Good day, ladies and gentlemen, and welcome to the Equity Bancshares, Inc. Second Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jacob Willis, Investor Relations Officer. Sir, you may begin.

Good morning, and thank you for joining our Equity Bancshares presentation and conference call, which will include discussion and presentation of our second quarter 2018 results. Joining me today are Equity Bancshares Chairman and CEO, Brad Elliott; and Equity Bancshares Executive Vice President and Chief Financial Officer, Greg Kossover. Presentation slides to accompany our call are available for download at investor.equitybank.com, as is our press release detailing second quarter results. The investor presentation accompanies discussion of our Q2 results and is available by clicking the Presentations tab to download the PDF. You may also click the Events icon for today's call posted at investor.equitybank.com. If you are viewing this call on our webcast player, please note that slides will not automatically advance. Please note Slide 2, including important information regarding forward-looking statements. From time to time, we may make forward-looking statements within today's call and actual results may differ. Slide 3 also details important additional information for investors and shareholders. Following the presentation, we will allow time for questions and further discussion. With that, I'd like to turn it over to Brad Elliott.

Good morning. I'm Brad Elliott, Chairman and CEO of Equity Bancshares. Here with me today is our CFO, Greg Kossover. Thank you for joining the Equity Bancshares Second Quarter 2018 Earnings Call. I am pleased to report second quarter core earnings, defined as after-tax net [indiscernible] merger expenses, was another record for our company. Our credit quality remains strong. Our net interest margin continues to be solid, and our balance sheet growth continues to be responsible. This comes as a result of the hard work from the Equity Bank team, both through mergers and through the organic efforts of our outstanding production, operating and support teams day-to-day at our bank. We've been fortunate to operate in an environment and geography conducive to mergers and to have a stock which has been supported by the investment community. This combination allows us to grow through mergers, and we will update you later in the call on that activity. But first, I want to personally thank each of our market leaders and their teams for their hard work and dedication to our organic goals as we enter the second half of 2018. The markets we operate in continue to be competitive, and that most definitely means our competitors must contend with the Equity Bank franchise, our talented bankers and our growing suite of services. These include new treasury products, new card services, new deposit products, automating our small business lending platform and upgrading our platform to offer commercial customers better terms on rate hedges for rising interest rate. Specifically, I would like to express my gratitude to Wendell Bontrager, who leads or community markets; and Craig Anderson, who leads our metro markets. Assisting Wendell is Patrick Harbert, who leads Mike Mense and his team in Western Kansas, Mark Detten and his team in…

Thanks, Brad. Our annualized organic loan growth during the first half of 2018 was about 6.5%, and our portfolio of credit quality has once again improved as we have worked down classified assets, which originated primarily from mergers. Our percentage of nonperforming assets to total assets has improved from 1.52% at 12/31/17 to 1.23% at June 30. Our classified assets have gone from 2.19% to 1.59% during the same time frame, and the percent of regulatory classified assets to capital went from 24.7% in the fourth quarter to 18.3% at June 30. Our net charge-offs are a muted 3 basis points, and our total reserves for loan losses, including purchase discounts, are 1.11%. Our ALLL has gone from 40 basis points to 42 basis points even with our acquisitions during the same time frame. Tim Kerr and our special assets teams have done excellent work in staying focused on the quality of our credit and managing special assets.

We're very focused on asset quality. I am pleased our legacy teams remain committed to quality loan portfolios and our merged teams have quickly learned our credit culture and the importance we place on quality customers and credit. This will become even more important as the cycle ages; at some point, out of prosperity into austerity. In both phases of the credit cycle, we will remain laser focused on customer service and responsible credit practices. Our loan growth will always be a bit lumpy, and this is not necessarily a bad thing. We do not buy business. Rather, our teams work hard to source new business and retain customers that bank with service and products. And yes, rate isn't always important, too. However, if rate is all the customer is after, we are less likely to bank them, and this approach leads to lumpiness. Even so, today, our pipeline for loan growth remains as strong as always, with over $150 million scheduled for the remainder of 2018. Our deposits, after being adjusted for the Q2 mergers, are down, and this is due in part to the fact we intentionally ran off hot money from earlier mergers in excess of $50 million. In addition, some of the decline is a seasonal as our community markets bank many public entities, which are high-quality core customers but which also tend to carry higher balances in the second half of the year, by as much as $50 million in our case. Greg, will you provide a snapshot of our margin and cost of funds?

We will go into net interest margin in more detail later. However, high level, our total cost of deposits increased only 4 basis points in the second quarter from first quarter going to 84 basis points. This is in part because our noninterest-bearing deposits rose $62 million or 18%. Our net interest margin, normalized for purchase accounting, to be discussed in a few moments, was steady during the quarter, even with the rise in cost of funding.

I am pleased with the performance of our operating teams and their results. We always operate in competitive conditions, which is what makes this journey fun. I remain incredibly excited about the teams at Equity. We have retained the market leaders in every market we have merged with since our IPO. This speaks highly of those bankers who have had to adopt the Equity platform. It is not always easy, but it is important to the markets we serve together. These folks, coupled with the additions to the legacy team, create the platform we need to continue delivering shareholder value. Greg, please take us through the second quarter results.

We will begin with the reconciliation of earnings per share for the quarter. Stated diluted earnings per share for the second quarter is $0.44 per share on $6.9 million in net income allocable to common stockholders. Mergers and acquisition expense, adjusted for income taxes, hurts earnings $4.0 million and EPS by $0.26 per share. We did have approximately $450,000 in 3 separate OREO recoveries, helping earnings per share $0.03 per share. Second quarter earnings and EPS reconciled for these items are approximately $10.5 million and $0.67 per share, both records for our company and in line with our expectations. Looking at the components of net income. We go back to net interest margin, which, for the quarter, was 3.93% as compared to net interest margin of 3.91% for Q1 and 3.79% in the fourth quarter 2017. Yield on assets is up in the quarter 7 basis points, led by loans with a yield of approximately 5.73% on a weighted average loan coupon at the end of June of 5.18%, up from March of about 5.04% and compared to about 4.98% at year-end. Securities yielded about 2.73% in Q2 and 2.67% in Q1 2018 and were about 2.50% at December 31. We discussed deposits earlier, and the cost of Federal Home Loan Bank overnight advances has risen, not surprisingly, about 38 basis points in the second quarter to 1.97%. Loan yields, including a heavy quarter for purchase accounting accretion and an estimated adjusted loan yield, would be about 5.65% and a normalized net interest margin would be about 3.80% to 3.85% against the stated NIM of 3.93%. Brad?

Provision for loan losses was $750,000 in the quarter, reflecting the high credit quality we alluded to earlier. And we have net loan recoveries for the quarter of $17,000. Greg referenced recoveries on OREO, and it was primarily on a senior living facility we acquired through the Eastman merger. ALLL as a percentage of total loans was 42 basis points at quarter-end, up since year-end, and total reserves with purchase accounting discounts was 1.11%. Although we are not tightening credit at this point, we are not loosening either. We believe this cycle is long in the tooth, and we are still seeing some exuberant behavior from some other lenders in our markets. And I want our stakeholders to know that is not who we have ever been or who we will become. I simply expect our lending teams to continue to work hard, be smart, provide excellent service and expertise and grow our portfolio wisely.

Noninterest income for the quarter was in line with our expectations at $4.6 million. After scrubbing our merger-related expenses of $5.2 million, noninterest expense in the quarter was $20.7 million, slightly higher than our guidance and due to incenting the teams for performance above our expectations and as we continue to enhance our infrastructure for growth. Our efficiency ratio continues to trend downward, ending the quarter at 58.40%; and noninterest expense without merger expenses to average assets was 2.39%, both measures at their lowest since the company went public. Our effective income tax rate for the first quarter was 22.2%, in line with our previous guidance. This leaves Equity Bancshares with a return on average assets as stated at 79 basis points and pro forma-ed for noncore adjustments of 1.22%. Return on average tangible common equity as stated is 10.6% and adjusted for noncore items is 15.2%.

We continue to work concentrations in our loan portfolio to manage risk and meet our customers' needs. As stated earlier, our commercial portfolio is slightly below our plan at June 30. However, our pipeline remains very active with a minimum of $150 million, previously mentioned, showing as opportunities between now and year-end.

Loans have grown organically about $69 million year-to-date or about 6.5% annualized loan growth, as previously mentioned. The allowance for loan losses increased $1.6 million to $10.1 million and with purchase accounting discounts, stands at $26.7 million. Securities have grown $148 million, in part reflecting the Liberal portfolio of $92 million. OREO plus nonperforming assets were down $2.6 million in the quarter. On the liability side, deposits are down approximately $132 million, and as mentioned on our Q1 call, time deposits greater than $100,000 were reduced by design as brokered CDs from recent mergers were allowed to roll off in the amount of $48 million. Signature accounts have grown $224 million and now stand at 69% of total deposits. Core deposits, including CDs less than $100,000, to total deposits remain at approximately 80% at quarter-end. Federal Home Loan Bank advances grew $210 million to help with the growth in loans and securities. Tangible common equity grew $29.5 million in the first half of 2018, with tangible book value per share ending at $18.16 per share and tangible common equity to tangible assets is 8.04%, about where we thought it would be post merger for Liberal and Adams Dairy. Brad?

I'd like to touch on our recent merger activity. We continue to be as active as ever regarding M&A. We have solid activity in our footprint of Kansas, Missouri, Arkansas and Oklahoma. We also continue to see healthy banks with strong core deposits show interest in Equity Bank, and the inbound interest is higher than ever. Even as we proactively cultivate our merger pipeline, we continue to have capacity internally within our infrastructure, which we expand proactively as we anticipate the need, and we continue to build human resources in the areas we need to expand for our continued growth. I'm excited for our pipeline, and each of you as stakeholders has my commitment we will only pursue and close mergers which meet all our criteria for healthy, long-term acquisitive growth.

And to support that growth, our capital ratios continue to be healthy and competitive, allowing us to safely execute our growth strategies, which Brad speaks of. Tangible common equity ended the quarter at 8.04%. Tier 1 was 11.65%, and total risk based was 12.03%. Tangible common book value per share is $18.16 at June 30, and after the 2 mergers were booked in the second quarter, down only slightly from the Q1 per share amount of $18.22. Basic share count at the end of June was 15,787,545 shares, and diluted was 16,131,096 shares.

Thank you to all our stakeholders for your support. We are working hard each day to grow and protect our balance sheet and to maximize earnings. We continue to attract high-quality people to our company, and we continue to see new and healthy customers in each market we serve. We will also only continue to execute mergers we believe will grow shareholder value within our expectations for earnback and with merger partners we believe fit into the Equity Bank culture. Two great examples of this, our Tina Call and all the folks at First National Bank Liberal and Adams Dairy Bank in Kansas City. These mergers occurred May 4, and because each team involved with those mergers, they occurred without upset. Our merger teams continue to deliver on the promise to convert on the day of closing and open day 1 as completely functioning Equity Bank team members, with all cost saves recognized in the quarter of closing. We are also very excited about the recent merger announcement with Bill Docking and the City Bank and Trust of Guymon, Oklahoma. That merger continues to go well, and we expect to close in the fourth quarter. At this time, we are happy to entertain questions.

Amanda, this is Greg. If I could, I'd like to correct one statement that I made. The -- when I said that deposits are down approximately $132 million, I intended to say that legacy deposits are down approximately $132 million. Actual total deposits are up $253 million. I was trying to isolate legacy from deposits acquired during merger. So thank you.

And we're ready for questions now, Amanda.

[Operator Instructions] Our first question comes from the line of Michael Perito of KBW.

I want to start on the expense line. I was wondering if you guys can maybe just give us a little help on where maybe some of the -- obviously, everything I'm asking is ex the onetime merger charges that you guys isolated, which is on the core expense run rate. Can you maybe isolate a couple items that drove the growth quarter-on-quarter and then maybe give us a sense of where you think that could shake out next quarter ahead of the City deal closing?

You bet. So they are a little higher than what we would have called for, primarily for 2 reasons. One is -- and we are having some incentives in salaries and employee benefits for the performance of the production teams, which we're proud to report. The second thing is occupancy is slightly higher. We continue to build infrastructure for the growth that we're experiencing. The good news is, we have, as Brad has stated earlier, the current headquarters building is -- has capacity, but it does require movement and remodeling to accommodate all the support staff that we need to continue to bring on board. And then also, we had a handful of key hires that were on board for the entire second quarter in the lending and lending support areas. The guidance for Q3, Michael, would be somewhere around $22 million to $22.5 million at this point.

Okay. That's helpful. And that incorporates the full quarter from the 2 deals of the core expense, though, the hires, some of the other infrastructure. That incorporates all that?

Correct.

Okay. Then a question on capital. I guess there's a few moving pieces, but generally speaking, you guys will be -- kind of either right at or right below 8% on TC by the end of the year, give or take, when you close the City deal. And I'm just curious, it sounds like the deal pipeline is still active. Wondering what your guys view is. Obviously, as you guys get bigger, my guess is the capital needed for some of the smaller deals would be relatively lower. But do you feel like you're generating enough internal capital to support the pipeline as you move into the end of this year and early part of next year?

Yes. We're replacing capital at about 135 basis points a year right now. So between the development and internal capital and our access to capital markets, Michael, we don't feel that there's any merger opportunity on our horizon that we can't accommodate. And then from a working capital standpoint relative to cash, we continue to have cash available for the cash components of the transactions as well.

Okay. Just one last one, kind of a high-level question, Brad, for you maybe. Just as you guys have grown here and your return profile has accelerated, has it gotten more challenging to find -- I know some of these deals you've done have actually been very profitable, which obviously is a good problem to have. But has it been at all more challenging to find -- to prospect opportunities that will really enhance your return -- your improving return profile? Or there's still plenty of deals in that map where you feel with cost saves and et cetera that overall will still be enhancing your ROA, your ROE as you guys kind of improve those metrics and continue to grow here?

Yes. I don't think we have gotten to a size yet, Michael, or close even to approaching a size where the deals in our map aren't still going to be accretive to earnings and to a valuable sense. And so I would tell you that the deals that we are working on all still move the needle from an EPS standpoint and a strategic footprint standpoint.

Our next question comes from the line of Andrew Liesch of Sandler O'Neill.

Just wanted to touch on the margin a little bit here. I think, last quarter, you referenced maybe resetting lower in the $3.75 to $3.80 range but did a little bit better than that this quarter on a core basis. Where do you see that going from here? It seems like it could stay pretty range-bound just with the lower cost deposits you had in these deals.

Yes. I think 2 things are happening here, Andrew. And the answer is I think we're going to be in the same range again in Q3 and probably Q4. But 2 things are happening. We are obviously seeing an increase in cost of funding, as is everybody. More fortunate in our space that we've had the opportunity to work on mergers that help to offset the core increase in cost of deposits. So we're blessed that way. We've also been fortunate in that we are beginning to see expansion across the board on interest-earning assets. Investment securities, as you know, we are seeing improvement in yields on those. And then also, our coupons on our loan portfolio were up about 14 basis points quarter-over-quarter in Q2. So we're beginning to see some expansion there as well. Guidance, I would not get carried away. And as you say, I would stay range-bound to where we think we are right now overall.

[Operator Instructions] Our next question is from the line of Terry McEvoy of Stephens.

I guess, could you just talk about deposit competition overall in your markets as rates rise and then your strategy and, really, ability to grow those signature deposits on an organic basis?

Yes. The competition is obviously heating up in all places. But there are still some niches that we compete in, Terry, that we probably still have an advantage in, in some of the community markets, which is what we call them. And in those places, we still have an advantage because we are still needing deposits and some of the markets still yet don't need deposits. And so from the other financial institutions, we can be a product leader in those markets. And so we are strategically working very hard to come up with products that will move deposits our way. And so that's one thing we're doing. We also have added some additional staff and services on the treasury management side on the commercial side. And so we are continually working on getting those folks geared into making sure they're focused on the right things and getting the deposits that we need. And we can compete there, honestly, a little bit on price because we're not giving away much in those areas. And so we've got a lot of room to kind of go after the gorillas in our space. So we are still pretty bullish on that. We have some ability to attract some deposits. And our strategy in these community markets has been really good because it's still keeping our deposit costs down as much as possible but also gives us some room to flex up a little bit in those markets with some growth.

And then just on M&A, I'm guessing there was a step-up in pricing expectations among sellers after tax reform. Could you just talk about expectations? Has there been a leveling off as you've had conversations over the last few months or quarters?

Yes. We actually have not seen a change since the Tax Reform Act in the expectations. And the reason is it doesn't really affect the earnback model. So it -- we haven't really seen much pressure on those. It's really still strategic opportunity fit. The people that we're talking to are really concerned about are they going to fit with our organization after we merge and are we going to be a good cultural fit for their communities? And they still really care a lot about those communities and making sure that they're selling lazy institution to us, that we're going to take care of that community as they have. And so pricing is always important and value is always important, but cultural fit for the people who we deal with is honestly the most important.

And just the last question. [ Got ] $100 million of agricultural loans in the portfolio, tariffs trade wars in the headlines. How has that impacted those borrowers? And have you seen any early signs of stress at all?

Well, our folks out here are big Trump supporters, so it'd be really hard for them to go against what he's doing. So they aren't -- there's not quite the rhetoric that's on the national television. Pricing on those grains have not moved quite yet. Actually, the profitability of our customers versus last year has actually improved as they're coming through the annual review cycle. They don't -- we haven't seen this year's, obviously, profits, but depending on how bad the trade wars get, it could dramatically affect grain prices. But we have not yet seen that. And so there's 2 rules of thought is if they're buying grain from us before, where are they going to get that supply from if they don't buy it from us even with the tariffs. So the grain is going to move somewhere. But we honestly haven't seen the effect yet in the projections of the customers' balance sheets. So we're still okay. Most of what we have, Terry, is -- partially are mostly secured by land. And the loan-to-value on these customers is about 40% debt-to-equity ratios, meaning they have debt of 40% assets against 100% of assets. So they've got a lot of room to go in their balance sheet before they get too stressed.

And at this time, I'm showing no further questions. I'd like to turn the conference back over to Mr. Jacob Willis for any closing remarks.

Ladies and gentlemen, this concludes our Equity Bancshares presentation and conference call. Thank you all for joining, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.