Equity Bank(EQBK) - 2018 Q4 - Annual Report

Part I Business Equity Bancshares, Inc. is a bank holding company with $4.06 billion in assets, operating 49 branches and focused on growth through organic expansion and strategic acquisitions Company Snapshot (as of December 31, 2018) | Metric | Value | | :--- | :--- | | Total Assets | $4.06 billion | | Total Deposits | $3.12 billion | | Total Loans (net) | $2.56 billion | | Total Stockholders' Equity | $455.9 million | | Full Service Branches | 49 | - The company's principal objective is to grow stockholder value through a dual strategy of organic expansion and strategic acquisitions of community banks[13] - A core strategy is to leverage low-cost, stable core deposits from community markets to finance higher-yield commercial loan growth in metropolitan markets like Wichita, Kansas City, and Tulsa[22][25] 2018 Acquisitions Summary | Acquired Entity | Date | Key Metrics Added | | :--- | :--- | :--- | | Kansas Bank Corporation (KBC) | May 2018 | Deposits: $288.4M, Loans: $159.4M, Assets: $336.1M | | Adams Dairy Bancshares, Inc. (Adams) | May 2018 | Deposits: $97.1M, Loans: $82.7M, Assets: $119.8M | | City Bank and Trust Company (City Bank) | August 2018 | Deposits: $126.9M, Loans: $77.1M, Assets: $163.3M | Our Company Founded in 2003, the company grew through 16 acquisitions and organic expansion to 49 branches and 627 employees by 2018, completing its IPO in 2015 - The company was founded in 2002 and began operations in 2003 with the acquisition of National Bank of Andover, which had $32 million in assets and was under a regulatory enforcement agreement[14] - Since its inception through December 31, 2018, the company has grown from 19 to 627 full-time equivalent employees and from two to 49 branches[18] - The company completed its Initial Public Offering (IPO) on November 16, 2015, with its common stock trading on the NASDAQ Global Select Market under the ticker "EQBK"[19] Our Banking Services The company offers comprehensive banking services, with lending focused on commercial and real estate, alongside diverse deposit products and treasury management Loan Portfolio Composition (December 31, 2018) | Loan Type | Amount (millions) | % of Total Loans (net) | | :--- | :--- | :--- | | Commercial & Industrial | $582.5 | 22.7% | | Commercial Real Estate | $1,250.0 | 48.8% | | Residential Real Estate | $444.5 | 17.3% | - The company's ten largest borrowing relationships amounted to approximately $240.3 million, or 9.3% of the total loan portfolio, as of December 31, 2018[40][172] - The bank's legal lending limit to a single borrower was $84.5 million, but it maintains a more conservative in-house limit of $25.0 million[47] - The company offers a full suite of commercial treasury management services, including lockbox, remote deposit capture, positive pay, and sweep accounts[70] Supervision and Regulation The company and Equity Bank are extensively regulated by federal and state authorities, with key areas covering capital adequacy, dividends, insider transactions, and consumer protection laws - The company is a registered bank holding company subject to supervision and regulation by the Federal Reserve[87] - Equity Bank is a Kansas state-chartered bank regulated by the Kansas Office of State Bank Commissioner (OSBC) and the Federal Reserve[117] - The company is subject to Basel III capital rules, which require minimum ratios for Common Equity Tier 1 (CET1), Tier 1, and Total Capital, plus a capital conservation buffer, and as of year-end 2018, its capital ratios exceeded the levels required to be considered "well capitalized"[96][97][100] - The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), which promulgates rules affecting consumer financial products, and while institutions over $10 billion in assets are directly examined by the CFPB, Equity Bank (with under $10 billion) is still subject to its rules[137] Risk Factors The company faces business, regulatory, and common stock risks, including geographic concentration, acquisition dependence, credit losses, evolving regulations, and stock price volatility Risks Relating to Our Business The company's business faces risks from geographic concentration, acquisition dependence, loan portfolio concentration, credit risk, interest rate fluctuations, and increasing cyber threats - The company's banking operations are geographically concentrated in Arkansas, Kansas, Missouri, and Oklahoma, making its financial condition dependent on the economic health of these specific markets[155] - A significant portion of historical growth is from acquisitions, and the company faces risks in finding, funding, and integrating future acquisitions in a competitive market[163][164] - As of December 31, 2018, the ten largest loan relationships totaled over $240.3 million, representing 9.3% of the total loan portfolio, creating concentration risk[172] - The company is vulnerable to interest rate fluctuations, which can impact net interest income, loan demand, and borrowers' ability to repay floating-rate debt[188] - The company faces increasing information security risks from cyber attacks, which could lead to reputational harm, litigation, and financial loss[226] Risks Related to the Regulation of Our Industry Operating in a highly regulated environment, the company faces risks from evolving laws, compliance costs, and potential sanctions for non-compliance with capital adequacy, AML, and fair lending laws - The company is subject to extensive federal and state regulation that limits operations and imposes significant compliance costs[246] - Failure to maintain "well capitalized" status could result in regulatory restrictions on growth, activities, and customer confidence[252] - Stringent Basel III capital requirements may adversely impact return on equity and constrain the ability to pay dividends or repurchase shares[254] - Non-compliance with fair lending laws like the Community Reinvestment Act (CRA) or anti-money laundering laws like the Bank Secrecy Act could lead to significant sanctions and reputational damage[256][257] Risks Related to Our Class A Common Stock Investment in Class A common stock carries risks including price volatility, public company obligations, no anticipated dividends, lower trading volume, and corporate governance provisions that could hinder takeovers - The market price of the Class A common stock is subject to substantial fluctuations, which may be unrelated to the company's operating performance[267][268] - The company has not historically paid cash dividends and does not expect to in the foreseeable future, retaining earnings to support operations and growth[272] - As an "emerging growth company" under the JOBS Act, the company is subject to reduced disclosure requirements, which may make its stock less attractive to some investors[287] - Certain provisions in the company's Articles of Incorporation and Bylaws, such as a classified board and the ability to issue preferred stock without stockholder approval, could make a takeover more difficult[291] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[297] Properties As of December 31, 2018, the company's principal executive offices are in Wichita, Kansas, operating 49 branches across four states, with suitable facilities - The company's principal executive offices are located at 7701 East Kellogg Drive, Wichita, Kansas 67207[297] - As of December 31, 2018, the company operated a total of 49 branches across four states: Kansas (Wichita, Kansas City, Topeka, Western, Southeast, Southwest), Missouri (Kansas City, Western), Arkansas (Northern), and Oklahoma (Tulsa, Northern, Western)[297] Legal Proceedings The company is party to various litigation matters incidental to its business, with details in Note 23 of the Consolidated Financial Statements - The company is involved in various litigation matters in the ordinary course of business, with further details available in Note 23 to the Consolidated Financial Statements[305] Mine Safety Disclosures This item is not applicable to the company - Not applicable[306] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on NASDAQ under "EQBK", with no historical or anticipated dividends, and details on equity compensation plans - The company's Class A common stock is listed on the NASDAQ Global Select Market under the ticker symbol "EQBK"[308] - The company has not historically paid cash dividends and does not expect to in the foreseeable future, retaining all future earnings to support operations and finance growth[310] Class A Common Stock Price Range (2018) | Quarter Ended | High ($) | Low ($) | | :--- | :--- | :--- | | March 31, 2018 | 40.77 | 34.72 | | June 30, 2018 | 44.26 | 36.57 | | September 30, 2018 | 44.30 | 37.11 | | December 31, 2018 | 40.00 | 31.32 | Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price ($) | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Security Holders | 834,663 | - | 614,424 | | Not Approved by Security Holders | 150,000 | 12.00 | - | | Total | 984,663 | 23.57 | 614,424 | Selected Financial Data Selected financial data shows significant growth from 2014 to 2018, with total assets reaching $4.06 billion, net loans $2.56 billion, and net income $35.8 million, driven by acquisitions Selected Financial Data (2014-2018) | (in thousands, except per share) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $4,061,716 | $3,170,509 | $2,192,192 | $1,585,727 | $1,174,515 | | Gross Loans Held for Investment | $2,575,408 | $2,117,270 | $1,383,605 | $960,355 | $725,876 | | Total Deposits | $3,123,447 | $2,382,013 | $1,630,451 | $1,215,914 | $981,177 | | Net Interest Income | $124,798 | $86,002 | $52,597 | $46,262 | $41,361 | | Net Income Allocable to Common Stockholders | $35,825 | $20,649 | $9,373 | $10,123 | $8,279 | | Diluted Earnings Per Share | $2.28 | $1.62 | $1.07 | $1.54 | $1.30 | | Book Value Per Share | $28.87 | $25.62 | $22.09 | $18.37 | $16.71 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, net income increased by 73.5% to $35.8 million, driven by net interest income growth and acquisitions, despite slight net interest margin compression and higher non-interest expenses 2018 vs. 2017 Performance Highlights | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net Income | $35.8M | $20.6M | +73.5% | | Total Assets | $4.06B | $3.17B | +28.1% | | Total Loans | $2.58B | $2.12B | +21.6% | | Total Deposits | $3.12B | $2.38B | +31.1% | | Book Value per Share | $28.87 | $25.62 | +12.7% | - The increase in net income was primarily driven by a $38.8 million increase in net interest income, partially offset by a $26.9 million rise in non-interest expenses and a $1.0 million increase in the provision for loan losses[359] - The net interest margin decreased slightly from 3.83% in 2017 to 3.81% in 2018, as the cost of interest-bearing liabilities (1.34%) rose faster than the yield on interest-earning assets (4.94%)[364][372] - Non-interest expense increased by 39.9% to $94.4 million in 2018, largely due to a $14.1 million increase in salaries and benefits and $7.5 million in merger expenses related to the year's acquisitions[391][392] Quantitative and Qualitative Disclosure About Market Risk The company's primary market risk is interest rate volatility, managed by ALCO through simulation analysis, with a 100 bps rate increase projected to decrease NII by 3.8% - The primary market risk for the company is interest rate volatility, managed by the Asset Liability Committee (ALCO) through balance sheet structuring and simulation analysis[542][544] Interest Rate Sensitivity Analysis (as of Dec 31, 2018) | Change in Interest Rates | Impact on Net Interest Income (12 months) | Impact on Economic Value of Equity | | :--- | :--- | :--- | | +300 bps | (13.0)% | (16.2)% | | +200 bps | (8.0)% | (8.2)% | | +100 bps | (3.8)% | (2.5)% | | -100 bps | +2.0% | +0.3% | Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements, independent auditor's report, and unaudited supplementary quarterly financial data 2018 Unaudited Quarterly Financial Data (in thousands, except per share) | Quarter | Total Interest Income | Net Interest Income | Net Income | Diluted EPS | | :--- | :--- | :--- | :--- | :--- | | Q1 2018 | $34,123 | $27,787 | $8,711 | $0.58 | | Q2 2018 | $38,831 | $30,920 | $6,867 | $0.44 | | Q3 2018 | $43,022 | $32,755 | $10,322 | $0.64 | | Q4 2018 | $45,580 | $33,336 | $9,925 | $0.62 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[557] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2018, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[557] - There were no material changes in internal control over financial reporting during the last fiscal quarter[558] - Management assessed internal control over financial reporting as effective based on the COSO 2013 framework, and an auditor attestation report is not required as the company is an Emerging Growth Company[559] Other Information The company reports no other information for this item - None[560] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2019 Annual Meeting of Stockholders[561] Executive Compensation Executive compensation information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2019 Annual Meeting of Stockholders[563] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2019 Annual Meeting of Stockholders[564] Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2019 Annual Meeting of Stockholders[565] Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2019 Annual Meeting of Stockholders[566] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including an index - This section contains the index to the Audited Financial Statements and a list of all exhibits filed with the Form 10-K[568] Financial Statements Consolidated Balance Sheets The consolidated balance sheet shows significant 2018 growth, with total assets reaching $4.06 billion, driven by increased net loans and deposits Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total Assets | $4,061,716 | $3,170,509 | | Cash and cash equivalents | $192,818 | $52,195 | | Loans, net | $2,563,954 | $2,108,772 | | Goodwill | $131,712 | $104,907 | | Total Liabilities | $3,605,775 | $2,796,365 | | Total deposits | $3,123,447 | $2,382,013 | | FHLB advances | $384,898 | $347,692 | | Total Stockholders' Equity | $455,941 | $374,144 | Consolidated Statements of Income For 2018, net interest income grew to $124.8 million, resulting in a 73.5% increase in net income to $35.8 million and diluted EPS of $2.28 Consolidated Income Statement Summary (Year Ended Dec 31) | (in thousands, except per share) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | | Net Interest Income | $124,798 | $86,002 | $52,597 | | Provision for Loan Losses | $3,961 | $2,953 | $2,119 | | Non-interest Income | $19,725 | $15,440 | $10,466 | | Non-interest Expense | $94,387 | $67,463 | $47,075 | | Net Income | $35,825 | $20,649 | $9,374 | | Diluted EPS | $2.28 | $1.62 | $1.07 | Consolidated Statements of Cash Flows For 2018, operating activities provided $36.7 million in cash, investing activities used $171.5 million, and financing activities provided $275.4 million, leading to a $140.6 million net cash increase Consolidated Cash Flow Summary (Year Ended Dec 31) | (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $36,666 | $27,628 | $15,548 | | Net cash used in investing activities | ($171,488) | ($222,924) | ($140,689) | | Net cash provided by financing activities | $275,445 | $212,396 | $103,407 | | Net change in cash and cash equivalents | $140,623 | $17,100 | ($21,734) | Notes to Consolidated Financial Statements The notes provide detailed information on accounting policies and financial statement components, including business combinations, loan portfolio, securities, goodwill, deposits, borrowings, regulatory matters, and subsequent events - Note 2 details the 2018 acquisitions of City Bank, Kansas Bank Corporation (KBC), and Adams Dairy Bancshares, Inc., including consideration paid and the fair value of assets acquired and liabilities assumed, adding a combined $28.3 million in goodwill[673][677][683] - Note 4 provides a detailed breakdown of the loan portfolio by type and credit quality indicators, with 96.7% of the loan portfolio categorized as "Unclassified" (Pass) as of December 31, 2018[723][743] - Note 16 confirms that as of December 31, 2018, both the company and Equity Bank met all capital adequacy requirements under Basel III rules and were categorized as "well capitalized" under prompt corrective action regulations[818][822] - Note 25 discloses a subsequent event: the acquisition of three branches from MidFirst Bank, which closed on February 8, 2019, adding approximately $98.5 million in deposits and $6.5 million in loans[888]