EDGAR 10-K Filing

Company CIK: 1227500
Filing Year: 2024
Filename: 1227500_10-K_2024_0000950170-24-028081.json

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ITEM 1. BUSINESS
Item 1: Business
Our Company
We are a financial holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 64 branches located in Arkansas, Kansas, Missouri and Oklahoma, as of December 31, 2023. As of December 31, 2023, we had, on a consolidated basis, total assets of $5.03 billion, total deposits of $4.15 billion, total loans (net of allowances) of $3.29 billion and total stockholders’ equity of $452.9 million.
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 businesspersons who share our entrepreneurial spirit. In 2003, we raised capital from 23 local investors to finance the acquisition of National Bank of Andover in Andover, Kansas.
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.
•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 Lee’s 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.
•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.
•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 and our total assets by $153.1 million. The merger added 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 $281.5 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 $343.4 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.
•February 2019 - Acquired the assets and assumed the deposits and certain other liabilities of two branch locations in Guymon, Oklahoma and one branch location in Cordell, Oklahoma, from MidFirst Bank based in Oklahoma City, Oklahoma. This acquisition increased our deposits by $98.5 million, our loans by $6.5 million and our total assets by $98.6 million.
•October 2020 - Purchased the assets and assumed the deposits of one branch location in Norton, Kansas, and one branch location in Almena, Kansas, from Almena State Bank (“Almena”) facilitated by the Federal Deposit Insurance Corporation (“FDIC”). This purchase increased our deposits by $62.5 million, our loans by $31.4 million and our total assets by $66.9 million.
•October 2021 - Acquired American State Bancshares, Inc. (“ASBI”), which had a total of seventeen branches in Kansas. The acquisition increased our deposits by $668.8 million, our loans by $441.9 million and our total assets by $777.6 million.
•December 2021 - Purchased the assets and assumed the deposits of three Security Bank of Kansas City (“Security”) branch locations in St. Joseph, Missouri, from Valley View Financial Co. of Overland Park, Kansas. The purchase increased our deposits by $75.1 million, our loans by $1.4 million and our total assets by $75.8 million.
•December 2023 - Announced the Company's merger with Rockhold BanCorp, the parent company of Bank of Kirksville. Following the merger, the Company has added approximately $350 million in deposit balances and $122 million in loan balances serviced out of 8 branch locations located in northcentral Missouri. The transaction closed on February 9, 2024.
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 focus on growth in our commercial loan portfolio through hiring and retaining talented bankers and incentivizing them 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, we have expanded our team of full-time equivalent employees from 19 to 717 and our network of branches from 2 to 64 as of December 31, 2023. 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 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 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 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 or compelling non-interest 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.
•Focus on Lending Growth in Our Metropolitan 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 in our community markets and our metropolitan markets as of December 31, 2023, which we believe illustrates our execution of this strategy.
Deposits
Loans
Amount(1)
Overall %
Amount(1)
Overall %
Metropolitan markets(2)
$
1,633,213
%
$
2,461,136
%
Community markets(3)
$
2,512,242
%
$
871,765
%
(1)Amounts in thousands.
(2)Represents 15 locations in the Wichita, Kansas City and Tulsa metropolitan statistical areas (“MSAs”).
(3)Represents 49 locations 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 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 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.
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.
•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 and with large, financial institutions in our markets during various economic cycles along with significant merger and acquisition experience in the financial services industry. Our 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, 2023, commercial loans composed over 70.8% of our loan portfolio and within our commercial loan portfolio, 74.6% of such loans were commercial real estate loans and 25.4% were commercial and industrial loans. 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 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 through cross-selling our banking products, such as our deposit and treasury management tools, as they expand their businesses. 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 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 target’s management team to execute on synergies and cost saving opportunities related to the acquisition; and (vii) involving a broader management team across multiple departments in order to help ensure the successful integration of all business functions. We believe our approach allows us to realize the benefits of the acquisition and create stockholder value while appropriately managing risk.
•Efficient and Scalable Platform with Capacity to Support Our Growth. Through significant investments in technology 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, risk management and internal audit, 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 specific internal audit functions 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.
•Culture Committed to Talent Development, Transparency and Accountability. We have invested in professional talent since our inception by building a team of “businesspersons first and bankers second” and economically aligned them with our stockholders, through our share-based incentive compensation and 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. 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 team’s 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 Equity Connect, a customized customer relationship management system, to assign relationship officers to enhance relationships with our customers and identify and meet their particular needs.
•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 25 years of banking and financial services 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.
Our Banking Services
A general description of the range of commercial banking products and other services we offer follows.
Lending Activities
At December 31, 2023, we had total loans of $3.29 billion (net of allowances), representing 65.3% of our total assets. For additional information concerning our loan portfolio, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Loan Portfolio.”
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 real estate loans, which were $1.76 billion and constituted 52.8% of our total loans as of December 31, 2023, commercial and industrial loans, which were $598.3 million and constituted 18% of our total loans as of December 31, 2023, and residential real estate loans, which were $556.3 million and constituted 16.7% of our total loans as of December 31, 2023. Our commercial real estate loans are generally secured by first liens on real property. The remaining commercial and industrial loans are typically secured by general business assets, accounts receivable, inventory and/or the corporate guaranty of the borrower and/or personal guaranty of its 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 credit losses. Management believes the allowance for credit losses is adequate to cover expected losses in our loan portfolio as of December 31, 2023.
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, 2023, the aggregate amount of loans to our ten largest borrowers (including related entities) amounted to approximately $344.7 million, or 10.3% 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, President, 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 individual’s 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.
Loan decisions are documented as to the borrower’s 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:
•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 for loans within each category; and
•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 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 to 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 credit losses incurred in the loan portfolio.
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 collateral securing the loan and the borrower’s income. Such loan policies include maximum amortization schedules and loan terms 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 credit losses and other matters relating to lending practices.
Lending Limits. Our lending activities are subject to a variety of lending limits imposed by federal and state law. In general, the Bank is subject to a legal lending limit on loans to a single borrower based on the Bank’s capital level. The dollar amounts of the Bank’s lending limit increases or decreases as the Bank’s 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 Bank’s legal lending limit as of December 31, 2023, on loans to a single borrower was $143.0 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, term loans, equipment financing, aircraft financing, acquisition, expansion and development loans, borrowing base loans, government guaranteed loans, letters of credit and other loan products, primarily in our target markets that are underwritten on the basis of the borrower’s 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 industrial loan 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 form of credit enhancement, such as a government guarantee is obtained.
In general, commercial and industrial 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 influenced 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 movable 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.
Commercial Real Estate Loans. We make commercial mortgage loans collateralized by real estate, which may be owner occupied or non-owner-occupied. 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.
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 property’s 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 borrower’s liquidity and leverage, management experience of the owners or principals, economic condition and industry trends.
We also 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 are also 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 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 ensures that the property is free from encumbrances and require hazard insurance.
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. 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. These loans typically are secured by collateral outside of our branch footprint.
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 borrower’s 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 under 80%. We also originate agricultural real estate loans directly and through programs sponsored by the Farm Service Agency (“FSA”), an agency of the United States Department of Agriculture, which provides a partial guarantee on loans underwritten to FSA 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 based on the borrower’s ability to make repayment from the cash flow of the borrower’s 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 and which provides certain preferential procedures to agricultural borrowers compared to traditional bankruptcy proceedings pursuant to other chapters of the U.S. Bankruptcy Code.
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 borrower’s 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 against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s 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.
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 variety 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 core 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 Certificate of Deposit Registry Services (“CDARS”) as well as the Insured Cash Sweep ("ICS") both provided via Promontory Interfinancial Network as options 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, ITMs, 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, cashier’s and travelers checks and letters of credit, as well as treasury management services, wire transfer services and automated clearing house (“ACH”) services. We offer both consumer and commercial credit cards, as well as Health Savings Account solutions.
We offer a full array of commercial treasury management services designed to be competitive with banks of all sizes. Treasury management services include balance reporting (including current day and previous day activity), transfers between accounts, wire transfer initiation, ACH origination and stop payments. Cash management deposit products consist of lockbox, remote deposit capture, positive pay, reverse positive pay, account reconciliation services, zero balance accounts and sweep accounts, including loan sweep.
We offer a full comprehensive suite of products and offerings for trust and wealth management customers. Trust and wealth management services include private banking, investment management, trust services and estate and financial planning.
We offer insurance brokerage services primarily focused on crop coverage for agricultural customers throughout our footprint.
Our Markets
As of December 31, 2023, we conducted banking operations through our 64 bank locations 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 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 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 footprint of our markets provides numerous industrial plants, facilities and 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., American Century Investments, Garmin International, Inc., Cessna Aircraft Company, Seaboard Corporation, Cargill Meat Solutions, Spirit AeroSystems, Dairy Farmers of America, Quik Trip, ONEOK, Salina Vortex and Williams Companies and host a major presence for companies across a variety of industries, including Bombardier Learjet, Collective Brands, Inc., FedEx, Flexsteel, Hills Pet Nutrition, Inc., Textron Aviation Services, Tyson Foods, Schwan’s Company, Phillips 66, Rib Crib, Honeywell, T-Mobile, Oracle, and Bayer Corporation. 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.
Information Technology Systems
We continue to make significant investments in our information 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 is maintained in-house. We house our back-up site at a decentralized location. This back-up site is intended to provide for redundancy and disaster recovery capabilities in the event of a significant equipment failure or disaster.
The majority of our other systems, including our e-mail, 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.
For a discussion of our cybersecurity risk management and strategy and governance, please see “Item 1C - Cybersecurity"
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.
Human Capital
The Company’s success depends on its ability to attract and retain highly qualified senior and middle management and other skilled employees. Competition for qualified employees can be intense and it may be difficult to locate personnel with the necessary combination of skills, attributes and business relationships.
The Company believes that its employees are the primary key to the Company’s success as a financial institution. The Company is committed to attracting, retaining and promoting top quality talent regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion and physical ability. The Company strives to identify and select the best candidates for all open positions based on qualifying factors for each job. The Company is dedicated to providing a workplace for its employees that is inclusive, supportive and free of any form of discrimination or harassment; rewarding and recognizing its employees based on their individual results and performance; and recognizing and respecting all of the characteristics and differences that make each of the Company’s employees unique.
Additionally, the Company is committed to employee development through a combination of in-house and external training programs. Further, the Company has two staff development programs with formal in-house training programs for junior bankers including guidance from senior banking team members.
As of December 31, 2023, the Company employed 717 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 earnings 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, the FDIC, the Kansas Office of State Bank Commissioner (“OSBC”), the Consumer Financial Protection Bureau (“CFPB”), the Internal Revenue Service (“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 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 FDIC’s 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. 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.
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.
The laws, rules and regulations add significantly to the cost of operating the Company and Equity Bank and thus have a negative impact on profitability. In recent years, financial service providers that are not subject to the same regulations as the Company and Equity Bank have expanded significantly. Less regulation may give these institutions a competitive advantage over the Company and Equity Bank. Such institutions may continue to draw large amounts of funds away from banking institutions, with a continuing adverse effect on the banking industry in general.
Bank Holding Company Regulation
We are a bank holding company registered under the Bank Holding Company Act of 1956 (“BHC Act”), as amended, 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. To maintain FHC status, the bank holding company and all subsidiary depository institutions must be “well managed” and “well capitalized.” Additionally, all subsidiary depository institutions must have received at least a “Satisfactory” rating on its most recent Community Reinvestment Act (“CRA”) examination. Failure to meet these requirements may result in limitations on activities and acquisitions. During the fourth quarter of 2022, we elected to become a FHC.
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 company’s consolidated net worth.
Consistent with the Dodd-Frank Act codification of the Federal Reserve’s 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 company’s capital needs, asset quality and overall financial condition.
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 company’s 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 company’s prospective rate of earnings retention is not consistent with the bank holding company’s 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 Bank’s ability to pay dividends could, in turn, affect our ability to pay dividends to our stockholders. For more information concerning Equity Bank’s 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 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.
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
Regulatory capital rules pursuant to the Basel III requirements (“Basel III rules”), require banks and bank holding companies to maintain a minimum common equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6%, a total risk-based capital ratio of 8% and a leverage ratio of 4%. Under the Basel III rules, banks and bank holding companies must maintain a CET1 risk-based capital ratio of 6.5%, a Tier 1 risk-based capital ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5% to be deemed “well capitalized” for purposes of certain rules and requirements. Banks and bank holding companies are also required to maintain a “capital conservation buffer” in excess of the minimum risk-based capital ratios. The buffer is intended to help ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The minimum 2.5% buffer is composed solely of CET1 capital. If an institution’s capital conservation buffer is less than or equal to 2.5%, then the institution is subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers.
The federal bank regulatory agencies may also set higher capital requirements for banks and bank 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.
The Basel III rules also set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn affect the calculation of risk-based capital ratios. Under the Basel III rules, higher or more sensitive risk weights are 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 prior to May 19, 2010, on a permanent basis without 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 (“AOCI”) components in the calculation of CET1 capital and, in effect, retain the AOCI treatment under the prior capital rules. Under the Basel III rules, we made the one-time, permanent election to continue to exclude AOCI from capital.
In accordance with the Economic Growth, Regulatory Relief and Consumer Protection Act, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the community bank leverage ratio framework. A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The final rules include a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater-than 9% leverage ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage ratio greater than 8%. A banking organization that fails to maintain a leverage ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III Capital rules and file the appropriate regulatory reports. The Company and Equity Bank have not made an election to use the community bank leverage ratio framework but may make such an election in the future if eligible and doing so is advantageous.
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 be considered well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2023, Equity Bank exceeded the capital levels required to be deemed well capitalized.
Additionally, FDICIA requires bank regulators to take prompt corrective action to resolve problems associated with insured depository institutions. 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 subsidiary’s compliance with the capital restoration plan, until it becomes adequately capitalized. We have control of Equity Bank for the purpose of this statute.
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 company’s 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 after 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.
In addition, the BHC Act prohibits any entity from acquiring 25% or more (the BHC Act has a lower limit for acquirers that are existing bank holding companies) of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or the power to exercise a “controlling influence” over a bank holding company or bank, without the prior approval of the Federal Reserve. On January 30, 2020, the Board of Governors of the Federal Reserve System adopted a final rule revising the Federal Reserve’s regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company, including a bank holding company or a bank, for purposes of the BHC Act. The final rule establishes a comprehensive framework that employs several factors to determine if a company has control over another company, including the first company’s total voting and non-voting equity investment in the second company; director, officer and employee overlaps between the first company and the second company; and the scope of business relationships between the first company and the second company. The final rule went into effect on April 1, 2020.
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 Bank’s 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 notes or debentures and the holding of real estate and personal property and requires 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.
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 FDICIA’s efforts to promote the safety and soundness of depository institutions 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 paid, 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 financial ability to pay dividends to us, or if 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.
Additional and more stringent limits apply to a bank’s transactions with its own executive officers and certain directors. These limits do not apply to transactions with all directors or to insiders of the bank’s affiliates.
Restrictions on Transactions with Affiliates
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 certain 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 bank’s capital:
•well capitalized (at least 5% leverage ratio, 6.5% CET1 risk-based capital ratio, 8% Tier 1 risk-based capital ratio and 10% total risk-based capital ratio);
•adequately capitalized (at least 4% leverage ratio, 4.5% CET1 risk-based capital ratio, 6% Tier 1 risk-based capital ratio and 8% total risk-based capital ratio);
•undercapitalized (less than 4% leverage ratio, 4.5% CET1 risk-based capital ratio, 6% Tier 1 risk-based capital ratio or 8% total risk-based capital ratio);
•significantly undercapitalized (less than 3% leverage ratio, 3% CET1 risk-based capital ratio, 4% Tier 1 risk-based capital ratio or 6% total risk-based capital ratio); and
•critically undercapitalized (less than 2% tangible capital to total assets).
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the 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 federal banking agency.
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, 2023, Equity Bank exceeded the capital levels required to be deemed well capitalized.
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 financial ratios and supervisory factors derived from a statistical model that estimates a bank’s probability of failure within three years.
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 earnings.
Consumer Financial Protection Bureau
The Dodd-Frank Act created the 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 borrower’s 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 CFPB’s final rules impact the operations and financial condition of Equity Bank, such rules may have a material impact on Equity Bank’s compliance costs, compliance risk and fee income.
Privacy
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 confidential information. Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market the institutions’ own 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 banks and other institutions that resulted in unauthorized access to confidential customer information have prompted the federal banking agencies to issue extensive guidance on cybersecurity. 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.
The Patriot Act, International Money Laundering Abatement and Financial Anti-Terrorism Act and Bank Secrecy 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 laws and regulations and an effective audit function for testing of Equity Bank’s compliance with the Bank Secrecy Act, on an ongoing basis.
The Community Reinvestment Act
The Community Reinvestment Act (“CRA”) and related regulations are intended to encourage banks to help meet the credit needs of their service areas, including low- and moderate-income neighborhoods, consistent with safe and sound operations. The bank regulators examine and assign each bank a public CRA rating. The CRA requires bank regulators to take into account the bank’s record in meeting the needs of its service area when considering an application by a bank to establish or relocate a branch or to conduct certain mergers or acquisitions. The Federal Reserve is required to consider the CRA records of a bank holding company’s controlled banks when considering an application by the bank holding company to acquire a banking organization or to merge with another bank holding company. When we or the Bank apply for regulatory approval to engage in certain transactions, the regulators will consider the CRA record of target institutions and our depository institution subsidiaries. An unsatisfactory CRA record could substantially delay approval or result in a withdrawal or denial of an application. The regulatory agency’s assessment of the institution’s record is made available to the public. The Bank received an overall CRA rating of “satisfactory” on its most recent CRA examination.
In October 2023, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency (“OCC”) jointly adopted a final rule that amends their regulations implementing the CRA. The final rule adopts key changes to existing CRA regulations, including:
1.Changes to the asset threshold of the different bank categories covered under the regulations.
2.Changes to activities that qualify for CRA credit.
3.New types of assessment areas that allow for increased flexibility in obtaining CRA credit.
4.New data collection and reporting obligations.
The final rule's effective date is April 1, 2024; however, most of the rule's new requirements will be applicable beginning January 1, 2026. The new data reporting requirements will be applicable on January 1, 2027.
Cybersecurity
Federal bank regulatory agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Many states have also recently implemented or modified their data breach notification, information security and data privacy requirements. We expect this trend of state-level activity in those areas to continue and are continually monitoring developments in the states in which our customers are located.
The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties.
Federal banking regulators have imposed a cybersecurity-related notification rules that requires banking organizations to notify their primary federal regulator as soon as possible and within 36 hours of incidents that, among other things, have materially disrupted or degraded, or are reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization or impact the stability of the financial sector. The rule also imposes requirements on bank service providers to notify their affected banking organization customers of certain computer-security incidents.
Further, In July 2023, the SEC adopted rules requiring public companies to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, processes, strategy, and governance. The rules also generally require public companies to disclose on Form 8-K any cybersecurity incident it determines to be material within four business days of such determination and to describe the material aspects of the incident's nature, scope, and timing, as well as its material impact or reasonably likely material impact on the company. See Item 1C. Cybersecurity for a discussion of the Company’s cybersecurity risk management, strategy and governance.
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 Bank’s 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 Fair Housing Act;
•the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•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.
In addition, Equity Bank’s 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.
Violations of consumer protection laws and other regulations can result in significant potential liability, including actual damages, restitution and injunctive relief from litigation brought by customers, state attorney generals, the Department of Justice and other plaintiffs, as well as enforcement actions by banking regulators and reputational harm.
Concentrated Commercial Real Estate Lending Regulations
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 may be exposed to heightened commercial real estate lending concentration risk and subject to further supervisory analysis 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 residential properties, non-farm non-residential properties and loans for construction, land development and other land, together with loans to finance commercial real estate, construction and land development activities that are not secured by real estate, represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management is expected to 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.
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 affiliates 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.

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ITEM 1A. RISK FACTORS
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 Company’s 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.
Summary of Risk Factors
Our risk factors can be broadly summarized by the following categories:
•Economic Risks
•Credit and Interest Rate Risks
•Strategic Risks
•Risks Relating to the Regulation of Our Industry
•Risks Relating to the Company’s Common Stock
•General Risks
While not an exhaustive list, the principal risks that we believe could adversely affect our business, financial condition or results of operations include:
•a change in economic conditions or a return to recessionary conditions could result in increases in our level of nonperforming loans and/or reduced demand for our products and services;
•the value of real estate collateral may fluctuate significantly resulting in an under-collateralized loan portfolio;
•external economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our business, financial condition and results of operations;
•inability to effectively manage or adequately measure credit risk;
•we could suffer losses from a decline in the credit quality of the assets that we hold;
•a significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could negatively impact our business;
•a large portion of our loan portfolio is comprised of commercial loans that are secured by accounts receivable, inventory, equipment or other asset-based collateral, and deterioration in the value of such collateral could increase our exposure to future probable losses;
•our largest lending relationships currently make up a material percentage of our total loan portfolio;
•our profitability is vulnerable to interest rate fluctuations;
•market interest rates for loans, investments and deposits are highly sensitive to many factors beyond our control;
•our financial instruments expose us to certain market risks and may increase the volatility of earnings and AOCI;
•the outbreak of an epidemic, pandemic or highly contagious disease occurring in the United States or in the geographies in which we conduct operations;
•our financial performance will be negatively impacted if we are unable to execute our growth strategy;
•our strategy of pursuing acquisitions exposes us to financial, execution, compliance and operational risks;
•acquisitions may disrupt our business, dilute stockholder value and be costly to integrate;
•we rely heavily on our management team and could be adversely affected by the unexpected loss of key officers;
•our business is concentrated in, and largely dependent upon, the continued growth and welfare of the general geographic markets in which we operate;
•our ability to grow our loan portfolio may be limited;
•our future profitability levels are dependent on our ability to grow and maintain deposits at competitive costs;
•our ability to retain bankers and recruit additional successful bankers is critical to the success of our business strategy;
•a lack of liquidity could adversely affect our financial condition and results of operations;
•our financial projections are based upon numerous assumptions about future events and our actual financial performance may differ materially from our projections if our assumptions are inaccurate;
•we continually encounter technological change and may have fewer resources than our competitors;
•our information systems may experience a failure or interruption;
•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;
•we are dependent upon outside third parties for the processing and handling of our records and data;
•if our enterprise risk management framework is not effective at mitigating risk and loss to us;
•changes in accounting standards could materially impact our financial statements;
•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;
•we may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition;
•increasing scrutiny and evolving expectations from customers, regulators, investors and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks;
•we are subject to extensive regulations in the conduct of our business, which imposes additional costs on us;
•changes in laws, government regulation and monetary policy may have a material effect on our results of operations;
•our banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments;
•we are subject to certain capital requirements by regulators;
•we are subject to stringent capital requirements, which may adversely impact our return on equity or constrain us from paying dividends or repurchasing shares;
•we may need to raise additional capital in the future and the capital may not be available when it is needed or may be dilutive to stockholders;
•we are subject to the Bank Secrecy Act and other anti-money laundering statutes and regulations, and any deemed deficiency by us with respect to these laws could result in significant liability;
•the laws that regulate our operations are designed for the protection of depositors and the public, not our stockholders;
•as a bank holding company, the sources of funds available to us are limited;
•recent negative developments affecting the banking industry, and resulting media coverage, may have eroded customer confidence in the banking system;
•any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company's expenses and affect the Company's operation;
•climate change related legislative and regulatory initiatives, have the potential to disrupt our business and adversely impact the operations and creditworthiness of our customers
•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 obligations associated with being a public company requires significant resources and management attention;
•there is no guarantee that we will declare or pay cash dividends on our common stock;
•securities analysts may not initiate or continue coverage on our Class A common stock, which could adversely affect the market for our Class A common stock;
•use of our common stock for future acquisitions or to raise capital may be dilutive to existing stockholders;
•a future issuance of stock could dilute the value of our Class A common stock;
•we have significant institutional investors whose interests may differ from yours;
•our directors and executive officers beneficially own a significant portion of our Class A common stock and have substantial influence over us;
•shares of our Class A common stock are not insured deposits and may lose value;
•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;
•if we fail to maintain 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 board of directors may issue shares of preferred stock that would adversely affect the rights of our Class A common stockholders;
•the return on your investment in our Class A common stock is uncertain;
•we operate in a highly competitive industry and face significant competition from other banking organizations;
•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 subject to environmental risk in our lending activities;
•we are subject to claims and litigation pertaining to intellectual property;
•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; and
•we have outstanding subordinated debt obligations, and if the Company defaults on those obligations, the debt holders could lose their investment.
The foregoing factors should not be construed as exhaustive. This summary of risk factors should be read in conjunction with the more detailed risk factors below.
Economic Risks
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.
Economic recession or other economic problems, including those affecting our markets and regions, but also those affecting the 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 affected. In addition, although deteriorating market conditions could adversely affect our financial condition, results of operations and cash flows, we may not benefit from any market growth or favorable economic conditions, either in our primary market areas or nationally, even if they do occur.
Changes in economic conditions could cause an increase in delinquencies 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 in 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 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 credit losses and our operating results and financial condition.
External economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our business, financial condition and results of operations.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly 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 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.
Volatility 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 significant volatility 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 affect our financial condition and results of operations. It is also difficult to project future commodity prices as they are dependent upon many different factors beyond our control.
Credit and Interest Rate Risks
Inability to effectively manage 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 credit 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.
We maintain an allowance for credit losses, which is an allowance established through a provision for credit losses charged to expense that represents management’s best estimate of probable incurred losses in our loan portfolio. Additional credit losses will likely occur in the future and may occur at a rate greater than we have experienced to date. In determining the amount of the allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions, 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 credit 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 could suffer losses from a decline in the credit quality 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. We have adopted underwriting and credit monitoring procedures and policies that we believe are appropriate to minimize this risk, including the establishment and review of the allowance for credit losses, periodic assessment of the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on our financial condition and results of operations. In particular, we face credit quality risks presented by past, current and potential economic and real estate market conditions.
A significant portion of our loan portfolio is secured by real estate, 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 borrower’s 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 number of borrowers. Thus, the deterioration of even a small number of these loans could cause a significant increase in the allowance for credit losses or loan charge-offs, which in turn 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 affected 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 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, equipment or other asset-based collateral, and deterioration in the value of such collateral could increase our exposure to future probable losses.
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 portfolio. 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.
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 only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.
A portion of our loan portfolio is comprised of participation and syndicated transaction interests, which could have an adverse effect on our ability to monitor the lending relationships 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 on our business, financial condition, results of operations and future prospects.
Our largest loan relationships currently make up a material percentage of our total loan portfolio.
As of December 31, 2023, our ten largest loan relationships totaled over $344.7 million in loan exposure, or 10.4% 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 credit losses may not be adequate to cover losses associated with any of these relationships and any loss or increase in the allowance would negatively affect our earnings and capital. Even if the loans are collateralized, the large increase in classified assets could harm our reputation with our regulators, investors and potential investors and inhibit our ability to execute our business plan.
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 borrower’s 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.
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 clients. Many of these 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 amount of the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of operations.
Our profitability is vulnerable to interest rate fluctuations.
Our profitability depends substantially upon our net interest income. Net interest income is the difference between the interest 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 effect on our net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can significantly affect our assets and 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 adjustable 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.
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 effects of changes in interest rates. Depending on our portfolio of loans and investments, our financial condition and results of operations may be adversely affected by changes in interest rates.
Our financial instruments expose us to certain market risks and may increase the volatility of earnings and AOCI.
We hold certain financial instruments measured at fair value. For those financial instruments measured at fair value, we are required to recognize the changes in the fair value of such instruments in earnings or accumulated other comprehensive income (“AOCI”) each quarter. Therefore, any increases or decreases in the fair value of these financial instruments have a corresponding impact on reported earnings or AOCI. Fair value can be affected by a variety of factors, many of which are beyond our control, including our credit position, interest rate volatility, capital markets volatility, and other economic factors. Accordingly, we are subject to mark-to-market risk and the application of fair value accounting may cause our earnings and AOCI to be more volatile than would be suggested by our underlying performance.
Strategic Risks
Global health pandemics or outbreaks of highly contagious diseases occurring in the United States or in the geographies in which we conduct operations, could adversely affect the Company’s business operations, asset valuations, financial condition and results of operations.
The Company’s business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. Outbreaks of highly contagious or infectious diseases could negatively impact the ability of our employees and customers to conduct such transactions and disrupt the business activities and operations of our customers in the geographic areas in which we operate. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial
activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Similar impacts could be experienced in the future if such an outbreak or pandemic were to occur again. Notwithstanding our contingency plans and other safeguards against pandemics or another contagious disease, the spread of contagion could negatively impact the availability of Equity Bank staff who are necessary to conduct our business operations, as well as potentially impact the business and operations third party service providers who perform critical services for us. If the response to contain a similar highly infectious or contagious disease, is unsuccessful, the Company could experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.
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 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 institutions, which could hinder our ability to continue to grow.
A substantial part of our historical growth has been a result of acquisitions of other financial institutions. 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 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 may 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 and branches also involve operational risks and uncertainties, such as unknown or contingent liabilities 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.
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 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 credit losses and complying with regulatory accounting requirements, including increased credit 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 may be more difficult, costly 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 affect 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 affect 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.
Operational Risks
We rely heavily on our management team and could be adversely affected by the unexpected 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 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.
Difficult conditions in the market for financial products and services may materially and adversely affect our business and results of operations.
Recessionary periods historically have brought about increased foreclosures and unemployment which have 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, have historically 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 have 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 effect on our business and 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.
Our ability to grow our loan portfolio may be limited 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 high credit quality borrowers. 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 loan 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 affect us.
Several of our large depositors have relationships with each other, which creates a higher risk that one customer’s withdrawal of its deposit could lead to a loss of other deposits from customers within the relationship, which, in turn, could force us to fund our business through more expensive and less stable sources.
As of December 31, 2023, our ten largest non-brokered depositors accounted for $270.6 million in deposits, or approximately 6.5% of our total deposits. Further, our non-brokered deposit account balance was $3.8 billion, or approximately 92.4% of our total deposits, as of December 31, 2023. Several of our large depositors have business, family or other relationships with each other, which creates a risk that any one customer’s 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 deposits 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 risks associated with such efforts, including risks that (i) revenues 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 might be inadequate to manage the risks associated with new activities. Furthermore, it is possible that our unfamiliarity with 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 impair a borrower’s ability to repay a loan and could adversely affect our financial condition and results of operations.
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 affected, our financial condition and results of operations may be negatively affected.
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.
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.
Our financial flexibility would be severely constrained if we were unable to maintain our access to funding or if adequate financing were not available at acceptable interest rates. Further, if we were required to rely more heavily on more expensive funding sources to support liquidity, our revenues may not increase proportionately to cover our increased costs. In this case, our operating margins and profitability would be adversely affected, If alternative funding sources were no longer available to us, we may need to sell a portion of our investment and/or loan portfolio to raise funds, which, depending upon market conditions, could result in us realizing a loss on the sale of such assets. As of December 31, 2023, we had a net unrealized loss of $51.9 million on our available for-sale investment securities portfolio primarily as a result of the rising interest rate environment.
As a community banking institution, we have lower lending limits and different lending risks than certain of our larger, more diversified competitors.
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 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 with 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 materially 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.
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.
We are subject to possible claims and litigation pertaining to fiduciary responsibility.
From time to time, customers could make claims and take legal action pertaining to our performance of our fiduciary responsibilities. Whether customer claims and legal action related to our performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect our market perception of our products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
We may be the subject of litigation, which would result in legal liability and damage to its business and reputation.
From time to time, we may be subject to claims or legal action from customers, employees or others. Financial institutions like the Company are facing a growing number of significant class actions, including those based on the manner of calculation of interest on loans and the assessment of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Company is also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and other agencies regarding its businesses. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other financial institutions, we are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against us could materially adversely affect its business, financial condition or results of operations and/or cause significant reputational harm to its business.
We continually encounter technological change and may have fewer resources than our competitors to continue to invest in technological improvements.
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 effectively implement new technology-driven products and services, which could reduce our ability to effectively 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 effect 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.
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 industry 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 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 is 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 liabilities. 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. 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.
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 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 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.
While we invest in systems and processes that 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 modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents.
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 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.
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.
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. 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. For additional information about the Company’s impairment assessment process and results see “NOTE 7 - GOODWILL AND CORE DEPOSIT INTANGIBLES” in Notes to Consolidated Financial Statements.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition.
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.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.
Risks Relating 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.
As a bank holding company, we are subject to federal regulation under 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 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 applicable requirements, may negatively impact our financial condition and results of operations.
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 management’s 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.
Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with 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 our 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 credit 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 effect 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 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” status could affect our customers’ confidence in us, which could adversely affect our ability to do business. In addition, failure to maintain such 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 capital requirements, which may adversely impact our return on equity or constrain us from paying dividends or repurchasing shares.
Banking institutions are required to hold more capital as a percentage of assets than most industries. Holding high amounts of capital compresses our earnings and constrains growth. In addition, the failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect client and investor confidence, our costs of funds and FDIC insurance costs and our ability to make acquisitions and result in a material adverse effect on our business, financial condition, results of operations and growth prospects.
We may need to raise additional capital in the future, including as a result of potential increased minimum capital thresholds established by regulators, but that capital may not be available when it is needed or may be dilutive to 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 comply with regulatory standards, we may need to raise capital in the future. Our ability to raise additional capital will depend on 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 may 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.
Stockholders may be deemed to be acting in concert or otherwise 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 group 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 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 finding 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.
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 laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s 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 institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We are subject to the Bank Secrecy Act and other anti-money laundering statutes and regulations, and any deemed deficiency 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, 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.
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 institution’s 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 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 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, 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 company’s 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 company’s general unsecured creditors, including the holders of any note obligations.
The laws that regulate our operations are designed for the protection 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 FDIC’s DIF and not for the purpose of protecting stockholders. These laws and regulations can materially affect our future business. 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.
As a bank holding company, the sources of funds 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 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 bank’s creditors, including depositors, which take priority, except to the extent that the holding company may be a creditor with a recognized claim.
Negative developments affecting the banking industry, and resulting media coverage in 2023 eroded customer confidence in the banking system.
The high-profile bank failures in 2023 involving Silicon Valley Bank, Signature Bank and First Republic Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks like Equity Bank. These market developments negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact Equity Bank's liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC made statements ensuring that depositors of these failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.
Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.
The Company and Equity Bank anticipate increased regulatory scrutiny and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. As a result, the Bank could face increased
scrutiny or be viewed as higher risk by regulators and the investor community. Equity Bank's level of uninsured deposits as a percentage of non-brokered deposits was 35.2% at December 31, 2023, and 25.3% at December 31, 2022.
Climate change related legislative and regulatory initiatives, have the potential to disrupt our business and adversely impact the operations and creditworthiness of our customers.
Political and social attention to the issue of climate change has increased. The federal and state legislatures and regulatory agencies have proposed legislative and regulatory initiatives seeking to mitigate the effects of climate change. These agreements and measures may result in the imposition of taxes and fees, the required purchase of emission credits, and the implementation of significant operational changes. In addition, the federal banking agencies may address climate-related issues in their agendas in various ways, including by increasing supervisory expectations with respect to banks' risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. We may incur compliance, operating, maintenance and remediation costs.
Risks Relating to the Company’s 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 commitments by or involving our competitors or us;
•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 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.
In the past, following periods of volatility in the market price of our common stock, securities class action litigation has been instituted. Pending or future securities class action suits against us could result in significant liabilities and, regardless of the outcome, could result in substantial costs and the diversion of our management’s attention and resources.
The obligations associated with 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. We 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 New York Stock Exchange, 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;
•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;
•enhance our investor relations function;
•establish internal policies, including those relating to trading in our securities and disclosure controls and procedures;
•retain additional personnel;
•comply with the New York Stock Exchange 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 management’s 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.
There is no guarantee that we will declare or pay cash dividends on our common stock.
The holders of our common stock will receive dividends if and when declared by our board of directors out of legally available funds. 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 earnings, 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.
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 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.
The trading volume in our common stock is less than other larger financial institutions.
Although our Class A common stock is listed for trading on the New York Stock Exchange, 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 of willing buyers and sellers of our 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.
Use of our common stock for future acquisitions or to raise capital may be dilutive to existing stockholders.
When we determine that appropriate strategic opportunities exist, we may acquire other financial institutions 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, 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. 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.
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 own a significant portion of our Class A common stock. As a result of this beneficial 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 of our other stockholders to approve transactions that they may deem to be in the best interests of our Company.
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 FDIC’s 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.
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.
If we fail to maintain 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 in place, including internal control over financial reporting, 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, our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting.
Our management may conclude that our internal control over financial reporting is 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 is effective, our independent registered public accounting firm may not conclude that our internal control over financial reporting is 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 the 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 control 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 modified, 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 or violations of listing standards. There could also be a negative reaction in the financial 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 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 corporation’s 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 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 7, 2024. 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 1A - Risk Factors” section, it is possible that an investor could lose his or her entire investment.
General Risks
We operate in a highly competitive 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 country’s 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 major retailers, all actively engaged in providing various types of loans and other financial services. Some of these competitors may 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 a 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.
We are subject to environmental risks 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 property’s value or limit our ability to use or sell the property. Although management has policies requiring 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.
Adverse weather or man-made events could negatively 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 affect 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 credit 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 credit losses. Such risks could also impair the value of collateral securing loans and hurt our deposit base.
We are or may become involved from time to time 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 intellectual property.
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.
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 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.
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 no balance as of December 31, 2023. This loan has a maximum lending commitment of $25.0 million. This loan was renewed subsequent to December 31, 2023, that set a new maturity date of February 10, 2025. If we were to default on this indebtedness, the lender of such loan could foreclose on Equity Bank’s stock and we would lose our principal asset. In that event, if the value of Equity Bank’s stock is less than the amount of the indebtedness, you would lose the entire amount of your investment.
We have outstanding subordinated debt obligations, and if the Company defaults on those obligations, the debt holders could lose their investment.
In the event of default, the Company’s senior debt holders will be entitled to receive payment in full prior to payment of subordinated debt holders. If the company’s distributable assets in the event of default can only repay the senior debt holders the subordinated debt holders could lose their investment.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B: Unresolved Staff Comments
None

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ITEM 2. PROPERTIES
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, 2023, we operated a total of 64 branches, consisting of seven branches in the Wichita, Kansas metropolitan area, seven branches in the Kansas City metropolitan area, two branches in Topeka, Kansas, eleven branches in Western Missouri, seven branches in Western Kansas, four branches in Southeast Kansas, seven branches in Southwest Kansas, five branches in Central Kansas, two branches in North Central Kansas, five branches in Northern Arkansas, one branch in the Tulsa, Oklahoma metropolitan area, four branches in Northern Oklahoma and two branches in Western Oklahoma. Most of Equity Bank’s 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, 2023.
Address
Owned/Leased
Principal Executive Office and Wichita Branch:
7701 East Kellogg Drive
Wichita, Kansas 67207
Owned
Branches as of December 31, 2023
Owned
Leased(1)
(1) Included in this category is one branch in which the building is owned but the land is on a long-term lease expiring in January 2030.

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ITEM 3. LEGAL PROCEEDINGS
Item 3: Legal Proceedings
From time to time we are party to various litigation matters incidental to the conduct of our business. See “NOTE 21 - 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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4: Mine Safety Disclosures
Not applicable.
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Common Equity Holders
Our common stock is listed on the New York Stock Exchange under the symbol “EQBK”. At February 29, 2024, there were 15,437,891 shares of our Class A common stock, outstanding and 241 stockholders of record for the Company’s Class A common stock. At February 29, 2024, no shares of our Class B common stock were outstanding.
Dividend Policy
Our 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; the Company expects to pay dividends at similar levels in the future;
•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 represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, 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.”
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 undercapitalized” 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 from the Federal Reserve for any capital distribution. In addition, Equity Bank generally is prohibited from making a capital distribution if such distribution would cause Equity Bank to be “undercapitalized” under applicable federal bank capital standards. For more information, see “Item 7 - Supervision and Regulation - Banking Regulation - Standards for Safety and Soundness.”
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, 2023.
Plan Category
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)
Equity compensation plans - stock options
376,446
$
26.71
*
Equity compensation plans - restricted stock awards and restricted stock units
283,375
*
Equity compensation plans - available
659,821
543,912
Equity compensation plans - employee stock purchase plan
-
-
351,646
Equity compensation plans
659,821
895,558
Equity compensation plans not approved by
security holders
-
-
-
Total
659,821
$
-
895,558
* All securities remaining available for future issuance were available under our 2022 Omnibus Equity Plan as of December 31, 2023.
On April 26, 2022, the Company's shareholders approved the Company’s 2022 Omnibus Equity Plan (the Plan) to reserve 760,000 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 Amended and Restated 2013 Stock Incentive Plan (2013 Plan). There were pour over shares available in the new plan from the previous plan due to forfeiture, cancellation, and expiration after the effective date. For the year ended December 31, 2023, there were pour over shares of 420,318 from our Amended and Restated 2013 Stock Incentive Plan, which are included in the available RSU balance at December 31, 2023.
On January 27, 2019, the Company’s Board of Directors adopted the Equity Bancshares, Inc. 2019 Employee Stock Purchase Plan (“ESPP”) and reserved 500,000 shares of common stock for issuance. The ESPP was approved by the Company’s stockholders on April 24, 2019. The ESPP enables eligible employees to purchase the Company’s common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each offering period. At December 31, 2023, there were 351,646 shares available under the employee stock purchase plan for future issuance.
Performance Graph
The following performance graph compares total stockholders’ return on the Company’s common stock for the period beginning at the close of trading December 31, 2018, to December 31, 2023, with the cumulative total return of the S&P 500 Index, NASDAQ Composite Index and the NASDAQ Bank Index for the same period. Cumulative total return is computed by dividing the difference between the Company’s share price at the end and the beginning of the measurement period by the share price at the beginning of the measurement period, including reinvestment of dividends. The performance graph assumes $100 is invested on December 31, 2018, in the Company’s common stock, the NASDAQ Composite Index, the NASDAQ Bank Index and the S&P 500 Index. The NASDAQ Composite Index is shown for comparative purposes and will be replaced with the S&P 500 Index in future reporting periods. Historical stock price performance is not necessarily indicative of future stock price performance.
Recent Sales of Unregistered Equity Securities
None
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Repurchase of Common Stock
On September 27, 2023, the Federal Reserve Bank of Kansas City advised the Company that it had no objection to the Company’s authorization of its repurchase of up to an additional 1,000,000 shares of the Company’s Class A Voting common stock, par value $0.01 per share, from time to time, beginning October 1, 2023, and concluding September 30, 2024.
The following table presents shares that were repurchased under the repurchase program during the fourth quarter of 2023.
Plan beginning October 1, 2023, to September 30, 2024
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Repurchase Plan
Maximum Number of Shares That May Yet Be Purchased Under the Plan(1)
October 1, 2023 through October 31, 2023
-
$
-
-
1,000,000
November 1, 2023 through November 30, 2023
-
-
-
1,000,000
December 1, 2023 through December 31, 2023
-
-
-
1,000,000
Total
-
$
-
-
1,000,000
(1)Represents shares that may be repurchased under the 2023 repurchase plan

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ITEM 6. SELECTED FINANCIAL DATA
Item 6: Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See “Cautionary Statement Regarding Forward-Looking Statements.” Also, see the risk factors and other cautionary statements described under the heading “Item 1A - Risk Factors” included in Item 1A of this Annual Report on Form 10-K. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
This discussion and analysis of our financial condition and results of operation includes the following sections:
•Table containing selected financial data and ratios for the periods;
•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 Resources - an analysis of our cash flows and capital position; and
•Non-GAAP Financial Measures - reconciliation of non-GAAP measures.
Years Ended December 31,
(Dollars in thousands, except per share data)
Statement of Income Data
Interest and dividend income
$
246,712
$
188,248
$
157,368
$
155,561
$
175,499
Interest expense
87,694
25,418
14,789
22,909
49,641
Net interest income
159,018
162,830
142,579
132,652
125,858
Provision (reversal) for credit losses
1,873
(8,480
)
24,255
18,354
Net gain on acquisition
-
2,145
-
Net gain (loss) from securities transactions
(51,909
)
Other non-interest income
32,780
34,990
31,851
23,867
24,974
Merger expense
9,189
Goodwill impairment
-
-
-
104,831
-
Loss on extinguishment of debt
-
-
-
-
Other non-interest expense
135,304
127,786
109,904
103,860
98,720
Income (loss) before income taxes
2,415
70,282
64,436
(74,570
)
32,857
Provision for income taxes
(5,406
)
12,594
11,956
7,278
Net income (loss)
7,821
57,688
52,480
(74,970
)
25,579
Net income (loss) allocable to common stockholders
7,821
57,688
52,480
(74,970
)
25,579
Basic earnings (loss) per share
0.50
3.56
3.49
(4.97
)
1.64
Diluted earnings (loss) per share
0.50
3.51
3.43
(4.97
)
1.61
Balance Sheet Data (at period end)
Cash and cash equivalents
$
379,099
$
104,428
$
259,954
$
280,698
$
89,291
Securities available-for-sale
919,648
1,184,390
1,327,442
871,827
142,067
Securities held-to-maturity
2,209
1,948
-
-
769,059
Loans held for sale
4,214
12,394
5,933
Gross loans held for investment
3,332,901
3,311,548
3,155,627
2,591,696
2,556,652
Allowance for credit losses
43,520
45,847
48,365
33,709
12,232
Loans held for investment, net of allowance for credit losses
3,289,381
3,265,701
3,107,262
2,557,987
2,544,420
Goodwill and core deposit intangibles, net
60,323
63,697
69,344
47,658
156,339
Mortgage servicing asset, net
-
Naming rights, net
1,000
1,044
1,087
1,130
1,174
Total assets
5,034,592
4,981,651
5,137,631
4,013,356
3,949,578
Total deposits
4,145,455
4,241,807
4,420,004
3,447,590
3,063,516
Borrowings
380,503
281,734
151,891
133,857
383,632
Total liabilities
4,581,732
4,571,593
4,637,000
3,605,707
3,471,518
Total stockholders’ equity
452,860
410,058
500,631
407,649
478,060
Tangible common equity*
391,462
345,141
429,924
358,861
320,542
Performance ratios
Return on average assets (ROAA)
0.16
%
1.15
%
1.18
%
(1.87
)%
0.64
%
Return on average equity (ROAE)
1.85
%
13.08
%
11.75
%
(16.14
)%
5.52
%
Return on average tangible common equity (ROATCE)*
2.94
%
16.35
%
14.10
%
8.27
%
9.22
%
Yield on loans
6.39
%
4.98
%
4.77
%
5.00
%
5.73
%
Cost of interest-bearing deposits
2.21
%
0.53
%
0.30
%
0.66
%
1.53
%
Net interest margin
3.46
%
3.51
%
3.44
%
3.63
%
3.48
%
Efficiency ratio*
70.55
%
64.60
%
63.01
%
66.36
%
65.45
%
Non-interest income / average assets
-0.38
%
0.72
%
0.74
%
0.65
%
0.63
%
Non-interest expense / average assets
2.71
%
2.56
%
2.70
%
5.23
%
2.50
%
Dividend payout ratio
88.35
%
10.26
%
4.84
%
0.00
%
0.00
%
Capital Ratios
Tier 1 Leverage Ratio
9.46
%
9.61
%
9.09
%
9.30
%
9.02
%
Common Equity Tier 1 Capital Ratio
11.74
%
12.26
%
12.03
%
12.82
%
11.63
%
Tier 1 Risk Based Capital Ratio
12.36
%
12.88
%
12.67
%
13.37
%
12.15
%
Total Risk Based Capital Ratio
15.48
%
16.08
%
15.96
%
17.35
%
12.59
%
Equity / Assets
8.99
%
8.23
%
9.74
%
10.16
%
12.10
%
Book value per share
$
29.35
$
25.74
$
29.87
$
28.04
$
30.95
Tangible book value per share*
$
25.37
$
21.67
$
25.65
$
24.68
$
20.75
Tangible common equity to tangible assets*
7.87
%
7.02
%
8.48
%
9.05
%
8.45
%
* 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.
Overview
We are a financial holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 64 full-service branches located in Arkansas, Kansas, Missouri and Oklahoma. As of December 31, 2023, we had, on a consolidated basis, total assets of $5.03 billion, total deposits of $4.15 billion, total loans held for investment, net of allowances, of $3.29 billion and total stockholders’ equity of $452.9 million. Net income for the year ended December 31, 2023, was $7.8 million, compared to net income of $57.7 million for the year ended December 31, 2022.
History and Background
From 2003 through 2023, we completed a series of twenty acquisitions, two charter consolidations and two branch dispositions. 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.
Highlights for the Year Ended December 31, 2023
•Net income of $7.8 million, or $0.50 diluted earnings per share, for the year ended December 31, 2023. Adjusted to exclude the loss on re-positioning of the investment portfolio, net income was $48.9 million, or $3.13 diluted earnings per share.
•Dividends declared of $6.9 million, or $0.44 per share, for the year ended December 31, 2023, compared to $5.4 million, or $0.36 per share, for the year ended December 31, 2022, an increase of 22.0%
•Total loans held for investment increased to $3.33 billion at December 31, 2023, compared to $3.31 billion at December 31, 2022.
•Announced the 10th whole-bank acquisition since the Company's initial public offering, with our merger with Rockhold BanCorp. The transaction was announced on December 6, 2023, and closed on February 9, 2024, adding approximately $340 million in deposits, eight banking locations and a new territory to the Equity Bank footprint.
•Successfully reduced classified assets as a percentage of regulatory capital from 9.98% at the end of 2022 to 7.09% at the end of 2023. Current problem asset ratios are amongst the lowest the Company has seen in its history.
Critical Accounting Policies
The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements. Our
accounting policies are described in “NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Notes to Consolidated Financial Statements.
The accounting policies that management believes are the most critical to an understanding of our financial condition and results of operations and require complex management judgment are described below.
Allowance for Credit Losses: The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date; however, determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. The actual realized facts and circumstances may be different than those currently estimated by management and may result in significant changes in the allowance for credit losses in future periods. The allowance for credit losses for loans, as reported in our consolidated balance sheets, is adjusted by provision for credit losses, which is recognized in earnings and is reduced by the charge-off amounts, net of recoveries.
The Company utilizes primarily two methods for estimating the allowance for credit losses and the method used depends on the status of the underlying loans. Non-performing loans primarily utilize a collateral specific fair value impairment method and performing loans primarily utilize a historical loss method. The performing loan method utilizes a probability of default (PD) and loss given default (LGD) modeling approach for historical loss coupled with a macroeconomic factor analysis derived from a statistical regression of loss experience correlated to changes in economic factors for all commercial banks operating within our geographical footprint. The macroeconomic regression is based on a multivariate approach and includes key indicators that provide the highest cumulative adjusted R-square figure. Economic factors include, but are not limited to, national unemployment, gross domestic product, market interest rates and property pricing indices. To arrive at the most predictive calculation, a lag factor was applied to these inputs, resulting in current and historic economic inputs driving the projection of loss over our reasonable and supportable forecast period, which management has defined as 12 months for all portfolio segments. Following the reasonable and supportable forecast period, loss experience immediately reverts to the current historical loss experience of the Company. The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management but measured by objective measurements period over period. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in projected economic sentiment, portfolio concentrations, policy exceptions, personnel retention, independent loan review results, collateral considerations, risk ratings and competition. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors. The resultant loss rates are applied to the estimated future exposure at default (EAD), as determined based on contractual amortization terms through an average default month and estimated prepayment experience in arriving at the quantitative reserve within our allowance for credit losses.
The allowance represents management’s best estimate, but significant changes in circumstances relating to loan quality and economic conditions could result in significantly different results than what is reflected in the consolidated balance sheet as of December 31, 2023. Likewise, an improvement in loan quality or economic conditions may allow for a further reduction in the required allowance. Changing credit conditions would be expected to impact realized losses driving variability in specifically assessed allowances, as well as calculated quantitative and more subjectively analyzed qualitative factors. Depending on the volatility in these conditions, material impacts could be realized within the Company’s operations. Likewise, changing economic conditions, both positive and negative, to the extent significant could result in unexpected realization of provision or reversal of allowance for credit losses due to its impact on the quantitative and qualitative inputs to the Company’s calculation. Under the CECL methodology, the impact of these conditions has the potential to further exacerbate periodic differences due to its life of loan perspective. The life of loans calculated under the methodology is based in contractual duration and modified for prepayment expectations, making significant variation in periodic results possible due to changing contractual or adjusted duration of the assets within the calculation.
Goodwill: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized and expensed in the period identified. Goodwill will be assessed more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired. We have selected December 31 as the date to perform our annual goodwill impairment test. Goodwill is the only intangible asset with an indefinite useful life. For the year ended December
31, 2023, management performed a qualitative analysis and has determined that there was not evidence of a triggering event during the period then ended. Our qualitative analysis process consists of using recent bank merger transactions, for companies that are similar to the Company based on financial performance, to calculate the average change in control premium from the merger data. The average change in control premium, number of shares and our current trading price is used to estimate the market value of our equity, which is compared to our book value of equity. In addition to estimating equity market value, we evaluate the qualitative considerations contained in current accounting guidance to identify any evidence of goodwill impairment. Based on this qualitative analysis and conclusion, it was determined that a more robust quantitative assessment was not necessary at our measurement date.
For additional information see “NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” and “NOTE 7 - GOODWILL AND CORE DEPOSIT INTANGIBLES” in the Notes to Consolidated Financial Statements.
Results of Operations
We generate most of our revenue from interest income and fees on loans, interest and dividends on investment securities and non-interest income, such as service charges and fees, debit card income and mortgage banking income. We incur interest expense on deposits and other borrowed funds and non-interest expense, such as salaries and employee benefits and occupancy expenses.
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.
For information comparing our results of operations for the year ended December 31, 2022, to year ended December 31, 2021, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 9, 2023.
Net Income
Year ended December 31, 2023, compared with year ended December 31, 2022
For the year ended December 31, 2023, there was net income allocable to common stockholders of $7.8 million, compared to net income allocable to common stockholders of $57.7 million for the year ended December 31, 2022, a decrease of $49.9 million. This change was primarily driven by the sale of $490.1 of investment securities at a loss of $52.0 million. The changes in the components of net income are discussed in more detail below 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 “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 “yield/rate change.”
The following table shows the average balance of each principal category of assets, liabilities, and stockholders’ equity and the average yields on interest-earning assets and average rates on interest-bearing liabilities for the years ended December 31, 2023, 2022,
and 2021. The yields and rates are calculated by dividing income or expense by the average daily balances of the associated assets or liabilities.
Average Balance Sheets and Net Interest Analysis
December 31, 2023
December 31, 2022
December 31, 2021
(Dollars in thousands)
Average
Outstanding
Balance
Interest
Income/
Expense
Average
Yield/
Rate(3)(4)
Average
Outstanding
Balance
Interest
Income/
Expense
Average
Yield/
Rate(3)(4)
Average
Outstanding
Balance
Interest
Income/
Expense
Average
Yield/
Rate(3)(4)
Interest-earning assets
Loans(1)
Commercial and industrial
$
580,451
$
42,901
7.39
%
$
583,295
$
32,258
5.53
%
$
714,561
$
41,580
5.82
%
Commercial real estate
1,302,568
83,441
6.41
%
1,259,257
65,122
5.17
%
1,040,443
48,676
4.68
%
Real estate construction
447,516
33,764
7.54
%
363,902
18,269
5.02
%
277,307
10,256
3.70
%
Residential real estate
565,711
23,799
4.21
%
597,196
22,004
3.68
%
498,164
19,341
3.88
%
Agricultural real estate
201,326
13,820
6.86
%
201,295
11,399
5.66
%
153,607
8,122
5.29
%
Agricultural
100,394
6,966
6.94
%
125,342
6,697
5.34
%
108,276
5,361
4.95
%
Consumer
106,542
6,522
6.12
%
102,185
5,110
5.00
%
88,383
3,998
4.52
%
Total loans
3,304,508
211,213
6.39
%
3,232,472
160,859
4.98
%
2,880,741
137,334
4.77
%
Taxable securities
1,027,726
23,873
2.32
%
1,185,750
22,713
1.92
%
976,942
15,996
1.64
%
Nontaxable securities
74,917
1,960
2.62
%
106,955
2,698
2.52
%
105,522
2,843
2.69
%
Federal funds sold and other
193,941
9,666
4.98
%
107,298
1,978
1.84
%
182,443
1,195
0.65
%
Total interest-earning assets
4,601,092
246,712
5.36
%
4,632,475
188,248
4.06
%
4,145,648
157,368
3.80
%
Non-interest-earning assets
Other real estate owned, net
3,991
10,144
10,510
Premises and equipment, net
107,297
102,165
93,539
Bank-owned life insurance
123,665
121,741
103,255
Goodwill and other intangibles, net
63,064
67,747
50,831
Other non-interest-earning assets
100,296
88,840
28,017
Total assets
$
4,999,405
$
5,023,112
$
4,431,800
Interest-bearing liabilities
Interest-bearing demand deposits
$
1,002,543
22,681
2.26
%
$
1,124,828
7,248
0.64
%
$
1,032,938
2,165
0.21
%
Savings and money market
1,359,822
23,525
1.73
%
1,308,536
3,549
0.27
%
1,129,869
1,540
0.14
%
Demand savings and money market
2,362,365
46,206
1.96
%
2,433,364
10,797
0.44
%
2,162,807
3,705
0.17
%
Certificates of deposit
827,652
24,267
2.93
%
663,790
5,524
0.83
%
625,562
4,550
0.73
%
Total interest-bearing deposits
3,190,017
70,473
2.21
%
3,097,154
16,321
0.53
%
2,788,369
8,255
0.30
%
FHLB term and line of credit advances
98,380
3,944
4.01
%
79,775
2,094
2.63
%
16,797
1.01
%
Federal Reserve Bank discount window
108,551
4,755
4.38
%
-
0.25
%
-
0.25
%
Subordinated borrowings
96,651
7,591
7.85
%
96,133
6,771
7.04
%
89,785
6,261
6.97
%
Other borrowings
49,464
1.88
%
55,036
0.42
%
45,819
0.23
%
Total interest-bearing liabilities
3,543,063
87,694
2.48
%
3,328,101
25,418
0.76
%
2,940,773
14,789
0.50
%
Non-interest-bearing liabilities and
stockholders’ equity
Non-interest-bearing checking accounts
979,410
1,203,167
1,021,261
Non-interest-bearing liabilities
53,210
50,962
22,971
Stockholders’ equity
423,722
440,882
446,795
Total liabilities and stockholders’ equity
$
4,999,405
$
5,023,112
$
4,431,800
Net interest income
$
159,018
$
162,830
$
142,579
Interest rate spread
2.88
%
3.30
%
3.30
%
Net interest margin(2)
3.46
%
3.51
%
3.44
%
Total cost of deposits, including
non-interest bearing deposits
$
4,169,427
$
70,473
1.69
%
$
4,300,321
$
16,321
0.38
%
$
3,809,630
$
8,255
0.22
%
Average interest-earning assets to
interest-bearing liabilities
129.86
%
139.19
%
140.97
%
(1)Average loan balances include nonaccrual loans, hedge fair value adjustments and merger fair value adjustments.
(2)Net interest margin is calculated by dividing net interest income by average interest-earning assets for the period.
(3)Tax exempt income is not included in the above table on a tax equivalent basis.
(4)Actual un-rounded 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.
The following table analyzes the change in volume variances and yield/rate variances for the year ended December 31, 2023, as compared to the year ended December 31, 2022, and the year ended December 31, 2022, as compared to the year ended December 31, 2021.
Analysis of Changes in Net Interest Income
2023 vs. 2022
2022 vs. 2021
Increase (Decrease) Due to:
Increase (Decrease) Due to:
(Dollars in thousands)
Volume(1)
Yield/Rate(1)
Total
Volume(1)
Yield/Rate(1)
Total
Interest-earning assets
Loans
Commercial and industrial
$
(158
)
$
10,801
$
10,643
$
(7,340
)
$
(1,982
)
$
(9,322
)
Commercial real estate
2,307
16,012
18,319
10,956
5,490
16,446
Real estate construction
4,860
10,635
15,495
3,736
4,277
8,013
Residential real estate
(1,205
)
3,000
1,795
3,689
(1,026
)
2,663
Agricultural real estate
2,419
2,421
2,667
3,277
Agricultural
(1,492
)
1,761
1,336
Consumer
1,186
1,412
1,112
Total loans
4,540
45,814
50,354
15,261
8,264
23,525
Taxable securities
(3,275
)
4,435
1,160
3,743
2,974
6,717
Nontaxable securities
(835
)
(738
)
(183
)
(145
)
Federal funds sold and other
2,473
5,215
7,688
(658
)
1,441
Total interest-earning assets
$
2,903
$
55,561
$
58,464
$
18,384
$
12,496
$
30,880
Interest-bearing liabilities
Demand savings and money market
$
(726
)
$
36,135
$
35,409
$
$
6,606
$
7,092
Certificates of deposit
1,670
17,073
18,743
Total interest-bearing deposits
53,208
54,152
7,290
8,066
FHLB term and line of credit advances
1,283
1,850
1,348
1,925
Federal Reserve Bank discount window
4,753
4,755
-
-
-
Subordinated borrowings
Other borrowings
(26
)
Total interest-bearing liabilities
6,275
56,001
62,276
2,595
8,034
10,629
Net Interest Income
$
(3,372
)
$
(440
)
$
(3,812
)
$
15,789
$
4,462
$
20,251
(1)The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior year’s volume. The changes attributable to both volume and rate, which cannot be segregated, have been allocated to the volume variance and the rate variance in proportion to the relationship of the absolute dollar amount of the change in each.
Year ended December 31, 2023, compared with year ended December 31, 2022
The decrease in net interest income is primarily due to a 172 basis point increase in average rates of interest bearing liabilities offset by a 130 basis point increase in yields on interest-earning assets. The change in yields and costs were driven, primarily, by rate increases within the marketplace over the past 20 months and their lagged impact on our balance sheet. Total fed fund rate increases of 525 basis points have been realized ratably within the asset portfolio while associated increases to liability costs have lagged and were more pronounced in 2023.
Following the banking turmoil in March of 2023, the Bank increased our FHLB and Federal Reserve Bank borrowings to maintain a heightened liquidity position. The amounts were materially offset by cash balances for the majority of the year, resulting in a small positive impact on net interest income and a reduction in net interest margin.
Net interest spread decreased from 3.30% at December 31, 2022 to 2.88% at December 31, 2023 primarily due to the increase in both the volume and cost of interest-bearing liabilities out-pacing the increase in the yield and change in volume in interest-earning assets. The primary driver of market interest rate changes in 2023 was the Federal Reserve raising the federal funds target rate four times for a total of 100 basis points. The decrease in net interest margin is driven by the lagging impact of interest rate changes on our interest-bearing liability balances coupled with the excess liquidity position maintained by the Company throughout 2023.
Provision for Credit Losses
We maintain an allowance for credit losses for estimated losses in our loan portfolio. The allowance for credit losses is increased by a provision for credit losses, which is a charge to earnings, and subsequent recoveries of amounts previously charged-off, but is decreased by charge-offs when the collectability of a loan balance is unlikely. Management estimates the allowance balance required using past loan loss experience within the Company’s portfolio. This historical loss calculation is then modified to reflect quantitative economic circumstances based on evidenced economic conditions and regression formulas which incorporate lag factors in identifying a sufficiently predictive adjusted-R square as well as qualitative factors not inherently reflected in our historical loss or quantitative economic inputs. Included in our qualitative assessment is the consideration of prospective economic conditions over the next 12 months, considered the Company’s reasonable and supportable forecast period. As these factors change, the amount of the credit loss provision changes.
Year ended December 31, 2023, compared with year ended December 31, 2022
There was a $1.9 million provision for credit losses for the year ended December 31, 2023, compared to a provision for credit losses of $125 thousand for the year ended December 31, 2022. The provision for credit losses recorded during the period ended December 31, 2023, is the result of overall portfolio loan growth, current realized loss rate, and net charge-offs during the period which were offset by decreases in projected future loss rates. The increase in impairments on specifically evaluated loans was primarily due to the charge-off of loans deemed uncollectible.
For additional detail see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Credit Losses.” Net charge-offs for the year ended December 31, 2023, were $4.2 million as compared to net charge-offs of $2.6 million for the year ended December 31, 2022. For the year ended December 31, 2023, gross charge-offs were $5.0 million offset by gross recoveries of $800 thousand. In comparison, gross charge-offs were $3.3 million for the year ended December 31, 2022, offset by gross recoveries of $700 thousand.
Non-Interest Income
The following table provides a comparison of the major components of non-interest income for the years ended December 31, 2023, 2022, and 2021.
Non-Interest Income
For the Years Ended December 31,
2023 vs. 2022
2022 vs. 2021
(Dollars in thousands)
Change
%
Change
%
Service charges and fees
$
10,187
$
10,632
$
8,596
$
(445
)
(4.2
)%
$
2,036
23.7
%
Debit card income
10,322
10,677
10,236
(355
)
(3.3
)%
4.3
%
Mortgage banking
1,416
3,306
(764
)
(54.0
)%
(1,890
)
(57.2
)%
Increase in value of bank-owned life
insurance
4,059
3,113
3,506
30.4
%
(393
)
(11.2
)%
Other
Investment referral income
(115
)
(21.3
)%
(139
)
(20.5
)%
Trust income
1,123
1,036
1,140
8.4
%
(104
)
(9.1
)%
Insurance sales commissions
2.8
%
3.9
%
Recovery on zero-basis
purchased loans
107.6
%
192.9
%
Income (loss) from equity method
investments
(222
)
(222
)
(222
)
-
-
%
-
-
%
Other non-interest income
5,136
6,984
3,981
(1,848
)
(26.5
)%
3,003
75.4
%
Total other
7,560
9,152
6,207
(1,592
)
(17.4
)%
2,945
47.4
%
Subtotal
32,780
34,990
31,851
(2,210
)
(6.3
)%
3,139
9.9
%
Gain on acquisition
-
(962
)
(100.0
)%
64.4
%
Net gain (loss) from securities
transactions
(51,909
)
(51,914
)
(100.0
)%
(401
)
(98.8
)%
Total non-interest income
$
(19,129
)
$
35,957
$
32,842
$
(55,086
)
(153.2
)%
$
3,115
9.5
%
Year ended December 31, 2023, compared with year ended December 31, 2022
Non-interest income, before gain on acquisition and gain (loss) on securities transactions decreased 6.3%. The decline was driven by service revenue lines, including service charges, debit card and mortgage banking fee income, as consumer spending activity decreased within our portfolio. In addition to declining service revenue, within the 'Other non-interest income' line item, derivative fair value gains of $1.8 million contributed to earnings in 2022 as the majority of market interest rate increases were realized. During 2023, this benefit was muted at $227 thousand, resulting in a comparative decline of $1.6 million.
During the year the Company sold securities to re-position aspects of the portfolio into higher yielding investments, including loans, securities and cash. The sale resulted in a realized loss of $52.0 million. During 2022, the Company completed two branch sale transactions resulting in realized gains of $962 thousand which did not repeat in 2023.
Non-Interest Expense
The following table provides a comparison of the major components of non-interest expense for the years ended December 31, 2023, 2022, and 2021.
Non-Interest Expense
For the Year Ended December 31,
2023 vs. 2022
2022 vs. 2021
(Dollars in thousands)
Change
%
Change
%
Salaries and employee benefits
$
64,384
$
62,006
$
54,198
$
2,378
3.8
%
$
7,808
14.4
%
Net occupancy and equipment
12,325
12,223
10,137
0.8
%
2,086
20.6
%
Data processing
17,433
15,883
13,261
1,550
9.8
%
2,622
19.8
%
Professional fees
5,754
4,951
4,713
16.2
%
5.0
%
Advertising and business development
5,425
5,042
3,370
7.6
%
1,672
49.6
%
Telecommunications
1,963
1,916
1,966
2.5
%
(50
)
(2.5
)%
FDIC insurance
2,195
1,140
1,665
1,055
92.5
%
(525
)
(31.5
)%
Courier and postage
2,046
1,881
1,429
8.8
%
31.6
%
Free nationwide ATM expense
2,073
2,103
2,019
(30
)
(1.4
)%
4.2
%
Amortization of core deposit intangibles
3,374
4,042
4,174
(668
)
(16.5
)%
(132
)
(3.2
)%
Loan expense
(288
)
(34.8
)%
(106
)
(11.3
)%
Other real estate owned
(188
)
(47
)
(8.0
)%
(413.3
)%
Loss on debt extinguishment
-
-
-
100.0
%
(372
)
(100.0
)%
Other
17,250
15,182
12,226
2,068
13.6
%
2,956
24.2
%
Subtotal
135,304
127,786
110,276
7,518
5.9
%
17,510
15.9
%
Merger expenses
9,189
(297
)
(50.0
)%
(8,595
)
(93.5
)%
Total non-interest expense
$
135,601
$
128,380
$
119,465
$
7,221
5.6
%
$
8,915
7.5
%
Year ended December 31, 2023, compared with year ended December 31, 2022
The increase in non-interest expense was primarily due to increases in salaries and employee benefits of $2.4 million, other non-interest expense of $2.1 million, data processing of $1.6 million and FDIC insurance of $1.1 million, offset by a decrease in the amortization of core deposits intangibles of $668 thousand. These items and other changes in the various components of non-interest expense are discussed in more detail below.
Salaries and employee benefits: There was a $2.4 million increase in salaries and benefits for the year ended December 31, 2023, as compared to the year ended December 31, 2022. Salaries and wages increased by $2.4 million, while deferral of cost associated with loan production declined by $743 thousand for the year ended December 31, 2023, as compared to the year ended December 31, 2022. Additionally, for the year ended December 31, 2023, there was an increase in employee insurance of $179 thousand and employee payroll taxes of $154 thousand offset by a decrease in share-based compensation expense of $641 thousand and incentive compensation of $521 thousand. Included in salaries and employee benefits is share-based compensation expense of $2.6 million for the year ended December 31, 2023, and $3.3 million for the year ended December 31, 2022.
Data processing: The $1.6 million increase was principally due to increased data processing expense of $939 thousand, debit card expense of $270 thousand, credit card processing expense of $250 thousand and software license expenses of $144 thousand.
FDIC Insurance: The $1.1 million increase was primarily due to the FDIC's increase in their insurance base assessment rate beginning in the first quarter of 2023.
Professional fees: The increase of $803 thousand was principally due to an increase in consulting fees of $1.1 million, including increases in BSA compliance fees, placement fees and trust management fees, partially offset by a decrease in accounting fees of $167 thousand.
Other: Other non-interest expenses consists of subscriptions, memberships and dues, employee expenses including travel, meals, entertainment and education, supplies, printing, insurance, account related losses, correspondent bank fees, customer program expenses, losses net of gains on the sale of fixed assets, losses net of gains on the sale of repossessed assets other than real estate, other operating expenses, such as settlement of claims, limited partnership tax credits and provision for unfunded commitments. There was a $2.1 million increase in other non-interest expense for the year ended December 31, 2023, as compared to the year ended December 31, 2022. This increase was primarily due to increases in recruiting of $508 thousand, auto and travel expenses of $601 thousand, and the write-off of tax credit investments of $315 thousand.
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. During 2023, the Company incurred merger expenses of $297 thousand related to the Bank of Kirksville acquisition.
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 goodwill impairment, 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 efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. The 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.”
The Company’s efficiency ratio increased in 2023 as compared to 2022 due to non-interest expense, excluding goodwill impairment and merger expenses, increasing at a higher proportional rate than net interest income and non-interest income, excluding net loss on security transactions and gain on acquisition, 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 of non-deductible expenses and available tax credits.
Year ended December 31, 2023, compared with year ended December 31, 2022
The effective income tax rate for the year ended December 31, 2023, was -223.9% as compared to the U.S. statutory rate of 21.0% as a result of tax planning benefits and credits amplified by a reduction in pre-tax book income for the year due to the pre-tax losses generated in the fourth quarter related to the sale of bonds. The effective income tax rate for the year ended December 31, 2022, was 17.9% as compared to the U.S. statutory rate of 21.0%. As detailed in “NOTE 13 - 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 Company made investments in solar tax credits during the years ended December 31, 2022, and December 31, 2023, which had a material impact on the effective income tax rate for each period.
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.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There were no material amounts to report for interest or penalties incurred in 2023, 2022, or 2021.
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 inflation or recession.
Unlike many industrial companies, substantially all 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.
Financial Condition
Overview
Our total assets increased $52.9 million, or 1.06%, from $4.98 billion at December 31, 2022, to $5.03 billion at December 31, 2023. The increase in total assets was primarily from increases in cash and cash equivalents of $274.7 million, loans of $23.7 million and premises and equipment, net of $11.1 million, offset by a decrease in securities of $264.7 million. Our total liabilities increased $10.1 million, or 0.2%, from $4.57 billion at December 31, 2022, to $4.58 billion at December 31, 2023. The increase in total liabilities was from increases in Federal Reserve Bank borrowings of $140.0 million, offset by a decrease in total deposits of $96.4 million and FHLB advances of $38.9 million. Our total stockholders’ equity increased $42.8 million, or 10.4%, from $410.1 million at December 31, 2022, to $452.9 million at December 31, 2023.
Loan Portfolio
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.
At December 31, 2023, gross total loans were 80.4% of deposits and 66.2% of total assets. At December 31, 2022, gross total loans were 78.1% of deposits and 66.5% of total assets.
The organic, or non-acquired, growth in our loan portfolio is attributable to our ability to attract new customers from other financial institutions and overall growth in our markets. Our lending staff has been successful in building banking relationships with 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 efforts 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.
The following table summarizes our loan portfolio by type of loan as of the dates indicated.
Composition of Loan Portfolio
December 31,
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Commercial and industrial
$
598,327
17.9
%
$
594,863
18.0
%
$
567,497
18.0
%
Real estate loans:
Commercial real estate
1,759,855
52.8
%
1,721,268
52.0
%
1,486,148
47.1
%
Residential real estate
556,328
16.7
%
570,550
17.2
%
638,087
20.2
%
Agricultural real estate
196,114
5.9
%
199,189
6.0
%
198,330
6.3
%
Total real estate loans
2,512,297
75.4
%
2,491,007
75.2
%
2,322,565
73.6
%
Agricultural
118,587
3.6
%
120,003
3.6
%
166,975
5.3
%
Consumer
103,690
3.1
%
105,675
3.2
%
98,590
3.1
%
Total loans held for investment
$
3,332,901
100.0
%
$
3,311,548
100.0
%
$
3,155,627
100.0
%
Total loans held for sale
$
100.0
%
$
100.0
%
$
4,214
100.0
%
Total loans held for investment
(net of allowances)
$
3,289,381
100.0
%
$
3,265,701
100.0
%
$
3,107,262
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.
Commercial real estate: Commercial real estate loans include all loans secured by nonfarm, nonresidential properties and multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.
Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences.
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.
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, 2023, and December 31, 2022, are summarized in the following tables.
Loan Maturity and Sensitivity to Changes in Interest Rates
As of December 31, 2023
One year
or less
After one year
through five
years
After five years through fifteen years
After fifteen years
Total
(Dollars in thousands)
Commercial and industrial
$
171,879
$
345,693
$
77,886
$
2,869
$
598,327
Real Estate:
Commercial real estate
369,311
1,063,226
247,300
80,018
1,759,855
Residential real estate
1,447
10,091
128,077
416,713
556,328
Agricultural real estate
73,882
84,802
27,559
9,871
196,114
Total real estate
444,640
1,158,119
402,936
506,602
2,512,297
Agricultural
80,659
30,948
2,851
4,129
118,587
Consumer
31,832
50,779
19,077
2,002
103,690
Total
$
729,010
$
1,585,539
$
502,750
$
515,602
$
3,332,901
Loans with a predetermined fixed interest rate
$
289,816
$
685,903
$
127,602
$
273,488
$
1,376,809
Loans with an adjustable/floating interest rate
439,194
899,636
375,148
242,114
1,956,092
Total
$
729,010
$
1,585,539
$
502,750
$
515,602
$
3,332,901
As of December 31, 2022
One year
or less
After one year
through five
years
After five years through fifteen years
After fifteen years
Total
(Dollars in thousands)
Commercial and industrial
$
194,487
$
310,839
$
84,930
$
4,607
$
594,863
Real Estate:
Commercial real estate
331,226
1,042,683
279,759
67,600
1,721,268
Residential real estate
1,293
9,647
122,509
437,101
570,550
Agricultural real estate
47,696
112,387
31,295
7,811
199,189
Total real estate
380,215
1,164,717
433,563
512,512
2,491,007
Agricultural
79,055
32,688
3,714
4,546
120,003
Consumer
35,026
45,258
23,091
2,300
105,675
Total
$
688,783
$
1,553,502
$
545,298
$
523,965
$
3,311,548
Loans with a predetermined fixed interest rate
$
218,417
$
771,980
$
181,239
$
306,537
$
1,478,173
Loans with an adjustable/floating interest rate
470,366
781,522
364,059
217,428
1,833,375
Total
$
688,783
$
1,553,502
$
545,298
$
523,965
$
3,311,548
Nonperforming Assets
The following table presents information regarding nonperforming assets at the dates indicated.
Nonperforming Assets
As of December 31,
(Dollars in thousands)
Nonaccrual loans
$
25,026
$
17,601
$
29,361
Accruing loans 90 or more days past due
-
OREO acquired through foreclosure, net
7,582
Other repossessed assets
28,799
Total nonperforming assets
$
26,457
$
18,248
$
65,998
Ratios:
Nonperforming assets to total assets
0.53
%
0.37
%
1.28
%
Nonperforming assets to total loans plus OREO
0.79
%
0.55
%
2.09
%
Nonperforming assets (“NPAs”) include loans on nonaccrual status, accruing loans 90 or more days past due, restructured loans, other real estate acquired through foreclosure and other repossessed assets. The change in NPAs is reflective of specific circumstances on specific borrower relationships and not considered indicative of broad declining credit quality as of the reporting date. NPAs and classified assets continue to be at historically low levels for the Company.
The nonperforming loans at December 31, 2023, consisted of 223 separate credits and 192 separate borrowers. We had five nonperforming loan relationships each with outstanding balances exceeding $1.0 million as of December 31, 2023. There are several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by lenders and we also monitor delinquency levels for any negative or adverse trends. 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.
Regulatory Loan Classification
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 include all loans that do not fall under one of the three following categories. These loans are considered unclassified.
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of 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, based on 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 borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. Potential problem loans are assigned a grade of special mention or substandard. At December 31, 2023, the Company had $11.1 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $37.6 million at December 31, 2022.
For additional information about the risk category by class of loans see “NOTE 4 - LOANS AND ALLOWANCE FOR CREDIT LOSSES” in the Notes to Consolidated Financial Statements. At December 31, 2023, loans considered unclassified increased to 98.8% of total loans from 98.2% of total loans at December 31, 2022.
Risk Category of Loans by Class
As of December 31, 2023
Unclassified
Classified
Total
(Dollars in thousands)
Commercial and industrial
$
586,629
$
11,698
$
598,327
Real estate:
Commercial real estate
1,748,878
10,977
1,759,855
Residential real estate
549,014
7,314
556,328
Agricultural real estate
190,659
5,455
196,114
Total real estate
2,488,551
23,746
2,512,297
Agricultural
115,284
3,303
118,587
Consumer
103,066
103,690
Total
$
3,293,530
$
39,371
$
3,332,901
As of December 31, 2022
Unclassified
Classified
Total
(Dollars in thousands)
Commercial and industrial
$
566,549
$
28,314
$
594,863
Real estate:
Commercial real estate
1,714,793
6,475
1,721,268
Residential real estate
567,179
3,371
570,550
Agricultural real estate
186,760
12,429
199,189
Total real estate
2,468,732
22,275
2,491,007
Agricultural
112,880
7,123
120,003
Consumer
105,328
105,675
Total
$
3,253,489
$
58,059
$
3,311,548
For additional information see “NOTE 4 - LOANS AND ALLOWANCE FOR CREDIT LOSSES” in the Notes to Consolidated Financial Statements.
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 borrower’s credit capacity.
With respect to potential problem loans, all monitored and under-performing loans are individually reviewed. If we determine that a loan has individually assessed credit loss, then we evaluate the borrower’s overall financial condition to determine the need, if any, for non-performing classification, possible write downs or appropriate additions to the allowance for credit losses based on the unlikelihood of full repayment of principal and interest in accordance with the contractual terms or the net realizable value of the pledged collateral.
Allowance for Credit Losses
Please see “Critical Accounting Policies - Allowance for Credit Losses” for additional discussion of our allowance policy.
In connection with our review of the loan portfolio, risk elements attributable to particular loan types or categories are considered when assessing the quality of individual loans. For additional information see “NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Notes to Consolidated Financial Statements.
Analysis of allowance for credit losses: At December 31, 2023, the allowance for credit losses totaled $43.5 million, or 1.31% of total loans. At December 31, 2022, the allowance for credit losses totaled $45.8 million, or 1.38% of total loans.
The $2.3 million decrease in the allowance for credit losses was the result of an increase in net charge offs of $1.5 million offset by the $2.1 million decrease in the allowance for credit losses on collectively evaluated loans and a $181 thousand decrease in specific reserves. The allowance for credit losses calculation on loans collectively evaluated at December 31, 2023, totaled $38.8 million, or 1.2%, of the $3.3 billion in loans collectively evaluated, compared to an allowance for credit losses of $40.9 million, or 1.2%, of the $3.3 billion in loans collectively evaluated at December 31, 2022. The decrease in the collectively evaluated calculation was primarily the result of a $1.0 million decrease in management qualitative adjustment coupled with a $889 thousand decrease in economic adjustment.
Net losses as a percentage of average loans was 0.13% for the twelve months ended December 31, 2023, as compared to 0.08% for the twelve months ended December 31, 2022, and 0.30% for the twelve months ended December 31, 2021.
The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data.
Allowance for Credit Losses
(Dollars in thousands)
December 31, 2023
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Agricultural Real Estate
Agricultural
Consumer
Total
Allowance for credit losses
$
13,476
$
17,954
$
7,784
$
1,718
$
$
1,593
$
43,520
Total loans outstanding (1)
1,759,855
598,327
556,328
196,114
118,587
103,690
3,332,901
Net charge-offs
(75
)
3,700
(47
)
4,200
Average loan balance (1)
1,750,084
580,451
564,728
201,326
100,394
106,542
3,303,525
Non-accrual loan balance
5,447
5,041
7,251
4,214
2,470
25,026
Loans to total loans outstanding
52.8
%
18.0
%
16.7
%
5.9
%
3.6
%
3.1
%
100.0
%
ACL to total loans
0.8
%
3.0
%
1.4
%
0.9
%
0.8
%
1.5
%
1.3
%
Net charge-offs to average loans
-
%
0.6
%
-
%
-
%
-
%
0.5
%
0.1
%
Non-accrual loans to total loans
0.3
%
0.8
%
1.3
%
2.1
%
2.1
%
0.6
%
0.8
%
ACL to non-accrual loans
247.4
%
356.2
%
107.4
%
40.8
%
40.3
%
264.2
%
173.9
%
December 31, 2022
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Agricultural Real Estate
Agricultural
Consumer
Total
Allowance for credit losses
$
16,731
$
14,951
$
8,608
$
$
2,457
$
2,281
$
45,847
Total loans outstanding (1)
1,721,268
594,863
570,550
199,189
120,003
105,675
3,311,548
Net charge-offs
1,193
2,643
Average loan balance (1)
1,623,159
583,295
595,494
201,295
125,342
102,186
3,230,771
Non-accrual loan balance
2,689
5,838
3,206
2,052
3,468
17,601
Loans to total loans outstanding
52.0
%
18.0
%
17.2
%
6.0
%
3.6
%
3.2
%
100.0
%
ACL to total loans
1.0
%
2.5
%
1.5
%
0.4
%
2.0
%
2.2
%
1.4
%
Net charge-offs to average loans
0.1
%
0.1
%
-
%
-
%
-
%
0.7
%
0.1
%
Non-accrual loans to total loans
0.2
%
1.0
%
0.6
%
1.0
%
2.9
%
0.3
%
0.5
%
ACL to non-accrual loans
622.2
%
256.1
%
268.5
%
39.9
%
70.8
%
655.5
%
260.5
%
December 31, 2021
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Agricultural Real Estate
Agricultural
Consumer
Total
Allowance for loan losses
$
22,478
$
12,248
$
5,560
$
2,235
$
3,756
$
2,088
$
48,365
Total loans outstanding (1)
1,486,148
567,497
638,087
198,330
166,975
98,590
3,155,627
Net charge-offs
(129
)
7,870
(52
)
(21
)
8,645
Average loan balance (1)
1,317,750
714,561
491,747
153,607
108,276
88,383
2,874,324
Non-accrual loan balance
6,833
6,557
5,075
4,398
6,175
29,361
Loans to total loans outstanding
47.1
%
18.0
%
20.2
%
6.3
%
5.3
%
3.1
%
100.0
%
ACL to total loans
1.5
%
2.2
%
0.9
%
1.1
%
2.2
%
2.1
%
1.5
%
Net charge-offs to average loans
-
%
1.1
%
-
%
0.3
%
-
%
0.6
%
0.3
%
Non-accrual loans to total loans
0.5
%
1.2
%
0.8
%
2.2
%
3.7
%
0.3
%
0.9
%
ACL to non-accrual loans
329.0
%
186.8
%
109.6
%
50.8
%
60.8
%
646.4
%
164.7
%
(1)Excluding loans held for sale.
Management believes that the allowance for credit losses at December 31, 2023, is adequate to cover current expected losses in the loan portfolio as of such date. There can be no assurance, however, that we will not sustain losses in future periods that could be substantial in relation to the size of the allowance at December 31, 2023.
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, 2023, securities represented 18.3% of total assets compared with 23.8% at December 31, 2022.
At the date of purchase, debt securities are classified into one of two categories, held-to-maturity or available-for-sale. We do not purchase securities for trading purposes. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities 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 those securities to maturity. Debt securities not classified as held-to-maturity are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of deferred income tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in total interest and dividend income. Also included in total interest and
dividend income are dividends received on stock investments in the Federal Reserve Bank of Kansas City and the FHLB of Topeka. These stock investments are stated at cost.
The following table summarizes the amortized cost and fair value by classification of available-for-sale securities as of the dates shown.
Available-For-Sale Securities
December 31,
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(Dollars in thousands)
U.S. Government-sponsored entities
$
39,103
$
33,087
$
123,196
$
106,406
U.S. Treasury securities
89,999
89,256
257,690
232,158
Mortgage-backed securities
Government-sponsored residential
mortgage-backed securities
560,674
529,143
560,776
498,606
Private label residential mortgage-backed
securities
161,174
137,841
190,889
163,560
Corporate
56,722
49,683
56,642
52,374
Small Business Administration loan pools
8,066
7,727
12,915
12,181
State and local subdivisions
81,458
72,911
130,311
119,105
Total available-for-sale securities
$
997,196
$
919,648
$
1,332,419
$
1,184,390
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
December 31,
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(Dollars in thousands)
Mortgage-backed securities
Government-sponsored residential
mortgage-backed securities
$
1,094
$
1,097
$
1,108
$
1,108
State and local subdivisions
1,115
1,153
Total held-to-maturity securities
$
2,209
$
2,250
$
1,948
$
1,973
The following tables summarize the contractual maturity of debt securities and their weighted average yields as of December 31, 2023, and December 31, 2022. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 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.
December 31, 2023
Due in one year
or less
Due after one
year through
five years
Due after five
years through
ten years
Due after 10 years
Total
Carrying
Value
Yield
Carrying
Value
Yield
Carrying
Value
Yield
Carrying
Value
Yield
Carrying
Value
Yield
(Dollars in thousands)
Available-for-sale securities:
U.S. Government-sponsored entities
$
-
-
%
$
-
0.00
%
$
31,337
1.65
%
$
1,750
2.02
%
$
33,087
1.67
%
U.S. Treasury securities
69,843
5.39
19,413
1.18
%
-
0.00
%
-
-
%
89,256
4.47
%
Mortgage-backed securities
Government-sponsored residential
mortgage-backed securities
-
-
%
40,978
3.78
%
137,929
2.62
%
350,236
4.26
%
529,143
3.80
%
Private label residential
mortgage-backed securities
-
-
%
-
-
%
-
-
%
137,841
2.27
%
137,841
2.27
%
Corporate
-
-
%
8,001
7.49
%
41,682
4.63
%
-
-
%
49,683
5.09
%
Small Business Administration loan pools
-
-
%
-
-
%
5,587
5.44
%
2,140
2.08
%
7,727
4.51
%
State and political subdivisions(1)
3,963
2.09
%
6,138
2.34
%
30,789
2.00
%
32,021
2.38
%
72,911
2.20
%
Total available-for-sale securities
73,806
5.21
%
74,530
3.38
%
247,324
2.82
%
523,988
3.60
%
919,648
3.51
%
Held-to-maturity securities:
Mortgage-backed securities
Government-sponsored residential
mortgage-backed securities
-
0.00
%
-
0.00
%
-
0.00
%
1,094
4.93
%
1,094
4.93
%
State and political subdivisions(1)
-
0.00
%
-
0.00
%
-
0.00
%
1,115
4.62
%
1,115
4.62
%
Total held-to-maturity securities
-
0.00
%
-
0.00
%
-
0.00
%
2,209
4.77
%
2,209
4.77
%
Total debt securities
$
73,806
5.21
%
$
74,530
3.38
%
$
247,324
2.82
%
$
526,197
3.61
%
$
921,857
3.51
%
(1)The calculated yield is not calculated on a tax equivalent basis.
December 31, 2022
Due in one year
or less
Due after one
year through
five years
Due after five
years through
ten years
Due after 10 years
Total
Carrying
Value
Yield
Carrying
Value
Yield
Carrying
Value
Yield
Carrying
Value
Yield
Carrying
Value
Yield
(Dollars in thousands)
Available-for-sale securities:
U.S. government-sponsored entities
$
-
-
%
$
49,100
0.74
%
$
54,094
1.51
%
$
3,212
1.96
%
$
106,406
1.17
%
U.S. treasury securities
-
-
%
222,552
1.18
%
9,606
1.32
%
-
-
%
232,158
1.19
%
Mortgage-backed securities
Government-sponsored residential
mortgage-backed securities
-
-
%
89,698
1.44
%
161,354
1.86
%
247,554
2.50
%
498,606
2.10
%
Private label residential
mortgage-backed securities
-
-
%
-
-
%
-
-
%
163,560
2.21
%
163,560
2.21
%
Corporate
-
-
%
7,904
6.20
%
44,470
4.65
%
-
-
%
52,374
4.88
%
Small Business Administration loan pools
-
-
%
-
-
%
7,676
3.53
%
4,505
1.79
%
12,181
2.89
%
State and political subdivisions(1)
4,958
2.61
%
18,601
2.42
%
42,088
2.31
%
53,458
2.50
%
119,105
2.43
%
Total available-for-sale securities
4,958
2.61
%
387,855
1.35
%
319,288
2.27
%
472,289
2.39
%
1,184,390
2.02
%
Held-to-maturity securities:
Mortgage-backed securities
Government-sponsored residential
mortgage-backed securities
-
-
%
-
-
%
-
-
%
1,108
4.96
%
1,108
4.96
%
State and political subdivisions(1)
-
-
%
-
-
%
-
-
%
4.57
%
4.57
%
Total held-to-maturity securities
-
-
%
-
-
%
-
-
%
1,948
4.79
%
1,948
4.79
%
Total debt securities
$
4,958
2.61
%
$
387,855
1.35
%
$
319,288
2.27
%
$
474,237
2.40
%
$
1,186,338
2.02
%
(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, Freddie Mac and non-agency private label providers. Unlike U.S. Treasury and U.S. Government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Premiums and discounts on mortgage-backed securities are amortized and accreted over the expected life of the security and may be impacted by prepayments. As such, mortgage-backed securities purchased at a premium will generally produce decreasing net yields as interest rates drop because homeowners tend to refinance their mortgages resulting in prepayments and an acceleration of premium amortization. Securities purchased at a discount will reflect higher net yields in a decreasing interest rate environment as prepayments result in an acceleration of discount accretion.
The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected lives because borrowers have the right to prepay their obligations at any time. Monthly pay downs on mortgage-backed securities cause the average lives of these securities to be much different than their stated lives. At December 31, 2023, and 2022, 73.2% and 62.1% of the mortgage-backed securities held by us had contractual final maturities of more than ten years with a weighted average life of 5.3 years and 5.1 years and a modified duration of 4.4 years and 4.3 years.
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. Overall, deposits have declined $96.4 million from December 31, 2022 to December 31, 2023 and deposits excluding brokered deposits have declined $44.5 million for the same time period. During 2023 there has been significant competition for deposits and continued pricing pressure which has caused deposit migration to higher earning deposit account types. In addition to competition, the overall decrease in deposits is due to a general decrease in excess liquidity in the market due to the impacts of elevated inflation and the effects of monetary policy, in the form of higher interest rates, on both consumer and business customers.
The following table shows our composition of deposits at December 31, 2023, 2022, and 2021.
Composition of Deposits
December 31,
2023 vs. 2022
2022 vs. 2021
Amount
Percent of
Total
Amount
Percent of
Total
Amount
Percent of
Total
Change
%
Change
%
(Dollars in thousands)
Non-interest-bearing demand
$
898,129
21.7
%
$
1,097,899
25.9
%
$
1,244,117
28.1
%
$
(199,770
)
(18.2
)%
$
(146,218
)
(11.8
)%
Interest-bearing demand
998,822
24.1
%
1,061,264
25.0
%
1,202,408
27.2
%
(62,442
)
(5.9
)%
(141,144
)
(11.7
)%
Savings and money market
1,484,985
35.8
%
1,268,320
29.9
%
1,319,881
29.9
%
216,665
17.1
%
(51,561
)
(3.9
)%
Time
763,519
18.4
%
814,324
19.2
%
653,598
14.8
%
(50,805
)
(6.2
)%
160,726
24.6
%
Total deposits
$
4,145,455
100.0
%
$
4,241,807
100.0
%
$
4,420,004
100.0
%
$
(96,352
)
(2.3
)%
$
(178,197
)
(4.0
)%
The following tables show deposits sold in 2022 branch dispositions, as of the time of such dispositions.
United Bank and Trust Branch Sale
Amount
Percent of
Total
(Dollars in thousands)
Non-interest-bearing demand
$
15,817
30.0
%
Interest-bearing demand
9,039
17.2
%
Savings and money market
19,576
37.1
%
Time
8,282
15.7
%
Total deposits
$
52,714
100.0
%
High Plains Bank Branch Sale
Amount
Percent of
Total
(Dollars in thousands)
Non-interest-bearing demand
$
1,925
10.1
%
Interest-bearing demand
3,664
19.2
%
Savings and money market
7,300
38.3
%
Time
6,168
32.4
%
Total deposits
$
19,057
100.0
%
The following tables show deposits assumed in 2021 acquisitions, as of the time of such acquisitions.
ASBI Acquisition
Amount
Percent of
Total
(Dollars in thousands)
Non-interest-bearing demand
$
254,944
38.1
%
Interest-bearing demand
95,023
14.2
%
Savings and money market
221,187
33.1
%
Time
97,695
14.6
%
Total deposits
$
668,849
100.0
%
Security Acquisition
Amount
Percent of
Total
(Dollars in thousands)
Non-interest-bearing demand
$
19,724
26.3
%
Interest-bearing demand
13,713
18.3
%
Savings and money market
26,132
34.8
%
Time
15,509
20.6
%
Total deposits
$
75,078
100.0
%
The following table shows the average deposit balance and average rate paid on deposits for the year ended December 31, 2023, 2022, and 2021.
Average Deposit Balances and Average Rate Paid
December 31,
Average
Balance
Average
Rate
Paid
Average
Balance
Average
Rate
Paid
Average
Balance
Average
Rate
Paid
(Dollars in thousands)
Non-interest-bearing demand
$
979,410
-
%
$
1,203,167
-
%
$
1,021,261
-
%
Interest-bearing demand
1,002,543
2.26
%
1,124,828
0.64
%
1,032,938
0.21
%
Savings and money market
1,359,822
1.73
%
1,308,536
0.27
%
1,129,869
0.14
%
Time
827,652
2.93
%
663,790
0.83
%
625,562
0.73
%
Total deposits
$
4,169,427
$
4,300,321
$
3,809,630
Included in interest-bearing demand deposits are Insured Cash Sweep (“ICS”) reciprocal demand deposit balances of $382.6 million at December 31, 2023, and $282.7 million at December 31, 2022, and $308.4 million at December 31, 2021. Also included in savings and money market deposits at December 31, 2023, 2022, and 2021, are ICS reciprocal money-market deposit balances of $230.8 million, $17.7 million, and $52.2 million. These balances represent customer funds placed in ICS that allow Equity Bank to break large demand and money-market deposits into smaller amounts and place them in a network of other ICS banks to ensure FDIC insurance coverage on the entire deposit. These deposits are placed in ICS but are Equity Bank’s customer relationships that management views as core funding.
Included in time deposits are Certificate of Deposit Account Registry Service (“CDARS”) program balances of $21.8 million, $11.8 million, and $3.0 million at December 31, 2023, 2022, and 2021. CDARS allows Equity Bank to break large deposits into smaller amounts and place them in a network of other CDARS banks to ensure FDIC insurance coverage on the entire deposit. Reciprocal deposits are not considered brokered deposits as long as the aggregate balance is less than the lesser of 20% of total liabilities or $5.0 billion and Equity Bank is well capitalized and well rated. All non-reciprocal deposits and reciprocal deposits in excess of regulatory limits are considered brokered deposits.
Also included in time deposits are brokered deposit balances totaling $200 million as of December 31, 2023, compared to $252 million as of December 31, 2022.
The following table provides information on the maturity distribution of time deposits of $250,000 or more as of December 31, 2023, and December 31, 2022.
December 31,
(Dollars in thousands)
3 months or less
$
65,449
$
40,578
Over 3 through 6 months
94,459
51,365
Over 6 through 12 months
18,082
19,191
Over 12 months
18,777
34,586
Total Time Deposits
$
196,767
$
145,720
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 Reserve Bank, federal funds purchased and retail repurchase agreements, a bank stock loan and subordinated debt. The Company continually has short-term borrowings which are disclosed in “NOTE 10 - BORROWINGS” and “NOTE 11 - SUBORDINATED DEBT.”
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 retail repurchase agreements as sales for accounting purposes in our financial statements. Retail repurchase agreements with banking customers are settled on the following business day. See “NOTE 10 - 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 a provision for prepayment penalties. Our FHLB borrowings are used for operational liquidity needs for originating and purchasing loans, purchasing investments and general operating cash requirements. See “NOTE 10 - BORROWINGS” in the Notes to Consolidated Financial Statements for additional information.
Federal Reserve Bank: Federal Reserve Bank Term Funding Program borrowings are fixed rate term loans, secured by loans and qualifying pledged securities. Our Federal Reserve Bank borrowings are used for operational liquidity needs for originating and purchasing loans, purchasing investments and general operating cash requirements. see “NOTE 10 - BORROWINGS” in the Notes to Consolidated Financial Statements.
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 prepaid 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 10 - BORROWINGS” in the Notes to Consolidated Financial Statements.
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 conjunction with the 2016 acquisition of Community First Bancshares, Inc., we assumed certain subordinated debentures owed to a special purpose unconsolidated subsidiary that is controlled by us, Community First (AR) Statutory Trust I, (“CFSTI”). In conjunction with the 2021 acquisition of ASBI, we assumed certain subordinated debentures owed to a special purpose unconsolidated subsidiary that is controlled by us, American State Bank Statutory Trust I, (“ASBSTI”). For additional information, see “NOTE 11 - SUBORDINATED DEBT” in the Notes to Consolidated Financial Statements.
Subordinated notes: In 2020, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and institutional accredited investors pursuant to which the Company issued and sold a total of $75.0 million in aggregate principal amounts of its 7.00% Fixed-to-Floating Rate Subordinated Notes due in 2030. For additional information, see “NOTE 11 - SUBORDINATED DEBT” in the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
Liquidity
Market and public confidence in our financial strength and financial institutions, in general, will largely determine access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.
Liquidity is defined as the ability to meet anticipated customer demands for future funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure our liquidity position by 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 ability to fund operations in a cost-effective manner and to meet current and future potential obligations such as loan commitments, lease obligations and unexpected deposit outflows. In this process, we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet our needs.
During the years ended December 31, 2023, 2022, and 2021, our liquidity needs have primarily been met by core deposits, securities and loan maturities, as well as amortizing payment from investment securities and loans. Other funding sources include federal funds purchased, retail repurchase agreements, brokered certificates of deposit, subordinated notes, borrowings from the FHLB and from the Federal Reserve Bank.
Our largest sources of funds are deposits, fed funds sold, retail repurchase agreements and subordinated debt, and our largest uses of funds are the origination of loans or purchases of loans or investment securities. Average loans were $3.30 billion for the year ended December 31, 2023, an increase of 2.2% over average loans of $3.23 billion for the year ended December 31, 2022. 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 investment securities portfolio has a weighted average life of 5.1 years and a modified duration of 4.3 years at December 31, 2023. 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, FHLB advances, Federal Reserve Bank and other borrowing relationships. For additional information, see "NOTE 10 - BORROWINGS" in the Notes to Consolidated Financial Statements.
Cash Flow Overview
During 2023, investing activities provided $232.2 million and operating activities provided $76.5 million of liquidity, which were offset by financing activities use of $34.0 million, ultimately increasing total cash and cash equivalents by $274.7 million. The cash provided by investing activities was driven mostly by the sale and maturity of securities of $789.4 million and mostly offset by the purchase of securities of $510.5 million, the purchase of correspondent and miscellaneous stock of $11.9 million and the purchase of premises and equipment of $15.6 million. The cash usage in financing activities was driven mostly by increases in proceeds from term FHLB advances of $100.0 million and FRB discount window of $140.0 million and decreases in deposits of $96.4 million and purchases of treasury stock of $17.9 million.
During 2022, operating activities provided $74.1 million of liquidity, which was offset by investing activities use of $214.2 million of cash assets and financing activities use of $15.4 million, ultimately decreasing total cash and cash equivalents by $155.5 million. The cash usage in investing activities was driven mostly by purchases of securities of $182.0 million and the net increase in
loans held for investment of $181.9 million, partially offset by proceeds from securities of $168.4 million and proceeds from sale of foreclosed assets of $29.9 million. The cash usage in financing activities was driven mostly by decreases in deposits of $106.3 million and purchases of treasury stock of $33.2 million.
For information related to cash flow during 2021, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 9, 2022.
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments.
Standby and Performance Letters of Credit: For additional information see “NOTE 20 - COMMITMENTS AND CREDIT RISK” in the Notes to Consolidated Financial Statements.
Commitments to Extend Credit: For additional information see “NOTE 20 - COMMITMENTS AND CREDIT RISK” in the Notes to Consolidated Financial Statements.
Future Debt Repayments
In the normal course of business, we enter into short-term and long-term debt obligations resulting in commitments to make future payments. For additional information see “NOTE 10 - BORROWINGS” and “NOTE 11 - SUBORDINATED DEBT.”
Capital Resources
Capital management consists of providing equity to support our current and future operations. The bank regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets that 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 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, 2023, and December 31, 2022, the Company and Equity Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as are asset growth and acquisitions, and capital restoration plans are required.
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver. As of December 31, 2023, 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 capital, Tier 1 capital, Common Equity Tier 1 capital and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed Equity Bank’s category.
The total increase in stockholders’ equity of $42.8 million was principally attributable to an increase in accumulated other comprehensive income of $55.6 million, partially offset by a decrease in treasury stock of $17.9 million. For additional information about the Company’s capital see "NOTE 12 - STOCKHOLDERS' EQUITY", “NOTE 14 - REGULATORY MATTERS” and "NOTE 17 - SHARE-BASED PAYMENTS" in Notes to Consolidated Financial Statements.
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 SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with 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 statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this 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 that we have discussed in this Annual Report on Form 10-K when comparing such non-GAAP financial measures.
Adjusted Net Income and Earnings Per Share: Adjusted net income and adjusted earnings per share are non-GAAP financial measures generally used to disclose core net income from the Company's operations and earnings per share. We calculated this by taking GAAP net income less non-core impacts to net income to arrive at adjusted net income, basic earnings per share, and diluted earnings per share. These financial measures are used by financial statement users to evaluate the core financial performance of the Company.
Management believes that these measures are important to many investors who are interested in changes from period to period in the Company's financial performance and quality of earnings.
The following table reconciles as of the dates set forth below, adjusted net income and earnings per share and compares them to GAAP net income and earnings per share.
December 31,
(Dollars in thousands, except share data)
Net income (loss) allocable to common stockholders
$
7,821
$
57,688
$
52,480
$
(74,970
)
$
25,579
Less: gains (losses) from sale of securities net of tax
(41,090
)
-
-
Plus: goodwill impairment, net of actual tax effect
-
-
-
99,526
-
Adjusted net income
$
48,911
$
57,684
$
52,189
$
24,556
$
25,579
Weighted average common shares outstanding
15,535,772
16,214,049
15,019,221
15,098,512
15,619,891
Weighted average diluted shares
15,648,842
16,437,906
15,306,431
15,238,499
15,843,139
Earnings Per Share
$
0.50
$
3.56
$
3.49
$
(4.97
)
$
1.64
Diluted Earnings Per Share
$
0.50
$
3.51
$
3.43
$
(4.97
)
$
1.61
Adjusted Earnings Per Share
$
3.15
$
3.56
$
3.47
$
1.63
$
1.64
Adjusted Diluted Earnings Per Share
$
3.13
$
3.51
$
3.41
$
1.61
$
1.61
Tangible Book Value per Common Share and Tangible Book Value Per Diluted Common Share: Tangible book value is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate: (a) tangible common equity as total stockholders’ equity less preferred stock, goodwill, core deposit intangibles, net of accumulated amortization, 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, the assumed exercise of stock options, redemption of non-vested restricted stock units, and pending employee stock purchase plan shares at period end. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value.
Management believes that these measures are important to many investors who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.
The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity, tangible book value per common share and tangible book value per diluted common share and compares these values with book value per common share.
December 31,
(Dollars in thousands, except share data)
Total stockholders’ equity
$
452,860
$
410,058
$
500,631
$
407,649
$
478,060
Less: goodwill
53,101
53,101
54,465
31,601
136,432
Less: core deposit intangibles, net
7,222
10,596
14,879
16,057
19,907
Less: mortgage servicing asset, net
-
Less: naming rights, net
1,000
1,044
1,087
1,130
1,174
Tangible common equity
$
391,462
$
345,141
$
429,924
$
358,861
$
320,542
Common shares outstanding at period end
15,428,251
15,930,112
16,760,115
14,540,556
15,444,434
Diluted common shares outstanding at period end
15,629,185
16,163,253
17,050,115
14,540,556
15,719,810
Book value per common share
$
29.35
$
25.74
$
29.87
$
28.04
$
30.95
Tangible book value per common share
$
25.37
$
21.67
$
25.65
$
24.68
$
20.75
Tangible book value per diluted common share
$
25.05
$
21.35
$
25.22
$
24.68
$
20.39
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.
The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets.
December 31,
(Dollars in thousands)
Total stockholders’ equity
$
452,860
$
410,058
$
500,631
$
407,649
$
478,060
Less: goodwill
53,101
53,101
54,465
31,601
136,432
Less: core deposit intangibles, net
7,222
10,596
14,879
16,057
19,907
Less: mortgage servicing asset, net
-
Less: naming rights, net
1,000
1,044
1,087
1,130
1,174
Tangible common equity
$
391,462
$
345,141
$
429,924
$
358,861
$
320,542
Total assets
$
5,034,592
$
4,981,651
$
5,137,631
$
4,013,356
$
3,949,578
Less: goodwill
53,101
53,101
54,465
31,601
136,432
Less: core deposit intangibles, net
7,222
10,596
14,879
16,057
19,907
Less: mortgage servicing asset, net
-
Less: naming rights, net
1,000
1,044
1,087
1,130
1,174
Tangible assets
$
4,973,194
$
4,916,734
$
5,066,924
$
3,964,568
$
3,792,060
Equity / assets
8.99
%
8.23
%
9.74
%
10.16
%
12.10
%
Tangible common equity to tangible assets
7.87
%
7.02
%
8.48
%
9.05
%
8.45
%
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 goodwill impairment, net of actual tax effect, plus amortization of intangible assets less estimated tax effect on amortization of intangible assets (tax rates used in this calculation were 21% for 2023, 2022, 2021, 2020 and 2019) (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.
Management believes that this measure is important to many investors in the marketplace because it measures the return on equity, exclusive of the effects of intangible assets on earnings and capital. Goodwill and other intangible assets have the effect of 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.
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.
December 31,
(Dollars in thousands)
Total average stockholders’ equity
$
423,722
$
440,882
$
446,795
$
464,608
$
463,445
Less: average intangible assets
63,064
67,746
50,831
130,329
158,410
Average tangible common equity
$
360,658
$
373,136
$
395,964
$
334,279
$
305,035
Net income (loss) allocable to common stockholders
$
7,821
$
57,688
$
52,480
$
(74,970
)
$
25,579
Plus: goodwill impairment, net of actual tax effect
-
-
-
99,526
-
Amortization of intangible assets
3,518
4,186
4,242
3,898
3,218
Less: estimated tax effect on intangible asset amortization
Adjusted net income allocable to common
stockholders
$
10,600
$
60,995
$
55,831
$
27,635
$
28,121
Return on average equity (ROAE)
1.85
%
13.08
%
11.75
%
(16.14
)%
5.52
%
Return on average tangible common equity
(ROATCE)
2.94
%
16.35
%
14.10
%
8.27
%
9.22
%
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 goodwill impairment, 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 expense less goodwill impairment, divided by net interest income plus non-interest income.
In management’s judgment, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess operating expenses in relation to operating revenue by removing merger expenses, 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.
December 31,
(Dollars in thousands)
Non-interest expense
$
135,601
$
128,380
$
119,465
$
208,990
$
99,635
Less: goodwill impairment
-
-
-
104,831
-
Less: merger expenses
9,189
Less: loss on debt extinguishment
-
-
-
-
Non-interest expense, excluding merger expenses and
loss on debt extinguishment
$
135,304
$
127,786
$
109,904
$
103,860
$
98,720
Net interest income
$
159,018
$
162,830
$
142,579
$
132,652
$
125,858
Non-interest income
$
(19,129
)
$
35,957
$
32,842
$
26,023
$
24,988
Less: gain on acquisition and branch sales
-
2,145
-
Less: net gains (losses) from securities transactions
(51,909
)
Non-interest income, excluding net gains (losses) from
security transactions and gain on acquisition
$
32,780
$
34,990
$
31,851
$
23,867
$
24,974
Non-interest expense, less goodwill impairment,
to net interest income plus non-interest income
96.93
%
64.58
%
68.10
%
65.64
%
66.05
%
Efficiency Ratio
70.55
%
64.60
%
63.01
%
66.36
%
65.45
%

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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/or fair market values. The objective is to measure the effect on net interest income (“NII”) and economic value of equity (“EVE”) and to adjust the balance sheet to minimize the inherent risk, while at the same time maximizing income.
We manage 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 with 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.
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 and sale activities, commitments to originate loans, and the maturities of investment securities and borrowings. Additionally, the ALCO reviews liquidity, projected cash flows, maturities of deposits, and consumer and commercial deposit activity.
ALCO uses a simulation analysis to monitor and manage the pricing and maturity of assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The simulation tests the sensitivity of NII and EVE. Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options within the investment securities portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the future NII and EVE. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
The change in the impact of net interest income from the base case for December 31, 2023, and 2022 was primarily driven by the rate and mix of variable and fixed rate financial instruments, the underlying duration of the financial instruments, and the level of response to changes in the interest rate environment.
December 31, 2023, Analysis
The increase in the level of positive impact to net interest income in the up interest rate shock scenarios is due to the decrease in fixed rate investments, increase in interest earning cash balances and overall increase in the level of adjustable rate loans, which were partially offset by the decreases in non-interest bearing deposits and savings accounts, which are low beta deposit products, and increases in money market and ICS deposits, which are high beta deposit produces. These factors result in the positive impacts to net interest income in the up interest rate shock scenarios that are detailed in the table below. In the down interest rate shock scenario, the main drivers of the negative impact on net interest income are the downward pricing of variable rate loans receivable, increase in interest-earning cash balances and the decrease in fixed rate investments. These factors result in the negative impact to net interest income in the down interest rate shock scenario.
The change in the economic value of equity from the base case for December 31, 2023, is due to us being in a liability sensitive position and the level of convexity in our prepayable assets. Generally, with a liability sensitive position, as interest rates increase, the value of your assets decrease faster than the value of liabilities and, as interest rates decrease, the value of your assets increase at a faster rate than liabilities. Due to the level of convexity in our fixed rate prepayable assets, we do not experience a similar change in the value of assets in a down interest rate shock scenario; however, due to the current level of convexity in our fixed rate prepayable assets becoming less negative and positive, in some cases, on a portion of or portfolio has resulted in the overall value of assets increasing more than liabilities. In addition, the mix of interest-bearing deposit and non-interest-bearing deposits impact the level of deposit decay and the resulting benefit of discounting from the non-interest-bearing deposits. At December 31, 2023, non-interest-bearing deposits were approximately $898.1 million, or 18.2%, lower than that deposit type at December 31, 2022. Substantially all investments and approximately 41.3% of loans are prepayable 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.
December 31, 2022, Analysis
The increase in the level of negative impact to net interest income in the up interest rate shock scenarios is due to the level of adjustable rate loans that will reprice to higher interest rates and non-term deposits that will adjust to higher rates but at a slower pace. These factors result in the positive impacts to net interest income in the up interest rate shock scenarios that are detailed in the table below. In the down interest rate shock scenario, the main drivers of the negative impact on net interest income are the downward pricing of variable rate loans receivable and the level of term deposit repricing; and the assumed prepayment and scheduled repayment of existing fixed rate loans receivable and fixed rate investments. Term deposits repricing will only decrease the average cost paid by some 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, 2022, is due to us being in a liability sensitive position and the level of convexity in our prepayable assets. Generally, with a liability sensitive position, as interest rates increase, the value of your assets decrease faster than the value of liabilities and, as interest rates decrease, the value of your assets increase at a faster rate than liabilities. Due to the level of convexity in our fixed rate prepayable assets, we do not experience a similar change in the value of assets in a down interest rate shock scenario; however, due to the current level of convexity in our fixed rate prepayable assets becoming less negative and positive, in some cases, on a portion of or portfolio has resulted in the overall value of assets increasing more than liabilities. In addition, the mix of interest-bearing deposit and non-interest-bearing deposits impact the level of deposit decay and the resulting benefit of discounting from the non-interest-bearing deposits. At December 31, 2022, non-interest-bearing deposits were approximately $1.10 billion, or 11.8%, lower than that deposit type at December 31, 2021. Substantially all investments and approximately 55.4% of loans are prepayable 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.
The following table summarizes the simulated immediate change in net interest income for twelve months as of the dates indicated.
Market Risk
Impact on Net Interest Income
December 31,
Change in prevailing interest rates
+300 basis points
10.3
%
5.0
%
+200 basis points
6.8
%
3.3
%
+100 basis points
3.3
%
1.6
%
0 basis points
-
%
-
%
-100 basis points
(2.1
)%
(2.3
)%
-200 basis points
(4.3
)%
(5.5
)%
-300 basis points
(7.3
)%
(10.2
)%
Impact on Economic Value of Equity
December 31,
Change in prevailing interest rates
+300 basis points
(7.4
)%
(10.7
)%
+200 basis points
(4.3
)%
(6.6
)%
+100 basis points
(2.2
)%
(3.3
)%
0 basis points
-
%
-
%
-100 basis points
0.3
%
0.7
%
-200 basis points
(1.5
)%
(0.5
)%
-300 basis points
(5.3
)%
(4.0
)%

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 of this Annual Report on Form 10-K.
Audited Financial Statements
Description
Page Number
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements
In the last three years, The Company has not had any retroactive change to historical quarterly data.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None

---

ITEM 9A. CONTROLS AND PROCEDURES
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 Company’s 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 Company’s 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 Management’s 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 Company’s 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 with 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, 2023, management assessed the effectiveness of the Company’s 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, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2023.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, has been audited by Crowe LLP, Indianapolis, Indiana, (U.S. PCAOB Auditor Firm I.D. 173), the independent registered public accounting firm who also has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K. Crowe LLP has issued a
report on the Company’s internal control over financial reporting as of December 31, 2023, which is included in Item 8 of this Form 10-K and is incorporated into this item by reference.

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ITEM 9B. OTHER INFORMATION
Item 9B: Other Information
During the three months ended December 31, 2023, none of the Company's directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such defined in Item 408 of Regulation S-K of the Securities Act of 1933).

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10: Directors, Executive Officers and Corporate Governance
The information required by this item will be contained in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be held April 23, 2024, 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.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11: Executive Compensation
The information required by this item will be contained in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be held April 23, 2024, 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.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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 2024 Annual Meeting of Stockholders to be held April 23, 2024, 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 Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.”

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 2024 Annual Meeting of Stockholders to be held April 23, 2024, 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.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14: Principal Accounting Fees and Services
The information required by this item will be contained in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be held April 23, 2024, 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.
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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.
Description
2.1
Agreement and Plan of Merger, dated December 5, 2023, by and among Equity Bancshares, Inc. Truman Merger Sub, Inc. Rockhold BanCorp and Rockhold BanCorp Stock Trust (incorporated by reference to Exhibit 2.1 to Equity Bancshares, Inc.'s Current Report on Form 8-K, filed with the SEC on December 6, 2023).
3.1
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).
3.2
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).
4.1
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).
4.2*
Description of Registrant’s Securities.
4.3
Indenture, dated as of June 29, 2020, by and between Equity Bancshares, Inc. and UMB Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Equity Bancshares, Inc.’s Current Report on Form 8-K, filed with the SEC on July 2, 2020).
4.4
Form of 7.00% Fixed-to-Floating Rate Subordinated Note due 2030 (incorporated by reference to Exhibit 4.1 to Equity Bancshares, Inc.’s Current Report on Form 8-K, filed with the SEC on July 2, 2020).
10.1
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).
10.2
Amended and Restated Employment Agreement, dated November 5, 2021, between Equity Bank, Equity Bancshares, Inc. and Brad S. Elliott (incorporated by reference to Exhibit 10.4 to Equity Bancshares, Inc.’s Annual Report on Form 10-K, filed with the SEC on March 9, 2022).
Exhibit
No.
Description
10.3
Amended and Restated Employment Agreement, dated November 5, 2021, between Equity Bank, Equity Bancshares, Inc. and Julie Huber (incorporated by reference to Exhibit 10.4 to Equity Bancshares, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on November 8, 2021).
10.4
Employment Agreement, dated May 2, 2023, among Equity Bank and Richard M. Sems, (incorporated by reference to Exhibit 10.2 to Equity Bancshares, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on May 4, 2023).
10.5
Employment Agreement, dated November 6, 2023, among Equity Bank, Equity Bancshares, Inc. and Chris M. Navratil (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, 2023).
10.6
Employment Agreement, dated November 5, 2021, between Equity Bank, Equity Bancshares, Inc. and Brett A. Reber (incorporated by reference to Exhibit 10.5 to Equity Bancshares, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on November 8, 2021).
10.7
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).
10.8
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).
10.9
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).
10.10
Form of Time-vested Restricted Stock Units Award Agreement (incorporated by reference to Exhibit 10.2 to Equity Bancshares, Inc.’s Current Report on Form 8-K, filed with the SEC on March 5, 2018).
10.11
Equity Bancshares, Inc. 2019 Employee Stock Purchase 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, 2019).
10.12
Equity Bancshares, Inc. 2022 Omnibus Equity 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 17, 2022).
10.13
Equity Bancshares, Inc. 2022 Employee Stock Purchase Plan (incorporated by reference to Appendix A to Equity Bancshares, Inc.’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on March 17, 2022).
10.14
Equity Bancshares, Inc. Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to Equity Bancshares, Inc.’s Current Report on Form 10-Q filed with the SEC on November 8, 2022).
10.17
Form of Subordinated Note Purchase Agreement, dated as of June 29, 2020, by and among Equity Bancshares, Inc. and the several purchasers thereto (incorporated by reference to Exhibit 10.1 to Equity Bancshares, Inc.’s Current Report on Form 8-K, filed with the SEC on July 2, 2020).
10.18
Loan and Security Agreement, dated January 28, 2016, by and 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 February 3, 2016).
Exhibit
No.
Description
10.19
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).
10.20
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).
10.21
Third Amendment to Loan and Security Agreement, dated March 11, 2019, 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 14, 2019).
10.22
The Fourth Amendment to Loan and Security Agreement and Promissory Notes Modification Agreement, dated June 29, 2020, by and among Equity Bancshares, Inc., as Borrower, and ServisFirst Bank, as Lender (incorporated by reference to Exhibit 10.3 to Equity Bancshares, Inc.’s Current Report on Form 8-K, filed with the SEC on July 2, 2020).
10.23
Fifth Amendment to Loan and Security Agreement, dated February 11, 2022, by and 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 February 18, 2022).
10.24
Sixth Amendment to Loan and Security Agreement, dated February 10, 2023, by and 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 06, 2023).
10.25
Seventh Amendment to Loan and Security Agreement, dated February 10, 2024, by and 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 February 14, 2024).
21.1*
List of Subsidiaries of Equity Bancshares, Inc.
23.1*
Consent of Crowe LLP.
24.1*
Powers of Attorney.
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
97.1*
Compensation Recovery Policy.
101.INS*
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*
Inline XBRL Taxonomy Extension Schema Document with Embedded Linkbase Documents.
Exhibit
No.
Description
104*
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
* Filed herewith.
** These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
 Represents a management contract or a compensatory plan or arrangement.
c)	Excluded Financial Statements
Not Applicable