Equity Bank(EQBK) - 2019 Q1 - Quarterly Report

Part I Financial Information Item 1. Financial Statements The company's financial statements for the period ended March 31, 2019, show total assets of $4.07 billion, a slight increase from year-end 2018. A significant net loss of $4.1 million was recorded for the first quarter of 2019, a sharp contrast to the $8.7 million net income in the same period of 2018. This loss was primarily driven by a substantial $15.6 million provision for loan losses. The statements also reflect the acquisition of three branch locations from MidFirst Bank in February 2019 Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2019 ($ billions) | December 31, 2018 ($ billions) | | :--- | :--- | :--- | | Total Assets | $4.07B | $4.06B | | Loans, net | $2.59B | $2.56B | | Goodwill | $136.4M | $131.7M | | Total Deposits | $3.26B | $3.12B | | Total Liabilities | $3.61B | $3.61B | | Total Stockholders' Equity | $453.5M | $455.9M | Consolidated Statement of Operations Highlights (Unaudited, Three Months Ended) | Account | March 31, 2019 ($ millions) | March 31, 2018 ($ millions) | | :--- | :--- | :--- | | Net Interest Income | $30.6M | $27.8M | | Provision for Loan Losses | $15.6M | $1.2M | | Non-interest Income | $5.3M | $4.3M | | Non-interest Expense | $25.5M | $19.6M | | Net Income (Loss) | ($4.1M) | $8.7M | | Diluted EPS | ($0.26) | $0.58 | - On February 8, 2019, Equity Bank acquired the assets and assumed the deposits of three branch locations in Oklahoma from MidFirst Bank, resulting in goodwill of $4.7 million[161][163] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported a net loss of $4.1 million for Q1 2019, a significant downturn from an $8.7 million net income in Q1 2018. The loss was primarily caused by a $14.5 million increase in the provision for loan losses, attributed to a single, isolated credit relationship with two related borrowers who filed for Chapter 11 bankruptcy. Nonperforming assets more than doubled to $77.4 million. Despite the loss, the company completed the acquisition of three branches from MidFirst Bank and maintained a 'well capitalized' regulatory status Overview Equity Bancshares, Inc. is a bank holding company with $4.07 billion in consolidated total assets as of March 31, 2019. The company operates through its subsidiary, Equity Bank, with 52 locations across Arkansas, Kansas, Missouri, and Oklahoma. For the first quarter of 2019, the company reported a net loss of $4.1 million, compared to a net income of $8.7 million for the same period in 2018 - As of March 31, 2019, the company had consolidated total assets of $4.07 billion, total loans of $2.59 billion (net), and total deposits of $3.26 billion[170] Quarterly Performance Summary | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Income (Loss) | ($4.1M) | $8.7M | | Diluted EPS | ($0.26) | $0.58 | | ROAA | (0.42)% | 1.11% | | ROAE | (3.59)% | 9.35% | Results of Operations The company's operating results for Q1 2019 were dominated by a $14.5 million increase in the provision for loan losses, leading to a net loss of $4.1 million. Net interest income grew by $2.9 million year-over-year to $30.6 million, but the net interest margin compressed to 3.49% from 3.91% due to rising deposit costs. Non-interest income increased by $1.1 million, while non-interest expense rose by $5.9 million, driven by costs associated with recent acquisitions - The net loss of $4.1 million in Q1 2019 was a $12.8 million decrease from the $8.7 million net income in Q1 2018, primarily due to a $14.5 million increase in the provision for loan losses[192] - The significant increase in the provision for loan losses was attributed to a single credit relationship that management believes is an isolated incident[209] Net Interest Margin Analysis | Metric | Q1 2019 ($ millions) | Q1 2018 ($ millions) | | :--- | :--- | :--- | | Net Interest Income | $30.6M | $27.8M | | Net Interest Margin | 3.49% | 3.91% | | Yield on Earning Assets | 4.92% | 4.80% | | Cost of Interest-Bearing Liabilities | 1.71% | 1.06% | - Non-interest expense increased by 30.1% to $25.5 million, largely due to a $3.2 million rise in salaries and employee benefits following recent mergers and acquisitions[217][218] Financial Condition As of March 31, 2019, total assets stood at $4.07 billion. The loan portfolio grew 1.7% to $2.62 billion since year-end 2018. However, credit quality deteriorated significantly, with nonperforming assets more than doubling to $77.4 million, representing 1.90% of total assets. This was driven by a large commercial and industrial credit relationship being placed on nonaccrual status. Consequently, the allowance for loan losses was increased substantially to $26.3 million, or 1.01% of total loans, up from 0.44% at year-end Nonperforming Assets (NPAs) | Metric | March 31, 2019 ($ millions) | December 31, 2018 ($ millions) | | :--- | :--- | :--- | | Nonaccrual loans | $71.0M | $33.2M | | Total NPAs | $77.4M | $39.6M | | NPAs to Total Assets | 1.90% | 0.97% | - The allowance for loan losses increased to $26.3 million (1.01% of total loans) from $11.5 million (0.44% of total loans) at year-end 2018[274] - The company recorded a $14.5 million allowance against a credit relationship with two related borrowers operating as franchisors, which filed for Chapter 11 bankruptcy in Q1 2019. The total exposure to these borrowers was $28.3 million at year-end 2018[285][286] - Total deposits increased by $137.4 million (4.4%) to $3.26 billion, partly due to the MidFirst acquisition which added $98.5 million in deposits[307][308] Liquidity and Capital Resources The company's liquidity is primarily sourced from core deposits, loan and security cash flows, and FHLB borrowings. As of March 31, 2019, management believes the company meets all capital adequacy requirements and its banking subsidiary, Equity Bank, is categorized as 'well capitalized' under the regulatory framework. The company maintains access to various funding sources to meet anticipated customer demands and obligations - The company's primary sources of funds are deposits and FHLB borrowings, while the primary uses are loans and securities[324] - As of March 31, 2019, Equity Bank was categorized as 'well capitalized' by federal regulatory agencies[335] Company Capital Ratios | Ratio | March 31, 2019 | Minimum for Adequacy (Fully Phased-In) | | :--- | :--- | :--- | | Common Equity Tier 1 | 10.46% | 7.00% | | Tier 1 Capital | 10.96% | 8.50% | | Total Capital | 11.87% | 10.50% | | Tier 1 Leverage | 8.37% | 4.00% | Non-GAAP Financial Measures The company utilizes several non-GAAP financial measures, such as Tangible Book Value per Share, Tangible Common Equity to Tangible Assets, Return on Average Tangible Common Equity, and the Efficiency Ratio, to provide investors with a clearer view of its core performance by excluding the impact of intangible assets and certain non-recurring items like merger expenses Tangible Book Value Reconciliation | Metric | March 31, 2019 ($) | December 31, 2018 ($) | | :--- | :--- | :--- | | Book Value Per Share | $28.66 | $28.87 | | Tangible Book Value Per Share | $18.55 | $19.08 | Efficiency Ratio (Non-GAAP) | Period | Efficiency Ratio (%) | | :--- | :--- | | Q1 2019 | 69.26% | | Q1 2018 | 59.59% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility. This risk is managed by the Asset Liability Committee (ALCO) through simulation analysis to monitor the sensitivity of Net Interest Income (NII) and Economic Value of Equity (EVE) to interest rate changes. The analysis as of March 31, 2019, indicates that a 200 basis point increase in rates would decrease NII by 7.5% over 12 months, while a 100 basis point decrease would increase NII by 1.1% - The company's primary market risk is interest rate volatility, which is managed by the Asset Liability Committee (ALCO) in accordance with board-approved policies[355][357] Interest Rate Sensitivity Analysis (Simulated Change over 12 months) | Change in Interest Rates | Impact on Net Interest Income (NII) (%) | Impact on Economic Value of Equity (EVE) (%) | | :--- | :--- | :--- | | +300 bps | (12.4)% | (15.2)% | | +200 bps | (7.5)% | (7.3)% | | +100 bps | (3.3)% | (2.0)% | | -100 bps | 1.1% | (2.7)% | Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2019, and concluded they were effective. There were no material changes to the company's internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[368] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[369] Part II Other Information Item 1. Legal Proceedings The company is involved in a lawsuit with CitiMortgage, Inc. regarding alleged breaches of contract related to loan repurchase obligations. An initial judgment was partially in favor of Equity Bank, but the decision has been appealed by Citi. The company maintains it has meritorious defenses and is vigorously contesting the matter - Equity Bank is a party to a lawsuit filed by CitiMortgage, Inc. concerning loan repurchase obligations with alleged damages of $2.7 million plus interest. The case is currently under appeal by Citi[151] Item 1A. Risk Factors There have been no material changes to the company's risk factors from those previously disclosed in its Annual Report on Form 10-K filed on March 20, 2019 - No material changes in risk factors were reported since the company's last Annual Report on Form 10-K[372] Other Items This section covers standard SEC filing requirements. There were no unregistered sales of equity securities, defaults upon senior securities, or mine safety disclosures to report. The exhibits section lists the documents filed with this quarterly report, including officer certifications and XBRL data files - No information was reported for Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, or Mine Safety Disclosures[373][374][375] - Item 6 lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL instance documents[373]