eqbk-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 001-37624

 

EQUITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

Kansas

 

72-1532188

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

7701 East Kellogg Drive, Suite 300

Wichita, KS

 

 

67207

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: 316.612.6000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

                                                   Large accelerated filer                  ☐                       Accelerated filer                        ☒

                                                   Non-accelerated filer (Do not check if a smaller reporting company)                       ☐

                                                                                                                   Smaller reporting company                        ☐

                                                                                                                   Emerging growth company                        ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

Shares outstanding as of

May 1, 2018


Class A Common Stock, par value $0.01 per share

14,609,414

Class B Non-Voting Common Stock, par value $0.01 per share

                0

 

 

TABLE OF CONTENTS

 

PART I

Financial Information

5

Item 1.

Financial Statements

5

 

Consolidated Balance Sheets

5

 

Consolidated Statements of Income

6

 

Consolidated Statements of Comprehensive Income

7

 

Consolidated Statements of Stockholders’ Equity

8

 

Consolidated Statements of Cash Flows

9

 

Condensed Notes to Interim Consolidated Financial Statements

11

Item 2.

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

34

 

Overview

34

 

Critical Accounting Policies

36

 

Results of Operations

38

 

Financial Condition

44

 

Liquidity and Capital Resources

56

 

Non-GAAP Financial Measures

59

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

62

Item 4.

Controls and Procedures

64

Part II

OTHER INFORMATION

65

Item 1.

Legal Proceedings

65

Item 1A.

Risk Factors

65

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 3.

Defaults Upon Senior Securities

65

Item 4.

Mine Safety Disclosures

65

Item 5.

Other Information

65

Item 6.

Exhibits

65

 

Important Notice about Information in this Quarterly Report

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

The information contained in this Quarterly Report is accurate only as of the date of this Quarterly Report on Form 10-Q and as of the dates specified herein.

2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance.  These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature.  These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, 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.  When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Item 1A - Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2018, and in Item 1A – Risk Factors of this Quarterly Report.

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

 

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 (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 costs of integrating the businesses we acquire, which may be greater than expected;

 

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;

 

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;

3


 

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 “Item 1A - Risk Factors.”

The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this Quarterly Report.  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.  All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement.  This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

 

 

4


PART I

 

 

Item 1: Financial Statements

EQUITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

March 31, 2018 and December 31, 2017

(Dollar amounts in thousands)

 

 

 

(Unaudited)

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

42,526

 

 

$

48,034

 

Federal funds sold

 

 

620

 

 

 

4,161

 

Cash and cash equivalents

 

 

43,146

 

 

 

52,195

 

Interest-bearing time deposits in other banks

 

 

3,496

 

 

 

3,496

 

Available-for-sale securities

 

 

174,717

 

 

 

162,272

 

Held-to-maturity securities, fair value of $511,138 and $532,744

 

 

522,021

 

 

 

535,462

 

Loans held for sale

 

 

11,112

 

 

 

16,344

 

Loans, net of allowance for loan losses of $9,316 and $8,498

 

 

2,116,008

 

 

 

2,094,781

 

Other real estate owned, net

 

 

7,090

 

 

 

7,907

 

Premises and equipment, net

 

 

62,572

 

 

 

63,449

 

Bank-owned life insurance

 

 

68,690

 

 

 

68,384

 

Federal Reserve Bank and Federal Home Loan Bank stock

 

 

25,437

 

 

 

24,373

 

Interest receivable

 

 

12,450

 

 

 

12,371

 

Goodwill

 

 

103,412

 

 

 

104,907

 

Core deposit intangibles, net

 

 

10,355

 

 

 

10,738

 

Other

 

 

15,556

 

 

 

13,830

 

Total assets

 

$

3,176,062

 

 

$

3,170,509

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand

 

$

362,786

 

 

$

366,530

 

Total non-interest-bearing deposits

 

 

362,786

 

 

 

366,530

 

Savings, NOW and money market

 

 

1,284,319

 

 

 

1,238,984

 

Time

 

 

721,192

 

 

 

776,499

 

Total interest-bearing deposits

 

 

2,005,511

 

 

 

2,015,483

 

Total deposits

 

 

2,368,297

 

 

 

2,382,013

 

Federal funds purchased and retail repurchase agreements

 

 

42,101

 

 

 

37,492

 

Federal Home Loan Bank advances

 

 

355,836

 

 

 

347,692

 

Bank stock loan

 

 

2,438

 

 

 

2,500

 

Subordinated debentures

 

 

14,040

 

 

 

13,968

 

Contractual obligations

 

 

1,966

 

 

 

1,967

 

Interest payable and other liabilities

 

 

9,897

 

 

 

10,733

 

Total liabilities

 

 

2,794,575

 

 

 

2,796,365

 

Commitments and contingent liabilities, see Notes 10 and 11

 

 

 

 

 

 

 

 

Stockholders’ equity, see Note 6

 

 

 

 

 

 

 

 

Common stock

 

 

161

 

 

 

161

 

Additional paid-in capital

 

 

332,075

 

 

 

331,339

 

Retained earnings

 

 

74,212

 

 

 

65,512

 

Accumulated other comprehensive loss

 

 

(5,185

)

 

 

(3,092

)

Employee stock loans

 

 

(121

)

 

 

(121

)

Treasury stock

 

 

(19,655

)

 

 

(19,655

)

Total stockholders’ equity

 

 

381,487

 

 

 

374,144

 

Total liabilities and stockholders’ equity

 

$

3,176,062

 

 

$

3,170,509

 

 

See accompanying condensed notes to interim consolidated financial statements.

5


EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months ended March 31, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

 

(Unaudited)

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Interest and dividend income

 

 

 

 

 

 

 

 

Loans, including fees

 

$

29,048

 

 

$

19,400

 

Securities, taxable

 

 

3,723

 

 

 

2,724

 

Securities, nontaxable

 

 

879

 

 

 

785

 

Federal funds sold and other

 

 

473

 

 

 

306

 

Total interest and dividend income

 

 

34,123

 

 

 

23,215

 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

 

4,718

 

 

 

2,576

 

Federal funds purchased and retail repurchase agreements

 

 

23

 

 

 

12

 

Federal Home Loan Bank advances

 

 

1,299

 

 

 

502

 

Bank stock loan

 

 

27

 

 

 

 

Subordinated debentures

 

 

269

 

 

 

232

 

Total interest expense

 

 

6,336

 

 

 

3,322

 

Net interest income

 

 

27,787

 

 

 

19,893

 

Provision for loan losses

 

 

1,170

 

 

 

1,095

 

Net interest income after provision for loan losses

 

 

26,617

 

 

 

18,798

 

Non-interest income

 

 

 

 

 

 

 

 

Service charges and fees

 

 

1,580

 

 

 

1,182

 

Debit card income

 

 

1,253

 

 

 

1,005

 

Mortgage banking

 

 

313

 

 

 

485

 

Increase in value of bank-owned life insurance

 

 

652

 

 

 

355

 

Net gain (loss) from securities transactions

 

 

(8

)

 

 

13

 

Other

 

 

461

 

 

 

299

 

Total non-interest income

 

 

4,251

 

 

 

3,339

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,891

 

 

 

7,806

 

Net occupancy and equipment

 

 

1,802

 

 

 

1,499

 

Data processing

 

 

1,674

 

 

 

1,161

 

Professional fees

 

 

715

 

 

 

516

 

Advertising and business development

 

 

619

 

 

 

518

 

Telecommunications

 

 

369

 

 

 

361

 

FDIC insurance

 

 

244

 

 

 

106

 

Courier and postage

 

 

255

 

 

 

226

 

Free nationwide ATM cost

 

 

292

 

 

 

212

 

Amortization of core deposit intangibles

 

 

384

 

 

 

209

 

Loan expense

 

 

346

 

 

 

177

 

Other real estate owned

 

 

268

 

 

 

205

 

Merger expenses

 

 

531

 

 

 

926

 

Other

 

 

1,237

 

 

 

1,304

 

Total non-interest expense

 

 

19,627

 

 

 

15,226

 

Income before income taxes

 

 

11,241

 

 

 

6,911

 

Provision for income taxes

 

 

2,530

 

 

 

2,047

 

Net income

 

 

8,711

 

 

 

4,864

 

Net income allocable to common stockholders

 

$

8,711

 

 

$

4,864

 

Basic earnings per share

 

$

0.60

 

 

$

0.41

 

Diluted earnings per share

 

$

0.58

 

 

$

0.40

 

 

See accompanying condensed notes to interim consolidated financial statements.

6


EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months ended March 31, 2018 and 2017

(Dollar amounts in thousands)

 

 

 

(Unaudited)

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Net income

 

$

8,711

 

 

$

4,864

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period on

   available-for-sale securities

 

 

(2,937

)

 

 

212

 

Amortization of unrealized losses on held-to-maturity securities

 

 

119

 

 

 

137

 

Reclassification adjustment for net gains included in net income

 

 

 

 

 

(13

)

Total other comprehensive income (loss)

 

 

(2,818

)

 

 

336

 

Tax effect

 

 

714

 

 

 

(129

)

Other comprehensive income (loss), net of tax

 

 

(2,104

)

 

 

207

 

Comprehensive income

 

$

6,607

 

 

$

5,071

 

 

See accompanying condensed notes to interim consolidated financial statements.

 

 

7


EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended March 31, 2018 and 2017

(Unaudited)

(Dollar amounts in thousands, except per share data)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Employee

 

 

 

 

 

 

Total

 

 

 

Shares

Outstanding

 

 

Amount

 

 

Paid-In

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (loss)

 

 

Stock

Loans

 

 

Treasury

Stock

 

 

Stockholders’

Equity

 

Balance at January 1, 2017

 

 

11,680,308

 

 

$

132

 

 

$

236,103

 

 

$

44,328

 

 

$

(2,702

)

 

$

(242

)

 

$

(19,655

)

 

$

257,964

 

Net income

 

 

 

 

 

 

 

 

 

 

 

4,864

 

 

 

 

 

 

 

 

 

 

 

 

4,864

 

Other comprehensive income,

   net of tax effects

 

 

 

 

 

 

 

 

 

 

 

 

 

 

207

 

 

 

 

 

 

 

 

 

207

 

Stock-based compensation

 

 

 

 

 

 

 

 

494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

494

 

Common stock issued upon

   exercise of stock options

 

 

40,834

 

 

 

 

 

 

692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

692

 

Common stock issued under

   stock-based incentive plan

 

 

1,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments on employee stock loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72

 

 

 

 

 

 

72

 

Issuance of common stock in

   connection with the acquisition

   of Prairie State Bancshares, net

   of issuance expenses of $329

 

 

479,465

 

 

 

5

 

 

 

14,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,913

 

Balance at March 31, 2017

 

 

12,202,237

 

 

$

137

 

 

$

252,197

 

 

$

49,192

 

 

$

(2,495

)

 

$

(170

)

 

$

(19,655

)

 

$

279,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

 

14,605,607

 

 

$

161

 

 

$

331,339

 

 

$

65,512

 

 

$

(3,092

)

 

$

(121

)

 

$

(19,655

)

 

$

374,144

 

Net income

 

 

 

 

 

 

 

 

 

 

 

8,711

 

 

 

 

 

 

 

 

 

 

 

 

8,711

 

Other comprehensive income,

   net of tax effects

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,104

)

 

 

 

 

 

 

 

 

(2,104

)

Stock-based compensation

 

 

 

 

 

 

 

 

718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

718

 

Common stock issued upon

   exercise of stock options

 

 

1,250

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

Common stock issued under

   stock-based incentive plan

 

 

2,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption of ASU 2016-01

   reclassifying AFS equity

   securities with readily

   determined fair value

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

11

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

 

14,609,414

 

 

$

161

 

 

$

332,075

 

 

$

74,212

 

 

$

(5,185

)

 

$

(121

)

 

$

(19,655

)

 

$

381,487

 

 

See accompanying condensed notes to interim consolidated financial statements.

 

 

8


EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months ended March 31, 2018 and 2017

(Dollar amounts in thousands, except per share data)

 

 

 

(Unaudited)

March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

8,711

 

 

$

4,864

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Stock based compensation

 

 

718

 

 

 

386

 

Depreciation

 

 

689

 

 

 

585

 

Provision for loan losses

 

 

1,170

 

 

 

1,095

 

Net amortization (accretion) of purchase valuation adjustments

 

 

(1,047

)

 

 

(1,544

)

Amortization of premiums and discounts on securities

 

 

755

 

 

 

723

 

Amortization of intangibles

 

 

396

 

 

 

211

 

Deferred income taxes

 

 

(19

)

 

 

(53

)

FHLB stock dividends

 

 

(254

)

 

 

(182

)

Loss (gain) on sales and valuation adjustments on other real estate owned

 

 

(182

)

 

 

30

 

Net loss (gain) on securities transactions

 

 

 

 

 

(13

)

Change in unrealized loss (gain) on equity securities

 

 

8

 

 

 

Loss (gain) on disposal of premise and equipment

 

 

(192

)

 

 

2

 

Loss (gain) on sales of loans

 

 

(256

)

 

 

(412

)

Originations of loans held for sale

 

 

(27,194

)

 

 

(17,230

)

Proceeds from the sale of loans held for sale

 

 

32,682

 

 

 

18,450

 

Increase in the value of bank owned life insurance

 

 

(652

)

 

 

(356

)

Change in fair value of derivatives recognized in earnings

 

 

(4

)

 

 

 

Net change in:

 

 

 

 

 

 

 

Interest receivable

 

 

(80

)

 

 

130

 

Other assets

 

 

1,034

 

 

 

(634

)

Interest payable and other liabilities

 

 

(1,377

)

 

 

450

 

Net cash provided by (used in) operating activities

 

 

14,906

 

 

 

6,502

 

Cash flows (to) from investing activities

 

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(20,498

)

 

 

(13,660

)

Purchases of held-to-maturity securities

 

 

 

 

 

(62,978

)

Proceeds from sales, calls, pay-downs, and maturities of available-for-sale securities

 

 

4,447

 

 

 

6,303

 

Proceeds from calls, pay-downs and maturities of held-to-maturity securities

 

 

13,963

 

 

 

13,383

 

Net change in interest-bearing time deposits in other banks

 

 

 

 

 

1

 

Net change in loans

 

 

(21,903

)

 

 

(3,717

)

Purchase of premises and equipment

 

 

(814

)

 

 

(1,286

)

Proceeds from sale of premise and equipment

 

 

1,194

 

 

 

1

 

Proceeds from sale of foreclosed assets

 

 

35

 

 

 

Net redemption (purchase) of FHLB and FRB stock

 

 

(810

)

 

 

1,467

 

Proceeds from sale of other real estate owned

 

 

1,202

 

 

 

425

 

Proceeds from bank-owned life insurance death benefits

 

 

346

 

 

 

Cash paid for acquisition of Eastman

 

 

(55

)

 

 

Purchase of Prairie, net of cash acquired

 

 

 

 

(6,744

)

Net cash provided by (used in) investing activities

 

 

(22,893

)

 

 

(66,805

)

Cash flows (to) from financing activities

 

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

(13,770

)

 

 

65,238

 

Net change in federal funds purchased and retail repurchase agreements

 

 

4,609

 

 

 

(2,938

)

Net borrowings (payments) on Federal Home Loan Bank line of credit

 

 

8,144

 

 

 

(2,520

)

Principal payments on bank stock loan

 

 

(62

)

 

 

 

Proceeds from the exercise of employee stock options

 

 

18

 

 

 

692

 

Principal payments on employee stock loans

 

 

 

 

 

72

 

Net change in contractual obligations

 

 

(1

)

 

 

(15

)

Net cash provided by (used in) financing activities

 

 

(1,062

)

 

 

60,529

 

9


Net change in cash and cash equivalents

 

 

(9,049

)

 

 

226

 

Cash and cash equivalents, beginning of period

 

 

52,195

 

 

 

35,095

 

Ending cash and cash equivalents

 

$

43,146

 

 

$

35,321

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

6,021

 

 

$

2,863

 

Income taxes paid, net of refunds

 

 

 

 

 

(78

)

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Other real estate owned acquired in settlement of loans

 

 

203

 

 

 

 

Total fair value of assets acquired in purchase of Prairie, net of cash

 

 

 

 

 

147,248

 

Total fair value of liabilities assumed in purchase of Prairie, net of cash

 

 

 

 

 

125,591

 

 

 

See accompanying condensed notes to interim consolidated financial statements.

 

10


EQUITY BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited)

(Dollar amounts in thousands, except per share data)

 

 

NOTE 1 – BASIS OF PRESENTATION

The interim consolidated financial statements include the accounts of Equity Bancshares, Inc., its wholly owned subsidiary, Equity Bank, and Equity Bank’s wholly owned subsidiary, SA Holdings, Inc.  These entities are collectively referred to as the “Company”.  All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information.  The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.  In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are of a normal recurring nature.  These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2018.  Operating results for the three months ended March 31, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or any other period.

Change in Tax Law:

On December 22, 2017, the President of the United States signed the 2017 Tax Cuts and Jobs Act (“Tax Reform”), which reduced the U.S. federal statutory corporate income tax rate from 35% to 21% beginning in 2018.  On the same date, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, which specifies that reasonable estimates of the income tax effects of Tax Reform should be used to account for the effects of Tax Reform in the period enactment is required by general accepted accounting principals and also provided for a measurement period that should not extend beyond one year from Tax Reform’s enactment date.  The Company has accounted for the effects of Tax Reform using reasonable estimates based on currently available information.  This accounting may change due to changes in interpretations the Company has made and the issuance of new tax or accounting guidance.

Adoption of New Accounting Standards:

On January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain or loss from the transfer of nonfinancial assets, such as other real estate owned (“OREO”).  The majority of the Company’s revenues come from interest income on financial instruments, including loans, leases, securities and derivatives, which are outside the scope of ASC 606.  The Company’s services that fall within the scope of ASC 606 are presented with non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer.  Services within the scope of ASC 606 include service charges and fees on deposits, debit card income, investment referral income, insurance sales commissions, and other non-interest income related to loans and deposits.

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018, are presented under ASC 606, while prior period amounts continue to be reported in accordance with legacy GAAP.  The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.

Except for gains or losses from the sale of OREO, all of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income.  The following table presents the Company’s sources of non-interest income for the three months ended March 31, 2018, and 2017.

11


 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Non-interest income

 

 

 

 

 

 

 

 

Service charges and fees

 

$

1,580

 

 

$

1,182

 

Debit card income

 

 

1,253

 

 

 

1,005

 

Mortgage banking(a)

 

 

313

 

 

 

485

 

Increase in bank-owned life insurance(a)

 

 

652

 

 

 

355

 

Net gain (loss) from securities transactions(a)

 

 

(8

)

 

 

13

 

Other(b)

 

 

461

 

 

 

299

 

Total

 

$

4,251

 

 

$

3,339

 

 

 

 

 

 

 

 

 

 

(a) Not within the scope of ASC 606.

 

 

 

 

 

 

 

 

(b) The Other category includes investment referral income, insurance sales commissions and other non-interest income related to loans and deposits totaling $402 for the three months ended March 31, 2018, which is within the scope of ASC 606; the remaining balance of $59 for the three months ended March 31, 2018, represents recovery on zero-basis purchased loans, income from equity method investments and other remaining items considered insignificant, which is outside the scope of ASC 606.

 

12


A description of the Company’s revenue streams accounted for under ASC 606 follows:

Service Charges and Fees:  The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services.  Transaction-based fees, which include services such as stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.  Overdraft fees are recognized at the point in time that the overdraft occurs.  Service charges on deposits are collected through withdrawal from the customer’s account balance.

Debit Card Income:  The Company earns debit card income from cardholder transactions conducted through payment processors.  Debit card income from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrently with the transaction processing services provided to the cardholder.

Investment Referral Income:  Investment referral services are offered through an unaffiliated registered broker-dealer and investment advisor.  Investment referral income consists of transaction-based fees (i.e. trade commissions) and account fees (i.e. custodial fees).  The service obligation for transaction-based fees relate to processing of individual transactions and are considered earned at the time the transaction occurs.  The Company currently records this income when payment is received and at each month end for current-month transactions.  Account fees are considered earned over the period for which the fees relate.  These fees are received during the first month of each quarter and represent advance payment for the current quarter.  These fees are amortized ratably over the three months during the quarter.  Therefore, all account-based fees are currently recorded as performance obligations are satisfied.

Insurance Sales Commissions:  Insurance commissions are received based on contracts with insurance companies which provide for a percentage of premiums to be paid to the Company in exchange for placement of policies with customers.  The commissions generally relate to a period of one year or less.  Under certain contracts, the Company may also assist with claims processing, but this performance obligation is considered insignificant compared to the initial placement of the policy.  As such, the performance obligation is considered to have been substantially satisfied at the time of policy placement.  While this indicates that all related revenue would be appropriately accrued at policy inception, in some cases recognition occurs over the policy period if received in installments from the insurance company.  In no cases would this deferral extend beyond 12 months and the effect is considered immaterial compared to recognition at the time of policy placement.  The Company also receives commission based on renewals of policies previously placed.  However, additional work is required to process the renewals, resulting in future performance obligations to earn the related revenue.  In addition, the occurrence of such renewals is not certain as initial policies are generally for one year or less and the fees earned are not determined until the time of renewal, based on underwriting at that time.  As such, the Company has determined that accrual of income, for future renewals, is not appropriate.

Other Non-interest Income:  Other non-interest income related to loans and deposits is earned when the specific transaction is processed, similar to service charges and fees.

Gain or Loss on Sale of Other Real Estate:  Gain or loss on sale of other real estate is reported in non-interest expense and is netted with other real estate expenses.  The Company records a gain or loss from the sale of other real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.  When the Company finances the sale of other real estate to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.  Once these criteria are met, the other real estate is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.  As a result, the Company has concluded that ASC 606 will affect the decision to recognize or defer gains on sales of other real estate in circumstances where the Company has financed the sale.

On January 1, 2018, the Company adopted ASU 2016-01Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments.  The update eliminated the available-for-sale classification of accounting for equity securities and adjusted fair value disclosures for financial instruments carried at amortized costs so that the disclosed fair values represent an exit price as opposed to an entry price.  The impact of adopting this update was the reclassification of $11 of after tax unrealized losses from available-for-sale equity securities with a readily determinable fair value from accumulated other comprehensive income to retained earnings.  Also, beginning January 1, 2018, changes in fair value on equity securities with a readily determinable fair value will be reported in net income.

Also on January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows (Topic 230). This update addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flow.  This update had no impact on our Company.

13


Recent Accounting Pronouncements:  In February 2016, FASB issued ASU 2016-02, Leases, with the intention of improving financial reporting about leasing transactions.  The ASU requires all lessees to recognize lease assets and lease liabilities on the balance sheet.  Lessor accounting is largely unchanged by the ASU, however disclosures about the amount, timing, and uncertainty of cash flows arising from leases are required of both lessees and lessors.  The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.  The modified retrospective approach provides for optional practical expedients when applying the ASU to leases that commenced before the effective date of the ASU.  The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements but expects that assets and liabilities will increase to reflect the impact of this standard.

 

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which will change how the Company measures credit losses for most of its financial assets.  This guidance is applicable to loans held for investment, off-balance-sheet credit exposures, such as loan commitments and standby letters of credit, and held-to-maturity investment securities.  The Company will be required to use a new forward-looking expected loss model that is anticipated to result in the earlier recognition of allowances for losses.  For available-for-sale securities with unrealized losses, the Company will measure credit losses in a manner similar to current practice, but will recognize those credit losses as allowances rather than reductions in the amortized cost of the securities.  In addition, the ASU requires significantly more disclosure including information about credit quality by year of origination for most loans.  The ASU is effective for the Company beginning in the first quarter of 2020.  Generally, the amendments will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The Company is currently gathering the historical loss data by portfolio and class of financial instrument to estimate the life of financial instrument credit loss and is developing the supporting system requirements to routinely generate the reported values.  At this time an estimate of the impact to the Company’s financial statements is not known.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other, which will simplify the subsequent measurement of goodwill. Goodwill and other intangibles must be assessed for impairment annually.  If an entity’s assessment determines that the fair value of an entity is less than its carrying amount, including goodwill, currently, the measurement of goodwill impairment requires that the entity’s identifiable net assets be valued following procedures similar to determining the fair value of assets acquired and liabilities assumed in a business combination.  Under ASU 2017-04, goodwill impairment is measured to the extent that the carrying amount of an entity exceeds its fair value.  The amendments in this update are effective for the Company’s annual goodwill impairment tests beginning in 2020.  The amendments will be applied on a prospective basis.  The Company is currently evaluating the impact of this new accounting standard but does not expect a material impact to its financial statements.

 

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, this update shortens the amortization period of certain callable debt securities held at a premium to the earliest call date.  The amendments in this update are effective for the Company’s fiscal year beginning after December 15, 2018, and interim periods within that fiscal year; however, early adoption is permitted.  If early adoption of this update is elected by the Company, any adjustments will be reflected as of the beginning of the fiscal year.  The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and the Company will be required to provide change in accounting principle disclosures.  The Company is currently evaluating the impact of this new accounting guidance and an estimate of the impact to the Company’s financial statements is not known.

 

 

 

14


NOTE 2 – SECURITIES

The amortized cost and fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income are listed below.

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities (issued by

   government-sponsored entities)

 

$

179,242

 

 

$

27

 

 

$

(4,747

)

 

$

174,522

 

State and political subdivisions

 

 

195

 

 

 

 

 

 

 

 

 

195

 

 

 

$

179,437

 

 

$

27