424B4 1 d945039d424b4.htm FINAL PROSPECTUS FINAL PROSPECTUS
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Filed Pursuant to Rule 424(b)(4)
Commission File No. 333-207351

PROSPECTUS

1,940,000 Shares

 

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Class A Common Stock

 

 

This prospectus relates to the initial public offering of Equity Bancshares, Inc. Class A common stock. We are a bank holding company headquartered in Wichita, Kansas for Equity Bank, a Kansas-chartered bank. We are offering 1,650,000 shares of our Class A common stock. The selling stockholders identified in this prospectus are offering 290,000 shares of our Class A common stock (which includes 273,000 shares of Class A common stock issuable upon the automatic conversion of an equal number of shares of Class B common stock as a result of this offering). We will not receive any proceeds from the sale of such shares by the selling stockholders.

Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price of our Class A common stock is $22.50 per share. Our Class A common stock has been approved for listing on the NASDAQ Global Select Market under the symbol “EQBK,” subject to notice of issuance.

We are an “emerging growth company” under the federal securities laws and are eligible for reduced public company reporting requirements. See “Implications of Being an Emerging Growth Company.”

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 24 of this prospectus.

 

 

 

     Per Share        Total  

Initial public offering price

    $ 22.50         $ 43,650,000   

Underwriting discounts and commissions(1)

    $ 1.4625         $ 2,837,250   

Proceeds to us, before expenses

    $ 21.0375         $ 34,711,875   

Proceeds to selling stockholders, before expenses

    $ 21.0375         $ 6,100,875   

 

(1) See “Underwriting” for a description of all underwriting compensation payable in connection with this offering.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The shares of our Class A common stock that you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

The underwriters expect to deliver the shares of our Class A common stock against payment in New York, New York on or about November 16, 2015, subject to customary closing conditions.

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase an additional 291,000 shares of our Class A common stock on the same terms and conditions set forth above solely to cover over-allotments.

 

 

 

Keefe, Bruyette & Woods   Stephens Inc.

                                                                 A Stifel Company

Sandler O’Neill + Partners, L.P.

Prospectus dated November 10, 2015


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Table of Contents

TABLE OF CONTENTS

 

     Page  

About this Prospectus

     ii   

Industry and Market Data

     ii   

Implications of Being an Emerging Growth Company

     ii   

Prospectus Summary

     1   

The Offering

     17   

Selected Historical Consolidated Financial and Other Data

     20   

Risk Factors

     24   

Cautionary Note Regarding Forward-Looking Statements

     53   

Use of Proceeds

     55   

Dividend Policy

     56   

Capitalization

     57   

Dilution

     59   

Price Range of Our Class A Common Stock

     61   

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

     62   

Business

     103   

Supervision and Regulation

     125   

Management

     135   

Executive Compensation and Other Matters

     143   

Certain Relationships and Related Party Transactions

     150   

Principal and Selling Stockholders

     157   

Description of Capital Stock

     162   

Shares Eligible for Future Sale

     168   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     170   

Underwriting

     174   

Legal Matters

     179   

Experts

     179   

Where You Can Find More Information

     179   

Index to Consolidated Financial Statements

     F-1   

 

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ABOUT THIS PROSPECTUS

Unless we state otherwise or the context otherwise requires, references in this prospectus to “we,” “our,” “us,” “the Company” and “Equity” refer to Equity Bancshares, Inc. and its consolidated subsidiaries, including Equity Bank, which we sometimes refer to as “Equity Bank,” “the Bank” or “our Bank.”

We, the selling stockholders and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We, the selling stockholders and the underwriters are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the cover page of this prospectus.

This prospectus describes the specific details regarding this offering and the terms and conditions of our Class A common stock being offered hereby and the risks of investing in our Class A common stock. For further information, see “Where You Can Find More Information.”

Neither we, nor any of our officers, directors, agents or representatives, the selling stockholders or the underwriters, make any representation to you about the legality of an investment in our Class A common stock. You should not interpret the contents of this prospectus or any free writing prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our Class A common stock.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our securities or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about, and to observe, any restrictions as to the offering and the distribution of this prospectus applicable to those jurisdictions.

Unless otherwise expressly stated or the context otherwise requires, all information in this prospectus assumes that the underwriters have not exercised their option to purchase additional shares of our Class A common stock to cover over-allotments, if any.

INDUSTRY AND MARKET DATA

Market data used in this prospectus has been obtained from independent industry sources and publications available to the public, sometimes with a subscription fee, as well as from research reports prepared for other purposes. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. We did not commission the preparation of any of the sources or publications referred to in this prospectus. We have also not independently verified the data obtained from these sources. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. Trademarks used in the prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the ™ symbols to identify such trademarks.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we are an emerging growth company, unlike other public companies that are not emerging growth companies under the JOBS Act, we are not required to:

 

    provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

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    provide more than two years of audited financial statements and related management’s discussion and analysis of financial condition and results of operations;

 

    comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

    provide certain disclosure regarding executive compensation required of larger public companies or hold stockholder advisory votes on executive compensation as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act; or

 

    obtain stockholder approval of any golden parachute payments not previously approved.

We will cease to be an “emerging growth company” upon the earliest of:

 

    the last day of the fiscal year in which we have $1.0 billion or more in annual revenues;

 

    the date on which we become a “large accelerated filer” (the fiscal year end on which the total market value of our common equity securities held by non-affiliates is $700.0 million or more as of June 30);

 

    the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

    the last day of the fiscal year following the fifth anniversary of our initial public offering.

We have elected to adopt the reduced disclosure requirements described above for purposes of the registration statement of which this prospectus is a part. In addition, we expect to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the Securities and Exchange Commission, or the SEC, and proxy statements that we use to solicit proxies from our stockholders.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, but we have irrevocably opted out of the extended transition period, and as a result, we will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for other public companies.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider before deciding to purchase our Class A common stock in this offering. You should read the entire prospectus carefully, including the sections titled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” together with our consolidated financial statements and the related notes thereto, before making an investment decision.

Our Company

We are a bank holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 25 full service branches located in Kansas and Missouri. As of June 30, 2015, we had, on a consolidated basis, total assets of $1.4 billion, total deposits of $1.0 billion, total loans of $828.5 million (net of allowances) and total stockholders’ equity of $121.7 million. We have been profitable nine out of the last ten years and each of the last five years.

Our principal objective is to increase stockholder value and generate consistent earnings growth by expanding our commercial banking franchise both organically and through strategic acquisitions. We strive to provide an enhanced banking experience for our customers by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based customer service of a community bank.

Our History and Growth

We were founded in November 2002 by our Chairman and CEO, Brad S. Elliott. Mr. Elliott believed that, as a result of in-market consolidation, there existed an opportunity to build an attractive commercial banking franchise and create long-term value for our stockholders. Following thirteen years’ experience as a finance executive, including serving as a Regional President for a Kansas bank with over $1.0 billion in assets, Mr. Elliott implemented his banking vision of developing a strategic consolidator of community banks and a destination for seasoned bankers and business persons who share our entrepreneurial spirit. In 2003, we raised capital from 23 local investors to finance the acquisition of National Bank of Andover in Andover, Kansas. At the time of our acquisition, National Bank of Andover had $32 million in assets and was subject to a regulatory enforcement agreement with the Office of the Comptroller of the Currency, or the OCC. Subsequent to our acquisition of National Bank of Andover, we changed its name to Equity Bank and instilled in its commercial and retail staff our entrepreneurial spirit and disciplined credit culture. Within eight months of the acquisition, the enforcement action with the OCC was terminated.

We believe we have a successful track record of selectively acquiring, integrating and consolidating community banks and branch networks. Since 2003, we have completed a series of eight acquisitions with aggregate total assets of approximately $760 million and total deposits of approximately $828 million and two charter consolidations. Our acquisition activity includes the following:

 

    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.

 



 

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    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., or First Community, 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, or First 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, which represents a new market for us, as well as a loan origination office in Lawrence, Kansas. As of June 30, 2015, First Independence had consolidated total assets of $133.7 million, total deposits of $89.1 million and total loans of $87.4 million (net of allowances). See “— Recent Developments — Expansion Activities” for more information.

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. These efforts have helped reduce our ratio of nonperforming assets to total assets from 1.76% at December 31, 2012 to 1.12% at June 30, 2015. In addition, we have grown 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. From December 31, 2012 to June 30, 2015, we increased our commercial loan portfolio (net of allowances) from 72.0% to 74.8% of our loan portfolio. Within our commercial loan portfolio, 61.2% of such loans were commercial real estate loans and 38.8% were commercial and industrial loans, in each case, as of June 30, 2015. We also seek to increase our most attractive deposit accounts, which we refer to as our “Signature Deposits,” primarily by growing deposits in our community markets and cross-selling our depository products to our loan customers. Our Signature Deposits, which consist of all our non-time deposits, including our non-interest bearing checking, interest checking, savings and money market deposit accounts, increased from 59.7% of our total deposits as of December 31, 2012 to 62.9% of our total deposits as of June 30, 2015. Our efforts to improve our deposit mix as well as the current rate environment helped lower our cost of interest-bearing deposits from 83 basis points at December 31, 2012 to 45 basis points at June 30, 2015.

As a result of these strategic and organic growth efforts, since our inception through June 30, 2015, we have expanded our team of full-time equivalent employees from 19 to 262, and our network of branches from two to 25. 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.

We have periodically raised capital from local and institutional investors in order to finance our strategic and organic growth initiatives. Most recently, in May 2012, we raised $20.3 million from local and institutional investors in connection with our acquisition of First Community. Since our inception, we have raised an aggregate of $62.8 million from investors on seven different occasions, exclusive of acquisitions in which we issued our stock as consideration.

 



 

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From time to time, we have also opportunistically raised capital through governmental programs in order to capitalize our balance sheet. For example, in 2009, we raised $8.8 million under the U.S. Treasury’s Troubled Asset Relief Program, or TARP. In 2011, we raised $16.4 million under the U.S. Treasury’s Small Business Lending Fund, or SBLF, and used these SBLF proceeds to redeem all of our TARP funding outstanding at that time and to fund loan growth. In 2014, we repaid all of the TARP funding we assumed in our acquisition of First Community with a loan from a third-party financial institution secured by our stock in Equity Bank, which we refer to as our bank stock loan. In addition, we repurchased $17.2 million of our Class A common shares in March 2014.

Our Historical Performance

Operating Results

Since our first acquisition in 2003 through June 30, 2015, we have achieved significant growth in many of our key financial performance categories. During this period, we have grown our total assets from $32.0 million to $1.4 billion, total loans from $22.0 million to $828.5 million (net of allowances) and total deposits from $27.0 million to $1.0 billion. The charts below illustrate the growth in the dollar balances of our total assets, loans and deposits for the five-year period ended December 31, 2014 as well as for the six months ended June 30, 2015. The growth in these metrics from December 31, 2011 to December 31, 2012 was primarily attributable to our acquisition of First Community, which was completed in October 2012. Our total assets, loans and deposits were relatively flat between December 31, 2012 and December 31, 2014 as we focused our efforts on integrating the First Community acquisition, repositioning our balance sheet, improving our loan portfolio and deposit mix, and enhancing operational efficiency during this time.

 

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During the five-year period ended December 31, 2014, our profitability also significantly increased. The charts below illustrate our net income to common stockholders, earnings per share (“EPS”) and net interest margin (“NIM”) during this period as well as for the six months ended June 30, 2015. We believe our earnings growth between December 31, 2012 and December 31, 2014 was primarily attributable to our repositioning efforts during this time, which improved our commercial loan portfolio, our deposit mix and our efficiency ratio. As a result of our growth initiatives and repositioning efforts, our net interest margin has increased from 3.83% as of December 31, 2013 to 3.98% as of June 30, 2015.

 

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Note: Net interest margin is calculated by dividing annualized net interest income by average interest-earning assets for the period.

 



 

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In addition, our operating performance has improved since our inception as well as in the five-year period ended December 31, 2014 and the six months ended June 30, 2015. As illustrated in the charts below, we have more than doubled our return on average assets (“ROAA”) and return on average tangible common equity (“ROATCE”), while significantly improving the efficiency of our operations during this time, as indicated by our improving efficiency ratio.

 

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Note: ROAA and ROATCE are calculated by dividing annualized net income by average assets and average tangible common equity.

Integration

We believe the successful execution of our acquisition strategy is based on our ability to effectively integrate the banks we have acquired. Following our most recent acquisition of First Community in October 2012, we integrated First Community’s fifteen branches and recognized the opportunity to consolidate two branches, while continuing to offer convenient locations to our customers. We grew our commercial loan originations from approximately $133 million in 2012 to approximately $260 million in 2014. During the six months ended June 30, 2015, our commercial loan originations were approximately $209 million. Our repositioning of our loan portfolio, after taking into account sales of loans and credit marks related to acquisition accounting, reflects total loan growth of approximately $210 million since the closing of the First Community acquisition through December 31, 2014, and approximately $125 million from December 31, 2014 to June 30, 2015. In addition, our Signature Deposits increased from $593.1 million as of December 31, 2012 to $638.8 million as of December 31, 2014 and were $631.1 million at June 30, 2015. Our operating performance during this time also coincided with a significant improvement in our asset quality ratios. Following the acquisition of $20.9 million of nonperforming assets of First Community, we were able to decrease our nonperforming assets from $31.7 million as of November 30, 2012, or 2.7% of total assets, to $15.6 million as of December 31, 2014, or 1.33% of total assets, and our nonperforming assets were $15.1 million as of June 30, 2015, or 1.12% of total assets. Most importantly, we believe the successful integration of First Community delivered increased value to our stockholders and our diluted EPS increased from $0.65 at December 31, 2012 to $1.30 at December 31, 2014, representing a compounded annualized growth rate, or CAGR, of 41%. Our diluted EPS for the six months ended June 30, 2015 was $0.78.

 



 

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As we have grown, we have been able to effectively manage our capital while strengthening our asset quality and driving growth in our tangible book value per share. As of June 30, 2015, our ratio of nonperforming assets to total assets was 1.12% and our Tier 1 leverage ratio was 8.44%. We have maintained a strong balance sheet and, as of June 30, 2015, we were above regulatory definitions of “well capitalized” even after we repurchased 1.3 million shares of our common stock in March 2014 for $17.2 million. Our tangible book value per share has increased from $10.91 at December 31, 2010 to $13.76 at June 30, 2015. As of June 30, 2015, we had $121.7 million in total stockholders’ equity.

 

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Loan and Deposit Portfolio

As illustrated in the chart and table below, we have grown our loan portfolio from $280.5 million as of December 31, 2010 to $828.5 million as of June 30, 2015 (net of allowances). Our loan portfolio composition was 74.8% commercial and 25.2% 1-4 family and other as of June 30, 2015, and within our commercial loan portfolio, 61.2% of such loans were commercial real estate loans and 38.8% of such loans were commercial and industrial loans. Our repositioning efforts following the acquisition of First Community helped expand our commercial loan portfolio (net of allowances) from 72.0% of our loan portfolio as of December 31, 2012 to 74.8% of our loan portfolio as of June 30, 2015.

 

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In addition, as illustrated in the chart and table below, we have grown our deposits from $374.1 million at December 31, 2010 to $1.0 billion at June 30, 2015. Our repositioning efforts following the acquisition of First Community helped improve our deposit mix by increasing our Signature Deposits from 59.7% of our total deposits as of December 31, 2012 to 62.9% of our total deposits as of June 30, 2015. The improvement in our deposit mix as well as the current rate environment have helped lower our cost of interest-bearing deposits from 83 basis points at December 31, 2012 to 45 basis points at June 30, 2015.

 

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more comprehensive discussion of our operating and financial performance.

 



 

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Our Strategies

We believe we are a leading provider of commercial and personal banking services to businesses and business owners as well as individuals in our targeted Midwestern markets. Our strategy is to continue strategically consolidating community banks within such markets and maintaining our organic growth, while preserving our asset quality through disciplined lending practices.

 

    Strategic Consolidation of Community Banks. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. We expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. The following map illustrates the headquarters of potential acquisition opportunities broken out by asset size between $50.0 million and $1.5 billion within our target footprint.

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Source: SNL Financial as of June 30, 2015.

We believe many of these banks will continue to be burdened by new and more complex banking regulations, resource constraints, competitive limitations, rising technological and other business costs, management succession issues and liquidity concerns.

Despite the significant number of opportunities, we intend to continue to employ a disciplined approach to our acquisition strategy and only seek to identify and partner with financial institutions that possess attractive market share, low-cost deposit funding and compelling noninterest income-generating businesses. We believe consolidation will lead to organic growth opportunities for us following the integration of businesses we acquire. We also expect to continue to manage our branch network in order to ensure effective coverage for customers while minimizing any geographic overlap and driving corporate efficiency.

 



 

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    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. For example, following our most recent acquisition of First Community in 2012, we increased our diluted EPS from $0.65 at December 31, 2012 to $1.30 at December 31, 2014, representing a CAGR of 41%. We believe that our experience and reputation as a successful integrator and acquiror 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 and Wichita, and stable community markets within Western Kansas, Western Missouri and Topeka. We believe this diverse geographic footprint provides us with access to low cost, stable core deposits in community markets that we can use to fund commercial loan growth in our metropolitan markets. The following table shows our total deposits and loans (net of allowances) in our community markets and our metropolitan markets as of June 30, 2015, which we believe illustrates our execution of this strategy.

 

     Deposits      Loans  
     Amount(1)      Overall %      Amount(1)      Overall %  

Metropolitan markets

   $ 395,395(2)         39%       $ 640,928         77%   

Community markets

   $ 608,406(3)         61%       $ 187,545         23%   

 

  (1) Amounts in thousands.
  (2) Represents 10 branches located in the Wichita and Kansas City metropolitan statistical areas, or MSAs.
  (3) Represents 15 branches located outside of the Wichita and Kansas City MSAs.

Our team of seasoned bankers represents an important driver of our organic growth by expanding banking relationships with current and potential customers. We expect to continue to make opportunistic hires of talented and entrepreneurial bankers, particularly in our metropolitan markets, to further augment our growth. Our bankers are incentivized to increase the size of their loan and deposit portfolios and generate fee income while maintaining strong credit quality. We also seek to cross-sell our various banking products, including our deposit and treasury wealth management products, to our commercial loan customers, which we believe provides a basis for expanding our banking relationships as well as a stable, low-cost deposit base. We believe we have built a scalable platform that will support this continued organic growth.

 

    Preserve Our Asset Quality Through Disciplined Lending Practices. Our approach to credit management uses well-defined policies and procedures, disciplined underwriting criteria and ongoing risk management. We believe we are a competitive and effective commercial and industrial lender, supplementing ongoing and active loan servicing with early-stage credit review provided by our bankers. This approach has allowed us to maintain loan growth with a diversified portfolio of high quality assets. We believe our credit culture supports accountable bankers, who maintain an ability to expand our customer base as well as make sound decisions for our Company. As of June 30, 2015, our ratio of nonperforming assets to total assets was 1.12% and our ratio of nonperforming loans to total loans was 1.00%. We believe our success in managing asset quality is illustrated by our aggregate net charge-off history. In the twelve years since our inception, we have cumulatively charged off $10.8 million, inclusive of both the recent recession and repositioning effort after the acquisition of First Community.

 



 

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Our Competitive Strengths

Our management team has identified the following competitive strengths that we believe 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. The members of our executive management team have, on average, more than twenty years’ experience working for large, billion-dollar-plus financial institutions in our markets during various economic cycles and have significant mergers and acquisitions experience in the financial services industry. Our executive management team has instilled a transparent and entrepreneurial culture that rewards leadership, innovation, and problem solving. Over 85% of the members of our senior executive management team, which consists of our executive vice presidents, chief financial officer and chief executive officer, have invested their own capital in the equity of our Company, providing close alignment of their interests with those of our other stockholders. See “— Our Team.”

 

    Focus on Commercial Banking. We are primarily a commercial bank. As measured by outstanding balances as of June 30, 2015, commercial loans composed over 74% of our loan portfolio, and within our commercial loan portfolio, 61.2% of such loans were commercial real estate loans and 38.8% were commercial and industrial loans. We believe we have developed strong commercial relationships in our markets across a diversified range of sectors, including key areas supporting regional and local economic activity and growth, such as manufacturing, freight/transportation, consumer services, franchising and commercial real estate. We believe we have also been successful in attracting customers from larger competitors because of our flexible and responsive approach in providing banking solutions tailored to meet our customers’ needs while maintaining disciplined underwriting standards. Our relationship-based approach seeks to grow lending relationships with our customers as they expand their businesses, including geographically and through cross-selling our various other banking products, such as our deposit and treasury management products. We have a growing presence in attractive commercial banking markets, such as Wichita and Kansas City, 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, such as Kansas City and Wichita, that are experiencing business growth and household expansion, as well as stable community markets that present opportunities to expand our market share. As illustrated by the map above on page 7, 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; (vii) involving a broader management team across multiple departments in order to help ensure the successful integration of all business functions; and (viii) scheduling the acquisition

 



 

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closing date to occur simultaneously with the platform conversion date. We believe this approach allows us to realize the benefits of the acquisition and create stockholder value, while appropriately managing risk.

 

    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 and risk management, which we believe will support our continued growth. For example, during 2013 and 2014, we undertook several initiatives designed to strengthen our operations and risk culture, including implementing controls and procedures designed to comply with the applicable requirements of the Federal Deposit Insurance Corporation Improvement Act, or FDICIA, implementing compliance and disaster relief measures, and establishing risk and product development committees. While expanding our infrastructure, several departmental functions have been outsourced to gain the experience of outside professionals while at the same time achieving more favorable economics and cost-effective solutions. Such outsourced areas include the internal audit function, investment securities management, and select loan review. This outsourcing strategy has proven to control costs while adding enhanced controls and/or service levels. We believe that this scalable infrastructure will continue to allow us to efficiently and effectively manage our anticipated growth.

 

    Culture Committed to Talent Development, Transparency and Accountability. We have invested in professional talent since our inception by building a team of “business persons first and bankers second” and economically aligned them with our stockholders, primarily through our stock purchase opportunities. In our efforts to become a destination for seasoned bankers with an entrepreneurial spirit, we have developed numerous leadership development programs. For example, “Equity University” is a year-long program we designed for our promising company-wide leaders. In addition, in 2014 Equity Bank was named one of the “Best Places to Work” by the Wichita Business Journal, and in 2015, the Wichita Business Journal named Equity Bank a “Best in Business” winner. 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, which allows us to tailor our products and services to meet our customers’ needs. In addition to offering a diverse array of banking products and services, we offer our customers the high-touch, relationship-based customer service experience of a community bank. For example, we utilize Flight, a customized customer relationship management system, to assign relationship officers to enhance our relationships with our customers and to 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 more than 60 years of combined banking experience, and our Chief Risk Officer, who has more than 20 years of banking experience. We believe that our enterprise risk management philosophy has been important in gaining and maintaining the confidence of our various constituencies and growing our business and footprint within our markets. We also believe our strong risk management practices are manifested in our asset quality statistics. As of June 30, 2015, our ratio of nonperforming assets to total assets was 1.12% and our ratio of nonperforming loans to total loans was 1.00%.

 



 

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Our Team

Our directors possess significant executive management and board leadership experience across a diverse range of industries, including financial services, private equity, manufacturing, accounting, legal and insurance. Six of our directors have been investors in our Company since inception, and our directors and executive officers beneficially owned an aggregate of approximately 38% of our outstanding common stock as of October 12, 2015. In addition, several of our directors have significant private equity experience, which has provided strategic guidance and facilitated our acquisitions, integration and consolidation during our growth.

Our board of directors oversees the seasoned and experienced members of our executive management team, who have held management-level positions at commercial banking franchises within our markets, including throughout various economic cycles. Our executive management team has a long and successful history of leading acquisition projects, managing organic growth and developing a strong and disciplined credit culture. Our executive management team is supported by our other officers, managers, bankers and employees, who also have significant experience in commercial banking, including areas such as lending, underwriting, credit administration, risk management, finance, operations and information technology. Sharing in our entrepreneurial and ownership-based culture, nearly every member of our executive management team has invested personal funds to acquire equity in our Company, which we believe closely aligns their interests with those of our stockholders.

Our executive management team includes the following officers:

 

    Brad S. Elliott, our Chairman and Chief Executive Officer, founded the Company in 2002. Mr. Elliott has more than twenty years of commercial banking experience in our markets, including previously serving as a Regional President of Sunflower Bank. Mr. Elliott began his career at Home State Bank and Trust in McPherson, Kansas. Mr. Elliott was also Director of Marketing and held finance positions at Koch Industries.

 

    Gregory H. Kossover, our Executive Vice President and Chief Financial Officer, joined Equity Bancshares as a director in December 2011 and became our Executive Vice President and Chief Financial Officer in October 2013. He previously served as Chief Executive Officer of Value Place, LLC, one of the largest economy extended stay lodging franchises in the United States, from 2004 to 2011. Mr. Kossover also previously served as Treasurer of a $1.2 billion publicly-held thrift holding company.

 

    Julie A. Huber, our Executive Vice President and Chief Credit Officer, has served in a variety of leadership roles for Equity Bank over a period of twelve years, including overseeing our operations, human resources, compliance functions and sales and training, and has managed the integration process for each community bank we have acquired. Ms. Huber previously served as President of Signature Bank following our acquisition of Signature Bank in 2007.

 

    Jennifer A. Johnson, our Executive Vice President, Chief Operations Officer and Chief Information Officer, joined Equity Bank in January 2012 after serving as Executive Vice President, Chief Operations Officer and Chief Information Officer for Sunflower Bank for 27 years. Ms. Johnson helped transform Sunflower Bank from a community bank with $100.0 million in assets to a $1.7 billion regional bank serving markets throughout Kansas, Missouri and Colorado.

 

    Sam S. Pepper, Jr., our Executive Vice President and Commercial Banking President, joined Equity Bank in July 2013. Mr. Pepper previously served as Chief Operating Officer and Regional President for Enterprise Bank, and he was employed in various capacities by M&I Bank and BMO Harris Bank for seven years, including most recently as Executive Vice President and Regional Manager for BMO Harris Bank’s commercial banking group in Kansas City.

 

   

Rolando Mayans, our Executive Vice President and Chief Risk Officer, rejoined Equity Bank in 2013, after previously serving as Chief Credit Officer from 2006 to 2009. Prior to rejoining the Company, Mr. Mayans

 



 

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served as Senior Lending Officer of First National Bank of Hutchinson. In addition, he also previously served as Chief Auditor of Fourth Financial Corporation and an audit manager for Fox & Co., which subsequently merged with Grant Thornton LLP.

 

    Patrick J. Harbert, our Executive Vice President and Community Markets President, joined Equity Bank in 2003 as a commercial loan officer. Mr. Harbert previously served as a Market President for Sunflower Bank, and he was also employed in various branch management roles with Commercial Federal Bank, Bank of America and Emprise Bank.

 

    Elizabeth A. Money, our Executive Vice President and Retail Director, joined Equity Bank in 2010. Ms. Money previously served as Vice President, District Manager for U.S. Bank in Kansas City, where she oversaw sixteen U.S. Bank locations in the Kansas City metropolitan area and more than 150 employees for over ten years, and was involved in numerous mergers, business combinations and retail branch integrations.

We have hired, and continue to recruit, talented professionals that we believe are ascending in their careers, have experience at large financial institutions with over $1 billion in assets, have varying entrepreneurial experience outside the banking industry and seek an ownership stake in our Company. We believe lending officers that are aligned with our stockholders through ownership in our Company better adhere to our specific credit requirements and make decisions to build and protect stockholder value and subscribe to our corporate culture.

For additional information about our directors, management team and other key employees, see “Business – Our Board of Directors and Management Team” and “Management – Executive Officers and Directors.”

Our Markets

We currently conduct banking operations through our 25 full service branches located in Kansas and Missouri. We believe that an important factor contributing to our historical performance and our ability to execute our strategy is the attractiveness and specific characteristics of our existing and target markets. In particular, we believe our markets provide us with access to low cost, stable core deposits in smaller community markets that we can use to fund commercial loan growth in metropolitan areas.

We believe our existing and target markets are among some of the most attractive in the Midwestern United States. Our markets are home to thousands of manufacturing and trade jobs, and have experienced recent growth in the healthcare, consumer services and technology sectors. For example, in our two largest markets, Kansas City and Wichita, during 2013 approximately 44% of the real gross domestic product (“GDP”) is related to a range of industries including manufacturing, trade, transportation and professional and business services, according to the Bureau of Economic Analysis. 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. In addition, many of the jobs within these industries in our market are highly specialized, and as a result, employees receive a premium in wages. For example, according to the Bureau of Labor Statistics, during 2014 aerospace engineers in Kansas City, one of our largest markets, received an annual average salary that was 10% higher than the annual average salary received by manufacturing employees in the United States. Our markets also serve as the corporate headquarters for Koch Industries Inc., Hallmark Cards, Inc., H&R Block, Inc., Sprint Corporation, Cerner Corporation, AMC Entertainment Holdings, Inc., Garmin International, Inc., Cessna Aircraft Company, Seaboard Corporation, Cargill Meat Solutions and The Coleman Company and host a major presence for companies across a variety of industries, including Spirit AeroSystems, Inc., Bombardier Learjet, Collective Brands, Inc., Hills Pet Nutrition, Inc., Beechcraft Corporation, Bayer Corporation and Dean & Deluca, Inc. We understand the community banking needs of the businesses and individuals within our markets and have focused on developing a commercial and personal banking platform to service such needs.

 



 

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The markets in which we operate have generally experienced stable population growth over the past five years, with modest population growth expected over the next five years. Wichita is the largest MSA in Kansas with a population of over 640,000, and Kansas City is the 29th largest MSA in the U.S. with a population of more than 2 million. In addition, over the next five years our markets are projected to experience moderate compounded annual growth in consumer and commercial deposits. Our markets are stable and have weathered various economic cycles relatively well. According to the Federal Deposit Insurance Corporation, the aggregate noncurrent loans as a percentage of loans for all reporting institutions in both Kansas and Missouri outpaced those of the United States during pre-recession periods (2005-2007), the most recent recession years (2008-2011) and post-recession years (2012-2014). More specifically, reporting banks nationwide posted average quarterly figures of 0.85%, 4.12% and 3.02% in the respective aforementioned time periods, while Kansas posted average quarterly figures of 0.78%, 2.76%, 1.53%, respectively, and Missouri posted average quarterly figures of 0.70%, 2.86%, and 1.77%, respectively.

The economies of our markets have also demonstrated steady growth. According to the Bureau of Economic Analysis, real GDP in Kansas City and Wichita has grown at a compounded rate of 3.0% and 4.2%, respectively, per year between 2010 and 2013. In addition, during periods of nationwide financial stress, from 2007 to 2011, Kansas City and Wichita outperformed the United States, as measured by real GDP growth rates and unemployment rates. United States real GDP grew at a 1.6% compounded rate between 2007 and 2011, and the United States experienced a 7.7% average monthly unemployment rate, whereas Kansas City and Wichita together realized compounded real GDP growth of 1.7% and experienced average unemployment rates of 7.4% and 6.6%, respectively, according to the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Federal Reserve Bank of St. Louis. These relatively stable markets have allowed for us to achieve steady growth since our inception without the challenging, volatile credit experiences that are sometimes present in rapidly expanding demographic and economic markets.

We compete for loans, deposits and financial services in our markets against many other bank and nonbank institutions, including community banks, regional banks, national banks, Internet-based banks, money market and mutual funds, brokerage houses, mortgage companies and insurance companies. We believe that our comprehensive suite of sophisticated banking products provides us with a competitive advantage over smaller community banks within our markets while our high-quality, relationship-based customer service will allow us to take market share from larger regional and national banks. In addition, our markets present significant acquisition, integration and consolidation opportunities, and we expect to continue to pursue strategic acquisitions in our markets. We believe that many small to mid-sized banking organizations that currently serve our markets are acquisition opportunities for us, either because of scale and operational challenges, regulatory pressures, management succession issues or stockholder liquidity needs. We think we offer an attractive solution for such banks because we retain the community banking feel and services upon which their customers expect and rely.

For more information about our markets, see “Business — Our Markets.”

Recent Developments

Preliminary Third Quarter Results

Our interim financial statements for the third quarter ending September 30, 2015 are not yet available. The following expectations regarding our results for the three and nine months ended September 30, 2015 are solely management’s estimates based on currently available information. Our auditor has not yet completed its review of our results for the three and nine months ended September 30, 2015, and does not express an opinion or any other form of assurance with respect to this information. Our actual results and the final results we report for these periods may differ materially from the preliminary results reported below. This summary information is not

 



 

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a comprehensive statement of our financial results for this period. Please see “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of certain factors that could result in differences between the preliminary financial data reported below and the final results we report for these periods. Tangible common equity, tangible book value per share and return on average tangible common equity are non-GAAP financial measures. Please see “Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for more information on these measures.

We expect to report net income allocable to common stockholders of approximately $2.7 million, or $0.43 per diluted share, for the three months ended September 30, 2015, as compared to $2.5 million, or $0.40 per diluted share for the three months ended June 30, 2015, and $2.3 million, or $0.38 per diluted share, for the three months ended September 30, 2014. For the nine months ended September 30, 2015, we expect to report net income allocable to common stockholders of approximately $7.6 million, or $1.21 per diluted share, as compared to $6.5 million, or $1.02 per diluted share, for the nine months ended September 30, 2014. The increase in our net income allocable to common stockholders was primarily driven by growth in both our loan and securities balances partially offset by an increase in interest expense as we funded the increase in earning assets with increased deposits and borrowings.

We expect our net interest margin to be approximately 3.46% for the quarter ended September 30, 2015, as compared to 3.87% for the three months ended June 30, 2015 and 3.89% for the year ended December 31, 2014. In addition, we expect our net interest margin to be approximately 3.79% for the nine months ended September 30, 2015 compared to 3.92% for the nine months ended September 30, 2014.

The decline in our net interest margin for the quarter and nine-month periods ended September 30, 2015 relates to our purchase of additional investment securities, our utilization of an existing “spread opportunity” and an increase in our 1-4 family loan portfolio in the late second quarter and early third quarter of 2015. In anticipation of our consummating the acquisition of First Independence (see “Expansion Activities” below), we purchased approximately $30 million in investment securities to replace First Independence’s investment portfolio of similar size that did not meet our investment criteria. We have since liquidated First Independence’s investment portfolio. This “spread opportunity” involves borrowing overnight on our line of credit with the Federal Home Loan Bank and investing the proceeds in federal funds sold, resulting in a positive spread of approximately 25 basis points. We utilized the spread opportunity to generate income to help offset the costs associated with the First Independence acquisition and our initial public offering. We can reduce or terminate the spread opportunity each business day and we do not presently anticipate that this opportunity would be a part of our core earnings stream or strategy. In addition, we expect the yield on our loan portfolio to decrease from approximately 5.54% during the second quarter 2015 to 5.08% during the third quarter 2015, based primarily on lower loan fees and an increase in 1-4 family residential loans.

At September 30, 2015, we expect to report consolidated total assets of approximately $1.4 billion, representing an increase of approximately $63 million, or 4.7%, from June 30, 2015 and an increase of approximately $239 million, or 20.3%, from December 31, 2014. We also expect to report loans held for investment of approximately $850.0 million, total deposits of approximately $1.0 billion, total consolidated stockholders’ equity to be approximately $126.1 million and book value per common share to be approximately $17.49. As of the September 30, 2015, we expect nonperforming assets to total assets to be approximately 0.92% and our allowance for loan losses to total loans to be approximately 0.59%, compared to 1.12% and 0.68% respectively, as of June 30, 2015. For the nine months ended September 30, 2015, we expect net charge-offs to average loans to be 0.48%.

We also estimate, as of September 30, 2015, that the ratio of common equity tier 1 capital to risk weighted assets to be approximately 9.37%, and the total capital to risk weighted assets to be approximately 11.49%. We

 



 

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expect to report tangible common equity of approximately $90.6 million and a return on average tangible common equity of approximately 11.97%. We also expect to report tangible book value per common share of approximately $14.45 as of September 30, 2015 (on common shares outstanding of 6,270,727). We estimate that for the nine months ended September 30, 2015, our return on average assets will be approximately 0.80%.

Expansion Activities

On October 9, 2015, as a part of our strategy to purchase financial institutions in our geographic footprint, we closed our acquisition of First Independence and its subsidiary, First Federal Savings & Loan of Independence, which was first announced on July 27, 2015. We paid the shareholders of First Independence $14.7 million in cash as the merger consideration. As of the closing, First Independence operated through four branches and one loan production office, all in our geographic footprint and within approximately 150 miles from our Wichita headquarters. We have closed the loan production office as it is not a part of our strategic direction. As of and for the nine months ended September 30, 2015, we estimate that on a consolidated basis First Independence had approximately $132 million in assets, $89 million in net loans, $87 million in deposits, total consolidated stockholders’ equity of $14 million, tangible common equity of $14 million, non-performing assets/assets of 1.47%, net charge-offs/average loans of 0.04%, allowance for loan losses/total loans of 1.85%, return on average assets of 0.14%, return on average tangible common equity of 1.39%, and a net interest margin of 3.55%.

We estimate that as of and for the nine months ended September 30, 2015, on a combined basis (without applying purchase accounting), Equity and First Independence had approximately $1.5 billion in assets, $939 million in net loans, $1.1 billion in deposits, total consolidated stockholders’ equity of $126.1 million, tangible common equity of $105 million, non-performing assets/assets of 0.97%, net charge-offs/average loans of 0.43%, allowance for loan losses/total loans of 0.71%, return on average assets of 0.74%, return on average tangible common equity of 10.51%, and a net interest margin of 3.75%. We expect to record goodwill from the acquisition of between approximately $500 thousand and $1.5 million. We also increased our bank stock loan $5.0 million, on the same terms as our previous bank stock loan, in order to provide the working capital necessary to close the acquisition.

Risk Factors

Investing in our Class A common stock involves risks. For a discussion of these risks and other considerations that could negatively affect us, including risks related to this offering and our Class A common stock, see “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These risks include, among others:

 

    Our business is concentrated in, and largely dependent upon, the continued growth and welfare of the general geographic markets in which we operate.

 

    A return of recessionary conditions or difficult conditions in the market for financial products and services, which could result in increases in our level of nonperforming loans and/or reduced demand for our products and services.

 

    As we rely heavily on our management team and our bankers, we could be adversely affected by the unexpected departure of key members of our management and banking teams.

 

    We operate in a highly competitive industry and face significant competition from other financial institutions and financial services providers, which may decrease our growth or profits.

 

    Our financial performance will be negatively impacted if we are unable to execute on our growth strategy.

 

   

Our actual financial results for the three and nine month periods ended September 30, 2015 may differ materially from the preliminary financial estimates we have provided as a result of the completion of our

 



 

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financial closing procedures, final adjustments and other developments arising between now and the time that our financial results for such periods are finalized.

 

    As our largest loan and depositor relationships make up a significant percentage of our total loan and deposit portfolios, respectively, the loss of any of these relationships could negatively affect our earnings and capital.

 

    Acquisitions may disrupt our business and dilute stockholder value, and integrating acquired companies may be more difficult, costly, or time-consuming than we expect.

 

    We may not be able to adequately measure and limit the credit risk associated with our portfolio, which could adversely affect our profitability, and 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.

 

    Market interest rates for loans, investments, and deposits are highly sensitive to many factors beyond our control.

 

    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.

 

    A decline in liquidity 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.

 

    Volatility in commodity prices may adversely affect our financial condition and results of operations.

 

    A large portion of our loan portfolio is comprised of commercial and industrial loans, which 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 losses.

 

    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.

 

    We are subject to extensive regulation in the conduct of our business, which imposes additional costs on us and adversely affects our profitability.

Corporate Information

Our principal executive offices are located at 7701 East Kellogg Drive, Suite 200, Wichita, Kansas 67207 and our telephone number is (316) 612-6000. Our website is www.equitybank.com. We expect to make our periodic reports and other information filed with, or furnished to, the SEC available free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with, or furnished to, the SEC. The information on, or otherwise accessible through, our website or any other website does not constitute a part of this prospectus.

 



 

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THE OFFERING

 

Shares of Class A common stock offered by us

   1,650,000 shares (or 1,941,000 shares, if the underwriters exercise their over-allotment option in full).

Shares of Class A common stock offered by selling
stockholders

  

 

290,000 shares of Class A common stock (which includes 273,000 shares of Class A common stock issuable upon the automatic conversion of an equal number of shares of Class B common stock as a result of this offering).

Shares of Class A common stock to be outstanding after this offering

  

 

6,859,017 shares (or 7,150,017 shares, if the underwriters exercise their over-allotment option in full).

Option to purchase additional shares

   We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase an additional 291,000 shares of our Class A common stock at the initial public offering price less the underwriting discount to cover over-allotments, if any.

Securities owned by directors and executive officers

   Our directors and executive officers beneficially owned 2,003,763 shares of our Class A common stock and 426,788 shares of our Class B common stock as of October 12, 2015. We expect our directors and executive officers to purchase approximately 8,355 shares of our Class A common stock in this offering.

Voting rights

   One vote per share of Class A common stock.

Use of proceeds

  

We estimate that the net proceeds to us from the sale of our Class A common stock in this offering will be $33.0 million (or $39.2 million if the underwriters exercise their over-allotment option in full), after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

 

We intend to use approximately $16.4 million of the net proceeds to redeem, as promptly as practicable following the completion of this offering, the outstanding 16,372 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, that we issued to the U.S. Department of Treasury in August 2011 in connection with the Small Business Lending Fund Program, which we refer to as our Series C preferred stock. Although we intend to use a portion of the net proceeds of this offering to redeem all outstanding shares of Series C preferred stock as promptly as practicable following the completion of this offering, the

 



 

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redemption is subject to regulatory approval, and accordingly, no assurance can be given as to when we will be able to redeem such shares, if at all. We intend to use the remaining net proceeds (which will be approximately $16.6 million) to support our organic growth and for other general corporate purposes, including to fund potential future acquisitions of bank and non-bank financial services companies that we believe are complementary to our business and consistent with our growth strategy (although we do not have any definitive agreements in place to make any such acquisitions at this time) and to maintain our capital and liquidity ratios at acceptable levels, including following acquisitions or as a result of organic growth.

 

We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders.

 

See “Use of Proceeds.”

Dividend policy

   We have not historically declared or paid cash dividends on our common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be retained to support our operations and finance the growth and development of our business. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend upon our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors that our board of directors deems relevant. See “Dividend Policy.”

Rank

   Our common stock is subordinate to our existing bank stock loan, trust preferred securities and Series C preferred stock, with respect to the payment of dividends and the distribution of assets upon liquidation. In addition, our common stock will be subordinate to any of our current indebtedness and any debt that we may issue in the future and may be subordinate to any new series of preferred stock that we may issue in the future. As of June 30, 2015, we had $23.5 million in total indebtedness and 16,372 shares of Series C preferred stock outstanding, with a liquidation preference of $1,000 per share (which we plan to redeem, as promptly as practicable following the completion of this offering, with a portion of the net proceeds of this offering).

 



 

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Listing and trading symbol

   We have been approved to list our Class A common stock on the NASDAQ Global Select Market under the symbol “EQBK,” subject to notice of issuance.

Directed share program

   At our request, the underwriters reserved for sale, at the initial public offering price, 49,525 shares of Class A common stock offered by this prospectus for sale to our directors, officers, employees, business associates and related persons. We will offer these shares to the extent permitted under applicable regulations in the United States through a directed share program. Reserved shares purchased by our directors and officers will be subject to the lock-up provisions described in “Underwriting – Lock-Up Agreements.” The number of shares of our Class A common stock available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Any reserved shares of our Class A common stock that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of our Class A common stock offered by this prospectus.

Risk factors

   Investing in our Class A common stock involves risks. You should carefully read and consider the information set forth under the headings “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” along with all of the other information set forth in this prospectus before deciding to invest in our Class A common stock.

References in this section to the number of shares of our Class A common stock outstanding after this offering are based on 4,936,017 shares of our Class A common stock issued and outstanding as of October 12, 2015 and gives effect to the automatic conversion of 273,000 shares of Class B common stock into an equal number of shares of Class A common stock as a result of this offering. Unless otherwise noted, these references exclude:

 

    430,271 shares of Class A common stock issuable upon the exercise of outstanding stock options at October 12, 2015 at a weighted average exercise price of $13.61 per share;

 

    294,729 shares of Class A common stock reserved at October 12, 2015 for issuance in connection with stock options that remain available for issuance under our 2013 Stock Incentive Plan; and

 

    1,061,710 shares of Class A common stock issuable upon the conversion of Class B common stock that are not included in this offering.

Unless otherwise indicated, the information contained in this prospectus is as of the date set forth on the cover page of this prospectus, assumes that the underwriters do not exercise their option to purchase any additional shares of Class A common stock to cover over-allotments, if any.

 



 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth selected historical consolidated financial and other data (i) as of and for the six months ended June 30, 2015 and 2014 and (ii) as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010. Selected consolidated financial data as of and for the years ended December 31, 2014 and 2013 have been derived from our audited financial statements included elsewhere in this prospectus. We have derived the selected consolidated financial data as of and for the years ended December 31, 2012, 2011 and 2010 from our audited financial statements not included in this prospectus. Selected financial data as of and for the six months ended June 30, 2015 and 2014 have been derived from our unaudited financial statements included elsewhere in this prospectus and have not been audited but, in the opinion of our management, contain all adjustments (consisting of only normal or recurring adjustments) necessary to present fairly our financial position and results of operations for such periods in accordance with generally accepted accounting principles, or GAAP. Our historical results are not necessarily indicative of any future period. The performance, asset quality and capital ratios are unaudited and derived from our audited and unaudited financial statements as of and for the periods presented. Average balances have been calculated using daily averages, unless otherwise denoted.

 

    Six Months Ended
June 30,
    Years Ended December 31,  

(Dollars in thousands,

except per share information)

          2015                     2014             2014     2013     2012     2011     2010  

Statement of Income Data

             

Interest and dividend income

  $ 25,244      $ 22,968      $ 46,411      $ 46,375      $ 30,333      $ 23,148      $ 22,130   

Interest expense

    2,900        2,485        5,433        5,610        4,763        5,258        6,348   

Net interest income

    22,344        20,483        40,978        40,765        25,570        17,890        15,782   

Provision for loan losses

    1,330        900        1,200        2,583        1,656        1,202        1,264   

Net gain on sale of securities

    370        94        986        500        3        425        206   

Other non-interest income(1)

    4,412        4,129        8,493        8,356        4,823        1,827        2,754   

Non-interest expense

    18,227        16,950        36,067        35,631        22,900        15,918        15,354   

Income before income tax

    7,569        6,856        13,190        11,407        5,840        3,022        2,124   

Provision for income taxes

    2,559        2,081        4,203        3,534        1,654        750        602   

Net income

    5,010        4,775        8,987        7,873        4,186        2,272        1,522   

Dividends and discount accretion on preferred stock

    86        565        708        978        372        901        571   

Net income allocable to common stockholders

    4,924        4,210        8,279        6,895        3,814        1,371        951   

Balance sheet (at period end)

             

Cash and cash equivalents

  $ 19,626      $ 22,618      $ 31,707      $ 20,620      $ 100,371      $ 40,005      $ 9,279   

Securities available for sale

    72,103        86,531        52,985        65,450        217,287        155,916        117,552   

Securities held to maturity

    306,100        278,821        261,017        284,407        36,013        40,721        44,190   

Loans held for sale

    2,251        3,036        897        347        2,252        2,803        1,876   

Loans, net of allowance for loan losses

    828,473        676,241        719,284        653,345        717,607        326,723        280,528   

Gross Loans

    836,367        685,379        726,144        659,306        724,330        333,879        286,051   

Allowance for loan losses

    5,643        6,102        5,963        5,614        4,471        4,353        3,647   

Goodwill and core deposit intangibles, net

    19,116        19,423        19,237        19,600        20,087        13,920        12,732   

Total assets

    1,351,479        1,181,413        1,175,323        1,140,074        1,188,850        609,998        491,909   

Total deposits

    1,003,801        966,531        980,966        947,144        993,128        479,410        374,066   

Borrowings

    214,566        79,882        70,370        43,365        48,277        44,292        40,950   

Total liabilities

    1,229,731        1,053,870        1,057,594        1,000,201        1,050,681        529,182        421,126   

Total stockholders’ equity

    121,748        127,543        117,729        139,873        138,169        80,816        70,783   

Tangible common equity

    86,269        76,224        82,133        88,381        86,198        50,559        49,651   

Preferred Equity

    16,363        31,896        16,359        31,892        31,884        16,337        8,400   

Selected Performance Ratios

             

Return on average assets (ROAA)(2)(3)

    0.82     0.84     0.78     0.67     0.58     0.45     0.33

Return on average equity (ROAE)(2)(3)

    8.45     7.37     7.30     5.71     4.10     3.02     2.53

Return on average tangible common equity (ROATCE)(2)(5)

    11.98     10.60     9.99     8.27     5.76     2.98     2.86

Net interest margin (NIM)(2)(3)

    3.98     3.97     3.89     3.83     3.85     3.76     3.76

Efficiency ratio

    66.94     68.87     72.91     72.54     75.35     80.73     82.83

Non-interest income / average assets(2)(3)

    0.78     0.74     0.82     0.75     0.67     0.45     0.64

Non-interest expense / average assets(2)(3)

    2.98     2.98     3.11     3.03     3.17     3.18     3.30

Yield on loans(2)(3)

    5.61     5.73     5.58     5.58     6.03     6.40     6.41

Cost of interest-bearing deposits(2)(3)

    0.45     0.43     0.44     0.47     0.83     1.39     1.62

 



 

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    Six Months Ended
June 30,
    Years Ended December 31,  

(Dollars in thousands,

except per share information)

  2015     2014     2014     2013     2012     2011     2010  

Nonperforming assets

             

Nonaccrual loans

  $ 7,531      $ 10,001      $ 10,790      $ 12,985      $ 10,247      $ 4,611      $ 4,347   

Other real estate and repossessed assets

    6,741        5,956        4,754        7,332        9,582        3,556        4,042   

Troubled debt restructurings

    0        0        0        0        1,015        0        0   

Loans past due 90 days or more and still accruing

    824        50        39        174        48        1        0   

Total nonperforming assets

    15,096        16,007        15,583        20,491        20,892        8,168        8,389   

Asset Quality Ratios

             

Nonperforming assets / Assets

    1.12     1.35     1.33     1.80     1.76     1.34     1.71 % 

Nonperforming assets / Loans + OREO

    1.80     2.33     2.13     3.08     2.86     2.44     2.91

Net charge-offs (recoveries) to average loans(2)

    0.44     0.13     0.12     0.21     0.37     0.16     0.51

Allowance for loan losses to total loans

    0.68     0.89     0.82     0.85     0.62     1.31     1.28

Allowance for loan losses to nonperforming loans

    67.54     60.71     55.07     42.66     39.53     94.38     83.90

Capital ratios (at period end)

             

Tier 1 Leverage Ratio

    8.44     10.63     9.62     11.59     12.55     12.51     12.61

Tier 1 Common Capital Ratio

    9.47     n/a        n/a        n/a        n/a        n/a        n/a   

Tier 1 Risk Based Capital Ratio

    11.17     15.03     13.16     17.01     15.87     17.60     17.76

Total Risk Based Capital Ratio

    11.76     15.80     13.86     17.74     16.47     18.76     18.87

Equity / Assets

    9.01     10.80     10.02     12.27     11.62     13.25     14.39

Tangible common equity to tangible assets

    6.47     6.56     7.10     7.89     7.38     8.48     10.36

Per Share Outstanding Data(4)

             

Basic earnings per share

  $ 0.79      $ 0.65      $ 1.31      $ 0.93      $ 0.66      $ 0.30      $ 0.33   

Diluted earnings per share

    0.78        0.64        1.30        0.92        0.65        0.30        0.33   

Common shares issued and outstanding at period end

    6,270,727        6,064,943        6,067,511        7,385,603        7,431,513        4,550,206        4,550,206   

Weighted average diluted shares

    6,287,810        6,555,256        6,373,149        7,492,020        5,863,543        4,550,206        2,845,829   

Book value per share

  $ 16.81      $ 15.77      $ 16.71      $ 14.62      $ 14.30      $ 14.17      $ 13.71   

Tangible book value per share

    13.76        12.57        13.54        11.97        11.60        11.11        10.91   

Composition of Loans Held for Investment

             

Commercial real estate

  $ 363,171        330,354      $ 363,467      $ 340,177      $ 366,251      $ 185,837      $ 160,181   

Commercial and industrial

    242,578        161,119        183,100        139,365        126,771        92,117        72,763   

Residential real estate

    186,150        143,848        134,455        125,395        170,726        40,399        36,702   

Agricultural real estate

    18,280        17,938        17,083        22,092        27,155        2,658        3,161   

Consumer

    9,522        7,835        7,875        7,961        11,361        2,733        3,799   

Agricultural

    14,415        21,249        19,267        23,969        19,814        7,332        7,569   

Deposit Composition

             

Demand

  $ 34,187        47,705      $ 49,312      $ 47,682      $ 57,965      $ 23,610      $ 15,188   

Savings, NOW and money market

    596,895        545,221        589,494        536,252        535,160        228,778        192,637   

Time deposits less than $100,000

    127,035        151,416        122,436        140,395        164,623        93,022        83,852   

Time deposits greater than or equal to $100,000

    245,684        222,189        219,724        222,815        235,380        134,000        82,389   

 

(1) Excludes securities gains (losses).
(2) Interim period calculations annualized.
(3) The value for 2010 was calculated using a simple average.
(4) Share and per share data includes Class A and Class B common stock issued and outstanding.
(5) All periods disclosed were calculated using a simple average of tangible common equity.

 



 

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Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial measures included in our selected historical consolidated financial and other data are not measures of financial performance recognized by GAAP. These non-GAAP financial measures include tangible common equity, return on average tangible common equity, efficiency ratio, tangible book value per share, and tangible common equity to tangible assets. Our management uses the non-GAAP financial measures set forth below in its analysis of our performance.

 

    “Tangible common equity” is total stockholders’ equity less goodwill, other intangible assets and preferred stock.

 

    “Tangible book value per share” is defined as tangible common equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets.

 

    “Tangible common equity to tangible assets” is defined as the ratio of stockholders’ equity less goodwill, other intangible assets and preferred stock, divided by total assets less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period-to-period in equity and total assets, each exclusive of changes in intangible assets.

 

    “Average tangible common equity” is defined as the average of our tangible common equity for the applicable period.

 

    “Return on average tangible common equity,” or ROATCE, is defined as net income available to common stockholders divided by average tangible common equity.

 

    “Efficiency ratio” is defined as noninterest expense not including loss on extinguishment of debt, divided by our operating revenue (which is equal to net interest income plus noninterest income) excluding gains and losses on sales of securities. This measure is important to investors looking for a measure of efficiency in our productivity measured by the amount of revenue generated for each dollar spent.

 



 

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We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures.

 

    Six Months Ended        
    June 30,     Years Ended December 31,  

(Dollars in thousands, except per share
information)

          2015                   2014           2014     2013     2012     2011     2010  

Total stockholders’ equity

  $ 121,748      $ 127,543      $ 117,729      $ 139,873      $ 138,169      $ 80,816      $ 70,783   

Less: Preferred equity

    16,363        31,896        16,359        31,892        31,884        16,337        8,400   

Less: intangible assets

    19,116        19,423        19,237        19,600        20,087        13,920        12,732   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

  $ 86,269      $ 76,224      $ 82,133      $ 88,381      $ 86,198      $ 50,559      $ 49,651   

Common shares issued and outstanding at year or period end(1)

    6,270,727        6,064,943        6,067,511        7,385,603        7,431,513        4,550,206        4,550,206   

Tangible book value per share

  $ 13.76      $ 12.57      $ 13.54      $ 11.97      $ 11.60      $ 11.11      $ 10.91   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at end of period

  $ 1,351,479      $ 1,181,413      $ 1,175,323      $ 1,140,074      $ 1,188,850      $ 609,998      $ 491,909   

Less: intangible assets

    19,116        19,423        19,237        19,600        20,087        13,920        12,732   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total tangible assets at end of period

    1,332,363        1,161,990        1,156,086        1,120,474        1,168,763        596,078        479,177   

Tangible common equity to tangible
assets

    6.47     6.56 %      7.10     7.89     7.38     8.48     10.36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total average stockholders’ equity(2)

  $ 119,614      $ 130,623      $ 123,174      $ 137,913      $ 102,032      $ 75,253      $ 60,122   

Less: average intangible assets and preferred stock

    (35,413     (48,320     (37,917     (50,623     (33,653     (25,148     (21,380
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible common equity(1)(5)

  $ 84,201      $ 82,303      $ 85,257      $ 87,290      $ 68,379      $ 50,105      $ 38,742   

Amortization of core deposit intangible

    121        178        363        487        192        182        237   

Net income allocable to common stockholders(1)

    4,924        4,210        8,279        6,895        3,814        1,371        951   

Return on average tangible common equity (ROATCE)(3)(4)

    11.98     10.60 %      9.99     8.27     5.76     2.98     2.86
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency ratio:

             

Net interest income

  $ 22,344      $ 20,483      $ 40,978      $ 40,765      $ 25,570      $ 17,890      $ 15,782   

Total non-interest income

    4,782        4,223        9,479        8,856        4,826        2,252        2,960   

Less: gain (loss) on sale of securities

    370        94        986        500        3        425        206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating revenue

  $ 26,756      $ 24,612      $ 49,471      $ 49,121      $ 30,393      $ 19,717      $ 18,536   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

             

Total non-interest expenses

  $ 18,227      $ 16,950      $ 36,067      $ 35,631      $ 22,900      $ 15,918      $ 15,354   

Less: loss on debt extinguishment

    316        -        -        -        -        -        -   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense excluding loss on debt extinguishment

  $ 17,911      $ 16,950      $ 36,067      $ 35,631      $ 22,900      $ 15,918      $ 15,354   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency ratio

    66.94     68.87 %      72.91     72.54     75.35     80.73     82.83

 

(1) Share and per share data includes Class A and Class B common stock issued and outstanding.
(2) The value for 2010 was calculated using a simple average.
(3) (Annualized net income allocable to common stockholders plus after tax effect of intangible amortization) divided by average tangible common equity.
(4) Tax rates used in this calculation were 35% for 2015 and 2014 and 34% for 2013, 2012, 2011 and 2010.
(5) All periods disclosed were calculated using a simple average of tangible common equity.

 



 

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RISK FACTORS

Investment in our Class A common stock involves risks. In addition to the other information contained in this prospectus, including the matters addressed under “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the following factors before deciding to invest in shares of our Class A common stock. The occurrence of any of these risks could have a material adverse effect on our business, prospects, results of operations or financial condition, in which case the trading price of our Class A common stock could decline and you could lose all or part of your investment. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business and results of operations.

Risks Related to Our Business

Our business is concentrated in, and largely dependent upon, the continued growth and welfare of the general geographic markets in which we operate.

Our commercial banking operations are primarily concentrated in Kansas and Missouri. As of June 30, 2015, approximately 85% of our total loans were to borrowers located in Kansas and Missouri. 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.

A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduced demand for our products and services, which could have an adverse effect on our results of operations.

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. Since the conclusion of the last recession, economic growth has been slow and uneven, and unemployment levels remain high. 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.

Difficult conditions in the market for financial products and services may materially and adversely affect our business and results of operations.

Dramatic declines in the housing market during the previous recessionary period, along with increased foreclosures and unemployment, resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, caused many financial institutions to seek additional capital, to merge with larger and stronger institutions, and, in some cases, to fail. This market turmoil and tightening of credit led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally. Although conditions have improved, a return of these trends could have a material adverse effect on our business and operations. Negative market developments may affect consumer confidence

 

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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.

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 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 borrowers whose businesses have been less negatively impacted by the challenging economic conditions of the last few years. We compete with both large regional and national financial institutions, who are sometimes able to offer more attractive interest rates and other financial terms than we choose to offer, as well as other community-based banks who seek to offer a similar level of service to that which we offer. This competition can make 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.

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.

 

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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 approvals, which have become substantially more difficult, time-consuming and unpredictable as a result of the recent financial crisis. Additionally, any future acquisition 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 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

 

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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 loan losses and complying with regulatory accounting requirements, including increased loan losses, reduced earnings and potential regulatory penalties and restrictions on growth, all could have a negative effect on our business, financial condition and results of operations.

Acquisitions may disrupt our business and dilute stockholder value, and integrating acquired companies 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 your investment. In addition, we may fail to realize some or all of the anticipated benefits of completed acquisitions. We anticipate that the integration of First Independence and other 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, including our acquisition of First Independence, 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;

 

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    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 operation.

There are material limitations with making preliminary estimates of our financial results as of and for the three and nine month periods ended September 30, 2015 prior to the completion of our and our auditors’ financial review procedures for such period.

The preliminary financial estimates contained in “Prospectus Summary—Recent Developments” are not a comprehensive statement of our financial results as of and for the three and nine month periods ended September 30, 2015, and our auditors have not yet completed their review of such financial results. Our financial statements for the three and nine month periods ended September 30, 2015 will not be available until after this offering is completed and, consequently, will not be available to you prior to investing in this offering. Our actual financial results for the three and nine month periods ended September 30, 2015 may differ materially from the preliminary financial estimates we have provided as a result of the completion of our financial closing procedures, final adjustments and other developments arising between now and the time that our financial results for such periods are finalized. The preliminary financial data included herein have been prepared by, and are the responsibility of, management. Crowe Chizek LLP, our independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to such preliminary estimates. Accordingly, Crowe Chizek LLP does not express an opinion or any other form of assurance with respect thereto.

Our largest loan relationships currently make up a material percentage of our total loan portfolio.

As of June 30, 2015, our ten largest loan relationships totaled over $142.6 million in loan exposure, or 17.1% of the total loan portfolio. The concentration risk associated with having a small number of large loan relationships is that, if one or more of these relationships were to become delinquent or suffer default, we could be at serious risk of material losses. The allowance for loan losses 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 and inhibit our ability to execute our business plan.

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 June 30, 2015, our ten largest non-brokered depositors accounted for $174.7 million in deposits, or approximately 17.4% of our total deposits. Further, our non-brokered deposit account balance was $989.9 million, or approximately 98.6% of our total deposits, as of June 30, 2015. 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

 

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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 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, which may impair a borrower’s ability to repay a loan, and such impairment 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.

In our business, we must effectively manage our credit risk.

As a lender, we are exposed to the risk that our loan customers may not repay their loans according to the terms of these loans and the collateral securing the payment of these loans may be insufficient to fully

 

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compensate us for the outstanding balance of the loan plus the costs to dispose of the collateral. We may experience significant loan losses, which could have a material adverse effect on our operating results and financial condition. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the diversification by industry of our commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume, growth and composition of our loan portfolio, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers and the evaluation of our loan portfolio through our internal loan review process and other relevant factors.

We maintain an allowance for credit losses, which is an allowance established through a provision for loan 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. Material additions to the allowance could materially decrease our net income.

In addition, banking regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further charge-offs, based on judgments different than those of our management. Any increase in our allowance for credit losses or charge-offs as required by these regulatory agencies could have a material negative effect on our operating results, financial condition and liquidity.

We may not be able to adequately measure and limit the credit risk associated with our loan portfolio, which could adversely affect our profitability.

As a part of the products and services that we offer, we make commercial and commercial real estate loans. The principal economic risk associated with each class of loans is the creditworthiness of the borrower, which is affected by the strength of the relevant business market segment, local market conditions, and general economic conditions. Additional factors related to the credit quality of commercial loans include the quality of the management of the business and the 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.

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 Board of Governors of the Federal Reserve System, or the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. The primary impact of inflation on our operations most likely will be reflected in increased operating costs. Conversely, deflation generally will tend to erode collateral values and diminish loan quality. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.

Our profitability is vulnerable to 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).

 

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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. As of June 30, 2015, this simulation analysis indicated that if prevailing interest rates immediately decreased by 100 basis points, we would expect net interest income to decrease by approximately $1.7 million, or 3.7%, over the next 12 months, and a decline in the economic value of equity of $6.7 million, or 3.0%. Conversely, if prevailing interest rates immediately increased by 300 basis points, we would expect net interest income to decrease by approximately $5.5 million, or 12.0%, over the next 12 months, and an increase in the economic value of equity of $63.3 million, or 24.0%. However, fluctuations in interest rates affect different classes of income-earning assets differently, and there can be no assurance as to the actual effect on our results of operations should such an increase or decrease occur.

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 “Management Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity and 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.

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

 

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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 materially adversely affect 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.

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 our Kansas and Missouri 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 loan losses and our operating results and financial condition.

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 significant portion of our loan portfolio is secured by either residential or commercial real estate. As of June 30, 2015, we had approximately $363.2 million in commercial real estate loans outstanding and $186.2 million in residential real estate loans outstanding, representing approximately 43.5% and 22.3%, respectively, of our total loans outstanding on that date.

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 loan loss allowance 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 Kansas and Missouri markets. Because the value of this

 

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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 two markets limits our ability to diversify the risk of such occurrences.

A large portion of our loan portfolio is comprised of commercial and industrial loans, which 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 losses.

As of June 30, 2015, we had approximately $242.6 million, or approximately 29.1% of our total loan portfolio, of commercial and industrial loans that were collateralized by general business assets, including, among other things, accounts receivable, inventory and equipment. These commercial and industrial 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 and industrial credits have been higher than losses in other segments 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 and industrial loans and expose us to future losses. An increase in specific reserves and charge-offs related to our commercial and industrial 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. As of June 30, 2015, $74.8 million, or approximately 9.0% of our total loans, consisted of participations or syndicated transactions in which we were not the lead 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.

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

 

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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.

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.

We operate in a highly competitive industry and face significant competition from other financial institutions and financial services providers, which may 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 the current low interest rate environment, competitors with lower costs of capital may solicit our customers to refinance their loans with a lower interest rate. Further, increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect our ability to market our products and services. Technology has lowered barriers to entry and made it possible for banks to compete in our market areas without a retail footprint by offering competitive rates, and for non-banks to offer products and services traditionally provided by banks.

The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge

 

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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.

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 to small to medium-sized businesses, which may expose us to greater lending risks than those of banks that lend to larger, better-capitalized businesses with longer operating histories. In addition, our legally mandated lending limits are lower than those of certain of our competitors that have more capital than we do. These lower lending limits may discourage borrowers 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 business plans and financial projections are based upon numerous assumptions about future events, and our actual financial performance may differ materially from our anticipated performance 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.

 

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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.

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 drop in crude oil and natural gas prices. In addition, we make loans to customers involved in the agricultural industry, many of whom are also impacted by fluctuations in commodity prices. Volatility in commodity prices could adversely impact the ability of borrowers in these industries to perform under the terms of their borrowing arrangements with us, and as a result, a severe and prolonged decline in commodity prices may adversely 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.

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 environmental risk in our lending activities.

Because a significant portion of our loan portfolio is secured by real property, we may foreclose upon and take title to such property in the ordinary course of business. If hazardous substances are found on such property, we could be liable for remediation costs, as well as for personal injury and property damage. Environmental laws might require us to incur substantial expenses, materially reduce the 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.

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

 

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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. We are under continuous threat of loss due to 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 cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. Therefore, the secure processing, transmission, and storage of information in connection with our online banking services are critical elements of our operations. However, our network could be vulnerable to unauthorized access, computer viruses and other malware, phishing schemes, or other security failures. In addition, our customers may use personal smartphones, tablet PCs, or other mobile devices that are beyond our control systems in order to access our products and services. Our technologies, systems and networks, and our customers’ devices, may become the target of cyber-attacks, electronic fraud, or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of our or our customers’ confidential, proprietary, and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations. As cyber threats continue to evolve, we may be required to spend significant capital and other resources to protect against these threats or to alleviate or investigate problems caused by such threats. To the extent that our activities or the activities of our customers involve the processing, storage, or transmission of confidential customer information, 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. While we have not experienced any material losses relating to cyber-attacks or other information security breaches to date, we may suffer such losses in the future. The occurrence of any cyber-attack or information security breach could result in potential liability to clients, 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.

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

 

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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 one of our employees 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.

 

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Adverse weather or manmade 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 Kansas and Missouri markets, which have been, and may continue to be, susceptible to natural disasters, such as droughts, tornadoes, 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 manmade events will affect our operations or the economies in our current or future market areas, but such events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing our loans, and an increase in delinquencies, foreclosures, or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or manmade 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 non-performing assets, net charge-offs, and provision for loan losses. Such risks could also impair the value of collateral securing loans and hurt our deposit base.

We are or may become 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.

 

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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 on our business, financial condition and results of operations.

Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired.

Our goodwill impairment test involves a two-step process. Under the first step, the estimation of fair value of the reporting unit is compared to its carrying value including goodwill. If step one indicates a potential impairment, the second step is performed to measure the amount of impairment, if any. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of June 30, 2015, our goodwill totaled $18.1 million. While we have not recorded any impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of our existing goodwill or goodwill we may acquire in the future will not result in findings of impairment and related write-downs, which could adversely affect our business, financial condition and results of operations.

We have pledged all of the stock of Equity Bank as collateral for a loan and if the lender forecloses, you could lose your investment.

We have pledged all of the stock of Equity Bank as collateral for a third-party loan, which had a balance of $14.4 million as of June 30, 2015. 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 could lose the entire amount of your investment.

The dividend rate on our Series C preferred stock fluctuates based on the changes in our “qualified small business lending” and other factors and may increase, which could have a material adverse effect on our income to common stockholders.

We issued $16.4 million in Series C preferred stock to the U.S. Department of Treasury, or the U.S. Treasury, in August 2011 in connection with the Small Business Lending Fund program. The dividend rate of such preferred stock is subject to adjustment over the second through tenth quarterly dividend periods and could be as high as 5.0% per annum if our “qualified small business lending” decreases below certain levels or we fail to comply with certain other terms of our Series C preferred stock. From the eleventh quarterly dividend period through four and one-half years from our issuance of the Series C preferred stock, the annual dividend rate will be fixed at a rate between 1.0% and 7.0%, based upon the level of our “qualified small business lending” at the end of the ninth dividend period. In addition, if our “qualified small business lending” at the end of the ninth dividend period does not exceed our baseline calculation, we will also be subject to a lending incentive fee of 2.0% per annum, payable quarterly, calculated based on the liquidation value of our Series C preferred stock, beginning with dividend payment dates on or after January 1, 2014 and ending on January 1, 2016. The dividend rate is currently fixed at 1% but increases to a fixed rate of 9.0% after December 2015. Although we intend to use a portion of the net proceeds of this offering to redeem all outstanding shares of Series C preferred stock as promptly as practicable following the completion of this offering, the redemption is subject to regulatory approval, and accordingly, no assurance can be given as to when we will be able to redeem such shares, if at all. Since issuance, we have maintained our “qualified small business lending” at levels that would enable us to qualify for the lowest dividend rate. If we are unable to maintain our “qualified small business lending” at certain levels, if we fail to comply with certain other terms of our Series C preferred stock, or if we are unable to redeem our Series C preferred stock by December 2015, the dividend rate on our Series C preferred stock could result in materially greater dividend payments, which in turn could have a material adverse effect on our business, financial condition, results of operations and future prospects.

 

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Failure to pay dividends on our Series C preferred stock may have adverse consequences, including external involvement on our board of directors.

If dividends on the shares of Series C preferred stock that we issued to the U.S. Treasury in August 2011 are not paid in full for six quarterly dividend periods, whether or not consecutive and if the aggregate liquidation preference amount of the then-outstanding shares of Series C preferred stock is at least $25.0 million, the total number of positions on our board of directors will automatically increase by two and the holders of the Series C preferred stock, acting as a single class, will have the right to elect two individuals to serve in the new director positions. This right and the terms of such directors will end when we have paid full dividends for at least four consecutive quarterly dividend periods. If full dividends have not been paid on the Series C preferred stock for five or more quarterly dividend periods, whether or not consecutive, we must invite a representative selected by the holders of a majority of the outstanding shares of Series C preferred stock, voting as a single class, to attend all meetings of our board of directors in a nonvoting observer capacity. Any such representative would not be obligated to attend any board meeting to which he or she is invited and this right will end when we have paid full dividends for at least four consecutive dividend periods.

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.

Risks Related to the Regulation of Our Industry

We are subject to extensive regulation in the conduct of our business, which imposes additional costs on us and adversely affects our profitability.

As a bank holding company, we are subject to federal regulation under the Bank Holding Company Act of 1956, as amended, or the BHC Act, and the examination and reporting requirements of the Federal Reserve. Federal regulation of the banking industry, along with tax and accounting laws, regulations, rules, and standards, may limit our operations significantly and control the methods by which we conduct business, as they limit those of other banking organizations. Banking regulations are primarily intended to protect depositors, deposit insurance funds, and the banking system as a whole, and not stockholders or other creditors. These regulations affect lending practices, capital structure, investment practices, dividend policy, and overall growth, among other things. For example, federal and state consumer protection laws and regulations limit the manner in which we may offer and extend credit. In 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.

 

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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 Office of the State Bank Commissioner of Kansas, or the OSBC, and we are subject to examination by the Federal Reserve. Accommodating such examinations may require management to reallocate resources, which would otherwise be used in the day-to-day operation of other aspects of our business. If, as a result of an examination, any such banking agency was to determine that the financial condition, capital resources, allowance for loan losses, asset quality, earnings prospects, management, liquidity, or other aspects of our operations had become unsatisfactory, or that we or our management were in violation of any law or regulation, such banking agency may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, our officers, or directors, to remove officers and directors, and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such a regulatory action, it could have a material adverse effect on our business, financial condition, and results of operations.

Federal Deposit Insurance Corporation (“FDIC”) deposit insurance assessments may continue to materially increase in the future, which would have an adverse effect on earnings.

As a member institution of the FDIC, our subsidiary, Equity Bank, is assessed a quarterly deposit insurance premium. Failed banks nationwide have significantly depleted the insurance fund and reduced the ratio of reserves to insured deposits. The FDIC has adopted a Deposit Insurance Fund, or DIF, Restoration Plan, which requires the DIF to attain a 1.35% reserve ratio by September 30, 2020. As a result of this requirement, Equity Bank could be required to pay significantly higher premiums or additional special assessments that would adversely affect its earnings, thereby reducing the availability of funds to pay dividends to us.

 

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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 will become subject to more stringent capital requirements, which may adversely impact our return on equity or constrain us from paying dividends or repurchasing shares.

The Dodd-Frank Act requires the federal banking agencies to establish stricter risk-based capital requirements and leverage limits to apply to banks and bank and savings and loan holding companies. In July 2013, the federal banking agencies published the final Basel III rules (as defined in “Supervision and Regulation”) that revised their risk-based and leverage capital requirements and their method for calculating risk-weighted assets. The final Basel III rules apply to all bank holding companies with $1.0 billion or more in consolidated assets and all banks regardless of size.

As a result of the enactment of the Basel III rules, we will become subject to increased required capital levels. The Basel III rules became effective as applied to us on January 1, 2015, with a phase-in period that generally extends from January 1, 2015 through January 1, 2019. The application of more stringent capital requirements on us could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions such as the inability to pay dividends or repurchase shares if we were to be unable to comply with such requirements.

We may need to raise additional capital in the future, including as a result of potential 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.

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

 

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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 condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.

The Federal Reserve may require us to commit capital 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.

 

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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.

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.

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.

 

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Risks Related to Our Class A Common Stock and This Offering

An active, liquid market for our Class A common stock may not develop or be sustained upon completion of this offering, which may impair your ability to sell your shares at or above the initial public offering price.

Before this offering, there has been no public market for our Class A common stock. We have been approved to have our Class A common stock listed on the NASDAQ Global Select Market, subject to notice of issuance, but we cannot provide any assurance that an active, liquid trading market for our Class A common stock will develop. If an active trading market does not develop, you may not be able to sell your shares at the volume, prices and times desired. The initial public offering price of shares of our Class A common stock will be determined by negotiations between us, the selling stockholders and the underwriters and may not be indicative of prices that will prevail following the completion of this offering. The initial public offering price does not necessarily bear any relationship to our book value, assets, or financial condition or any other established criteria of value and may not be indicative of the market price for our Class A common stock after this offering. The price at which shares of our Class A common stock trade after the completion of this offering may be lower than the price at which the underwriters sell them in this offering.

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.

 

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The obligations associated with being a public company will require significant resources and management attention.

As a public company, we will face increased legal, accounting, administrative and other costs and expenses that we have not incurred as a private company, particularly after we are no longer an emerging growth company. We expect to incur significant incremental costs related to operating as a public company, particularly when we no longer qualify as an emerging growth company. After the completion of this offering, we will be subject to the reporting requirements of the Exchange Act, which requires that we file annual, quarterly and current reports with respect to our business and financial condition and proxy and other information statements, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the PCAOB and the NASDAQ Global Select Market, each of which imposes additional reporting and other obligations on public companies. As a public company, we will be 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 new internal policies, including those relating to trading in our securities and disclosure controls and procedures;

 

    retain additional personnel;

 

    comply with the NASDAQ Global Select Market listing standards; and

 

    comply with the Sarbanes-Oxley Act.

We expect these rules and regulations and changes in laws, regulations and standards relating to corporate governance and public disclosure, which have created uncertainty for public companies, to increase legal and financial compliance costs and make some activities more time consuming and costly. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of 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

Our management will have broad discretion as to the use of proceeds from this offering, and you may not agree with the manner in which we use the proceeds.

We intend to use approximately $16.4 million of the net proceeds of this offering to redeem, as promptly as practicable following the completion of this offering, our outstanding Series C preferred stock. Although we intend to use a portion of the net proceeds of this offering to redeem all outstanding shares of our Series C preferred stock as promptly as practicable following the completion of this offering, the redemption is subject to regulatory approval, and accordingly, no assurance can be given as to when we will be able to redeem such shares, if at all. We intend to use the remaining net proceeds (which will be approximately $16.6 million) to support our organic

 

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growth and for other general corporate purposes, including potential future acquisitions of bank and non-bank financial services companies, although at present we do not have any current plans, arrangements, or understandings to make any such acquisitions, and to maintain our capital and liquidity at acceptable levels. We have not formally designated the amount of net proceeds that we will contribute to our subsidiary, Equity Bank, or that we will use for any particular purpose (other than the redemption of our Series C preferred stock). Accordingly, our management will have broad discretion as to the application of the net proceeds of this offering and could use them for purposes other than those contemplated at the time of this offering. Our stockholders may not agree with the manner in which our management chooses to allocate and invest the net proceeds. We may not be successful in using the net proceeds from this offering to increase our profitability or market value, and we cannot predict whether the proceeds will be invested to yield a favorable return.

We have not historically declared or paid cash dividends on our common stock and we do not expect to pay dividends on our common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in the foreseeable future is if the price of our Class A common stock appreciates.

The holders of our common stock will receive dividends if and when declared by our board of directors out of legally available funds. Our board of directors has not declared a dividend on our common stock since our inception. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our future 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.

New investors in our Class A common stock will experience immediate and substantial book value dilution after this offering.

The initial public offering price of our Class A common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding Class A common stock immediately after the offering. If you purchase our Class A common stock in this offering, you will pay more for your shares than the amounts paid by many of our existing stockholders for their shares, and you will suffer immediate dilution of approximately $7.44 per share in pro forma net tangible book value. As a result of this dilution, investors purchasing stock in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation.

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 following this offering, 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. Upon completion of this offering, we will have 6,859,017 shares of Class A common stock outstanding, or 7,150,017 shares if the underwriters exercise in full their option to purchase additional shares. Our directors, executive officers, the selling stockholders and certain additional other holders of our Class A common stock will be subject to the lock-up agreements described in “Underwriting” and the Rule 144 holding period requirements described in “Shares Eligible for Future Sale.” After all of the lock-up periods have expired and the holding periods have elapsed, 3,913,761 additional shares of our outstanding common stock will be eligible for sale in the public market. In addition, the underwriters may, at any time and

 

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without notice, release all or a portion of the shares subject to lock-up agreements. The market price of shares of our Class A common stock may drop significantly when the restrictions on resale by our existing stockholders lapse. 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 purchased in this offering.

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.

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. Upon completion of this offering, there will be 6,859,017 shares of our Class A common stock issued and outstanding. Those shares outstanding do not include the potential issuance, as of October 12, 2015, of 430,271 shares of our Class A common stock subject to issuance upon exercise of outstanding stock options under our 2013 Stock Incentive Plan or 297,583 additional shares of our Class A common stock that were reserved for issuance under our 2013 Stock Incentive Plan at October 12, 2015. 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 that beneficially owned approximately 40% of our outstanding Class A common stock and 100% of our nonvoting Class B common stock, as of October 12, 2015. Following the closing of this offering, we expect these funds to beneficially own approximately 28% of our outstanding Class A common stock. These funds could have a significant level of influence because of their level of ownership and representation on our board of directors, including an ability to influence the election of directors and the potential outcome of other matters submitted to a vote of our stockholders, such as mergers, the sale of substantially all of our assets and other extraordinary corporate matters and affect the votes of our board of directors. These funds also have certain rights, such as access rights and registration rights that our other stockholders do not have. The interests of these funds could conflict with the interests of our other stockholders, including you, and any future transfer by these funds of their shares of Class A common stock to other investors who have different business objectives could have a material adverse effect on our business, financial condition, results of operations and future prospects, and the market value of our Class A common stock.

 

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Our directors and executive officers beneficially own a significant portion of our Class A common stock and have substantial influence over us.

Our directors and executive officers, as a group, beneficially owned approximately 38% of our outstanding Class A common stock as of October 12, 2015. As a result of this level of ownership, our directors and executive officers have the ability, by taking coordinated action, to exercise significant influence over our affairs and policies. The interests of our directors and executive officers may not be consistent with your interests as a stockholder. This influence may also have the effect of delaying or preventing changes of control or changes in management, or limiting the ability 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.

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.

We have the ability to incur debt and pledge our assets, including our stock in Equity Bank, to secure that debt and holders of any such debt obligations will generally have priority over holders of our Class A common stock with respect to certain payment obligations.

We have the ability to incur debt and pledge our assets to secure that debt. Absent special and unusual circumstances, a holder of indebtedness for borrowed money has rights that are superior to those of holders of Class A common stock. For example, interest must be paid to the lender before dividends can be paid to stockholders, and loans must be paid off before any assets can be distributed to stockholders if we were to liquidate. Furthermore, we would have to make principal and interest payments on our indebtedness, which could reduce our profitability or result in net losses on a consolidated basis.

We are an emerging growth company under the JOBS Act, and we cannot be certain whether the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an emerging growth company under the JOBS Act, and we therefore are permitted to, and we intend to, take advantage of exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed a “large accelerated filer,” as defined under the federal securities laws. For so long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding

 

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executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on certain executive compensation matters, such as “say on pay” and “say on frequency.” As a result, our stockholders may not have access to certain information that they may deem important. Although we intend to rely on certain of the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies.

We cannot predict whether investors will find our Class A common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our Class A common stock less attractive as a result of these choices, there may be a less active trading market for our Class A common stock, and our stock price may be more volatile.

If we fail to 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.

Ensuring that we have adequate disclosure controls and procedures, including internal control over financial reporting, in place so that we can produce accurate financial statements on a timely basis is costly and time-consuming and needs to be reevaluated frequently. We are in the process of documenting, reviewing and, if appropriate, improving our internal controls and procedures in anticipation of being a public company and being subject to the requirements of Section 404 of the Sarbanes-Oxley Act, which will require annual management assessments of the effectiveness of our internal control over financial reporting and, when we cease to be an emerging growth company under the JOBS Act, a report by our independent auditors addressing these assessments. Our management may conclude that our internal control over financial reporting are not effective due to our failure to cure any identified material weakness or otherwise. Moreover, even if our management concludes that our internal control over financial reporting are effective, our independent registered public accounting firm may not conclude that our internal control over financial reporting are effective. In the future, our independent registered public accounting firm may not be satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated or reviewed, or it may interpret 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 that we may not be able to remediate in time to meet the deadline imposed by the SEC for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. 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, 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 in accordance with the Sarbanes-Oxley Act, 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 our 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;

 

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    provide for a classified board of directors, so that only approximately one-third of or 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.

As of June 30, 2015, our authorized capital stock includes 10,000,000 shares of preferred stock of which 16,372 are issued and outstanding (which we plan to redeem, as promptly as practicable following the completion of this offering, with a portion of the net proceeds of this offering). 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 “Risk Factors” section, it is possible that an investor could lose his or her entire investment.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The information in this prospectus includes “forward-looking statements.” These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but are not limited to, the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    the failure to receive the regulatory approval necessary to redeem our outstanding Series C preferred stock, or a delay in receiving such approval;

 

    the costs of integrating the businesses we acquire, including our recent acquisition of First Independence, which may be greater than expected;

 

    The completion of our financial closing procedures, final adjustments and other developments arising between now and the time that our financial results for the three and nine month periods ended September 30, 2015 are finalized;

 

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

 

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

 

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

 

    the loss of our largest loan and depositor relationships;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    other factors that are discussed in “Risk Factors.”

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

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of our Class A common stock in this offering will be $33.0 million (or $39.2 million if the underwriters exercise their over-allotment option in full), after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

We intend to use approximately $16.4 million of the net proceeds to redeem, as promptly as practicable following the completion of this offering, the outstanding 16,372 shares of Series C preferred stock that we issued to the U.S. Department of Treasury in August 2011 in connection with the Small Business Lending Fund Program. Although we intend to use a portion of the net proceeds of this offering to redeem all outstanding shares of our Series C preferred stock as promptly as practicable following the completion of this offering, the redemption is subject to regulatory approval, and accordingly, no assurance can be given as to when we will be able to redeem such shares, if at all. We intend to use the remaining net proceeds (which will be approximately $16.6 million) to support our organic growth and for other general corporate purposes, including to fund potential future acquisitions of bank and non-bank financial services companies that we believe are complementary to our business and consistent with our growth strategy and to maintain our capital and liquidity ratios at acceptable levels, including following acquisitions or as a result of organic growth. Although we may, from time to time, evaluate potential acquisitions, we do not have any definitive agreements in place to make any such acquisitions at this current time.

We have not specifically allocated the amount of net proceeds to us that will be used for these purposes (other than the redemption of our Series C preferred stock), and our management will have broad discretion over how these proceeds are used. Proceeds held by us will be invested in short-term investments until needed for the uses described above.

We will not receive any proceeds from the sale of shares of Class A common stock and Class B common stock by the selling stockholders.

 

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DIVIDEND POLICY

We have not historically declared or paid cash dividends on our common stock and we do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend on a number of factors, including:

 

    our historical and projected financial condition, liquidity and results of operations;

 

    our capital levels and requirements;

 

    statutory and regulatory prohibitions and other limitations;

 

    any contractual restriction on our ability to pay cash dividends, including pursuant to the terms of any of our credit agreements or other borrowing arrangements;

 

    our business strategy;

 

    tax considerations;

 

    any acquisitions or potential acquisitions that we may examine;

 

    general economic conditions; and

 

    other factors deemed relevant by our board of directors.

We are not obligated to pay dividends on our common stock.

As a Kansas corporation, we are subject to certain restrictions on dividends under the Kansas General Corporation Code. Generally, a Kansas corporation may pay dividends to its stockholders out of its surplus or, if there is no surplus, out of its net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, or both. In addition, if the capital of a Kansas corporation is diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital 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. See “Supervision and Regulation – Bank 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 for any capital distribution from the Federal Reserve. In addition, Equity Bank generally is prohibited from making a capital distribution if such a distribution would cause Equity Bank to be “undercapitalized” under applicable federal bank capital standards. For more information, see “Supervision and Regulation – Bank Regulation – Standards for Safety and Soundness.”

 

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CAPITALIZATION

The following table shows our capitalization, including regulatory capital ratios, on a consolidated basis, as of June 30, 2015:

 

    on an actual basis; and

 

    on a pro forma basis to give effect to (i) the issuance and sale by us of 1,650,000 shares of Class A common stock in this offering (assuming the underwriters do not exercise their option to purchase any additional shares of our Class A common stock to cover over-allotments, if any), and the receipt and application, including our intended redemption of our Series C preferred stock, of the net proceeds from the sale of these shares at an initial public offering price of $22.50 per share and (ii) the sale by the selling stockholders of 290,000 shares of Class A common stock in this offering (which includes 273,000 shares of Class A common stock issuable upon the automatic conversion of an equal number of shares of Class B common stock as a result of this offering), after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

This table should be read in conjunction with, and is qualified in its entirety by reference to, “Selected Historical Consolidated Financial and Other Data,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of June 30, 2015  

(Dollars in thousands, except share and per share information)

   Actual     Pro Forma  

Indebtedness:

    

Bank stock loan(1)

   $ 14,375      $ 14,375   

Subordinated debentures(2)

     9,096        9,096   

Stockholders’ Equity:

    

Preferred Stock; 10,000,000 shares authorized and 16,372 shares issued and outstanding (actual) and no shares issued and outstanding (pro forma)

   $ 16,363      $   

Class A common stock, par value $0.01 per share; 45,000,000 shares authorized, 4,936,017 shares issued and outstanding (actual) and 6,859,017 shares issued and outstanding (pro forma)

     62        81   

Class B non-voting common stock, par value $0.01 per share; 5,000,000 shares authorized, 1,334,710 shares issued and outstanding (actual) and 1,061,710 shares issued and outstanding (pro forma)

     16        13   

Additional paid-in capital

     98,836        131,865   

Retained earnings

     29,756        29,747   

Accumulated other comprehensive loss

     (2,415     (2,415

Treasury stock, 1,271,043 shares of Class A common stock and 234,903 shares of Class B common stock, carried at cost

     (19,655     (19,655

Employee stock loans(3)

     (1,215     (1,215
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 121,748      $ 138,421   
  

 

 

   

 

 

 
Book Value and Tangible Book Value per Share:     

Book value per share

   $ 16.81      $ 17.48   

Tangible book value per share

   $ 13.76      $ 15.06   

Capital Ratios (Basel III Guidelines):

    

Tier 1 Leverage Ratio

     8.44     9.63

Tier 1 Common Capital Ratio

     9.47     12.91

Tier 1 Risk-Based Capital Ratio

     11.17     12.91

Total Risk-Based Capital Ratio

     11.76     13.50

Tangible Common Equity to Tangible Assets(4)

     6.47     8.84

 

(1) Consists of senior debt secured by our stock in Equity Bank. As of October 12, 2015, the actual principal balance outstanding under the bank stock loan was approximately $18.6 million. The increase represents borrowings to fund a portion of the purchase price for the acquisition of First Independence Corporation.

 

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(2) Consists of debt issued in connection with our trust preferred securities.

 

(3) Consists of loans made to employees of the Company for income tax withholding obligations associated with the termination of the Restricted Stock Unit Plan. All of these loans made to executive officers have been repaid in full to the Company prior to the date of this registration statement.

 

(4) Tangible common equity to tangible assets is a non-GAAP financial measure. Tangible common equity is computed as total stockholders’ equity, excluding preferred stock, less intangible assets. Tangible assets are calculated as total assets less intangible assets. We believe that the most directly comparable GAAP financial measure is total stockholders’ equity to assets. For a reconciliation of the non-GAAP measure to the most directly comparable GAAP measure see “Selected Historical Consolidated Financial and Other Data—Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

 

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DILUTION

If you invest in our Class A common stock, your ownership interest will be diluted to the extent that the initial public offering price per share of our Class A common stock exceeds the net tangible book value per share of our common stock immediately following this offering. Net tangible book value per share of our common stock is equal to our total stockholders’ equity, excluding preferred stock and intangible assets, divided by the number of shares of our common stock outstanding. As of June 30, 2015, the net tangible book value of our common stock was $86.3 million, or $13.76 per share.

After giving effect to our sale of 1,650,000 shares of Class A common stock in this offering (assuming the underwriters do not exercise their option to purchase any additional shares of our Class A common stock to cover over-allotments, if any) at the initial public offering price of $22.50 per share and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, the pro forma net tangible book value of our common stock as of June 30, 2015 would have been approximately $119.3 million, or $15.06 per share. Therefore, this offering will result in an immediate increase of approximately $1.30 in the net tangible book value per share of our common stock of existing stockholders and an immediate dilution of approximately $7.44 in the net tangible book value per share of our common stock to investors purchasing shares in this offering, or approximately 33.1% of the public offering price.

The following table illustrates the calculation of the amount of dilution per share that a purchaser of our Class A common stock in this offering will incur given the assumptions above:

 

Initial public offering price per share

      $ 22.50   

Net tangible book value per share of common stock as of June 30, 2015

   $ 13.76      

Increase in net tangible book value per share of common stock attributable to new investors in this offering

   $ 1.30      
  

 

 

    

Pro forma net tangible book value per share of common stock upon completion of this offering

      $ 15.06   
     

 

 

 

Dilution per share of common stock to new investors in this offering

      $ 7.44   
     

 

 

 

If the underwriters exercise their over-allotment in full, then our pro forma net tangible book value of our common stock as of June 30, 2015, would be approximately $125.4 million, or $15.28 per share, representing an immediate increase in net tangible book value to our existing stockholders of approximately $1.52 per share and immediate dilution in net tangible book value to investors purchasing shares in this offering of approximately $7.22 per share.

 

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The following table summarizes, as of June 30, 2015, the number of shares of our common stock purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by the new investors in this offering, at the initial public offering price of $22.50 per share before deducting the underwriting discounts and commissions and the estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    
                  (in thousands)               

Existing stockholders as of June 30, 2015(1)

     6,270,727         79.2   $ 78,044         67.8   $ 12.45   

New investors in this offering

     1,650,000         20.8   $ 37,125         32.2   $ 22.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     7,920,727         100.0   $ 115,169         100.0   $ 14.54   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
(1) Net of treasury stock

The table above excludes (i) 430,271 shares of Class A common stock issuable upon the exercise of outstanding stock options at June 30, 2015 at a weighted average exercise price of $13.61 per share, and (ii) 294,729 shares of Class A common stock reserved at June 30, 2015 for issuance in connection with options that remain available for issuance under our 2013 Stock Incentive Plan. In connection with the exercise of any of these stock options or if other equity awards are issued under our 2013 Stock Incentive Plan, investors purchasing in this offering will experience further dilution.

 

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PRICE RANGE OF OUR CLASS A COMMON STOCK

Prior to this offering, our common stock has not been traded on an established public trading market and quotations for our common stock were not reported on any market. As a result, there has been no regular market for our common stock. Although shares of our common stock may have been sporadically traded in private transactions, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our Class A common stock in an active market. As of October 12, 2015, there were 267 holders of record of our Class A common stock.

We anticipate that this offering and the listing of our Class A common stock on the NASDAQ Global Select Market will result in a more active trading market for our Class A common stock. However, we cannot assure you that a liquid trading market for our Class A common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our Class A common stock is not active. See “Underwriting” for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.

 

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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 “Selected Historical Consolidated Financial and Other Data” and our audited and unaudited consolidated financial statements and the accompanying notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.

Overview

We are a bank holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 25 full service branches located in Kansas and Missouri. As of June 30, 2015, we had consolidated total assets of $1.4 billion, total loans of $828.5 million (net of allowances), total deposits of $1.0 billion and total stockholders’ equity of $121.7 million. During the six-month periods ended June 30, 2015 and 2014, net income was $5.0 million and $4.8 million. Net income for the year ended December 31, 2014 was $9.0 million compared to $7.9 million for the prior year ended December 31, 2013, an increase of $1.1 million, or 14.1%.

History and Background

Since 2003, we have completed a series of eight acquisitions with aggregate total assets of approximately $760 million and total deposits of approximately $828 million as well as two charter consolidations. We have sought 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 October 2012, we completed our largest acquisition to date when we acquired First Community Bancshares, Inc., or First Community, 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. We integrated fifteen of First Community’s branches and recognized the opportunity to consolidate two branches. Following the acquisition, we also endeavored to reposition and improve First Community’s loan portfolio and deposit mix. We focused on identifying and disposing of First Community’s problematic loans and replacing them with higher quality loans generated organically. In addition, we have grown our commercial loan portfolio, which we believe generally offers higher return opportunities than our consumer loans, primarily by hiring additional talented bankers, particularly in our metropolitan markets, and incentivizing our bankers to expand their commercial banking relationships. We also increased our most attractive deposit accounts, which we refer to as our “Signature Deposits,” primarily by growing deposits in our community markets and cross-selling our depository products to our loan customers. Our Signature Deposits consist of our non-time deposits, including our non-interest bearing checking, interest checking, savings and money market deposit accounts.

Our principal objective is to continue to 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 and

 

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Wichita, and stable community markets within Western Kansas, Western Missouri and Topeka, 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

Year Ended December 31, 2014

 

    During the first quarter of 2014, we completed a stock repurchase offer to our stockholders, which resulted in our repurchase of 1,320,660 shares for $17.2 million.

 

    In July 2014, we borrowed $15.5 million secured by our stock in Equity Bank from an unaffiliated financial institution in order to redeem, at liquidation value of $15.5 million, the TARP preferred shares we assumed in connection with the First Community acquisition.

 

    In November 2014, we sold two branches located in Spring Hill and De Soto, Kansas.

 

    By December 31, 2014, we had repositioned the acquired First Community loan portfolio with pay downs, amortization, charge-offs and sales of a combined $243.3 million since the acquisition in October 2012. During the same period as this First Community loan portfolio reduction, total loan growth was $211.2 million with $75.7 million in commercial and industrial loan growth and $91.4 million in commercial real estate loan growth. This organic growth was primarily the result of our efforts to hire, develop and retain seasoned loan officers who can grow commercial loans and cultivate new relationships. These repositioning activities and business development efforts allowed us to grow our commercial and industrial loan portfolio $43.7 million during the year ended December 31, 2014 and our entire loan portfolio grew $66.3 million during this time.

Six Months Ended June 30, 2015

 

    We had record net income to common stockholders of $4.9 million, or diluted earnings per share of $0.78, for the six months ended June 30, 2015.

 

    We had total loan growth of $108.9 million for the six months ended June 30, 2015.

 

    Our efficiency ratio improved to 66.94% for the six months ended June 30, 2015 from 68.87% for the same period in 2014 and 72.91% for the year ended December 31, 2014.

Subsequent Events

 

    On October 9, 2015, we completed our acquisition of First Independence Corporation, 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, which represents a new market for us, as well as a loan origination office in Lawrence, Kansas. As of June 30, 2015, First Independence had consolidated total assets of $133.7 million, total deposits of $89.1 million and total loans of $87.4 million (net of allowances). See “Summary—Recent Developments—Expansion Activities” for more information.

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 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.

 

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Changes in interest rates earned on interest-earning assets or incurred on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic change in net interest income. Fluctuations in interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Kansas and Missouri, as well as developments affecting the consumer, commercial and real estate sectors within these markets.

Net Income

Six months ended June 30, 2015 compared with six months ended June 30, 2014: Net income allocable to common stockholders was $4.9 million for the six months ended June 30, 2015, compared to $4.2 million for the six months ended June 30, 2014, an increase of $714 thousand, or 17.0%. During the six-month period ended June 30, 2015, net income was $5.0 million as compared to net income of $4.8 million during the six-month period ended June 30, 2014. In July 2014, we redeemed $15.5 million of preferred stock which reduced dividends on preferred stock by $479 thousand in the first six months of 2015 as compared to the same period in 2014. This redemption replaced preferred stock that had a 9.0% dividend rate with the bank stock loan carrying a 4.0% interest rate, or an after tax rate of approximately 2.6%. During the first six months of 2015, increases in net interest income of $1.9 million and non-interest income of $559 thousand were offset by $430 thousand in additional provision for loan losses and $1.3 million in higher non-interest expenses when compared to the first six months of 2014. The changes in the components of net income are discussed in more detail in the following sections of Results of Operations.

Year ended December 31, 2014 compared with year ended December 31, 2013: Net income allocable to common stockholders was $8.3 million for the year ended December 31, 2014, compared to $6.9 million for the year ended December 31, 2013. Net income for the year ended December 31, 2014 was $9.0 million compared to $7.9 million for the prior year ended December 31, 2013, an increase of $1.1 million. Dividends on preferred stock were $269 thousand less for the year ended December 31, 2014 as compared to the year of 2013. The benefit to 2014 net income allocable to common stockholders of the July 2014 redemption of $15.5 million in preferred stock was partially offset by the May 2014 increase, from 5% to 9%, in the dividend rate on $14.8 million of preferred stock prior to its redemption. During 2014, increases in net interest income of $213 thousand and non-interest income of $623 thousand were offset by $1.1 million in higher non-interest expenses and the provision for income taxes when compared to the year of 2013. The provision for loan losses for the year ended December 31, 2014 was $1.2 million compared with $2.6 million for the prior year. The decrease in the provision for loan losses was, in the opinion of management, the result of improvement in the credit quality of the loan portfolio. The changes in the components of net income are discussed in more detail in the following sections of “Results of Operations.”

Net Interest Income and Net Interest Margin Analysis

Net interest income is the difference between interest income on interest-earning assets, including loans and securities, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. To evaluate net interest income, management measures and monitors (1) yields on loans and other interest-earning assets, (2) the costs of deposits and other funding sources, (3) the net interest spread and (4) net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources of funds. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change,” and it is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “yield/rate change.”

 

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Six months ended June 30, 2015 compared with six months ended June 30, 2014: The following table shows the average balance of each principal category of assets, liabilities, and stockholders’ equity and the average yields on earning assets and average costs of liabilities for the six month periods ended June 30, 2015 and 2014. The yields and costs are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.

Average Balance Sheets and Net Interest Analysis

 

     For the Six Months Ended June 30,  
     2015     2014  

(dollars in thousands)

   Average
Outstanding
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate(3)(4)
    Average
Outstanding
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate(3)(4)
 

Interest-earning assets:

                

Loans(1)

   $ 754,513       $ 20,994         5.61   $ 651,772       $ 18,506         5.73

Taxable securities

     308,983         3,529         2.30     327,493         3,892         2.40

Nontaxable securities

     40,278         455         2.28     36,408         414         2.29

Federal funds sold and other

     27,849         266         1.93     24,137         156         1.30
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,131,623       $ 25,244         4.50     1,039,810       $ 22,968         4.45
     

 

 

         

 

 

    

Other real estate owned, net

     5,403              6,881         

Premises and equipment, net

     37,718              37,564         

Bank owned life insurance

     28,928              27,998         

Goodwill and core deposit intangible, net

     19,173              19,499         

Other non-interest-earning assets

     12,295              15,080         
  

 

 

         

 

 

       

Total assets

   $ 1,235,140            $ 1,146,832         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings, NOW and money market

   $ 610,595       $ 713         0.24   $ 552,502       $ 568         0.21

Certificates of deposit

     339,155         1,412         0.84     374,327         1,392         0.75
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     949,750         2,125         0.45     926,829         1,960         0.43

FHLB term & line of credit advances

     78,519         126         0.32     15,642         172         2.22

Bank stock loan

     14,694         300         4.11     -         -         0.00

Subordinated borrowings

     9,024         318         7.11     8,715         318         7.36

Other borrowings

     25,721         31         0.24     27,520         35         0.26
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,077,708       $ 2,900         0.54     978,706       $ 2,485         0.51
     

 

 

         

 

 

    

Non-interest-bearing checking accounts

     30,902              29,511         

Non-interest-bearing liabilities

     6,916              7,992         

Stockholders’ equity

     119,614              130,623         
  

 

 

         

 

 

       

Total liabilities and equity

   $ 1,235,140            $ 1,146,832         
  

 

 

         

 

 

       

Net interest income

      $ 22,344            $ 20,483      
     

 

 

         

 

 

    

Interest rate spread

           3.96           3.94
        

 

 

         

 

 

 

Net interest margin(2)

           3.98           3.97
        

 

 

         

 

 

 

Total cost of deposits, including non-interest bearing deposits

   $ 980,652       $ 2,125         0.44   $ 956,340       $ 1,960         0.41
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Average interest-earning assets to interest-bearing liabilities

           105.00           106.24
        

 

 

         

 

 

 

 

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(1) Average loan balances include nonaccrual loans.
(2) Net interest margin is calculated by dividing annualized 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 unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest yields/rates. The following table analyzes the change in volume variances and yield/rate variances for the six months ended June 30, 2015 and June 30, 2014.

Analysis of Changes in Net Interest Income

For the Six Months Ended June 30, 2015 and June 30, 2014

 

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

(dollars in thousands)

   Volume(1)     Yield/Rate(1)    

Interest-earning assets:

      

Loans

   $ 2,865      $ (377   $ 2,488   

Taxable securities

     (215     (148     (363

Nontaxable securities

     44        (3     41   

Federal funds sold and other

     27        83        110   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 2,721      $ (445   $ 2,276   
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Savings, NOW and money market

   $ 63      $ 83      $ 146   

Certificates of deposit

     (138     157        19   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     (75     240        165   

FHLB term & line of credit advances

     204        (250     (46

Bank stock loan

     300        -        300   

Subordinated borrowings

     11        (11     -   

Other borrowings

     (2     (2     (4
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ 438      $ (23   $ 415   
  

 

 

   

 

 

   

 

 

 

Net Interest Income

   $ 2,283      $ (422   $ 1,861   
  

 

 

   

 

 

   

 

 

 

 

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

Net interest income before the provision for loan losses for the six months ended June 30, 2015 was $22.3 million compared with $20.5 million for the six months ended June 30, 2014, an increase of $1.9 million, or 9.1%. Interest income for the six months ended June 30, 2015 was $25.2 million, an increase of $2.3 million, or 9.9%, from $23.0 million for the six months ended June 30, 2014. Interest income increased primarily due to an increase in the average volume of interest-earning assets due in large part to growth in commercial loan balances in the period. Interest expense for the six months ended June 30, 2015 was $2.9 million, an increase of $415 thousand, or 16.7%, from $2.5 million for the six months ended June 30, 2014. The increase in interest expense was primarily due to an increase average volume of interest-bearing liabilities used to fund loan growth.

Interest income was $25.2 million for the six months ended June 30, 2015, an increase of $2.3 million over the six months ended June 30, 2014. Interest income on loans, including loan fees which consist of fees for loan

 

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origination, renewal, prepayment, covenant breakage and loan modification, was $21.0 million for the first six months of 2015, an increase of $2.5 million, or 13.4%, compared with the first six months of 2014. This increase was due to an increase in average loans, partially offset by a decrease in the average yield on the loan portfolio. The increase in average loan volume was primarily from increases of $58.7 million in commercial and industrial loans, $3.9 million in commercial real estate loans, $40.2 million in mortgage loans, $3.0 million in real estate construction loans and $4.2 million in home equity lines of credit loans, which were partially offset by a decrease of $8.1 million in average loan volume of agricultural loans. The average yield on loans was 5.61% for the first six months of 2015 and 5.73% for the first six months of 2014. The average yield on loans excluding loan fees was 5.03% for the first six months of 2015 and 5.36% for the first six months of 2014. The decrease in yield excluding loan fees was primarily due to decreases in average yields on commercial loans, mortgage loans and agricultural loans. The decrease in yield on commercial loans was the result of loan originations of approximately $84 million and loan renewals in a lower interest rate environment and the payoff of approximately $25 million of higher-rate, higher-credit risk loans. The decrease in the yield on mortgage loans is due to the pay down of approximately $12 million of older loans that had higher interest rates and loan originations of approximately $73 million in the current low interest rate environment. The decrease in yield on agricultural loans was the result of approximately $8 million of pay downs of higher-rate, higher-credit risk loans. Interest income on all securities was $4.0 million during the first six months of 2015, a decrease of $322 thousand when compared to the first six months of 2014. This decrease was due to the decrease of $14.6 million in average total securities and a nine basis point decrease in the average yield on the securities portfolio. The decrease in the average volume of securities was due to the sales and pay downs on securities that were used to fund loan portfolio growth and the Federal Home Loan Bank, or FHLB, debt retirement. The decrease in average yield was due to decreased average yields on mortgage backed securities. Interest income on federal funds sold and other was $266 thousand, an increase of $110 thousand, or 70.5%. This increase is due to the increased stock ownership in the FHLB, which has increased due to our current level of borrowings, resulting in higher dividends earned.

Interest expense was $2.9 million for the six months ended June 30, 2015, an increase of $415 thousand over interest expense for the first six months of 2014. The change in interest expense was due to $300 thousand of interest expense on the bank stock loan, an increase in interest expense on total deposits of $165 thousand and a decrease in interest expense on FHLB advances of $46 thousand. In July 2014, we borrowed $15.5 million to redeem a like amount of preferred stock and this loan was not outstanding at June 30, 2014. Average savings, NOW and money market deposits increased $58.1 million for the first six months of 2015 compared to the first six months of 2014, and the average rate on interest-bearing demand deposits increased from 0.21% to 0.24% for the same period. The average balance increase in interest-bearing deposits is the result of actively managing deposits as a funding vehicle and expansion of our customer base. The increase in rate on interest-bearing deposits is the result of actively managing the rates on this funding source in specific targeted markets with undersized branches. Average certificates of deposit decreased $35.2 million for the first six months of 2015 compared to the first six months of 2014, and the average rate increased from 0.75% to 0.84% for the same period. The increase in interest expense on certificates of deposit was primarily due to the increase in longer term higher rate certificates of deposits. In February 2015, we prepaid older higher cost FHLB term advances and began using the FHLB line of credit advance option that resulted in a lower funding cost and is pre-payable without a fee. We funded the advance repayments by selling available for sale, or AFS, investment securities resulting in gains of $368 thousand. Total cost of funds increased three basis points to 0.54% for the first six months of 2015 from 0.51% for the first six months of 2014.

Net interest margin, defined as net interest income divided by average interest-earning assets, for the first six months of 2015 was 3.98%, an increase of one basis point compared with 3.97% for the first six months of 2014. As discussed in more detail above, net interest margin was positively impacted by increased loan volume, increased loan fee income and decreased investment securities volume, offset by the impact of our bank stock loan that was made in July 2014. These changes for the six months ended June 30, 2015 resulted in an increase in net interest income of $1.9 million, an increase in average interest-earning assets of $91.8 million and an increase in net interest margin.

 

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Year ended December 31, 2014 compared with year ended December 31, 2013: The following table shows the average balance of each principal category of assets, liabilities, and stockholders’ equity and the average yields on earning assets and average costs of liabilities for the years ended December 31, 2014 and 2013. The yields and costs 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

 

     For the Years Ended December 31,  
     2014     2013  

(dollars in thousands)

   Average
Outstanding
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate(3)(4)
    Average
Outstanding
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate(3)(4)
 

Interest-earning assets:

                

Loans(1)

   $ 681,547       $ 38,023         5.58   $ 697,910       $ 38,926         5.58

Taxable securities

     310,936         7,204         2.32     297,247         6,294         2.12

Nontaxable securities

     36,900         839         2.27     36,981         828         2.24

Federal funds sold and other

     23,770         345         1.45     31,983         327         1.02
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,053,153       $ 46,411         4.41     1,064,121       $ 46,375         4.36
     

 

 

         

 

 

    

Other real estate owned, net

     6,054              9,971         

Premises and equipment, net

     37,948              37,528         

Bank owned life insurance

     28,225              26,366         

Goodwill and core deposit intangible, net

     19,423              18,816         

Other non-interest-earning assets

     14,251              17,696         
  

 

 

         

 

 

       

Total assets

   $ 1,159,054            $ 1,174,498         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings, NOW and money market

   $ 561,629       $ 1,196         0.21   $ 540,550       $ 1,200         0.22

Certificates of deposit

     366,168         2,888         0.79     386,459         3,182         0.82
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     927,797         4,084         0.44     927,009         4,382         0.47

FHLB term and line of credit advances

     22,790         345         1.51     29,710         494         1.66

Bank stock loan

     7,097         295         4.16     -         -         -

Subordinated borrowings

     8,793         634         7.22     8,484         642         7.56

Other borrowings

     28,517         75         0.26     31,608         92         0.29
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     994,994       $ 5,433         0.55     996,811       $ 5,610         0.56
     

 

 

         

 

 

    

Non-interest-bearing checking accounts

     32,456              32,151         

Non-interest-bearing liabilities

     8,430              7,623         

Stockholders’ equity

     123,174              137,913         
  

 

 

         

 

 

       

Total liabilities and equity

   $ 1,159,054            $ 1,174,498         
  

 

 

         

 

 

       

Net interest income

      $ 40,978            $ 40,765      
     

 

 

         

 

 

    

Interest rate spread

           3.86           3.80
        

 

 

         

 

 

 

Net interest margin(2)

           3.89           3.83
        

 

 

         

 

 

 

Total cost of deposits, including non-interest bearing deposits

   $ 960,253       $ 4,084         0.43   $ 959,160       $ 4,382         0.46
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Average interest-earning assets to interest-bearing liabilities

           105.85           106.75
        

 

 

         

 

 

 

 

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(1) Average loan balances include nonaccrual loans.
(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 unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest yields/rates. The following table analyzes the change in volume variances and yield/rate variances for the twelve months ended December 31, 2014 and December 31, 2013.

Analysis of Changes in Net Interest Income

For the Year Ended December 31, 2014 and December 31, 2013

 

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

(dollars in thousands)

   Volume(1)     Yield/Rate(1)    

Interest-earning assets:

      

Loans

   $ (913   $ 10      $ (903

Taxable securities

     299        611        910   

Nontaxable securities

     (2     13        11   

Federal funds sold and other

     (97     115        18   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ (713   $ 749      $ 36   
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Savings, NOW and money market

   $ 46      $ (50   $ (4

Certificates of deposit

     (163     (131     (294
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     (117     (181     (298

FHLB term and line of credit advances

     (108     (41     (149

Bank stock loan

     295        -        295   

Subordinated borrowings

     23        (31     (8

Other borrowings

     (8     (9     (17
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ 85      $ (262   $ (177
  

 

 

   

 

 

   

 

 

 

Net Interest Income

   $ (798   $ 1,011      $ 213   
  

 

 

   

 

 

   

 

 

 

 

(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 volume variance and the rate variance in proportion to the relationship of the absolute dollar amount of the change in each.

Net interest income before the provision for loan losses for the year ended December 31, 2014 was $41.0 million compared with $40.8 million for the prior year, an increase of $213 thousand, or 0.5%. The increase in net interest income is primarily due to a $177 thousand decrease in interest expense. The decrease in interest expense is due to lower average balances and rates paid on certificates of deposit and lower average balances and rates paid on FHLB term and line of credit advances, partially offset by interest expense incurred in the last six months of 2014 on the $15.5 million bank stock loan. The $36 thousand increase in interest income is due to increased average balances and yields on the securities portfolio, partially offset by the $16.4 million decrease in average loan balances associated with our efforts to improve the loan portfolio’s credit quality following the merger with First Community.

 

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Interest income was $46.4 million in each of 2014 and 2013. Interest income on loans, including loan fees which consist of fees for loan origination, renewal, prepayment, covenant breakage and loan modification, was $38.0 million for 2014, a decrease of $903 thousand, or 2.3%, compared with 2013. The decrease in loan interest income was driven by the decrease in average loan volume; however, the yield on the loan portfolio remained unchanged at 5.58%. One of the factors that caused the yield on loans to remain unchanged was the increase in loan fees included in interest income. Loan fees for the year ended December 31, 2014 were $2.4 million compared to $1.9 million for the year ended December 31, 2013. The increase in loan fees was primarily due to increases in fees on mortgage loans and agricultural loans. Interest income on securities was $8.0 million during 2014, an increase of $921 thousand over 2013 due to an 18 basis point increase in the average yield on the total securities portfolio and an increase in the average total securities portfolio of $13.6 million. The increases in the average yield and average volume of investment securities were primarily due to additional average volume of mortgage-backed securities of $8.0 million with an average yield of 2.20% for the year ended December 31, 2014 compared to the average yield of 2.00% for the year ended December 31, 2013. We purchased additional mortgage-backed securities because this investment option provided us with a competitive yield.

Interest expense was $5.4 million for 2014, a decrease of $177 thousand from the $5.6 million expensed in 2013. Interest expense on savings, NOW and money market deposits was $1.2 million for both 2014 and 2013. Average certificates of deposit decreased $20.3 million for 2014 compared to 2013 and the average rate decreased from 0.82% to 0.79% for the same time period resulting in a decrease in related interest expense of $294 thousand. Average balances of borrowings from the FHLB decreased by $6.9 million, or 23.3%, from an average balance of $29.7 million in 2013 to an average balance of $22.8 million in 2014, resulting in a decrease in interest expense of $149 thousand. In July 2014, we borrowed $15.5 million secured by our stock in Equity Bank. The purpose of this bank stock loan was to redeem a like amount of preferred stock, which carried a 9.0% after-tax divided rate. Interest expense on the bank stock loan for the year of 2014 was $295 thousand. Total cost of interest-bearing liabilities decreased one basis point to 0.55% for the year ended December 31, 2014 from 0.56% for the year ended December 31, 2013.

Net interest margin, for 2014 was 3.89%, an increase of six basis points compared with 3.83% for 2013. The increase in net interest margin is largely the result of changes in mix and yield of interest-earning assets and cost of interest-bearing liabilities. As discussed in more detail above, net interest margin was positively impacted by the increase in loan fee income that is reflected in interest income, decreases in the rate paid on deposits, and FHLB advances, and was negatively impacted by the decrease in the average loan volume for the twelve months ended December 31, 2014. These changes for the twelve months ended December 31, 2014 resulted in an increase in net interest income of $213 thousand, a decrease in average interest-earning assets of $11.0 million and an increase in net interest margin.

Provision for Loan Losses

We maintain an allowance for loan losses for probable incurred credit losses. The allowance for loan losses is increased by a provision for loan losses, which is a charge to earnings, and subsequent recoveries of amounts previously charged-off, but is decreased by charge-offs when the collectability of a loan balance is unlikely. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, discounted cash flows, economic conditions, and other factors including regulatory guidance. As these factors change, the amount of the loan loss provision changes.

Six months ended June 30, 2015 compared with six months ended June 30, 2014: The provision for loan losses for the six months ended June 30, 2015 was $1.3 million compared with $900 thousand for the six months ended June 30, 2014. The increase of $430 thousand was primarily related to increased reserves on impaired loans. Net charge-offs for the six months ended June 30, 2015 were $1.7 million compared to net charge-offs of $412 thousand for the six months ended June 30, 2014. For the first six months of 2015, gross charge-offs were $1.7 million offset by gross recoveries of $89 thousand. Annualized net losses as a percentage of average loans

 

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increased to 0.44% for the six months ended June 30, 2015 as compared to 0.13% for the six months ended June 30, 2014. While net charge-offs have increased in 2015, $1.0 million of the gross charge-offs had been previously identified and reserved for in the allowance for loan losses. Losses as a percentage of average loans decreased to 0.12% for the year ended December 31, 2014 as compared to 0.21% for the year ended December 31, 2013. In comparison, gross charge-offs were $730 thousand for the six months ended June 30, 2014 offset by gross recoveries of $318 thousand.

Year ended December 31, 2014 compared with year ended December 31, 2013: The provision for loan losses for the year ended December 31, 2014 was $1.2 million compared with $2.6 million for the year ended December 31, 2013. The decrease in the provision for loan losses was due to management’s assessment as to the improved credit quality of the loan portfolio. Net charge-offs for the years ended December 31, 2014 and 2013 were $851 thousand and $1.4 million. The decrease of $589 thousand reflected decreases in both gross charge-offs and gross recoveries when comparing the years of 2014 and 2013. Loans charged-off in 2014 totaled $1.3 million offset by $483 thousand of recoveries, compared to $2.0 million of gross charge-offs and $545 thousand of recoveries in 2013.

Non-interest Income

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

Six months ended June 30, 2015 compared with six months ended June 30, 2014: The following table provides a comparison of the major components of non-interest income for the six months ended June 30, 2015 and 2014:

Non-Interest Income

For the Six Months Ended June 30,

 

                   2015 vs. 2014  

(Dollars in thousands)

   2015      2014      Change     %  

Service charges and fees

   $ 1,302       $ 1,467       $ (165     (11.2 )% 

Debit card income

     981         716         265        37.0

Mortgage banking

     578         368         210        57.1

Increase in value of bank owned life insurance

     466         474         (8     (1.7 )% 

Recovery on zero-basis purchased loans

     356         206         150        72.8

Investment referral income

     293         213         80        37.6

Other

     436         685         (249     (36.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Sub-Total

     4,412         4,129         283        6.9

Net gain on sale of available for sale securities

     370         94         276        293.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 4,782       $ 4,223       $ 559        13.2
  

 

 

    

 

 

    

 

 

   

 

 

 

For the six months ended June 30, 2015, non-interest income totaled $4.8 million, an increase of $559 thousand, or 13.2%, compared with the six months ended June 30, 2014. This increase was primarily due to increases in mortgage banking income, debit card income, the recovery on zero-basis purchased loans and gains on the sale of available for sale securities. In connection with the First Community acquisition, we received the rights to certain loans that were previously charged off by First Community. At acquisition, there was no expectation of future cash flows from these previously charged-off loans and thus they were assigned a zero basis. Subsequent to the acquisition, we have received cash payments on several of these loans. No interest has been accrued as cash flow payments have not been expected prior to receipt. During the six-month period ended June 30, 2015 cash payments were $356 thousand compared to $206 thousand received during the six-month

 

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period ended June 30, 2014. Service charges and fees declined $165 thousand from $1.5 million at June 30, 2014 to $1.3 million at June 30, 2015, and debit card income increased $265 thousand for the same period from $716 thousand at June 30, 2014 to $981 thousand at June 30, 2015. Our principal source of service charges and fees is non-sufficient funds charges, which are cyclical in nature and generally fluctuate with the change in volume of transaction deposit accounts and economic conditions impacting our customers, and represents a significant portion of the decrease in our service charges and fees. In our experience, favorable customer economic conditions are inversely related to non-sufficient funds charges. As economic conditions improve, non-sufficient funds charges generally decrease because customers typically have more disposable income; however, this decrease is typically offset by fees generated from the increased debit card transaction volume associated with favorable economic conditions.

Year ended December 31, 2014 compared with year ended December 31, 2013: The following table provides a comparison of the major components of non-interest income for the years ended December 31, 2014 and 2013:

Non-Interest Income

For the Year Ended December 31,

 

                   2014 vs. 2013  

(Dollars in thousands)

   2014      2013      Change     %  

Service charges and fees

   $ 3,040       $ 3,432       $ (392     (11.4 )% 

Debit card income

     1,462         1,336         126        9.4

Mortgage banking

     894         701         193        27.5

Increase in value of bank owned life insurance

     960         953         7        0.7

Income from other real estate owned

     40         126         (86     (68.3 )% 

Recovery on zero-basis purchased loans

     500         382         118        30.9

Investment referral income

     475         472         3        0.6

Other

     1,122         954         168        17.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Sub-Total

     8,493         8,356         137        1.6

Net gain on sale of available for sale securities

     986         500         486        97.2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 9,479       $ 8,856       $ 623        7.0
  

 

 

    

 

 

    

 

 

   

 

 

 

For the year ended December 31, 2014, non-interest income totaled $9.5 million, an increase of $623 thousand, or 7.0%, from $8.9 million in 2013. The increase was primarily due to increases in debit card income, mortgage banking income, the recovery of zero-basis purchased loans, and net gains on the sale of available for sale securities, partially offset by a decrease in service charges and fees. Service charges and fees are primarily impacted by non-sufficient fund charges, which are cyclical in nature and generally fluctuate with the change in volume of transactional deposit accounts and economic conditions impacting our customers. Service charges and fees declined $392 thousand from $3,432 thousand at December 31, 2013 to $3,040 thousand at December 31, 2014, and debit card income and mortgage banking increased $126 thousand and $193 thousand for the same period. Our principal source of service charges and fees is non-sufficient funds charges, which are cyclical in nature and generally fluctuate with the change in volume of transaction deposit accounts and economic conditions impacting our customers and represents a significant portion of the decrease in our service charges and fees. In our experience, favorable customer economic conditions are inversely related to non-sufficient fund charges. As economic conditions improve, non-sufficient charges generally decrease because customers typically have more disposable income; however, this decrease is typically offset by fees generated from the increased debit card transaction volume associated with favorable economic conditions. Our mortgage banking fees increased due to greater mortgage loan originations during 2014 compared to 2013.

Non-interest Expense

Six months ended June 30, 2015 compared with six months ended June 30, 2014: For the six months ended June 30, 2015, non-interest expense totaled $18.2 million, an increase of $1.3 million, or 7.5%, compared with

 

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the six months ended June 30, 2014. This increase was primarily due to the prepayment penalty of $316 thousand associated with the retirement of our FHLB term debt in February 2015, an increase of $631 thousand in salaries and employee benefits, an increase of $139 thousand in expenses and losses, net of gains, on other real estate owned, an increase of $175 thousand of data processing expense, and an increase of $281 thousand in other non-interest expenses. These items and other changes in the various components of non-interest expense are discussed in more detail below.

The following table provides a comparison of the major components of non-interest expense for the six-month periods ended June 30, 2015 and 2014.

Non-Interest Expense

For the Six Months Ended June 30,

 

                  2015 vs. 2014  

(Dollars in thousands)

   2015      2014     Change     %  

Salaries and employee benefits

   $ 9,584       $ 8,953      $ 631        7.0

Net occupancy and equipment

     2,238         2,375        (137     (5.8 )% 

Data processing

     1,381         1,206        175        14.5

Professional fees

     912         1,035        (123     (11.9 )% 

Advertising and business development

     568         522        46        8.8

Telecommunications

     379         381        (2     (0.5 )% 

FDIC insurance

     351         366        (15     (4.1 )% 

Courier and postage

     263         274        (11     (4.0 )% 

Amortization of core deposit intangible

     121         178        (57     (32.0 )% 

Loan expense

     178         144        34        23.6

Other real estate owned

     136         (3     139        4,633.3

Other

     1,800         1,519        281        18.5
  

 

 

    

 

 

   

 

 

   

 

 

 

Sub-Total

     17,911         16,950        961        5.7

Loss on extinguishment of debt

     316         -        316        100.0
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest expense

   $ 18,227       $ 16,950      $ 1,277        7.5
  

 

 

    

 

 

   

 

 

   

 

 

 

Salaries and employee benefits: Salaries and benefits were $9.6 million for the six months ended June 30, 2015, compared to $9.0 million for the six months ended June 30, 2014. Included in salaries and employee benefits is stock based compensation expense of $82 thousand in 2015 and $292 thousand in 2014. The decrease of $210 thousand in stock based compensation is attributable to the 2014 termination of the restricted stock unit plan, or RSUP. There was no expense associated with the RSUP for the six months ended June 30, 2015, compared to $212 thousand for the six months ended June 30, 2014. The efficiency ratio, discussed below, would have been 66.9% and 68.0% for the six months ended June 30, 2015 and June 30, 2014 if the expense associated with the RSUP were removed. The $631 thousand increase in total salaries and benefits expense when comparing the six-month periods of 2015 and 2014 reflects increases in salaries, commissions, incentives, bonuses and benefits totaling $881 thousand, partially offset by the $210 thousand reduction in stock based compensation and $40 thousand reduction in contract labor costs. The $214 thousand increase in salaries and the $508 thousand increase in commissions, incentives and bonuses reflect cost-of-living raises, increased loan production and the achievement of performance targets.

Net occupancy and equipment: Net occupancy and equipment includes expenses related to the use of premises and equipment, such as depreciation, operating lease payments, repairs and maintenance, insurance, property taxes and utilities. Occupancy expenses were $2.2 million for the six months ended June 30, 2015, compared to $2.4 million for the six months ended June 30, 2014. The majority of the decrease is due to the purchase of the corporate headquarters building in April 2015 and the construction of a new branch building in Wichita that replaced a rented space and was completed in November 2014, resulting in decreases in building rent that was partially offset by an increase in depreciation expense.

 

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Data processing: Data processing expenses were $1.4 million and $1.2 million for the six months ended June 30, 2015 and 2014. The increase of $175 thousand was due to debit card processing costs as usage increased.

Professional fees: Professional fees, including regulatory assessments were $912 thousand for the six months ended June 30, 2015 and $1.0 million for the six months ended June 30, 2014. The decrease of $123 thousand, or 11.9%, is due to a decrease in legal fees of $297 thousand, offset by an increase in accounting fees of $60 thousand, an increase in consulting fees of $50 thousand and the addition of investment advisory fees totaling $58 thousand that began in January 2015. The decrease in legal fees was primarily due to the settlement of the lawsuit with U.S. Bank in June 2015, as discussed in the June 30, 2015 Notes to Interim Consolidated Financial Statements, Note 11 – Legal Matters.

Loss on extinguishment of debt: We chose to incur a $316 thousand loss on extinguishment of debt in February 2015 due to the prepayment of all our FHLB term advances. The weighted average rate of the FHLB term advances was 3.82%. To the extent that additional funding is needed our FHLB line of credit has a lower cost of funds, 0.26% at June 30, 2015.

Other: Other non-interest expenses, which consist of subscriptions, memberships and dues; employee expenses including travel, meals, entertainment and education; supplies; printing; insurance; account related losses; correspondent bank fees; customer program expenses; losses net of gains on the sale of fixed assets; and other operating expenses such as settlement of claims, were $1.8 million for the six months ended June 30, 2015 and $1.5 million for the six months ended June 30, 2014. During the six months ended June 30, 2015, the increase is due to the settlement of the U.S. Bank lawsuit, as discussed in the June 30, 2015 Notes to Interim Consolidated Financial Statements, Note 11 – Legal Matters.

Year ended December 31, 2014 compared with year ended December 31, 2013: For the year ended December 31, 2014, non-interest expense totaled $36.1 million, an increase of $436 thousand, or 1.2%, compared with 2013. This increase was primarily due to an increase of $1.8 million in salaries and employee benefits, and an increase of $468 thousand in professional fees, partially offset by a decrease of $1.2 million in expenses and losses, net of gains, related to other real estate owned. These items and other changes in the various components of non-interest expense are discussed in more detail below.

The following table provides a comparison of the major components of non-interest expense for the years ended December 31, 2014 and 2013.

Non-Interest Expense

For the Twelve Months Ended December 31,

 

                   2014 vs. 2013  

(Dollars in thousands)

   2014      2013      Change     %  

Salaries and employee benefits

   $ 19,621       $ 17,776       $ 1,845        10.4

Net occupancy and equipment

     4,761         4,804         (43     (0.9 )% 

Data processing

     2,530         2,437         93        3.8

Professional fees

     2,279         1,811         468        25.8

Advertising and business development

     1,057         952         105        11.0

Telecommunications

     755         793         (38     (4.8 )% 

FDIC insurance

     727         922         (195     (21.1 )% 

Courier and postage

     562         551         11        2.0

Amortization of core deposit intangible

     363         487         (124     (25.5 )% 

Loan expense

     327         366         (39     (10.7 )% 

Other real estate owned

     61         1,251         (1,190     (95.1 )% 

Loss on sale of buildings held for sale

     -         197         (197     (100.0 )% 

Other

     3,024         3,284         (260     (7.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest expense

   $ 36,067       $ 35,631       $ 436        1.2
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Salaries and employee benefits: Salaries and benefits were $19.6 million for the year ended December 31, 2014, an increase of $1.8 million compared to the year ended December 31, 2013. Included in salaries and employee benefits are stock based compensation expense of $1.8 million for 2014 and $401 for 2013. The increase of $1.4 million in stock based compensation is principally attributable to the May 2014 termination of the RSUP. Upon termination of the RSUP the vesting of the RSU’s outstanding was accelerated, the service period was shortened, and the remaining unrecognized compensation was expensed. The expense associated with the RSUP was $1.5 million for the year ended December 31, 2014 compared to $303 thousand for the year ended December 31, 2013. The efficiency ratio, discussed below, would have been 69.8% and 71.9% if the expense associated with the RSUP were removed for the years ended December 31, 2014 and 2013. Incentives and bonuses of $1.1 million for 2014 were up $393 thousand over the $747 thousand in incentives and bonuses expense for 2013, accounting for the remaining increase in salaries and employee benefit expense.

Net occupancy and equipment: Net occupancy and equipment includes expenses related to the use of premises and equipment, such as depreciation, operating lease payments, repairs and maintenance, insurance, property taxes and utilities. Occupancy expenses were $4.8 million during each of the years ended December 31, 2014 and 2013. The 2013 closure of a branch in Topeka, Kansas reduced building rent expense by $96 thousand in 2014 as compared to 2013. This reduction in rent expense was partially offset by a $27 thousand increase in building rent expense associated with the 2014 lease of additional space in the Wichita corporate headquarters building.

Data processing: Data processing expenses were $2.5 million for 2014. An increase of $93 thousand, or 3.82%, from 2013 was due to technology enhancements during 2014.

Professional fees: Professional fees, including regulatory assessments were $2.3 million and $1.8 million for the years ended December 31, 2014 and 2013. The increase of $468 thousand, or 25.8%, is related to legal matters discussed in Note 22 of the December 31, 2014 audited financial statements and additional consulting/accounting services related to SEC registration.

Other real estate owned: For the year ended December 31, 2014 other real estate owned expenses were $437 thousand offset by gains on the sale of other real estate owned of $376 thousand. For the year ended December 31, 2013 other real estate owned expenses were $775 thousand and losses were $476 thousand. The decrease of $1.2 million from 2013 includes a $339 thousand decrease in other real estate owned expenses such as maintenance, repairs, insurance and taxes.

Other: Other non-interest expenses, which consist of subscriptions; memberships and dues; employee expenses including travel, meals, entertainment and education; supplies; printing; insurance; account related losses; correspondent bank fees; customer program expenses; losses net of gains on the sale of fixed assets, losses net of gains on the sale of repossessed assets other than real estate; and other operating expenses such as settlement of claims, were $3.0 million and $3.3 million for the years ended December 31, 2014 and 2013.

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 loss on debt extinguishment by the sum of net interest income and non-interest income, excluding net gains on available for sale securities. 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.

Our efficiency ratio was 66.9% for the six months ended June 30, 2015, compared with 68.9% for the six months ended June 30, 2014. The decrease was primarily due to increased net interest income and non-interest income as discussed in “Results of Operations – Net Interest Income and Net Interest Margin Analysis” and “Results of Operations – Non-interest Income” as well as decreases in salaries and employee benefits associated with the RSUP termination in 2014.

 

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Our efficiency ratio was 72.9% for the year ended December 31, 2014, compared with 72.5% for the year ended December 31, 2013. This increase was due to increased non-interest expenses, primarily stock-based compensation associated with the RSUP termination in 2014, as discussed in “Results of Operation – Non-interest Expense.”

Income Taxes

The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other non-deductible expenses and available tax credits.

Six months ended June 30, 2015 compared with six months ended June 30, 2014: For the six months ended June 30, 2015, income tax expense was $2.6 million compared with $2.1 million for the six months ended June 30, 2014. The increase was primarily attributable to higher taxable income and a higher effective income tax rate for the six months ended June 30, 2015. The effective income tax rate for the six months ended June 30, 2015 was 33.8% and for the six months ended June 30, 2014 was 30.4%, as compared to U.S. statutory rate of 35.0% for both periods. The effective income tax rate differed from the U.S. statutory rate primarily due to non-taxable income, non-deductible expenses and tax credits.

Year ended December 31, 2014 compared with year ended December 31, 2013: For the year ended December 31, 2014, income tax expense was $4.2 million compared with $3.5 million for the year ended December 31, 2013. The effective income tax rates for the years ended December 31, 2014 and 2013 were 31.9% and 31.0%, as compared to U.S. statutory rates of 35.0% and 34.0%. The effective income tax rate differed from the U.S. statutory rate primarily due to non-taxable income, non-deductible expenses and tax credits. Beginning in 2014, our federal taxable income exceeded $10.0 million resulting in a higher U.S. statutory rate.

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this prospectus 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 of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

Financial Condition

Overview

Our total assets increased $176.2 million, or 15.0%, from $1.18 billion at December 31, 2014, to $1.35 billion at June 30, 2015. Net loans increased by $109.2 million, or 15.2%, over the same period. Total investment securities at June 30, 2015 were $378.2 million, an increase of $64.2 million when compared to December 31, 2014. Cash and cash equivalents decreased by $12.1 million for the six-months ended June 30, 2015 as we invested excess liquidity into other earning assets. During the first quarter of 2015, we prepaid all FHLB term advances to decrease future funding cost, resulting in a $316 thousand loss on extinguishment of debt. Deposits at June 30, 2015 totaled $1.0 billion, an increase of $22.8 million as compared to December 31, 2014. Our deposits increased during the first six months of 2015 due to successful business development efforts.

Our total assets at December 31, 2014 were $1.18 billion, an increase of $35.2 million, or 3.1%, from $1.14 billion at December 31, 2013. The increase was primarily the result of loan growth of $65.9 million. During

 

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2014, we increased loans through both organic growth and loan acquisition. Cash along with increased deposits and increased borrowings were used to fund loan growth. Total deposits at December 31, 2014 totaled $981.0 million, an increase of $33.8 million as compared to December 31, 2013. Our deposits increased during 2014 due to successful business development efforts, as well as benefiting from excess liquidity in the financial markets. Our borrowings at December 31, 2014 were $70.4 million, an increase of $27.0 million from $43.4 million at December 31, 2013. The increase is primarily from increases in FHLB advances and the bank stock loan. In July 2014, we borrowed $15.5 million from an unaffiliated financial institution to redeem a like amount of preferred stock.

Loan Portfolio

Loans are our largest category of earning assets and typically provide higher yields than other types of earning assets. At June 30, 2015, our gross loans held for portfolio totaled $834.1 million, an increase of $108.9 million, or 15.0%, compared with December 31, 2014. This overall growth consisted of $59.5 million or 54.6% from commercial and industrial, including $15.6 million or 14.3% in broadly syndicated shared national credits; $27.1 million or 24.9% in mortgage finance loans; $51.7 million or 47.5% from residential real estate; $4.3 million or 3.9% from real estate construction; $1.6 million or 1.5% from consumer; and $1.2 million or 1.1% from agricultural real estate, partially offset by decreases of $4.9 million or 4.4% from agricultural and $4.6 million or 4.2% from commercial real estate. We also had loans classified as held for sale totaling $2.3 million at June 30, 2015, compared to $897 thousand at December 31, 2014.

Our loan portfolio consists of various types of loans, most of which are made to borrowers located in the Wichita and Kansas City MSAs, as well as various community markets throughout Kansas and Missouri. From time to time, we invest in syndicated shared national credits or pools of residential real estate loans where the borrowers are not located within our general market area. Although included in the loan portfolio, we invest in these interest-earning assets as alternatives to investments in corporate bonds or additional residential mortgage-backed securities within our securities portfolio. At June 30, 2015, shared national credits included in our commercial and industrial loan portfolio totaled $18.6 million. Our residential real estate loan portfolio included $32.7 million of out-of-market purchased residential real estate loans at June 30, 2015. 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 Kansas and Missouri. As of June 30, 2015, there was no concentration of loans to any one type of industry exceeding 10% of total loans.

At December 31, 2014, our gross loans held for investment portfolio totaled $725.2 million, an increase of $66.3 million, or 10.1%, compared with $659.0 million at December 31, 2013. This overall growth consisted of $43.7 million or 66.0% from commercial and industrial; $14.2 million or 21.4% from commercial real estate; $9.1 million or 13.7% from real estate construction; and $9.1 million or 13.7% from residential real estate. Growth in our gross loans held portfolio was partially offset by decreases of $5.0 million or 7.6% from agricultural real estate; $4.7 million or 7.1% from agricultural; and $86 thousand or 0.1% from consumer. Our loans classified as held for sale totaled $897 thousand at December 31, 2014.

At June 30, 2015, total loans were 83.1% of deposits and 61.7% of total assets. At December 31, 2014, total loans were 73.9% of deposits and 61.7% of total assets. At December 31, 2013, total loans were 69.6% of deposits and 57.8% of total assets.

The organic, or non-acquired, growth in our loan portfolio is attributable to our ability to attract new customers from other 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 and Kansas City MSAs, as well as community markets in both Kansas and Missouri.

 

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We provide commercial lines of credit, working capital loans, commercial real estate-backed loans (including loans secured by owner occupied commercial properties), term loans, equipment financing, acquisition, expansion and development loans, borrowing base loans, real estate construction loans, homebuilder loans, SBA loans, agricultural and agricultural real estate loans, letters of credit and other loan products to national and regional companies, real estate developers, mortgage lenders, manufacturing and industrial companies and other businesses. The types of loans we make to consumers include residential real estate loans, home equity loans, home equity lines of credit, or HELOC, installment loans, unsecured and secured personal lines of credit, overdraft protection and letters of credit.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:

Composition of Loan Portfolio

 

     June 30, 2015     December 31, 2014     December 31, 2013  
     Amount      Percent     Amount      Percent     Amount      Percent  

Commercial and industrial

   $ 242,578         29.1   $ 183,100         25.2   $ 139,365         21.1

Real estate loans:

               

Commercial real estate

     318,494         38.2     323,047         44.5     308,830         46.9

Real estate construction

     44,677         5.4     40,420         5.6     31,347         4.8

Residential real estate

     186,150         22.3     134,455         18.5     125,395         19.0

Agricultural real estate

     18,280         2.2     17,083         2.4     22,092         3.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate loans

     567,601         68.1     515,005         71.0     487,664         74.1

Consumer

     9,522         1.1     7,875         1.1     7,961         1.2

Agricultural

     14,415         1.7     19,267         2.7     23,969         3.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans held for investment

   $ 834,116         100.0   $ 725,247         100.0   $ 658,959         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans held for sale

   $ 2,251         100.0   $ 897         100.0   $ 347         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans(1)

   $ 619,863         74.8   $ 559,046         77.7   $ 497,561         76.2

Total residential real estate and other

     208,610         25.2     160,238         22.3     155,784         23.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans (net of allowance)

   $ 828,473         100.0   $ 719,284         100.0   $ 653,345         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Total commercial loans include commercial and industrial, commercial real estate, commercial real estate construction and agricultural real estate.

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. Our commercial and industrial portfolio totaled $242.6 million at June 30, 2015, an increase of $59.5 million, or 32.5%, compared to December 31, 2014. Of this growth, $15.6 million, or 26.3%, was a result of broadly syndicated shared national credit originations and $27.1 million, or 45.5%, was a result of mortgage finance loan participations. The remainder was a combination of loan originations within our target markets, principal repayment, and changes in the balances of revolving lines of credit. Our commercial and industrial portfolio increased $43.7 million, or 31.4%, to total $183.1 million at December 31, 2014 from $139.4 million at December 31, 2013. Of this growth, $3.0 million, or 6.8%, was a result of broadly syndicated shared national credit originations. The remainder was a combination of loan originations within our target markets, principal repayment, and changes in the balances of revolving lines of credit.

Commercial real estate: Commercial real estate loans include all loans secured by nonfarm, nonresidential properties and by multifamily residential properties, as well as 1-4 family investment-purpose real estate loans. Our commercial real estate loans were $318.5 million at June 30, 2015 a decrease of $4.6 million, or 1.4%, compared to December 31, 2014. The decrease was primarily due to principal repayment and changes in the balances of revolving lines of credit. Our commercial real estate loans increased $14.2 million, or 4.6%, to $323.0 million at December 31, 2014 from $308.8 million at December 31, 2013.

 

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Real estate construction: Real estate construction loans include loans made for the purpose of acquisition, development, or construction of real property, both commercial and consumer. Our real estate construction portfolio totaled $44.7 million at June 30, 2015, an increase of $4.3 million, or 10.5%, compared to December 31, 2014. Our real estate construction portfolio increased $9.1 million, or 28.9%, at December 31, 2014 from $31.3 million at December 31, 2013.

Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences. Our residential real estate portfolio totaled $186.2 million at June 30, 2015, an increase of $51.7 million, or 38.4%, compared to December 31, 2014. During 2015 we purchased two pools of mortgage loans that represent $57.4 million of the increase that was partially offset by net payment activity in the existing residential real estate loans. These pools of mortgages were purchased to expand our loan portfolio and provide additional loan spread.

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 and yield of the farm products. Consumer loans are generally secured by consumer assets, but may be unsecured. These three loan pools form an immaterial portion of our overall loan portfolio.

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 June 30, 2015 are summarized in the following table:

Loan Maturity and Sensitivity to Changes in Interest Rates

 

     As of June 30, 2015  
     One year
or Less
     After one year
through five
years
     After five
Years
     Total  

Commercial and industrial

   $ 126,516       $ 80,737       $ 35,325       $ 242,578   

Real estate loans:

           

Commercial real estate

     66,935         175,162         76,397         318,494   

Real estate construction

     16,529         20,692         7,456         44,677   

Residential real estate

     6,418         8,156         171,576         186,150   

Agricultural real estate

     4,333         7,251         6,696         18,280   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     94,215         211,261         262,125         567,601   

Consumer

     2,007         5,849         1,666         9,522   

Agricultural

     8,576         3,779         2,060         14,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 231,314       $ 301,626       $ 301,176       $ 834,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a predetermined fixed interest rate

   $ 123,644       $ 191,806       $ 56,798       $ 372,248   

Loans with an adjustable/floating interest rate

     107,670         109,820         244,378         461,868   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 231,314       $ 301,626       $ 301,176       $ 834,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2014 are summarized in the following table:

Loan Maturity and Sensitivity to Changes in Interest Rates

 

     As of December 31, 2014  
     One year
or less
     After one year
through five
years
     After five
years
     Total  
     (Dollars in thousands)  

Commercial and industrial

   $ 96,751       $ 61,268       $ 25,081       $ 183,100   

Real Estate

           

Commercial real estate

     52,425         187,757         82,865         323,047   

Real estate construction

     14,224         18,660         7,536         40,420   

Residential real estate

     10,282         12,705         111,468         134,455   

Agricultural real estate

     3,616         6,399         7,068         17,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     80,547         225,521         208,937         515,005   

Consumer

     2,080         4,733         1,062         7,875   

Agricultural

     12,924         4,343         2,000         19,267   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 192,302       $ 295,865       $ 237,080       $ 725,247   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a predetermined fixed interest rate

     104,142         197,142         37,518         338,802   

Loans with an adjustable/floating interest rate

     88,160         98,723         199,562         386,445   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 192,302       $ 295,865       $ 237,080       $ 725,247   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonperforming Assets

The following table presents information regarding nonperforming assets at the dates indicated:

Nonperforming Assets

 

(Dollars in thousands)

   June 30,
2015
    December 31,
2014
    December 31,
2013
 

Nonaccrual loans

   $ 7,531      $ 10,790      $ 12,985   

Accruing loans 90 or more days past due

     824        39        174   

Restructured loans-accruing

     -        -        -   

OREO acquired through foreclosure, net

     6,741        4,754        7,332   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 15,096      $ 15,583      $ 20,491   
  

 

 

   

 

 

   

 

 

 

Ratios:

      

Nonperforming assets to total assets

     1.12     1.33     1.80
  

 

 

   

 

 

   

 

 

 

Nonperforming assets to total loans plus OREO

     1.80     2.13     3.08
  

 

 

   

 

 

   

 

 

 

Nonperforming assets (“NPAs”) include loans on nonaccrual status, accruing loans 90 or more days past due, restructured loans, and other real estate acquired through foreclosure. Impaired loans do not include purchased loans that were identified upon acquisition as having experienced credit deterioration since origination (“purchased credit impaired loans” or “PCI loans”). See the “Critical Accounting Policies” section for information regarding the review of loans for determining the allowance for loan loss and impairment.

 

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We had $8.4 million in nonperforming loans at June 30, 2015, compared with $10.8 million and $13.2 million at December 31, 2014 and 2013. The nonperforming loans at June 30, 2015 consisted of 52 separate credits and 40 separate borrowers. We had two nonperforming loan relationships with outstanding balances exceeding $1.0 million as of June 30, 2015.

There are several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by lenders, and also monitor delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

Potential Problem Loans

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

Pass: Loans classified as pass do not have any noted weaknesses and repayment of the loan is expected.

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.

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

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

The risk category of loans by class of loans is as follows as of June 30, 2015:

Risk Category of Loans by Class

 

    As of June 30, 2015
    Pass     % of
Total
    Special
Mention
    % of
Total
    Substandard     % of
Total
    Doubtful     % of
Total
    Total      
    (Dollars in thousands)

Commercial and industrial

  $ 239,154        $ -        $ 2,522        $ 902        $ 242,578     

Real estate:

                   

Commercial real estate

    304,544          -          13,950          -          318,494     

Real estate construction

    42,577          -          2,100          -          44,677     

Residential real estate

    184,432          -          1,718          -          186,150     

Agricultural real estate

    17,663          -          617          -          18,280     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total real estate

    549,216          -          18,385          -          567,601     

Consumer

    9,485          -          37          -          9,522     

Agricultural

    14,296          -          119          -          14,415     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  $ 812,151        97.4   $ -        0   $ 21,063        2.5   $ 902        0.1   $ 834,116     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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The risk category of loans by class of loans is as follows as of December 31, 2014:

Risk Category of Loans by Class

 

    As of December 31, 2014
    Pass     % of
Total
    Special
Mention
    % of
Total
    Substandard     % of
Total
    Doubtful     % of
Total
    Total      
    (Dollars in thousands)

Commercial and industrial

  $ 181,272        $ -        $ 1,828        $ -        $ 183,100     

Real estate

                   

Commercial real estate

    301,882          147          21,018          -          323,047     

Real estate construction

    38,342          -          2,078          -          40,420     

Residential real estate

    132,285          -          2,170          -          134,455     

Agricultural real estate

    16,708          -          375          -          17,083     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total real estate

    489,217          147          25,641          -          515,005     

Consumer

    7,846          -          29          -          7,875     

Agricultural

    15,432          -          3,835          -          19,267     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  $ 693,767        95.7   $ 147        0   $ 31,333        4.3   $ -        0   $ 725,247     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

At June 30, 2015 loans considered pass rated credits increased to 97.4% of total loans from 95.7% of total loans at December 31, 2014. Classified loans were $22.0 million at June 30, 2015, a decrease of $9.5 million, or 30.2%, from $31.5 million at December 31, 2014. The increase primarily resulted from our continued focus on resolving classified loans in a timely manner as well as economic improvement in our principal markets.

Generally, loans are designated as nonaccrual when either principal or interest payments are 90 days or more past due based on contractual terms, unless the loan is well secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed against income. Future interest income may be recorded on a cash basis after recovery of principal is reasonably assured. Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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 reviewed and evaluated to determine if they are impaired. If we determine that a loan is impaired, then we evaluate the borrower’s overall financial condition to determine the need, if any for possible write downs or appropriate additions to the allowance for loan losses based on the unlikelihood of full repayment of principal and interest in accordance with the contractual terms or the net realizable value of the pledged collateral.

Allowance for loan losses

Please see “Critical Accounting Policies – Allowance for Loan Losses” for additional discussion of our allowance policy.

In connection with our review of the loan portfolio, risk elements attributable to particular loan types or categories are considered when assessing the quality of individual loans. Some of the risk elements include:

 

   

Commercial and industrial loans are dependent on the strength of the industries of the related borrowers and the success of their businesses. Commercial and industrial loans are advanced for equipment purchases, to

 

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provide working capital, or meet other financing needs of the business. These loans may be secured by accounts receivable, inventory, equipment, or other business assets. Financial information is obtained from the borrower to evaluate the debt service coverage and ability to repay the loans.

 

    Commercial real estate loans are dependent on the industries tied to these loans as well as the local commercial real estate market. The loans are secured by the real estate, and appraisals are obtained to support the loan amount. An evaluation of the project’s cash flows is performed to evaluate the borrower’s ability to repay the loan at the time of origination and periodically updated during the life of the loan. Residential real estate loans are affected by the local residential real estate market, the local economy, and movement in interest rates. We evaluate the borrower’s repayment ability through a review of credit reports and debt to income ratios. Appraisals are obtained to support the loan amount.

 

    Agricultural real estate loans are real estate loans related to farmland, and are affected by the value of farmland. We evaluate the borrower’s ability to repay based on cash flows from farming operations.

 

    Consumer loans are dependent on the local economy. Consumer loans are generally secured by consumer assets, but may be unsecured. We evaluate the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios.

 

    Agricultural loans are primarily operating lines subject to annual farming revenues including productivity and yield of the farm products and market pricing at the time of sale.

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

The table below shows the contractually required principal loan payments and the associated purchase discount on our purchased credit impaired portfolio.

Recorded Investment in Purchased Credit Impaired Loans

 

     June 30,
2015
    December 31,
2014
    December 31,
2013
 

Contractually required payments

   $ 6,447      $ 7,278      $ 9,063   

Discount

     (1,396     (2,167     (2,536
  

 

 

   

 

 

   

 

 

 

Recorded Investment

   $ 5,051      $ 5,111      $ 6,527   
  

 

 

   

 

 

   

 

 

 

Analysis of Allowance for loan losses: At June 30, 2015, the allowance for loan losses totaled $5.6 million, or 0.68% of total loans. At December 31, 2014 and 2013 the allowance for loan losses aggregated $6.0 million and $5.6 million, or 0.82% and 0.85% of total loans.

The allowance for loan losses on loans collectively evaluated for impairment totaled $4.3 million, or 0.52% of the $826.7 million in loans collectively evaluated for impairment at June 30, 2015, compared to an allowance for loan losses of $4.3 million, or 0.60%, of the $714.6 million in loans collectively evaluated for impairment at December 31, 2014, and $4.5 million, or 0.70%, of the $646.4 million in loans collectively evaluated for impairment at December 31, 2013. The decrease was primarily related to a change in applied loss factors which are based in part on historical loss experience as well as changes in the composition and quality of our loan

 

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portfolio collectively evaluated for impairment. The changes in composition included purchases of broadly syndicated loans, mortgage finance loans, and residential real estate mortgage pools which have different credit characteristics than our loan portfolio at December 31, 2014.

Annualized net losses as a percentage of average loans increased to 0.44% for the six months ended June 30, 2015 as compared to 0.13% for the six months ended June 30, 2014. While net charge-offs have increased in 2015, $1.0 million of the gross charge-offs had been previously identified and reserved for in the allowance for loan losses. Losses as a percentage of average loans decreased to 0.12% for the year ended December 31, 2014 as compared to 0.21% for the year ended December 31, 2013.

There have been no material changes to our accounting policies related to our allowance for loan loss methodology during the first six months of 2015 and the years ended December 31, 2014 and 2013.

The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:

Allowance for Loan Losses

 

     As of and for the Six Months
Ended June 30,
    As of and for the Years
Ended December 31,
 
             2015                     2014             2014     2013  

Average loans outstanding(1)

   $ 754,513      $ 651,772      $ 681,547      $ 697,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans outstanding at end of period(1)

   $ 834,116      $ 682,343      $ 725,247      $ 658,959   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses at beginning of the period

   $ 5,963      $ 5,614      $ 5,614      $ 4,471   

Provision for loan losses

     1,330        900        1,200        2,583   

Charge-offs:

        

Commercial and industrial

     (8     (46     (46     (126

Real estate:

        

Commercial real estate

     (1,456     -        (241     (920

Real estate construction

     -        -        -        (6

Residential real estate

     (156     (563     (668     (522

Agricultural real estate

     -        -        -        -   

Consumer

     (119     (120     (360     (374

Agricultural

     -        (1     (19     (37
  

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (1,739     (730     (1,334     (1,985
  

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

        

Commercial and industrial

     7        31        36        39   

Real estate:

        

Commercial real estate

     40        52        72        29   

Real estate construction

     2        13        16        30   

Residential real estate

     8        122        139        292   

Agricultural real estate

     -        -        -        -   

Consumer

     32        99        218        154   

Agricultural

     -        1        2        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     89        318        483        545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,650     (412     (851     (1,440
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses at end of the period

   $ 5,643      $ 6,102      $ 5,963      $ 5,614   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of ALLL to end of period loans

     0.68     0.89     0.82     0.85
  

 

 

   

 

 

   

 

 

   

 

 

 

Annualized ratio of net charge-offs (recoveries) to average loans

     0.44     0.13     0.12     0.21
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excluding loans held for sale.

 

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The following table shows the allocation of the allowance for loan losses among our loan categories and certain other information as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any loan category.

Analysis of the Allowance for Loan Losses

 

    June 30,
2015
    December 31,
2014
    December 31,
2013
 
    Amount     % of
Total
Allowance
    Amount     % of
Total
Allowance
    Amount     % of
Total
Allowance
 

Balance of allowance for loan losses applicable to:

           

Commercial and industrial

  $ 2,228        39.5   $ 1,559        26.1   $ 990        17.6

Real estate loans:

           

Commercial real estate

    1,623        28.8     2,298        38.5     2,378        42.4

Real estate construction

    290        5.1     599        10.0     488        8.7

Residential real estate

    1,345        23.8     1,190        20.0     1,360        24.2

Agricultural real estate

    25        0.4     148        2.5     217        3.9

Consumer

    90        1.6     81        1.4     63        1.1

Agricultural

    42        0.8     88        1.5