U.S. Markets open in 8 hrs 11 mins

Edited Transcript of EQBK earnings conference call or presentation 23-Jul-19 2:00pm GMT

Q2 2019 Equity Bancshares Inc Earnings Call

WICHITA Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Equity Bancshares Inc earnings conference call or presentation Tuesday, July 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brad S. Elliott

Equity Bancshares, Inc. - Founder, Chairman, CEO & President

* Brett Alan Reber

Equity Bancshares, Inc. - Executive VP & General Counsel

* Chris Navratil

Equity Bancshares, Inc. - SVP of Accounting and Finance

* Gregory H. Kossover

Equity Bancshares, Inc. - Executive VP, CFO & Director

================================================================================

Conference Call Participants

================================================================================

* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Michael Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Terence James McEvoy

Stephens Inc., Research Division - MD and Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello and welcome to Equity Bancshares' Second Quarter 2019 Earnings Call. (Operator Instructions)

Now it's my pleasure to turn the call to Chris Navratil for opening remarks.

--------------------------------------------------------------------------------

Chris Navratil, Equity Bancshares, Inc. - SVP of Accounting and Finance [2]

--------------------------------------------------------------------------------

Good morning and thank you for joining Equity Bancshares' conference call, which will include discussion and presentation of our second quarter 2019 results. Joining me today are Equity Bancshares' Chairman and Chief Executive Officer, Brad Elliott; Equity Bancshares' Executive Vice President and Chief Financial Officer, Greg Kossover; and Equity Bancshares' General Counsel, Brett Reber.

Presentation slides to accompany our call are available via PDF or download at investor.equitybank.com, by clicking the Presentations tab. You may also click the Event icon for today's call posted at investor.equitybank.com to view the webcast player. 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. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us.

With that, I'd like to turn it over to Brad Elliott.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Good morning. Thank you for joining the Equity Bancshares' Second Quarter 2019 Earnings Call. I'm joined today by Greg Kossover, our Chief Financial Officer; and our General Counsel, Brett Reber.

After a challenging first quarter, I'm pleased to announce our company bounced back nicely in the second quarter with $0.59 a share in earnings, adjusted for merger expenses, and we had resolution to a piece of the underperforming credit relationship we discussed in April on the first quarter earnings call. That relationship had 2 commercial credits. And the credit involving a franchise bakery business was sold at auction in May. Brett, would you please take us through the highlights of that transaction?

--------------------------------------------------------------------------------

Brett Alan Reber, Equity Bancshares, Inc. - Executive VP & General Counsel [4]

--------------------------------------------------------------------------------

As Brad just noted, the unprofitable piece of the relationship was sold at auction in May due to bankruptcy court. We had accrued enough specific loan loss provision where the realized value at auction did not create additional loss. That credit, which was about $9 million, and its related interest is off our books and out of the bank.

In addition, we have spent a great deal of effort toward resolving the other commercial credit in the relationship, a franchise entertainment and pizza-related business.

Although this business was put in Chapter 11 bankruptcy along with the bakery business, we believed, correctly, it was profitable and has strong prospects as an ongoing concern.

We have worked closely with the borrower to expedite the company's exit from bankruptcy to reduce the delay and expense involved in those proceedings.

We are supportive of the borrower's desire to return to normal operations outside of bankruptcy. We believe operation of the company outside of bankruptcy will enhance existing store operations, allow for new franchise sales and create a positive overall resolution. The company recently filed its proposed plan of reorganization disclosure statement and is working to get the plan approved by its creditors and the court. The target date for plan approval is early October.

We also have other assets financed for these borrowers, which consist of 3 homes for the principals of the business, 2 of which are listed for sale.

We believe these houses will sell in due course for a reasonable market-based value. The third has never been past due. The principals continue to work with us on a fair outcome on these loans.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [5]

--------------------------------------------------------------------------------

As stated on the first quarter call, this was a relationship that goes back to 2011 with a then-strong borrower who specialized in increasing revenues and profitability of underperforming companies. We had a significant banking relationship with this borrower for several years, and they performed well and ultimately sold 2 of their portfolio companies for substantial profits. Although I've obviously been disappointed by the performance of these credits, and it is a responsibility myself and our executive team completely own, I'm happy to see the hard work of our legal and credit teams to get this remaining business out of bankruptcy and returned to normal operation. Greg?

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [6]

--------------------------------------------------------------------------------

You may recall from our first quarter earnings call in April that the then-current impairment analysis called for a provision for loan loss of $14.5 million. After the resolution of the bakery business and after an updated impairment analysis for the second quarter, we have concluded that our provision for loan loss taken in the first quarter remains adequate at this time. Excluding the resolution of the bakery business, year-to-date net charge-offs for the bank have been $506,000, only 2 basis points of average loans, which is the same rate as 2018. In addition, if the entertainment and pizza franchise credit was taken out of our non-performing asset ratios, we would now be at 91 basis points of nonperforming assets to total assets, down from 98 basis points at the end of 2018. Classified assets, scrubbed to be above credit, stand at 24.8% of regulatory capital at the end of June.

Nonaccrual loans would be $32 million, down from $33.2 million at December 31. And OREO from December 31 to June 30 is down 10% and is only $5.8 million.

For a presentation of our asset quality metrics, please refer to Slide 14 in the deck presented with our press release from last night.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [7]

--------------------------------------------------------------------------------

Craig Mayo and his credit group continue to work hard at reducing special assets, and we thank them for the results they are achieving.

Our teams and myself are focused on maintaining the same credit standards we have achieved throughout the history of the bank. Craig and his credit department as well as the lending teams are all joined with me and the executive team in originating high-quality credits, administrating those credits with proper diligence and working out any credits that may require resolution.

I think it is important to note that 2/3 of our nonperforming credits have been booked through mergers, and 1/3 have been originated from our credit platform. We treat them all the same. And as Greg noted, our net charge-offs without the large credit mentioned have been only 2 basis points, and our total reserves, including ALLL and purchase discounts, are 1.14% of loans.

Greg will take us through the rest of the quarter's performance.

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [8]

--------------------------------------------------------------------------------

We begin with our earnings performance and reconciliation of quarterly earnings per share back to core EPS. Stated diluted earnings per share is $0.58 for the quarter. Adding back merger expenses of $0.01 per share leaves adjusted diluted earnings per share of $0.59 compared to Street consensus of $0.60 per share. There were minimal platform enhancement expenditures this quarter, however, professional fees directly associated with the previously mentioned nonperforming credit are estimated at $0.02 per share.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [9]

--------------------------------------------------------------------------------

Although we were within $0.01 of consensus earnings, we are not satisfied with our result. Loan production remains soft, and we continue to bank credits that fit our underwriting while pricing them appropriately. And although we have leveled off and reduced pricing on our deposit offerings, our margin continues to be a point of emphasis with our teams.

We are working to increase spread. We began 2019 with an initiative to reduce cost and improve noninterest income. On a core basis, we have delivered on the initiative by examining and reducing overhead, primarily in our overall compensation expense and by increasing revenue in deposit account fees and wealth and treasury management. This is an ongoing initiative the teams are focused on in addition to the production goals. We believe those efforts will show significant improvement in FTE headcount from Q1 to the end of Q3, by example.

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [10]

--------------------------------------------------------------------------------

Looking at the income statement. Starting with margin. Loan fees were light compared to our expectations, driven by lower originations. Commercial loan balances have been mostly flat overall since December 31, and residential mortgages have increased, indicative of the environment. Accretable loan yield was relatively normal.

Securities balances and yields were essentially in line with our forecast and expectations, however, there was a small reduction in yield on taxable securities due to faster prepayments on mortgage-backed securities.

As Brad said earlier, we had anticipated a rate cut from the Fed and proactively leveled and reduced rates on our deposit offerings. This has helped lead to a quarter-over-quarter flattening of cost on transaction accounts for us. Time and public fund deposits continue to be competitive. And this leads us to an increase in overall cost of deposits of 3 basis points to 1.64% compared to 1.61% in Q1.

After factoring noninterest checking, the cost of deposits for Q2 is 1.40%. Our betas of 65 and 75 on transaction and time accounts are essentially leveling off from prior quarters. Overall, net interest margin for the quarter, as stated, at 3.42% and would be 3.47% but for the nonaccrual impact of the credit we have been discussing.

Normalized loan fees would take NIM to about 3.53%. We mentioned last quarter the impact of amortizing securities' premiums to call date as opposed to maturity date. And that accounting change hurts margin about 4 basis points during the quarter.

Provision for loan losses was $974,000 in the quarter, returning to a more normal level. Noninterest income for the quarter was $6.5 million, an increase of $1.2 million over the previous quarter or 22%, and better than expectation by $800,000.

Each line item of noninterest income was up quarter-over-quarter: service charges and fees, up 16%; debit card income, up 26%; mortgage banking, up 77%; and other is up 12%. Some of this improvement is seasonal, and some of it is from the efforts the team has put in during the first 6 months of 2019, as we have previously discussed.

Noninterest expense, as stated, was $25.0 million for the quarter and $24.7 million without merger costs as compared to expectations of $24.1 million, the $600,000 delta mostly coming from elevated professional fees of about $300,000, primarily associated with our workout credit, and higher-than-expected FDIC insurance costs in the quarter of about $170,000.

Our FDIC assessments changed in the second quarter based on the first quarter call report, which included the large loan loss provision. Of particular note, however, is the quarter-over-quarter reduction in salaries and benefits of about $1 million.

Part of this decrease is explained by incentive compensation and overtime paid in the first quarter for elevated business activities such as the MidFirst merger and the Q2 online banking platform, and part is explained by a reduction in current year performance bonuses.

However, an additional portion is explained in the efforts of the team to responsibly reduce overtime and overall compensation expense as our business environment allows. Our effective income tax rate year-to-date is 20.8%.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [11]

--------------------------------------------------------------------------------

I'm very proud of each Equity Bank associate for their efforts in pushing noninterest income up and driving down noninterest expense.

The results Greg just described are, in large part, due to these efforts. While we continue to work on these initiatives, we will not take shortcuts in any of our key areas, assuring our customers, employees, and shareholders, we will continue to improve bank operations and performance, but not at the risk of safe and sound banking practice.

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [12]

--------------------------------------------------------------------------------

As we begin a review of the balance sheet, I first want to say, in the second quarter, we repurchased 277,806 shares of our stock at an average price of $25.95.

This price is within the range we expected, and the impact on our tangible common equity to tangible assets ratio is approximately 18 basis points, and annualized accretion to EPS is about $0.04 per share at this point.

Moving to the rest of the balance sheet. Loan growth was acceptable for the second quarter, however, we believe the lending environment was still slow for the first 6 months of 2019. As we have stated before, we will not change our credit culture to chase credit growth for the sake of growth. Loans are up about $105 million from December 31, however, most categories are flat or relatively small growth, except for single-family residential, which is up about $100 million.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [13]

--------------------------------------------------------------------------------

Our pipeline is still very strong, and our team continues working as hard as it ever has to originate and service loans within our high underwriting standards. The markets that we serve have fantastic banking relationship opportunities. And I believe the pace of our growth, more than ever, is based on banking relationships, not banking deals that often lead to inconsistencies in loan growth. We are in this space for the long run, and as such, we'll continue to work hard and be smart about our portfolio.

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [14]

--------------------------------------------------------------------------------

Although the second quarter is traditionally a slower quarter for deposit growth for us, we were able to grow noninterest-bearing deposits at about 1%. As Brad said, we have reduced the rate on our deposit offerings, and I do not believe that has caused our deposits to decline. I believe our decline in deposits of $75 million in the quarter is a reflection of normal seasonality. We typically see deposits flat to declining in the first 6 months of the year and then picking back up again in the second half.

Federal Home Loan Bank advances increased from Q1 to fund the asset growth and the change in deposits. Our bank stock loan increased about $7 million, reflecting the repurchase of our treasury stock. Our capital ratios at June 30 are 7.44% tangible common to tangible assets, and our leverage ratio is 8.26%. Although efficient, both of these are slightly below where we would like, and we are mindful of the impact our growth and the stock repurchase plan have on them.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [15]

--------------------------------------------------------------------------------

Overall, our second quarter was okay, but we are not satisfied, even though our efforts to build noninterest income as a more significant driver of earnings are paying off and our noninterest expense is trending favorably with some hard work from our operating teams. Our production teams are working hard and working smart to book assets that meet our criteria and to procure and price core deposit growth.

We have also had a great year for product and platform development, including our new online banking platform, which has exceeded our expectations; wealth and trust, which have also exceeded our expectations; and we'll be introducing new credit card services in the third quarter.

We also continue to receive inbound traffic for merger-related discussions, which is encouraging as mergers continue to be a piece of our long-term strategy. We'll continue to work on reducing nonperforming assets and to increase net interest margin.

But we won't take unnecessary risk to do so. This means no unnecessary credit risk, duration risk, composition risk in our assets or liability. I believe we are at a time in the cycle where hard work will be rewarded even more than usual. And for all our stakeholders and shareholders, you have my word: We'll continue to put forth the outstanding effort the Equity Bank team has always expected of ourselves. At this time, we will entertain questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Michael Perito with KBW.

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

--------------------------------------------------------------------------------

I wanted to start -- appreciate all the color on all the items you guys gave in your prepared remarks. Can we maybe drill down into the expenses a little bit more? They've been a little heavier than what I've been looking for a fourth quarter exit run rate for the first half of the year. Any just general thoughts about where you think that could trend in the back half of the year? And as you kind of think of the overall efficiency of the company, maybe any broader thoughts there, Brad, as we move forward with the rate environment being what it is would be helpful.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Greg, understand the question?

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [4]

--------------------------------------------------------------------------------

Mike, we had somehow our audio cut out in the first part of your question. Can you ask the first part again, please?

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [5]

--------------------------------------------------------------------------------

Yes. You probably didn't miss much. Just me [spieling around]. I was just asking kind of for near term expectations on expenses because the first half of the year has been a little heavier than what I've been looking for. And then also just a broader comment on kind of efficiency goals from Brad as we move forward with the new rate environment.

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [6]

--------------------------------------------------------------------------------

Yes. Let me get started, Mike, and let you know that, as we talked about, Brad and the team have worked really hard on looking at all of the expenses. He challenged the operating teams early in the year to look at the revenue, noninterest revenue and noninterest expense. And so we think that the teams have accomplished a great deal with that. And probably, guidance would be for noninterest expense in the second half of the year at about $24.5 million in Q3. And right now, I would give the same guidance for Q4, but it's a little bit fluid right now as we are going through some of these expense reviews. You want to take that, Brad?

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [7]

--------------------------------------------------------------------------------

Yes. So Mike, we worked really hard this year, as we talked about. I think you'll see efficiency pickups that would be something you guys can measure in the third quarter over what first quarter started at. And so the teams have worked really hard to make sure that we have optimized all the opportunities that we have in all the different departments that we currently have. So on the expense side, I think we -- you'll see differences from Q2 to Q3. On the revenue side, I think you're also going to see differences as the deposit -- we went through all our deposit products. And so the fee income on deposit products is up. And I think that will continue to trend that way. As we get better and better at treasury services, that will continue to trend that way. Our wealth management and trust division is booking assets, so I think we will continue to see revenue production from there. And then when the card services business kicks in, I think we'll continue to see revenue production from that. That answer your question, Michael?

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [8]

--------------------------------------------------------------------------------

Yes. Very helpful. I wanted to maybe transition to credit quickly. It seems like these -- the 2 credits from the first quarter are either -- one's done and the other's on its way to being a little bit more firmly resolved, but I wanted to ask actually a little bit of a different question. Just we saw a bank in the Midwest have some difficulties with their ag portfolio. I believe it was dairy and cattle. And I'm just curious if you could maybe remind us kind of the makeup of your ag exposure and if there's been any kind of recent developments or performance worth noting, good or bad, that's on your radar.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [9]

--------------------------------------------------------------------------------

Yes. Well, the good thing is you only lose a wheat crop 8 times before it makes bumper crop. And so since the wheat crop is now harvested, it's a bumper crop. And so our Western Kansas market, which is the majority of our ag markets, we do have some in Central Missouri as well and in Northern Oklahoma, but that crop is more than 2x the average on production and is also -- the price is very positive. So we are doing well from that aspect. And then the corn crop for us is very positive in that we are at a high desert, so we don't usually expect a lot of rain. We actually did get above-normal rainfall, but for our areas, that just means that we had inches instead of [tens] of inches. And so they all got their crops planted. That crop looks really good. Most of it is irrigated. And so with the price being up and the yield looking very positive at this time, I think our farmers are all going to have a very healthy year. And so we aren't going to suffer the issues that a lot of the other places have suffered. We do have some protein production in both cattle, hog and beef, but those markets are also doing very well. So it looks like our ag guys are going to have a good year to a great year. And so that's going to actually heal up a lot of them from the ones that have been struggling. As you remember, about 8% of our loan portfolio is tied to ag.

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [10]

--------------------------------------------------------------------------------

Helpful. And then just lastly, kind of a little bit of a strategic challenge question here for you guys. I mean, the first half of the year here has had some challenges. Obviously, the 4-plus years before that were very active from a deal perspective. What's the thought process internally? I mean, is it -- does it make sense to have a more of an internally focused 2019 and 2020, where excess capital is allocated to buybacks and efficiencies you're trying to gain and you try to kind of reap what you sow on what you've put together here before introducing other outside firms through M&A? Or do you think that the credit blip aside, that once you kind of get through these efficiencies in the next quarter or so, you guys will be ready and that M&A is still kind of the best bet to create value moving forward?

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [11]

--------------------------------------------------------------------------------

So we've always said it's a two-pronged approach, Michael. We've always had to focus on running the bank. And so we've gone periods where we didn't do any M&A transactions because they didn't fit our model, our pricing model. And so I would say we are still very open to M&A transactions that fit in with the model. And I'll also just tell you that we're very focused internally on making sure that all the processes are up to speed with what we need to have to be able to run the institution that we currently have. And so I'd say it's a two-pronged approach, and I would -- we don't force anything into a bucket. And so I would say our operating teams are going to get very good at running the institution and making it as efficient as possible. And we'll still continue to have merger conversations with other people who have the desire to partner with us.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from Terry McEvoy with Stephens.

--------------------------------------------------------------------------------

Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [13]

--------------------------------------------------------------------------------

First question, I was hoping you could discuss the credit performance and trends of the restaurant franchise portfolio ex the one relationship that we've been talking about the last couple of months.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [14]

--------------------------------------------------------------------------------

Yes. So the credit trends on the -- I think the question, Terry, is the credit trends on the rest of the restaurant QSR portfolio. The credit trends on that portfolio have actually been really well. Most of it is tied to concept restaurants like Freddy's, Taco Bell, Papa John's. Am I missing one, Greg? And so those concepts have been performing well. The operators that we currently finance have performed well. And so on a store-by-store basis, we have not seen deterioration in any of those metrics. We are monitoring those well, but -- very closely. And so I would tell you that, that franchise lending has gone well. As you know, the majority of that is all to local operators. And so with that comes -- we are secured by, a lot of times, real estate, equipment and also, personal guarantees.

--------------------------------------------------------------------------------

Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [15]

--------------------------------------------------------------------------------

Great. And Greg, thanks for all the commentary on the NIM dynamics in the second quarter. I guess my question is, do you think deposit costs can fall in the third and fourth quarter? You had mentioned lowering rates in certain markets or certain products. And as you think about all the variables, loan fees, accretion, combined with the funding costs, directionally where do you think the margin can head over the next 2 quarters?

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [16]

--------------------------------------------------------------------------------

Yes. Well, Terry, we would start by hoping that it's leveled off at its current level, the margin I'm referring to, and we would like to think that our deposit costs can continue to come down. Third and fourth quarter are heavy growth quarters in our core deposits every year. It's been that way since the inception of the bank. And so we think that we can continue to grow deposits. We think we can level off and hopefully reduce some of the funding cost. And of course, if the Fed will ease a little bit, that will help our borrowings at Federal Home Loan Bank as well. So I would conservatively say we'd like to start off by seeing a leveling in Q3 and 4, and maybe with a little a luck, we'll get some improvement.

--------------------------------------------------------------------------------

Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [17]

--------------------------------------------------------------------------------

And just last question. The digital bank platform that was rolled out in the second quarter, could you just talk about how much of that was defensive in nature just given the competitive landscape and what some of the larger banks already have out? And then on the offensive side, are you growing relationships, growing clients because of this new product?

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [18]

--------------------------------------------------------------------------------

Yes. So Terry, I would tell you that the product that we were currently on, prior to going to Q2, just was not of the scale or capability for a bank our size. And so we were having limitations on being able to manage customer relationships. The product offerings on the commercial treasury side were not adequate. And so it gave us the ability to do more marketing of a robust product to our customer base. So from that standpoint, a little bit defensive but also a little bit offensive. It gives us a much better opportunity to be able to market directly to those customers and try to enhance the relationships we have within our customer base. It also gives us the ability, which we're in the process of working on, rolling out a shadow bank so that we could have a bank that we could use on a national platform to raise deposits at different deposit costs than we would offer in our regional market.

And so that gives us an offensive tool as we continue to look at funding ways, as many other institutions have that same capability. And so it gives us some ongoing capabilities that we wouldn't be able to have on our own.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from Jeff Rulis with D.A. Davidson.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [20]

--------------------------------------------------------------------------------

Interested in your thoughts in the second half of -- for loan growth. Just talking about how maybe C&I, if that's picked up in July. And what you're expecting from a -- you talk about strong pipelines, but I want to get your thoughts on the second half.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [21]

--------------------------------------------------------------------------------

Yes. Jeff, our teams are working hard. We do have a solid backlog of loans that are in the pipeline for funding. Some of those -- I'm looking at the report. Some of those are draws, and so I don't have a breakdown by type, in particular. But some of those are draws, which means the commercial real estate loans already booked. So some of that will be commercial real estate. And then C&I is getting a -- in our marketplace, it's getting a little softer.

So I'm not sure about the growth in the C&I lending as we are seeing some softening on balances on our lines of credit in our C&I portfolio. Not meaning that they're having issues, but meaning that they're not expanding and buying new equipment but allowing cash flow to pay down debt and cash flow to pay down their lines of credit.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [22]

--------------------------------------------------------------------------------

Would you set -- would you characterize it as sort of mid-single digit, high single digit? What would you kind of peg are range-bound expectations for net growth?

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [23]

--------------------------------------------------------------------------------

What's that, Greg?

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [24]

--------------------------------------------------------------------------------

3% to 5%.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [25]

--------------------------------------------------------------------------------

3% to 5%.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [26]

--------------------------------------------------------------------------------

And that's annualized?

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [27]

--------------------------------------------------------------------------------

That would be annualized.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [28]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [29]

--------------------------------------------------------------------------------

Okay. Got you. And then on the problem credit balance, Greg, I think you mentioned $30 million or half of the nonaccruals are in the -- this credit relationship we've discussed. Are there -- are the remaining roughly $30 million, are there some chunkier credits in there, 2 or 3 that make up a decent-size portion of that remaining balance?

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [30]

--------------------------------------------------------------------------------

Yes. No. After those relationships, the largest nonaccrual loan is $2.3 million, and then it drops to $1.5 million.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [31]

--------------------------------------------------------------------------------

And you mentioned a great portion of those have been acquired through acquisition. Is there any kind of characteristics of those that are -- are they a certain type of loans? Like the balance of them, are they in one or 2 product categories?

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [32]

--------------------------------------------------------------------------------

So the majority of those are acquired, which also means that some of them are showing as nonaccrual loans. But if you remember, $29 million of that nonaccrual is current and...

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [33]

--------------------------------------------------------------------------------

$21.7 million.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [34]

--------------------------------------------------------------------------------

$21.7 million -- sorry, Terry (sic) [Jeff]. $21.7 million of that is accruing and current but is on nonaccrual because it was a purchase accounting adjustment against it. And that stuff is all over the board. I mean, some of it's $500,000, some of it's $2 million.

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [35]

--------------------------------------------------------------------------------

Some of it's ag, some of it's CRE.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [36]

--------------------------------------------------------------------------------

Yes. Some of it's ag, some of it's CRE, but if we put a credit purchase mark on it, we have to list it as nonaccruing -- pardon, yes, nonaccruing, nonperforming. But reality is the customer's never missed a payment and is still paying as the contract says.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [37]

--------------------------------------------------------------------------------

So I guess, fast forwarding that, I mean, these balances seem like if -- once it's been altered, does it stay that way? And I guess, the balance of that $30 million, you'd expect to stay on the books for a reasonable amount of time. Is that fair?

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [38]

--------------------------------------------------------------------------------

Yes, yes. We do try to force these customers at times to find other homes. So it's not that we just allow them to continue to make payments. But there's a lot of times where these things are a 5-year contract and there's not much we can do to have them move somewhere else. And so we put a mark on it because it wasn't written to our credit standard, our credit policy, and so we put a mark against it. So it's well reserved, but they pay off over time a lot of times more than leaving and finding another institution.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

And our next question is from Andrew Liesch with Sandler O'Neill.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [40]

--------------------------------------------------------------------------------

Just a clarification on Jeff's question. That 3% to 5% for net growth. Was that just in C&I? Or is that the entire portfolio?

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [41]

--------------------------------------------------------------------------------

That would be whole -- that would be the entire portfolio.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [42]

--------------------------------------------------------------------------------

Okay. And then just curious on the loan growth in the second quarter. Was any of that purchased? Or was it all originated internally?

--------------------------------------------------------------------------------

Gregory H. Kossover, Equity Bancshares, Inc. - Executive VP, CFO & Director [43]

--------------------------------------------------------------------------------

Some of it was purchased, and some of it was originated.

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [44]

--------------------------------------------------------------------------------

The purchased loans were in the 1-to-4 family bucket that we've purchased from people in the past.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [45]

--------------------------------------------------------------------------------

Okay, so you're familiar with their underwriting?

--------------------------------------------------------------------------------

Brad S. Elliott, Equity Bancshares, Inc. - Founder, Chairman, CEO & President [46]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

(Operator Instructions) All right, ladies and gentlemen, and thank you for joining the Equity Bancshares' presentation call. Have a great day.