1,418,693
48,777
88,261
2,055,872
$
13,597
2,606
6,554
9,402
32,159
584
7,286
61,398
$
801,491
186,170
376,705
86,486
1,450,852
49,361
95,547
2,117,270
$
$
$
At December 31, 2018, loans considered unclassified decreased to 96.7% of total loans from 97.1% of total loans at
December 31, 2017. Approximately $17.9 million of loans considered classified increase were a direct result of the KBC, Adams and
City Bank mergers.
In accordance with applicable regulation, appraisals or evaluations are required to independently value real estate and, as an
important element, to consider when underwriting loans secured in part or in whole by real estate. The value of real estate collateral
provides additional support to the borrowers credit capacity.
With respect to potential problem loans, all monitored and under-performing loans are reviewed and evaluated to determine if
they are impaired. If we determine that a loan is impaired, then we evaluate the borrowers overall financial condition to determine
the need, if any, for possible write downs or appropriate additions to the allowance for loan losses based on the unlikelihood of full
repayment of principal and interest in accordance with the contractual terms or the net realizable value of the pledged collateral.
Allowance for loan losses
Please see Critical Accounting Policies Allowance for Loan Losses for additional discussion of our allowance policy.
In connection with our review of the loan portfolio, risk elements attributable to particular loan types or categories are
considered when assessing the quality of individual loans. For additional information see NOTE 1 NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Notes to Consolidated Financial Statements.
Purchased credit impaired loans: Please see Critical Accounting Policies Allowance for Loan Losses for additional
discussion of our purchased credit impaired loans policy. For additional information
NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES in the Notes to Consolidated Financial Statements.
about our purchased credit impaired loans see
ff
69
Analysis of allowance for loan and lease losses: At December 31, 2018, the allowance for loan losses totaled $11.5 million, or
0.44% of total loans. At December 31, 2017 the allowance for loan losses aggregated $8.5 million, or 0.40% of total loans.
The allowance for loan losses on loans collectively evaluated for impairment totaled $9.6 million, or 0.38%, of the $2.51 billion
in loans collectively evaluated for impairment at December 31, 2018, compared to an allowance for loan losses of $7.6 million, or
0.37%, of the $2.07 billion in loans collectively evaluated for impairment at December 31, 2017, and an allowance for loan losses of
$5.8 million, or 0.43%, of the $1.36 billion in loans collectively evaluated for impairment at December 31, 2016. The increase in
allowance as a percentage of loans collectively evaluated for impairment from December 31, 2017 to December 31, 2018 was
primarily related to changes in applied loss factors which are based in part on historical loss experience as well as changes in the
composition and quality of our loans collectively evaluated for impairment. The decrease in allowance as a percentage of loans
collectively evaluated for impairment from December 31, 2016 to December 31, 2017, was largely due to $533.7 million in loans
which were purchased at a discount as part of mergers during 2017.
Net losses as a percentage of average loans decreased to 0.05% for the twelve months ended December 31, 2018 as compared to
0.06% for the twelve months ended December 31, 2017, and 0.12% for the twelve months ended December 31, 2016.
There have been no material changes to our accounting policies related to our allowance for loan and lease loss methodology
during 2018 and 2017.
70
The following table presents, as of and for the periods indicated, an analysis of the allowance for loan and lease losses and other
related data.
Allowance for Loan and Lease Losses
Average loans outstanding(1)
Gross loans outstanding at end of
period(1)
Allowance for loan and lease losses at
beginning of the period
Provision for loan losses
Charge-offs:
Commercial and industrial
Real estate:
Commercial real estate
Real estate construction
Residential real estate
Agricultural real estate
Consumer
Agricultural
Total charge-offs
Recoveries:
Commercial and industrial
Real estate:
Commercial real estate
Real estate construction
Residential real estate
Agricultural real estate
Consumer
Agricultural
Total recoveries
Net recoveries (charge-offs)
Allowance for loan and lease losses at
end of the period
Ratio of ALLL to end of period loans(1)
Ratio of net charge-offs (recoveries)
to average loans
As of and for the Twelve Months
ended December 31,
2018
2017
2016
2015
2014
(Dollars in thousands)
$2,146,177
$1,573,402
$1,006,745
$813,970
$680,982
$2,575,408
$2,117,270
$1,383,605
$960,355
$725,876
$
$
8,498
3,961
$
6,432
2,953
5,506
2,119
$
5,963
3,047
$
5,614
1,200
(118)
(431)
(226)
(1,468)
(46)
(121)
(1,658)
(293)
(93)
(1,431)
(43)
(3,757)
(271)
(350)
(16)
(1,025)
(42)
(2,135)
(557)
(299)
(23)
(584)
(31)
(1,720)
(1,668)
(296)
(309)
(3,741)
(241)
(668)
(360)
(19)
(1,334)
53
35
41
23
36
304
1,565
254
19
545
12
2,752
(1,005)
660
243
13
291
6
1,248
(887)
201
165
23
96
1
527
(1,193)
126
2
31
53
2
237
(3,504)
72
16
139
218
2
483
(851)
$
11,454
$
0.44%
$
8,498
0.40%
$
6,432
0.46%
$
5,506
0.57%
5,963
0.82%
0.05%
0.06%
0.12%
0.43%
0.13%
(1)
Excluding loans held for sale.
71
The following table shows the allocation of the allowance for loan losses among our loan categories and certain other
information as of the dates indicated. The total allowance is available to absorb losses from any loan or lease category.
Analysis of the Allowance for Loan and Lease Losses
2018
2017
December 31,
2016
2015
2014
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
(Dollars in thousands)
$ 2,707
23.6% $2,136
25.1% $1,881
29.3% $1,366
24.8% $1,559
26.1%
3,108
1,554
2,320
391
1,070
304
27.1% 2,047
13.6%
693
20.3% 2,262
319
3.4%
768
9.3%
273
2.7%
24.1% 1,808
8.2%
612
26.6% 1,765
35
3.8%
266
9.0%
65
3.2%
28.1% 1,728
9.5%
323
27.4% 1,824
29
0.6%
187
4.1%
49
1.0%
31.4% 2,298
5.9%
599
33.1% 1,190
148
0.5%
81
3.4%
88
0.9%
38.5%
10.0%
20.0%
2.5%
1.4%
1.5%
Balance of allowance for loan and
lease losses applicable to:
Commercial and industrial
Real estate:
Commercial real estate
Real estate construction
Residential real estate
Agricultural real estate
Consumer
Agricultural
Total allowance for loan
and lease losses
$11,454
100.0% $8,498
100.0% $6,432
100.0% $5,506
100.0% $5,963
100.0%
Management believes that the allowance for loan and lease losses at December 31, 2018, was adequate to cover probable
incurred losses in the loan portfolio as of such date. There can be no assurance, however, that we will not sustain losses in future
periods, which could be substantial in relation to the size of the allowance at December 31, 2018.
The Company has a credit relationship with two related borrowers whose principals have been customers of the Bank since
2011. At December 31, 2018, the total outstanding to these borrowers was $28,261. The relationship which consists of several loans
to several related entities and categorized as commercial real estate and commercial and industrial was performing and current at its
most recent renewal in 2018 and was current at December 31, 2018. Despite one of the borrowers entities showing negative cash
flow, the other entity generated enough earnings before interest, tax, depreciation and amortization and had cash flow to support the
obligations of the overall relationship. Subsequent to December 31, 2018, the borrowing entities filed for Chapter 11 Bankruptcy
protection based on overall obligations in excess of their willingness to invest more capital.
the filing our Form 10-K that repayment of the principal and interest at December 31, 2018 is ultimately expected based on the values
of the entities at sale. The Company has not recorded any specific credit impairment on the relationship, but the Company cannot be
certain of future events that could impact the overall valuation of the assets or the price the assets will bring at disposition.
The Company believes as of the date of
a
Securities
We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage
interest rate risk, to meet pledging requirements and to meet regulatory capital requirements. At December 31, 2018, securities
represented 22.6% of total assets compared with 22.0% at December 31, 2017.
At the date of purchase, debt and equity securities are classified into one of two categories, held-to-maturity or available-for-
sale. We do not purchase securities for trading purposes. At each reporting date, the appropriateness of the classification is
reassessed. Investments in debt securities are classified as held-to-maturity and carried at cost, adjusted for the amortization of
premiums and the accretion of discounts, in the financial statements only if management has the positive intent and ability to hold
Debt securities not classified as held-to-maturity are classified as available-for-sale and measured at faff ir
those securities to maturity.
value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss
until realized. Interest earned on securities is included in total interest and dividend income. Also included in total interest and
dividend income are dividends received on stock investments in the Federal Reserve Bank of Kansas City and the FHLB of Topeka.
These stock investments are stated at cost.
t
72
The following table summarizes the amortized cost and fair value by classification of available-for-sale securities as of the dates
shown.
Available-For-Sale Securities
U.S. government-sponsored entities
Residential mortgage-backed securities (issued by
$
$
2018
Amortized
Cost
Fair
Value
December 31,
2017
Fair
Amortized
Cost
Value
(Dollars in thousands)
$
$
2016
Amortized
Cost
Fair
Value
$
4,766
$
4,782
government-sponsored entities)
Corporate
Small Business Administration loan pools
State and political subdivisions
Equity securities
Total available-for-sale securities
173,503
$ 173,503
168,875
$ 168,875
163,374
195
500
$ 164,069
161,591
195
486
$ 162,272
88,257
3,000
210
499
500
97,232
$
86,703
3,039
223
499
486
95,732
$
The following table summarizes the amortized cost and fair value by classification of held-to-maturity securities as of the dates
shown.
Held-To-Maturity Securities
2018
Amortized
Cost
Fair
Value
December 31,
2017
Fair
Amortized
Value
Cost
(Dollars in thousands)
2016
Amortized
Cost
Fair
Value
$
3,873
$
3,860
$
998
$
985
$
998
$
965
567,766
22,993
1,746
151,978
$ 748,356
560,467
22,901
1,728
151,033
$ 739,989
383,875
22,991
2,048
125,550
$ 535,462
379,582
23,346
2,034
126,797
$ 532,744
338,749
12,988
2,398
110,576
$ 465,709
334,733
13,099
2,382
109,977
$ 461,156
U.S. government-sponsored entities
Residential mortgage-backed securities (issued by
government-sponsored entities)
Corporate
Small Business Administration loan pools
State and political subdivisions
Total held-to-maturity securities
At December 31, 2018, 2017 and 2016, we did not own securities of any one issuer (other than the U.S. government and its
agencies or sponsored entities) for which aggregate adjusted cost exceeded 10% of the consolidated stockholders equity at the
reporting dates noted.
73
The following tables summarize the contractual maturity of debt securities and their weighted average yields as of December 31,
2018 and December 31, 2017. Expected maturities will differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-
backed securities, are shown separately. Available-for-sale securities are shown at fair value and held-to-maturity securities are
shown at cost, adjusted for the amortization of premiums and the accretion of discounts.
Due in one year
or less
Carrying
Value
Yield
Due after one
year through
five years
Carrying
Value
Yield
December 31, 2018
Due after five
years through
10 years
Carrying
Value
Yield
(Dollars in thousands)
Due after 10
years
Total
Carrying
Value
Yield
Carrying
Value
Yield
$
% $
%
10
10
3.14% $
3.14%
98
98
2.38% $168,767
2.38% 168,767
3.04% $168,875
3.04% 168,875
3.04%
3.04%
1,886
2.43%
1,987
2.21%
%
%
3,873
2.32%
1,373
4,540
7,799
$ 7,799
2.23%
%
%
8,280
5,166
4.06% 29,259
3.34% 44,692
3.34% $ 44,702
2.76% 72,060
2.74% 17,827
%
2.72% 36,378
2.71% 126,265
2.71% $126,363
2.83% 486,053
5.21%
%
1,746
3.04% 81,801
3.23% 569,600
3.23% $738,367
3.10% 567,766
% 22,993
2.61%
1,746
3.31% 151,978
3.12% 748,356
3.10% $917,231
3.05%
4.66%
2.61%
3.15%
3.12%
3.10%
Available-for-sale securities:
Residential mortgage-backed securities
(issued by government- sponsored
entities)
Total available-for-sale securities
Held-to-maturity securities:
U.S. government-sponsored entities
Residential mortgage-backed securities
(issued by government-sponsored entities)
Corporate
Small Business Administration loan pools
State and political subdivisions(1)
Total held-to-maturity securities
Total debt securities
(1)
The calculated yield is not calculated on a tax equivalent basis.
Due in one year
or less
Carrying
Value
Yield
Due after one
year through
y
five years
Carrying
Value
Yield
December 31, 2017
Due after five
years through
y
10 years
Carrying
Value
Yield
(Dollars in thousands)
Due after 10
y
years
Total
Carrying
Value
Yield
Carrying
Value
Yield
Available-for-sale securities:
Residential mortgage-backed securities
(issued by government- sponsored
entities)
State and political subdivisions(1)
Total available-for-sale securities
Held-to-maturity securities:
U.S. government-sponsored entities
Residential mortgage-backed securities
(issued by government-sponsored entities)
Corporate
Small Business Administration loan pools
State and political subdivisions(1)
Total held-to-maturity securities
Total debt securities
$ 3,461
195
3,656
1.82% $
1.11%
1.78%
20
20
3.14% $
%
3.14%
171
171
2.38% $157,939
%
2.38% 157,939
%
2.90% $161,591
195
2.90% 161,786
2.87%
1.11%
2.87%
%
998
1.65%
%
%
998
1.65%
2,871
2,871
$ 6,527
%
%
%
9,203
5,236
2.35% 21,022
2.35% 36,459
2.03% $ 36,479
%
2.60% 23,979
2.74% 17,755
3.02% 25,351
2.84% 67,085
2.84% $ 67,256
2.52% 350,693
4.69%
%
2,048
3.16% 76,306
3.34% 429,047
3.33% $586,986
2.86% 383,875
% 22,991
2,048
2.61%
3.23% 125,550
2.93% 535,462
2.92% $697,248
2.83%
4.25%
2.61%
3.16%
2.97%
2.95%
(1)
The calculated yield is not calculated on a tax equivalent basis.
Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages and which are
principally issued by federal agencies such as Ginnie Mae, Fannie Mae and Freddie Mac. Unlike U.S. Treasury and U.S. government
agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the securities. Premiums and discounts on mortgage-backed
securities are amortized and accreted over the expected lifeff of the security and may be impacted by prepayments. As such, mortgage-
backed securities which are purchased at a premium will generally produce decreasing net yields as interest rates drop because home
owners tend to refinance their mortgages resulting in prepayments and an acceleration of premium amortization. Securities purchased
74
at a discount will reflect higher net yields in a decreasing interest rate environment as prepayments result in an acceleration of
discount accretion.
The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected lives because borrowers have
the right to prepay their obligations at any time. Monthly pay downs on mortgage-backed securities cause the average lives of these
securities to be much different than their stated lives. At December 31, 2018 and December 31, 2017, 88.9% and 93.2% of the
mortgage-backed securities held by us had contractual
and 5.5 years and a modified duration of 4.4 years and 4.8 years.
final maturities of more than ten years with a weighted average life of 5.0 years
t
Deposits
Our lending and investing activities are primarily funded by deposits. A variety of deposit accounts are offered with a wide
range of interest rates and terms including demand, savings, money market and time deposits. We rely primarily on competitive
pricing policies, convenient locations, comprehensive marketing strategy and personalized service to attract and retain these deposits.
The following table shows our composition of deposits at December 31, 2018, 2017 and 2016.
Composition of Deposits
December 31,
2017
2016
2018 vs. 2017
2017 vs. 2016
Percent
of
Total
Amount
Percent
of
Total
Amount
(Dollars in thousands)
g
Change %
g
Change %
2018
Percent
of
Total
Amount
Non-interest-bearing demand
Interest-bearing demand and
NOW accounts
Savings and money market
Time
Total deposits
$ 503,831
16.1% $ 366,530
15.4% $ 207,668
12.8% $137,301 37.5% $158,862 76.5%
671,320
940,390
1,007,906
30.2% 120,743 21.9% 57,994 11.8%
23.1% 251,983 36.6% 311,365 82.6%
33.9% 231,407 29.8% 223,341 40.4%
$3,123,447 100.0% $2,382,013 100.0% $1,630,451 100.0% $741,434 31.1% $751,562 46.1%
21.5% 550,577
30.1% 688,407
32.3% 776,499
23.1% 492,583
28.9% 377,042
32.6% 553,158
The following table shows deposits assumed in 2018 mergers, as of the time of such mergers.
KBC Merger
g
Amount
Percent of
Total
Adams Merger
g
Percent of
Total
Amount
(Dollars in thousands)
City Bank Merger
y
g
Percent of
Total
Amount
Non-interest-bearing demand
Interest-bearing demand and NOW accounts
Savings and money market
Time
Total deposits
$ 53,105
80,873
75,462
78,912
$288,352
18.4% $ 27,518
28.0%
8,168
26.2% 26,484
27.4% 34,954
100.0% $ 97,124
28.3% $ 30,947
8.4% 24,783
27.3% 32,763
36.0% 38,360
100.0% $126,853
24.4%
19.6%
25.8%
30.2%
100.0%
The following table shows deposits assumed in 2017 mergers, as of the time of such mergers.
Non-interest-bearing demand
Interest-bearing demand and NOW accounts
Savings and money market
Time
Total deposits
Prairie Merger
Amount
Percent of
Total
Eastman Merger
Percent of
Total
Amount
(Dollars in thousands)
Cache Merger
Amount
Percent of
Total
$ 24,585
3,082
52,395
45,291
$125,353
19.6% $ 60,363
2.5% 49,862
41.8% 86,877
36.1% 27,009
100.0% $224,111
26.9% $ 26,108
22.2%
3,004
38.8% 117,480
12.1% 132,114
100.0% $278,706
9.4%
1.1%
42.1%
47.4%
100.0%
75
The following table shows the average deposit balance and average rate paid on deposits for the year ended December 31, 2018,
2017 and 2016.
Average Deposit Balances and Average Rate Paid
Non-interest-bearing demand
Interest-bearing demand and NOW accounts
Savings and money market
Time
Total deposits
2018
Average
Balance
$ 426,409
602,506
798,820
836,298
$2,664,033
Average
Rate
Paid
December 31,
2017
Average
Rate
Average
Balance
Paid
(Dollars in thousands)
2016
Average
Balance
Average
Rate
Paid
0.77%
1.01%
1.56%
% $ 257,346
452,652
501,386
647,998
$1,859,382
0.51%
0.55%
1.18%
% $ 169,514
314,515
317,394
453,045
$1,254,468
%
0.28%
0.41%
1.07%
Included in savings and money market deposits at December 31, 2018, 2017 and 2016 are brokered deposit balances of $21.0
million, $23.2 million, and $2.7 million. These balances represent customer funds placed in the Insured Cash Sweep (ICS) service
that allows Equity Bank to break large money-market deposits into smaller amounts and place them in a network of other ICS banks to
ensure that FDIC insurance coverage is gained on the entire deposit. Although classified as brokered deposits for regulatory purposes,
funds placed through the ICS service are Equity Banks customer relationships that management views as core funding. Brokered
certificates of deposit as of December 31, 2018, 2017, and 2016 were $131.1 million, $63.0 million, and $5.4 million. Of these
balances, $131.1 million at December 31, 2018, $63.0 million at December 31, 2017 and $5.4 million at December 31, 2016 were
customer funds placed in the Certificate of Deposit Account Registry Service (CDARS) program. CDARS allows Equity Bank to
break large deposits into smaller amounts and place them in a network of other CDARS banks to ensure that FDIC insurance coverage
is gained on the entire deposit. Although classified as brokered deposits for regulatory purposes, funds placed through the CDARS
program are Equity Banks customer relationships that management views as core funding.
rr
The following table provides information on the maturity distribution of time deposits of $100,000 or more as of December 31,
2018 and December 31, 2017.
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total Time Deposits
December 31,
2018
2017
(Dollars in thousands)
157,033 $
160,259
183,862
204,991
706,145 $
133,588
98,523
131,098
155,457
518,666
$
$
Other Borrowed Funds
We utilize borrowings to supplement deposits to fund our lending and investing activities. Short-term borrowing and long-term
borrowing consist of funds from the FHLB, federal funds purchased and retail repurchase agreements, a bank stock loan and
subordinated debentures.
76
The following table presents our short-term borrowings at the dates indicated.
(Dollars in thousands)
December 31, 2018:
Amount outstanding at year-end
Weighted average interest rate at year-end
Maximum month-end balance during the year
Average balance outstanding during the year
Weighted average interest rate during the year
December 31, 2017:
Amount outstanding at year-end
Weighted average interest rate at year-end
Maximum month-end balance during the year
Average balance outstanding during the year
Weighted average interest rate during the year
December 31, 2016:
Amount outstanding at year-end
Weighted average interest rate at year-end
Maximum month-end balance during the year
Average balance outstanding during the year
Weighted average interest rate during the year
Federal funds
purchased
and retail
repurchase
agreements
FHLB
Line of
Credit
$
$
$
$
$
$
$
$
$
50,068
0.28%
53,815
43,536
0.26%
37,492
0.23%
43,843
25,823
0.25%
20,637
0.27%
25,382
22,599
0.26%
$
$
$
$
$
$
$
$
$
368,770
2.65%
603,280
424,708
2.09%
347,692
1.47%
347,692
258,951
1.12%
259,588
0.72%
292,756
250,282
0.56%
Federal funds purchased and retail repurchase agreements: We have available federal funds lines of credit with our
correspondent banks. Retail repurchase agreements outstanding represent the purchase of interests in securities by banking customers.
Retail repurchase agreements are stated at the amount of cash received in connection with the transaction. We do not account for any
of our repurchase agreements as sales for accounting purposes in our financial statements. Repurchase agreements with banking
customers are settled on the following business day. See NOTE 11 BORROWINGS in the Notes to Consolidated Financial
Statements for additional information.
FHLB advances: FHLB advances include both draws against our line of credit and fixed rate term advances. Each term
advance is payable in full at its maturity date and contains provision for prepayment penalties. The Company acquired $17.4 million
in term advances in the August 2018 City Bank merger. Our FHLB borrowings are used for operational liquidity needs for originating
and purchasing loans, purchasing investments and general operating cash requirements. See NOTE 11 BORROWINGS in the
Notes to Consolidated Financial Statements for additional information.
Bank stock loan: The Company maintains a borrowing facility through an unaffiliated financial institution. The terms of the
loan require us and Equity Bank to maintain minimum capital ratios and other covenants. The loan and accrued interest may be pre-
paid at any time without penalty. In the event of default, the lender has the option to declare all outstanding balances as immediately
due. For detailed information,
see NOTE 11 BORROWINGS in the Notes to Consolidated Financial Statements.
ff
Subordinated debentures: In conjunction with the 2012 acquisition of First Community, we assumed certain subordinated
debentures owed to special purpose unconsolidated subsidiaries that are controlled by us, FCB Capital Trust II and FCB Capital Trust
III, (CTII and CTIII, respectively). In conjn unction with the 2016 acquisition of Community First Bancshares, Inc., we assumed
certain subordinated debentures owed to special purpose unconsolidated subsidiaries that are controlled by us, Community First (AR)
Statutory Trust I, (CFSTI). For additional information, see NOTE 11 BORROWINGS in the Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
Liquidity
Market and public confidff ence in our financial strength and fiff nancial institutions
t
in general will largely determine access to
appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and
appropriate levels of capital reserves.
77
Liquidity is defined as the ability to meet anticipated customer demands for future funds under credit commitments and deposit
withdrawals at a reasonable cost and on a timely basis. We measure our liquidity position by giving consideration to both on- and off-
balance sheet sources of and demands for funds on a daily, weekly, and monthly basis.
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as
the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the abilitytt
fund operations in a cost-effective manner and to meet current and future potential obligations such as loan commitments, lease
obligations, and unexpected deposit outflows. In this process, we focus on both assets and liabilities and on the manner in which they
combine to provide adequate liquidity to meet our needs.
to
During the years ended December 31, 2018, 2017, and 2016 our liquidity needs have primarily been met by core deposits,
security and loan maturities
retail repurchase agreements, brokered certificates of deposit and borrowings from the FHLB.
and amortizing investment and loan portfolios. Other funding sources include federal funds purchased,
t
Our largest sources of funds are FHLB borrowings and deposits and our largest uses of funds are the origination or purchases of
loans and securities purchases. Average loans were $2.39 billion for the year ended December 31, 2018, an increase of 51.5% over
average loans of $1.58 billion for the year ended December 31, 2017. Excess deposits are primarily invested in our interest-bearing
deposit account with the Kansas City Federal Reserve Bank, investment securities, federal funds sold or other short-term liquid
investments until the funds are needed to fund loan growth. Our securities portfolio has a weighted average life of 5.3 years and a
modified duration of 4.6 years at December 31, 2018. We believe that our daily funding needs can be met through cash provided by
operating activities, payments and maturities on loans and investment securities, our core deposit base and FHLB advances and other
borrowing relationships. On March 13, 2017, the Company entered into an agreement with an unaffiliated financial institution that
provided for a maximum borrowing facility of $30.0 million, which was subsequently amended on March 11, 2019 to increase the
maximum borrowing facility to $40.0 million. This agreement, which is secured by Equity Bank stock, can be used to fund future
acquisitions and for general corporate purposes. The outstanding balance on this borrowing facility was $15.5 million for the period
ending December 31, 2018.
Cash Flow Overview
During 2018, the net cash used in investing activities was principally related to loan portfolio growth and purchase of
investment securities in excess of the cash flows generated by maturities, pay-downs, calls and sales of and settlement of securities.
Liquidity provided by operating activities, deposit growth, FHLB borrowings and net borrowings on bank stock loan were used to
grow loans by $135.5 million, net purchase of additional investment securities of $54.6 million, purchase additional FHLB and
Federal Reserve Bank stock of $1.9 million and purchase premise and equipment of $8.8 million. The purchase of net non-cash assets
of Adams Dairy Bancshares, Inc. used $1.4 million, which was funded by available cash, cash and cash equivalents of $12.8 million
and $8.8 million from the purchase of Kansas Bank Corporation and City Bank and Trust and $13.0 net additional borrowings on the
bank stock loan.
During 2017, the net cash used in investing activities was principally related to loan portfolio growth, purchase of investment
securities in excess of the cash flows generated by maturities,
pay-downs, calls and sales of and settlement of securities and purchase
of additional bank owned life insurance. Liquidity provided by operating activities, FHLB borrowings and deposit growth were used
to grow loans by $125.7 million and net purchase of additional investment securities of $74.5 million, purchase additional FHLB and
Federal Reserve Bank stock of $4.3 million and purchase premise and equipment of $6.9 million. The purchase of net non-cash assets
of Prairie State Bancshares, Inc. and Cache Holdings, Inc. used $6.7 million and $2.9 million, which were funded by available cash,
cash and cash equivalents of $6.1 million from the purchase of Eastman National Bancshares, Inc. and $2.5 million additional
borrowings on the bank stock loan.
t
During 2016, the net cash used in investing activities was principally related to loan portfolio growth, the purchase of
investment securities in excess of the cash flows generated by maturities, pay-downs, call and sales of and settlement of securities and
purchase of additional bank owned life insurance. Liquidity provided by operating activities, FHLB borrowings and deposit growth
were used to grow loans by $73.9 million and purchase additional investment securities of $48.2 million, purchase additional FHLB
and Federal Reserve Bank stock of $2.0 million and purchase premise and equipment of $2.8 million. The purchase of net non-cash
assets of Community First Bancshares, Inc. used $3.0 million of cash and cash equivalents which was funded by available cash and
$6.0 million of additional borrowings on the bank stock loan.
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our
consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions
78
include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of
credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Our exposure to credit loss is
represented by the contractual
commitments as for on-balance sheet instruments.
amounts of these commitments. The same credit policies and procedures are used in making these
t
Our commitments associated with outstanding standby and performance letters of credit and commitments to extend credit
expiring by period as of December 31, 2018 are summarized below. Since commitments associated with letters of credit and
commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual
future cash funding
requirements:
t
Credit Extensions and Commitments
December 31, 2018
Standby and performance letters of credit
Commitments to extend credit
Total
1 Year
or Less
More Than
1 Year but Less
Than 3 Years
3 Years or
More but Less
Than 5 Years
(Dollars in thousands)
5 Years
or More
Total
$
6,175
252,305
$ 258,480
$
$
1,006
66,779
67,785
$
$
9
55,173
55,182
$
$
$
96,231
96,231
$
7,190
470,488
477,678
Standby and Performance Letters of Credit: For additional information see NOTE 22 COMMITMENTS AND CREDIT
RISK in the Notes to Consolidated Financial Statements.
Commitments to Extend Credit: For additional information see NOTE 22 COMMITMENTS AND CREDIT RISK in the
Notes to Consolidated Financial Statements.
Contractual Obligations
The following table summarizes our contractual obligations and other commitments to make future payments as of
December 31, 2018 (other than securities sold under repurchase agreements). These obligations consist of our future cash payments
associated with contractual obligations pursuant to FHLB advances, time deposit contracts, borrowed funds, and non-cancelable future
operating leases. Payments related to leases are based on actual payments specified in underlying contracts.
Other contractual obligations represent commitments made by us to make capital investments in limited-liability entities that
invest in qualified affordable housing projects. Payments on these obligations are made as requested by the managers of the limited-
liability entities, however the table below includes an estimate of the anticipated timing of payments pursuant to these commitments.
t
Contractual Obligations
December 31, 2018
Certificates and other time deposits
Subordinated debentures
FHLB advances
Bank stock loan
Other contractual obligation commitments
Non-cancelable future operating leases
Total
Capital Resources
1 Year
or Less
$
673,838
371,749
1,850
651
655
$ 1,048,743
More Than
1 Year but
Less Than
3 Years
$
$
254,479
5,377
3,200
2,856
947
266,859
3 Years or
More but
Less
Than
5 Years
(Dollars in thousands)
$
$
78,530
4,732
10,400
417
655
94,734
$
$
5 Years or
More
Total
1,059
14,260
3,040
41
1,911
20,311
$ 1,007,906
14,260
384,898
15,450
3,965
4,168
$ 1,430,647
Capital management consists of providing equity to support our current and future operations. The federal bank regulators view
capital levels as important indicators of an institutions financial soundness. As a general matter, FDIC-insured depository institutions
79
and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As a bank
holding company and a state-chartered-Fed-member bank, the Company and Equity Bank are subject to regulatory capital
requirements.
Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory
action. Management believes as of December 31, 2018 and December 31, 2017, the Company and Equity Bank meet all capital
adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalize
d, 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.
a
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatoryrr
agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the
FDIC as conservator or receiver. As of December 31, 2018, 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 capita
ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed Equity
Banks category.
Common Equity Tier 1 capital, and Tier 1 leverage
al, Tier 1 capital,
a
The increase in stockholders equity was principally attributable to common stock issuance as part of the mergers with Kansas
Bank Corporation and Adams Dairy Bancshares, Inc., net of issuance expenses of $31.9 million and 13.2 million, retained earnings of
$35.8 million for the year ended December 31, 2018, stock based compensation of $2.5 million, common stock issued upon exercise
of stock options of $133 thousand and change in accumulated other comprehensive loss of $1.8 million. For additional information
about the Companys capital
see NOTE 16 REGULATORY MATTERS in Notes to Consolidated Financial Statements.
a
Non-GAAP Financial Measures
We identify certain financial measures discussed in this Annual Report on Form 10-K as being non-GAAP financial
measures. In accordance with the SECs rules, we classify a financial measure as being a non-GAAP financial measure if that
financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts,
that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance
with generally accepted accounting principles as in effect from time to time in the United States in our statements of income, balance
sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or
or
statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measuresu
other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this Annual Report on Form 10-K should not be considered in isolation or
as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the
manner in which we calculate the non-GAAP financial measures that we discuss in this Annual Report on Form 10-K may differ from
that of other companies reporting measures with similar names. You should understand how such other banking organizations
calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Annual
Report on Form 10-K when comparing such non-GAAP financial measures.
Tangible Book Value per Common Share and Tangible Book Value Per Diluted Common Share: Tangible book value is a non-
GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate:
(a) tangible common equity as total stockholders equity less preferred stock, goodwill, core deposit intangibles, net of accumulam ted
amortization, mortgage servicing asset, net of accumulated amortization and naming rights, net of accumulated amortization;
(b) tangible book value per common share as tangible common equity (as described in clause (a)) divided by shares of common stock
outstanding; and (c) tangible book value per diluted common share as tangible common equity (as described in clause (a)) divided by
shares of common stock outstanding plus the period-end dilutive effects of vested restricted stock units and the assumed exercise of
stock options and redemption of non-vested restricted stock units. For tangible book value, the most directly comparable financial
measure calculated in accordance with GAAP is book value.
80
Management believes that these measures are important to many investors who are interested in changes from period to period
in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effff eff ct of
increasing total book value while not increasing our tangible book value.
The following table reconciles, as of the dates set forth below, total stockholders equity to tangible common equity, tangible
book value per common share, and diluted tangible book value per common share and compares these values with book value per
common share.
December 31,
2018
2017
2016
2015
2014
(Dollars in thousands, except share data)
Total stockholders equity
Less: preferred stock
Less: goodwill
Less: core deposit intangibles, net
Less: mortgage servicing asset, net
Less: naming rights, net
Tangible common equity
Common shares outstanding at period end
Diluted common shares outstanding at
period end
Book value per common share
Tangible book value per common
share
Tangible book value per diluted
common share
$
$
$
$
$
455,941 $
374,144 $
257,964 $ 167,233 $ 117,729
16,359
16,372
18,130
18,130
1,107
1,549
29
82,133
15,793,095 14,605,607 11,680,308 8,211,727 6,067,511
104,907
10,738
17
1,260
257,222 $
131,712
21,725
11
1,217
301,276 $
58,874
4,715
23
194,352 $ 131,153 $
16,085,729 14,873,257 11,873,480 8,332,762 6,285,628
16.71
18.37 $
25.62 $
22.09 $
28.87 $
19.08 $
17.61 $
16.64 $
15.97 $
13.54
18.73 $
17.29 $
16.37 $
15.74 $
13.07
Tangible Common Equity to Tangible Assets: Tangible common equity to tangible assets is a non-GAAP measure generally
used by financial analysts and investment bankers to evaluate financial institutions. We calculate: (a) tangible common equity as total
stockholders equity less preferred stock, goodwill, core deposit intangibles, net of accumulated amortization, mortgage servicing
asset, net of accumulated amortization and naming rights, net of accumulated amortization; (b) tangible assets as total assets less
goodwill, core deposit intangibles, net of accumulated amortization, mortgage servicing asset, net of accumulated amortization and
naming rights, net of accumulated amortization; and (c) tangible common equity to tangible assets as tangible common equity (as
described in clause (a)) divided by tangible assets (as described in clause (b)). For common equity to tangible assets, the most directly
comparable financial measure calculated in accordance with GAAP is total stockholders equity to total assets.
Management believes that this measure is important to many investors in the marketplace who are interested in the relative
changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill and other
intangible assets have the effect of increasing both total stockholders equity and total assets while not increasing tangible common
equity or tangible assets.
81
The following table reconciles, as of the dates set forth below, total stockholders equity to tangible common equity and total
assets to tangible assets.
Total stockholders equity
Less: preferred stock
Less: goodwill
Less: core deposit intangibles, net
Less: mortgage servicing asset, net
Less: naming rights, net
Tangible common equity
Total assets
Less: goodwill
Less: core deposit intangibles, net
Less: mortgage servicing asset, net
Less: naming rights, net
Tangible assets
Equity / assets
Tangible common equity to
$ 455,941
131,712
21,725
11
1,217
$ 301,276
$4,061,716
131,712
21,725
11
1,217
$3,907,051
2018
2017
2015
2014
December 31,
2016
(Dollars in thousands)
$ 257,964
58,874
4,715
23
$ 194,352
$2,192,192
58,874
4,715
23
$2,128,580
$ 374,144
104,907
10,738
17
1,260
$ 257,222
$3,170,509
104,907
10,738
17
1,260
$3,053,587
$ 167,233
16,372
18,130
1,549
29
$ 131,153
$1,585,727
18,130
1,549
29
$1,566,019
$ 117,729
16,359
18,130
1,107
$
82,133
$1,174,515
18,130
1,107
$1,155,278
11.23%
11.80%
11.77%
10.55%
10.02%
tangible assets
7.71%
8.42%
9.13%
8.37%
7.11%
Return on Average Tangible Common Equity: Return on average tangible common equity is a non-GAAP measure generally
used by financial analysts and investment bankers to evaluate financial institutions. We calculate: (a) average tangible common equity
as total average stockholders equity less average intangible assets and preferred stock; (b) adjusted net income allocable to common
stockholders as net income allocable to common stockholders plus amortization of core deposit intangible less tax effecff
amortization of core deposit intangible (tax rates used in this calculation were 21% for 2018; 35% for 2017, 2016, 2015 and 2014)
(c) return on average tangible common equity as adjusted net income allocable to common stockholders (as described in clause (b))
divided by average tangible common equity (as described in clause (a)). For return on average tangible common equity, the most
directly comparable financial measure calculated in accordance with GAAP is return on average equity.
t of
Management believes that this measure is important to many investors in the marketplace because it measures the return on
of
equity, exclusive of the effects of intangible assets on earnings and capital. Goodwill and other intangible assets have the effect
increasing average stockholders equity and, through amortization, decreasing net income allocable to common stockholders while not
increasing average tangible common equity or decreasing adjusted net income allocable to common stockholders.
ff
The following table reconciles, as of the dates set forth below, total average stockholders equity to average tangible common
equity and net income allocable to common stockholders to adjusted net income allocable to common stockholders.
Total average stockholders equity
Less: average intangible assets and preferred
stock
Average tangible common equity
Net income allocable to common
Amortization of intangible assets
Less: tax effect of intangible asset
amortization
Adjusted net income allocable to
common stockholders
Return on average equity (ROAE)
Return on average tangible common
equity (ROATCE)
2018
2017
2015
2014
December 31,
2016
(Dollars in thousands)
$168,823
$293,798
$125,808
$420,453
139,131
$281,322
$ 35,825
2,492
76,320
$217,478
$ 20,649
1,070
25,883
$142,940
9,373
$
419
19,165
$106,643
$ 10,123
275
$123,181
37,924
$ 85,257
8,279
$
363
523
375
147
96
127
$ 37,794
$ 21,344
$
8.52%
7.03%
9,645
5.55%
$ 10,302
$
8.19%
8,515
7.30%
13.43%
9.81%
6.75%
9.66%
9.99%
82
Efficiency Ratio: The efficiency ratio is a non-GAAP measure generally used by financial analysts and investment bankers to
evaluate financial institutions. We calculate the efficiency ratio by dividing non-interest expense, excluding merger expenses and loss
on debt extinguishment, by the sum of net interest income and non-interest income, excluding net gains on the sale of available-for-
sale securities and other securities transactions, and the net gain on acquisition. The GAAP-based efficiency ratio is non-interest
expenses divided by net interest income plus non-interest income.
In managements judgment, the adjustments made to non-interest expense and non-interest income allow investors and analysts
to better assess operating expenses in relation to operating revenue by removing merger expenses, loss on debt extinguishment, net
gains on the sale of available-for-sale securities and other securities transactions, and the net gain on acquisition.
The following table reconciles, as of the dates set forth below, the efficiency ratio to the GAAP-based efficiency ratio.
Non-interest expense
Less: merger expenses
Less: loss on debt extinguishment
Non-interest expense, excluding merger
expenses and loss on debt extinguishment
Net interest income
Non-interest income
Less: net gains on sales and settlement of
securities
Less: net gain on acquisition
Non-interest income, excluding net gains on
security transactions and on acquisition
Non-interest expense to net interest
income plus non-interest income
Efficiency Ratio
2018
2017
2015
2014
December 31,
2016
(Dollars in thousands)
$ 47,075
5,294
58
$ 94,387
7,462
$ 67,463
5,352
$ 38,575
1,691
316
$ 35,645
$ 86,925
$124,798
$ 19,725
$ 62,111
$ 86,002
$ 15,440
$ 41,723
$ 52,597
$ 10,466
$ 36,568
$ 46,262
$ 9,802
$ 35,645
$ 41,361
$ 8,674
(9)
271
479
756
682
986
$ 19,734
$ 15,169
$ 9,987
$ 8,364
$ 7,688
65.31% 66.50%
60.14% 61.39%
74.65%
66.67%
68.81%
66.94%
71.24%
72.67%
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
Our asset-liability policy provides guidelines to management for effective funds management, and management has established
a measurement system for monitoring net interest rate sensitivity position within established guidelines.
As a financial institution, the primary component of market risk is interest rate volatility. Fluctuations in interest rates will
ultimately impact both the level of income and expense recorded on most assets and liabilities, and the market value of all interest-
earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of
economic gains or losses due to future interest rate changes. These changes can be reflected in future net interest income and/ordd
market values. The objective is to measure the effecff
adjust the balance sheet to minimize the inherent risk, while at the same time maximizing income.
t on net interest income (NII) and economic value of equity (EVE) and to
fair
We manage exposure to interest rates by structuring the balance sheet in the ordinary course of business. We have the ability to
enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts or forward
delivery contracts for the purpose of reducing interest rate risk; however, currently we do not have a material exposure to these
instruments. We also have the ability to enter into interest rate swaps as an accommodation to our customers in connection witht an
interest rate swap program. Based upon the nature of its operations, we are not subject to foreign exchange or commodity price
risk. We do not own any trading assets.
rr
Our exposure to interest rate risk is managed by the Asset Liability Committee (ALCO), which is composed of certain
members of senior management, in accordance with policies approved by the Board of Directors. The ALCO formulates strategies
based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO considers the
impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies,
liquidity, business strategies and other factors. The ALCO meets monthly to review, among other things, the sensitivity of assets and
liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, securities purchase
83
and sale activities, commitments to originate loans and the maturities of investment securities and borrowings. Additionally, the
ALCO reviews liquidity, projected cash flows, maturities of deposits and consumer and commercial deposit activity.
ALCO uses a simulation analysis to monitor and manage the pricing and maturity of assets and liabilities
a
in order to diminish
the potential adverse impact that changes in interest rates could have on net interest income. The simulation tests the sensitivity of NII
and EVE. Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment
assumptions, maturity data and call options within the investment securities portfolio. Assumptions based on past experience are
incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the
model cannot precisely measure the future
magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various
management strategies.
NII and EVE. Actual results will differ from the models simulated results due to timing,
ff
The change in the impact of net interest income from the base case for December 31, 2018 and 2017 was primarily driven by the
rate and mix of variable and fixed rate financial instruments, the underlying duration of the financial instruments, and the level of
response to changes in the interest rate environment. The increase in the level of negative impact to net interest income in the up
interest rate shock scenarios are due to the assumed migration of non-term deposit liabilities to higher rate term deposits; the level of
fixed rate investments and loans receivable that will not reprice to higher rates; the variable rate Federal Home Loan Bank advances;
the variable rate subordinated debentures, and the non-term deposits that are assumed not to migrate to term deposits that are variable
rate and will reprice to the higher rates; and a portion of our portfolio of variable rate loans contain restrictions on the amount of
repricing and frequency of repricing that limit the amount of repricing to the current higher rates. These factors result in the negative
impacts to net interest income in the up interest rate shock scenarios that are detailed in the table below. In the down interest rate
shock scenario the main drivers of the negative impact on net interest income are the decrease in investment income due to the
negative convexity features of the fixed rate mortgage backed securities; assumed prepayment of existing fixed rate loans receivable;
the downward pricing of variable rate loans receivable; the constraint of the shock on non-term deposits; and the level of term deposit
repricing. Our mortgage back security portfolio is comprised of fixed rate investments and as rates decrease the level of prepayments
will increase and cause the current higher rate investments to prepay and the assumed reinvestment will be at lower interest
rates. Similar to our mortgage backed securities, the model assumes that our fixed rate loans receivable will prepay at a faster rate and
reinvestment will occur at lower rates. The level of downward shock on the non-term deposits is constrained to limit the downward
shock to a non-zero rate which results in a minimal reduction in the average rate paid. Term deposits repricing will only decrease the
average cost paid by a minimal amount due to the assumed repricing occurring at maturity. These factors result in the negative impact
to net interest income in the down interest rate shock scenario.
The change in the economic value of equity from the base case for December 31, 2018 and 2017 is due to us being in a liabili
sensitive position and the level of convexity in our pre-payable assets. Generally, with a liability sensitive position, as interest rates
increase the value of your assets decrease faster than the value of liabilities and as interest rates decrease the value of your assets
increase at a faff ster rate than liabilities. However, due to the level of convexity in our fixed rate pre-payable assets we do not
experience a similar change in the value of assets in a down interest rate shock scenario. Substantially all investments and
approximately 50.4% of loans are pre-payable and fixed rate and as rates decrease the level of modeled prepayments increase. The
prepaid principal is assumed to reprice at the assumed current rates, resulting in a smaller positive impact to the economic value of
equity.
a
ty
84
The following table summarizes the simulated immediate change in net interest income for twelve months as of the dates
indicated.
Market Risk
Change in prevailing interest rates
+300 basis points
+200 basis points
+100 basis points
0 basis points
-100 basis points
Change in prevailing interest rates
+300 basis points
+200 basis points
+100 basis points
0 basis points
-100 basis points
Impact on Net Interest Income
December 31,
2018
2017
(13.0)%
(8.0)%
(3.8)%
2.0%
(9.8)%
(5.9)%
(2.7)%
0.2%
Impact on Economic Value of Equity
December 31,
2018
2017
(16.2)%
(8.2)%
(2.5)%
0.3%
(15.4)%
(8.5)%
(2.0)%
(2.7)%
85
Item 8: Financial Statements and Supplementary Data
Our financial statements and accompanying notes, including the Report of Independent Registered Public Accounting Firm, are
set forth beginning on page F-1 of this Annual Report on Form 10-K.
Audited Financial Statements
Description
Report of Independent Registered Public Accounting Firm ...................................................................................................
Consolidated Balance Sheets as of December 31, 2018 and 2017..........................................................................................
Consolidated Statements of Income for the Years Ended December 31, 2018, 2017 and 2016.............................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016...................
Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2018, 2017 and 2016 .......................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016 ......................................
Notes to Consolidated Financial Statements ...........................................................................................................................
Page Number
F-1
F-2
F-3
F-4
F-5
F-7
F-9
The following tables present supplementary quarterly financial information (unaudited) for the years ended December 31, 2018
and 2017. This information should be read in conjunction with the historical consolidated financial statements of the Company and the
notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Total interest and dividend income
Total interest expense
Net interest income
Provision for loan loss
Net interest income after provision for loan loss
Total non-interest income
Total non-interest expense(1)
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Total interest and dividend income
Total interest expense
Net interest income
Provision for loan loss
Net interest income after provision for loan loss
Total non-interest income
Total non-interest expense
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
(Dollars in thousands, except per share data)
2018
$
$
$
$
45,580
12,244
33,336
750
32,586
5,449
25,138
2,972
9,925
0.63
0.62
$
$
$
$
43,022
10,267
32,755
1,291
31,464
5,433
23,647
2,928
10,322
0.65
0.64
$
$
$
$
2017
38,831
7,911
30,920
750
30,170
4,592
25,975
1,920
6,867
0.45
0.44
$
$
$
$
34,123
6,336
27,787
1,170
26,617
4,251
19,627
2,530
8,711
0.60
0.58
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
(Dollars in thousands, except per share data)
$
$
$
$
29,808
5,219
24,589
503
24,086
4,104
20,718
3,198
4,274
0.32
0.31
$
$
$
$
24,588
4,267
20,321
727
19,594
4,035
16,388
2,084
5,157
0.42
0.41
$
$
$
$
25,082
3,883
21,199
628
20,571
3,962
15,131
3,048
6,354
0.52
0.51
$
$
$
$
23,215
3,322
19,893
1,095
18,798
3,339
15,226
2,047
4,864
0.41
0.40
(1) For additional information see Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations.
86
Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
None
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, management of the Company, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of the Companys disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange
Act). Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective, in ensuring the information relating to the Company (and its
consolidated subsidiaries) required to be disclosed by the Company in the reports it files or submits under the Exchange Act was
recorded, processed, summarized and reported in a timely manner.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act) during the last fiscal quarter of the fiscal year for which this Annual Report on Form 10-K is filed that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report on Managements Assessment of Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined under Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Companys internal control system is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2018, management assessed the effectiveness of the Companys internal control over financial reporting
based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework,
issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in 2013. Based on the assessment,
tive internal control over financial reporting as of December 31, 2018.
management determined that the Company maintained effecff
This Annual Report on Form 10-K does not include an attestation report of the Companys independent registered public
accounting firm due to the rules of the Securities and Exchange Commission for an Emerging Growth Company.
Item 9B: Other Information
None
87
Part III
Item 10: Directors, Executive Officff er and Corporate Governance
The information required by this item will be contained in our Proxy Statement for the 2019 Annual Meeting of Stockholders to
be held in April 2019, a copy of which will be filed not later than 120 days after the close of the fiscal year, and is incorporated herein
by reference.
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and
directors, including our Chief Executive Officer, Chief Financial Officer and other executive officers. The full text of our Code of
Business Conduct and Ethics is posted on the investor relations page of our website which is located at
http://investor.equitybank.com. We will post any amendments to our code of business conduct and ethics, or waivers of its
requirements, on our website.
p
y
q
Item 11: Executive Compensation
The information required by this item will be contained in our Proxy Statement for the 2019 Annual Meeting of Stockholders to
be held in April 2019, a copy of which will be filed not later than 120 days after the close of the fiscal year, and is incorporated herein
by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be contained in our Proxy Statement for the 2019 Annual Meeting of Stockholders to
be held in April 2019, a copy of which will be filed not later than 120 days after the close of the fiscal year, and is incorporated herein
by reference.
Information relating to securities authorized for issuance under our equity compensation plans is included in Part II of this
Annual Report on Form 10-K under Item 5 Market for Registrants Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities.
Item 13: Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be contained in our Proxy Statement for the 2019 Annual Meeting of Stockholders to
be held in April 2019, a copy of which will be filed not later than 120 days after the close of the fiscal year, and is incorporated herein
by reference.
Item 14: Principal Accounting Fees and Services
The information required by this item will be contained in our Proxy Statement for the 2019 Annual Meeting of Stockholders to
be held in April 2019, a copy of which will be filed not later than 120 days after the close of the fiscal year, and is incorporated herein
by reference.
88
Part IV
Item 15: Exhibits, Financial Statement Schedules
a)
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements
The financial statements included as part of this Form 10-K are identified in the index to the Audited Financial Statements
appearing in Item 8 of this Form 10-K and which index is incorporated in this Item 15 by reference.
2.
Financial Statement Schedules
All supplemental schedules are omitted as inapplicable or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3.
Exhibits
The information required by this Item 15(a)(3) is set forth in the Exhibit Index immediately following. The exhibits listed
herein will be furnished upon written request to Equity Bancshares, Inc., 7701 East Kellogg Drive, Suite 300, Wichita,
Kansas 67207, Attention: Investor Relations, and payment of a reasonable fee that will be limited to our reasonable
expense in furnishing such exhibits.
b)
Exhibits
The exhibits listed below are incorporated by reference or attached hereto.
Exhibit
No.
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
Description
Second Amended and Restated Articles of Incorporation of Equity Bancshares, Inc. (incorporated
by reference to Exhibit 3.1 to Equity Bancshares, Inc.s Current Report on Form 8-K, filed with the
SEC on May 3, 2016).
Amended and Restated Bylaws of Equity Bancshares, Inc. (incorporated by reference to Exhibit 3.2
to Equity Bancshares, Inc.s Registration Statement on Form S-1, filed with the SEC on October 9,
2015, File No. 333-207351).
Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Equity
Bancshares, Inc.s Amendment No. 1 to Registration Statement on Form S-1, filed with the SEC on
October 27, 2015, File No. 333-207351).
Equity Bancshares, Inc. 2006 Non-Qualified Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to Equity Bancshares, Inc.s Amendment No. 1 to Registration Statement
on Form S-1, filed with the SEC on October 27, 2015, File No. 333-207351).
Equity Bancshares, Inc. Amended and Restated 2013 Stock Incentive Plan (incorporated by
reference to Appendix A to Equity Bancshares, Inc.s Definitive Proxy Statement on Schedule 14A,
filed with the SEC on March 28, 2016).
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.3 to Equity
Bancshares, Inc.s Registration Statement on Form S-1, filed with the SEC on October 9, 2015, File
No. 333-207351).
Amended and Restated Employment Agreement, dated November 14, 2016, between Equity Bank,
Equity Bancshares, Inc. and Brad S. Elliott (incorporated by reference to Exhibit 10.1 to Equity
Bancshares, Inc.s Current Report on Form 8-K, filed with the SEC on November 15, 2016).
Amended and Restated Employment Agreement, dated November 14, 2016, among Equity Bank,
Equity Bancshares, Inc. and Gregory H. Kossover (incorporated by reference to Exhibit 10.2 to
Equity Bancshares, Inc.s Current Report on Form 8-K, filed with the SEC on November 15, 2016).
Employment Agreement, dated January 26, 2017, among Equity Bank, Equity Bancshares, Inc. and
Wendell Bontrager. (incorporated by reference to Exhibit 10.1 to Equity Bancshares, Inc.s Current
Report on Form 8-K, filed with the SEC on January 26, 2017).
89
Exhibit
No.
10.7
10.8
10.9
10.10
10.11
10.12
10.13
21.1*
23.1*
24.1
31.1*
31.2*
32.1**
32.2**
Description
Amended and Restated Employment Agreement, dated December 15, 2014, between Equity Bank,
Equity Bancshares, Inc. and Julie Huber (incorporated by reference to Exhibit 10.1 to Equity
Bancshares, Inc.s Quarterly Report on Form 10-Q, filed with the SEC on May 10, 2017).
Amended Loan and Security Agreement, dated March 13, 2017, between Equity Bancshares, Inc.
and ServisFirst Bank (incorporated by reference to Exhibit 10.1 to Equity Bancshares, Inc.s Current
Report on Form 8-K, filed with the SEC on March 16, 2017).
Second Amendment to Loan and Security Agreement, dated March 12, 2018. Between Equity
Bancshares, Inc. and ServisFirst Bank (incorporated by reference to Exhibit 10.1 to Equity
Bancshares, Inc.s Quarterly Report on Form 10-Q, filed with the SEC on November 9, 2018).
Equity Bancshares, Inc. Annual Executive Incentive Plan (incorporated by reference to Appendix A
to Equity Bancshares, Inc.s Definitive Proxy Statement on Schedule 14A, filed with the SEC on
March 22, 2017).
Form of Performance-vested Restricted Stock Units Award Agreement (incorporated by reference to
Exhibit 10.1 to Equity Bancshares, Inc.s Current Report on Form 8-K, filed with the SEC on March
5, 2018).
Form of Time-vested Restricted Stock Units Award Agreement (incorporated by refeff rence to Exhibit
Inc.s Current Reportrr on Form 8-K, filed with the SEC on March 5, 2018).
10.2 to Equity Bancshares,
a
Employment Agreement, dated March 16, 2018, among Equity Bank and Craig L. Anderson,
(incorporated by reference to Exhibit 10.1 to Equity Bancshares, Inc.s Current Report on Form 8-K,
filed with the SEC on March 22, 2018).
List of Subsidiaries of Equity Bancshares, Inc.
Consent of Crowe LLP
Powers of Attorney (included on signature page).
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Label Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
*
**
Filed herewith.
These exhibits are furnished herewith and shall not be deemed filed for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into
any filing under the Securities Act or the Exchange Act.
Represents a management contract or a compensatory plan or arrangement.
c)
Excluded Financial Statements
Not Applicable
90
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
EQUITY BANCSHARES, INC.
/s/ Brad S. Elliott
By:
Name: Brad S. Elliott
Title: Chairman and Chief Executive Officer
Date: March 20, 2019
91
Each person whose signature appears below appoints Brad S. Elliott and Gregory H. Kossover, and each of them, any of whom
POWER OF ATTORNEY
may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annualn
Report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or would do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes,
lawfully do or cause to be done by virtue hereof.
may
tt
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Date
March 20, 2019
March 20, 2019
March 20, 2019
March 20, 2019
March 20, 2019
March 20, 2019
March 20, 2019
March 20, 2019
March 20, 2019
/s/ Brad S. Elliott
Brad S. Elliott
/s/ Gregory H. Kossover
Gregory H. Kossover
/s/ Gary C. Allerheiligen
Gary C. Allerheiligen
/s/ James L. Berglund
James L. Berglund
/s/ Jeff A. Bloomer
Jeff A. Bloomer
/s/ Gregory L. Gaeddert
Gregory L. Gaeddert
/s/ Jerry P. Maland
Jerry P. Maland
/s/ Shawn D. Penner
Shawn D. Penner
/s/ Harvey R. Sorensen
Harvey R. Sorensen
Signature
Title
Chairman and
Chief Executive Officer (Principal Executive
Officer)
Director, Executive Vice President and Chief
Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of Equity Bancshares, Inc.
Wichita, Kansas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Equity Bancshares, Inc. (the "Company") as of December 31, 2018
and 2017, the related consolidated statements of income, comprehensive income, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018
and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Crowe LLP
We have served as the Company's auditor since 2007.
Dallas, Texas
March 20, 2019
F-1
EQUITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
(Dollar amounts in thousands, except per share data)
2018
2017
ASSETS
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Interest-bearing time deposits in other banks
Available-for-sale securities
Held-to-maturity securities, fair value of $739,989 and $532,744
Loans held for sale
Loans, net of allowance for loan losses of $11,454 and $8,498
Other real estate owned, net
Premises and equipment, net
Bank-owned life insurance
Federal Reserve Bank and Federal Home Loan Bank stock
Interest receivable
Goodwill
Core deposit intangibles, net
Other
Total assets
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits
Demand
Total non-interest-bearing deposits
Savings, NOW and money market
Time
Total interest-bearing deposits
Total deposits
Federal funds purchased and retail repurchase agreements
Federal Home Loan Bank advances
Bank stock loan
Subordinated debentures
Contractual obligations
Interest payable and other liabilities
Total liabilities
Commitments and contingent liabilities, see Notes 22 and 23
Stockholders equity, see Note 14
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Employee stock loans
Treasury stock
Total stockholders equity
Total liabilities and stockholders equity
$
$
$
$
192,735
83
192,818
4,991
168,875
748,356
2,972
2,563,954
6,372
80,442
73,105
29,214
17,372
131,712
21,725
19,808
4,061,716
503,831
503,831
1,611,710
1,007,906
2,619,616
3,123,447
50,068
384,898
15,450
14,260
3,965
13,687
3,605,775
173
379,085
101,326
(4,867)
(121)
(19,655)
455,941
4,061,716
$
$
$
$
48,034
4,161
52,195
3,496
162,272
535,462
2,353
2,108,772
7,907
63,449
68,384
24,373
12,371
104,907
10,738
13,830
3,170,509
366,530
366,530
1,238,984
776,499
2,015,483
2,382,013
37,492
347,692
2,500
13,968
1,967
10,733
2,796,365
161
331,339
65,512
(3,092)
(121)
(19,655)
374,144
3,170,509
See accompanying notes to consolidated financial statements.
F-2
EQUITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2018, 2017 and 2016
(Dollar amounts in thousands, except per share data)
2018
2017
2016
Interest and dividend income
Loans, including fees
Securities, taxable
Securities, nontaxable
Federal funds sold and other
Total interest and dividend income
Interest expense
Deposits
Federal funds purchased and retail repurchase agreements
Federal Home Loan Bank advances
Bank stock loan
Subordinated debentures
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Service charges and fees
Debit card income
Mortgage banking
Increase in value of bank-owned life insurance
Net gains on sales and settlements of securities
Other
Total non-interest income
Non-interest expense
Salaries and employee benefits
Net occupancy and equipment
Data processing
Professional fees
Advertising and business development
Telecommunications
FDIC insurance
Courier and postage
Free nationwide ATM cost
Amortization of core deposit intangibles
Loan expense
Other real estate owned
Loss on debt extinguishment
Merger expenses
Other
Total non-interest expense
Income before income tax
Provision for income taxes
Net income
Dividends and discount accretion on preferred stock
Net income allocable to common stockholders
Basic earnings per share
Diluted earnings per share
$
$
$
$
137,048
17,943
4,089
2,476
161,556
25,687
114
9,039
731
1,187
36,758
124,798
3,961
120,837
7,250
6,178
1,298
2,199
(9)
2,809
19,725
48,018
8,126
8,094
3,402
3,002
1,775
1,536
1,183
1,355
2,443
1,005
(71)
7,462
7,057
94,387
46,175
10,350
35,825
35,825
2.33
2.28
$
$
85,662
12,308
3,375
1,348
102,693
12,722
64
2,909
16
980
16,691
86,002
2,953
83,049
5,319
4,547
1,955
1,445
271
1,903
15,440
33,960
6,305
4,927
2,363
2,105
1,191
945
935
932
1,025
993
523
5,352
5,907
67,463
31,026
10,377
20,649
20,649
1.66
1.62
$
$
$
$
$
$
50,272
8,111
1,654
1,762
61,799
7,042
58
1,400
31
671
9,202
52,597
2,119
50,478
3,610
2,898
1,394
1,000
479
1,085
10,466
21,951
4,586
3,568
2,075
1,198
1,101
894
683
672
413
599
386
58
5,294
3,597
47,075
13,869
4,495
9,374
(1)
9,373
1.09
1.07
See accompanying notes to consolidated financial statements.
F-3
EQUITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2018, 2017 and 2016
(Dollar amounts in thousands, except per share data)
Net income
Other comprehensive income:
Unrealized holding gains (losses) arising during the period on
available-for-sale securities
Amortization of unrealized losses on held-to-maturity securities
Reclassification adjustment for net gains included in net income
Total other comprehensive income (loss)
Tax effect
Other comprehensive income (loss), net of tax
Comprehensive income
2018
2017
2016
$
35,825
$
20,649
$
9,374
(2,845)
453
(2,392)
606
(1,786)
34,039
$
(26)
532
(271)
235
(90)
145
20,794
$
$
(264)
615
(893)
(542)
211
(331)
9,043
See accompanying notes to consolidated financial statements.
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F-6
EQUITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31, 2018, 2017 and 2016
(Dollar amounts in thousands, except per share data)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash froff m operating activities:
2018
2017
2016
$
35,825
$
20,649
$
9,374
Stock based compensation
Depreciation
Provision for loan losses
Net amortization (accretion) of purchase valuation adjustments
Amortization (accretion) of premiums and discounts on securities
Amortization of intangible assets
Deferred income taxes
Federal Home Loan Bank stock dividends
Loss (gain) on sales and valuation adjustments on other real
estate owned
Net loss (gain) on sales and settlements of securities
Change in unrealized (gains)/losses on equity securities
Loss (gain) on disposal of premises and equipment
Loss (gain) on sales of foreclosed assets
Loss (gain) on sales of loans
Originations of loans held for sale
Proceeds from the sale of loans held for sale
Increase in the value of bank-owned life insurance
Change in fair value of derivatives recognized in earnings
Net change in:
Interest receivable
Other assets
Interest payable and other liabilities
Net cash provided by operating activities
Cash flows (to) from investing activities
Purchases of available-for-sale securities
Purchases of held-to-maturity securities
Proceeds from sales, calls, pay-downs and maturities of available-for-
sale securities
Proceeds from calls, pay-downs and maturities of held-to-maturity
securities
Net change in interest-bearing time deposits in other banks
Net change in loans
Purchase of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
Net redemptions (purchases) of Federal Home Loan Bank and Federal Reserve
Bank stock
Proceeds from sale of other real estate owned
Purchase of bank-owned life insurance
Proceeds from bank-owned life insurance death benefits
Net cash (paid)/from acquisition of Community First
Net cash (paid)/from acquisition of Prairie
Net cash (paid)/from acquisition of Eastman
Net cash (paid)/from acquisition of Cache
Net cash (paid)/from acquisition of KBC
Net cach (paid)/from acquisition of Adams
Net cash (paid)/from acquisition of City Bank
Net cash (used in) investing activities
Cash flows (to) from financing activities
Net increase (decrease) in deposits
Net change in federal funds purchased and retail repurchase agreements
F-7
2,509
3,130
3,961
(5,586)
3,062
2,492
3,483
(1,402)
(580)
(1)
11
(182)
(17)
(1,072)
(48,576)
48,271
(2,199)
271
(2,255)
(5,738)
1,259
36,666
1,100
2,496
2,953
(4,518)
2,869
1,070
2,621
(760)
(109)
(271)
(5)
32
(1,640)
(73,961)
78,077
(1,445)
(14)
(1,276)
(673)
433
27,628
553
1,764
2,119
615
3,049
419
909
(657)
(112)
(479)
(42)
(1,198)
(51,369)
51,241
(1,000)
6
(544)
885
15
15,548
(36,007)
(150,479)
(105,749)
(129,016)
(56,391)
(134,745)
58,739
102,040
73,098
2,742
(135,500)
(8,831)
1,254
217
(1,891)
4,730
347
(55)
12,774
(1,385)
8,759
(171,488)
228,924
12,576
58,245
1,242
(125,679)
(6,873)
9
165
(4,276)
5,461
(15,000)
(6,744)
6,108
(2,857)
(222,924)
123,224
8,177
90,459
51,439
1,495
(73,932)
(2,796)
209
(1,973)
3,017
(14,500)
(2,971)
(140,689)
39,082
(4,150)
Net borrowings (repayments) on Federal Home Loan Bank line of credit
Principal repayments on Federal Home Loan Bank term advances
Borrowings on bank stock loan
Principal repayments on bank stock loan
Proceeds from issuance of common stock, net
Proceeds from exercise of employee stock options
Principal payments on employee stock loan
Redemption of Series C preferred stock
Net change in contractual obligations
Dividends paid on preferred stock
Excess tax benefits as a result of the exercise of employee stock options
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Ending cash and cash equivalents
Supplemental cash flow information:
Interest paid
Income taxes paid, net of refunds
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans
Total fair value of assets acquired in purchase of Community First,
net of cash
Total fair value of liabilities acquired in purchase of Community First
Total fair value of assets acquired in purchase of Prairie, net of cash
Total fair value of liabilities acquired in purchase of Prairie
Total fair value of assets acquired in purchase of Eastman, net of cash
Total fair value of liabilities acquired in purchase of Eastman
Total fair value of assets acquired in purchase of Cache, net of cash
Total fair value of liabilities acquired in purchase of Cache
Total fair value of assets acquired in purchase of KBC, net of cash
Total fair value of liabilities acquired in purchase of KBC
Total fair value of assets acquired in purchase of Adams, net of cash
Total fair value of liabilities acquired in purchase of Adams
Total fair value of assets acquired in purchase of City Bank, net of cash
Total fair value of liabilities acquired in purchase of City Bank
$
$
2018
2017
2016
$
$
20,078
(1,214)
22,500
(9,550)
133
1,998
275,445
140,623
52,195
192,818
32,667
9,214
2,307
308,225
289,103
117,010
102,406
135,594
144,353
$
$
79,996
(1,300)
2,500
(1,000)
1,215
121
(537)
212,396
17,100
35,095
52,195
15,041
6,438
4,562
147,247
125,591
267,094
234,337
333,140
291,056
114,149
(25,221)
6,000
(33,218)
23,643
112
(16,372)
(589)
(42)
13
103,407
(21,734)
56,829
35,095
8,943
3,212
3,006
496,352
419,641
See accompanying notes to consolidated financial statements.
F-8
EQUITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
(Dollar amounts in thousands, except per share data)
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Equity Bancshares, Inc. is a bank holding company, whose principal activity is the ownership and
p
management of its wholly-owned subsidiaries, Equity Bank (Equity Bank) and EBAC, LLC (EBAC). SA Holdings, Inc. is a
wholly-owned subsidiary of Equity Bank and was established for the purpose of holding and selling other real estate owned. These
entities are collectively referred to as the Company. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Equity Bank is a Kansas state-chartered bank and member of the Federal Reserve (state Fed member bank jointly supervised by
both the Federal Reserve Bank of Kansas City and the Office of the Kansas State Bank Commissioner).
The Company is primarily engaged in providing a full range of banking, mortgage banking and financial services to individual
and corporate customers generally in Arkansas, Kansas, Missouri and Oklahoma. Equity Bank competes with a variety of other
financial institutions
lenders.
including large regional banks, community banks and thrifts as well as credit unions and other non-traditional
t
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles,
management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and actual results could differ.
Cash Equivalents: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less
q
than 90 days and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits
in other financial institutions, federal funds purchased, retail repurchase agreements, Federal Home Loan Bank advances and
contractual obligations.
Securities: Securities are classified as held-to-maturity when management has the positive intent and ability to hold them to
maturity. Securities are classified as available-for-sale when they might be sold before maturity. Held-to-maturity securities are
carried at amortized cost while securities available-for-sale are carried at faff ir value, with unrealized holding gains and losses reported
in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on
the level-yield basis without anticipating prepayments, except for certain securities where prepayments are anticipated. Gains and
losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and more
frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management
considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management
also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss
position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire
difference between amortized cost and fair value is recognized as impairment through earnr ings. For debt securities that do not meet
the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which
must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.
The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost
basis. All OTTI related to equity securities is recognized through earnings.
Equity investments with a readily determinable fair value are measured at fair value with changes in fair value recognized in net
income. The exit price concept is used when measuring the fair value of financial instruments for disclosure purposes.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of
aggregate cost or fair value. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Mortgage
loans held for sale are sold with servicing rights released. Gains or losses on loans held for sale are recognized upon completion of the
sale and based on the difference between the net sales proceeds and carrying value of the sold loan.
F-9
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, the Company 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
acquisition date fair value, such that there is no carryover of the sellers allowance for loan losses. After acquisition, losses are
recognized by an increase in the allowance for loan losses. Such purchase credit impaired loans are accounted for individually. The
Company estimates 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). During acquisitions, if the Companya
expects to liquidate the loan collateral in a relatively short period of time, the Company will assign no value to accretable yield as the
impact is immaterial. The excess of the loans 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
carryrr ing 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 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 the Company
will be unable to collect all contractual principal and interest due according to the terms of the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows discounted at the loans effective interest rate or on the value of the
underlying collateral if the loan is collateral dependent. The Company evaluates 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
rr
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 borrowers 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 the Company makes 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 collectabia lity 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
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 managements judgment, should be charged off.
about specific borrower situations and estimated collateral values,
ff
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 loans 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 loans 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, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
F-10
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 the Company. This actual loss experience is then adjusted by comparing current conditions to the conditions that
existed during the loss history. The Company considers 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.
The Company considers loan performance and collateral values in assessing risk for each class in the loan portfolio, as follows:
•
•
•
•
•
•
Commercial and industrial loans are dependent on the strength of the industries of the related borrowers and the success of
their businesses. Commercial and industrial loans are advanced for equipment purchases, to provide working capital or
meet other financing needs of the business. These loans may be secured by accounts receivable, inventory, equipment or
other business assets. Financial information
ability to repay the loans.
is obtained from the borrower to evaluate the debt service coverage and
ff
Commercial real estate loans are dependent on the industries tied to these loans, as well as the local commercial real estate
market. The loans are secured by real estate and typically appraisals are obtained to support the loan amount. Generally,
an evaluation of the projects cash flows is performed to evaluate the borrowers ability to repay the loan at the time of
origination and periodically updated during the life of the loan.
Residential real estate loans are affected by the local residential real estate market, the local economy and movement in
interest rates. The Company evaluates the borrowers repayment ability through a review of credit reports and debt to
income ratios. Generally, appraisals are obtained to support the loan amount.
Agricultural real estate loans are real estate loans related to farmland and are affff eff cted by the value of farmland.
Generally, the Company evaluates the borrowers ability to repay based on cash flows from farming operations.
Consumer loans are dependent on the local economy. Consumer loans are generally secured by consumer assets, but may
be unsecured. Typically, the Company evaluates the borrowers repayment ability through a review of credit scores and
an evaluation of debt to income ratios.
Agricultural loans are primary operating lines subject to annual farming revenues, including productivity and yield of the
farm products and market pricing at the time of sale.
There have been no material changes to the Companys accounting policies related to its allowance for loan loss methodology
during 2018 and 2017.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been
relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the
transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity.
Bank-Owned Life Insurance: The Company maintains insurance policies on certain key executives as well as policies from
acquired institutions. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the
balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
In some cases, the Company has entered into agreements with the insured which would require it to make one-time payments to the
insureds beneficiaries if certain conditions exist at the time of death.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less
estimated cost to sell when acquired, thereby establishing a new cost basis. Generally, collateral properties are recorded as other real
estate owned when the Company takes physical possession. Physical possession of residential real estate collateral occurs when legal
title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through
completion of a deed in lieu of foreclosure or through a similar legal agreement. Other real estate owned properties are subsequently
accounted for at the lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation
allowance is recorded through expense. Operating costs after acquisition are expensed.
F-11
Premises and Equipment: Land is carried at cost. Premises and equipment are carried at cost less accumulated
q p
depreciation. Depreciation is an estimate and is charged to expense using the straight-line method over the estimated useful lives of
the respective assets. The useful lives of buildings and related components are estimated to be 39 years. The useful lives of furniture,
fixtures and equipment are estimated to be 4 to 7 years. Leasehold improvements are capitalized and depreciated using the straight-
line method over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Property
held for sale is carried at the lower of cost or fair value.
Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying
rr
amount
may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Federal Reserve Bank and Federal Home Loan Bank Stock: Federal Reserve Bank (FRB) and Federal Home Loan Bank
(FHLB) stocks are required investments for institutions that are members of the FRB and FHLB systems. FRB and FHLB stocks
are carried at cost, considered restricted securities and are periodically evaluated for impairment based on the ultimate recovery of par
value. Both cash and stock dividends are reported as income.
Goodwill and Core Deposit Intangibles: Goodwill results from business acquisitions and represents the excess of the purchase
p
g
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 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. The Company has selected December 31 as
the date to perform its annual goodwill impairment test. Goodwill is the only intangible asset with an indefinite useful life.
Credit Related Financial Instruments: Credit related financial instruments include off-balance-sheet credit instruments,
commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these
items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are
recorded when they are funded.
r
such as
Derivatives: 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.
An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on
which the cash flows will be paid and the manner in which the cash flows will be calculated. Typically, an interest rate swap
transaction is used as an exchange of cash flows based on a fixed rate for cash flows based on a variable rate.
In an interest rate cap agreement, a cash flow is generated if the price or interest rate of an underlying variable rises above a
certain threshold price or interest rate. In an interest rate floor agreement, a cash flow is generated if the price or interest rate of an
underlying variable falls below a certain threshold price or interest rate. Caps and floors are designed as protection against the interest
rate on a variable rate asset or liability
rising above or falling below a certain level.
a
At the inception of a derivative contract, the Company designates the derivatives as one of three types based on the Companys
intentions and belief as to likely effectiveness as a hedge. These three types are: (1) a hedge of the faff ir value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedge); (2) a hedge of a forecasted transaction or the variabilitytt of cash
flows to be received or paid related to a recognized asset or liability (cash flow hedge); or (3) an instrument with no hedging
designation (stand-alone derivative). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain
on the hedged item, are recognized in current earnings as fair value changes. For a cash flow hedge, the gain or loss on the derivative
is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction
affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes
in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of
derivatives that do not qualify for hedge accounting are reported currently in earnings as non-interest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based
on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest
income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged unless
the derivative meets the criteria to be a financing derivative. All derivatives are recognized in the consolidated balance sheet at their
fair values and are reported as either derivative assets or derivative liabilities net of accrued net settlements and collateral, if any. The
individual derivative amounts are netted by counterparty when the netting requirements have been met. If these netted values are
positive, they are classified as an asset and, if negative, they are classified as a liability.
F-12
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management
objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation
includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. The Company also formally assesses, both at the hedges inception and on an ongoing basis, at least
quarterly, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the
hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no
longer probable, a hedged firm commitment is no longer firm or treatment of the derivative as a hedge is no longer appropriate or
intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest
income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the
existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is
discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that are accumulated in
other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
The Company has entered into interest rate cap derivatives to assist with interest rate risk management. These derivatives are
not designated as hedging instruments but rather as stand-alone derivatives. The fair values of stand-alone derivatives are included in
other assets and other liabilities. Changes in fair value of stand-alone derivatives are recorded through earnr ings as non-interest
income.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities and are computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is more likely
than not that the tax position will be sustained in a tax examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is more likely than not to be realized on examination. On December 22, 2017, the
President of the United States signed the 2017 Tax Cuts and Jobs Act (Tax Reform) which reduced the U.S. federal statutory corporate
income tax rate from 35% to 21% beginning in 2018. On the same date, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 118, which specifies that reasonable estimates of the income tax effects of Tax Reform should be used to
account for the effeff cts of Tax Reform in the period of enactment as required by general accepted accounting principals and also
provided for a measurement period that should not extend beyond one year from Tax Reforms enactment date. The Company has
appropriately accounted for the effeff cts of Tax Reform.
As a result of Tax Reform enacted in December 2017, the Company recognized a $1,086 re-measurement of its net deferred tax
assets, including a re-measurement of $535 in a net deferred tax asset related to unrealized losses on available-for-sale securities and
held-to-maturity securities previously transferred from available-for-sale. Because the tax effeff ct of variations in unrealized losses on
available-for-sale securities and transferred held-to-maturity securities impact accumulated other comprehensive income, the
Company had a stranded tax effff eff ct of $535 as of the date of enactment. The Company elected to early adopt ASU 2018-02 resulting
in a reclassification of $535 from accumulated other comprehensive income to retained earnings in December 2017.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. During 2016 there was
$1 paid to the Missouri Department of Revenue. No such interest or penalties were incurred in 2018 or 2017.
Earnings Per Common Share: Net income, less dividends and discount accretion on preferred stock, equals net income allocable
g
to common stockholders. Basic earnings per common share is net income allocable to common stockholders divided by the weighted
average number of common shares and vested restricted stock units outstanding during the period. Diluted earnings per common
share include the dilutive effect of additional potential common shares of unexercised stock options and unvested restricted stock
units.
Share-Based Payments: The Company has share-based payments which are described more fully
y
ff
in a subsequent
note. Compensation expense associated with the stock option plan is based on the fair value of the options at the grant date. This
compensation is expensed over the periods during which the options vest. Options vest based on the passage of time or the
achievement of performance targets, depending on the structure of the related grant.
Compensation expense associated with restricted stock units is based on the fair value of the units at the grant date. This
compensation expense is recognized ratably over the service period stipulated in the grant agreement.
F-13
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other
p
comprehensive income includes unrealized gains and losses on securities available-for-sale and the amortization of unrealized gains
and losses on securities transferred to held-to-maturity from available-for-sale.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Additional
discussion of loss contingencies at December 31, 2018, is presented in a subsequent note.
g
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and
clearing requirements.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the
wholly owned subsidiaries to the holding company or by the holding company to stockholders.
Fair Value: Fair values of financial instruments, impaired loans, other real estate owned and property held for sale are estimated
using relevant market information and other assumptions, as more fully disclosed in a separate note. 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 items. Changes in assumptions or in market conditions could materially
affect the estimates.
Segment Information: As a community oriented financial institution, substantially all of the Companys operations involve the
g
delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an
ongoing review of these banking operations, which constitute the Companys only operating segment for financial reporting purposes.
Revenue Recognition: On January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and
g
all subsequent amendments to the ASU (collectively, ASC 606), which (i) creates a single framework for recognizing revenue from
contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain or loss from the transfer of
nonfinancial assets, such as other real estate owned (OREO). The majority of the Companys revenues come from interest income
on financial instruments,
s
including loans, leases, securities and derivatives, which are outside the scope of ASC 606. The Companym
services that fall within the scope of ASC 606 are presented with non-interest income and are recognized as revenue as the Company
satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges and fees on deposits, debit card
income, investment referral income, insurance sales commissions and other non-interest income related to loans and deposits.
rr
The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1,
2018. Results for reporting periods beginning after January 1, 2018, are presented under ASC 606, while prior period amounts
continue to be reported in accordance with legacy GAAP. The adoption of ASC 606 did not result in a change to the accounting for
any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.
Except for gains or losses from the sale of OREO, all of the Companys revenue from contracts with customers within the scope
of ASC 606 is recognized in non-interest income. The following table presents the Companys sources of non-interest income for the
twelve months ended December 31, 2018 and 2017.
Non-interest income
Service charges and fees
Debit card income
Mortgage banking(a)
Increase in bank-owned life insurance(a)
Net gain (loss) from securities transactions(a)
Other(b)
Total non-interest income
2018
2017
$
$
7,250
6,178
1,298
2,199
(9)
2,809
19,725
$
$
5,319
4,547
1,955
1,445
271
1,903
15,440
(a) Not within the scope of ASC 606
(b) The Other category includes investment referral income, insurance sales commissions and other non-interest income
related to loans and deposits totaling $2,333 for the year ended December 31, 2018, which is within the scope of ASC
606; the remaining balance of $475 for the year ended December 31, 2018, represents recovery on zero-basis purchased
loans, income from equity method investments and other remaining items considered insignificant, which is outside the
scope of ASC 606.
F-14
A description of the Companys revenue streams accounted for under ASC 606 are as follows:
Service Charges and Fees: The Company earns fees from its deposit customers for transaction-based, account maintenance and
overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and ACH fees,
are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customers request. Account
maintenance fees, which relate primarily to monthly maintenance, are earnr ed over the course of a month, representing the period over
which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.
Service charges on deposits are collected through withdrawal from the customers account balance.
Debit Card Income: The Company earns debit card income from cardholder transactions conducted through payment
processors. Debit card income from cardholder transactions represent a percentage of the underlying transaction value and are
recognized concurrently with the transaction processing services provided to the cardholder.
Investment Referral Income: Investment referral services are offered through an unaffiliated registered broker-dealer and
investment advisor. Investment referral income consists of transaction-based fees (i.e. trade commissions) and account fees (i.e.
custodial fees). The service obligation for transaction-based fees relates to processing of individual transactions and is considered
earned at the time the transaction occurs. The Company currently records this income when payment is received and at each month
end for current-month transactions. Account fees are considered earned over the period for which the feff es relate. These fees are
received during the fiff rst month of each quarter and represent advance payment for the current quarter. These fees are amortized
ratably over the three months during the quarter. Therefore, all account-based fees are currently recorded as performance obligations
are satisfied.
Insurance Sales Commissions: Insurance commissions are received based on contracts with insurance companies which provide
for a percentage of premiums to be paid to the Company in exchange for placement of policies with customers. The commissions
generally relate to a period of one year or less. Under certain contracts, the Company may also assist with claims processing, but this
performance obligation is considered insignificant compared to the initial placement of the policy. As such, the performance
obligation is considered to have been substantially satisfied at the time of policy placement. While this indicates that all related
revenue would be appropriately
installments from the insurance company. In no cases would this deferral extend beyond 12 months and the effff eff ct is considered
immaterial compared to recognition at the time of policy placement. The Company also receives commission based on renewals of
policies previously placed. However, additional work is required to process the renewals, resulting in future performance obligations
to earn the related revenues. In addition, the occurrence of such renewals is not certain as initial policies are generally for one year or
less and the fees earned are not determined until the time of renewal, based on underwriting at that time. As such, the Company has
determined that accrual
accrued at policy inception, in some cases recognition occurs over the policy period if received in
of income, for future renewals, is not appropriate.
a
rr
Other Non-interest Income: Other non-interest income related to loans and deposits is earned when the specific transaction is
processed, similar to service charges and fees.
Gain or Loss on Sale of Other Real Estate: Gain or loss on sale of other real estate is reported in non-interest expense and is
netted with other real estate expenses. The Company records a gain or loss from the sale of other real estate when control of the
property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of other
real estate to the buyer, the Company assesses whether the buyer is committed to perform their obligation under the contract and
whether collectability of the transaction price is probable. Once these criteria are met, the other real estate is derecognized and the
gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the
Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present. As a result, the
Company has concluded that ASC 606 will affect the decision to recognize or defer gains on sales of other real estate in circumstances
where the Company has financed the sale.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current
presentation. Management determined the items reclassified are immaterial to the consolidated financial statements taken as a whole
and did not result in a change in equity or net income for years ended December 31, 2018, 2017 and 2016.
g
Recent Accounting Pronouncements: The Company is an emerging growth company as defined in the Jumpstart Our
Business Startups Act of 2012 (JOBS Act). 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. The Company has irrevocably elected to adopt new accounting standards within the public company adoption
period.
F-15
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 accountiu
ng 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
when applying the ASU to leases that commenced before the effective date of the ASU. This accounting pronouncement was further
Improvements, to allow for another transition method by
modified in July 2018 with the issuance of ASU 2018-11, Leases Targeted
applying a cumulative-effect adjustment to opening retained earnings at adoption and providing lessors a practical expedient to not
separate non-lease and lease components in certain circumstances. The Company adopted this accounting standard effective January
1, 2019, resulting in the Company recording $3,251 in right of use assets and $3,251 of operating lease liabilities.
provides for optional practical expedients
TT
a
In June 2016, FASB issued ASU 2016-13, Financial Instruments Credit Losses, which will change how the Company
measures credit losses for most of its financial assets. This guidance is applicable to loans held for investment, off-balance-sheet
credit exposures, such as loan commitments and standby letters of credit, and held-to-maturity investment securities. The Company
will be required to use a new forward-looking expected loss model that is anticipated to result in the earlier recognition of allowances
for losses. For available-for-sale securities with unrealized losses, the Company will measure credit losses in a manner similar to
current practice, but will recognize those credit losses as allowances rather than reductions in the amortized cost of the securities. In
addition, the ASU requires significantly more disclosure including information about credit quality by year of origination for most
loans. The ASU is effective for the Company beginning in the first quarter of 2020. Generally, the amendments will be applied
through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is
effective. The Company is currently gathering the historical loss data by portfolio and class of financial instrument to estimate the life
of financial instrument credit loss and is evaluating the supporting system requirements to routinely generate the reported values.
Initial evaluation of this new accounting standard indicates that interest rate fair market value adjustments on loans acquired in
acquisitions will not offset the allowance required under this standard and the Company expects that to increase the required
allowance; however, at this time, an estimate of the impact on the Companys financial statements is not known.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other, which will simplify the subsequent
measurement of goodwill. Goodwill and other intangibles must be assessed for impairment annually. If an entitys assessment
determines that the fair value of an entity is less than its carrying amount, including goodwill, currently, the measurement of goodwill
impairment requires that the entitys identifiable net assets be valued following procedures similar to determining the fair value of
assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, goodwill impairment is measured to the
extent that the carrying amount of an entity exceeds its fair value. The amendments in this update are effective for the Companya
annual goodwill impairment tests beginning in 2020. The amendments will be applied on a prospective basis. The Company is
currently evaluating the impact of this new accounting standard but does not expect a material impact to its financial statements.
s
In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This update
shortens the amortization period of certain callable debt securities held at a premium to the earliest call date. The amendments in this
update are effective for the Companys fiscal year beginning after December 15, 2018, and interim periods within that fiscal year,
however, early adoption is permitted. If early adoption of this update is elected by the Company, any adjustments will be reflected as
of the beginning of the fiscal year. The amendments will be applied on a modified retrospective basis through a cumulative-effect
adjustment to retained earnings as of the beginning of the period of adoption and the Company will be required to provide change in
accounting principle disclosures. The Company adopted this accounting standard effective January 1, 2019, which resulted in the
Company recording a $1,385 reduction in the amortized cost of investment securities and retained earnings.
ff
In August 2017, FASB issued ASU 2017-12, Derivatives and Hedging, Targeted Improvements to Accounting for Hedging
Activities, with the stated objective of improving the financial reporting of hedging relationships to better reflect the economics of
hedging transactions and to simplify the application of hedge accounting. The amendments are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018. Potential effects on the Companys current hedging activities
include eliminating the requirement to separately measure and report hedge ineffectiveness, providing additional flexibility for
measuring the change in fair value of the hedged item in fair value hedges of interest rate risk and easing certain hedge documentation
and assessment requirements. The adoption of this accounting standard did not materially impact the Companys financial statements
but will result in changes to financial statement disclosures and changes to existing and future swap documentation.
In August 2018, FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software,
tt
Customers Accounting
for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This update requires
implementation costs of hosting arrangements that are considered a service contract to be capitalized. The amendments in this update
are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal
years. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities. The
Company adopted this accounting standard effective October 1, 2018 and resulted in the Company capitalizing $311 of
implementation costs during 2018.
F-16
NOTE 2 BUSINESS COMBINATIONS
On August 23, 2018, the Company acquired City Bank and Trust Company (City Bank), which had one branch location in
Guymon, Oklahoma, from Docking Bancshares, Inc. Results of operations of City Bank were included in the Companys results of
operations beginning August 24, 2018. Acquisition-related costs associated with this merger were $1,387 ($1,054 on an after-tax
basis) and are included in merger expenses in the Companys income statement for the year ended December 31, 2018.
The fair value of consideration exchanged exceeded the recognized amounts of the identifiable net assets and resulted in
goodwill of $5,824. Goodwill resulted from a combination of expected synergies, expansion in western Oklahoma with the addition
of one branch location and growth opportunities. The following table summarizes the consideration paid for City Bank and the
amounts of the assets acquired and liabilities assumed recognized at the merger date.
Fair value of consideration:
Cash
Recognized amounts of identifiable assets acquired and
liabilities assumed:
Cash and due from banks
Held-to-maturity securities
Federal Reserve Bank and Federal Home Loan Bank stock
Loans
Premises and equipment
Core deposit intangibles
Other real estate owned
Other assets
Total assets acquired
Deposits
Federal Home Loan Bank advances
Interest payable and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$
$
$
$
18,900
18,900
27,659
44,927
881
77,148
2,044
3,360
307
1,103
157,429
126,853
17,353
147
144,353
13,076
5,824
18,900
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered purchased credit
cash flows. However, the
impaired as of the merger date. The faff ir value adjustments were determined using discounted contractual
Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these loans were
not considered impaired at the merger date and were not subject to the guidance relating to purchased credit impaired loans, which
have shown evidence of credit deterioration since origination. Cash flows associated with purchased credit impaired loans are not
considered reasonably predictable and as such these loans are considered nonaccrual.
t
The following table presents the best available information about the loans acquired in the City Bank merger as of the date of
merger.
Contractually required principal
Non-accretable difference (expected losses)
Cash flows expected to be collected
Accretable yield
Fair value of acquired loans
Non-Credit
Impaired
Purchased Credit
Impaired
$
$
74,918
74,918
(1,750)
73,168
$
$
5,136
(1,156)
3,980
3,980
F-17
The following table presents the carrying value of the loans acquired in the City Bank merger by class, as of the date of merger.
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Fair value of acquired loans
Non-Credit
Impaired
Purchased
Credit
Impaired
$
$
17,398
8,463
26,716
5,571
8,905
6,115
73,168
$
$
2,592
158
798
244
188
3,980
$
$
Total
19,990
8,621
27,514
5,571
9,149
6,303
77,148
On May 4, 2018, the Company acquired 100% of the outstanding common shares of Kansas Bank Corporation (KBC), based
in Liberal, Kansas. Results of operations of KBC were included in the Companys results of operations beginning May 5, 2018.
Acquisition-related costs associated with this merger were $4,360 ($3,349 on an after-tax basis) for year ended December 31, 2018,
and $14 ($9 on an after-tax basis) for year ended December 31, 2017, and are included in merger expenses in the Companys income
statements.
The fair value of consideration exchanged exceeded the recognized amounts of the identifiable net assets and resulted in
goodwill of $14,010. Goodwill resulted from a combination of expected synergies, expansion in southwest Kansas with the addition
of five branch locations, growth opportunities and increases in stock prices after the stock exchange ratios were negotiated. The
following table summarizes the consideration paid for KBC and the amounts of the assets acquired and liabilities assumed recognized
at the merger date.
Fair value of consideration:
Common Stock
Cash
Recognized amounts of identifiable assets acquired and
liabilities assumed:
Cash and due from banks
Available-for-sale securities
Held-to-maturity securities
Federal Reserve Bank and Federal Home Loan Bank stock
Loans
Premises and equipment
Core deposit intangibles
Other assets
Total assets acquired
Deposits
Interest payable and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$
$
$
$
32,103
14,918
47,021
27,899
22,820
92,028
475
159,359
5,835
8,080
5,618
322,114
288,352
751
289,103
33,011
14,010
47,021
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered purchased credit
impaired as of the merger date. The faff ir value adjustments were determined using discounted contractual
cash flows. However, the
Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these loans were
not considered impaired at the merger date and were not subject to the guidance relating to purchased credit impaired loans, which
have shown evidence of credit deterioration since origination. Cash flows associated with purchased credit impaired loans are not
considered reasonably predictable and as such these loans are considered nonaccrual.
t
F-18
The following table presents the best available information about the loans acquired in the KBC merger as of the date of merger.
Contractually required principal
Non-accretable difference (expected losses)
Cash flows expected to be collected
Accretable yield
Fair value of acquired loans
Non-Credit
Impaired
Purchased Credit
Impaired
$
$
160,526
160,526
(3,928)
156,598
$
$
5,066
(2,305)
2,761
2,761
The following table presents the carrying value of the loans acquired in the KBC merger by class, as of the date of merger.
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Fair value of acquired loans
Non-Credit
Impaired
Purchased
Credit
Impaired
$
$
94,492
18,848
2,898
22,425
3,539
14,396
156,598
$
$
1,975
622
164
2,761
$
$
Total
96,467
19,470
2,898
22,425
3,539
14,560
159,359
Also on May 4, 2018, the Company acquired 100% of the outstanding common shares of Adams Dairy Bancshares, Inc.
(Adams), based in Blue Springs, Missouri. Results of operations of Adams were included in the Companys results of operations
beginning May 5, 2018. Acquisition-related costs associated with this merger were $1,217 ($961 on an after-tax basis) for year ended
December 31, 2018, and $4 ($2 on an after-tax basis) for year ended December 31, 2017, are included in merger expenses in the
Companys income statements.
F-19
The fair value of consideration exchanged exceeded the recognized amounts of the identifiable net assets and resulted in
goodwill of $8,465. Goodwill resulted from a combination of expected synergies, expansion in the Kansas City metro area with the
addition of one branch location, growth opportunities and increases in stock prices after the stock exchange ratios were negotiated.
The following table summarizes the consideration paid for Adams and the amounts of the assets acquired and liabilities assumed
recognized at the merger date.
Fair value of consideration:
Common stock
Cash
Recognized amounts of identifiable assets acquired and
liabilities assumed:
Cash and due from banks
Interest bearing time deposits in other banks
Available-for-sale securities
Held-to-maturity securities
Federal Reserve Bank and Federal Home Loan Bank stock
Loans
Premises and equipment
Bank-owned life insurance
Core deposit intangibles
Other assets
Total assets acquired
Deposits
Federal Home Loan Bank advances
Interest payable and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$
$
$
$
13,456
3,960
17,416
2,812
4,237
10,677
335
194
82,716
4,485
2,869
1,990
1,042
111,357
97,124
1,000
4,282
102,406
8,951
8,465
17,416
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered purchased credit
impaired as of the merger date. The faff ir value adjustments were determined using discounted contractual
cash flows. However, the
Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these loans were
not considered impaired at the merger date and were not subject to the guidance relating to purchased credit impaired loans, which
have shown evidence of credit deterioration since origination. Cash flows associated with purchased credit impaired loans are not
considered reasonably predictable and as such these loans are considered nonaccrual.
t
The following table presents the best available information about the loans acquired in the Adams merger as of the date of
merger.
Contractually required principal
Non-accretable difference (expected losses)
Cash flows expected to be collected
Accretable yield
Fair value of acquired loans
Non-Credit
Impaired
Purchased Credit
Impaired
$
$
84,225
84,225
(2,748)
81,477
$
$
1,477
(238)
1,239
1,239
F-20
The following table presents the carrying value of the loans acquired in the Adams merger by class, as of the date of merger.
Commercial real estate
Commercial and industrial
Residential real estate
Consumer
Fair value of acquired loans
Non-Credit
Impaired
Purchased
Credit
Impaired
$
$
74,657
1,002
4,955
863
81,477
$
$
820
419
1,239
$
$
Total
75,477
1,421
4,955
863
82,716
Assuming that the City Bank, KBC and Adams mergers would have taken place on January 1, 2017, total combined revenue
would have been $203,860 for year ended December 31, 2018 and $147,222 for year ended December 31, 2017. Net income would
have been $49,801 and $27,108 at December 31, 2018 and 2017. The pro forma amounts disclosed exclude merger expense from
non-interest expense, which is considered a material non-recurring adjustment. Separate revenue and earnr ings of the former Citytt
Bank, KBC and Adams are not available subsequent to the business combinations.
On November 10, 2017, the Company acquired 100% of the outstanding common shares of Eastman National Bancshares, Inc.,
based in Newkirk, Oklahoma (Eastman). Results of operations of Eastman were included in the Companys results of operations
beginning November 11, 2017. Acquisition-related costs associated with this merger are included in merger expenses in the
Companys income statement and were $146 ($110 on an aftff er-tax basis) for the year ended December 31, 2018, and $2,925 ($1,920
on an after-tax basis) for the year ended December 31, 2017.
The fair value of consideration exchanged exceeded the recognized amounts of the identifiable net assets and resulted in
goodwill of $20,743. Goodwill resulted from a combination of expected synergies, expansion in northern Oklahoma with the addition
of four branch locations, growth opportunities and increases in stock prices after the stock exchange ratios were negotiated. The
following table summarizes the consideration paid for Eastman and the amounts of the assets acquired and liabilities
recognized at the merger date.
assumed
a
Fair value of consideration:
Common stock
Cash
Recognized amounts of identifiable assets acquired and
liabilities assumed:
Cash and due from banks
Available-for-sale securities
Federal Reserve Bank and Federal Home Loan Bank stock
Loans
Premises and equipment
Core deposit intangible
Other real estate owned
Interest receivable
Other assets
Total assets acquired
Deposits
Federal funds purchased and retail repurchase agreements
Interest payable and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$
$
$
$
39,109
8,096
47,205
14,698
59,778
434
177,880
1,903
4,020
41
998
1,047
260,799
224,111
8,678
1,548
234,337
26,462
20,743
47,205
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered purchased credit
impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However,
the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these loans were
not considered impaired at the merger date and were not subject to the guidance relating to purchased credit impaired loans, which
F-21
have shown evidence of credit deterioration since origination. Cash flows associated with purchased credit impaired loans are not
considered reasonably predictable and as such these loans are considered nonaccrual.
The following table presents the best available information about the loans acquired in the Eastman merger as of the date of
merger.
Contractually required principal
Non-accretable difference (expected losses)
Cash flows expected to be collected
Accretable yield
Fair value of acquired loans
Non-Credit
Impaired
Purchased Credit
Impaired
$
$
171,788
171,788
(2,680)
169,108
$
$
12,849
(4,077)
8,772
8,772
The following table presents the carrying value of the loans acquired in the Eastman merger by class, as of the date of merger.
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Fair value of acquired loans
Non-Credit
Impaired
Purchased
Credit
Impaired
$
$
71,917
36,645
36,846
7,080
5,158
11,462
169,108
$
$
5,326
1,545
458
33
1,410
8,772
$
$
Total
77,243
38,190
37,304
7,113
5,158
12,872
177,880
Also on November 10, 2017, the Company acquired 100% of the outstanding common shares of Cache Holdings, Inc.
(Cache), based in Tulsa, Oklahoma. Results of operations of Cache were included in the Companys results of operations beginning
November 11, 2017. Acquisition-related costs associated with this merger are included in merger expenses in the Companys income
statement and were $166 ($124 on an after-tax basis for the year ended December 31, 2018, and $1,483 ($1,031 on an after-tax basis)
for the year ended December 31, 2017.
F-22
The fair value of consideration exchanged exceeded the recognized amounts of the identifiable net assets and resulted in
goodwill of $18,083. Goodwill resulted from a combination of expected synergies, expansion in northern Oklahoma with the addition
of one branch location, growth opportunities and increases in stock prices after the stock exchange ratios were negotiated. The
following table summarizes the consideration paid for Cache and the amounts of the assets acquired and liabilities
at the acquisition date.
assumed recognized
a
Fair value of consideration:
Common stock
Cash
Recognized amounts of identifiable assets acquired and
liabilities assumed:
Cash and due from banks
Federal Reserve Bank and Federal Home Loan Bank stock
Loans held for investment
Premises and equipment
Core deposit intangible
Bank-owned life insurance
Interest receivable
Other assets
Total assets acquired
Deposits
Federal Home Loan Bank advances
Bank stock loan
Interest payable and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$
$
$
$
39,480
12,877
52,357
10,273
2,053
300,715
4,235
1,580
3,883
778
1,813
325,330
278,706
9,402
1,000
1,948
291,056
34,274
18,083
52,357
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered purchased credit
impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However,
the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these loans were
not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which
have shown evidence of credit deterioration since origination. Cash flows associated with purchased credit impaired loans are not
considered reasonably predictable and as such these loans are considered nonaccrual.
The following table presents the best available information about the loans acquired in the Cache merger as of the date of
merger.
Contractually required principal
Non-accretable difference (expected losses)
Cash flows expected to be collected
Accretable yield
Fair value of acquired loans
Non-Credit
Impaired
Purchased Credit
Impaired
$
$
302,460
302,460
(3,017)
299,443
$
$
2,035
(371)
1,664
(392)
1,272
F-23
The following table presents the carrying value of the loans acquired in the Cache merger by class, as of the date of merger.
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Fair value of acquired loans
Non-Credit
Impaired
Purchased
Credit
Impaired
$
$
199,151
96,682
2,027
265
1,318
299,443
$
$
918
354
1,272
$
$
Total
200,069
97,036
2,027
265
1,318
300,715
On March 10, 2017, the Company acquired 100% of the outstanding common shares of Prairie State Bancshares, Inc., based in
Hoxie, Kansas (Prairie). Results of operations of Prairie were included in the Companys results of operations beginning March 11,
2017. Acquisition-related costs associated with this merger were $926 ($576 on an after-tax basis) and are included in merger
expenses in the Companys income statement for the year ended December 31, 2017.
The fair value of consideration exchanged exceeded the recognized amounts of the identifiable net assets and resulted in
goodwill of $5,713. Goodwill resulted from a combination of expected synergies, expansion in western Kansas with the addition of
three branch locations, growth opportunities and increases in stock prices after the stock exchange ratios were negotiated. The
following table summarizes the consideration paid for Prairie and the amounts of the assets acquired and liabilities
recognized at the acquisition date.
assumed
a
Fair value of consideration:
Common stock
Cash
Recognized amounts of identifiable assets acquired and
liabilities assumed:
Cash and due from banks
Available-for-sale securities
Held-to-maturity securities
Federal Reserve Bank and Federal Home Loan Bank stock
Loans
Premises and equipment
Core deposit intangible
Other assets
Total assets acquired
Deposits
Interest payable and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$
$
$
$
15,242
12,255
27,497
6,579
3,427
971
198
129,997
2,424
1,448
2,331
147,375
125,353
238
125,591
21,784
5,713
27,497
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered purchased credit
impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However,
the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these loans were
not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which
have shown evidence of credit deterioration since origination. Cash flows associated with purchased credit impaired loans are not
considered reasonably predictable and as such these loans are considered nonaccrual.
F-24
The following table presents the best available information about the loans acquired in the Prairie merger as of the date of
merger.
Contractually required principal
Non-accretable difference (expected losses)
Cash flows expected to be collected
Accretable yield
Fair value of acquired loans
Non-Credit
Impaired
Purchased Credit
Impaired
$
$
123,519
123,519
(2,279)
121,240
$
$
11,430
(2,673)
8,757
8,757
The following table presents the carrying value of the loans acquired in the Prairie merger by class, as of the date of merger.
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Fair value of acquired loans
Non-Credit
Impaired
Purchased
Credit
Impaired
$
$
9,224
11,203
137
25,593
1,451
73,632
121,240
$
$
144
974
2,960
4,679
8,757
$
$
Total
9,368
12,177
137
28,553
1,451
78,311
129,997
Assuming that the Prairie, Eastman and Cache mergers would have taken place on January 1, 2016, total combined revenue
would have been $141,843 for year ended December 31, 2017 and $106,969 for year ended December 31, 2016. Net income would
have been $32,539 and $24,480 at December 31, 2017 and 2016. The pro forma amounts disclosed exclude merger expense from
non-interest expense, which is considered a material non-recurring adjustment. Separate revenue and earnr ings of the former Prairie,
Eastman and Cache are not available subsequent to the business combinations.
NOTE 3 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.
December 31, 2018
,
Available-for-sale securities
Residential mortgage-backed securities (issued by
government-sponsored entities)
December 31, 2017
,
Available-for-sale securities
Residential mortgage-backed securities (issued by
government-sponsored entities)
State and political subdivisions
Equity securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
$
$
173,503
173,503
163,374
195
500
164,069
$
$
$
$
12
12
36
36
$
$
$
$
(4,640) $
(4,640) $
168,875
168,875
(1,819) $
(14)
(1,833) $
161,591
195
486
162,272
F-25
The amortized cost and fair value of held-to-maturity securities and the related gross unrecognized gains and losses were as
follows.
,
December 31, 2018
Held-to-maturity securities
y
U.S. Government-sponsored entities
Residential mortgage-backed securities (issued by
government sponsored entities)
Corporate
Small Business Administration loan pools
State and political subdivisions
December 31, 2017
,
Held-to-maturity securities
y
U.S. Government-sponsored entities
Residential mortgage-backed securities (issued by
government sponsored entities)
Corporate
Small Business Administration loan pools
State and political subdivisions
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair Value
$
3,873
$
7
$
(20) $
3,860
567,766
22,993
1,746
151,978
748,356
$
2,354
234
804
3,399
$
(9,653)
(326)
(18)
(1,749)
(11,766) $
560,467
22,901
1,728
151,033
739,989
998
$
$
(13) $
985
383,875
22,991
2,048
125,550
535,462
$
573
355
1,694
2,622
$
(4,866)
(14)
(447)
(5,340) $
379,582
23,346
2,034
126,797
532,744
$
$
$
The tables above present unrecognized losses on held-to-maturity securities since date of designation.
The fair value and amortized cost of debt securities at December 31, 2018, by contractual
t
t maturity,
maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without
or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
t
is shown below. Expected
call
Within one year
One to five years
Five to ten years
After ten years
Mortgage-backed securities
Total debt securities
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
$
$
$
173,503
173,503
$
$
168,875
168,875
$
6,425
36,413
54,205
83,547
567,766
748,356
$
$
Fair
Value
6,474
36,586
54,275
82,187
560,467
739,989
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately
$800,744 at December 31, 2018 and $570,146 at December 31, 2017. At year-end 2018 and 2017, there were no holdings of
securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders equity.
F-26
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 December 31, 2018 and 2017.
,
December 31, 2018
Available-for-sale securities
Residential mortgage-backed (issued by
government-sponsored entities)
Total temporarily impaired securities
December 31, 2017
,
Available-for-sale securities
Residential mortgage-backed (issued by
government-sponsored entities)
Equity securities
Total temporarily impaired securities
December 31, 2018
,
Held-to-maturity securities
U.S. Government-sponsored entities
Residential mortgage-backed (issued by
y
government-sponsored entities)
Corporate
Small Business Administration loan pools
State and political subdivisions
Total temporarily impaired securities
December 31, 2017
,
Held-to-maturity securities
U.S. Government-sponsored entities
Residential mortgage-backed (issued by
y
government-sponsored entities)
Corporate
Small Business Administration loan pools
State and political subdivisions
Total temporarily impaired securities
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
$
$
$
$
48,332
48,332
78,884
78,884
$
$
$
$
(575) $ 115,844
(575) $ 115,844
(437) $
(437) $
58,540
486
59,026
$
$
$
$
(4,065) $ 164,176
(4,065) $ 164,176
(1,382) $ 137,424
486
(1,396) $ 137,910
(14)
$
$
$
$
(4,640)
(4,640)
(1,819)
(14)
(1,833)
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
$
1,882
$
(3) $
982
$
(17) $
2,864
$
(20)
31,270
7,500
40,415
81,067
$
(356)
(326)
(473)
294,127
5,182
1,728
45,137
(1,158) $ 347,156
(10,579)
(49)
(37)
(1,561)
325,397
12,682
1,728
85,552
$ (12,243) $ 428,223
(10,935)
(375)
(37)
(2,034)
$ (13,401)
$
$
985
$
(13) $
985
$
(13)
$
$
147,281
5,312
926
22,100
$ 175,619
$
(1,263)
(16)
(1)
(123)
198,239
1,108
26,387
(1,403) $ 226,719
$
(5,030)
(38)
(439)
345,520
5,312
2,034
48,487
(5,520) $ 402,338
$
(6,293)
(16)
(39)
(562)
(6,923)
As of December 31, 2018, the Company held 36 available-for-sale securities and 449 held-to-maturity securities in an
unrealized loss position. The tables above present unrealized losses on held-to-maturity securities since the date of their purchase,
independent of the impact associated with changes in cost basis upon transfer from the available-for-sale designation to the held-to-
maturity designation.
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.
F-27
The proceeds from sales and the associated gains and losses on available-for-sale securities reclassified from other
comprehensive income to income are listed below.
Proceeds
Gross gains
Gross losses
Income tax expense on net realized gains
$
2018
2017
2016
$
$
84,087
271
103
70,957
893
342
Included in net gains on sales of and settlement of securities in the Companys consolidated statement of income for 2016 the
Company recorded an other-than-temporary impairment loss in the amount of $414. The impairment loss reflects the difference
between the amortized cost of the Companys investment in AgriBank 9.125% subordinated notes, due July 2019 and the fair value
attributable to AgriBanks redemption call of those notes.
NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table lists categories of loans at December 31, 2018 and 2017.
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Total loans
Allowance for loan losses
Net loans
2018
$ 1,251,992
582,527
444,540
139,332
62,894
94,123
2,575,408
(11,454)
$ 2,563,954
$
2017
987,661
521,510
376,705
86,486
49,361
95,547
2,117,270
(8,498)
$ 2,108,772
During 2017 the Company purchased one pool of residential real estate loans totaling $14,767. As of December 31, 2018 and
2017, residential real estate loans include $64,558 and $85,868 of purchased residential real estate loans.
Overdraft deposit accounts are reclassified and included in consumer loans above. These accounts totaled $1,279 and $741 at
December 31, 2018 and 2017.
The following tables present the activity in the allowance for loan losses by class for the years ended December 31, 2018, 2017
and 2016.
December 31, 2018
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
Total ending allowance balance
December 31, 2017
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
Total ending allowance balance
Commercial
Real Estate
Commercial
and
Industrial
Residential
Real
Estate
Agricultural
Real
Estate
Consumer Agricultural
Total
$
$
2,740 $
1,832
(1,779)
1,869
4,662 $
2,136 $
636
(118)
53
2,707 $
2,262 $
97
(293)
254
2,320 $
768 $
319 $
146
(93)
19
391 $ 1,070 $
1,188
(1,431)
545
273 $ 8,498
3,961
62
(3,757)
(43)
12
2,752
304 $ 11,454
Commercial
Real Estate
Commercial
and
Industrial
Residential
Real
Estate
Agricultural
Real
Estate
Consumer Agricultural
Total
$
$
2,420 $
(69)
(271)
660
2,740 $
1,881 $
651
(431)
35
2,136 $
1,765 $
604
(350)
243
2,262 $
35 $
287
(16)
13
319 $
266 $
1,236
(1,025)
291
768 $
244
(42)
6
65 $ 6,432
2,953
(2,135)
1,248
273 $ 8,498
F-28
December 31, 2016
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
Total ending allowance balance
Commercial
Real Estate
Commercial
and
Industrial
Residential
Real
Estate
Agricultural
Real
Estate
Consumer Agricultural
g
Total
$
$
2,051 $
725
(557)
201
2,420 $
1,366 $
700
(226)
41
1,881 $
1,824 $
75
(299)
165
1,765 $
29 $
6
(23)
23
35 $
187 $
567
(584)
96
266 $
49 $ 5,506
2,119
46
(1,720)
(31)
1
527
65 $ 6,432
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 December 31, 2018 and 2017.
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit impaired loans
Total
Loan Balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit impaired loans
Total
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit impaired loans
Total
Loan Balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit impaired loans
Total
Commercial
Real Estate
Commercial
and
Industrial
Residential
Real
Estate
Agricultural
Real
Estate
Consumer Agricultural
Total
242 $
3,695
725
4,662 $
185 $
2,493
29
2,707 $
391 $
1,861
68
2,320 $
22 $
367
2
62 $
925
83
391 $ 1,070 $
10 $
293
1
304 $
912
9,634
908
11,454
23,323 $
5,020 $
4,434 $
856 $
678 $
1,215,173
13,496
571,171
6,336
437,219
2,887
133,415
5,061
61,978
238
$1,251,992 $ 582,527 $444,540 $ 139,332 $ 62,894 $
2,252 $
89,194
2,677
36,563
2,508,150
30,695
94,123 $2,575,408
Commercial
Real Estate
Commercial
and
Industrial
Residential
Real
Estate
Agricultural
Real
Estate
Consumer Agricultural
Total
130 $
2,582
28
2,740 $
87 $
2,028
21
2,136 $
386 $
1,815
61
2,262 $
46 $
190
83
319 $
56 $
712
768 $
36 $
236
1
273 $
741
7,563
194
8,498
2,728 $
7,886 $
4,829 $
533 $
556 $
971,376
13,557
507,894
5,730
369,471
2,405
$ 987,661 $ 521,510 $376,705 $
82,493
3,460
86,486 $ 49,361 $
48,802
3
1,050 $
90,795
3,702
17,582
2,070,831
28,857
95,547 $2,117,270
$
$
$
$
$
$
Excluding purchased credit impaired loans, included in the above tables is $827,676, $796,064 and $388,251 of loans
purchased at a discount acquired as part of a merger and the discount associated with these loans is $11,372, $7,231 and $3,596 at
December 31, 2018, 2017 and 2016.
F-29
The following table presents information related to impaired loans, excluding those purchased credit impaired loans which have
not deteriorated since acquisition, by class of loans as of and for the year ended December 31, 2018.
December 31, 2018
With no related allowance recorded:
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Subtotal
d
With an allowance recorded:
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Subtotal
Total
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Loan Losses
Allocated
Average
Recorded
Investment
Interest
Income
g
Recognized
$
$
20,940
3,446
533
2,038
61
756
27,774
8,700
2,255
4,934
261
1,144
162
17,456
45,230
$
$
20,902
3,396
527
2,035
55
756
27,671
7,179
1,911
4,582
242
859
106
14,879
42,550
$
$
$
967
214
459
24
145
11
1,820
1,820
$
5,652
5,629
744
1,364
32
411
13,832
2,913
1,068
4,188
429
568
418
9,584
23,416
$
$
150
66
20
18
2
18
274
142
53
74
2
33
4
308
582
The above table presents interest income for the twelve months ended December 31, 2018. Interest income recognized in the
aba ove table was substantially recognized on the cash basis. The recorded investment in loans excludes accrued interest receivablea
to immateriality.
due
The following table presents information related to impaired loans, excluding purchased credit impaired loans which have not
deteriorated since acquisition, by portfolio and class of loans as of and for the year ended December 31, 2017.
December 31, 2017
With no related allowance recorded:
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Subtotal
d
With an allowance recorded:
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Subtotal
Total
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Loan Losses
Allocated
Average
Recorded
Investment
Interest
Income
g
Recognized
$
$
1,878
8,679
1,230
52
1
7
11,847
4,049
1,310
4,868
1,266
677
1,798
13,968
25,815
$
$
1,567
8,020
969
52
7
10,615
1,597
1,113
4,468
1,034
559
1,444
10,215
20,830
$
$
$
158
108
447
129
56
37
935
935
$
1,426
4,572
587
270
83
6,938
1,813
663
3,916
527
448
469
7,836
14,774
$
$
267
252
29
12
1
73
634
16
51
95
16
15
2
195
829
The above table presents interest income for the twelve months ended December 31, 2017. Interest income recognized in the
aba ove table was substantially recognized on the cash basis. The recorded investment in loans excludes accrued interest receivablea
to immateriality.
due
F-30
The following tables present the aging of the recorded investment in past due loans as of December 31, 2018 and 2017, by
portfolio and class of loans.
December 31, 2018
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Total
December 31, 2017
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Total
$
$
$
$
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
1,302 $
509
782
501
186
3,280 $
259 $
2,467
2,188
30
157
3
5,104 $
$ 12,768 $1,237,663 $1,251,992
582,527
444,540
18
139,332
62,894
94,123
18 $ 33,203 $2,533,803 $2,575,408
572,597
436,295
134,445
61,322
91,481
6,954
5,257
4,857
914
2,453
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
1,284 $
251
1,457
123
359
415
3,889 $
22 $
6
1,176
112
1,316 $
$ 11,607 $ 974,748 $ 987,661
521,510
508,036
376,705
367,924
86,486
82,370
49,361
48,331
95,547
90,380
2,117,270
$ 40,276 $2,071,789
13,217
6,148
3,993
559
4,752
Credit Quality Indicators
Q
y
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 unclassified credits unless downgraded due to payment status or reviewed as part of a larger credit
relationship. The Company uses the following definitions for risk ratings:
Pass: Loans classified as pass do not have any noted weaknesses and repayment of the loan is expected. These loans are
considered unclassified.
Special Mention: Loans classified as special mention have a potential weakness that deserves managements close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the
Companys credit position at some future date. These loans are considered classified.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected. These loans are considered classified.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable and improbable. These loans are considered classified.
F-31
The risk category of loans by class of loans is as follows as of December 31, 2018 and 2017.
December 31, 2018
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Total
December 31, 2017
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Consumer
Agricultural
Total
$
$
Unclassified
Classified
$
$
$
$
1,215,015
553,045
439,184
129,285
61,976
90,848
2,489,353
Unclassified
971,458
500,141
370,151
77,084
48,777
88,261
2,055,872
$
$
$
$
36,977
29,482
5,356
10,047
918
3,275
86,055
Classified
16,203
21,369
6,554
9,402
584
7,286
61,398
Total
1,251,992
582,527
444,540
139,332
62,894
94,123
2,575,408
Total
987,661
521,510
376,705
86,486
49,361
95,547
2,117,270
Purchased Credit Impaired Loans
p
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 purchased credit impaired loans as of December 31, 2018, 2017 and 2016 were as follows.
Contractually required principal payments
Discount
Recorded investment
2018
2017
2016
$
$
40,772
(10,077)
30,695
$
$
41,349
(12,492)
28,857
$
$
27,413
(8,914)
18,499
The accretable yield associated with these loans was $3,785, $1,980 and $1,063 as of December 31, 2018, 2017 and 2016. The
interest income recognized on these loans was $1,096, $1,785 and $1,237 for the years ended December 31, 2018, 2017 and 2016.
For the years ended December 31, 2018 and 2017, there was $714 and $194 provision for loan losses recorded for these loans. There
was no provision for loan losses recorded for these loans for the year ended December 31, 2016.
Troubled Debt Restructuringsg
The company had no material loans modified under troubled debt restructurings as of December 31, 2018 and 2017.
NOTE 5 OTHER REAL ESTATE OWNED
Changes in other real estate owned for the years ended December 31, 2018 and 2017 were as follows.
Beginning of year
Transfers in
Acquired in acquisition
Net (loss) gain on sales
Proceeds from sales
Additions to valuation reserve
Recorded investment
2018
2017
$
$
7,907
3,228
307
(75)
(4,730)
6,637
(265)
6,372
$
$
8,656
4,562
41
121
(5,461)
7,919
(12)
7,907
F-32
Expenses related to other real estate owned for the years ended December 31, 2018, 2017 and 2016 were as follows.
Net loss (gain) on sales
Gain on initial valuation of other real estate properties
received
Provision for unrealized losses
Operating expenses, net of rental income
2018
2017
2016
75
$
(121) $
(156)
(920)
265
509
(71) $
12
632
523
$
44
498
386
$
$
The balance of real estate owned includes $720 of foreclosed residential real estate properties recorded as a result of obtaining
physical possession of the property at December 31, 2018 and $704 at December 31, 2017. The recorded investment of consumer
mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $2,064 at
December 31, 2018 and $2,186 at December 31, 2017.
NOTE 6 PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, are as follows.
ff
Land
Buildings and improvements
Furniture, fixtures and equipment
Less: accumulated depreciation
Premises and equipment, net
2018
2017
$
$
16,988
62,116
17,217
96,321
(15,879)
80,442
$
$
13,842
51,703
11,620
77,165
(13,716)
63,449
g
Operating Leases
p
The Company leases certain branch properties under operating leases. Rent expense was $695, $691 and $554 for 2018, 2017
and 2016. Rent commitments at December 31, 2018, before considering renewal options that generally are present, were as follows.
Due in one year or less
Due after one year through two years
Due after two years through three years
Due after three years through four years
Due after four years through five years
Thereafter
Total
$
$
655
585
362
352
303
1,911
4,168
NOTE 7 GOODWILL AND CORE DEPOSIT INTANGIBLES
The assets and liabilities acquired in business combinations are recorded at their estimated fair values at the acquisition
date. The excess of the purchase price over the estimated fair value of the net assets for tax free acquisitions is recorded as goodwill,
none of which is deductible for tax purposes. The excess of the purchase price over the estimated fair value of the net assets for
taxable acquisitions is recorded as goodwill and is deductible for tax purposes.
F-33
The carrying basis of goodwill and core deposit intangibles as of and for the years ended December 31, 2018 and 2017 were as
follows.
Balance as of January 1, 2017
Acquired in acquisition
Amortization
Balance as of December 31, 2017
Acquired in acquisition
Amortization
Balance as of December 31, 2018
$
$
Goodwill
58,874 $
46,033
104,907
26,805
131,712 $
Core Deposit
4,715
7,048
(1,025)
10,738
13,430
(2,443)
21,725
Estimated amortization expense for each of the following five years and thereaftff er is listed in the following table.
Expensed in one year or less
Expensed after one year through two years
Expensed after two years through three years
Expensed after three years through four years
Expensed after four years through five years
Thereafter
Total
$
$
2,949
2,822
2,759
2,696
2,637
7,862
21,725
NOTE 8 QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS
The Company invests in qualified affordable housing projects. At December 31, 2018, 2017 and 2016, the balances of the
investments in qualified affordable housing projects were $6,689, $4,604 and $4,983. These balances are reflected in the other assets
line in the consolidated balance sheets. Total unfunded commitments related to the investments in qualified affordable housing
projects totaled $3,965, $1,967 and $2,504 at December 31, 2018, 2017 and 2016. The Company expects to fulfill these commitments
during the years 2019 through 2033.
During the years ended December 31, 2018, 2017 and 2016, the Company recognized amortization expense of $412, $376 and
$296, which was included within pretax income on the consolidated statements of income. Additionally, during the years ended
December 31, 2018, 2017 and 2016, the Company recognized tax credits from its investment in affordable
$657 and $625.
housing tax credits of $568,
ff
NOTE 9 DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps Designated as Fair Value Hedges
g
p
g
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 counterpart
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 December 31, 2018, the portfolio of interest rate swaps had a weighted average
maturity of 7.7 years, a weighted average pay rate of 4.94% and a weighted average rate received of 5.10%. At December 31, 2017,
the portfolio of interest rate swaps had a weighted average maturity of 8.7 years, a weighted average pay rate of 4.94% and a weighted
average rate received of 4.13%.
y a
rr
Stand-Alone Derivatives
The Company periodically enters into interest rate swaps with out borrowers and simultaneously enters into swaps with a
counterparty with offsetting terms for the purpose of providing our borrowers long-term fixed rate loans. Neither swap is designated
as a hedge and both are marked to market through earnings. At December 31, 2018, this portfolio of interest rate swaps had a
weighted average maturity of 7.6 years, weighted average pay rate of 5.18% and a weighted rate received of 5.18%. The Company
had none of these swaps at December 31, 2017.
F-34
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 December 31, 2018, the interest rate capa had a term
of 0.9 years and a cap rate of 4.50%. At December 31, 2017, the interest rate cap had a term of 1.9 years and a cap rate of 4.50%.
)
Reconciliation of Derivative Fair Values and Gains/(Losses)
(
f
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 Companys overall exposure to credit or market risk, generally, the exposure is significantly smaller.
The following table shows the notional balances and fair values (including net accrued interest) of the derivatives outstanding by
derivative type at December 31, 2018 and December 31, 2017.
Derivatives designated as hedging instruments:
Interest rate swaps
Total derivatives designated as hedging relationships
Derivatives not designated as hedging instruments:
Interest rate swaps
Interest rate caps/floors
Total derivatives not designated as hedging
instruments
Total
Cash collateral
Netting adjustments
Net amount presented in balance sheet
Notional
Amount
December 31, 2018
Derivative
Assets
Derivative
Liabilities
Notional
Amount
December 31, 2017
Derivative
Assets
Derivative
Liabilities
$
16,743
16,743
$
38,073
2,264
40,337
$ 57,080
$
242
242
690
1
691
933
(531)
289
691
$
$
$
17,231
17,231
$
$
2,574
2,574
19,805
$
777
777
777
(541)
289
525
$
1
1
1
164
165
$
46
46
46
(210)
164
The following table shows net gains or losses on derivatives and hedging activities for the years ended December 31, 2018,
2017 and 2016.
2018
2017
2016
$
$
$
202
202
202
(1)
$
(1)
(1) $
(1)
(1)
(1)
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 swaps
Interest rate caps/floors
Total net gains (losses) related to derivatives not designated
as hedging instruments
Net gains (losses) on derivatives and hedging activities
$
F-35
The following table shows the recorded net gains or losses on derivatives and the related hedged items in fair value hedging
relationships and the impact of those derivatives on the Companys net interest income for the years ended December 31, 2018, 2017
and 2016.
Commercial real estate loans
Total
Commercial real estate loans
Total
Commercial real estate loans
Total
NOTE 10 DEPOSITS
December 31, 2018
Gain/(Loss)
on
Derivatives
Gain/(Loss)
on Hedged
Items
Net Fair Value
Hedge
Ineffectiveness
Effect of
Derivatives on
Net Interest
Income
$
$
283
283
$
$
(283) $
(283) $
$
$
(40)
(40)
December 31, 2017
Gain/(Loss)
on
Derivatives
Gain/(Loss)
on Hedged
Items
Net Fair Value
Hedge
Ineffectiveness
Effect of
Derivatives on
Net Interest
Income
$
$
12
12
$
$
(12) $
(12) $
$
$
(137)
(137)
December 31, 2016
Gain/(Loss)
on
Derivatives
Gain/(Loss)
on Hedged
Items
Net Fair Value
Hedge
Ineffectiveness
Effect of
Derivatives on
Net Interest
Income
$
$
211
211
$
$
(211) $
(211) $
$
$
(199)
(199)
Time deposits that met or exceeded the FDIC insurance limit of $250 totaled $316,288 and $245,321 as of December 31, 2018
and 2017.
At December 31, 2018 and 2017, Certificate of Deposit Account Registry Services (CDARS) deposits of $131,107 and
$62,988 were included in the Companys time deposit balance. Of the CDARS deposits at December 31, 2018 and 2017, $20,933 and
$22,934 were reciprocal customer funds placed in the CDARS program. CDARS allows Equity Bank to break large deposits into
smaller amounts and place them in a network of other CDARS banks to ensure that FDIC insurance coverage is gained on the entire
deposit. Reciprocal deposits are not considered brokered deposits as long as the aggregate balance is less than the lesser of 20% of
total liabilities or $5 billion and Equity Bank is well capitalized and well rated. All non-reciprocal deposits and reciprocal deposits in
excess of regulatory limits are considered brokered deposits.
At December 31, 2018, the scheduled maturities of time deposits are as follows.
Due in one year or less
Due after one year through two years
Due after two years through three years
Due after three years through four years
Due after four years through five years
Thereafter
Total
$
$
673,838
209,695
44,784
63,810
14,720
1,059
1,007,906
F-36
NOTE 11 BORROWINGS
Federal funds purchased and retail repurchase agreements
g
p
p
f
Federal funds purchased and retail repurchase agreements included the following at December 31, 2018 and 2017.
Federal funds purchased
Retail repurchase agreements
2018
2017
$
$
$
50,068 $
37,492
Securities sold under agreements to repurchase (retail repurchase agreements) consist of obligations of the Company to other
parties. The obligations are secured by residential mortgage-backed securities held by the Company with a fair value of $51,701 and
$44,768 at December 31, 2018 and December 31, 2017. The agreements are on a day-to-day basis and can be terminated on demand.
The following table presents the borrowing usage and interest rate information
ff
for federal funds purchased and retail repurchase
agreements at and for the years ended December 31, 2018 and 2017.
Average daily balance during the period
Average interest rate during the period
Maximum month-end balance during the period
Weighted average interest rate at period-end
$
$
2018
2017
43,536
0.26%
53,815
$
$
0.28%
25,823
0.25%
43,843
0.23%
Federal Home Loan Bank advances
Federal Home Loan Bank advances as of December 31, 2018 and 2017 were as follows.
Federal Home Loan Bank line of credit advances
Federal Home Loan Bank fixed rate term advances
Total principal outstanding
Federal Home Loan Bank fixed rate term advances, fair market value
adjustments
Total Federal Home Loan Bank advances
2018
2017
368,770
16,049
384,819
79
384,898
$
$
347,692
347,692
347,692
$
$
At December 31, 2018 and 2017, the Company had $368,770 and $347,692 drawn against its line of credit at a weighted
average rate of 2.65% and 1.47%.
At December 31, 2018 and 2017, the Company had undisbursed advance commitments (letters of credit) with the Federal Home
Loan Bank of $31,451 and $5,690. These letters of credit were obtained in lieu of pledging securities to secure public fund deposits
that are over the FDIC insurance limit.
The advances, Mortgage Partnership Finance credit enhancement obligations and letters of credit were collateralized by certain
qualifying loans totaling $951,196 and $478,966 at December 31, 2018 and 2017. Based on this collateral and the Companys
holdings of Federal Home Loan Bank stock, the Company was eligible to borrow an additional $534,627 and $125,271 at December
31, 2018 and 2017.
Future principal repayments of the December 31, 2018 outstanding balances are as follows.
Due in one year or less
Due after one year through two years
Due after two years through three years
Due after three years through four years
Due after four years through five years
Thereafter
Total
$
$
371,724
2,988
2,357
2,357
2,357
3,036
384,819
F-37
Bank stock loan
On March 13, 2017, the Company entered into an agreement with an unaffiliated financial institution that provided for a
maximum borrowing facility of $30,000, secured by the Companys stock in Equity Bank. The borrowing facility was renewed on
March 12, 2018, amended March 11, 2019 to provide a maximum borrowing facility of $40,000 and matures May 15, 2020. 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
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 20 basis points per annum on the unused portion of the maximum borrowing facility.
Bank stock loan advances as of December 31, 2018 and 2017 are listed below.
December 31, 2018
Bank stock loan
December 31, 2017
Bank stock loan
Outstanding
Balance
Weighted Average
Rate
15,450
5.50%
Outstanding
Balance
Weighted Average
Rate
2,500
4.50%
$
$
Future principal repayments of the December 31, 2018 outstanding balances are as follows.
Due in one year or less
Due after one year through two years
Due after two years through three years
Due after three years through four years
Due after four years through five years
Thereafter
Total
$
$
1,850
1,600
1,600
1,600
8,800
15,450
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 12 SUBORDINATED DEBENTURES
In conjunction with the 2012 acquisition of First Community Bancshares, Inc. (FCB), the Company assumed certain
subordinated debentures owed to special purpose unconsolidated subsidiaries that are controlled by the Company, FCB Capital Trust
II and FCB Capital Trust III, (CTII and CTIII, respectively).
On March 24, 2005, CTII, an unconsolidated subsidiary of the Company, issued $10,000 of variable rate trust preferred
securities, all of which are outstanding at December 31, 2018 and 2017. The trust
distributions quarterly at three-month LIBOR plus 2.00% (4.44% at December 31, 2018 and 3.36% at December 31, 2017) on the
stated liquidation amount of the trust preferred securities. As an integral part of the acquisition of FCB, the Company has guaranteed
fully and unconditionally all of the obligations of CTII. The guaranty covers the quarterly distributions and payments on liquidation
or redemption of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on April 15,
2035 or upon earlier redemption. The Company has the right to redeem the trust preferred securities in whole or in part, on or after
April 15, 2015 at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. The
proceeds from the sale of the trust preferred securities and the issuance of $310 in common securities to FCB were used by CTII to
purchase $10,310 of floating rate subordinated debentures of FCB which have the same payment terms as the trust preferred
securities.
preferred securities issued by CTII accrue and pay
rr
On March 30, 2007, CTIII, an unconsolidated subsidiary of the Company, issued $5,000 of variable rate trust preferred
securities, all of which are outstanding at December 31, 2018 and 2017. The trust
distributions quarterly at three-month LIBOR plus 1.89% (4.68% at December 31, 2018, and 3.48% at December 31, 2017) on the
stated liquidation amount of the trust preferred securities. As an integral part of the acquisition of FCB, the Company has guaranteed
fully and unconditionally all of the obligations of CTIII. The guaranty covers the quarterly distributions and payments on liquidation
or redemption of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on June 15,
preferred securities issued by CTIII accrue and pay
q
rr
F-38
2037 or upon earlier redemption. The Company has the right to redeem the trust preferred securities in whole or in part at a
redemption price specified in the indenture plus any accruedrr
but unpaid interest to the redemption date. The proceeds from the sale of
the trust preferred securities and the issuance of $155 in common securities to FCB were used by CTIII to purchase $5,155 of floating
rate subordinated debentures of FCB which have the same payment terms as the trust preferred securities.
In conjunction with the 2016 acquisition of Community First Bancshares, Inc. (CFBI), the Company assumed certain
subordinated debentures owed to special purpose unconsolidated subsidiaries, Community First (AR) Statutory Trust I, (CFSTI).
The trust preferred securities issued by CFSTI accrue and pay distributions quarterly at three-month LIBOR plus 3.25% (6.07% at
December 31, 2018 and 4.92% at December 31, 2017) on the stated liquidation amount of the trust preferred securities. These trust
preferred securities are mandatorily redeemable upon maturity on December 26, 2032 or upon earlier redemption.
rr
The common securities issued to the Company by the trusts possess sole voting rights with respect to matters involving those
entities. The Company has the right to defer the payment of interest on all of its outstanding trust preferred securities. The Company
has the right to declare such a deferral for up to 20 consecutive quarterly periods and deferral may only be declared as long as the
Company is not then in default under the provisions of the Amended and Restated Trust Agreements. During the deferral period,
and the unpaid interest is compounded. As long as the deferral period continues, the
interest on the indebtedness continues to accruer
Company is prohibited from: (i) declaring or paying any dividend on any of its capital stock, which would include both its common
stock and the outstanding preferred stock issued to the Treasury, or (ii) making any payment on any debt security that is ranked
equally with or junior to the securities issued by the trust.
As a part of the acquisition of FCB, the Company recorded the debentures at an estimated fair value of $8,270. As part of the
acquisition of CFBI, the Company recorded the debentures at an estimated fair value of $4,187. The initial fair value adjustments will
be amortized against earnings on a prospective basis. At December 31, 2018 and 2017, the contractual balance and the unamortized
fair value adjustments were as shown below.
Contractual balance
Unamortized fair value adjustment
Net book value
2018
2017
20,620
(6,360)
14,260
$
$
20,620
(6,652)
13,968
$
$
Subordinated debentures are included in Tier 1 capital for purposes of determining the Companys compliance with regulatory
capital requirements.
NOTE 13 CONTRACTUAL OBLIGATIONS
At December 31, 2018 and 2017, the Company had contractual obligations of $3,965 and $1,967. Contractual obligations
represent commitments made by the Company to make capital investments in limited-liability entities that invest in qualified
affordable housing projects. The Company expects to fulfill these commitments during the years 2019 through 2033.
NOTE 14 STOCKHOLDERS EQUITY
Preferred Stock
f
The Companys articles of incorporation provide for the issuance of 10,000,000 shares of preferred stock.
On August 11, 2011, as part of the Small Business Lending Fund (SBLF), the Company entered into an SBLF Purchase
Agreement with the United States Treasury. Under the SBLF Purchase Agreement, the Company issued the Series C preferred stock
having a per share liquidation amount of $1,000 per share. The Series C preferred stock qualified as Tier 1 capital and paid quarterly
dividends at a rate of 1.0% at December 31, 2015. At December 31, 2015, there were 16,372 shares of senior non-cumulative
perpetual preferred stock, Series C (the Series C preferred stock) issued and outstanding. 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. There were no shares of preferred
stock outstanding at December 31, 2018, 2017 or 2016.
Common stock
The Companys 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
F-39
value of $0.01 per share. At December 31, 2018 and 2017, the following table presents shares that were issued and were held in
treasury or were outstanding.
Class A common stock issued
Class A common stock held in treasury
Class A common stock outstanding
Class B common stock issued
Class B common stock held in treasury
Class B common stock outstanding
2018
17,244,138
(1,271,043)
15,973,095
234,903
(234,903)
2017
15,876,650
(1,271,043)
14,605,607
234,903
(234,903)
Treasury stock is stated at cost, determined by the first-in, first-out method.
On March 10, 2017, the Company completed its merger with Prairie State Bancshares, Inc. (Prairie) of Hoxie, Kansas. There
were a total of 479,465 shares of Class A common stock issued in connection with this merger.
On November 10, 2017, the Company completed its mergers with Eastman National Bancshares, Inc. (Eastman) of Newkirk,
Oklahoma and Cache Holdings, Inc. (Cache) of Tulsa, Oklahoma. There were a total of 1,179,747 shares of Class A common stock
issued in connection with the Eastman merger and 1,190,941 shares of Class A common stock issued in connection with the Cache
merger.
On May 4, 2018, the Company completed its mergers with Kansas Banking Corporation (KBC), of Liberal, Kansas, and
Adams Dairy Bancshares, Inc. (Adams) of Blue Springs, Missouri. There were a total of 820,849 shares of Class A common stock
issued in connection with the KBC merger and 344,063 shares of Class A common stock issued in connection with the Adams merger.
p
Restricted stock unit plan termination loans
In connection with termination of the Companys restricted stock unit plan (RSUP), 203,216 shares of Class A common stock
in
were issued in May 2015 to employees with vested restricted stock units. Additional paid-in capital includes $224 of tax benefitsff
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 participants federal and state income tax
withholding obligation associated with the stock issuance. These loans totaling $121 at December 31, 2018, are collateralized by the
shares received with a maturity date of December 31, 2019, and an interest rate of 1.68%.
)
Accumulated other comprehensive income (loss)
p
(
For the years ended December 31, 2018 and 2017, 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. During 2018, 2017 and 2016, gains
of $0, $271 and $893 were reclassified from accumulated other comprehensive income to net gains on sales of and settlement of
securities within the consolidated statement of income and $453, $532 and $615 of accretion expense were reclassified from
accumulated other comprehensive income to taxablea
interest income on securities within the consolidated statement of income.
Components of accumulated other comprehensive income as of December 31, 2018 and 2017 were as follows.
,
December 31, 2018
Net unrealized or unamortized gains (losses)
Tax effect
,
December 31, 2017
Net unrealized or unamortized gains (losses)
Tax effect
Available
-for-Sale
Securities
Held-to
-Maturity
Securities
Accumulated
Other
Comprehensive
Income
$
$
$
$
(4,628) $
1,173
(3,455) $
(1,797) $
455
(1,342) $
(1,891) $
479
(1,412) $
(2,344) $
594
(1,750) $
(6,519)
1,652
(4,867)
(4,141)
1,049
(3,092)
F-40
NOTE 15 INCOME TAXES
Income tax expense is listed in the following table.
Current income tax expense
Federal
State
Total current income tax expense
Deferred income tax expense
Federal
State
Total deferred income tax expense
Total income tax expense
2018
2017
2016
$
$
4,655
2,212
6,867
2,933
550
3,483
10,350
$
$
6,474
1,282
7,756
2,550
71
2,621
10,377
$
$
2,863
723
3,586
865
44
909
4,495
A reconciliation of income tax expense at the U.S. federal statutory rate (21% in 2018; 35% in 2017and 2016) to the Companys
actual income tax expense is shown below.
Computed at the statutory rate
Increase (decrease) resulting from:
State and local taxes, net of federal benefit
Tax-exempt interest
Non-taxable life insurance income
Non-deductible expenses
Share-based payments
Federal tax credits
Change in valuation allowance
Effect of tax reform
Other
Income tax expense
$
2018
2017
2016
$
9,697
$
10,862
$
4,854
1,962
(844)
(462)
530
(23)
(568)
336
(278)
10,350
$
717
(1,177)
(506)
376
(335)
(660)
187
1,086
(173)
10,377
$
449
(576)
(350)
689
(625)
65
(11)
4,495
On December 22, 2017, Tax Reform was enacted which reduced the U.S. federal statutory income tax rate from 35% to 21%
effective January 1, 2018. The Company accounted for the effects of Tax Reform in the period of enactment as required by generally
accepted accounting principles using reasonable estimates based on information available in December 2017. The Company has
completed its accounting for the effects of Tax Reform and no additional income tax expense was recorded in 2018. The direct impact
to the 2017 financial statements was the re-measurement of the Companys December 31, 2017, deferred tax assets and liabilities
which were expected to reverse beginning in 2018. The re-measurement of the Companys net deferred tax asset resulted in $1,086
additional income tax expense being recognized in 2017, including a $535 decrease in the net deferred tax assets related to unrealized
or unamortized losses on securities. The impact of this re-measurement is included in the statutory rate reconciliation above.
With the exception of the revaluation adjustment required by Tax Reform, the deferred tax effects of unrealized or unamortized
tive January
gains and losses on securities are recorded directly to stockholders equity as part of other comprehensive income. Effecff
1, 2017, the Company adopted the provisions of ASU 2016-09 on a prospective basis. In accordance with ASU 2016-09, $23 and
$335 tax benefits, which were generated when the tax deduction for share-based payments exceeded book compensation costs,
reduced income tax expense for the years ended December 31, 2018 and 2017. Prior to the adoption of ASU 2016-09, excess tax
benefits associated with share-based payments were recognized in paid-in-capital and totaled $13 in 2016.
F-41
Components of deferred tax assets and liabilities are shown in the table below.
Deferred tax assets
Allowance for loan losses
Net unrealized or unamortized losses on securities
Tax credit carryforwards
Accrued compensation
Net operating loss carryforwards
Other real estate owned
Acquired loans fair market value adjustments
Other
Gross deferred tax assets
Deferred tax liabilities
Assumed debt fair market value adjustments
Goodwill amortization
Depreciation
Federal Home Loan Bank stock dividends
Core deposit intangibles
Other
Gross deferred tax liabilities
State valuation allowance
Net deferred tax asset
2018
2017
2,880
1,639
974
1,675
1,003
656
4,058
1,072
13,957
1,537
1,492
3,288
1,123
4,293
283
12,016
(908)
1,033
$
$
2,121
1,034
974
1,208
797
588
4,532
404
11,658
1,607
1,267
1,831
764
2,301
360
8,130
(571)
2,957
$
$
s
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilitie
and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In 2018, the
Company recognized deferred tax assets of $2,522 and deferred tax liabilities of $2,190 for temporary differences associated with the
KBC merger and deferred tax assets of $1,134 and deferred tax liabilities of $518 for temporary differences associated with the
Adams merger. Deferred tax assets of $34 were recognized in connection with the CBT merger. In 2017, the Company recognized
deferred tax assets of $2,832 and deferred tax liabilities of $2,075 for temporary differences associated with the Eastman merger and
deferred tax assets of $1,446 and deferred tax liabilities of $694 for temporary differences associated with the Cache merger. Federal
net operating losses, acquired through previous acquisitions, totaled $464 at December 31, 2018 and will expire between 2031 and
2033. Acquired federal tax credits totaling $974 will expire between 2027 and 2033. The utilization of these net operating loss and
tax credit carryforwards
are not expected to be limited by internal revenue code sections 382 and 383.
a
rr
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Arkansas, Kansas,
Missouri, Oklahoma and Iowa. Commercial banks are not allowed to file consolidated Kansas returns with non-bank consolidated
group members. The Company has unused state operating loss carryforwards of approximately $25,141 that expire between 2020 and
2028 resulting from the separate Kansas returns of the Company and SA Holdings, Inc. These operating losses, as well as certain
value. In connection with a
deferred tax assets, have a full valuation allowance recorded against them resulting in a zero carrying
2015 acquisition, the Company acquired Kansas net operating losses useable against Kansas bank income. At December 31, 2018, the
Kansas net operating loss carryforward useable against Kansas bank income totaled $2,885 with expiration dates between 2020 and
2024. The utilization of this acquired Kansas net operating loss carryforward is expected to be limited, and a valuation allowance has
been recorded against the portion which is expected to expire unused. In establishing a valuation allowance management considers
whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company is no longer subject to
examination by taxing authorities for years before 2015. At December 31, 2018, there were no examinations in any jurisdiction.
rr
NOTE 16 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 the Basel Committee on Banking Supervisions capital guidelines for U.S. banks (Basel III rules)
became effective for the Company 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. The Basel III rules also require banks to maintain a Common Equity Tier 1
capital ratio of 6.5%, a total Tier 1 capital ratio of 8%, a total capital ratio of 10% and a leverage ratio of 5% to be deemed well
F-42
capitalized for purposes of certain rules and prompt corrective action requirements. The risk-based ratios include a capital
conservation buffer of 2.5%. The new capital conservation buffer requirement is to be phased in beginning in January 2016 at
0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution
would be subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to
executive officers, if its capital level is below the buffer amount. Management believes as of December 31, 2018, the Company and
Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalize
d, 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.
a
As of December 31, 2018, 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 Banks category.
The Companys and Equity Banks capital amounts and ratios at December 31, 2018 and 2017 are presented in the tables below.
Ratios provided for Equity Bancshares, Inc. represent the ratios of the Company on a consolidated basis.
December 31, 2018
Total capital to risk weighted assets
,
Equity Bancshares, Inc.
Equity Bank
Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.
Equity Bank
Common equity Tier 1 capital to risk
weighted assets
Equity Bancshares, Inc.
Equity Bank
Tier 1 leverage to average assets
Equity Bancshares, Inc.
Equity Bank
Minimum Required
for
Capital Adequacy
Under Basel III
Phase-In
Amount
Ratio
Minimum Required
for
Capital Adequacy
Under Basel III
Fully Phased-In
Amount
Ratio
To Be Well
Capitalized Under
Prompt Corrective
Provisions
Amount
Ratio
Actual
Amount
Ratio
$337,649
338,180
11.92% $279,621
11.96% 279,244
9.88% $297,319
9.88% 296,918
N/A
10.50% $
10.50% 282,779
N/A
10.00%
326,195
326,726
11.52% 222,989
11.55% 222,688
7.88% 240,687
7.88% 240,362
8.50%
N/A
8.50% 226,223
N/A
8.00%
311,935
326,726
11.02% 180,515
11.55% 180,271
6.38% 198,213
6.38% 197,945
7.00%
N/A
7.00% 183,806
326,195
326,726
8.60% 151,731
8.62% 151,590
4.00% 151,731
4.00% 151,590
4.00%
N/A
4.00% 189,488
N/A
6.50%
N/A
5.00%
F-43
Minimum Required
for
Capital Adequacy
Under Basel III
Phase-In
Actual
Amount
Ratio
Amount
Ratio
Minimum Required
for
Capital Adequacy
Under Basel III
Fully Phased-In
Ratio
Amount
y
To Be Well
Capitalized Under
Prompt Corrective
Provisions
Amount
Ratio
December 31, 2017
Total capital to risk weighted assets
,
Equity Bancshares, Inc.
Equity Bank
$288,353 12.54% $212,705
279,712 12.17% 212,682
9.25% $241,449 10.50% $
9.25% 241,423 10.50% 229,927 10.00%
N/A N/A
Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.
Equity Bank
279,855 12.17% 166,715
271,214 11.80% 166,697
7.25% 195,459
7.25% 195,438
Common equity Tier 1 capital to risk
weighted assets
Equity Bancshares, Inc.
Equity Bank
Tier 1 leverage to average assets
Equity Bancshares, Inc.
Equity Bank
265,887 11.56% 132,222
271,214 11.80% 132,208
5.75% 160,966
5.75% 160,949
279,855 10.33% 108,372
271,214 10.01% 108,351
4.00% 108,372
4.00% 108,351
8.50%
8.50% 183,942
N/A N/A
8.00%
7.00%
7.00% 149,452
N/A N/A
6.50%
4.00%
4.00% 135,439
N/A N/A
5.00%
Equity Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.
NOTE 17 RELATED PARTY TRANSACTIONS
At December 31, 2018 and 2017, the Company had loans outstanding to executive officers, directors, significant stockholders,
and their affiliates (related parties), in the amount of $2,267 and $3,892. Changes during 2018 are listed below.
Balance at January 1, 2018
New loans/advances
Repayments
Balance at December 31, 2018
2018
3,892
1,803
(3,428)
2,267
$
$
At December 31, 2018 and 2017, the Company had deposits from executive officers, directors, significant stockholders, and
their affiliates (related parties), in the amount of $6,127 and $6,274.
NOTE 18 EMPLOYEE BENEFITS
The Company has a defined contribution profit sharing plan and a retirement savings 401(k) plan covering substantially all
employees. Employees may contribute up to $19 of their compensation. Contributions to the profit sharing plan and 401(k) plan are
discretionary and are determined annually by the Board of Directors. Employer contributions charged to expense for 2018, 2017 and
2016 were $885, $704 and $479.
As a result of the acquisition of First Independence, the Company assumed the obligations related to First Independences
participation in the Pentegra Defined Benefit Plan for Financial Institutions, a tax-qualified defined benefit pension plan. The
Pentegra Defined Benefit Plan is treated as a multi-employer plan for accounting purposes but operates as a multiple-employer plan
under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multi-
employer plan disclosures are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan,
contributions made by a participating employer may be used to provide benefits to employees of other participating employers
because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees
m
of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required
contributions for the other participating employers could increase proportionately.
The Pentegra Defined Benefit Plan covered substantially all officers and employees of First Independence who began
employment prior to December 31, 2009, with 55 participants retaining benefits under the plan.
F-44
The Pentegra Defined Benefit Plan operates on a fiscal year from July 1 through June 30 and files one Form 5500 on behalf of
all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is
333. There are no collective bargaining agreements in place at the Company.
The Pentegra Defined Benefit Plans annual valuation process includes calculating the plans funded status and separately
calculating the funded status of each participating employer. The funded
ff
funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra
Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. As a
result, the fair value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the
immediately preceding plan year ended June 30. The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the
year ended June 30, 2017.
status is defined as the market value of assets divided by the
The following table presents the net pension cost and funded status of the Company relating to the Pentegra Defined Benefit
Plan since the date of acquisition (dollar amounts in thousands).
Net pension cost charged to salaries and employee
benefits
Pentegra defined benefit plan funded status as of
July 1
Plan's funded status as of July 1
Contributions paid to the plan
$
$
2018
2017
113
$
84
109.86%
94.30%
93
$
110.37%
96.89%
65
The Companys contributions to the Pentegra Defined Benefit Plan were less than 5.00% of the total contributions to the
Pentegra Defined Benefit plan for the plan year ended June 30, 2018.
NOTE 19 SHARE-BASED PAYMENTS
The Companys Amended and Restated 2013 Stock Incentive Plan (the Plan) reserved 1,500,000 shares for the grant of non-
qualified stock options, restricted stock units, restricted stock and unrestricted stock to its employees and directors. The Plan replaced
the 2006 Non-qualified Stock Option Plan (2006 Plan). Under the 2006 Plan, there were 150,000 and 150,000 fully vested and
exercisable options outstanding at December 31, 2018 and 2017. No new grants of options may be made under the 2006 Plan. The
Company believes that stock-based awards better align the interests of its employees with those of its stockholders. Under the
Companys director compensation policy, directors may elect to receive all or a portion of their fees in cash, Company stock or non-
qualified stock options. During the years ended December 31, 2018 , 2017 and 2016, the Company recognized director compensation
expense of $53, $46 and $32 and issued 1,375, 1,457 and 953 shares of Company stock pursuant to certain directors elections under
the Companys director compensation policy. At December 31, 2018, there were 614,424 shares available for equity awards under the
Plan.
Stock Option Awards: Options granted to directors and employees under the Plan vest depending on the passage of time or the
p
achievement of performance targets, depending on the terms of the underlying grant.
The following tables summarize stock option activity for the years ended December 31, 2018 and 2017.
December 31, 2018
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Fully vested and expected to vest
Exercisable at end of year
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
22.54
34.69
(19.49)
(31.97)
23.57
23.57
19.44
8
10
(8)
(10)
7
7
4
$
$
$
$
10,261
10,044
10,044
8,995
Options
797,521
99,935
(6,800)
(38,100)
852,556
852,556
565,847
$
$
$
$
F-45
December 31, 2017
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Fully vested and expected to vest
Exercisable at end of year
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
16.69
33.05
(17.01)
(27.72)
22.54
22.54
17.48
7
10
(3)
(10)
8
8
7
$
$
$
$
10,017
10,261
10,261
8,692
Options
590,835
305,404
(71,434)
(27,284)
797,521
797,521
484,728
$
$
$
$
The fair values of stock options granted during the years ended December 31, 2018, 2017 and 2016, were estimated to be $9.01
per share, $8.75 per share and $5.10 per share. The faff ir value of each option award is estimated on the date of grant using a closed
form option valuation (Black-Scholes) model. Expected stock price volatility is based on the historical volatility of the SNL Bank
Index. The expected term of options granted is based on the Simplified Method. The risk-free interest rate for the expected term of
the option is based on the U.S. Treasury yield curve in effecff
t at the time of the grant.
The fair values of options granted were determined using the following weighted-average assumptions as of grant dates.
Risk free rate
Market value of stock on grant date
Expected term (in years)
Expected volatility
Dividend rate
$
2018
2017
2016
$
2.45%
34.69
6.3
19.71%
%
$
2.20%
33.05
6.7
19.66%
%
1.58%
25.44
5.0
19.08%
%
Compensation expense for stock options is recognized as the options vest. Total stock option compensation cost that has been
charged against income was $813, $592, and $374 for 2018, 2017 and 2016. The total income tax benefit was $205, $226 and
$143. At December 31, 2018, there was $2.0 million of unrecognized compensation expense related to non-vested stock options
granted under the Plan. Unrecognized compensation expense at December 31, 2018, will be recognized over a remaining weighted
average period of 7 years.
Restricted Stock Unit Awards:
Restricted stock units (RSUs) granted to employees under the Plan represent the right to receive one share of Company stock
upon vesting, in accordance with the vesting schedule provided in each award agreement. To the extent vested, the RSUs become
Class A voting common stock within ten calendar days of the vesting date. Non-vested RSUs have no voting rights and are not
considered outstanding until vesting. The fair value of the RSUs is determined by the closing price of the Companys stock on the
date of grant.
A summary of changes in the Companys non-vested RSUs for the year is shown below.
Non-vested Restricted Stock Units
Shares
Weighted
Average
Grant Date Fair
Value
Non-vested RSUs at January 1, 2018
Granted
Vested
Forfeited
Outstanding at end of year
4,890
145,288
(14,401)
(3,670)
132,107
$
$
33.50
36.89
(36.55)
(37.57)
36.78
F-46
Compensation expense is recognized over the vesting period of the award based on the fair value of RSU awards at the grant
date. The Company recognized share-based compensation attributable to RSUs of $1,643, $80 and $0 for the years ended December
31, 2018, 2017 and 2016. The total income tax benefit was $413, $31 and $0 for the same time periods. Unrecognized RSU
compensation expense of $3.7 million at December 31, 2018, will be recognized over a remaining weighted average period of 3 years.
NOTE 20 EARNINGS PER SHARE
Earnings per share were computed as shown below.
Basic:
Net income allocable to common stockholders
Weighted average common shares outstanding
Weighted average vested restricted stock units
Weighted average shares
Basic earnings per common share
Diluted:
Net income allocable to common stockholders
Weighted average common shares outstanding for:
Basic earnings per common share
Dilutive effects of the assumed exercise of
stock options
Dilutive effects of the assumed redemption of RSUs
Average shares and dilutive potential common shares
Diluted earnings per common share
2018
2017
2016
$
$
$
35,825
15,389,513
4,403
15,393,916
2.33
35,825
$
$
$
20,649
12,446,851
1,751
12,448,602
1.66
20,649
$
$
$
9,373
8,624,108
8,624,108
1.09
9,373
15,393,916
12,448,602
8,624,108
293,588
20,882
15,708,386
2.28
$
255,947
2,635
12,707,184
1.62
$
131,418
8,755,526
1.07
$
Average outstanding stock options of 26,419, 141,891 and 92 for the years ending December 31, 2018, 2017 and 2016 were not
included in the computation of diluted earnings per share because the options were antidilutive.
NOTE 21 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 entitys 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.
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 Companya
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.
Whenever possible, the Company first looks for quoted prices for identical assets or
a
F-47
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
g
f
The fair values of available-for-sale securities are carried at fair value on a recurring basis. To the extent possible, observabl
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
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 Companys available-for-sale securities, including residential mortgage-backed securities (all of which are issued or
guaranteed by government sponsored agencies) and state and political subdivision securities are classified as Level 2.
by
e
rr
rr
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 derivative.
Assets and liabilities measured at fair value on a recurring basis are summarized below.
(Level 1)
December 31, 2018
(Level 2)
(Level 3)
Assets:
Available-for-sale securities:
Residential mortgage-backed securities (issued by
government-sponsored entities)
$
$
168,875
$
Derivative assets:
Derivative assets (included in other assets)
Cash collateral held by counterparty and netting
adjustments
Total derivative assets
Other assets:
Equity securities with readily determinable fair value
Total other assets
Total assets
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)
Cash collateral held by counterparty and netting
adjustments
Total derivative liabilities
a
Total liabilities
(242)
(242)
933
933
475
475
233
$
169,808
$
$
777
$
(252)
(252)
(252) $
777
777
$
$
$
$
F-48
Assets:
Available-for-sale securities:
Residential mortgage-backed securities (issued by
government-sponsored entities)
State and political subdivisions
Equity securities
Derivative assets:
Derivative assets (included in other assets)
Cash collateral held by counterparty and netting
adjustments
Total derivative assets
Total assets
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)
Cash collateral held by counterparty and netting
adjustments
Total derivative liabilities
a
Total liabilities
(Level 1)
December 31, 2017
(Level 2)
(Level 3)
$
$
$
$
$
486
161,591
195
164
164
650
1
1
161,787
$
$
$
$
46
$
(46)
(46)
(46) $
46
46
$
There were no transfers between Levels during 2018 or 2017. The Companys 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
g
f
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. 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.
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
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.
process by the appraisers to adjust for differences between the
a
Assets measured at fair value on a non-recurring basis are summarized below.
Impaired loans:
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Other
Other real estate owned:
Commercial real estate
Residential real estate
(Level 1)
December 31, 2018
(Level 2)
(Level 3)
$
$
$
6,212
1,697
4,123
218
809
1,391
97
F-49
Impaired loans:
Commercial real estate
Commercial and industrial
Residential real estate
Agricultural real estate
Other
Other real estate owned:
Commercial real estate
Residential real estate
(Level 1)
December 31, 2017
(Level 2)
(Level 3)
$
$
$
1,439
1,005
4,021
905
1,910
1,018
157
The Company did not record any liabilities for which the fair value was measured on a non-recurring basis during the years
ended December 31, 2018 and 2017.
Valuations of impaired loans and other real estate owned utilize third party appraisals or broker price opinions and are 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.
December 31, 2018
Impaired loans
,
December 31, 2017
Impaired loans
,
Fair
Value
Valuation
Technique
Unobservable
Input
Range
(weighted
average)
g
13,059
Sales Comparison
Approach
Adjustments for differences
between comparable sales
4% - 22%
(13%)
9,280
Sales Comparison
Approach
Adjustments for differences
between comparable sales
15% - 26%
(5%)
$
$
Measurable inputs for other real estate owned are not material.
F-50
Carrying amounts and estimated fair values of financial instruments at year end were as follows as of the date indicated.
December 31, 2018
Level 1
Level 2
Level 3
$
$
192,818
N/A
(242)
(242)
192,576
4,991
168,875
739,989
2,972
N/A
17,372
933
933
935,132
$
2,565,526
N/A
$ 2,565,526
$ 3,124,654
$
50,068
384,898
15,450
14,260
3,965
3,648
777
(252)
(252)
777
(252) $ 3,597,720
$
Financial assets:
Cash and cash equivalents
Interest-bearing deposits
Available-for-sale securities
Held-to-maturity securities
Loans held forff
Loans, net of allowance for loan losses
Federal Reserve Bank and Federal Home Loan
sale
Bank stock
Interest receivable
Derivative assets
Cash collateral held by derivative counterparty
Total derivative assets
Total assets
Financial liabilities:
Deposits
Federal funds purchased and retail repurchase
agreements
Federal Home Loan Bank advances
Bank stock loan
Subordinated debentures
Contractual obligations
Interest payable
Derivative liabilities
Cash collateral held by derivative counterparty
Total derivative liabilities
Total liabilities
Carrying
Amount
Estimated
Fair Value
$
192,818
4,991
168,875
748,356
2,972
2,563,954
$
192,818
4,991
168,875
739,989
2,972
2,565,526
29,214
17,372
933
(242)
691
$ 3,729,243
N/A
17,372
933
(242)
691
$ 3,693,234
$ 3,123,447
$ 3,124,654
50,068
384,898
15,450
14,260
3,965
3,648
777
(252)
525
$ 3,596,261
50,068
384,898
15,450
14,260
3,965
3,648
777
(252)
525
$ 3,597,468
$
$
$
$
F-51
Carrying
Amount
Estimated
Fair Value
Level 1
Level 2
Level 3
December 31, 2017
Financial assets:
Cash and cash equivalents
Interest-bearing deposits
Available-for-sale securities
Held-to-maturity securities
Loans held forff
Loans, net of allowance for loan losses
Federal Reserve Bank and Federal Home Loan
sale
Bank stock
Interest receivable
Derivative assets
Cash collateral held by derivative counterparty
Total derivative assets
Total assets
Financial liabilities:
Deposits
Federal funds purchased and retail repurchase
agreements
Federal Home Loan Bank advances
Bank stock loan
Subordinated debentures
Contractual obligations
Interest payable
Derivative liabilities
Cash collateral held by derivative counterparty
Total derivative liabilities
Total liabilities
$
52,195
3,496
162,272
535,462
2,353
2,108,772
24,373
12,371
1
164
165
$ 2,901,459
$
52,195
3,496
162,272
532,744
2,353
2,112,422
N/A
12,371
1
164
165
$ 2,878,018
$ 2,382,013
$ 2,385,528
37,492
347,692
2,500
13,968
1,967
1,932
46
(46)
$ 2,787,564
37,492
347,692
2,500
13,968
1,967
1,932
46
(46)
$ 2,791,079
$
$
$
$
$
$
52,195
486
N/A
164
164
52,845
3,496
161,786
532,744
2,353
N/A
12,371
1
1
712,751
$
2,112,422
N/A
$ 2,112,422
$ 2,385,528
$
37,492
347,692
2,500
13,968
1,967
1,932
46
(46)
(46)
46
(46) $ 2,791,125
$
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 amount of cash and short-term instruments approximate
fair value.
q
g
p
Held-to-maturity securities: The fair value of held-to-maturity securities are determined in a manner consistent with availabla e-
for-sale securities which has been previously discussed.
y
Loans held for sale: The faff ir value of loans held for sale are based on quoted market prices for loans with similar
characteristics.
Loans: Fair value of variable rate loans that reprice frequently and with no significant change in credit risk are based on
carrying values. Fair value 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.
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
value.
p y
rr
amount of accrued interest receivable and payable approximate their fair
p
Deposits: The fair value disclosed for demand deposits is, 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 value at the reporting date. Fair value for fixed rate certificates of deposit are
estimated using a discounted cash flow 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 amount of these financial instruments approximate their fair value.
p
p
g
F-52
Federal Home Loan Bank Advances: The carrying amount of draws against the Companys line of credit at the Federal Home
Loan Bank approximate their fair value. The fair value of fixed rate term advances is determined using discounted cash flow
analyses based on the current borrowing rates for similar types of borrowing arrangements.
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
g
rr
value of contractual obligations approximate their fair value.
The fair value of off-balance-sheet items is not considered material.
NOTE 22 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:
g
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
customers creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on
managements 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 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 December 31, 2018 and 2017
were as as follows.
Commitments to make loans
Mortgage loans in the process of origination
Unused lines of credit
December 31, 2018
December 31, 2017
$
Fixed
Rate
29,543
6,785
92,225
$
Variable
Rate
171,857
2,860
167,218
$
Fixed
Rate
Variable
Rate
$
38,031
14,803
87,948
67,107
9,258
141,026
At December 31, 2018, the fixed rate loan commitments have interest rates ranging from 3.75% to 8.50% and maturities ranging
from 1 month to 81 months.
Standby Letters of Credit:
y
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
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 December 31, 2018 and 2017 are listed below.
obligations. The credit risk involved in
t
Standby letters of credit
December 31, 2018
December 31, 2017
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
$
4,474
$
2,716
$
4,064
$
3,830
F-53
NOTE 23 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 contingencies have been identified by the Company as reasonably possible to
result in an unfavorable outcome for the Company.
Equity Bank is a party to a February 3, 2015, lawsuit filed against it by CitiMortgage, Inc. (Citi). 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. In January 2018, final judgement was entered by the court dismissing Citis claims with regard to six loans and holding
Equity Bank liable with regard to six loans. A loss contingency of $477 was recorded at December 31, 2017, in connection with the
resolution of this case. Subsequently Citi appealed the courts decision. The Company believes it has numerous and meritorious
defenses to the claims and continues to contest the matter vigorously.
Except for the above mentioned lawsuit and settlement, there have been no other 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 faff ce 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.
NOTE 24 CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is the condensed financial information
ff
as to financial position, results of operations and cash flows of the
Parent Company.
CONDENSED BALANCE SHEET
ASSETS
Cash and due from banks
Investment in Equity Bank
Investment in EBAC
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities
Stockholders equity
Total liabilities and stockholders equity
2018
2017
1,540
470,902
3,262
10,490
486,194
30,253
455,941
486,194
$
$
$
$
4,201
379,933
6,762
390,896
16,752
374,144
390,896
$
$
$
$
F-54
CONDENSED STATEMENT OF INCOME
2018
2017
2016
Dividends from Equity Bank
Other income
Total income
Expenses
Interest expense
Other expenses
Total expenses
Income (loss) before income tax and equity in undistributed
income of subsidiaries
Income tax benefit
Income (loss) before equity in undistributed income (loss)
of subsidiaries
Equity in undistributed income (loss) of Equity Bank
Equity in undistributed income (loss) of EBAC
Net income
Dividends and discount accretion on preferred stock
Net income allocable to common stockholders
$
$
30,500
3
30,503
1,918
3,358
5,276
25,227
1,025
26,252
9,681
(108)
35,825
35,825
$
$
17,250
26
17,276
996
3,018
4,014
13,262
2,017
15,279
5,370
20,649
20,649
$
$
9,500
1
9,501
701
2,408
3,109
6,392
859
7,251
2,123
9,374
(1)
9,373
F-55
CONDENSED STATEMENT OF CASH FLOWS
2018
2017
2016
$
35,825
$
20,649
$
9,374
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash from
operating activities:
Stock based compensation
Equity in undistributed (income) loss of Equity Bank
Equity in undistributed (income) loss of EBAC
Net amortization of purchase valuation adjustments
Net change in:
Other assets
Interest payable and other liabilities
Net cash from (to) operating activities
Cash flows (to) from investing activities
Proceeds from sale of other real estate owned
Purchase stock of Community First, net of holding
company cash acquired
Purchase stock of Prairie, net of holding
company cash acquired
Purchase stock of Eastman, net of holding
company cash acquired
Purchase stock of Cache, net of holding
company cash acquired
Purchase stock of KBC, net of holding
company cash acquired
Purchase stock of Adams, net of holding
company cash acquired
Purchase assets of City Bank, net of liabilities assumed
Purchase of net assets of EBAC
Net cash (used in) investing activities
Cash flows (to) from financing activities
Borrowings on bank stock loan
Principal payments on bank stock loan
Proceeds from the issuance of common stock, net
Proceeds from exercise of employee stock options
Principal payments on employee stock loan
Redemption of Series C preferred stock
Dividends paid on preferred stock
Excess tax benefits recognized on exercise of employee stock options
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Ending cash and cash equivalents
$
F-56
2,509
(9,681)
108
292
(4,092)
(50)
24,911
(55)
(14,151)
(4,179)
(18,900)
(3,370)
(40,655)
22,500
(9,550)
133
13,083
(2,661)
4,201
1,540
$
1,100
(5,370)
284
(1,331)
(1,419)
13,913
267
(12,510)
(7,813)
(13,103)
(33,159)
2,500
(1,000)
1,215
121
2,836
(16,410)
20,611
4,201
$
553
(2,123)
246
(1,529)
(409)
6,112
(9,549)
(9,549)
6,000
(33,218)
23,643
112
(16,372)
(42)
13
(19,864)
(23,301)
43,912
20,611
NOTE 25 SUBSEQUENT EVENTS
On September 21, 2018, the Company entered into a branch purchase and assumption agreement with MidFirst Bank
(MidFirst) to acquire two branches in Guymon, Oklahoma and one branch in Cordell, Oklahoma. The transaction closed February
8, 2019. Information necessary to recognize the fair value of assets acquired and liabilities assumed remains incomplete. At the time
of the acquisition, total assets transferred were approximately $14,144, which included total loans of approximately $6,507. Also, at
the time of the acquisition, total liabia lities transferred were approximately $98,606, which included total deposits of approximately
$98,543. The Company anticipates there will be goodwill and core deposit intangibles recorded with this merger. Goodwill is
calculated as the excess of the cash consideration transferred over the net of the acquisition-date fair value of identifiable assets
acquired and liabilities assumed.
F-57
Corporate Headquarters
7701 East Kellogg Avenue, Suite 300
Wichita, Kansas 67207
(316) 612-6000
investor.equitybank.com
Form 10K and Investor Inquiries
Analysts, investors, and others with additional
questions about Equity Bancshares, Inc. are encouraged
to contact Jacob Willis, Investor Relations Officer, at
(316) 779-1675 or investor@equitybank.com.
Transfer Agent
Continental Stock Transfer & Trust Company
1 State Street, 30th Floor
New York, NY 10004-1561
(212) 509-4000
investor.equitybank.com