Equity Bank(EQBK) - 2020 Q2 - Quarterly Report

Part I Financial Information Financial Statements This section presents the unaudited interim consolidated financial statements for Equity Bancshares, Inc. as of June 30, 2020, reflecting financial position, operational results, and cash flow activities, including initial COVID-19 impacts Consolidated Balance Sheets As of June 30, 2020, total assets increased to $4.21 billion, driven by a $227.8 million rise in net loans, including PPP loans, while total deposits grew to $3.25 billion Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $4,205,269 | $3,949,578 | | Cash and cash equivalents | $178,290 | $89,291 | | Loans, net of allowance | $2,772,256 | $2,544,420 | | Goodwill | $136,432 | $136,432 | | Total Liabilities | $3,725,503 | $3,471,518 | | Total deposits | $3,247,267 | $3,063,516 | | Federal Home Loan Bank advances | $344,900 | $324,373 | | Total Stockholders' Equity | $479,766 | $478,060 | Consolidated Statements of Operations Net income for Q2 2020 sharply decreased to $1.7 million from $9.2 million, primarily due to a significant increase in the provision for loan losses reflecting COVID-19 uncertainty Key Performance Metrics (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $32,891 | $31,288 | $64,986 | $61,927 | | Provision for Loan Losses | $12,500 | $974 | $22,440 | $16,620 | | Net Income | $1,689 | $9,232 | $2,947 | $5,159 | | Diluted Earnings Per Share | $0.11 | $0.58 | $0.19 | $0.32 | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for Q2 2020 declined to $1.3 million from $10.7 million in 2019, driven by lower net income and a net other comprehensive loss Comprehensive Income (Loss) (in thousands) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $1,689 | $9,232 | $2,947 | $5,159 | | Other comprehensive income (loss), net of tax | ($379) | $1,476 | $3,393 | $3,576 | | Comprehensive Income | $1,310 | $10,708 | $6,340 | $8,735 | Consolidated Statements of Stockholders' Equity Total stockholders' equity slightly increased to $479.8 million, primarily due to net income and other comprehensive income, partially offset by treasury stock purchases - During the six months ended June 30, 2020, the company repurchased 295,461 shares of its common stock for a total cost of $6.9 million[30] Consolidated Statements of Cash Flows Cash and cash equivalents increased by $89.0 million in the first half of 2020, with net cash provided by operating and financing activities offsetting investing activities Six Months Ended June 30, 2020 Cash Flow Summary (in thousands) | Cash Flow Category | Amount | | :--- | :--- | | Net cash provided by operating activities | $24,646 | | Net cash used in investing activities | ($180,840) | | Net cash provided by financing activities | $245,193 | | Net change in cash and cash equivalents | $88,999 | Condensed Notes to Interim Consolidated Financial Statements The notes detail accounting policies and financial items, highlighting the significant impact of COVID-19, PPP loans, loan deferrals, CECL deferral, and subsequent events - The company is actively participating in the Paycheck Protection Program (PPP), originating 3,081 loans with an outstanding balance of $373.0 million as of June 30, 2020[57] - In response to COVID-19, the company offered payment deferrals to affected borrowers, executing 1,296 deferrals on outstanding loan balances of $649.3 million as of June 30, 2020[53] - The company elected to utilize the temporary relief provided by the CARES Act to delay the implementation of the Current Expected Credit Losses (CECL) accounting standard[61] - Subsequent to the quarter end, on July 23, 2020, the company issued an additional $33.0 million of subordinated notes and reinstated its stock repurchase program[199] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, emphasizing COVID-19 impacts, increased loan loss provision, PPP participation, loan deferrals, and exposure to at-risk industries Overview Equity Bancshares, Inc. is a bank holding company with $4.21 billion in total assets, $2.77 billion in net loans, and $3.25 billion in total deposits as of June 30, 2020 Financial Highlights as of June 30, 2020 (in billions) | Metric | Value | | :--- | :--- | | Total Assets | $4.21 | | Total Loans (net) | $2.77 | | Total Deposits | $3.25 | | Total Stockholders' Equity | $0.48 | Critical Accounting Policies The allowance for loan losses and goodwill impairment are critical accounting policies, with a recent quantitative goodwill test showing no impairment but a narrow margin - The allowance for loan losses is a critical accounting estimate based on past experience, portfolio nature, borrower information, economic conditions, and other factors[208] - A quantitative goodwill impairment test performed at June 30, 2020, concluded no impairment, but the fair value exceeded carrying value by only 0.23%, indicating high sensitivity to assumptions[210] Recent Developments (COVID-19 Impact) This section details the company's response to COVID-19, including $373.0 million in PPP loans, $649.3 million in loan deferrals, and monitoring of at-risk industry exposures - The company originated $373.0 million in PPP loans and granted payment deferrals on $649.3 million of loans in response to the COVID-19 pandemic[217] Exposure to At-Risk Industries (as of June 30, 2020) | Industry | Exposure (approx.) | % of Total Loans (ex-PPP) | | :--- | :--- | :--- | | Hospitality | $273.0 million | 11.2% | | Restaurants | $108.0 million | 4.4% | | Retail | $206.0 million | 8.5% | | Aircraft Manufacturing | $63.0 million | 2.6% | Results of Operations Net income for Q2 2020 decreased significantly due to an $11.5 million increase in loan loss provision, while net interest income and margin improved - Q2 2020 net income decreased by $7.5 million year-over-year, primarily due to an $11.5 million increase in the provision for loan losses[228] Net Interest Margin Analysis (Q2 2020 vs Q2 2019) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Net Interest Income | $32,891 thousand | $31,288 thousand | | Net Interest Margin | 3.49% | 3.42% | | Yield on Loans | 4.68% | 5.74% | | Cost of Interest-Bearing Deposits | 0.63% | 1.64% | - The provision for loan losses in Q2 2020 was $12.5 million, a significant increase from $974 thousand in Q2 2019, largely due to qualitative adjustments for the projected economic impact of COVID-19[255] - The non-GAAP efficiency ratio improved to 62.0% for Q2 2020 from 65.6% in Q2 2019, reflecting better expense management relative to operating revenue[284] Financial Condition Total assets grew to $4.21 billion, driven by loan growth including PPP, while the allowance for loan losses significantly increased reflecting heightened credit risk - Gross loans held for investment increased by $249.7 million (9.8%) from December 31, 2019, primarily due to a $311.7 million increase in commercial and industrial loans, which includes PPP loans[292][297] - The allowance for loan losses as a percentage of total loans increased to 1.21% at June 30, 2020, from 0.48% at December 31, 2019, reflecting management's assessment of probable incurred losses due to COVID-19[332] - Nonperforming assets increased to $57.8 million (1.37% of total assets) at June 30, 2020, compared to $46.9 million (1.19% of total assets) at December 31, 2019[321] - Total deposits increased by $183.8 million (6.0%) from year-end 2019, with non-interest-bearing demand deposits growing by $275.3 million[353][354] Liquidity and Capital Resources The company maintained strong liquidity and capital, with cash increasing and all regulatory capital ratios exceeding 'well capitalized' thresholds - Cash and cash equivalents increased by $89.0 million during the first six months of 2020 to $178.3 million[365] - As of June 30, 2020, the company had total commitments to extend credit and standby letters of credit of $434.3 million[370] - The company and Equity Bank met all capital adequacy requirements and were categorized as 'well capitalized' under the regulatory framework as of June 30, 2020[373][375] Non-GAAP Financial Measures This section reconciles non-GAAP measures like Tangible Book Value Per Share and Efficiency Ratio, providing a clearer view of core operating performance Key Non-GAAP Financial Measures | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Tangible book value per common share | $21.29 | $20.75 | | Tangible common equity to tangible assets | 8.00% | 8.45% | | Return on average tangible common equity (annualized, Q2) | 3.03% | 13.42% (Q4 2019) | | Efficiency Ratio (Q2) | 61.98% | 63.63% (Q4 2019) | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using simulations, with a liability-sensitive balance sheet showing varying impacts on NII and EVE from rate shocks Interest Rate Sensitivity Analysis (as of June 30, 2020) | Change in Interest Rates | Impact on Net Interest Income (12 months) | Impact on Economic Value of Equity | | :--- | :--- | :--- | | +300 bps | (8.4)% | +6.0% | | +200 bps | (5.2)% | +6.7% | | +100 bps | (2.3)% | +6.0% | | -100 bps | (3.0)% | (15.3)% | Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the period - The CEO and COO concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level[408] - No changes were identified during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[409] Part II Other Information Legal Proceedings The company is involved in various litigation matters in the ordinary course of business, with further details in Note 12 of the financial statements - The company is involved in various litigation matters incidental to its business, with further details provided in Note 12 of the financial statements[411] Risk Factors A new material risk factor highlights the significant uncertainty and potential adverse economic impacts of the COVID-19 pandemic on the company's financial condition - A significant new risk factor has been added regarding the adverse economic impact of the COVID-19 pandemic, which could affect the company's financial condition and results of operations[413] Unregistered Sales of Equity Securities and Use of Proceeds The company discusses its stock repurchase program, with 716,477 shares repurchased as of June 30, 2020, and 383,523 shares remaining authorized - As of June 30, 2020, the company has repurchased 716,477 shares under its stock repurchase program at a weighted average price of $24.79 per share, with 383,523 shares remaining authorized for repurchase[414] Other Information The company announced executive leadership changes, with Eric Newell becoming CFO and Greg Kossover transitioning to COO, effective July 31, 2020 - Effective July 31, 2020, Eric Newell will succeed Greg Kossover as Chief Financial Officer, following Mr. Kossover's transition to Chief Operating Officer[416] Exhibits This section lists exhibits filed with the quarterly report, including agreements, employment contracts, and required certifications