eqbk-10q_20200331.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, 2020

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Class A, Common Stock, par value $0.01 per share

Trading Symbol

EQBK

Name of each exchange on which registered

The Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted 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 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

 

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

 

As of April 27, 2020, the registrant had 15,198,986 shares of common stock, $0.01 par value per share, outstanding.

 

 


TABLE OF CONTENTS

 

Part I

Financial Information

5

Item 1.

Financial Statements

5

 

Consolidated Balance Sheets

5

 

Consolidated Statements of Operations

6

 

Consolidated Statements of Comprehensive Income (Loss)

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

37

 

Overview

37

 

Critical Accounting Policies

39

 

Results of Operations

43

 

Financial Condition

49

 

Liquidity and Capital Resources

60

 

Non-GAAP Financial Measures

61

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

64

Item 4.

Controls and Procedures

66

Part II

Other Information

67

Item 1.

Legal Proceedings

67

Item 1A.

Risk Factors

67

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67

Item 3.

Defaults Upon Senior Securities

68

Item 4.

Mine Safety Disclosures

68

Item 5.

Other Information

68

Item 6.

Exhibits

68

 

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, particularly with regard to developments related to the COVID-19 pandemic.  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 10, 2020, 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 related to the COVID-19 pandemic;

 

an economic downturn unrelated to the COVID-19 pandemic, 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;

 

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

 

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;

 

the adoption of ASU 2016-13, Financial Instruments – Credit Losses, and its impact on our allowance for loan losses and capital;

 

the effects of new federal tax laws, or changes to existing federal tax laws;

 

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

 

differences in our qualitative factors used in our calculation of the allowance for loan losses from actual results;

 

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;

 

potential fraud related to Small Business Administration (“SBA”) loan applications through the Paycheck Protection Program (“PPP”) as part of the U.S. Coronavirus Aid, Relief and Economic Security Act (“CARES Act”);

 

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;

3


 

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;

 

required implementation of new accounting standards that significantly change certain of our existing recognition practices;

 

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

 

the effects of pandemic and widespread public health emergencies;

 

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

 

the impact of the transition from London Interbank Offered Rate (“LIBOR”) and our ability to adequately manage such transition;

 

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

 

our ability to remediate, on a timely basis, our material weakness in our control over financial reporting, relating to the reconciliation process, for a portion of our corporate accounts to our general ledger, 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 verbal 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, 2020 and December 31, 2019

(Dollar amounts in thousands)

 

 

 

(Unaudited)

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

141,989

 

 

$

88,973

 

Federal funds sold

 

 

263

 

 

 

318

 

Cash and cash equivalents

 

 

142,252

 

 

 

89,291

 

Interest-bearing time deposits in other banks

 

 

2,498

 

 

 

2,498

 

Available-for-sale securities

 

 

187,812

 

 

 

142,067

 

Held-to-maturity securities, fair value of $750,900 and $783,911

 

 

721,992

 

 

 

769,059

 

Loans held for sale

 

 

6,494

 

 

 

5,933

 

Loans, net of allowance for loan losses of $21,915 and $12,232

 

 

2,485,208

 

 

 

2,544,420

 

Other real estate owned, net

 

 

5,870

 

 

 

8,293

 

Premises and equipment, net

 

 

84,732

 

 

 

84,478

 

Bank-owned life insurance

 

 

75,585

 

 

 

75,103

 

Federal Reserve Bank and Federal Home Loan Bank stock

 

 

31,662

 

 

 

31,137

 

Interest receivable

 

 

15,549

 

 

 

15,738

 

Goodwill

 

 

136,432

 

 

 

136,432

 

Core deposit intangibles, net

 

 

19,105

 

 

 

19,907

 

Other

 

 

28,641

 

 

 

25,222

 

Total assets

 

$

3,943,832

 

 

$

3,949,578

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand

 

$

508,441

 

 

$

481,298

 

Total non-interest-bearing deposits

 

 

508,441

 

 

 

481,298

 

Savings, NOW, and money market

 

 

1,668,145

 

 

 

1,749,048

 

Time

 

 

783,811

 

 

 

833,170

 

Total interest-bearing deposits

 

 

2,451,956

 

 

 

2,582,218

 

Total deposits

 

 

2,960,397

 

 

 

3,063,516

 

Federal funds purchased and retail repurchase agreements

 

 

37,113

 

 

 

35,708

 

Federal Home Loan Bank advances

 

 

389,620

 

 

 

324,373

 

Bank stock loan

 

 

40,000

 

 

 

8,990

 

Subordinated debentures

 

 

14,638

 

 

 

14,561

 

Contractual obligations

 

 

5,781

 

 

 

5,836

 

Interest payable and other liabilities

 

 

18,932

 

 

 

18,534

 

Total liabilities

 

 

3,466,481

 

 

 

3,471,518

 

Commitments and contingent liabilities, see Notes 11 and 12

 

 

 

 

 

 

 

 

Stockholders’ equity, see Note 7

 

 

 

 

 

 

 

 

Common stock

 

 

174

 

 

 

174

 

Additional paid-in capital

 

 

383,850

 

 

 

382,731

 

Retained earnings

 

 

127,015

 

 

 

125,757

 

Accumulated other comprehensive income (loss)

 

 

3,769

 

 

 

(3

)

Employee stock loans

 

 

(43

)

 

 

(77

)

Treasury stock

 

 

(37,414

)

 

 

(30,522

)

Total stockholders’ equity

 

 

477,351

 

 

 

478,060

 

Total liabilities and stockholders’ equity

 

$

3,943,832

 

 

$

3,949,578

 

See accompanying condensed notes to interim consolidated financial statements.

5


EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months ended March 31, 2020 and 2019

(Dollar amounts in thousands, except per share data)

 

 

(Unaudited)

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Interest and dividend income

 

 

 

 

 

 

 

 

Loans, including fees

 

$

34,376

 

 

$

36,533

 

Securities, taxable

 

 

4,620

 

 

 

5,082

 

Securities, nontaxable

 

 

966

 

 

 

953

 

Federal funds sold and other

 

 

595

 

 

 

634

 

Total interest and dividend income

 

 

40,557

 

 

 

43,202

 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

 

6,864

 

 

 

10,730

 

Federal funds purchased and retail repurchase agreements

 

 

31

 

 

 

32

 

Federal Home Loan Bank advances

 

 

1,175

 

 

 

1,305

 

Bank stock loan

 

 

109

 

 

 

162

 

Subordinated debentures

 

 

283

 

 

 

334

 

Total interest expense

 

 

8,462

 

 

 

12,563

 

Net interest income

 

 

32,095

 

 

 

30,639

 

Provision for loan losses

 

 

9,940

 

 

 

15,646

 

Net interest income after provision for loan losses

 

 

22,155

 

 

 

14,993

 

Non-interest income

 

 

 

 

 

 

 

 

Service charges and fees

 

 

2,026

 

 

 

1,923

 

Debit card income

 

 

2,043

 

 

 

1,738

 

Mortgage banking

 

 

590

 

 

 

317

 

Increase in value of bank-owned life insurance

 

 

482

 

 

 

488

 

Net gain (loss) from securities transactions

 

 

8

 

 

 

6

 

Other

 

 

157

 

 

 

852

 

Total non-interest income

 

 

5,306

 

 

 

5,324

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

13,504

 

 

 

14,098

 

Net occupancy and equipment

 

 

2,235

 

 

 

1,967

 

Data processing

 

 

2,663

 

 

 

2,405

 

Professional fees

 

 

1,367

 

 

 

1,156

 

Advertising and business development

 

 

696

 

 

 

646

 

Telecommunications

 

 

487

 

 

 

585

 

FDIC insurance

 

 

517

 

 

 

278

 

Courier and postage

 

 

384

 

 

 

327

 

Free nationwide ATM cost

 

 

420

 

 

 

361

 

Amortization of core deposit intangibles

 

 

802

 

 

 

779

 

Loan expense

 

 

234

 

 

 

268

 

Other real estate owned

 

 

308

 

 

 

112

 

Merger expenses

 

 

 

 

 

639

 

Other

 

 

2,141

 

 

 

1,922

 

Total non-interest expense

 

 

25,758

 

 

 

25,543

 

Income (loss) before income taxes

 

 

1,703

 

 

 

(5,226

)

Provision (benefit) for income taxes

 

 

445

 

 

 

(1,153

)

Net income (loss) and net income (loss) allocable to common stockholders

 

$

1,258

 

 

$

(4,073

)

Basic earnings (loss) per share

 

$

0.08

 

 

$

(0.26

)

Diluted earnings (loss) per share

 

$

0.08

 

 

$

(0.26

)

See accompanying condensed notes to interim consolidated financial statements.

6


EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three Months ended March 31, 2020 and 2019

(Dollar amounts in thousands)

 

 

 

(Unaudited)

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Net income (loss)

 

$

1,258

 

 

$

(4,073

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period on

   available-for-sale securities

 

 

4,862

 

 

 

2,520

 

Amortization of unrealized losses on held-to-maturity securities

 

 

177

 

 

 

293

 

Total other comprehensive income

 

 

5,039

 

 

 

2,813

 

Tax effect

 

 

(1,267

)

 

 

(713

)

Other comprehensive income, net of tax

 

 

3,772

 

 

 

2,100

 

Comprehensive income (loss)

 

$

5,030

 

 

$

(1,973

)

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, 2020 and 2019

(Unaudited)

(Dollar amounts in thousands, except 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, 2019

 

 

15,793,095

 

 

$

173

 

 

$

379,085

 

 

$

101,326

 

 

$

(4,867

)

 

$

(121

)

 

$

(19,655

)

 

$

455,941

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

(4,073

)

 

 

 

 

 

 

 

 

 

 

 

(4,073

)

Other comprehensive income,

   net of tax effects

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,100

 

 

 

 

 

 

 

 

 

2,100

 

Stock based compensation

 

 

 

 

 

 

 

 

734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

734

 

Common stock issued upon

   exercise of stock options

 

 

6,100

 

 

 

 

 

 

112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

112

 

Common stock issued under

   stock-based incentive plan

 

 

21,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayment on employee stock loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

 

 

 

34

 

Cumulative effect of change in

   accounting principle from

   implementation of ASU 2017-08

 

 

 

 

 

 

 

 

 

 

 

(1,385

)

 

 

 

 

 

 

 

 

 

 

 

(1,385

)

Balance at March 31, 2019

 

 

15,820,303

 

 

$

173

 

 

$

379,931

 

 

$

95,868

 

 

$

(2,767

)

 

$

(87

)

 

$

(19,655

)

 

$

453,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

 

 

15,444,434

 

 

$

174

 

 

$

382,731

 

 

$

125,757

 

 

$

(3

)

 

$

(77

)

 

$

(30,522

)

 

$

478,060

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,258

 

 

 

 

 

 

 

 

 

 

 

 

1,258

 

Other comprehensive income,

   net of tax effects

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,772

 

 

 

 

 

 

 

 

 

3,772

 

Stock based compensation

 

 

 

 

 

 

 

 

756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

756

 

Common stock issued upon

   exercise of stock options

 

 

400

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

Common stock issued under

   stock-based incentive plan

 

 

32,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued under

   employee stock purchase plan

 

 

16,764

 

 

 

 

 

 

354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

354

 

Repayment on employee stock loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

 

 

 

34

 

Treasury stock purchases

 

 

(295,461

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,892

)

 

 

(6,892

)

Balance at March 31, 2020

 

 

15,198,986

 

 

$

174

 

 

$

383,850

 

 

$

127,015

 

 

$

3,769

 

 

$

(43

)

 

$

(37,414

)

 

$

477,351

 

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, 2020 and 2019

(Dollar amounts in thousands, except per share data)

 

 

 

(Unaudited)

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,258

 

 

$

(4,073

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

756

 

 

 

734

 

Depreciation

 

 

933

 

 

 

863

 

Amortization of operating lease right-of-use asset

 

 

153

 

 

 

148

 

Amortization of cloud computing implementation costs

 

 

27

 

 

 

20

 

Provision for loan losses

 

 

9,940

 

 

 

15,646

 

Net (accretion) amortization of purchase accounting adjustments

 

 

(906

)

 

 

(1,233

)

Amortization (accretion) of premiums and discounts on securities

 

 

1,471

 

 

 

1,288

 

Amortization of intangibles

 

 

814

 

 

 

791

 

Deferred income taxes

 

 

257

 

 

 

(14

)

Federal Home Loan Bank stock dividends

 

 

(265

)

 

 

(184

)

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

 

 

177

 

 

 

(21

)

Net loss (gain) on securities transactions

 

 

 

 

 

(6

)

Change in unrealized loss (gain) on equity securities

 

 

(8

)

 

 

 

Loss (gain) on disposal of premises and equipment

 

 

 

 

 

(10

)

Loss (gain) on sale of foreclosed assets

 

 

27

 

 

 

15

 

Loss (gain) on sales of loans

 

 

(478

)

 

 

(260

)

Originations of loans held for sale

 

 

(23,381

)

 

 

(11,448

)

Proceeds from the sale of loans held for sale

 

 

23,298

 

 

 

12,540

 

Increase in the value of bank-owned life insurance

 

 

(482

)

 

 

(488

)

Change in fair value of derivatives recognized in earnings

 

 

495

 

 

 

(1,342

)

Payments on operating lease payable

 

 

(178

)

 

 

(222

)

Net change in:

 

 

 

 

 

 

 

 

Interest receivable

 

 

189

 

 

 

965

 

Other assets

 

 

(4,448

)

 

 

(156

)

Interest payable and other liabilities

 

 

(1,100

)

 

 

(803

)

Net cash provided by (used in) operating activities

 

 

8,549

 

 

 

12,750

 

Cash flows from (to) investing activities

 

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(50,368

)

 

 

 

Purchases of held-to-maturity securities

 

 

(2,754

)

 

 

(27,022

)

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

 

 

9,023

 

 

 

4,602

 

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

 

 

48,989

 

 

 

23,942

 

Net change in interest-bearing time deposits in other banks

 

 

 

 

 

249

 

Net change in loans

 

 

50,501

 

 

 

(36,465

)

Capitalized construction cost of other real estate owned

 

 

(52

)

 

 

Purchase of premises and equipment

 

 

(1,204

)

 

 

(1,261

)

Proceeds from sale of premises and equipment

 

 

17

 

 

 

10

 

Proceeds from sale of foreclosed assets

 

 

97

 

 

 

73

 

Net redemption (purchase) of Federal Home Loan Bank and Federal Reserve

    Bank stock

 

 

(260

)

 

 

6,829

 

Proceeds from sale of other real estate owned

 

 

2,455

 

 

 

121

 

Net cash received from acquisition of MidFirst locations

 

 

 

 

 

85,360

 

Net cash provided by (used in) investing activities

 

 

56,444

 

 

 

56,438

 

Cash flows from (to) financing activities

 

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

(103,149

)

 

 

38,824

 

Net change in federal funds purchased and retail repurchase agreements

 

 

1,405

 

 

 

(6,635

)

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

 

 

(184,223

)

 

 

(119,429

)

Proceeds from Federal Home Loan Bank term advances

 

 

250,000

 

 

 

 

9


Principal payments on Federal Home Loan Bank term advances

 

 

(525

)

 

 

(509

)

Proceeds from bank stock loan

 

 

38,354

 

 

 

 

Principal payments on bank stock loan

 

 

(7,344

)

 

 

(6,950

)

Principal payments on employee stock loans

 

 

34

 

 

 

34

 

Proceeds from the exercise of employee stock options

 

 

9

 

 

 

112

 

Proceeds from employee stock purchase plan

 

 

354

 

 

 

 

Purchase of treasury stock

 

 

(6,892

)

 

 

 

Net change in contractual obligations

 

 

(55

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(12,032

)

 

 

(94,553

)

Net change in cash and cash equivalents

 

 

52,961

 

 

 

(25,365

)

Cash and cash equivalents, beginning of period

 

 

89,291

 

 

 

192,818

 

Ending cash and cash equivalents

 

$

142,252

 

 

$

167,453

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

8,942

 

 

$

11,418

 

Income taxes paid, net of refunds

 

 

 

 

 

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Other real estate owned acquired in settlement of loans

 

$

157

 

 

$

111

 

Operating leases recognized

 

 

 

 

 

3,546

 

Total fair value of assets acquired in purchase of MidFirst locations

 

 

 

 

 

13,246

 

Total fair value of liabilities acquired in purchase of MidFirst locations

 

 

 

 

 

98,606

 

 

See accompanying condensed notes to interim consolidated financial statements.

 

10


EQUITY BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(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 subsidiaries, EBAC, LLC and Equity Bank and Equity Bank’s wholly owned subsidiaries, EBHQ, LLC and 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 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, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2020.  Operating results for the three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other period.

Reclassifications

Some items in prior financial statements were reclassified to conform to the current presentation.  Management determined the items reclassified are immaterial to the consolidated financial statements taken as a whole and did not result in a change in equity or net income for the periods reported.

Risk and Uncertainties

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.  The package also includes extensive emergency funding for hospitals and medical providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware of.

Financial position and results of operations

11


The Company’s interest income and fees could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees.  While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

As of March 31, 2020, all our capital ratios, and our subsidiary bank’s capital ratios, were in excess of regulatory requirements.  While we are currently classified as well capitalized, an extended economic recession brought about by COVID-19, could adversely impact our reported and regulatory capital ratios by further credit losses.  The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s subsidiary bank’s capital deteriorates such that it is unable to pay dividends to the Company for an extended period of time, the Company may not be able to service its debt.

The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19 could cause a further and sustained decline in the Company’s stock price, which may require further quantitative and qualitative analysis and could result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Processes, controls and business continuity plan

The Company has invoked a preparedness plan that includes breaking up onsite work departments and remote working strategy for part of the Company’s staff. The Company does not anticipate incurring additional material cost related to its continued deployment of the preparedness plan and no material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19.  The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 90 or 180 days.  As of April 27, 2020, the Company has executed 927 of these deferrals on outstanding loan balances of $474,658.  In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program.  PPP loans have a two-year term and earn interest at 1%.  As of April 27, 2020, the Company has closed or approved with the SBA 1,776 PPP loans representing $470,127 in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through additional provision for loan loss expense charged to earnings.

12


Credit

The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for loan losses and record additional provision for loan losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

All industries have and will continue to experience adverse impacts as a result of the COVID-19 virus.  Our exposure from outstanding loans and commitments totaled approximately $239,900 in hospitality, approximately $222,200 in construction, approximately $144,200 in retail, approximately $96,400 in restaurants, approximately $85,100 in multifamily properties, approximately $62,900 in aircraft manufacturing and approximately $45,200 in syndicated national credits.

Recent Accounting Pronouncements

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 is required to use a new forward-looking current expected credit losses (CECL) 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 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 has completed the process of developing credit models and model implementation during the fourth quarter of 2019; however, the Company is in the final stages of implementing the internal controls, accounting, financial reporting and governance processes to comply with the new guidance. The adoption of CECL is expected to result in an increase to our total allowance for credit losses (ACL) on loans held for investment and will require a reclassification of purchased credit-impaired discount from loans to the allowance for credit losses.  The expected increase in the ACL is largely attributable to the longer duration of the real estate portfolios.  The ultimate impact to the Company’s financial condition and results of operations of the ASU, at both adoption and each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, the composition of our loan portfolio and other management judgements.  The ASU was effective for the Company beginning in the first quarter of 2020; however, the CARES Act, issued in 2020, provided temporary relief related to the implementation of this accounting guidance until the earlier of the date on which the national emergency concerning the COVID-19 virus terminates or December 31, 2020.  The Company has elected to utilize this relief and has calculated the allowance for loan losses and the resulting provision for loan losses using the prior incurred loss method at March 31, 2020.  When the temporary relief expires the implementation of this accounting guidance is expected to be applied retroactively back to January 1, 2020.

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 and the impact from the accounting guidance will be highly dependent on changes in financial markets and future events.  The Company will monitor indicators of goodwill impairment on a quarterly basis and will record impairment when it is determined to have occurred.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial

13


institutions working with customers affected by the Coronavirus.  The interagency statement was effective immediately and impacted accounting for loan modifications.  Under Accounting Standards Codification 310-40, Receivables – Troubled Debt Restructurings by Creditors, (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.  The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.  This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.  Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.  This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

 

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 (loss) are listed below.

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

March 31, 2020