EQUITY BANCSHARES INC

Results of Operations

We generate 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, trust 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.

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 and non-interest-bearing liabilities and stockholders’ equity, 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 circumstances and 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 consumer, commercial and real estate sectors within these markets.

Net Income

Three months ended March 31, 2024, compared with three months ended March 31, 2023: Net income allocable to common stockholders for the three months ended March 31, 2024, was $14.1 million, or $0.90 diluted earnings per share as compared to $12.3 million, or $0.77 diluted earnings per share for the three months ended March 31, 2023, an increase of $1.7 million. The increase was largely due to an increase in net interest income of $5.1 million, an increase in non-interest income of $3.1 million, offset by an increase in the provision for loan losses of $1.4 million, an increase in non-interest expense of $3.9 million and an increase in the provision for Income taxes of $1.2 million.

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 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.”

Three months ended March 31, 2024, compared with three months ended March 31, 2023: 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 March 31, 2024, and 2023. 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

(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 un-rounded 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.

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 March 31, 2024, and 2023.

Analysis of Changes in Net Interest Income

For the Three Months Ended March 31, 2024, and 2023

(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.

Interest income increased $15.6 million for the quarter ended March 31, 2024, as compared to the quarter ended March 31, 2023. Of this increase, $8.2 million is attributable to increases in loan rate/yield. Yield on loans increased by 91 basis points for the quarter ended March 31, 2024, as compared quarter ended to March 31, 2023. The increase in interest income on loans is primarily due to increases in loan coupon and the addition of $118.1 million in balances from the merger of Rockhold, offset by decrease due to volume on real estate construction, agricultural and consumer loans. Also during the first quarter, the Company realized expanded earnings on securities following our portfolio re-positioning in late 2023. As compared to the quarter ended March 31, 2023, improved yield on the securities portfolio contributed $4.3 million to the current quarter.

The increase in interest expense of $10.6 million was due to a general increase in market interest rates on the deposit portfolio and to a lesser extent the increase in volume on borrowing, primarily from the Federal Reserve Bank. The cost of interest-bearing deposits increased from 1.73% for the quarter ended March 31, 2023 to 2.77% for the quarter ended March 31, 2024.

During the quarter ended March 31, 2024, when compared to the quarter ended March 31, 2023, net interest margin increased 31 basis points and net interest spread increased by 14 basis points to 3.10% from 2.96%. The increase in net interest margin is primarily due to the increase in yield earned on interest-earning assets, which outpaced the increases in the cost of interest-bearing liabilities. The increase in interest spread is primarily due to the increase in the yield on interest-earning assets to current market rates.

Provision for Credit Losses

We maintain an allowance for credit losses for estimated losses in our loan portfolio. The allowance for credit losses is increased by a provision for credit losses, which is 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 within the Company’s portfolio. This historical loss calculation is then modified to reflect quantitative economic circumstances based on evidenced economic conditions and regression formulas, which incorporate lag factors in identifying a sufficiently predictive adjusted-R square, as well as qualitative factors not inherently reflected in our historical loss or quantitative economic inputs. Included in our qualitative assessment is the consideration of prospective economic conditions over the next 12 months, considered the Company’s reasonable and supportable forecast period. As these factors change, the amount of the credit loss provision changes.

Three months ended March 31, 2024, compared with three months ended March 31, 2023: During the three months ended March 31, 2024, there was a provision for credit losses of $1.0 million compared to a reversal of provision for credit losses of $366 thousand during the three months ended March 31, 2023. The provision for the quarter is attributable to the establishment of reserves on non-PCD loans acquired in the Rockhold acquisition. The Company continues to estimate the allowance for credit losses with assumptions that anticipate low prepayment rates and continued market disruption caused by elevated inflation, supply chain issues and the impact of monetary policy on consumers and businesses. Net charge-offs for the three months ended March 31, 2024 were $668 thousand compared to net charge-offs of $378 thousand for the three months ended March 31, 2023. For the three months ended March 31, 2024, gross charge-offs were $882 thousand, offset by gross recoveries of $215 thousand. In comparison, gross charge-offs were $638 thousand for the three months ended March 31, 2023, offset by gross recoveries of $260 thousand.

Non-Interest Income

The primary sources of non-interest income are service charges and fees, debit card income, mortgage banking income, and increases in the value of bank-owned life insurance. 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 March 31, 2024, compared with three months ended March 31, 2023: The following table provides a comparison of the major components of non-interest income for the three months ended March 31, 2024, and 2023.

Non-Interest Income

For the Three Months Ended March 31,

Total non-interest income increased $3.1 million during the three months ended March 31, 2024, as compared to the same period in 2023. The increase is largely attributable to increases in recovery on zero-basis purchased loans of $3.3 million, mortgage banking income of $100 thousand and trust income of $79 thousand, offset by decreases in bank owned life insurance of $755 thousand, other income of $771 thousand and debit card income of $107 thousand. The decrease in other non-interest income was primarily due to decreases in loan repurchase obligation reversal. Additionally, we recorded a gain on acquisition of $1.2 million on the Rockhold merger.

Non-Interest Expense

Three months ended March 31, 2024, compared with three months ended March 31, 2023: For the three months ended March 31, 2024, non-interest expense totaled $37.2 million, an increase of $3.9 million, when compared to the three months ended March 31, 2023. Changes in the various components of non-interest expense for the three months ended March 31, 2024, and 2023, are discussed in more detail in the following table.

Non-Interest Expense

For the Three Months Ended March 31,

Salaries and employee benefits: There was an increase in salaries and employee benefits of $1.4 million for the period ended March 31, 2024, as compared to the same period in 2023. The increase is primarily due to increases in employee salaries and incentive compensation, additional payroll cost from the Rockhold merger, off-set by decreases in share-based compensation expense. The decrease in share-based compensation is due to the reversal of share-based compensation expense associated with the departure of senior management team members.

Data processing: There was an increase in data processing costs of $912 thousand for the period ended March 31, 2024, as compared to the same period in 2023. The increase is primarily due to the renewal of software licenses.

Net occupancy and equipment: There was an increase in net occupancy and equipment costs of $656 thousand for the period ended March 31, 2024, as compared to the same period in 2023. The increase is primarily due to increases in repairs and maintenance expense and utilities expense.

FDIC insurance: FDIC insurance costs increased $211 thousand for the period ended March 31, 2024, as compared to the same period in 2023. The increase was primarily due to an increase in FDIC assessment rates.

Other: Other non-interest expenses consists 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, losses net of gains on the sale of repossessed assets other than real estate, other operating expenses, such as settlement of claims, losses from limited partnerships entered into for tax credits and provision for unfunded commitments. The primary driver of the decline from the comparative period is a reduction in amortization of investments in tax credit partnerships.

Merger expenses: To facilitate the Rockhold merger the Company realized expense of $1.6 million for the period ended March 31, 2024, as compared to the same period in 2023.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in the internal evaluation of 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.

The efficiency ratio was 65.2% for the three months ended March 31, 2024, compared with 70.0% for the three months ended March 31, 2023. The improvement was primarily due to an increase in net interest income offset slightly by an increase in non-interest expense net of merger related expenses.

Income Taxes

In general, the Company records income tax expense each quarter based on its estimate as to the full year’s effective tax rate which includes, in addition to statutory rates, estimated amounts for tax-exempt interest income, non-taxable life insurance income, non-deductible executive compensation, valuation allowance on deferred assets, other non-deductible expense, and federal and state income tax credits anticipated to be available in proportion to anticipated annual income before income taxes. Certain items, however, are given discrete period treatment and the tax effects for such items are therefore reported in the quarter that an event arises. Events or items that may give rise to discrete recognition include excess tax benefits or shortfalls with respect to share-based compensation, changes in tax law, and non-deductible merger expense.

Three months ended March 31, 2024, compared with three months ended March 31, 2023: The effective income tax rate for the three month period ended March 31, 2024, was 20.8% as compared to 17.0% for the three month period ended March 31, 2023. The increase in rate at quarter ended March 31, 2024 as compared to the quarter ended March 31, 2023, was the result of a reduction in the tax benefit related to investments in tax credit structures offset by the tax benefit recognize in the current quarter related to the bargain purchase gain recorded on the acquisition completed during the quarter.