Equity Bank(EQBK) - 2019 Q4 - Annual Report

Part I Business Equity Bancshares, Inc. operates as a bank holding company through Equity Bank, with 52 branches across four states, holding $3.95 billion in assets as of December 31, 2019 - The company's principal objective is to increase stockholder value through both organic growth and strategic acquisitions of community banks[11] - A key strategy involves utilizing low-cost, stable core deposits from community markets to fund higher-yield commercial loan growth in metropolitan areas[20] Company Overview (as of December 31, 2019) | Metric | Value (Billions) | | :--- | :--- | | Total Assets | $3.95 | | Total Deposits | $3.06 | | Total Loans (net) | $2.54 | | Total Stockholders' Equity | $0.478 | Loan Portfolio Composition (as of December 31, 2019) | Loan Type | Percentage of Portfolio | | :--- | :--- | | Commercial Loans | 68.5% | | - Commercial Real Estate | 66.2% (of commercial) | | - Commercial & Industrial | 33.8% (of commercial) | - In February 2019, the company acquired three branch locations from MidFirst Bank, increasing deposits by $98.5 million and loans by $6.5 million[14][29] - The company and its bank subsidiary are subject to extensive regulation and supervision by authorities including the Federal Reserve, FDIC, OCC, Kansas OSBC, and the CFPB[82] Risk Factors The company faces significant risks related to its business, regulatory environment, and common stock, including geographic concentration and acquisition challenges - 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[151] - A substantial part of historical growth has come from acquisitions, and the company faces a highly competitive market for finding and integrating suitable acquisition candidates[159][162] - The company has significant concentration risk, with its ten largest loan relationships totaling over $215.7 million (8.4% of the total loan portfolio) and its ten largest non-brokered depositors accounting for $353.3 million (11.5% of total deposits) as of December 31, 2019[170][171] - The transition away from LIBOR as a reference rate after 2021 could create considerable costs and additional risk for the company's financial instruments that are dependent on it[190][191] - The company is subject to extensive regulation that imposes significant costs and may limit operations, with non-compliance potentially leading to sanctions or growth restrictions[249][255] - The company has pledged all of the stock of its subsidiary, Equity Bank, as collateral for a third-party loan with a balance of $9.0 million as of December 31, 2019, where a default could lead to foreclosure on this principal asset[247] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[301] Properties The company's principal executive offices are in Wichita, Kansas, operating 52 branches across four states as of December 31, 2019 - The company's main executive offices are located at 7701 East Kellogg Drive, Wichita, Kansas[301] - As of December 31, 2019, the company operated 52 branches across Kansas, Missouri, Arkansas, and Oklahoma[301] Legal Proceedings The company is involved in various litigation matters incidental to its business, with further details in NOTE 23 of the financial statements - The company is involved in various litigation matters in the ordinary course of business, with further details provided in NOTE 23 of the financial statements[308] Mine Safety Disclosures This section is not applicable to the company - This item is not applicable[309] 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", has not historically paid dividends, and repurchased 421,016 shares in 2019 - The company's common stock is listed on the NASDAQ Global Select Market under the ticker symbol "EQBK"[311] - The company has not historically paid cash dividends and does not anticipate doing so in the foreseeable future, intending to retain earnings to support operations and finance growth[313] 2019 Stock Repurchase Program Activity | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Apr 2019 | 15,000 | $26.35 | | May 2019 | 165,944 | $26.38 | | Jun 2019 | 96,862 | $25.15 | | Aug 2019 | 110,406 | $25.47 | | Sep 2019 | 32,804 | $25.84 | | Total | 421,016 | $25.81 | Selected Financial Data This section provides a five-year summary of key consolidated financial data from 2015 to 2019, highlighting significant growth in assets, loans, and deposits Selected Historical Financial Data (2015-2019, in Millions) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Income | $25.6 | $35.8 | $20.6 | $9.4 | $10.3 | | Diluted EPS | $1.61 | $2.28 | $1.62 | $1.07 | $1.54 | | Total Assets | $3,949.6 | $4,061.7 | $3,170.5 | $2,192.2 | $1,585.7 | | Gross Loans | $2,556.7 | $2,575.4 | $2,117.3 | $1,383.6 | $960.4 | | Total Deposits | $3,063.5 | $3,123.4 | $2,382.0 | $1,630.5 | $1,215.9 | | Total Equity | $478.1 | $455.9 | $374.1 | $258.0 | $167.2 | | ROAA | 0.64% | 1.00% | 0.84% | 0.55% | 0.75% | | ROAE | 5.52% | 8.52% | 7.03% | 5.55% | 8.19% | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, net income decreased to $25.6 million due to a $14.4 million increase in loan loss provision, while net interest margin compressed to 3.48% Financial Highlights (FY 2019 vs. FY 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net Income | $25.6M | $35.8M | -28.6% | | Total Assets | $3.95B | $4.06B | -2.8% | | Total Loans (HFI) | $2.56B | $2.58B | -0.7% | | Total Deposits | $3.06B | $3.12B | -1.9% | | Book Value per Share | $30.95 | $28.87 | +7.2% | - The provision for loan losses increased by $14.4 million in 2019, primarily due to a $14.5 million provision related to a single credit relationship that subsequently filed for bankruptcy[384][458][459] Net Interest Income and Margin | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Interest Income | $125.9M | $124.8M | | Net Interest Margin | 3.48% | 3.81% | - Non-interest income increased by 26.7% to $25.0 million, driven by higher debit card income (+$2.1 million) and service charges (+$1.4 million)[389][391] - Non-interest expense increased by 5.6% to $99.6 million, primarily due to higher salaries and employee benefits (+$4.1 million) and data processing costs (+$2.0 million)[396][397] Nonperforming Assets (NPA) | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total NPAs | $46.9M | $39.6M | | NPAs to Total Assets | 1.19% | 0.98% | Quantitative and Qualitative Disclosure About Market Risk The company's primary market risk is interest rate volatility, managed by ALCO, with a 100 basis point rate increase projected to decrease NII by 3.5% and EVE by 0.6% - The primary component of the company's market risk is interest rate volatility, which affects both income levels and the market value of assets and liabilities[538] - The Asset Liability Committee (ALCO) manages interest rate risk exposure using simulation analysis to test the sensitivity of Net Interest Income (NII) and Economic Value of Equity (EVE)[540][541] Simulated Impact of Immediate Interest Rate Changes (as of Dec 31, 2019) | Change in Interest Rates | Impact on Net Interest Income (12 mo.) | Impact on Economic Value of Equity | | :--- | :--- | :--- | | +300 bps | (12.3)% | (7.6)% | | +200 bps | (7.6)% | (3.0)% | | +100 bps | (3.5)% | (0.6)% | | -100 bps | 1.9% | (4.4)% | Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for 2017-2019, the independent auditor's report, and unaudited quarterly financial data - This item includes the company's audited consolidated financial statements and the report from its independent registered public accounting firm, Crowe LLP[552][580] 2019 Unaudited Quarterly Results (in Millions) | Quarter | Total Interest Income | Net Interest Income | Provision for Loan Loss | Net Income | | :--- | :--- | :--- | :--- | :--- | | Q1 2019 | $43.2 | $30.6 | $15.6 | ($4.1) | | Q2 2019 | $44.8 | $31.3 | $1.0 | $9.2 | | Q3 2019 | $44.5 | $31.5 | $0.7 | $10.4 | | Q4 2019 | $43.0 | $32.4 | $1.1 | $10.0 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - There were no disagreements with accountants on accounting and financial disclosures[556] Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2019, due to a material weakness in corporate account reconciliation, which has since been remediated - Management concluded that disclosure controls and procedures were not effective as of the end of the period covered by the report[556] - A material weakness was identified in the control over financial reporting related to the reconciliation process for a portion of the company's corporate accounts to its general ledger[557] - The company has implemented remediation efforts, including new supervision, review processes, and assigning knowledgeable personnel to the reconciliation function[557] Other Information There is no other information to report in this section - None[559] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - The information required by this item is incorporated by reference from the registrant's Proxy Statement for the 2020 Annual Meeting of Stockholders[560] Executive Compensation Details concerning executive compensation are incorporated by reference from the company's 2020 Proxy Statement - The information required by this item is incorporated by reference from the registrant's Proxy Statement for the 2020 Annual Meeting of Stockholders[562] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the company's 2020 Proxy Statement - The information required by this item is incorporated by reference from the registrant's Proxy Statement for the 2020 Annual Meeting of Stockholders[563] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 Proxy Statement - The information required by this item is incorporated by reference from the registrant's Proxy Statement for the 2020 Annual Meeting of Stockholders[564] Principal Accounting Fees and Services Details on principal accounting fees and services are incorporated by reference from the company's 2020 Proxy Statement - The information required by this item is incorporated by reference from the registrant's Proxy Statement for the 2020 Annual Meeting of Stockholders[565] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including a detailed exhibit index - This item lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, with a detailed exhibit index provided[567]