UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 001-37624

EQUITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Kansas	72-1532188
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7701 East Kellogg Drive, Suite 300 Wichita, KS	67207
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 316.612.6000

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

Title of each class Class A, Common Stock, par value $0.01 per share Trading Symbol EQBK Name of each exchange on which registered The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer            ☐Accelerated filer                     ☒

Non-accelerated filer              ☐                            Smaller reporting company    ☐

Emerging growth company    ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

As of July 26, 2019, the registrant had 15,563,873 shares of common stock, $0.01 par value per share, outstanding.

TABLE OF CONTENTS

Part I	Financial Information	5
Item 1.	Financial Statements	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Operations	6
	Consolidated Statements of Comprehensive Income (Loss)	7
	Consolidated Statements of Stockholders’ Equity	8
	Consolidated Statements of Cash Flows	10
	Condensed Notes to Interim Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
	Overview	40
	Critical Accounting Policies	42
	Results of Operations	44
	Financial Condition	53
	Liquidity and Capital Resources	65
	Non-GAAP Financial Measures	67
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	70
Item 4.	Controls and Procedures	72
Part II	Other Information	73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 3.	Defaults Upon Senior Securities	73
Item 4.	Mine Safety Disclosures	73
Item 5.	Other Information	73
Item 6.	Exhibits	73

Important Notice about Information in this Quarterly Report

Unless we state otherwise or the context otherwise requires, references in this Quarterly Report to “we,” “our,” “us,” “the Company” and “Equity” refer to Equity Bancshares, Inc. and its consolidated subsidiaries, including Equity Bank, which we sometimes refer to as “Equity Bank,” “the Bank” or “our Bank.”

The information contained in this Quarterly Report is accurate only as of the date of this Quarterly Report on Form 10-Q and as of the dates specified herein.

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance.  These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature.  These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.  Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict.  Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.  When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Item 1A - Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 20, 2019, and in Item 1A – Risk Factors of this Quarterly Report.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

• an economic downturn, especially one affecting our core market areas;

• the occurrence of various events that negatively impact the real estate market, since a significant portion of our loan portfolio is secured by real estate;

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

• interest rate fluctuations, which could have an adverse effect on our profitability;

• external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;

• continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;

• costs arising from the environmental risks associated with making loans secured by real estate;

• losses resulting from a decline in the credit quality of the assets that we hold;

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

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

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

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

• inaccuracies or changes in the appraised value of real estate securing the loans that we originate, which could lead to losses if the real estate collateral is later foreclosed upon and sold at a price lower than the appraised value;

• the costs of integrating the businesses we acquire, which may be greater than expected;

• challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;

• a lack of liquidity resulting from decreased loan repayment rates, lower deposit balances, or other factors;

• restraints on the ability of Equity Bank to pay dividends to us, which could limit our liquidity;

• the loss of our largest loan and depositor relationships;

• limitations on our ability to lend and to mitigate the risks associated with our lending activities as a result of our size and capital position;

3

• additional regulatory requirements and restrictions on our business, which could impose additional costs on us;

• increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;

• a failure in the internal controls we have implemented to address the risks inherent to the business of banking;

• inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;

• the departure of key members of our management personnel or our inability to hire qualified management personnel;

• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;

• unauthorized access to nonpublic personal information of our customers, which could expose us to litigation or reputational harm;

• disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;

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

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

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

• the impact of the transition from LIBOR and our ability to adequately manage such transition;

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

• other factors that are discussed in “Item 1A - Risk Factors.”

The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this Quarterly Report.  If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.  Accordingly, you should not place undue reliance on any such forward-looking statements.  Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.  New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us.  In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement.  This cautionary statement should also be considered in connection with any subsequent written or verbal forward-looking statements that we or persons acting on our behalf may issue.

4

PART I

Item 1: Financial Statements

EQUITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2019 and December 31, 2018

(Dollar amounts in thousands)

	(Unaudited) June 30,			December 31,
	2019			2018
ASSETS
Cash and due from banks	$	180,827		$	192,735
Federal funds sold		591			83
Cash and cash equivalents		181,418			192,818
Interest-bearing time deposits in other banks		4,742			4,991
Available-for-sale securities		161,082			168,875
Held-to-maturity securities, fair value of $778,050 and $739,989		766,950			748,356
Loans held for sale		6,761			2,972
Loans, net of allowance for loan losses of $17,777 and $11,454		2,662,208			2,563,954
Other real estate owned, net		5,764			6,372
Premises and equipment, net		84,942			80,442
Bank-owned life insurance		74,092			73,105
Federal Reserve Bank and Federal Home Loan Bank stock		33,226			29,214
Interest receivable		16,702			17,372
Goodwill		136,432			131,712
Core deposit intangibles, net		21,512			21,725
Other		24,243			19,808
Total assets	$	4,180,074		$	4,061,716
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand	$	487,430		$	503,831
Total non-interest-bearing deposits		487,430			503,831
Savings, NOW, and money market		1,705,104			1,611,710
Time		993,359			1,007,906
Total interest-bearing deposits		2,698,463			2,619,616
Total deposits		3,185,893			3,123,447
Federal funds purchased and retail repurchase agreements		41,047			50,068
Federal Home Loan Bank advances		444,818			384,898
Bank stock loan		15,308			15,450
Subordinated debentures		14,409			14,260
Contractual obligations		3,744			3,965
Interest payable and other liabilities		16,449			13,687
Total liabilities		3,721,668			3,605,775
Commitments and contingent liabilities, see Notes 11 and 12
Stockholders’ equity, see Note 7
Common stock		173			173
Additional paid-in capital		381,133			379,085
Retained earnings		105,337			101,326
Accumulated other comprehensive loss		(1,291	)		(4,867	)
Employee stock loans		(83	)		(121	)
Treasury stock		(26,863	)		(19,655	)
Total stockholders’ equity		458,406			455,941
Total liabilities and stockholders’ equity	$	4,180,074		$	4,061,716

See accompanying condensed notes to interim consolidated financial statements.

5

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months ended June 30, 2019 and 2018

(Dollar amounts in thousands, except per share data)

	(Unaudited) Three Months Ended June 30,					(Unaudited) Six Months Ended June 30,
	2019		2018			2019		2018
Interest and dividend income
Loans, including fees	$	38,027	$	33,101		$	74,560	$	62,149
Securities, taxable		4,969		4,112			10,051		7,835
Securities, nontaxable		1,145		1,025			2,098		1,904
Federal funds sold and other		623		593			1,257		1,066
Total interest and dividend income		44,764		38,831			87,966		72,954
Interest expense
Deposits		11,144		5,338			21,874		10,056
Federal funds purchased and retail repurchase agreements		34		24			66		47
Federal Home Loan Bank advances		1,841		2,094			3,146		3,393
Bank stock loan		147		156			309		183
Subordinated debentures		310		299			644		568
Total interest expense		13,476		7,911			26,039		14,247
Net interest income		31,288		30,920			61,927		58,707
Provision for loan losses		974		750			16,620		1,920
Net interest income after provision for loan losses		30,314		30,170			45,307		56,787
Non-interest income
Service charges and fees		2,240		1,729			4,163		3,309
Debit card income		2,186		1,522			3,924		2,775
Mortgage banking		562		312			879		625
Increase in value of bank-owned life insurance		499		508			987		1,160
Net gain (loss) from securities transactions		7		(2	)		13		(10	)
Other		957		523			1,809		984
Total non-interest income		6,451		4,592			11,775		8,843
Non-interest expense
Salaries and employee benefits		13,067		11,629			27,165		22,520
Net occupancy and equipment		2,188		2,011			4,155		3,813
Data processing		2,358		1,968			4,763		3,642
Professional fees		1,228		844			2,384		1,559
Advertising and business development		722		665			1,368		1,284
Telecommunications		485		432			1,070		801
FDIC insurance		730		510			1,008		754
Courier and postage		341		303			668		558
Free nationwide ATM cost		420		330			781		622
Amortization of core deposit intangibles		785		625			1,564		1,009
Loan expense		175		145			443		491
Other real estate owned		302		(671	)		414		(403	)
Merger expenses		276		5,236			915		5,767
Other		1,946		1,948			3,868		3,185
Total non-interest expense		25,023		25,975			50,566		45,602
Income before income taxes		11,742		8,787			6,516		20,028
Provision for income taxes		2,510		1,920			1,357		4,450
Net income and net income allocable to common stockholders	$	9,232	$	6,867		$	5,159	$	15,578
Basic earnings per share	$	0.59	$	0.45		$	0.33	$	1.04
Diluted earnings per share	$	0.58	$	0.44		$	0.32	$	1.02

See accompanying condensed notes to interim consolidated financial statements.

6

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Six Months ended June 30, 2019 and 2018

(Dollar amounts in thousands)

	(Unaudited) Three Months Ended June 30,						(Unaudited) Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	9,232		$	6,867		$	5,159		$	15,578
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period on    available-for-sale securities		1,768			(1,199	)		4,288			(4,136	)
Amortization of unrealized losses on held-to-maturity securities		212			115			505			234
Total other comprehensive income (loss)		1,980			(1,084	)		4,793			(3,902	)
Tax effect		(504	)		275			(1,217	)		989
Other comprehensive income (loss), net of tax		1,476			(809	)		3,576			(2,913	)
Comprehensive income	$	10,708		$	6,058		$	8,735		$	12,665

See accompanying condensed notes to interim consolidated financial statements.

7

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended June 30, 2019 and 2018

(Unaudited)

(Dollar amounts in thousands, except share data)

	Common Stock					Additional				Accumulated Other			Employee						Total
	Shares Outstanding			Amount		Paid-In Capital		Retained Earnings		Comprehensive Income (Loss)			Stock Loans			Treasury Stock			Stockholders’ Equity
Balance at April 1, 2018		14,609,414		$	161	$	332,075	$	74,212	$	(5,185	)	$	(121	)	$	(19,655	)	$	381,487
Net income		—			—		—		6,867		—			—			—			6,867
Other comprehensive loss, net of tax effects		—			—		—		—		(809	)		—			—			(809	)
Stock based compensation		1,375			—		621		—		—			—			—			621
Common stock issued upon exercise of stock options		—			—		—		—		—			—			—			—
Common stock issued under stock-based incentive plan		5,076			—		—		—		—			—			—			—
Issuance of common stock in connection with the acquisition of Kansas Bank Corporation, net of issuance expenses of $207		820,849			8		31,888		—		—			—			—			31,896
Issuance of common stock in connection with the acquisition of Adams Dairy Bancshares, Inc., net of issuance expenses of $236		344,063			4		13,216		—		—			—			—			13,220
Balance at June 30, 2018		15,780,777		$	173	$	377,800	$	81,079	$	(5,994	)	$	(121	)	$	(19,655	)	$	433,282
Balance at April 1, 2019		15,820,303		$	173	$	379,931	$	95,868	$	(2,767	)	$	(87	)	$	(19,655	)	$	453,463
Net income		—			—		—		9,232		—			—			—			9,232
Other comprehensive income,    net of tax effects		—			—		—		—		1,476			—			—			1,476
Stock based compensation		9,104			—		998		—		—			—			—			998
Common stock issued upon exercise of stock options		11,402			—		204		—		—			—			—			204
Common stock issued under stock-based incentive plan		870			—		—		—		—			—			—			—
Treasury stock purchases		(277,806	)		—		—		—		—			—			(7,208	)		(7,208	)
Repayment on employee stock loans		—			—		—		—		—			4			—			4
Cumulative effect of change in accounting principle from implementation of ASU 2017-08		—			—		—		237		—			—			—			237
Balance at June 30, 2019		15,563,873		$	173	$	381,133	$	105,337	$	(1,291	)	$	(83	)	$	(26,863	)	$	458,406

See accompanying condensed notes to interim consolidated financial statements.

8

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Six Months ended June 30, 2019 and 2018

(Unaudited)

(Dollar amounts in thousands, except share data)

	Common Stock					Additional					Accumulated Other			Employee						Total
	Shares Outstanding			Amount		Paid-In Capital		Retained Earnings			Comprehensive Income (loss)			Stock Loans			Treasury Stock			Stockholders’ Equity
Balance at January 1, 2018		14,605,607		$	161	$	331,339	$	65,512		$	(3,092	)	$	(121	)	$	(19,655	)	$	374,144
Net income		—			—		—		15,578			—			—			—			15,578
Other comprehensive loss,    net of tax effects		—			—		—		—			(2,913	)		—			—			(2,913	)
Stock based compensation		1,375			—		1,339		—			—			—			—			1,339
Common stock issued upon exercise of stock options		1,250			—		18		—			—			—			—			18
Common stock issued under stock-based incentive plan		7,633			—		—		—			—			—			—			—
Issuance of common stock in connection with the acquisition of Kansas Bank Corporation, net of issuance expenses of $207		820,849			8		31,888		—			—			—			—			31,896
Issuance of common stock in connection with the acquisition of Adams Dairy Bancshares, Inc., net of issuance expenses of $236		344,063			4		13,216		—			—			—			—			13,220
Adoption of ASU 2016-01 reclassifying AFS equity securities with readily determined fair value		—			—		—		(11	)		11			—			—			—
Balance at June 30, 2018		15,780,777		$	173	$	377,800	$	81,079		$	(5,994	)	$	(121	)	$	(19,655	)	$	433,282
Balance at January 1, 2019		15,793,095		$	173	$	379,085	$	101,326		$	(4,867	)	$	(121	)	$	(19,655	)	$	455,941
Net income		—			—		—		5,159			—			—			—			5,159
Other comprehensive income,    net of tax effects		—			—		—		—			3,576			—			—			3,576
Stock based compensation		9,104			—		1,732		—			—			—			—			1,732
Common stock issued upon    exercise of stock options		17,502			—		316		—			—			—			—			316
Common stock issued under stock-based incentive plan		21,978			—		—		—			—			—			—			—
Treasury stock purchases		(277,806	)		—		—		—			—			—			(7,208	)		(7,208	)
Repayment on employee stock loans		—			—		—		—			—			38			—			38
Cumulative effect of change in accounting principle from implementation of ASU 2017-08		—			—		—		(1,148	)		—			—			—			(1,148	)
Balance at June 30, 2019		15,563,873		$	173	$	381,133	$	105,337		$	(1,291	)	$	(83	)	$	(26,863	)	$	458,406

See accompanying condensed notes to interim consolidated financial statements.

9

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months ended June 30, 2019 and 2018

(Dollar amounts in thousands, except per share data)

	(Unaudited) June 30,
	2019			2018
Cash flows from operating activities
Net income	$	5,159		$	15,578
Adjustments to reconcile net income to net cash from operating activities:
Stock-based compensation		1,732			1,339
Depreciation		1,743			1,451
Amortization of operating lease right-of-use asset		305			—
Amortization of cloud computing implementation costs		46			—
Provision for loan losses		16,620			1,920
Net (accretion) amortization of purchase accounting adjustments		(2,738	)		(2,559	)
Amortization of premiums and discounts on securities		2,677			1,551
Amortization of intangibles		1,588			1,033
Deferred income taxes		(15	)		(101	)
FHLB stock dividends		(421	)		(575	)
Loss (gain) on sales and valuation adjustments on other real estate owned		49			(725	)
Net loss (gain) on securities transactions		—			(2	)
Change in unrealized loss (gain) on equity securities		(13	)		12
Loss (gain) on disposal of premises and equipment		(10	)		(192	)
Loss (gain) on sale of foreclosed assets		20			1
Loss (gain) on sales of loans		(708	)		(504	)
Originations of loans held for sale		(37,324	)		(22,870	)
Proceeds from the sale of loans held for sale		34,243			22,154
Increase in the value of bank-owned life insurance		(987	)		(1,160	)
Change in fair value of derivatives		(4,038	)		(7	)
Payments on operating lease payable		(401	)		—
Net change in:
Interest receivable		686			167
Other assets		638			(332	)
Interest payable and other liabilities		85			(552	)
Net cash provided by (used in) operating activities		18,936			15,627
Cash flows from (to) investing activities
Purchases of available-for-sale securities		—			(36,007	)
Purchases of held-to-maturity securities		(71,028	)		(71,325	)
Proceeds from sales, calls, pay-downs and maturities of available-for-sale securities		11,241			46,516
Proceeds from calls, pay-downs and maturities of held-to-maturity securities		49,718			32,240
Net change in interest-bearing time deposits in other banks		249			743
Net change in loans		(105,415	)		(91,452	)
Capitalized construction cost of other real estate owned		(8	)	—
Purchase of premises and equipment		(5,587	)		(2,002	)
Proceeds from sale of premises and equipment		10			1,200
Proceeds from sale of foreclosed assets		169			99
Net redemption (purchase) of FHLB and FRB stock		(3,591	)		(10,066	)
Proceeds from sale of other real estate owned		1,051			2,305
Proceeds from bank-owned life insurance death benefits		—			346
Cash paid for acquisition of Eastman		—			(55	)
Purchase of KBC, net of cash acquired		—			12,774
Purchase of ADBI, net of cash acquired		—			(1,385	)
Net cash received from acquisition of MidFirst locations		85,360			—
Net cash provided by (used in) investing activities		(37,831	)		(116,069	)
Cash flows from (to) financing activities
Net increase (decrease) in deposits		(36,199	)		(132,549	)

10

Net change in federal funds purchased and retail repurchase agreements		(9,021	)		3,902
Net borrowings (payments) on Federal Home Loan Bank line of credit		61,155			208,926
Principal payments on Federal Home Loan Bank term advances		(1,223	)		—
Proceeds from bank stock loan		7,208			16,000
Principal payments on bank stock loan		(7,350	)		(125	)
Principal payments on employee stock loans		38			—
Proceeds from the exercise of employee stock options		316			18
Purchase of treasury stock		(7,208	)		—
Net change in contractual obligations		(221	)		(234	)
Net cash provided by (used in) financing activities		7,495			95,938
Net change in cash and cash equivalents		(11,400	)		(4,504	)
Cash and cash equivalents, beginning of period		192,818			52,195
Ending cash and cash equivalents	$	181,418		$	47,691
Supplemental cash flow information:
Interest paid	$	24,508		$	13,309
Income taxes paid, net of refunds		718			2,230
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans		494			1,296
Operating leases recognized		3,546			—
Total fair value of assets acquired in purchase of KBC, net of cash		—			294,618
Total fair value of liabilities assumed in purchase of KBC		—			289,103
Total fair value of assets acquired in purchase of ADBI, net of cash		—			108,545
Total fair value of liabilities assumed in purchase of ADBI		—			102,406
Total fair value of assets acquired in purchase of MidFirst locations		13,246			—
Total fair value of liabilities acquired in purchase of MidFirst locations		98,606			—

See accompanying condensed notes to interim consolidated financial statements.

11

EQUITY BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

(Dollar amounts in thousands, except per share data)

NOTE 1 – BASIS OF PRESENTATION

The interim consolidated financial statements include the accounts of Equity Bancshares, Inc., its wholly owned subsidiaries, EBAC, LLC and Equity Bank and Equity Bank’s wholly owned subsidiaries, EBHQ, LLC and SA Holdings, Inc.  These entities are collectively referred to as the “Company”.  All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information.  The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.  In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are of a normal recurring nature.  These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 20, 2019.  Operating results for the three and six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other period.

Reclassifications

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

Adoption of New Accounting Standards

In February 2016, FASB issued ASU 2016-02, Leases, with the intention of improving financial reporting about leasing transactions.  The ASU required all lessees to recognize lease assets and lease liabilities on the balance sheet.  Lessor accounting was largely unchanged by the ASU; however, disclosures about the amount, timing and uncertainty of cash flows arising from leases are required of both lessees and lessors.  The ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.  The modified retrospective approach provides for optional practical expedients when applying the ASU to leases that commenced before the effective date of the ASU.  This accounting pronouncement was further modified in July 2018 with the issuance of ASU 2018-11, Leases – Targeted Improvements, to allow for another transition method by applying a cumulative-effect adjustment to opening retained earnings at adoption and providing lessors a practical expedient to not separate non-lease and lease components in certain circumstances.  The Company adopted this accounting standard effective January 1, 2019, and elected to record the adoption through a cumulative-effect adjustment at January 1, 2019 which resulted in the Company recording $3,251 in right-of-use assets and $3,251 of operating lease liabilities.  In addition, the Company elected the following practical expedients to all leases that commenced prior to January 1, 2019: (1) No reassessment of lease populations as long as the contract was properly scoped as a lease or not a lease under ASC 840; (2) No reassessment of existing lease classification; (3) No adjustment of existing costs.

In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities.  This update shortened the amortization period of certain callable debt securities held at a premium to the earliest call date.  The amendments in this update were effective for the Company’s fiscal year beginning after December 15, 2018, and interim periods within that fiscal year, however, early adoption was permitted.  The amendments were applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings.  The Company adopted this accounting standard effective January 1, 2019, which resulted in the Company recording a $1,385 reduction in the amortized cost of investment securities and a reduction of $1,148 in retained earnings, net of $237 in deferred taxes.

In August 2017, FASB issued ASU 2017-12, Derivatives and Hedging, Targeted Improvements to Accounting for Hedging Activities, with the stated objective of improving the financial reporting of hedging relationships to better reflect the economics of hedging transactions and to simplify the application of hedge accounting.  The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Potential effects on the Company’s current hedging activities

12

included eliminating the requirement to separately measure and report hedge ineffectiveness, providing additional flexibility for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk and easing certain hedge documentation and assessment requirements.  The adoption of  this accounting standard did not materially impact the Company’s financial statements but did result in changes to financial statement disclosures and changes to existing and future swap documentation.

In August 2018, FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.  This update required implementation costs of hosting arrangements that are considered a service contract to be capitalized.  The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities.  The Company adopted this accounting standard effective October 1, 2018 which resulted in the Company capitalizing $311 of implementation costs during 2018.

Recent Accounting Pronouncements

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which will change how the Company measures credit losses for most of its financial assets. This guidance is applicable to loans held for investment, off-balance-sheet credit exposures, such as loan commitments and standby letters of credit, and held-to-maturity investment securities.  The Company will be required to use a new forward-looking expected loss model that is anticipated to result in the earlier recognition of allowances for losses.  For available-for-sale securities with unrealized losses, the Company will measure credit losses in a manner similar to current practice, but will recognize those credit losses as allowances rather than reductions in the amortized cost of the securities.  In addition, the ASU requires significantly more disclosure including information about credit quality by year of origination for most loans.  The ASU is effective for the Company beginning in the first quarter of 2020.  Generally, the amendments will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The Company is currently gathering the historical loss data by portfolio and class of financial instrument to estimate the life of financial instrument credit loss and is evaluating the supporting system requirements to routinely generate the reported values.  At this time an estimate of the impact to the Company’s financial statements is not known.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other, which will simplify the subsequent measurement of goodwill.  Goodwill and other intangibles must be assessed for impairment annually.  If an entity’s assessment determines that the fair value of an entity is less than its carrying amount, including goodwill, currently, the measurement of goodwill impairment requires that the entity’s identifiable net assets be valued following procedures similar to determining the fair value of assets acquired and liabilities assumed in a business combination.  Under ASU 2017-04, goodwill impairment is measured to the extent that the carrying amount of an entity exceeds its fair value.  The amendments in this update are effective for the Company’s annual goodwill impairment tests beginning in 2020.  The amendments will be applied on a prospective basis.  The Company is currently evaluating the impact of this new accounting standard, but does not expect a material impact to its financial statements.

NOTE 2 – SECURITIES

The amortized cost and fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) are listed below.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2019
Available-for-sale securities
Residential mortgage-backed securities (issued by    government-sponsored entities)	$	161,422	$	536	$	(876	)	$	161,082
	$	161,422	$	536	$	(876	)	$	161,082
December 31, 2018
Available-for-sale securities
Residential mortgage-backed securities (issued by    government-sponsored entities)	$	173,503	$	12	$	(4,640	)	$	168,875
	$	173,503	$	12	$	(4,640	)	$	168,875

13

The amortized cost and fair value of held-to-maturity securities and the related gross unrecognized gains and losses are listed in the following table.

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
June 30, 2019
Held-to-maturity securities
U.S. Government-sponsored entities	$	3,885	$	25	$	(4	)	$	3,906
Residential mortgage-backed (securities issued by    government sponsored entities)		585,906		9,663		(1,996	)		593,573
Corporate		22,993		352		(77	)		23,268
Small Business Administration loan pools		1,585		44		—			1,629
State and political subdivisions		152,581		3,147		(54	)		155,674
	$	766,950	$	13,231	$	(2,131	)	$	778,050
December 31, 2018
Held-to-maturity securities
U.S. Government-sponsored entities	$	3,873	$	7	$	(20	)	$	3,860
Residential mortgage-backed (securities issued by    government sponsored entities)		567,766		2,354		(9,653	)		560,467
Corporate		22,993		234		(326	)		22,901
Small Business Administration loan pools		1,746		—		(18	)		1,728
State and political subdivisions		151,978		804		(1,749	)		151,033
	$	748,356	$	3,399	$	(11,766	)	$	739,989

The tables above present unrecognized gains and losses on held-to-maturity securities since date of designation.

The fair value and amortized cost of debt securities at June 30, 2019, by contractual maturity, is shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	—	$	—	$	11,772	$	11,795
One to five years		—		—		36,543		37,248
Five to ten years	—		—			54,814		56,024
After ten years		—		—		77,915		79,410
Mortgage-backed securities		161,422		161,082		585,906		593,573
Total debt securities	$	161,422	$	161,082	$	766,950	$	778,050

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $789,104 at June 30, 2019 and $800,744 at December 31, 2018.

14

The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018.

	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
June 30, 2019
Available-for-sale securities
Residential mortgage-backed (issued by    government-sponsored entities)	$	4,312	$	(2	)	$	76,259	$	(874	)	$	80,571	$	(876	)
Total temporarily impaired securities	$	4,312	$	(2	)	$	76,259	$	(874	)	$	80,571	$	(876	)
December 31, 2018
Available-for-sale securities
Residential mortgage-backed (issued by    government-sponsored entities)	$	48,332	$	(575	)	$	115,844	$	(4,065	)	$	164,176	$	(4,640	)
Total temporarily impaired securities	$	48,332	$	(575	)	$	115,844	$	(4,065	)	$	164,176	$	(4,640	)

	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
June 30, 2019
Held-to-maturity securities
U.S. Government-sponsored entities	$	—	$	—		$	995	$	(4	)	$	995	$	(4	)
Residential mortgage-backed (issued by    government-sponsored entities)		173		(2	)		223,036		(2,456	)		223,209		(2,458	)
Corporate		7,785		(77	)		—		—			7,785		(77	)
Small Business Administration loan pools		—		—			883		(2	)		883		(2	)
State and political subdivisions		—		—			9,481		(61	)		9,481		(61	)
Total temporarily impaired securities	$	7,958	$	(79	)	$	234,395	$	(2,523	)	$	242,353	$	(2,602	)
December 31, 2018
Held-to-maturity securities
U.S. Government-sponsored entities	$	1,882	$	(3	)	$	982	$	(17	)	$	2,864	$	(20	)
Residential mortgage-backed (issued by    government-sponsored entities)		31,270		(356	)		294,127		(10,579	)		325,397		(10,935	)
Corporate		7,500		(326	)		5,182		(49	)		12,682		(375	)
Small Business Administration loan pools		—		—			1,728		(37	)		1,728		(37	)
State and political subdivisions		40,415		(473	)		45,137		(1,561	)		85,552		(2,034	)
Total temporarily impaired securities	$	81,067	$	(1,158	)	$	347,156	$	(12,243	)	$	428,223	$	(13,401	)

The tables above present unrealized losses on held-to-maturity securities since the date of purchase, independent of the impact associated with changes in cost basis upon transfer from the available-for-sale designation to the held-to-maturity designation. As of June 30, 2019, the Company held 24 available-for-sale securities and 188 held-to-maturity securities in an unrealized loss position.

Unrealized losses on securities have not been recognized into income because the security issuers are of high credit quality, management does not intend to sell and it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recovery and the decline in fair value is largely due to changes in interest rates.  The fair value is expected to recover as the securities approach maturity.

There were no proceeds from sales of available-for-sale securities during the six months ended June 30, 2019 or 2018. 

15

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table lists categories of loans at June 30, 2019 and December 31, 2018.

	June 30, 2019			December 31, 2018
Commercial real estate	$	1,234,650		$	1,231,217
Commercial and industrial		592,569			601,782
Residential real estate		561,431			446,060
Agricultural real estate		136,657			139,332
Consumer		71,791			62,894
Agricultural		82,887			94,123
Total loans		2,679,985			2,575,408
Allowance for loan losses		(17,777	)		(11,454	)
Net loans	$	2,662,208		$	2,563,954

From time to time the Company has purchased pools of residential real estate loans originated by other financial institutions to hold for investment with the intent to diversify the residential real estate portfolio.  During the first six months of 2019, the Company purchased seven pools of residential real estate loans totaling $129,921.  As of June 30, 2019 and December 31, 2018, residential real estate loans include $179,761 and $64,558 of purchased residential real estate loans.

The unamortized balance of merger purchase accounting adjustments related to non-purchase credit impaired loans included in the loan totals above are $9,703 with related loans of $704,610 at June 30, 2019, and $11,372 with related loans of $827,676 at December 31, 2018.

Overdraft deposit accounts are reclassified and included in consumer loans above.  These accounts totaled $1,482 at June 30, 2019 and $1,279 at December 31, 2018.

The following tables present the activity in the allowance for loan losses by class for the three-month periods ended June 30, 2019 and 2018.

June 30, 2019	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	4,528		$	16,056		$	3,617		$	494		$	1,347		$	298		$	26,340
Provision for loan losses		719			135			(272	)		59			257			76			974
Loans charged-off		(582	)		(8,244	)		(465	)		(28	)		(389	)		(36	)		(9,744	)
Recoveries		47			1			28			—			129			2			207
Total ending allowance balance	$	4,712		$	7,948		$	2,908		$	525		$	1,344		$	340		$	17,777

June 30, 2018	Commercial Real Estate		Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	3,010	$	2,388		$	2,442		$	267		$	878		$	331		$	9,316
Provision for loan losses		216		(64	)		185			147			247			19			750
Loans charged-off		—		(77	)		(148	)		(80	)		(203	)		(4	)		(512	)
Recoveries		269		7			184			—			61			8			529
Total ending allowance balance	$	3,495	$	2,254		$	2,663		$	334		$	983		$	354		$	10,083

16

The following tables present the activity in the allowance for loan losses by class for the six-month periods ended June 30, 2019 and 2018.

June 30, 2019	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	4,662		$	2,707		$	2,320		$	391		$	1,070		$	304		$	11,454
Provision for loan losses		585			13,930			1,129			168			732			76			16,620
Loans charged-off		(608	)		(8,738	)		(579	)		(34	)		(681	)		(42	)		(10,682	)
Recoveries		73			49			38			—			223			2			385
Total ending allowance balance	$	4,712		$	7,948		$	2,908		$	525		$	1,344		$	340		$	17,777

June 30, 2018	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	2,740		$	2,136		$	2,262		$	319		$	768		$	273		$	8,498
Provision for loan losses		507			196			475			92			535			115			1,920
Loans charged-off		(29	)		(86	)		(271	)		(80	)		(509	)		(43	)		(1,018	)
Recoveries		277			8			197			3			189			9			683
Total ending allowance balance	$	3,495		$	2,254		$	2,663		$	334		$	983		$	354		$	10,083

The following tables present the recorded investment in loans and the balance in the allowance for loan losses by portfolio and class based on impairment method as of June 30, 2019 and December 31, 2018.

June 30, 2019	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Agricultural Real Estate		Consumer		Agricultural		Total
Allowance for loan losses:
Individually evaluated for impairment	$	357	$	5,159	$	366	$	32	$	66	$	46	$	6,026
Collectively evaluated for impairment		3,482		2,774		2,515		387		1,228		294		10,680
Purchased credit impaired loans		873		15		27		106		50		—		1,071
Total	$	4,712	$	7,948	$	2,908	$	525	$	1,344	$	340	$	17,777
Loan Balance:
Individually evaluated for impairment	$	6,420	$	22,125	$	14,224	$	2,453	$	686	$	989	$	46,897
Collectively evaluated for impairment		1,215,593		565,367		544,391		128,715		70,893		80,053		2,605,012
Purchased credit impaired loans		12,637		5,077		2,816		5,489		212		1,845		28,076
Total	$	1,234,650	$	592,569	$	561,431	$	136,657	$	71,791	$	82,887	$	2,679,985

December 31, 2018	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Agricultural Real Estate		Consumer		Agricultural		Total
Allowance for loan losses:
Individually evaluated for impairment	$	242	$	185	$	391	$	22	$	62	$	10	$	912
Collectively evaluated for impairment		3,695		2,493		1,861		367		925		293		9,634
Purchased credit impaired loans		725		29		68		2		83		1		908
Total	$	4,662	$	2,707	$	2,320	$	391	$	1,070	$	304	$	11,454
Loan Balance:
Individually evaluated for impairment	$	4,068	$	24,275	$	4,434	$	856	$	678	$	2,252	$	36,563
Collectively evaluated for impairment		1,213,653		571,171		438,739		133,415		61,978		89,194		2,508,150
Purchased credit impaired loans		13,496		6,336		2,887		5,061		238		2,677		30,695
Total	$	1,231,217	$	601,782	$	446,060	$	139,332	$	62,894	$	94,123	$	2,575,408

17

The following table presents information related to impaired loans, excluding purchased credit impaired loans which have not deteriorated since acquisition, by class of loans as of June 30, 2019 and December 31, 2018.  The recorded investment in loans excludes accrued interest receivable due to immateriality.

	June 30, 2019						December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial real estate	$	3,884	$	3,692	$	—	$	1,685	$	1,647	$	—
Commercial and industrial		1,079		1,070		—		22,701		22,651		—
Residential real estate		11,163		10,560		—		533		527		—
Agricultural real estate		2,571		2,567		—		2,038		2,035		—
Consumer		68		29		—		61		55		—
Agricultural		324		323		—		756		756		—
Subtotal		19,089		18,241		—		27,774		27,671		—
With an allowance recorded:
Commercial real estate		8,808		7,234		1,230		8,700		7,179		967
Commercial and industrial		21,421		21,199		5,174		2,255		1,911		214
Residential real estate		4,180		3,923		393		4,934		4,582		459
Agricultural real estate		1,263		1,153		138		261		242		24
Consumer		1,065		832		116		1,144		859		145
Agricultural		666		666		46		162		106		11
Subtotal		37,403		35,007		7,097		17,456		14,879		1,820
Total	$	56,492	$	53,248	$	7,097	$	45,230	$	42,550	$	1,820

The tables below present average recorded investment and interest income related to impaired loans for the three and six months ended June 30, 2019 and 2018.  Interest income recognized in the following table was substantially recognized on the cash basis.  The recorded investment in loans excludes accrued interest receivable due to immateriality.

	As of and for the three months ended
	June 30, 2019				June 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	2,922	$	79	$	1,773	$	118
Commercial and industrial		2,156		4		6,186		56
Residential real estate		5,538		31		565		9
Agricultural real estate		2,124		—		1,189		11
Consumer		34		—		19		—
Agricultural		222		—		307		18
Subtotal		12,996		114		10,039		212
With an allowance recorded:
Commercial real estate		7,276		—		665		1
Commercial and industrial		25,634		3		514		—
Residential real estate		9,710		8		3,774		22
Agricultural real estate		973		—		313		2
Consumer		803		5		473		3
Agricultural		478		—		218		4
Subtotal		44,874		16		5,957		32
Total	$	57,870	$	130	$	15,996	$	244

18

	As of and for the six months ended
	June 30, 2019				June 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	8,915	$	79	$	1,704	$	118
Commercial and industrial		2,570		5		6,797		66
Residential real estate		3,867		31		700		10
Agricultural real estate		2,095		—		810		12
Consumer		41		—		13		—
Agricultural		400		—		207		18
Subtotal		17,888		115		10,231		224
With an allowance recorded:
Commercial real estate		7,244		74		975		2
Commercial and industrial		17,726		3		714		—
Residential real estate		8,001		8		4,005		22
Agricultural real estate		729		—		553		2
Consumer		822		5		502		3
Agricultural		354		2		627		4
Subtotal		34,876		92		7,376		33
Total	$	52,764	$	207	$	17,607	$	257

The following tables present the aging of the recorded investment in past due loans as of June 30, 2019 and December 31, 2018, by portfolio and class of loans.

June 30, 2019	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days Past Due Still On Accrual		Nonaccrual		Loans Not Past Due		Total
Commercial real estate	$	759	$	343	$	—	$	14,192	$	1,219,356	$	1,234,650
Commercial and industrial		995		134		—		22,937		568,503		592,569
Residential real estate		1,016		1,944		—		14,484		543,987		561,431
Agricultural real estate		384		—		—		6,500		129,773		136,657
Consumer		292		81		—		861		70,557		71,791
Agricultural		242		12		—		2,197		80,436		82,887
Total	$	3,688	$	2,514	$	—	$	61,171	$	2,612,612	$	2,679,985

December 31, 2018	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days Past Due Still On Accrual		Nonaccrual		Loans Not Past Due		Total
Commercial real estate	$	1,302	$	259	$	—	$	12,768	$	1,216,888	$	1,231,217
Commercial and industrial		509		2,467		—		6,954		591,852		601,782
Residential real estate		782		2,188		18		5,257		437,815		446,060
Agricultural real estate		—		30		—		4,857		134,445		139,332
Consumer		501		157		—		914		61,322		62,894
Agricultural		186		3		—		2,453		91,481		94,123
Total	$	3,280	$	5,104	$	18	$	33,203	$	2,533,803	$	2,575,408

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Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship.  The Company uses the following definitions for risk ratings.

Pass:  Loans classified as pass do not have any noted weaknesses and repayment of the loan is expected.  These loans are considered unclassified.

Special Mention:  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.  These loans are considered classified.

Substandard:  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.  These loans are considered classified.

Doubtful:  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  These loans are considered classified.

The risk category of loans by class of loans is as follows as of June 30, 2019 and December 31, 2018.

June 30, 2019	Unclassified		Classified		Total
Commercial real estate	$	1,212,047	$	22,603	$	1,234,650
Commercial and industrial		543,942		48,627		592,569
Residential real estate		546,849		14,582		561,431
Agricultural real estate		122,633		14,024		136,657
Consumer		70,930		861		71,791
Agricultural		77,390		5,497		82,887
Total	$	2,573,791	$	106,194	$	2,679,985

December 31, 2018	Unclassified		Classified		Total
Commercial real estate	$	1,194,240	$	36,977	$	1,231,217
Commercial and industrial		572,300		29,482		601,782
Residential real estate		440,704		5,356		446,060
Agricultural real estate		129,285		10,047		139,332
Consumer		61,976		918		62,894
Agricultural		90,848		3,275		94,123
Total	$	2,489,353	$	86,055	$	2,575,408

Purchased Credit Impaired Loans

The Company has acquired loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The table below lists recorded investments in purchased credit impaired loans as of June 30, 2019 and December 31, 2018.

	June 30, 2019			December 31, 2018
Contractually required principal payments	$	36,858		$	40,772
Discount		(8,782	)		(10,077	)
Recorded investment	$	28,076		$	30,695

The accretable yield associated with these loans was $3,902 and $3,785 as of June 30, 2019 and December 31, 2018.  The interest income recognized on these loans for the three-month periods ended June 30, 2019, and 2018, was $273 and $813.  The interest income recognized on these loans for the six-month periods ended June 30, 2019, and 2018, was $554 and $699.  For the

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three-month period ended June 30, 2019, there was a provision for loan loss reversal of $39 and for the six-month period ended June 30, 2019, there was a provision for loan losses of $163 recorded for these loans.  For the three-month period ended June 30, 2018, there was a $25 provision for loan loss recorded for these loans and for the six-month period ended June 30, 2018, there was a provision for loan loss reversal of $146 for these loans.

Troubled Debt Restructurings

The Company had no loans modified under troubled debt restructurings as of June 30, 2019 or December 31, 2018.

NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to interest-rate risk primarily from the effect of interest rate changes on its interest-earning assets and its sources of funding these assets.  The Company will periodically enter into interest rate swaps or interest rate caps/floors to manage certain interest rate risk exposure.

Interest Rate Swaps Designated as Fair Value Hedges

The Company periodically enters into interest rate swaps to hedge the fair value of certain commercial real estate loans.  These transactions are designated as fair value hedges.  In this type of transaction, the Company typically receives from the counterparty a variable-rate cash flow based on the one-month London Interbank Offered Rate (“LIBOR”) plus a spread to this index and pays a fixed-rate cash flow equal to the customer loan rate.  At June 30, 2019, the portfolio of interest rate swaps had a weighted average maturity of 7.2 years, a weighted average pay rate of 4.94% and a weighted average rate received of 5.17%.  At December 31, 2018, the portfolio of interest rate swaps had a weighted average maturity of 7.7 years, a weighted average pay rate of 4.94% and a weighted average rate received of 5.10%.

Stand-Alone Derivatives

The Company periodically enters into interest rate swaps with our borrowers and simultaneously enters into swaps with a counterparty with offsetting terms for the purpose of providing our borrowers long-term fixed rate loans.  Neither swap is designated as a hedge and both are marked to market through earnings.  At June 30, 2019, this portfolio of interest rate swaps had a weighted average maturity of 8.1 years, weighted average pay rate of 5.29% and a weighted average rate received of 5.29%.  At December 31, 2018, this portfolio of interest rate swaps had a weighted average maturity of 7.6 years, weighted average pay rate of 5.18% and weighted average rate received of 5.18%.

In 2009, the Company purchased an interest rate cap derivative to assist with interest rate risk management.  This derivative is not designated as a hedging instrument but rather as a stand-alone derivative.  At June 30, 2019, the interest rate cap had a term of 0.4 years and a cap rate of 4.50%.  At December 31, 2018, the interest rate cap had a term of 0.9 years and a cap rate of 4.50%.

Reconciliation of Derivative Fair Values and Gains/(Losses)

The notional amount of a derivative contract is a factor in determining periodic interest payments or cash flows received or paid.  The notional amount of derivatives serves as a level of involvement in various types of derivatives.  The notional amount does not represent the Company’s overall exposure to credit or market risk, generally, the exposure is significantly smaller.

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The following table shows the notional balances and fair values (including net accrued interest) of the derivatives outstanding by derivative type at June 30, 2019 and December 31, 2018.

	June 30, 2019							December 31, 2018
	Notional Amount		Derivative Assets		Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	16,487	$	—	$	555		$	16,743	$	242		$	—
Total derivatives designated as hedging relationships		16,487		—		555			16,743		242			—
Derivatives not designated as hedging instruments:
Interest rate swaps		103,056		3,300		3,708			38,073		690			777
Interest rate caps/floors		2,073		—		—			2,264		1			—
Total derivatives not designated as hedging    instruments		105,129		3,300		3,708			40,337		691			777
Total	$	121,616		3,300		4,263		$	57,080		933			777
Cash collateral				—		(4,368	)				(531	)		(541	)
Netting adjustments				105		105					289			289
Net amount presented in Balance Sheet			$	3,405	$	—				$	691		$	525

 The table below lists designated and qualifying hedged items in fair value hedges at June 30, 2019.

	June 30, 2019
	Carrying Amount		Hedging Fair Value Adjustment		Fair Value Adjustments on Discontinued Hedges
Commercial real estate loans	$	17,054	$	555	$	—
Total	$	17,054	$	555	$	—

Prior to the implementation of ASU 2017-12, derivative gains/(losses) for derivatives in hedging relationships were reported in other income as hedge ineffectiveness; net interest settlements on those derivatives were recorded to loan interest income; and derivative gains/(losses) and the related net interest settlements for economic derivatives were reported in other income. The Company implemented ASU 2017-12 effective January 1, 2019, and currently reports hedging derivative gains/(losses) as adjustments to loan interest income along with the related net interest settlements; and the derivative gains/(losses) and net interest settlements for economic derivatives are reported in other income. For the three and six-month periods ended June 30, 2019 and 2018, the Company recorded net gains/(losses) on derivatives and hedging activities.

	Three months ended					Six months ended
	June 30, 2019			June 30, 2018		June 30, 2019			June 30, 2018
Derivatives designated as hedging instruments:
Interest rate swaps	$	—		$	—	$	—		$	—
Total net gain (loss) related to fair value hedge    ineffectiveness		—			—		—			—
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps		(259	)	—			(321	)	—
Interest rate caps/floors		—			—		(1	)		—
Total net gains (losses) related to derivatives not    designated as hedging instruments		(259	)		—		(322	)		—
Net gains (losses) on derivatives and hedging activities	$	(259	)	$	—	$	(322	)	$	—

The following table shows the recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Company’s net interest income for the three-month periods ended June 30, 2019 and 2018.

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	June 30, 2019
	Gain/(Loss) on Derivatives			Gain/(Loss) on Hedged Items		Net Fair Value Hedge Gain/(Loss)		Effect of Derivatives on Net Interest Income
Commercial real estate loans	$	(495	)	$	495	$	—	$	8
Total	$	(495	)	$	495	$	—	$	8

	June 30, 2018
	Gain/(Loss) on Derivatives		Gain/(Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness		Effect of Derivatives on Net Interest Income
Commercial real estate loans	$	155	$	(155	)	$	—	$	(14	)
Total	$	155	$	(155	)	$	—	$	(14	)

The following table shows the recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Company’s net interest income for the six-month periods ended June 30, 2019 and 2018.

	June 30, 2019
	Gain/(Loss) on Derivatives			Gain/(Loss) on Hedged Items		Net Fair Value Hedge Ineffectiveness		Effect of Derivatives on Net Interest Income
Commercial real estate loans	$	(796	)	$	796	$	—	$	19
Total	$	(796	)	$	796	$	—	$	19

	June 30, 2018
	Gain/(Loss) on Derivatives		Gain/(Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness		Effect of Derivatives on Net Interest Income
Commercial real estate loans	$	584	$	(584	)	$	—	$	(38	)
Total	$	584	$	(584	)	$	—	$	(38	)

NOTE 5 – LEASE OBLIGATIONS

The Company evaluates contracts that convey the right to control the use of identified property, plant or equipment for a period of time for consideration to determine if they are lease obligations.  The Company evaluates each lease component to determine if the lease qualifies as a financing lease or as an operating lease.  Leases that meet any of the following criteria are considered financing leases: (1) the lease transfers ownership of the underlying asset by the end of the lease term; (2) the lease grants the Company an option to purchase the underlying asset that the Company is reasonably certain to exercise; (3) the lease term is the major part of the remaining economic life of the underlying asset; (4) the present value of the sum of the lease payments and any residual value guaranteed by the Company that is not already reflected in lease payments equals or exceeds substantially all of the fair value of the underlying asset; or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.  If none of the financing lease criteria are met, the lease is considered an operating lease.

The Company evaluates each lease to determine the lease term which will be used based on the type and use of the leased equipment and future expected changes in operations.  The resulting lease term will consist of the noncancellable period for which the Company has the right to use the underlying asset plus (1) periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option; (2) periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option; and (3) periods covered by an option to extend the lease in which exercise of the option is controlled by the lessor.  The Company has certain leases that contain options to extend the lease and contain options for changes in lease payments which are evaluated by the Company to determine the recorded values for right-of-use assets and lease liability.

Lease payments that are contractually known at lease inception are used by the Company for calculating the right-of-use asset and lease liability.  Lease payments that vary because of facts or circumstances after the commencement date of the lease from other than passage of time are treated as variable lease payments and are recorded to lease expense in the period in which the obligation for the payments are incurred by the Company. Variable lease payments are not part of the lease payments for determining the right-of-use asset or the lease liability at the lease commencement date.

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The discount rate to initially determine the present value of the lease payments is based on the information available at the lease commencement date and is either the rate implicit in the lease or the Company’s incremental borrowing rate.  If the rate implicit in the lease is known or determinable, that rate shall be used.  If that rate is not known, the Company’s incremental borrowing rate shall be used.  At the January 1, 2019, implementation of this accounting guidance, the Company’s incremental borrowing rate based on the remaining lease term was used to calculate the right-of-use assets and operating lease liabilities.

Operating lease right-of-use assets and lease obligations are accounted for subsequent to initial recording by amortizing the right-of-use asset over the lease term on a straight-line method while the lease obligation is increased by the accrual of interest and decreased by subsequent lease payments.  Operating lease right-of-use asset amortization and lease obligation interest are reported in non-interest expense in the Consolidated Statements of Operations.  Operating lease payments and variable lease payments are reflected within cash flows from operating activities in the Consolidated Statements of Cash Flows.

Financing lease right-of-use assets and lease obligations are accounted for subsequent to initial recording by amortizing the right-of-use asset similar to owned assets over the lesser of the lease term or economic life of the asset if the lease transfers ownership of the leased asset while the lease obligation is increased by the accrual of interest and decreased by subsequent lease payments.  Financing lease right-of-use asset amortization is reported in non-interest expense, similar to other owned assets, and lease obligation interest accruals are reported in interest expense in the Consolidated Statements of Operations.  Financing lease obligation principal payments are reflected within cash flows from financing activities and interest payments and variable lease payments are reflected with the cash flows from operating activities in the Consolidated Statements of Cash Flows.

At June 30, 2019, the Company had lease liabilities totaling $3,189 and right-of-use assets totaling $3,236 related to these leases.  Lease liabilities and right-of-use assets are reflected in other liabilities and other assets.

Right-of-use asset and lease obligations by type of property are listed below.

	June 30, 2019
Operating Leases	Right-of-Use Asset		Lease Liability		Weighted Average Lease Term in Years		Weighted Average Discount Rate
Land and building leases	$	3,206	$	3,156		13.7		3.06	%
Equipment leases		30		33		2.5		2.59	%
Total operating leases	$	3,236	$	3,189		13.6		3.06	%

Operating lease costs are listed below.

	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease cost	$	182	$	355
Short-term lease cost		—		—
Variable lease cost		10		23
Total operating lease cost	$	192	$	378

Rent expense for the three and six-month periods ending June 30, 2018, prior to the adoption of ASU 2016-02, were $158 and $323.

There were no sales and leaseback transactions, leverage leases, lease transactions with related parties or leases that had not yet commenced during the three or six-month periods ended June 30, 2019.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is listed below.

Lease Payments	June 30, 2019
Due in one year or less	$	642
Due after one year through two years		544
Due after two years through three years		433
Due after three years through four years		394
Due after four years through five years		202
Thereafter		1,849
Total undiscounted cash flows		4,064
Discount on cash flows		(875	)
Total operating lease liability	$	3,189

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NOTE 6 – BORROWINGS

Federal funds purchased and retail repurchase agreements

Federal funds purchased and retail repurchase agreements as of June 30, 2019 and December 31, 2018 are listed below.

	June 30, 2019		December 31, 2018
Federal funds purchased	$	—	$	—
Retail repurchase agreements		41,047		50,068

The Company has available federal funds lines of credit with its correspondent banks.

Securities sold under agreements to repurchase (retail repurchase agreements) consist of obligations of the Company to other parties.  The obligations are secured by residential mortgage-backed securities held by the Company with a fair value of $52,043 and $51,701 at June 30, 2019 and December 31, 2018.  The agreements are on a day-to-day basis and can be terminated on demand.

	June 30, 2019			December 31, 2018
Year-to-date average daily balance during the period	$	44,187		$	43,536
Maximum month-end balance year-to-date	$	45,575		$	53,815
Weighted average interest rate at period-end		0.37	%		0.28	%

Federal Home Loan Bank advances

Federal Home Loan Bank advances as of June 30, 2019 are listed below.

	June 30, 2019		Weighted Average Rate			Weighted Average Term in Years
Federal Home Loan Bank line of credit advances	$	429,925		2.55	%	—
Federal Home Loan Bank fixed-rate term advances		14,826		2.80	%		2.8
Total principal outstanding		444,751
Merger purchase accounting adjustment		67
Total Federal Home Loan Bank advances	$	444,818

Federal Home Loan Bank advances as of December 31, 2018 are listed below.

	December 31, 2018		Weighted Average Rate			Weighted Average Term in Years
Federal Home Loan Bank line of credit advances	$	368,770		2.65	%	—
Federal Home Loan Bank fixed-rate term advances		16,049		2.81	%		3.1
Total principal outstanding		384,819
Merger purchase accounting adjustment		79
Total Federal Home Loan Bank advances	$	384,898

The advances, Mortgage Partnership Finance credit enhancement obligations and letters of credit were collateralized by certain qualifying loans totaling $837,026 and $951,196 at June 30, 2019 and December 31, 2018.  Based on this collateral and the Company’s holdings of Federal Home Loan Bank stock, the Company was eligible to borrow an additional $330,576 and $534,627 at June 30, 2019 and December 31, 2018.

Future principal repayments of the June 30, 2019 outstanding balances are as follows.

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Due in one year or less	$	432,896
Due after one year through two years		2,677
Due after two years through three years		2,357
Due after three years through four years		2,357
Due after four years through five years		2,107
Thereafter		2,357
Total	$	444,751

Bank stock loan

On March 13, 2017, the Company entered into an agreement with an unaffiliated financial institution that provided for a maximum borrowing facility of $30,000, secured by the Company’s stock in Equity Bank.  The borrowing facility was amended on March 11, 2019 to provide a maximum borrowing facility of $40,000 and extend the maturity to May 15, 2020.  Each draw of funds on the facility will create a separate note that is repayable over a term of five years.  Each note will bear interest at a variable interest rate equal to the prime rate published in the “Money Rates” section of The Wall Street Journal (or any generally recognized successor), floating daily.  Accrued interest and principal payments will be due quarterly with one final payment of unpaid principal and interest due at the end of the five year term of each separate note.  The Company is also required to pay an unused commitment fee in an amount equal to 20 basis points per annum on the unused portion of the maximum borrowing facility.

Bank stock loan advances as of June 30, 2019 are listed below.

	June 30, 2019		Weighted Average Rate			Weighted Average Term in Years
Bank stock loan	$	15,308		5.50	%	4.5

Bank stock loan advances as of December 31, 2018 are listed below.

	December 31, 2018		Weighted Average Rate			Weighted Average Term in Years
Bank stock loan	$	15,450		5.50	%		4.5

Future principal repayments of the June 30, 2019 outstanding balances are as follows.

Due in one year or less	$	2,283
Due after one year through two years		2,326
Due after two years through three years		2,326
Due after three years through four years		2,326
Due after four years through five years		2,426
Thereafter		3,621
Total	$	15,308

The terms of the borrowing facility require the Company and Equity Bank to maintain minimum capital ratios and other covenants.  In the event of default, the lender has the option to declare all outstanding balances immediately due.  The Company believes it is in compliance with the terms of the borrowing facility and has not been otherwise notified of noncompliance.

NOTE 7 – STOCKHOLDERS’ EQUITY

Preferred stock

The Company’s articles of incorporation provide for the issuance of 10,000,000 shares of preferred stock.  At June 30, 2019 and December 31, 2018, there was no preferred stock outstanding.

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Common stock

The Company’s articles of incorporation provide for the issuance of 45,000,000 shares of Class A voting common stock (“Class A common stock”) and 5,000,000 shares of Class B non-voting common stock (“Class B common stock”), both of which have a par value of $0.01.  

The following table presents shares that were issued and were held in treasury or were outstanding at June 30, 2019 and December 31, 2018.

	June 30, 2019			December 31, 2018
Class A common stock – issued		17,112,722			17,064,138
Class A common stock – held in treasury		(1,548,849	)		(1,271,043	)
Class A common stock – outstanding		15,563,873			15,793,095
Class B common stock – issued		234,903			234,903
Class B common stock – held in treasury		(234,903	)		(234,903	)
Class B common stock – outstanding		—			—

On January 27, 2019, the Company’s Board of Directors adopted the Equity Bancshares, Inc. 2019 Employee Stock Purchase Plan (“ESPP”) and reserved 500,000 shares of common stock for issuance.  The ESPP was approved by the Company’s stockholders on April 24, 2019.  The ESPP enables eligible employees to purchase the Company’s common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each offering period.  The first offering period began on February 15, 2019 and will end on August 14, 2019.  ESPP compensation expense of $40 and $62 was recorded for the three and six-month periods ended June 30, 2019.

Treasury stock is stated at cost, determined by the first-in, first-out method.

On April 18, 2019, the Company’s Board of Directors authorized the repurchase of up to 1,100,000 shares of the Company’s outstanding common stock, from time to time, beginning April 29, 2019 and concluding October 30, 2020.  The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice.  Under this program, during the second quarter of 2019, the Company repurchased a total of 277,806 shares of the Company’s outstanding common stock at an average price paid of $25.95 per share.

Employee stock loans

In May 2015, in connection with the termination of a discontinued restricted stock unit plan (“Plan”), the Company agreed to loan electing participants an amount equal to each participant’s federal and state income tax withholding obligation associated with the Plan termination.  These loans totaling $83 at June 30, 2019 and $121 at December 31, 2018, are collateralized with the shares received, have a maturity date of December 31, 2019 and have an interest rate of 2.72%.

Accumulated other comprehensive income (loss)

At June 30, 2019 and December 31, 2018, accumulated other comprehensive income (loss) consisted of (i) the after-tax effect of unrealized gains (losses) on available-for-sale securities and (ii) the after-tax effect of unamortized unrealized gains (losses) on securities transferred from the available-for-sale designation to the held-to-maturity designation.

Components of accumulated other comprehensive income (loss) as of June 30, 2019 and December 31, 2018, are listed below.

	Available-for- Sale Securities			Held-to- Maturity Securities			Accumulated Other Comprehensive Income (Loss)
June 30, 2019
Net unrealized or unamortized gains (losses)	$	(340	)	$	(1,386	)	$	(1,726	)
Tax effect		86			349			435
	$	(254	)	$	(1,037	)	$	(1,291	)
December 31, 2018
Net unrealized or unamortized gains (losses)	$	(4,628	)	$	(1,891	)	$	(6,519	)
Tax effect		1,173			479			1,652
	$	(3,455	)	$	(1,412	)	$	(4,867	)

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NOTE 8 – REGULATORY MATTERS

Banks and bank holding companies (on a consolidated basis) are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action.  The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.  Beginning in January 2016, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reached 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company's ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If adequately capitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributions are limited, as are asset growth and acquisitions, and capital restoration plans are required.

As of June 30, 2019, management believes that the Company meets all capital adequacy requirements to which they are subject and the most recent notifications from the federal regulatory agencies categorized Equity Bank as well capitalized under the regulatory framework for prompt corrective action, including the capital conservation buffer.  To be categorized as well capitalized, Equity Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since that notification that management believes have changed Equity Bank’s category.

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The Company’s and Equity Bank’s capital amounts and ratios at June 30, 2019 and December 31, 2018 are presented in the table below.  Ratios provided for Equity Bancshares, Inc. represent the ratios of the Company on a consolidated basis.

	Actual					Minimum Required for Capital Adequacy Under Basel III Phase-In					Minimum Required for Capital Adequacy Under Basel III Fully Phased-In					To Be Well Capitalized Under Prompt Corrective Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2019
Total capital to risk weighted assets
Equity Bancshares, Inc.	$	337,773		11.56	%	$	306,770		10.50	%	$	306,770		10.50	%	$	N/A	N/A
Equity Bank		335,113		11.49	%		306,171		10.50	%		306,171		10.50	%		291,592		10.00	%
Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		319,996		10.95	%		248,338		8.50	%		245,338		8.50	%	N/A		N/A
Equity Bank		317,336		10.88	%		247,853		8.50	%		247,853		8.50	%		233,273		8.00	%
Common equity Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		305,586		10.46	%		204,513		7.00	%		204,513		7.00	%	N/A		N/A
Equity Bank		317,336		10.88	%		204,114		7.00	%		204,114		7.00	%		189,535		6.50	%
Tier 1 leverage to average assets
Equity Bancshares, Inc.		319,996		8.26	%		154,882		4.00	%		154,882		4.00	%	N/A		N/A
Equity Bank		317,336		8.21	%		154,696		4.00	%		154,696		4.00	%		193,371		5.00	%
December 31, 2018
Total capital to risk weighted assets
Equity Bancshares, Inc.	$	337,649		11.86	%	$	281,222		9.88	%	$	299,021		10.50	%	$	N/A	N/A
Equity Bank		338,180		11.89	%		280,845		9.88	%		298,619		10.50	%		284,400		10.00	%
Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		326,195		11.45	%		224,266		7.88	%		242,065		8.50	%	N/A		N/A
Equity Bank		326,726		11.49	%		223,965		7.88	%		241,740		8.50	%		227,520		8.00	%
Common equity Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		311,935		10.95	%		181,548		6.38	%		199,347		7.00	%	N/A		N/A
Equity Bank		326,726		11.49	%		181,305		6.38	%		199,080		7.00	%		184,860		6.50	%
Tier 1 leverage to average assets
Equity Bancshares, Inc.		326,195		8.60	%		151,731		4.00	%		151,731		4.00	%	N/A		N/A
Equity Bank		326,726		8.62	%		151,590		4.00	%		151,590		4.00	%		189,488		5.00	%

Equity Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.

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NOTE 9 – EARNINGS PER SHARE

The following table presents earnings per share for the three and six-month periods ended June 30, 2019 and 2018.

	Three months ended				Six months ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Basic:
Net income allocable to common stockholders	$	9,232	$	6,867	$	5,159	$	15,578
Weighted average common shares outstanding		15,723,116		15,353,421		15,761,333		14,982,077
Weighted average vested restricted stock units		195		11,230		2,353		8,019
Weighted average shares		15,723,311		15,364,651		15,763,686		14,990,096
Basic earnings per common share	$	0.59	$	0.45	$	0.33	$	1.04
Diluted:
Net income allocable to common stockholders	$	9,232	$	6,867	$	5,159	$	15,578
Weighted average common shares outstanding for:
Basic earnings per common share		15,723,311		15,364,651		15,763,686		14,990,096
Dilutive effects of the assumed exercise of stock options		184,497		304,999		212,397		292,165
Dilutive effects of the assumed vesting of restricted stock units		10,466		20,461		16,182		12,126
Average shares and dilutive potential common shares		15,918,274		15,690,111		15,992,265		15,294,387
Diluted earnings per common share	$	0.58	$	0.44	$	0.32	$	1.02

Average shares not included in the computation of diluted earnings per share because they were antidilutive are shown in the following table.

	Three months ended				Six months ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Stock options		363,051		125,051		320,713		119,928
Restricted stock units		149,701		41,261		2,280	—
Total antidilutive shares		512,752		166,312		322,993		119,928

NOTE 10 – FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments.  Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value.  The three levels of inputs that may be used to measure fair values are defined as follows:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:  Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Level 1 inputs are considered to be the most transparent and reliable.  The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability.  Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability.  However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities.  The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available.  The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or

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of the underlying collateral.  Although, in some instances, third party price indications may be available, limited trading activity can challenge the implied value of those quotations.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the hierarchy:

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The fair values of securities available-for-sale are carried at fair value on a recurring basis.  To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as Level 1.  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities, generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).  The Company’s available-for-sale securities, including U.S. Government sponsored entity securities, residential mortgage-backed securities (all of which are issued or guaranteed by government sponsored agencies), corporate securities, Small Business Administration securities, and State and Political Subdivision securities are classified as Level 2.

The fair values of derivatives are determined based on a valuation pricing model using readily available observable market parameters such as interest rate yield curves (Level 2 inputs) adjusted for credit risk attributable to the seller of the interest rate derivative.  Cash collateral received from or delivered to a derivative counterparty is classified as Level 1.

Assets and liabilities measured at fair value on a recurring basis are summarized in the following table.

	June 30, 2019
	(Level 1)			(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
Residential mortgage-backed securities (issued by    government-sponsored entities)	$	—		$	161,082	$	—
Derivative assets:
Derivative assets (included in other assets)		—			3,300		—
Cash collateral held by counterparty and netting adjustments		105			—		—
Total derivative assets		105			3,300		—
Other assets:
Equity securities with readily determinable fair value		488			—		—
Total other assets		488			—		—
Total assets	$	593		$	164,382	$	—
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)	$	—		$	4,263	$	—
Cash collateral held by counterparty and netting adjustments		(4,263	)		—		—
Total derivative liabilities		(4,263	)		4,263		—
Total liabilities	$	(4,263	)	$	4,263	$	—

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	December 31, 2018
	(Level 1)			(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
Residential mortgage-backed securities (issued by    government-sponsored entities)	$	—		$	168,875	$	—
Derivative assets:
Derivative assets (included in other assets)		—			933		—
Cash collateral held by counterparty and netting adjustments		(242	)		—		—
Total derivative assets		(242	)		933		—
Other assets:
Equity securities with readily determinable fair value		475			—		—
Total other assets		475			—		—
Total assets	$	233		$	169,808	$	—
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)	$	—		$	777	$	—
Cash collateral held by counterparty		(252	)		—		—
Total derivative liabilities		(252	)		777		—
Total liabilities	$	(252	)	$	777	$	—

There were no material transfers between levels during the six months ended June 30, 2019 or the year ended December 31, 2018.  The Company’s policy is to recognize transfers into or out of a level as of the end of a reporting period.

Fair Value of Assets and Liabilities Measured on a Non-recurring Basis

Certain assets are measured at fair value on a non-recurring basis when there is evidence of impairment.  The fair value of impaired securities is determined as discussed previously for available-for-sale securities.  The fair values of impaired loans with specific allocations of the allowance for loan losses are generally based on recent real estate appraisals of the collateral less estimated cost to sell.  Declines in the fair values of other real estate owned subsequent to their initial acquisitions are also based on recent real estate appraisals less selling costs.

Real estate appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  We routinely value loans other than real estate as multiples of earnings or with the discounted cash flow approach and adjustments are made to observable market data to make the valuation consistent with the underlying credit.  Such adjustments made to real estate appraisals and other loan valuations are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets measured at fair value on a non-recurring basis are summarized below.

	June 30, 2019
	(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate	$	—	$	—	$	6,004
Commercial and industrial		—		—		16,025
Residential real estate		—		—		3,530
Agricultural real estate		—		—		1,015
Other		—		—		1,336
Other real estate owned:
Commercial real estate		—		—		1,703
Residential real estate		—		—		43

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	December 31, 2018
	(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate	$	—	$	—	$	6,212
Commercial and industrial		—		—		1,697
Residential real estate		—		—		4,123
Agricultural real estate		—		—		218
Other		—		—		809
Other real estate owned:
Commercial real estate		—		—		1,391
Residential real estate		—		—		97

The Company did not record any liabilities for which the fair value was measured on a non-recurring basis at June 30, 2019 or at December 31, 2018.

Valuations of impaired loans and other real estate owned utilize third party appraisals or broker price opinions, and were classified as Level 3 due to the significant judgment involved.  Appraisals may include the utilization of unobservable inputs, subjective factors, and quantitative data to estimate fair market value.

The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a nonrecurring basis that were categorized with Level 3 of the fair value hierarchy:

	Fair Value		Valuation Technique	Unobservable Input	Range (weightedaverage) or Multiple of Earnings
June 30, 2019
Impaired real estate loans	$	13,647	SalesComparison Approach	Adjustments for differencesbetween comparable sales	20% - 24% (2%)
Impaired other loans	$	14,263	Multiple of Earnings	Multiples of earnings for comparable entities	5.3X
December 31, 2018
Impaired loans	$	13,059	SalesComparison Approach	Adjustments for differencesbetween comparable sales	4% - 22% (13%)

Measurable inputs for other real estate owned were not material.

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Carrying amount and estimated fair values of financial instruments at period end were as follows as of the date indicated:

	June 30, 2019
	Carrying Amount			Estimated Fair Value			Level 1			Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	181,418		$	181,418		$	181,418		$	—	$	—
Interest-bearing time deposits in other banks		4,742			4,742			—			4,742		—
Available-for-sale securities		161,082			161,082			—			161,082		—
Held-to-maturity securities		766,950			778,050			—			778,050		—
Loans held for sale		6,761			6,761			—			6,761		—
Loans, net of allowance for loan losses		2,662,208			2,644,553			—			—		2,644,553
Federal Reserve Bank and Federal Home    Loan Bank stock		33,226		N/A			N/A			N/A		N/A
Interest receivable		16,702			16,702			—			16,702		—
Derivative assets		3,300			3,300			—			3,300		—
Cash collateral held by derivative counterparty and netting adjustments		105			105			105			—		—
Total derivative assets		3,405			3,405			105			3,300		—
Equity securities with readily determinable fair value		488			488			488			—		—
Total assets	$	3,836,982		$	3,797,201		$	182,011		$	970,637	$	2,644,553
Financial liabilities:
Deposits	$	3,185,893		$	3,192,570		$	—		$	3,192,570	$	—
Federal funds purchased and retail    repurchase agreements		41,047			41,047			—			41,047		—
Federal Home Loan Bank advances		444,818			444,818			—			444,818		—
Bank stock loan		15,308			15,308			—			15,308		—
Subordinated debentures		14,409			14,409			—			14,409		—
Contractual obligations		3,744			3,744			—			3,744		—
Interest payable		4,939			4,939			—			4,939		—
Derivative liabilities		4,263			4,263			—			4,263		—
Cash collateral held by derivative counterparty and netting adjustments		(4,263	)		(4,263	)		(4,263	)		—		—
Total derivative liabilities		—			—			(4,263	)		4,263		—
Total liabilities	$	3,710,158		$	3,716,835		$	(4,263	)	$	3,721,098	$	—

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	December 31, 2018
	Carrying Amount			Estimated Fair Value			Level 1			Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	192,818		$	192,818		$	192,818		$	—	$	—
Interest-bearing time deposits in other banks		4,991			4,991			—			4,991		—
Available-for-sale securities		168,875			168,875			—			168,875		—
Held-to-maturity securities		748,356			739,989			—			739,989		—
Loans held for sale		2,972			2,972			—			2,972		—
Loans, net of allowance for loan losses		2,563,954			2,565,526			—			—		2,565,526
Federal Reserve Bank and Federal Home    Loan Bank stock		29,214		N/A			N/A			N/A		N/A
Interest receivable		17,372			17,372			—			17,372		—
Derivative assets		933			933			—			933		—
Cash collateral held by derivative counterparty and netting adjustments		(242	)		(242	)		(242	)		—		—
Total derivative assets		691			691			(242	)		933		—
Equity securities with readily determinable fair value		475			475			475			—		—
Total assets	$	3,729,718		$	3,693,709		$	193,051		$	935,132	$	2,565,526
Financial liabilities:
Deposits	$	3,123,447		$	3,124,654		$	—		$	3,124,654	$	—
Federal funds purchased and retail    repurchase agreements		50,068			50,068			—			50,068		—
Federal Home Loan Bank advances		384,898			384,898			—			384,898		—
Bank stock loan		15,450			15,450			—			15,450		—
Subordinated debentures		14,260			14,260			—			14,260		—
Contractual obligations		3,965			3,965			—			3,965		—
Interest payable		3,648			3,648			—			3,648		—
Derivative liabilities		777			777			—			777		—
Cash collateral held by derivative counterparty and netting adjustments		(252	)		(252	)		(252	)		—		—
Total derivative liabilities		525			525			(252	)		777		—
Total liabilities	$	3,596,261		$	3,597,468		$	(252	)	$	3,597,720	$	—

The fair value of off-balance-sheet items is not considered material.

NOTE 11 – COMMITMENTS AND CREDIT RISK

The Company extends credit for commercial real estate mortgages, residential mortgages, working capital financing and loans to businesses and consumers.

Commitments to Originate Loans and Available Lines of Credit  

Commitments to originate loans and available lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since a portion of the commitments and lines of credit may expire without being drawn upon, the total commitment and lines of credit amounts do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate.  Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days, and which are intended for sale to investors in the secondary market.

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The contractual amounts of commitments to originate loans and available lines of credit as of June 30, 2019 and December 31, 2018 were as follows.

	June 30, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	26,447	$	174,387	$	29,543	$	171,857
Mortgage loans in the process of origination		16,107		2,416		6,785		2,860
Unused lines of credit		85,054		159,290		92,225		167,218

The fixed rate loan commitments have interest rates ranging from 3.75% to 8.00% and maturities ranging from 1 month to 76 months.

Standby Letters of Credit  

Standby letters of credit are irrevocable commitments issued by the Company to guarantee the performance of a customer to a third party once specified pre-conditions are met.  Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.  Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.

The contractual amounts of standby letters of credit as of June 30, 2019 and December 31, 2018 were as follows.

	June 30, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Standby letters of credit	$	3,356	$	3,199	$	4,474	$	2,716

NOTE 12 – LEGAL MATTERS

The Company is party to various matters of litigation in the ordinary course of business.  The Company periodically reviews all outstanding pending or threatened legal proceedings and determines if such matters will have an adverse effect on the business, financial condition or results of operations or cash flows.  A loss contingency is recorded when the outcome is probable and reasonably able to be estimated.  The following loss contingency has been identified by the Company as reasonably possible to result in an unfavorable outcome for the Company or the Bank.

Equity Bank is a party to a February 3, 2015 lawsuit filed against it by CitiMortgage, Inc., (“Citi”).  The lawsuit involves an alleged breach of contract related to loan repurchase obligations and damages of $2,700 plus pre-judgment and post-judgment interest.  In January 2018, judgement was entered by the court dismissing Citi’s claims with regard to six loans and holding Equity Bank liable with regard to six loans.  A loss contingency of $477 was recorded at December 31, 2017, in connection with this case.  Subsequently, Citi appealed the courts decision.  Equity Bank believes it has numerous and meritorious defenses to the claims and continues to contest the matter vigorously.

Except for the above mentioned lawsuit, there are no other outstanding claims for potential repurchase or indemnification demands regarding mortgage loans originated by Equity Bank and sold to investors.  However, the Company believes there is possible risk it may face similar demands based on comparable demands loan aggregators are facing from their investors, including Government Sponsored Entities such as Freddie Mac and Fannie Mae, and or settlement agreements loan aggregators have entered into with those investors.  The amount of potential loss and outcome of such possible litigation, if it were commenced, is uncertain and the Company would vigorously contest any claims.

Equity Bank is a party to a claim filed against it by a borrower and his wife.  The lawsuit alleges the Bank violated the Equal Credit Opportunity Act when it obtained pledge agreements and control agreements from the borrower’s wife that made certain investment accounts and life insurance policies collateral for certain business loans.  The borrowers seek return of collateral proceeds the Bank liquidated and used to pay down related business loan balances.  The Bank does not believe the case has merit and is vigorously defending the claim.

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On May 13, 2019, a purported stockholder of the Company filed a putative securities class action lawsuit in federal court in the Southern District of New York against the Company and certain of its executive officers.  The plaintiff alleges that the Company made materially misleading positive statements about the Company’s business, operations and prospects starting on May 11, 2018, that these statements caused the Company’s securities to be overvalued and that the “truth” came out on January 24, 2019, when the Company disclosed that a credit relationship was downgraded and further on April 22, 2019, when the Company disclosed a $14.5 million provision for loan loss against that credit relationship.  The Company believes that the lawsuit is without merit and it intends to vigorously defend against all claims asserted.  At this time, the Company is unable to reasonably estimate the outcome of this litigation.

NOTE 13 – REVENUE RECOGNITION

The majority of the Company’s revenues come from interest income on financial instruments, including loans, leases, securities and derivatives, which are outside the scope of ASC 606.  The Company’s services that fall within the scope of ASC 606 are presented with non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer.  Services within the scope of ASC 606 include service charges and fees on deposits, debit card income, investment referral income, insurance sales commissions and other non-interest income related to loans and deposits.

Except for gains or losses from the sale of OREO, all of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income.  The following table presents the Company’s sources of non-interest income for the three and six month periods ended June 30, 2019, and 2018.

	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Non-interest income
Service charges and fees	$	2,240	$	1,729		$	4,163	$	3,309
Debit card income		2,186		1,522			3,924		2,775
Mortgage banking(a)		562		312			879		625
Increase in bank-owned life insurance(a)		499		508			987		1,160
Net gain (loss) from securities transactions(a)		7		(2	)		13		(10	)
Other(b)		957		523			1,809		984
Total	$	6,451	$	4,592		$	11,775	$	8,843
(a) Not within the scope of ASC 606.
(b) The Other category includes investment referral income, trust income, insurance sales commissions and other non-interest income related to loans and deposits totaling $906 and $1,707 for the three and six-month periods ended June 30, 2019, and $457 and $863 for the three and six-month periods ended June 30, 2018, which is within the scope of ASC 606; the remaining balances of $51 and $101 for the three and six-month periods ended June 30, 2019, and $67 and $121 for the three and six-month periods ended June 30, 2018, represent recovery on zero-basis purchased loans, income from equity method investments and other remaining items considered insignificant, which is outside the scope of ASC 606.

A description of the Company’s revenue streams accounted for under ASC 606 follows.

Service Charges and Fees

The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services.  Transaction-based fees, which include services such as stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.  Overdraft fees are recognized at the point in time that the overdraft occurs.  Service charges on deposits are collected through withdrawal from the customer’s account balance.

Debit Card Income

The Company earns debit card income from cardholder transactions conducted through payment processors.  Debit card income from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrently with the transaction processing services provided to the cardholder.

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Investment Referral Income

Investment referral services are offered through an unaffiliated registered broker-dealer and investment advisor.  Investment referral income consists of transaction-based fees (i.e., trade commissions) and account fees (i.e. custodial fees).  The service obligation for transaction-based fees relates to processing of individual transactions and is considered earned at the time the transaction occurs.  The Company currently records this income when payment is received and at each month end for current-month transactions.  Account fees are considered earned over the period for which the fees relate.  These fees are received during the first month of each quarter and represent advance payment for the current quarter.  These fees are amortized ratably over the three months during the quarter.  Therefore, all account-based fees are currently recorded as performance obligations are satisfied.

Trust Income

Trust income includes fees from asset management, custody, recordkeeping, investment advisory and administration services.  Revenue is recognized at the time the services are performed and may be based on either the fair value of the account or the services provided.

Insurance Sales Commissions

Insurance commissions are received based on contracts with insurance companies which provide for a percentage of premiums to be paid to the Company in exchange for placement of policies with customers.  The commissions generally relate to a period of one year or less.  Under certain contracts, the Company may also assist with claims processing, but this performance obligation is considered insignificant compared to the initial placement of the policy.  As such, the performance obligation is considered to have been substantially satisfied at the time of policy placement.  While this indicates that all related revenue would be appropriately accrued at policy inception, in some cases recognition occurs over the policy period if received in installments from the insurance company.  In no cases would this deferral extend beyond 12 months and the effect is considered immaterial compared to recognition at the time of policy placement.  The Company also receives commission based on renewals of policies previously placed.  However, additional work is required to process the renewals, resulting in future performance obligations to earn the related revenues.  In addition, the occurrence of such renewals is not certain as initial policies are generally for one year or less and the fees earned are not determined until the time of renewal, based on underwriting at that time.  As such, the Company has determined that accrual of income, for future renewals, is not appropriate.

Other Non-interest Income

Other non-interest income related to loans and deposits is earned when the specific transaction is processed, similar to service charges and fees.

Gain or Loss on Sale of Other Real Estate

Gain or loss on sale of other real estate is reported in non-interest expense and is netted with other real estate expenses.  The Company records a gain or loss from the sale of other real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.  When the Company finances the sale of other real estate to the buyer, the Company assesses whether the buyer is committed to perform their obligation under the contract and whether collectability of the transaction price is probable.  Once these criteria are met, the other real estate is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.  As a result, the Company has concluded that ASC 606 will affect the decision to recognize or defer gains on sales of other real estate in circumstances where the Company has financed the sale.

NOTE 14 – BUSINESS COMBINATIONS

On February 8, 2019, Equity Bank acquired the assets and assumed the deposits and certain other liabilities of two branch locations in Guymon, Oklahoma and one branch location in Cordell, Oklahoma, from MidFirst Bank based in Oklahoma City, Oklahoma (“MidFirst”).  Results of operations of these new branches were included in the Company’s results of operations beginning February 9, 2019.  Acquisition-related costs associated with this acquisition were $902 ($684 on an after-tax basis) and are included in merger expenses in the Company’s income statement for the six months ended June 30, 2019.

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The fair value of consideration exchanged exceeded the recognized amounts of the identifiable net assets and resulted in goodwill of $4,720.  Goodwill resulted from a combination of expected synergies including expansion into western Oklahoma with an additional three branch locations and growth opportunities.  The following table summarizes the consideration paid for the MidFirst assets acquired and liabilities assumed recognized at the acquisition date.

Recognized amounts of identifiable assets acquired and
liabilities assumed:
Cash and due from banks	$	85,360
Loans		6,507
Premises and equipment		656
Core deposit intangible		1,350
Other assets		13
Total assets acquired		93,886
Deposits		98,543
Interest payable and other liabilities		63
Total liabilities assumed		98,606
Total identifiable net assets		(4,720	)
Goodwill		4,720
	$	—

The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired as of the acquisition date.  The fair value adjustments were determined using discounted contractual cash flows.  However, the Company believes that all contractual cash flows related to these financial instruments will be collected.  As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination.

The following table presents information about the loans acquired in the MidFirst acquisition as of the date of acquisition.

	Non-Credit Impaired			Purchased Credit Impaired
Contractually required principal	$	6,770		$	—
Non-accretable difference (expected losses)	—			—
Cash flows expected to be collected		6,770			—
Accretable yield		(263	)	—
Fair value of acquired loans	$	6,507		$	—

The following table presents the carrying value of the loans acquired in the MidFirst acquisition by class, as of the date of acquisition.

	Non-Credit Impaired		Purchased Credit Impaired		Total
Commercial real estate	$	668	$	—	$	668
Commercial and industrial		34		—		34
Residential real estate		3,271		—		3,271
Agricultural real estate		—		—		—
Consumer		2,534		—		2,534
Agricultural		—		—		—
Fair value of acquired loans	$	6,507	$	—	$	6,507

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K filed with the SEC on March 20, 2019 and our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report.  The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance.  We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material.  See “Cautionary Note Regarding Forward-Looking Statements.” Also, see the risk factors and other cautionary statements described under the heading “Item 1A: Risk Factors” included in the Annual Report on Form 10-K and in Item 1A of this Quarterly Report.  We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

This discussion and analysis of our financial condition and results of operation includes the following sections:

• Overview – a general description of our business and financial highlights;

• Critical Accounting Policies – a discussion of accounting policies that require critical estimates and assumptions;

• Results of Operations – an analysis of our operating results, including disclosures about the sustainability of our earnings;

• Financial Condition – an analysis of our financial position;

• Liquidity and Capital Resources – an analysis of our cash flows and capital position; and

• Non-GAAP Financial Measures – a reconciliation of non-GAAP measures.

Overview

We are a bank holding company headquartered in Wichita, Kansas. Our wholly-owned banking subsidiary, Equity Bank, provides a broad range of financial services primarily to businesses and business owners as well as individuals through our network of 52 full service banking sites located in Arkansas, Kansas, Missouri and Oklahoma.  As of June 30, 2019, we had consolidated total assets of $4.18 billion, total loans held for investment of $2.66 billion, net of allowances, total deposits of $3.19 billion and total stockholders’ equity of $458.4 million.  During the three-month periods ended June 30, 2019 and June 30, 2018, net income was $9.2 million and $6.9 million and for the six-month periods ended June 30, 2019 and June 30, 2018, net income was $5.2 million and $15.6 million.

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Selected Financial Data for the periods indicated (dollars in thousands, except per share amounts):

	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
Statement of Income Data (for the quarterly period ended)
Interest and dividend income	$	44,764		$	43,202		$	45,580		$	43,022		$	38,831
Interest expense		13,476			12,563			12,244			10,267			7,911
Net interest income		31,288			30,639			33,336			32,755			30,920
Provision for loan losses		974			15,646			750			1,291			750
Net gain (loss) from securities transactions		7			6			5			(4	)		(2	)
Other non-interest income		6,444			5,318			5,444			5,437			4,594
Merger expenses		276			639			938			757			5,236
Other non-interest expense		24,747			24,904			24,200			22,890			20,739
Income (loss) before income taxes		11,742			(5,226	)		12,897			13,250			8,787
Provision for income taxes		2,510			(1,153	)		2,972			2,928			1,920
Net income (loss)		9,232			(4,073	)		9,925			10,322			6,867
Net income (loss) allocable to common stockholders		9,232			(4,073	)		9,925			10,322			6,867
Basic earnings (loss) per share	$	0.59		$	(0.26	)	$	0.63		$	0.65		$	0.45
Diluted earnings (loss) per share	$	0.58		$	(0.26	)	$	0.62		$	0.64		$	0.44
Balance Sheet Data (at period end)
Cash and cash equivalents	$	181,418		$	167,453		$	192,818		$	61,379		$	47,691
Available-for-sale securities		161,082			166,355			168,875			172,388			180,238
Held-to-maturity securities		766,950			749,493			748,356			713,899			665,995
Loans held for sale		6,761			2,140			2,972			1,698			3,574
Gross loans held for investment		2,679,985			2,618,986			2,575,408			2,598,729			2,451,772
Allowance for loan losses		17,777			26,340			11,454			11,010			10,083
Loans held for investment, net of allowance for loan losses		2,662,208			2,592,646			2,563,954			2,587,719			2,441,689
Goodwill and core deposit intangibles, net		157,944			158,728			153,437			154,189			145,285
Other intangible assets		1,203			1,216			1,228			1,241			1,253
Total assets		4,180,074			4,065,354			4,061,716			3,931,036			3,712,185
Total deposits		3,185,893			3,260,870			3,123,447			2,821,246			2,635,048
Borrowings		515,582			331,221			464,676			652,755			631,501
Total liabilities		3,721,668			3,611,891			3,605,775			3,487,799			3,278,903
Total stockholders’ equity		458,406			453,463			455,941			443,237			433,282
Tangible common equity*		299,259			293,519			301,276			287,807			286,744
Performance ratios
Return on average assets (ROAA) annualized		0.92	%		(0.42	)%		1.00	%		1.08	%		0.79	%
Return on average equity (ROAE) annualized		8.10	%		(3.59	)%		8.76	%		9.31	%		6.66	%
Return on average tangible common equity (ROATCE)    annualized*		13.29	%		(4.62	)%		14.17	%		14.91	%		10.58	%
Yield on loans annualized		5.74	%		5.79	%		5.91	%		5.73	%		5.73	%
Cost of interest-bearing deposits annualized		1.64	%		1.61	%		1.45	%		1.15	%		1.00	%
Net interest margin annualized		3.42	%		3.49	%		3.70	%		3.76	%		3.93	%
Efficiency ratio*		65.59	%		69.26	%		62.40	%		59.93	%		58.40	%
Non-interest income / average assets annualized		0.64	%		0.55	%		0.55	%		0.57	%		0.53	%
Non-interest expense / average assets annualized		2.49	%		2.64	%		2.53	%		2.47	%		3.00	%
Capital Ratios
Tier 1 Leverage Ratio		8.26	%		8.37	%		8.60	%		8.60	%		9.36	%
Common Equity Tier 1 Capital Ratio		10.46	%		10.46	%		10.95	%		10.49	%		11.04	%
Tier 1 Risk Based Capital Ratio		10.95	%		10.96	%		11.45	%		10.99	%		11.56	%

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Total Risk Based Capital Ratio		11.56	%		11.87	%		11.86	%		11.37	%		11.94	%
Equity / Assets		10.97	%		11.15	%		11.23	%		11.28	%		11.67	%
Tangible common equity to tangible assets*		7.44	%		7.52	%		7.71	%		7.62	%		8.04	%
Book value per share	$	29.45		$	28.66		$	28.87		$	28.07		$	27.44
Tangible common book value per share*	$	19.23		$	18.55		$	19.08		$	18.22		$	18.16
Tangible common book value per diluted share*	$	18.99		$	18.30		$	18.73		$	17.86		$	17.78

* The value noted is considered a Non-GAAP financial measure.  For a reconciliation of Non-GAAP financial measures see “Non-GAAP Financial Measures” in this Item 2.

Critical Accounting Policies

Our significant accounting policies are integral to understanding the results reported.  Our accounting policies are described in detail in Note 1 to the December 31, 2018 audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 20, 2019.  There have been no material changes in our critical accounting policies since that time.  We believe that of our significant accounting policies, the following may involve a higher degree of judgement and complexity.  We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgements and assumptions inherent in those policies and estimates and the potential sensitivity of our financial statements to those judgements and assumptions, are critical to an understanding of our financial condition and results of operations.  We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate.

Business Combinations:  We apply the acquisition method of accounting for business combinations.  Under the acquisition method, the acquiring entity in a business combination recognizes 100% of the assets acquired and liabilities assumed at their acquisition-date fair values.  We use valuation techniques appropriate for the asset or liability being measured in determining these fair values.  Any excess of the purchase price over amounts allocated to assets acquired, including identified intangible assets and liabilities assumed is recorded as goodwill.  Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized.  Acquisition-related costs are expensed as incurred.

Loans:  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of previous charge-offs and an allowance for loan losses, and for purchased loans, net of unamortized purchase premiums and discounts.  Interest income is accrued on the unpaid principal balance.

Purchased Credit Impaired Loans:  As a part of acquisitions, we acquired certain loans for which there was, at acquisition, evidence of deterioration of credit quality since origination.  These purchased credit impaired loans were recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses.  After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased credit impaired loans are accounted for individually.  We estimate the amount and timing of expected cash flows for each loan, and the expected cash flows in excess of the amount paid are recorded as interest income over the remaining life of the loan (accretable yield).  The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated.  If the present value of the expected cash flows is less than the carrying amount, a loss is recorded.  If the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Nonaccrual Loans:  Generally, loans are designated as nonaccrual when either principal or interest payments are 90 days or more past due based on contractual terms unless the loan is well secured and in the process of collection.  Consumer loans are typically charged off no later than 180 days past due.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.  When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed against income.  Future interest income may be recorded on a cash basis after recovery of principal is reasonably assured.  Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Impaired Loans:  A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all contractual principal and interest due according to the terms of the loan agreement.  All loans are individually evaluated for impairment.  Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or on the value of the underlying collateral if the loan is collateral dependent.  We evaluate the collectability of both principal and interest when assessing the need for a loss accrual.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment

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shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Troubled Debt Restructurings:  In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructured loan and classified as impaired.  Generally, a nonaccrual loan that is a troubled debt restructuring remains on nonaccrual until such time that repayment of the remaining principal and interest is not in doubt, and the borrower has a period of satisfactory repayment performance.

Allowance for Loan Losses:  The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the collectability of a loan balance is unlikely.  Subsequent recoveries, if any, are credited to the allowance.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.  A loan review process, independent of the loan approval process, is utilized by management to verify loans are being made and administered in accordance with company policy, to review loan risk grades and potential losses, to verify that potential problem loans are receiving adequate and timely corrective measures to avoid or reduce losses, and to assist in the verification of the adequacy of the loan loss reserve.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the sale of the collateral.  Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.  If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral.  For troubled debt restructurings that subsequently default, we determine the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by portfolio and class and is based on the actual loss history experienced by us.  This actual loss experience is then adjusted by comparing current conditions to the conditions that existed during the loss history.  We consider the changes related to (i) lending policies, (ii) economic conditions, (iii) nature and volume of the loan portfolio and class, (iv) lending staff, (v) volume and severity of past due, non-accrual and risk graded loans, (vi) loan review system, (vii) value of underlying collateral for collateral dependent loans, (viii) concentration levels and (ix) effects of other external factors.

Goodwill and Core Deposit Intangibles:  Goodwill results from business combinations and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Core deposit intangibles are acquired customer relationships arising from whole bank and branch acquisitions.  Core deposit intangibles are initially measured at fair value and then are amortized over their estimated useful lives.  The useful lives of the core deposits are estimated to generally be between seven and ten years.  Goodwill and core deposit intangibles are assessed at least annually for impairment and any such impairment is recognized and expensed in the period identified.  We have selected December 31 as the date to perform our annual goodwill impairment test; however, if during the year we become aware of quantitative or qualitative data that suggest goodwill impairment has occurred we will test on an interim basis as well.  At June 30, 2019, our book value per share was higher than our market value per share so we performed an interim assessment that, after adjusting market value per share by relevant control premiums that recently occurred, no impairment was indicated.  Goodwill is the only intangible asset with an indefinite useful life.

Fair Value:  Fair values of assets and liabilities are estimated using relevant market information and other assumptions.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, collateral values and other factors, especially in the absence of broad markets for particular assets and liabilities.  Changes in assumptions or in market conditions could materially affect the estimates.

Emerging Growth Company:  Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by the FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.  We have irrevocably elected to adopt new accounting standards within the public company adoption period.

We may take advantage of some of the reduced regulatory and reporting requirements that are available to us so long as the Company qualifies as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.

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Results of Operations

We generate most of our revenue from interest income and fees on loans, interest and dividends on investment securities and non-interest income, such as service charges and fees, debit card income and mortgage banking income.  We incur interest expense on deposits and other borrowed funds and non-interest expense, such as salaries and employee benefits and occupancy expenses.  On May 4, 2018, we completed our mergers with Kansas Bank Corporation (“KBC”) of Liberal, Kansas, and Adams Dairy Bancshares, Inc. (“Adams”) of Blue Springs, Missouri.  The merger with KBC added five bank locations in Liberal and Hugoton, Kansas and the merger with Adams added one bank location in Blue Springs, Missouri.  Results of operations of KBC and Adams were included in our financial results beginning May 5, 2018.  On August 23, 2018, we completed our merger with City Bank and Trust (“City Bank”) of Guymon, Oklahoma.  The merger with City Bank added one bank location in Guymon, Oklahoma.  Results of operations of City Bank were included in our financial results beginning August 24, 2018.  On February 8, 2019, we completed our acquisition of the assets and assumption of the deposits and certain other liabilities for two branches in Guymon, Oklahoma and one branch in Cordell, Oklahoma from MidFirst Bank of Oklahoma City, Oklahoma (“MidFirst acquisition”).  Results of operations of our MidFirst acquisition were included in our financial results beginning February 9, 2019.

Changes in interest rates earned on interest-earning assets or incurred on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing liabilities and non-interest-bearing liabilities are usually the largest drivers of periodic change in net interest income.  Fluctuations in interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.  Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Arkansas, Kansas, Missouri and Oklahoma, as well as developments affecting the commercial, consumer and real estate sectors within these markets.

Net Income

Three months ended June 30, 2019 compared with three months ended June 30, 2018:  Net income and net income allocable to common stockholders for the three months ended June 30, 2019 was $9.2 million as compared to $6.9 million for the three months ended June 30, 2018, an increase of $2.4 million.  During the three-month period ended June 30, 2019, increases in non-interest income of $1.9 million and net interest income of $368 thousand were complemented by a decrease in non-interest expense of $952 thousand and partially offset by an increase in provision for loan losses of $224 thousand when compared to the three-month period ended June 30, 2018.  The changes in the components of net income are discussed in more detail in the following sections of “Results of Operations.”

Six months ended June 30, 2019 compared with six months ended June 30, 2018:  Net income and net income allocable to common stockholders for the six months ended June 30, 2019 was $5.2 million as compared to $15.6 million for the six months ended June 30, 2018, a decrease of $10.4 million.  During the six-month period ended June 30, 2019, increases in net interest income of $3.2 million and non-interest income of $2.9 million were offset by an increase in non-interest expense of $5.0 million and an increase in provision for loan losses of $14.7 million when compared to the six-month period ended June 30, 2018.  The changes in the components of net income are discussed in more detail in the following sections of “Results of Operations.”

Net Interest Income and Net Interest Margin Analysis

Net interest income is the difference between interest income on interest-earning assets, including loans and securities, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds.  To evaluate net interest income, management measures and monitors (1) yields on loans and other interest-earning assets, (2) the costs of deposits and other funding sources, (3) the net interest spread and (4) net interest margin.  Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities.  Net interest margin is calculated as net interest income divided by average interest-earning assets.  Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources of funds.  Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change,” and it is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “yield/rate change.”

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Three months ended June 30, 2019 compared with three months ended June 30, 2018:  The following table shows the average balance of each principal category of assets, liabilities and stockholders’ equity and the average yields on interest-earning assets and average rates on interest-bearing liabilities for the three months ended June 30, 2019 and 2018.  The yields and rates are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.

Average Balance Sheets and Net Interest Analysis

	For the Three Months Ended June 30,
	2019							2018
(Dollars in thousands)	Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate(3)(4)			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate(3)(4)
Interest-earning assets:
Loans(1)	$	2,655,256	$	38,027		5.74	%	$	2,317,071	$	33,101		5.73	%
Taxable securities		782,739		4,969		2.55	%		632,881		4,112		2.61	%
Nontaxable securities		142,175		1,145		3.23	%		134,157		1,025		3.07	%
Federal funds sold and other		85,448		623		2.92	%		74,078		593		3.21	%
Total interest-earning assets		3,665,618	$	44,764		4.90	%		3,158,187	$	38,831		4.93	%
Non-interest-earning assets:
Other real estate owned, net		6,069							7,211
Premises and equipment, net		83,504							69,366
Bank-owned life insurance		73,765							70,659
Goodwill, core deposit and other intangibles, net		159,562							134,146
Other non-interest-earning assets		37,245							36,217
Total assets	$	4,025,763						$	3,475,786
Interest-bearing liabilities:
Interest-bearing demand deposits	$	712,336	$	2,322		1.31	%	$	610,507	$	1,238		0.81	%
Savings and money market		1,003,655		3,535		1.41	%		757,037		1,353		0.72	%
Savings, NOW and money market		1,715,991		5,857		1.37	%		1,367,544		2,591		0.76	%
Certificates of deposit		1,010,452		5,287		2.10	%		780,817		2,747		1.41	%
Total interest-bearing deposits		2,726,443		11,144		1.64	%		2,148,361		5,338		1.00	%
FHLB term and line of credit advances		278,864		1,841		2.65	%		426,392		2,094		1.97	%
Bank stock loan		10,636		147		5.57	%		12,575		156		4.96	%
Subordinated borrowings		14,367		310		8.67	%		14,072		299		8.52	%
Other borrowings		43,236		34		0.31	%		42,519		24		0.23	%
Total interest-bearing liabilities		3,073,546	$	13,476		1.76	%		2,643,919	$	7,911		1.20	%
Non-interest-bearing liabilities and    stockholders’ equity:
Non-interest-bearing checking accounts		474,181							408,621
Non-interest-bearing liabilities		20,933							9,772
Stockholders’ equity		457,103							413,474
Total liabilities and stockholders’ equity	$	4,025,763						$	3,475,786
Net interest income			$	31,288						$	30,920
Interest rate spread						3.14	%						3.73	%
Net interest margin(2)						3.42	%						3.93	%
Total cost of deposits, including non-interest    bearing deposits	$	3,200,624	$	11,144		1.40	%	$	2,556,982	$	5,338		0.84	%
Average interest-earning assets to    interest-bearing liabilities						119.26	%						119.45	%

(1) Average loan balances include nonaccrual loans.

(2) Net interest margin is calculated by dividing annualized net interest income by average interest-earnings assets for the period.

(3) Tax exempt income is not included in the above table on a tax equivalent basis.

(4) Actual unrounded values are used to calculate the reported yield or rate disclosed.  Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

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Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest yields/rates.  The following table analyzes the change in volume variances and yield/rate variances for the three-month periods ended June 30, 2019 and 2018.

Analysis of Changes in Net Interest Income

For the Three Months Ended June 30, 2019 and 2018

	Increase (Decrease) Due to:						Total Increase /
(Dollars in thousands)	Volume(1)			Yield/Rate(1)			(Decrease)
Interest-earning assets:
Loans	$	4,842		$	84		$	4,926
Taxable securities		954			(97	)		857
Nontaxable securities		64			56			120
Federal funds sold and other		86			(56	)		30
Total interest-earning assets	$	5,946		$	(13	)	$	5,933
Interest-bearing liabilities:
Savings, NOW and money market	$	781		$	2,485		$	3,266
Certificates of deposit		957			1,583			2,540
Total interest-bearing deposits		1,738			4,068			5,806
FHLB term and line of credit advances		(850	)		597			(253	)
Bank stock loan		(27	)		18			(9	)
Subordinated borrowings		5			6			11
Other borrowings		—			10			10
Total interest-bearing liabilities	$	866		$	4,699		$	5,565
Net Interest Income	$	5,080		$	(4,712	)	$	368

⁽¹⁾ The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior year’s volume.  The changes attributable to both volume and rate, which cannot be segregated, have been allocated to the volume variance and the rate variance in proportion to the relationship of the absolute dollar amount of the change in each.

The increase in loan interest income, including loan fees, which consist of fees for loan origination, renewal, prepayment, covenant breakage and loan modification, was driven by the increase in average loan volume and a 1 basis point increase in yield on the loan portfolio from 5.73% for the three months ended June 30, 2018 to 5.74% for the three months ended June 30, 2019.  The impact to net interest income from loan fees for the three months ended June 30, 2019 was $1.1 million compared to $1.8 million for the three months ended June 30, 2018.

Average balances of borrowings from the FHLB decreased by $147.5 million from an average balance of $426.4 million for the three months ended June 30, 2018 to an average balance of $278.9 million for the three months ended June 30, 2019.  The decrease is primarily due to pay downs from a focused effort to increase core deposits.  The positive effect of this decrease in average FHLB borrowings was offset by an increase in average rate on these borrowings of 68 basis points from 1.97% for the three months ended June 30, 2018 to 2.65% for the three months ended June 30, 2019.  Interest expense on our bank stock loan for the three months ended June 30, 2019 was $147 thousand compared to $156 thousand for the same time period in 2018.  Total cost of interest-bearing liabilities increased 56 basis points to 1.76% for the three months ended June 30, 2019 from 1.20% for the three months ended June 30, 2018.

The decrease in net interest margin is largely due to the cost of interest-bearing liabilities rising at a faster rate than interest-earning assets.  The increase in cost of funds is primarily from the increase in cost of both retail and public fund deposits.  The cost of retail deposits increased as the general level of interest rates rose and due to an increased level of market competition for those deposits, which are more desirable due to lower interest rate sensitivity.  The cost of public fund deposits increased due to the level of competition from other financial institutions and state investment funds and due to the timing of the investment of these funds in an elevated interest rate environment.

46

Six months ended June 30, 2019 compared with six months ended June 30, 2018:  The following table shows the average balance of each principal category of assets, liabilities, and stockholders’ equity and the average yields on interest-earning assets and average rates on interest-bearing liabilities for the six months ended June 30, 2019 and 2018.  The yields and rates are calculated by dividing annualized income or annualized expense by the average daily balances of the associated assets or liabilities.

Average Balance Sheets and Net Interest Analysis

	For the Six Months Ended June 30,
	2019							2018
(Dollars in thousands)	Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate(3)(4)			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate(3)(4)
Interest-earning assets:
Loans(1)	$	2,607,906	$	74,560		5.77	%	$	2,220,559	$	62,149		5.64	%
Taxable securities		779,705		10,051		2.60	%		609,100		7,835		2.59	%
Nontaxable securities		142,171		2,098		2.98	%		124,134		1,904		3.09	%
Federal funds sold and other		83,723		1,257		3.03	%		68,038		1,066		3.16	%
Total interest-earning assets		3,613,505	$	87,966		4.91	%		3,021,831	$	72,954		4.87	%
Non-interest-earning assets:
Other real estate owned, net		6,224							7,425
Premises and equipment, net		82,314							66,282
Bank-owned life insurance		73,520							69,551
Goodwill, core deposit and other intangibles, net		158,444							125,438
Other non-interest-earning assets		42,327							32,768
Total assets	$	3,976,334						$	3,323,295
Interest-bearing liabilities:
Interest-bearing demand deposits	$	706,545	$	4,503		1.29	%	$	597,076	$	2,326		0.79	%
Savings and money market		998,127		7,022		1.42	%		722,447		2,488		0.69	%
Savings, NOW and money market		1,704,672		11,525		1.36	%		1,319,523		4,814		0.74	%
Certificates of deposit		1,013,394		10,349		2.06	%		776,838		5,242		1.36	%
Total interest-bearing deposits		2,718,066		21,874		1.62	%		2,096,361		10,056		0.97	%
FHLB term and line of credit advances		238,462		3,146		2.66	%		379,675		3,393		1.80	%
Bank stock loan		11,373		309		5.48	%		7,535		183		4.89	%
Subordinated borrowings		14,327		644		9.07	%		14,033		568		8.16	%
Other borrowings		44,349		66		0.30	%		41,390		47		0.23	%
Total interest-bearing liabilities		3,026,577	$	26,039		1.74	%		2,538,994	$	14,247		1.13	%
Non-interest-bearing liabilities and    stockholders’ equity:
Non-interest-bearing checking accounts		471,391							377,913
Non-interest-bearing liabilities		19,965							10,605
Stockholders’ equity		458,401							395,783
Total liabilities and stockholders’ equity	$	3,976,334						$	3,323,295
Net interest income			$	61,927						$	58,707
Interest rate spread						3.17	%						3.74	%
Net interest margin(2)						3.46	%						3.92	%
Total cost of deposits, including non-interest    bearing deposits	$	3,189,457	$	21,874		1.38	%	$	2,474,274	$	10,056		0.82	%
Average interest-earning assets to interest-bearing    liabilities						119.39	%						119.02	%

(1) Average loan balances include nonaccrual loans.

(2) Net interest margin is calculated by dividing annualized net interest income by average interest-earnings assets for the period.

(3) Tax exempt income is not included in the above table on a tax equivalent basis.

(4) Actual unrounded values are used to calculate the reported yield or rate disclosed.  Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

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Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest yields/rates.  The following table analyzes the change in volume variances and yield/rate variances for the six-month periods ended June 30, 2019 and 2018.

Analysis of Changes in Net Interest Income

For the Six Months Ended June 30, 2019 and 2018

	Increase (Decrease) Due to:						Total Increase /
(Dollars in thousands)	Volume(1)			Yield/Rate(1)			(Decrease)
Interest-earning assets:
Loans	$	11,049		$	1,362		$	12,411
Taxable securities		2,200			16			2,216
Nontaxable securities		269			(75	)		194
Federal funds sold and other		237			(46	)		191
Total interest-earning assets	$	13,755		$	1,257		$	15,012
Interest-bearing liabilities:
Savings, NOW and money market	$	1,701		$	5,010		$	6,711
Certificates of deposit		1,902			3,205			5,107
Total interest-bearing deposits		3,603			8,215			11,818
FHLB term and line of credit advances		(1,526	)		1,279			(247	)
Bank stock loan		102			24			126
Subordinated borrowings		11			65			76
Other borrowings		4			15			19
Total interest-bearing liabilities	$	2,194		$	9,598		$	11,792
Net Interest Income	$	11,561		$	(8,341	)	$	3,220

(1) The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior year’s volume.  The changes attributable to both volume and rate, which cannot be segregated, have been allocated to the volume variance and the rate variance in proportion to the relationship of the absolute dollar amount of the change in each.

The increase in loan interest income, including loan fees, which consist of fees for loan origination, renewal, prepayment, covenant breakage and loan modification, was driven by the increase in average loan volume and a 13 basis point increase in yield on the loan portfolio from 5.64% for the six months ended June 30, 2018 to 5.77% for the six months ended June 30, 2019.  The impact to net interest income from loan fees for the six months ended June 30, 2019 was $2.1 million compared to $3.4 million for the six months ended June 30, 2018.

Average balances of borrowings from the FHLB decreased by $141.2 million from an average balance of $379.7 million for the six months ended June 30, 2018 to an average balance of $238.5 million for the six months ended June 30, 2019.  The decrease is primarily due to excess cash of $85.4 million received during the MidFirst acquisition and pay downs from a concentrated effort to increase core deposits.  The positive effect of this decrease in average FHLB borrowings was offset by an increase in average rate on these borrowings of 86 basis points from 1.80% for the six months ended June 30, 2018 to 2.66% for the six months ended June 30, 2019.  Interest expense on our bank stock loan for the six months ended June 30, 2019 was $309 thousand compared to $183 thousand for the same time period in 2018.  Total cost of interest-bearing liabilities increased 61 basis points to 1.74% for the six months ended June 30, 2019 from 1.13% for the six months ended June 30, 2018.

The decrease in net interest margin is largely due to the cost of interest-bearing liabilities rising at a faster rate than interest-earning assets.  The increase in cost of funds is primarily from the increase in cost of both retail and public fund deposits.  The cost of retail deposits increased as the general level of interest rates rose and due to an increased level of market competition for those deposits, which are more desirable due to lower interest rate sensitivity.  The cost of public fund deposits increased due to the level of competition from other financial institutions and state investment funds and due to the timing of the investment of these funds in an elevated interest rate environment.

Provision for Loan Losses

We maintain an allowance for loan losses for probable incurred credit losses.  The allowance for loan losses is increased by a provision for loan losses, a charge to earnings and subsequent recoveries of amounts previously charged off, but is decreased by charge-offs when the collectability of a loan balance is unlikely.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated

48

collateral values, discounted cash flows, economic conditions and other factors including regulatory guidance, as described in “Part I – Item 2 – Financial Condition – Allowance for loan losses.”  As these factors change, the amount of the loan loss provision changes.

Three months ended June 30, 2019 compared with three months ended June 30, 2018:  The provision for loan losses for the three months ended June 30, 2019 was $974 thousand compared with $750 thousand for the three months ended June 30, 2018.  Net charge-offs for the three months ended June 30, 2019 were $9.5 million compared to net recoveries of $17 thousand for the three months ended June 30, 2018.  During the first quarter of 2019 we increased the provision for loan losses by $14.5 million directly related to one credit relationship believed to be an isolated incident within our portfolio.  Subsequently, during the second quarter of 2019, there was a $9.2 million charge off associated with this credit relationship.  For additional discussion pertaining to this credit relationship please see, “Part I – Item 2 – Financial Condition – Allowance for Loan Losses.” For the three months ended June 30, 2019, gross charge-offs were $9.7 million offset by gross recoveries of $207 thousand.  In comparison, gross charge-offs were $512 thousand for the three months ended June 30, 2018 offset by gross recoveries of $529 thousand.

Six months ended June 30, 2019 compared with six months ended June 30, 2018:  The provision for loan losses for the six months ended June 30, 2019 was $16.6 million, of which $14.5 million was a provision directly related to the above mentioned credit relationship, compared to a provision for loan losses of $1.9 million for the six months ended June 30, 2018.  Net charge-offs for the six months ended June 31, 2019 were $10.3 million, of which $9.8 million was directly related to the above mentioned credit relationship, compared to net charge-offs of $335 thousand for the six months ended June 30, 2018.  For the six months ended June 30, 2019, gross charge-offs were $10.7 million offset by gross recoveries of $385 thousand.  In comparison, gross charge-offs were $1.0 million for the six months ended June 30, 2018 offset by gross recoveries of $683 thousand.

Non-Interest Income

The primary sources of non-interest income are service charges and fees, debit card income, mortgage banking income, increases in the value of bank-owned life insurance, investment referral income, the recovery of zero-basis purchased loans and net gain from securities transactions.  Non-interest income does not include loan origination or other loan fees which are recognized as an adjustment to yield using the interest method.

Three months ended June 30, 2019 compared with three months ended June 30, 2018:  The following table provides a comparison of the major components of non-interest income for the three months ended June 30, 2019 and 2018.

Non-Interest Income

For the Three Months Ended June 30,

						2019 vs. 2018
(Dollars in thousands)	2019		2018			Change			%
Service charges and fees	$	2,240	$	1,729		$	511			29.6	%
Debit card income		2,186		1,522			664			43.6	%
Mortgage banking		562		312			250			80.1	%
Increase in value of bank-owned life insurance		499		508			(9	)		(1.8	)%
Investment referral income		148		87			61			70.1	%
Recovery on zero-basis purchased loans		32		75			(43	)		(57.3	)%
Other		777		361			416			115.2	%
Sub-Total		6,444		4,594			1,850			40.3	%
Net gain (loss) from securities transactions		7		(2	)		9			(450.0	)%
Total non-interest income	$	6,451	$	4,592		$	1,859			40.5	%

Debit card income was $2.2 million for the three months ended June 30, 2019, an increase of $664 thousand, or 43.6%, from $1.5 million for the three months ended June 30, 2018, largely due to increased volume related to mergers and acquisitions.  Service charges and fees increased $511 thousand during the three months ended June 30, 2019, as compared to the same time period during 2018, mainly due to an increase in non-sufficient fund charges, principally due to increased volumes related to mergers and acquisitions.  In connection with acquisitions, we received the rights to certain loans that were previously charged off by the acquired bank.  At acquisition, there was no expectation of future cash flows from these previously charged-off loans and thus they were assigned a zero basis.  Subsequent to the acquisitions, we have received cash payments on several of these loans.  No interest has been accrued as cash flow payments have not been expected prior to receipt.  Cash receipts on these zero-basis loans totaled $32 thousand and $75 thousand for the three months ended June 30, 2019 and 2018.  The increase in other non-interest income was mainly due to $516 thousand gain on swap fees during the second quarter of 2019.

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Six months ended June 30, 2019 compared with six months ended June 30, 2018:  The following table provides a comparison of the major components of non-interest income for the six months ended June 30, 2019 and 2018.

Non-Interest Income

For the Six Months Ended June 30,

						2019 vs. 2018
(Dollars in thousands)	2019		2018			Change			%
Service charges and fees	$	4,163	$	3,309		$	854			25.8	%
Debit card income		3,924		2,775			1,149			41.4	%
Mortgage banking		879		625			254			40.6	%
Increase in value of bank-owned life insurance		987		1,160			(173	)		(14.9	)%
Investment referral income		324		180			144			80.0	%
Recovery on zero-basis purchased loans		78		133			(55	)		(41.4	)%
Other		1,407		671			736			109.7	%
Sub-Total		11,762		8,853			2,909			32.9	%
Net gain (loss) from securities transactions		13		(10	)		23			(230.0	)%
Total non-interest income	$	11,775	$	8,843		$	2,932			33.2	%

Increases in debit card income and service charges and fees were mainly due to increased volume related to mergers and acquisitions.  Our principal source of service charges and fees is non-sufficient funds charges, which are cyclical in nature and generally fluctuate with the change in volume of transaction deposit accounts and economic conditions impacting our customers.  Other non-interest income was mainly due to $707 thousand gain on swap fees during the six months ending June 30, 2019.

Non-Interest Expense

Three months ended June 30, 2019 compared with three months ended June 30, 2018:  For the three months ended June 30, 2019, non-interest expense totaled $25.0 million, a decrease of $952 thousand, or 3.7%, compared with the three months ended June 30, 2018.  Changes in the various components of non-interest expense for the three months ended June 30, 2019 and 2018 are discussed in more detail in the following table.

Non-Interest Expense

For the Three Months Ended June 30,

						2019 vs. 2018
(Dollars in thousands)	2019		2018			Change			%
Salaries and employee benefits	$	13,067	$	11,629		$	1,438			12.4	%
Net occupancy and equipment		2,188		2,011			177			8.8	%
Data processing		2,358		1,968			390			19.8	%
Professional fees		1,228		844			384			45.5	%
Advertising and business development		722		665			57			8.6	%
Telecommunications		485		432			53			12.3	%
FDIC insurance		730		510			220			43.1	%
Courier and postage		341		303			38			12.5	%
Free nationwide ATM cost		420		330			90			27.3	%
Loan expense		175		145			30			20.7	%
Amortization of core deposit intangible		785		625			160			25.6	%
Other real estate owned		302		(671	)		973			(145.0	)%
Other		1,946		1,948			(2	)		(0.1	)%
Sub-Total		24,747		20,739			4,008			19.3	%
Merger expenses		276		5,236			(4,960	)		(94.7	)%
Total non-interest expense	$	25,023	$	25,975		$	(952	)		(3.7	)%

Salaries and employee benefits:  There was a $1.4 million increase in salaries and employee benefits for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018.  This increase reflects approximately $700 thousand, or 48.7%, directly associated to the addition of staff related to the May 2018 KBC merger; the addition of staff related to the May 2018 Adams merger; the addition of staff related to the August 2018 City Bank acquisition; and to a lesser extent the addition of staff related to the February 2019 MidFirst acquisition.

50

Net occupancy and equipment:  Net occupancy and equipment includes expenses related to the use of premises and equipment, such as depreciation, operating leases, repairs and maintenance, insurance, property taxes and utilities and is net of incidental rental income of excess facilities.  The majority of the increase is due to the addition of five banking locations associated with the KBC merger, the addition of one banking location associated with the Adams merger, addition of one banking location associated with the City Bank acquisition and the addition of three banking locations associated with the MidFirst acquisition.

Data processing:  The increase was principally due to increased debit card processing costs as usage increased mainly related to mergers and acquisitions and software license expense.

Professional fees:  The increase of $384 thousand, or 45.5%, is principally due to an increase in accounting fees of $173 thousand and an increase in attorney fees of $126 thousand. During the second quarter of 2019, there was $55 thousand in accounting fees and $131 thousand in attorney fees directly related to one specific credit relationship.  For additional information pertaining to this credit relationship please see, “Part I – Item 2 – Financial Condition – Allowance for Loan Losses.”

Advertising and business development:  Advertising and business development includes media advertising, community sponsorships, customer appreciation expenses and other forms of advertising.  The increase is due to additional advertising and business development in new markets added from the previously mentioned mergers.

Other real estate owned:  Other real estate owned includes other real estate expenses, including provision for unrealized losses, gain or loss on other real estate owned and gain or loss on the sale of other repossessed property.  For the three months ended June 30, 2019, there was $235 thousand in other real estate owned expense, including provision for unrealized losses, and $74 thousand loss on the sale of other real estate owned partially offset by $7 thousand gain on the sale of other repossessed assets.  For the three months ended June 30, 2018, there were gains on the sale of other real estate owned of $592 thousand and gain on sale of other repossessed assets of $86 thousand partially offset by other real estate owned expense, including provision for unrealized losses, of $7 thousand.

Other:  Other non-interest expenses consist of subscriptions; memberships and dues; employee expenses, including travel, meals, entertainment and education; supplies; printing; insurance; account related losses; correspondent bank fees; customer program expenses; losses net of gains on the sale of fixed assets and other operating expenses.  For the three months ended June 30, 2019, employee expenses, including travel, meals, entertainment and education, were $365 thousand, insurance expense was $238 thousand and bank service charges were $133 thousand.  For the three months ended June 30, 2018, employee expenses, including travel, meals, entertainment and education, were $363 thousand, insurance expense was $188 thousand and bank service charges were $182 thousand.

Merger expenses:  Merger expenses were $276 thousand for the three months ended June 30, 2019 and $5.2 million for the three months ended June 30, 2018.  The merger expenses for the three-month period ended June 30, 2019 were associated with the MidFirst acquisition.

Six months ended June 30, 2019 compared with six months ended June 30, 2018:  For the six months ended June 30, 2019, non-interest expense totaled $50.6 million, an increase of $5.0 million, or 10.9%, compared with the six months ended June 30, 2018.  Changes in the various components of non-interest expense for the six months ended June 30, 2019 and 2018 are discussed in more detail in the following table.

						2019 vs. 2018
(Dollars in thousands)	2019		2018			Change			%
Salaries and employee benefits	$	27,165	$	22,520		$	4,645			20.6	%
Net occupancy and equipment		4,155		3,813			342			9.0	%
Data processing		4,763		3,642			1,121			30.8	%
Professional fees		2,384		1,559			825			52.9	%
Advertising and business development		1,368		1,284			84			6.5	%
Telecommunications		1,070		801			269			33.6	%
FDIC insurance		1,008		754			254			33.7	%
Courier and postage		668		558			110			19.7	%
Free nationwide ATM cost		781		622			159			25.6	%
Loan expense		443		491			(48	)		(9.8	)%
Amortization of core deposit intangibles		1,564		1,009			555			55.0	%
Other real estate owned		414		(403	)		817			(202.7	)%
Other		3,868		3,185			683			21.4	%
Sub-Total		49,651		39,835			9,816			24.6	%
Merger expenses		915		5,767			(4,852	)		(84.1	)%
Total non-interest expense	$	50,566	$	45,602		$	4,964			10.9	%

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Salaries and employee benefits:  There was a $4.6 million increase in salaries and employee benefits for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018.  Roughly $2.1 million, or 44.2%, of this increase reflects the addition of staff related to the May 2018 KBC merger; the addition of staff related to the May 2018 Adams merger; the addition of staff related to the August 2018 City Bank acquisition; and to a lesser extent the addition of staff related to the February 2019 MidFirst acquisition.

Net occupancy and equipment:  Net occupancy and equipment includes expenses related to the use of premises and equipment, such as depreciation, operating leases, repairs and maintenance, insurance, property taxes and utilities and is net of incidental rental income of excess facilities.  The majority of the increase is due to the addition of five banking locations associated with the KBC merger, the addition of one banking location associated with the Adams merger, additional banking location associated with the City Bank acquisition and the addition of three banking locations associated with the MidFirst acquisition.

Data processing:  The increase was principally due to increased debit card processing costs as usage increased mainly related to mergers and acquisitions and software license expense.

Professional fees:  The increase of $825 thousand, or 52.9%, is principally due to an increase in accounting fees of $234 thousand, an increase in advisor services of $221 thousand, an increase in consulting fees of $196 thousand and an increase in attorney fees of $124 thousand.  During the six-month period ended June 30, 2019, there was $55 thousand in accounting fees and $284 thousand in attorney fees directly related to one specific credit relationship.  For additional information pertaining to this credit relationship please see, “Part I – Item 2 – Financial Condition – Allowance for Loan Losses.”

Advertising and business development:  Advertising and business development includes media advertising, community sponsorships, customer appreciation expenses and other forms of advertising.  The increase is due to additional advertising and business development in new markets added from the previously mentioned mergers.

Other real estate owned:  Other real estate owned includes other real estate expenses, including provision for unrealized losses, gain or loss on other real estate owned and gain or loss on the sale of other repossessed property.  For the six months ended June 30, 2019, there was $372 thousand in other real estate owned expense, including provision for unrealized losses, and $49 thousand loss on the sale of other real estate owned partially offset by $7 thousand gain on the sale of other repossessed assets.  For the six months ended June 30, 2018, there were gains on the sale of other real estate owned of $595 thousand and gain on sale of other repossessed assets of $107 thousand partially offset by other real estate owned expense, including provision for unrealized losses, of $299 thousand.

Other:  Other non-interest expenses consist of subscriptions; memberships and dues; employee expenses, including travel, meals, entertainment and education; supplies; printing; insurance; account related losses; correspondent bank fees; customer program expenses; losses net of gains on the sale of fixed assets and other operating expenses.  For the six months ended June 30, 2019, employee expenses, including travel, meals, entertainment and education, were $767 thousand, insurance expense was $441 thousand and bank service charges were $320 thousand.  For the six months ended June 30, 2018, employee expenses, including travel, meals, entertainment and education, were $616 thousand, insurance expense was $333 thousand and bank service charges were $287 thousand.

Merger expenses:  Merger expenses were $915 thousand for the six months ended June 30, 2019 and $5.8 million for the six months ended June 30, 2018.  The merger expenses for the six-month period ended June 30, 2019 were mainly associated with the MidFirst acquisition.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in the internal evaluation of our performance and is not defined under GAAP.  For a reconciliation of non-GAAP financial measures see “Non-GAAP Financial Measures” in this Item 2.  Our efficiency ratio is computed by dividing non-interest expense, excluding merger expenses, by the sum of net interest income and non-interest income, excluding net gain or loss from securities transactions.  Generally, an increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources.

Our efficiency ratio was 65.6% for the three months ended June 30, 2019, compared with 58.4% for the three months ended June 30, 2018.  The increase was primarily due to the effect on net interest income of the cost of interest-bearing liabilities rising at a faster rate than the yield on interest-earning assets, as discussed in “Results of Operations – Net Interest Income and Net Interest Margin Analysis,” and increased non-interest expense, as discussed in “Results of Operations – Non-Interest Expense.”

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Our efficiency ratio was 67.4% for the six months ended June 30, 2019, compared with 59.0% for the six months ended June 30, 2018.  The increase was primarily due to the effect on net interest income of the cost of interest-bearing liabilities rising at a faster rate than the yield on interest-earning assets, as discussed in “Results of Operations – Net Interest Income and Net Interest Margin Analysis,” and increased non-interest expense, as discussed in “Results of Operations – Non-Interest Expense.”

Income Taxes

The provision for income taxes is influenced by the amount of pre-tax income (loss), the amount of tax-exempt income, the amount of non-deductible expenses and available tax credits.

Three months ended June 30, 2019 compared with three months ended June 30, 2018:  The effective income tax rate for the quarter ended June 30, 2019 was 21.4% as compared to 21.9% for the quarter ended June 30, 2018.  Excess tax benefits associated with the exercise of stock options and the settlement in stock of restricted stock units recorded in the second quarter of 2019 were $10 thousand.  No excess tax benefits associated with share-based compensation were recognized in the comparable period of 2018.

Six months ended June 30, 2019 compared with six months ended June 30, 2018:  The effective income tax rate for the six months ended June 30, 2019 was 20.8% as compared to 22.2% for the six months ended June 30, 2018.  For both of the comparable periods, the estimated annual effective tax rates at which income tax expense was provided reflect, in addition to statutory tax rates, the levels of tax-exempt interest income, non-taxable life insurance income, non-deductible facilitative merger expense and other non-deductible expenses in proportion to anticipated annual income before income taxes, as well as federal income tax credits anticipated to be available in each annual period.  Excess tax benefits associated with the exercise of stock options and the settlement in stock of restricted stock units recorded in the first six months of 2019 were $18 thousand as compared to $6 thousand in the comparable period of 2018.

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this Quarterly Report have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation.  Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services.  However, other operating expenses reflect general levels of inflation.

Financial Condition

Our total assets increased $118.4 million to $4.18 billion from December 31, 2018 to June 30, 2019.  The increase in total assets was primarily from an increase of $98.3 million in net loans held for investment.  Our total liabilities increased $115.9 million to $3.72 billion at June 30, 2019.  The increase in total liabilities was primarily from increases in total deposits of $62.4 million, largely due to the MidFirst acquisition, and an increase of $59.9 million in FHLB borrowings partially offset by a decrease in retail repurchase agreements of $9.0 million.  Our total stockholders’ equity increased $2.5 million from $455.9 million at December 31, 2018 to $458.4 million at June 30, 2019.

Loan Portfolio

Loans are our largest category of earning assets and typically provide higher yields than other types of earning assets.  At June 30, 2019, our gross loans held for investment totaled $2.68 billion, an increase of $104.6 million, or 4.1%, compared with December 31, 2018.  The overall increase in loan volume consisted of $115.4 million from residential real estate, $70.5 million from real estate construction and $8.9 million from consumer, partially offset by reductions of $67.1 million in commercial real estate, $11.2 million from agricultural, $9.2 million from commercial and industrial and $2.7 million from agricultural real estate.  We also had loans classified as held-for-sale totaling $6.8 million at June 30, 2019.

Our loan portfolio consists of various types of loans, most of which are made to borrowers located in the Wichita, Kansas City and Tulsa Metropolitan Statistical Areas (“MSAs”), as well as various community markets throughout Arkansas, Kansas, Missouri and Oklahoma.  The majority of our loan portfolio consists of commercial and industrial and commercial real estate loans and a substantial portion of our borrowers’ ability to honor their obligations is dependent on local economic conditions in Arkansas, Kansas, Missouri and Oklahoma.  As of June 30, 2019, there was no concentration of loans to any one type of industry exceeding 10% of total loans.

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At June 30, 2019, gross total loans, including loans held-for-sale, were 84.3% of deposits and 64.3% of total assets.  At December 31, 2018, gross total loans, including loans held-for-sale, were 82.5% of deposits and 63.5% of total assets.

The organic, or non-acquired, changes in our loan portfolio are attributable to our ability to attract new customers from other financial institutions and overall growth in our markets.  Lending activities originate from the efforts of our lenders, with an emphasis on lending to individuals, professionals, small to medium-sized businesses and commercial companies located in the Wichita, Kansas City and Tulsa MSAs, as well as community markets in Arkansas, Kansas, Missouri and Oklahoma.

We provide commercial lines of credit, working capital loans, commercial real estate-backed loans (including loans secured by owner-occupied commercial properties), term loans, equipment financing, aircraft financing, real property acquisition and development loans, borrowing base loans, real estate construction loans, homebuilder loans, SBA loans, agricultural and agricultural real estate loans, letters of credit and other loan products to national and regional companies, real estate developers, mortgage lenders, manufacturing and industrial companies and other businesses.  The types of loans we make to consumers include residential real estate loans, home equity loans, home equity lines of credit, installment loans, unsecured and secured personal lines of credit, overdraft protection and letters of credit.

The following table summarizes our loan portfolio by type of loan as of the dates indicated.

Composition of Loan Portfolio

	June 30, 2019					December 31, 2018
	Amount		Percent			Amount		Percent			Change			%
	(Dollars in thousands)
Commercial and industrial	$	592,569		22.1	%	$	601,782		23.4	%	$	(9,213	)		(1.5	)%
Real estate loans:
Commercial real estate		1,039,789		38.8	%		1,106,871		43.0	%		(67,082	)		(6.1	)%
Real estate construction		194,861		7.3	%		124,346		4.8	%		70,515			56.7	%
Residential real estate		561,431		20.9	%		446,060		17.3	%		115,371			25.9	%
Agricultural real estate		136,657		5.1	%		139,332		5.4	%		(2,675	)		(1.9	)%
Total real estate loans		1,932,738		72.1	%		1,816,609		70.5	%		116,129			6.4	%
Consumer		71,791		2.7	%		62,894		2.4	%		8,897			14.1	%
Agricultural		82,887		3.1	%		94,123		3.7	%		(11,236	)		(11.9	)%
Total loans held for investment	$	2,679,985		100.0	%	$	2,575,408		100.0	%	$	104,577			4.1	%
Total loans held for sale	$	6,761		100.0	%	$	2,972		100.0	%	$	3,789			127.5	%
Total loans held for investment (net of allowances)	$	2,662,208		100.0	%	$	2,563,954		100.0	%	$	98,254			3.8	%

Commercial and industrial:  Commercial and industrial loans include loans used to purchase fixed assets, provide working capital, or meet other financing needs of the business.

Commercial real estate:  Commercial real estate loans include all loans secured by nonfarm, nonresidential properties and by multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.

Real estate construction:  Real estate construction loans include loans made for the purpose of acquisition, development, or construction of real property, both commercial and consumer.

Residential real estate:  Residential real estate loans include loans secured by primary or secondary personal residences.

Agricultural real estate, Agricultural, Consumer and other:  Agricultural real estate loans are loans related to farmland.  Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced.  Consumer loans are generally secured by consumer assets, but may be unsecured.

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The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of June 30, 2019 are summarized in the following table.

Loan Maturity and Sensitivity to Changes in Interest Rates

	As of June 30, 2019
	One year or less		After one year through five years		After five years		Total
	(Dollars in thousands)
Commercial and industrial	$	219,825	$	218,158	$	154,586	$	592,569
Real Estate:
Commercial real estate		163,587		546,130		330,072		1,039,789
Real estate construction		67,056		87,647		40,158		194,861
Residential real estate		13,299		14,384		533,748		561,431
Agricultural real estate		51,186		50,180		35,291		136,657
Total real estate		295,128		698,341		939,269		1,932,738
Consumer		17,235		45,442		9,114		71,791
Agricultural		61,648		19,072		2,167		82,887
Total	$	593,836	$	981,013	$	1,105,136	$	2,679,985
Loans with a predetermined fixed interest rate		270,172		591,091		357,186		1,218,449
Loans with an adjustable/floating interest rate		323,664		389,922		747,950		1,461,536
Total	$	593,836	$	981,013	$	1,105,136	$	2,679,985

The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of December 31, 2018 are summarized in the following table.

Loan Maturity and Sensitivity to Changes in Interest Rates

	As of December 31, 2018
	One year or less		After one year through five years		After five years		Total
	(Dollars in thousands)
Commercial and industrial	$	246,601	$	222,960	$	132,221	$	601,782
Real Estate:
Commercial real estate		171,544		590,101		345,226		1,106,871
Real estate construction		59,816		42,144		22,386		124,346
Residential real estate		13,232		14,888		417,940		446,060
Agricultural real estate		50,635		46,759		41,938		139,332
Total real estate		295,227		693,892		827,490		1,816,609
Consumer		10,879		42,570		9,445		62,894
Agricultural		71,003		19,583		3,537		94,123
Total	$	623,710	$	979,005	$	972,693	$	2,575,408
Loans with a predetermined fixed interest rate		327,086		629,327		340,452		1,296,865
Loans with an adjustable/floating interest rate		296,624		349,678		632,241		1,278,543
Total	$	623,710	$	979,005	$	972,693	$	2,575,408

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Credit Quality Indicators

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Loans are analyzed individually and classified based on credit risk.  Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship.  We use the following definitions for risk ratings.

Pass:  Loans classified as pass do not have any noted weaknesses and repayment of the loan is expected.  These loans are considered unclassified.

SpecialMention:  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit position at some future date.  These loans are considered classified.

Substandard:  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.  These loans are considered classified.

Doubtful:  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  These loans are considered classified.

The risk category of loans by class of loans is as follows as of June 30, 2019.

Risk Category of Loans by Class

	As of June 30, 2019
	Unclassified		Classified		Total
	(Dollars in thousands)
Commercial and industrial	$	543,942	$	48,627	$	592,569
Real estate:
Commercial real estate		1,018,967		20,822		1,039,789
Real estate construction		193,080		1,781		194,861
Residential real estate		546,849		14,582		561,431
Agricultural real estate		122,633		14,024		136,657
Total real estate		1,881,529		51,209		1,932,738
Consumer		70,930		861		71,791
Agricultural		77,390		5,497		82,887
Total	$	2,573,791	$	106,194	$	2,679,985

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The risk category of loans by class of loans is as follows as of December 31, 2018.

Risk Category of Loans by Class

	As of December 31, 2018
	Unclassified		Classified		Total
	(Dollars in thousands)
Commercial and industrial	$	572,300	$	29,482	$	601,782
Real estate:
Commercial real estate		1,070,802		36,069		1,106,871
Real estate construction		123,438		908		124,346
Residential real estate		440,704		5,356		446,060
Agricultural real estate		129,285		10,047		139,332
Total real estate		1,764,229		52,380		1,816,609
Consumer		61,976		918		62,894
Agricultural		90,848		3,275		94,123
Total	$	2,489,353	$	86,055	$	2,575,408

At June 30, 2019, loans considered unclassified decreased to 96.0% of total loans, down from 96.7% of total loans at December 31, 2018.  Classified loans were $106.2 million at June 30, 2019, an increase of $20.1 million, or 23.4%, from $86.1 million at December 31, 2018.  Classified balances related to one credit relationship were $29.2 million at June 30, 2019 and $9.0 million at December 31, 2018.  For additional information pertaining to this credit relationship please see, “Allowance for Loan Losses.”

Nonperforming Assets

The following table presents information regarding nonperforming assets at the dates indicated.

Nonperforming Assets

	June 30, 2019			December 31, 2018
	(Dollars in thousands)
Nonaccrual loans	$	61,171		$	33,203
Accruing loans 90 or more days past due		—			18
Restructured loans-accruing		—			—
OREO acquired through foreclosure, net		5,764			6,372
Other repossessed assets		206			56
Total nonperforming assets	$	67,141		$	39,649
Ratios:
Nonperforming assets to total assets		1.61	%		0.97	%
Nonperforming assets to total loans plus OREO		2.51	%		1.53	%

Impaired loans do not include purchased loans that were identified upon acquisition as having experienced credit deterioration since origination (“purchased credit impaired loans” or “PCI loans”).  See the “Critical Accounting Policies” section for information regarding the review of loans for determining the allowance for loan loss and impairment.

Generally, loans are designated as nonaccrual when either principal or interest payments are 90 days or more past due based on contractual terms, unless the loan is well secured and in the process of collection.  Consumer loans are typically charged off no later than 180 days past due.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.  When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed against income.  Future interest income may be recorded on a cash basis after recovery of principal is reasonably assured.  Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The nonperforming loans at June 30, 2019 consisted of 321 separate credits and 234 separate borrowers.  We had ten non-performing loan relationships, totaling $40.5 million, with an outstanding balance in excess of $1.0 million as of June 30, 2019.  There was $264 thousand directly related to the KBC merger, $1.3 million directly related to the Adams merger and $3.3 million directly

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related to the City Bank acquisition.  The nonaccrual balance at June 30, 2019 included $29.2 million directly related to one credit relationship.  For additional information pertaining to this credit relationship please see, “Allowance for Loan Losses.”

There are several procedures in place to assist us in maintaining the overall quality of our loan portfolio.  We have established underwriting guidelines to be followed by lenders and also monitor delinquency levels for any negative or adverse trends.  In accordance with applicable regulation, appraisals or evaluations are required to independently value real estate and, as an important element, to consider when underwriting loans secured in part or in whole by real estate.  The value of real estate collateral provides additional support to the borrower’s credit capacity.  There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

Potential Problem Loans

Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which management has concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties.  Potential problem loans are assigned a grade of special mention or substandard.  At June 30, 2019, the Company had $44.0 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $52.9 million at December 31, 2018.

With respect to potential problem loans, all monitored and under-performing loans are reviewed and evaluated to determine if they are impaired.  If we determine that a loan is impaired, then we evaluate the borrower’s overall financial condition to determine the need, if any, for possible write downs or appropriate additions to the allowance for loan losses based on the unlikelihood of full repayment of principal and interest in accordance with the contractual terms or the net realizable value of the pledged collateral.

The Company also monitors the aging of loans less than 90 days past due as reported in “NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES” in the Condensed Notes to Interim Consolidated Financial Statements.

Allowance for Loan Losses

Please see “Critical Accounting Policies – Allowance for Loan Losses” for additional discussion of our allowance policy.

In connection with our review of the loan portfolio, risk elements attributable to particular loan types or categories are considered when assessing the quality of individual loans.  Some of the risk elements include:

• Commercial and industrial loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.  Commercial and industrial loans are advanced for equipment purchases, to provide working capital or to meet other financing needs of the business.  These loans may be secured by accounts receivable, inventory, equipment or other business assets.  Financial information is obtained from the borrower to evaluate the debt service coverage and ability to repay the loans.

• Commercial real estate loans are dependent on the industries tied to these loans as well as the local commercial real estate market.  The loans are secured by the real estate and appraisals are obtained to support the loan amount.  An evaluation of the project’s cash flows is performed to evaluate the borrower’s ability to repay the loan at the time of origination and periodically updated during the life of the loan.  Residential real estate loans are affected by the local residential real estate market, the local economy and movement in interest rates.  We evaluate the borrower’s repayment ability through a review of credit reports and debt to income ratios.  Appraisals are obtained to support the loan amount.

• Agricultural real estate loans are real estate loans related to farmland and are affected by the value of farmland.  We evaluate the borrower’s ability to repay based on cash flows from farming operations.

• Consumer loans are dependent on the local economy.  Consumer loans are generally secured by consumer assets, but may be unsecured.  We evaluate the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios.

• Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced and the market pricing at the time of sale.

Purchased credit impaired loans: Please see “Critical Accounting Policies – Allowance for Loan Losses” for additional discussion of our purchased credit impaired loans policy.  For additional information about our purchased credit impaired loans see “NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES” in the Notes to Consolidated Financial Statements.

Analysis of allowance for loan losses:  At June 30, 2019, the allowance for loan losses totaled $17.8 million, or 0.66%, of total loans.  At December 31, 2018, the allowance for loan losses aggregated $11.5 million or 0.44% of total loans.

The allowance for loan losses on loans collectively evaluated for impairment totaled $10.7 million, or 0.41%, of the $2.61 billion in loans collectively evaluated for impairment at June 30, 2019, compared to an allowance for loan losses of $9.6 million, or 0.38% of the $2.51 billion in loans collectively evaluated for impairment at December 31, 2018.  The increases in the allowance for

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loan losses as a percentage of total loans and of loans collectively evaluated for impairment principally reflect management’s evaluation of current environmental conditions and changes in the composition and quality of our loan portfolio.  Also considered by management in evaluating the allowance for loan losses are applied loss factors which are based in part on historical loss experience.

Annualized net losses as a percentage of average loans increased to 1.44%, or 0.08%, adjusted for one credit relationship, for the three months ended June 30, 2019, as compared to 0.00% for the three months ended June 30, 2018.   For additional information pertaining to this credit relationship please see, “Allowance for Loan Losses.” Annualized net losses as a percentage of average loans increased to 0.80%, or 0.08% adjusted for the one credit relationship mentioned earlier, for the six months ended June 30, 2019, as compared to 0.03% for the six months ended June 30, 2018.

The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data.

Allowance for Loan Losses

	As of and for the Three Months Ended June 30,						As of and for the Six Months Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands)						(Dollars in thousands)
Average loans outstanding	$	2,655,256		$	2,317,071		$	2,607,906		$	2,220,559
Gross loans outstanding at end of period(1)	$	2,679,985		$	2,451,772		$	2,679,985		$	2,451,772
Allowance for loan losses at beginning of    the period	$	26,340		$	9,316		$	11,454		$	8,498
Provision for loan losses		974			750			16,620			1,920
Charge-offs:
Commercial and industrial		(8,244	)		(77	)		(8,738	)		(86	)
Real estate:
Commercial real estate		(582	)		—			(608	)		(29	)
Real estate construction		—			—			—			—
Residential real estate		(465	)		(148	)		(579	)		(271	)
Agricultural real estate		(28	)		(80	)		(34	)		(80	)
Consumer		(389	)		(203	)		(681	)		(509	)
Agricultural		(36	)		(4	)		(42	)		(43	)
Total charge-offs		(9,744	)		(512	)		(10,682	)		(1,018	)
Recoveries:
Commercial and industrial		1			7			49			8
Real estate:
Commercial real estate		47			269			49			277
Real estate construction		—			—			24			—
Residential real estate		28			184			38			197
Agricultural real estate		—			—			—			3
Consumer		129			61			223			189
Agricultural		2			8			2			9
Total recoveries		207			529			385			683
Net recoveries (charge-offs)		(9,537	)		17			(10,297	)		(335	)
Allowance for loan losses at end of the    period	$	17,777		$	10,083		$	17,777		$	10,083
Ratio of allowance to period-end loans		0.66	%		0.41	%		0.66	%		0.41	%
Annualized ratio of net charge-offs    (recoveries) to average loans		1.44	%		—			0.80	%		0.03	%

(1) Excluding loans held for sale.

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The following table shows the allocation of the allowance for loan losses among our loan categories and certain other information as of the dates indicated.  The total allowance is available to absorb losses from any loan category.

Analysis of the Allowance for Loan Losses

	June 30, 2019					December 31, 2018
	Amount		% of Total Allowance			Amount		% of Total Allowance
	(Dollars in thousands)
Balance of allowance for loan losses applicable to:
Commercial and industrial	$	7,948		44.7	%	$	2,707		23.6	%
Real estate:
Commercial real estate		3,777		21.2	%		3,108		27.1	%
Real estate construction		935		5.3	%		1,554		13.6	%
Residential real estate		2,908		16.4	%		2,320		20.3	%
Agricultural real estate		525		2.9	%		391		3.4	%
Consumer		1,344		7.6	%		1,070		9.3	%
Agricultural		340		1.9	%		304		2.7	%
Total allowance for loan losses	$	17,777		100.0	%	$	11,454		100.0	%

We disclosed in our 10-K filed March 20, 2019, that the Company has a credit relationship with two related borrowers totaling $28.3 million at December 31, 2018, with potential problems, which consists of several loans to two related borrowers, whose principal businesses operate as franchisors.  In the first quarter of 2019, the borrowing entities filed for Chapter 11 bankruptcy protection based on their overall obligations in excess of their willingness to invest more capital.  The loans were current at December 31, 2018.  The Company believed that all principal and interest due as of December 31, 2018, would ultimately be repaid, primarily based on the value of the entities at sale.  One borrowing entity showed negative cash flow and the Company believed the other entity generated enough adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) to support the obligations of the overall relationship.  As such, the Company did not record any specific impairment on the credit relationship and believed that all principal and accrued interest at December 31, 2018, would be repaid.  The relationship was placed on nonaccrual status in the first quarter of 2019.

In April 2019, the Company received new information on the relationship which we believe necessitated a specific provision to our allowance for loan loss against the relationship of $14.5 million.  This new information included data that the expected sale proceeds of one of the entities was significantly less than previously anticipated.  The Company also received new and current financial information on the other entity which, included but was not limited to potential sales values, indicated that the potential sale value from such borrowing entity was less than expected as of December 31, 2018.  Subsequently, $9.2 million of the relationship was charged off during the second quarter.

In addition, the Company has loans totaling $10.5 million, at June 30, 2019, against personal assets of the two principals of the companies noted above.  These loans are secured by residential real estate.

The Chapter 11 bankruptcy is ongoing and the focus has turned to the larger of the two franchisors and its related credit.  The Company has estimated the allowance for loan loss based on information available to us at the date of filing.  Actual values realized in a future disposition may be different than the value estimated by the Company at the date of filing, for example, the length of time the company is in operations while in bankruptcy.

Management believes that the allowance for loan losses at June 30, 2019 was adequate to cover probable incurred losses in the loan portfolio as of such date.  There can be no assurance, however, that we will not sustain losses in future periods, which could be substantial in relation to the size of the allowance at June 30, 2019.

Securities

We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk, to meet pledging requirements and to meet regulatory capital requirements.  At June 30, 2019, the carrying amount of investment securities totaled $928.0 million, an increase of $10.8 million compared with December 31, 2018.  At June 30, 2019, securities represented 22.2% of total assets compared with 22.6% at December 31, 2018.

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At the date of purchase, debt securities are classified into one of two categories, held-to-maturity or available-for-sale.  We do not purchase securities for trading purposes.  At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held-to-maturity and carried at cost, adjusted for the amortization of premiums and the accretion of discounts, in the financial statements only if management has the positive intent and ability to hold those securities to maturity.  Debt securities not classified as held-to-maturity are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in total interest and dividend income.  Also included in total interest and dividend income are dividends received on stock investments in the Federal Reserve Bank of Kansas City and the FHLB of Topeka.  These stock investments are stated at cost.

The following table summarizes the amortized cost and fair value by classification of available-for-sale securities as of the dates shown.

Available-For-Sale Securities

	June 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Residential mortgage-backed securities (issued by    government-sponsored entities)	$	161,422	$	161,082	$	173,503	$	168,875
Total available-for-sale securities	$	161,422	$	161,082	$	173,503	$	168,875

The following table summarizes the amortized cost and fair value by classification of held-to-maturity securities as of the dates shown.

Held-To-Maturity Securities

	June 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
U.S. government-sponsored entities	$	3,885	$	3,906	$	3,873	$	3,860
Residential mortgage-backed securities (issued by    government-sponsored entities)		585,906		593,573		567,766		560,467
Corporate		22,993		23,268		22,993		22,901
Small Business Administration loan pools		1,585		1,629		1,746		1,728
State and political subdivisions		152,581		155,674		151,978		151,033
Total held-to-maturity securities	$	766,950	$	778,050	$	748,356	$	739,989

At June 30, 2019 and December 31, 2018, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which aggregate adjusted cost exceeded 10% of consolidated stockholders’ equity at the reporting dates noted.

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The following tables summarize the contractual maturity of debt securities and their weighted average yields as of June 30, 2019 and December 31, 2018.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.  Available-for-sale securities are shown at fair value and held-to-maturity securities are shown at cost, adjusted for the amortization of premiums and the accretion of discounts.

	June 30, 2019
	Due in one year or less					Due after one year through five years					Due after five years through 10 years					Due after 10 years					Total
	Carrying Value		Yield			Carrying Value		Yield			Carrying Value		Yield			Carrying Value		Yield			Carrying Value		Yield
	(Dollars in thousands)
Available-for-sale securities:
Residential mortgage-backed    securities (issued by    government-sponsored entities)	$	—	—%			$	7		3.50	%	$	68		2.50	%	$	161,007		2.51	%	$	161,082		2.51	%
Total available-for-sale securities	$	—	—%			$	7		3.50	%	$	68		2.50	%	$	161,007		2.51	%	$	161,082		2.51	%
Held-to-maturity securities:
U.S. government-sponsored    entities	$	1,895		2.43	%	$	1,990		2.21	%	$	—	—%			$	—	—%			$	3,885		2.32	%
Residential mortgage-backed    securities (issued by    government-sponsored entities)		1,366		2.24	%		3,128		2.69	%		71,607		2.95	%		509,805		2.84	%		585,906		2.85	%
Corporate		—	—%				5,131		2.74	%		17,862		5.23	%		—	—%				22,993		4.67	%
Small Business Administration    loan pools		—	—%				—	—%				—	—%				1,585		2.73	%		1,585		2.73	%
State and political subdivisions(1)		9,877		1.23	%		29,422		2.77	%		36,952		2.91	%		76,330		3.14	%		152,581		2.89	%
Total held-to-maturity securities	$	13,138		1.51	%	$	39,671		2.73	%	$	126,421		3.26	%	$	587,720		2.88	%	$	766,950		2.91	%
Total debt securities	$	13,138		1.51	%	$	39,678		2.73	%	$	126,489		3.26	%	$	748,727		2.80	%	$	928,032		2.84	%

⁽¹⁾ The calculated yield is not presented on a tax equivalent basis.

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	December 31, 2018
	Due in one year or less					Due after one year through five years					Due after five years through 10 years					Due after 10 years					Total
	Carrying Value		Yield			Carrying Value		Yield			Carrying Value		Yield			Carrying Value		Yield			Carrying Value		Yield
	(Dollars in thousands)
Available-for-sale securities:
Residential mortgage-    backed securities    (issued by government-    sponsored entities)	$	—	—%			$	10		3.14	%	$	98		2.38	%	$	168,767		3.04	%	$	168,875		3.04	%
Total available-for-sale securities	$	—	—%			$	10		3.14	%	$	98		2.38	%	$	168,767		3.04	%	$	168,875		3.04	%
Held-to-maturity securities:
U.S. government-    sponsored entities	$	1,886		2.43	%	$	1,987		2.21	%	$	—	—%			$	—	—%			$	3,873		2.32	%
Residential mortgage-    backed securities    (issued by government-    sponsored entities)		1,373		2.23	%		8,280		2.76	%		72,060		2.83	%		486,053		3.10	%		567,766		3.05	%
Corporate		—	—%				5,166		2.74	%		17,827		5.21	%		—	—%				22,993		4.66	%
Small Business    Administration loan pools		—	—%				—	—%				—	—%				1,746		2.61	%		1,746		2.61	%
State and political subdivisions(1)		4,540		4.06	%		29,259		2.72	%		36,378		3.04	%		81,801		3.31	%		151,978		3.15	%
Total held-to-maturity securities	$	7,799		3.34	%	$	44,692		2.71	%	$	126,265		3.23	%	$	569,600		3.12	%	$	748,356		3.12	%
Total debt securities	$	7,799		3.34	%	$	44,702		2.71	%	$	126,363		3.23	%	$	738,367		3.10	%	$	917,231		3.10	%

⁽¹⁾ The calculated yield is not presented on a tax equivalent basis.

Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages and which are principally issued by federal agencies such as Ginnie Mae, Fannie Mae and Freddie Mac.  Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities.  Premiums and discounts on mortgage-backed securities are amortized and accreted over the expected life of the security and may be impacted by prepayments.  As such, mortgage-backed securities which are purchased at a premium will generally produce decreasing net yields as interest rates drop because home owners tend to refinance their mortgages resulting in prepayments and an acceleration of premium amortization.  Securities purchased at a discount will reflect higher net yields in a decreasing interest rate environment as prepayments result in an acceleration of discount accretion.

The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected lives because borrowers have the right to prepay their obligations at any time.  Monthly pay downs on mortgage-backed securities cause the average lives of these securities to be much different than their stated lives.  At June 30, 2019 and December 31, 2018, 89.8% and 88.9% of the mortgage-backed securities held by us had contractual final maturities of more than ten years with a weighted average life of 4.3 years and 5.0 years and a modified duration of 3.8 years and 4.4 years.

Deposits

Our lending and investing activities are primarily funded by deposits.  A variety of deposit accounts are offered with a wide range of interest rates and terms including demand, savings, money market and time deposits.  We rely primarily on competitive pricing policies, convenient locations, comprehensive marketing strategy and personalized service to attract and retain these deposits.

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The following table shows our composition of deposits at June 30, 2019 and December 31, 2018.

Composition of Deposits

	June 30, 2019					December 31, 2018
	Amount		Percent of Total			Amount		Percent of Total
	(Dollars in thousands)
Non-interest-bearing demand	$	487,430		15.3	%	$	503,831		16.1	%
Interest-bearing demand		707,195		22.2	%		671,320		21.5	%
Savings and money market		997,909		31.3	%		940,390		30.1	%
Time		993,359		31.2	%		1,007,906		32.3	%
Total deposits	$	3,185,893		100.0	%	$	3,123,447		100.0	%

The following table shows deposits assumed in our 2019 acquisition, as of the time of such acquisition.

	MidFirst Acquisition
	Amount		Percent of Total
	(Dollars in thousands)
Non-interest-bearing demand	$	12,662		12.9	%
Interest-bearing demand		11,538		11.7	%
Savings and money market		24,269		24.6	%
Time		50,074		50.8	%
Total deposits	$	98,543		100.0	%

Total deposits at June 30, 2019 were $3.19 billion, an increase of $62.4 million, or 2.0%, compared to total deposits of $3.12 billion at December 31, 2018.

Included in the savings and money market deposits are brokered deposit balances of $19.9 million as of June 30, 2019 and $21.0 million as of December 31, 2018.  These balances represent customer funds placed in the Insured Cash Sweep (“ICS”) service that allows Equity Bank to break large money market deposits into smaller amounts and place them in a network of other ICS banks to ensure FDIC insurance coverage on the entire deposit.  Although classified as brokered deposits for regulatory purposes, funds placed through the ICS service are Equity Bank’s customer relationships that management views as core funding.  Brokered certificates of deposit as of June 30, 2019 were $30.5 million and $131.1 million at December 31, 2018.  Of these balances, $18.1 million at June 30, 2019 and $20.9 million at December 31, 2018 were reciprocal customer funds placed in the Certificate of Deposit Account Registry Service (“CDARS”) program.  CDARS allows Equity Bank to break large time deposits into smaller amounts and place them in a network of other CDARS banks to ensure FDIC insurance coverage on the entire deposit.  Reciprocal deposits are not considered brokered deposits as long as the aggregate balance is less than the lesser of 20% of total liabilities or $5.0 billion and Equity Bank is well capitalized and well rated.  All non-reciprocal deposits and reciprocal deposits in excess of regulatory limits are considered brokered deposits.

The following table provides information on the maturity distribution of time deposits of $100 thousand or more as of June 30, 2019 and December 31, 2018.

	June 30, 2019		December 31, 2018		Change			%
	(Dollars in thousands)
3 months or less	$	148,261	$	157,033	$	(8,772	)		(5.6	)%
Over 3 through 6 months		117,322		160,259		(42,937	)		(26.8	)%
Over 6 through 12 months		200,072		183,862		16,210			8.8	%
Over 12 months		205,328		204,991		337			0.2	%
Total Time Deposits	$	670,983	$	706,145	$	(35,162	)		(5.0	)%

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Other Borrowed Funds

We utilize borrowings to supplement deposits to fund our lending and investing activities.  Short-term borrowings and long-term borrowings include federal funds purchased and retail repurchase agreements, FHLB advances, a bank stock loan, and subordinated debentures.

Federal funds purchased and retail repurchase agreements:  We have available federal funds lines of credit with our correspondent banks.  As of June 30, 2019 and December 31, 2018, there were no federal funds purchased outstanding.  Retail repurchase agreements outstanding represent the purchase of interests in securities by banking customers.  Retail repurchase agreements are stated at the amount of cash received in connection with the transaction.  We do not account for any of our repurchase agreements as sales for accounting purposes in our financial statements.  Repurchase agreements with banking customers are settled on the following business day.  For additional information see “NOTE 6 – BORROWINGS” in the Condensed Notes to Consolidated Financial Statements for additional information.

FHLB advances:  FHLB advances include both draws against our line of credit and fixed rate term advances.  Each term advance is payable in full at its maturity date and contains provision for prepayment penalties.  Our FHLB borrowings are used for operational liquidity needs for originating and purchasing loans, purchasing investments and general operating cash requirements.  For additional information see “NOTE 6 – BORROWINGS” in the Condensed Notes to Interim Consolidated Financial Statements.

Bank stock loan:  The Company maintains a borrowing facility through an unaffiliated financial institution.  The terms of the loan require us and Equity Bank to maintain minimum capital ratios and other covenants.  The loan and accrued interest may be prepaid at any time without penalty.  In the event of a default, the lender has the option to declare all outstanding balances as immediately due.  For additional information see “Note 6 – BORROWINGS” in the Condensed Notes to Interim Consolidated Financial Statements.  We are in compliance with the terms of the borrowing facility.

Subordinated debentures:  In conjunction with the 2012 acquisition of First Community Bancshares, Inc., we assumed certain subordinated debentures owed to special purpose unconsolidated subsidiaries that are controlled by us, FCB Capital Trust II (“CTII”) and FCB Capital Trust III (“CTIII”).  The trust preferred securities issued by CTII accrue and pay distributions quarterly at three-month LIBOR plus 2.00% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on April 15, 2035 or upon earlier redemption.  The trust preferred securities issued by CTIII accrue and pay distributions quarterly at three-month LIBOR plus 1.89% on the stated liquidation amount of the trust preferred securities.  These trust preferred securities are mandatorily redeemable upon maturity on June 15, 2037 or upon earlier redemption.

In conjunction with the 2016 acquisition of Community First Bancshares, Inc., we assumed certain subordinated debentures owed to a special purpose unconsolidated subsidiary that is controlled by us, Community First (AR) Statutory Trust I, (“CFSTI”).  The trust preferred securities issued by CFSTI accrue and pay distributions quarterly at three-month LIBOR plus 3.25% on the stated liquidation amount of the trust preferred securities.  These trust preferred securities are mandatorily redeemable upon maturity on December 26, 2032, or upon earlier redemption.

The subordinated debentures balance, including CTII, CTIII and CFSTI, was $14.4 million at June 30, 2019 and $14.3 million at December 31, 2018.  This increase is due to amortization of purchase accounting adjustments.

Liquidity and Capital Resources

Liquidity

Market and public confidence in our financial strength and financial institutions in general will largely determine access to appropriate levels of liquidity.  This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.

Liquidity is defined as the ability to meet anticipated customer demands for future funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis.  We measure our liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily, weekly and monthly basis.

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Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs.  Liquidity planning and management are necessary to ensure the ability to fund operations in a cost-effective manner and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows.  In this process, we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet our needs.

During the six-month periods ended June 30, 2019 and 2018, our liquidity needs have primarily been met by core deposits, security and loan maturities and amortizing investment and loan portfolios.  Other funding sources include federal funds purchased, brokered certificates of deposit and borrowings from the FHLB.

Our largest sources of funds are deposits and FHLB borrowings and largest uses of funds are loans and securities.  Average loans were $2.61 billion for the six months ended June 30, 2019, an increase of 9.2% over December 31, 2018 average balance.  Excess deposits are primarily invested in our interest-bearing deposit account with the Federal Reserve Bank of Kansas City, investment securities, federal funds sold or other short-term liquid investments until the funds are needed to fund loan growth.  Our securities portfolio has a weighted average life of 4.3 years and a modified duration of 3.9 years at June 30, 2019.

Cash and cash equivalents were $181.4 million at June 30, 2019, a decrease of $11.4 million from the $192.8 million cash and cash equivalents at December 31, 2018.  The decrease in cash and cash equivalents is driven primarily by $37.8 million in net cash used in investing activities somewhat offset by $19.0 million of net cash from operating activities combined with $7.5 million net cash provided by financing activities.  Cash and cash equivalents at January 1, 2019 plus liquidity provided by operating activities, pay downs, sales and maturities of investment securities and FHLB borrowings during the first six months of 2019 were used to originate or purchase loans and to purchase investment securities.  We believe that our daily funding needs can be met through cash provided by operating activities, payments and maturities on loans and investment securities, core deposit base and FHLB advances and other borrowing relationships.

Off-Balance Sheet Items

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets.  We enter into these transactions to meet the financing needs of our customers.  These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.  Our exposure to credit loss is represented by the contractual amounts of these commitments.  The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments.

Our commitments associated with outstanding standby and performance letters of credit and commitments to extend credit expiring by period as of June 30, 2019 are summarized below.  Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

Credit Extensions Commitments

As of June 30, 2019

	1 Year or Less		More Than 1 Year but Less Than 3 Years		3 Years or More but Less Than 5 Years		5 Years or More		Total
	(Dollars in thousands)
Standby and performance letters of credit	$	5,279	$	1,051	$	226	$	—	$	6,556
Commitments to extend credit		230,708		83,135		26,207		123,651		463,701
Total	$	235,987	$	84,186	$	26,433	$	123,651	$	470,257

Standby and Performance Letters of Credit:  Standby letters of credit are irrevocable commitments issued by us to guarantee the performance of a customer to a third party once specified pre-conditions are met.  Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.  Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.

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Commitments to Extend Credit:  Commitments to originate loans and available lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since a portion of the commitments and lines of credit may expire without being drawn upon, the total commitment and lines of credit amounts do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.  Mortgage loans in the process of origination represent amounts that we plan to fund within a normal period of 60 to 90 days which are intended for sale to investors in the secondary market.

Capital Resources

Capital management consists of providing equity to support our current and future operations.  The federal bank regulators view capital levels as important indicators of an institution’s financial soundness.  As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold.  As a bank holding company and a state-chartered-Fed-member bank, the Company and Equity Bank are subject to regulatory capital requirements.

Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action. Management believes as of June 30, 2019 and December 31, 2018, the Company and Equity Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If adequately capitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributions are limited, as are asset growth and acquisitions, and capital restoration plans are required.

Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver.  As of June 30, 2019, the most recent notifications from the federal regulatory agencies categorized Equity Bank as “well capitalized” under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, Equity Bank must maintain minimum total capital, Tier 1 capital, Common Equity Tier 1 capital and Tier 1 leverage ratios.  For additional information, see “NOTE 8 – REGULATORY MATTERS” in the Condensed Notes to Interim Consolidated Financial Statements.  There are no conditions or events since that notification that management believes have changed Equity Bank’s category.

Non-GAAP Financial Measures

We identify certain financial measures discussed in this Quarterly Report as being “non-GAAP financial measures.”  In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheet or statements of cash flows.  Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Quarterly Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP.  Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Quarterly Report may differ from that of other companies reporting measures with similar names.  You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Quarterly Report when comparing such non-GAAP financial measures.

Tangible Book Value Per Common Share and Tangible Book Value Per Diluted Common Share:  Tangible book value is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions.  We calculate: (a) tangible common equity as total stockholders’ equity less preferred stock, goodwill, core deposit intangibles (net of accumulated amortization) and other intangible assets (net of amortization); (b) tangible book value per common share as tangible common equity (as described in clause (a)) divided by shares of common stock outstanding; and tangible book value per diluted common share as

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tangible common equity (as described in clause (a)) divided by diluted shares of common stock outstanding.  For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value.

Management believes that these measures are important to many investors who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets.  Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity, tangible book value per common share and tangible book value per diluted common share and compares these values with book value per common share.

	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018
	(Dollars in thousands, except per share data)
Total stockholders’ equity	$	458,406	$	453,463	$	455,941	$	443,237	$	433,282
Less: goodwill		136,432		136,432		131,712		131,723		125,485
Less: core deposit intangibles, net		21,512		22,296		21,725		22,466		19,800
Less: mortgage servicing asset, net		8		10		11		13		14
Less: naming rights, net		1,195		1,206		1,217		1,228		1,239
Tangible common equity	$	299,259	$	293,519	$	301,276	$	287,807	$	286,744
Common shares issued at period end		15,563,873		15,820,303		15,793,095		15,792,695		15,780,777
RSU shares vested	—			108	—		—			6,768
Common shares outstanding at period end		15,563,873		15,820,411		15,793,095		15,792,695		15,787,545
Diluted common shares outstanding at period end		15,758,747		16,036,700		16,085,729		16,118,067		16,131,096
Book value per common share	$	29.45	$	28.66	$	28.87	$	28.07	$	27.44
Tangible book value per common share	$	19.23	$	18.55	$	19.08	$	18.22	$	18.16
Tangible book value per diluted common share	$	18.99	$	18.30	$	18.73	$	17.86	$	17.78

Tangible Common Equity to Tangible Assets:  Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions.  We calculate (a) tangible common equity as total stockholders’ equity less preferred stock, goodwill, core deposit intangibles (net of accumulated amortization) and other intangible assets (net of accumulated amortization); (b) tangible assets as total assets less goodwill, core deposit intangibles (net of accumulated amortization) and other intangible assets (net of accumulated amortization); and (c) tangible common equity to tangible assets as tangible common equity (as described in clause (a)) divided by tangible assets (as described in clause (b)).  For tangible common equity to tangible assets, the most directly comparable financial measure calculated in accordance with GAAP is total stockholders’ equity to total assets.

Management believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets.  Goodwill and other intangible assets have the effect of increasing both total stockholders’ equity and total assets while not increasing tangible common equity or tangible assets.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets.

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	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
	(Dollars in thousands)
Total stockholders’ equity	$	458,406		$	453,463		$	455,941		$	443,237		$	433,282
Less: goodwill		136,432			136,432			131,712			131,723			125,485
Less: core deposit intangibles, net		21,512			22,296			21,725			22,466			19,800
Less: mortgage servicing asset, net		8			10			11			13			14
Less: naming rights, net		1,195			1,206			1,217			1,228			1,239
Tangible common equity	$	299,259		$	293,519		$	301,276		$	287,807		$	286,744
Total assets	$	4,180,074		$	4,065,354		$	4,061,716		$	3,931,036		$	3,712,185
Less: goodwill		136,432			136,432			131,712			131,723			125,485
Less: core deposit intangibles, net		21,512			22,296			21,725			22,466			19,800
Less: mortgage servicing asset, net		8			10			11			13			14
Less: naming rights, net		1,195			1,206			1,217			1,228			1,239
Tangible assets	$	4,020,927		$	3,905,410		$	3,907,051		$	3,775,606		$	3,565,647
Equity to assets		10.97	%		11.15	%		11.23	%		11.28	%		11.67	%
Tangible common equity to tangible assets		7.44	%		7.52	%		7.71	%		7.62	%		8.04	%

Return on Average Tangible Common Equity:  Return on average tangible common equity is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions.  We calculate (a) average tangible common equity as total average stockholders’ equity less average goodwill, core deposit intangibles (net of accumulated amortization) and other intangible assets (net of accumulated amortization); (b) adjusted net income allocable to common stockholders as net income allocable to common stockholders plus intangible asset amortization less tax effect on intangible assets amortization; and (c) return on average tangible common equity as annualized adjusted net income allocable to common stockholders (as described in clause (b)) divided by average tangible common equity (as described in clause (a)).  For return on average tangible common equity, the most directly comparable financial measure calculated in accordance with GAAP is return on average equity.

Management believes that this measure is important to many investors in the marketplace who are interested in earnings quality on tangible common equity.  Goodwill and other intangible assets have the effect of increasing total stockholders’ equity while not increasing tangible common equity.

The following table reconciles, as of the dates set forth below, return on average stockholders’ equity and return on average tangible common equity.

	As of and for the three months ended
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
	(Dollars in thousands)
Total average stockholders’ equity	$	457,103		$	459,713		$	449,450		$	439,771		$	413,474
Less: average intangible assets		159,562			157,315			154,944			150,256			134,146
Average tangible common equity	$	297,541		$	302,398		$	294,506		$	289,515		$	279,328
Net income (loss) allocable to common stockholders	$	9,232		$	(4,073	)	$	9,925		$	10,322		$	6,867
Amortization of intangible assets		797			791			752			707			637
Less: tax effect of intangible assets amortization		167			166			158			148			134
Adjusted net income (loss) allocable to common    stockholders	$	9,862		$	(3,448	)	$	10,519		$	10,881		$	7,370
Return on total average stockholders’ equity    (ROAE) annualized		8.10	%		(3.59	)%		8.76	%		9.31	%		6.66	%
Return on average tangible common equity    (ROATCE) annualized		13.29	%		(4.62	)%		14.17	%		14.91	%		10.58	%

Efficiency Ratio:  The efficiency ratio is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions.  We calculate the efficiency ratio by dividing non-interest expense, excluding merger expenses and loss on debt extinguishment, by the sum of net interest income and non-interest income, excluding net gain from securities transactions and

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net gain on acquisition.  The GAAP-based efficiency ratio is non-interest expenses divided by net interest income plus non-interest income.

In management’s judgment, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess operating expenses in relation to operating revenue by removing merger expenses and net gain (loss) from securities transactions.

The following table reconciles, as of the dates set forth below, the efficiency ratio to the GAAP-based efficiency ratio.

	Three months ended
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
	(Dollars in thousands)
Non-interest expense	$	25,023		$	25,543		$	25,138		$	23,647		$	25,975
Less: merger expenses		276			639			938			757			5,236
Non-interest expense, excluding merger expenses	$	24,747		$	24,904		$	24,200		$	22,890		$	20,739
Net interest income	$	31,288		$	30,639		$	33,336		$	32,755		$	30,920
Non-interest income	$	6,451		$	5,324		$	5,449		$	5,433		$	4,592
Less: net gain (loss) from securities transactions		7			6			5			(4	)		(2	)
Non-interest income, excluding net gain (loss) from    securities transactions	$	6,444		$	5,318		$	5,444		$	5,437		$	4,594
Net interest income plus non-interest income,    excluding net gain (loss) from securities transactions	$	37,732		$	35,957		$	38,780		$	38,192		$	35,514
Non-interest expense to net interest income    plus non-interest income		66.31	%		71.03	%		64.81	%		61.92	%		73.14	%
Efficiency Ratio		65.59	%		69.26	%		62.40	%		59.93	%		58.40	%

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Our asset-liability policy provides guidelines to management for effective funds management, and management has established a measurement system for monitoring net interest rate sensitivity position within established guidelines.

As a financial institution, the primary component of market risk is interest rate volatility.  Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short-term held-to-maturity.  Interest rate risk is the potential of economic gains or losses due to future interest rate changes.  These changes can be reflected in future net interest income and/or fair market values.  The objective is to measure the effect on net interest income (“NII”) and economic value of equity (“EVE”) and to adjust the balance sheet to minimize the inherent risk, while at the same time maximizing income.

We manage exposure to interest rates by structuring the balance sheet in the ordinary course of business.  We have the ability to enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Currently, we do not have a material exposure to these instruments.  We also have the ability to enter into interest rate swaps as an accommodation to our customers in connection with an interest rate swap program.  Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Our exposure to interest rate risk is managed by the Asset Liability Committee (“ALCO”), which is composed of certain members of senior management, in accordance with policies approved by the Board of Directors.  The ALCO formulates strategies based on appropriate levels of interest rate risk.  In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors.  The ALCO meets monthly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, securities purchase and sale activities, commitments to originate loans and the maturities of investment securities and borrowings.  Additionally, the ALCO reviews liquidity, projected cash flows, maturities of deposits and consumer and commercial deposit activity.

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ALCO uses a simulation analysis to monitor and manage the pricing and maturity of assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income.  The simulation tests the sensitivity of NII and EVE. Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options within the investment securities portfolio.  Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts.  The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the future NII and EVE.  Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

The change in the impact of net interest income from the base case for June 30, 2019 and December 31, 2018, was primarily driven by the rate and mix of variable and fixed rate financial instruments, the underlying duration of the financial instruments, and the level of response to changes in the interest rate environment.  The increase in the level of negative impact to net interest income in the up interest rate shock scenarios is due to the assumed migration of non-term deposit liabilities to higher rate term deposits; the level of fixed rate investments and loans receivable that will not reprice to higher rates; the variable rate Federal Home Loan Bank advances; the variable rate subordinated debentures and the non-term deposits that are assumed not to migrate to term deposits that are variable rate and will reprice to the higher rates; and a portion of our portfolio of variable rate loans contain restrictions on the amount of repricing and frequency of repricing that limit the amount of repricing to the current higher rates.  These factors result in the negative impacts to net interest income in the up interest rate shock scenarios that are detailed in the table below. In the down interest rate shock scenario the main drivers of the negative impact on net interest income are the decrease in investment income due to the negative convexity features of the fixed rate mortgage backed securities; assumed prepayment of existing fixed rate loans receivable; the downward pricing of variable rate loans receivable; the constraint of the shock on non-term deposits; and the level of term deposit repricing.  Our mortgage backed security portfolio is comprised of fixed rate investments and as rates decrease, the level of prepayments are assumed to increase and cause the current higher rate investments to prepay and the assumed reinvestment will be at lower interest rates.  Similar to our mortgage backed securities, the model assumes that our fixed rate loans receivable will prepay at a faster rate and reinvestment will occur at lower rates.  The level of downward shock on the non-term deposits is constrained to limit the downward shock to a non-zero rate which results in a minimal reduction in the average rate paid.  Term deposits repricing will only decrease the average cost paid by a minimal amount due to the assumed repricing occurring at maturity.  These factors result in the negative impact to net interest income in the down interest rate shock scenario.

The change in the EVE from the base case for June 30, 2019 and December 31, 2018 is due to us being in a liability sensitive position and the level of convexity in our pre-payable assets.  Generally, with a liability sensitive position, as interest rates increase, the value of your assets decrease faster than the value of liabilities and as interest rates decrease, the value of your assets increase at a faster rate than liabilities.  However, due to the level of convexity in our fixed rate pre-payable assets, we do not experience a similar change in the value of assets in a down interest rate shock scenario.  Substantially all investments and approximately 45.5% of loans are pre-payable and fixed rate and as rates decrease, the level of modeled prepayments increase.  The prepaid principal is assumed to reprice at the assumed current rates, resulting in a smaller positive impact to the EVE.

Management utilizes static balance sheet rate shocks to estimate the potential impact on various rate scenarios.  This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet.  The following table summarizes the simulated immediate change in net interest income for twelve months as of the dates indicated.

Market Risk

	Impact on Net Interest Income
Change in prevailing interest rates	June 30, 2019			December 31, 2018
+300 basis points		(13.2	)%		(13.0	)%
+200 basis points		(8.1	)%		(8.0	)%
+100 basis points		(3.5	)%		(3.8	)%
0 basis points		—			—
-100 basis points		1.7	%		2.0	%

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The following table summarizes the simulated immediate impact on economic value of equity as of the dates indicated.

	Impact on Economic Value of Equity
Change in prevailing interest rates	June 30, 2019			December 31, 2018
+300 basis points		(10.8	)%		(16.2	)%
+200 basis points		(5.5	)%		(8.2	)%
+100 basis points		(1.4	)%		(2.5	)%
0 basis points		—			—
-100 basis points		(4.5	)%		0.3	%

Item 4: Controls and Procedures

Evaluation of disclosure controls and procedures

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply judgement in evaluating its controls and procedures.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Changes in internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1:  Legal Proceedings

From time to time we are a party to various litigation matters incidental to the conduct of our business.  See “NOTE 11 – LEGAL MATTERS” of the Condensed Notes to Interim Consolidated Financial Statements under Item 1 to this Quarterly report for a complete discussion of litigation matters.

Item 1A:  Risk Factors

There has been no material changes in the Company’s risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 20, 2019.

Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds

Repurchase of Common Stock

On April 18, 2019, the Company’s Board of Directors authorized the repurchase of up to 1,100,000 shares of the Company’s outstanding common stock, from time to time, beginning April 29, 2019 and concluding October 30, 2020.  The repurchase program does not obligate us to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice.

The following table presents shares that have been repurchased under the program.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Repurchase Plan		Maximum Number of Shares That May Yet Be Purchased Under the Plan
April 1, 2019 through April 30, 2019		15,000	$	26.35		15,000		1,085,000
May 1, 2019 through May 31, 2019		165,944	$	26.38		165,944		919,056
June 1, 2019 through June 30, 2019		96,862	$	25.15		96,862		822,194
Total		277,806	$	25.95		277,806		822,194

Item 3:  Defaults Upon Senior Securities

None

Item 4:  Mine Safety Disclosures

Not applicable.

Item 5:  Other Information

None

Item 6: Exhibits

Exhibit No.	Description
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.

** These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Equity Bancshares, Inc.
August 5, 2019	By:	/s/ Brad S. Elliott
Date		Brad S. Elliott
		Chairman and Chief Executive Officer
August 5, 2019	By:	/s/ Gregory H. Kossover
Date		Gregory H. Kossover
		Executive Vice President and Chief Financial Officer

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