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 September 30, 2024, compared with three months ended September 30, 2023: Net income allocable to common stockholders for the three months ended September 30, 2024, was $19.9 million, or $1.28 diluted earnings per share as compared to $12.3 million, or $0.80 diluted earnings per share for the three months ended September 30, 2023, an increase of $7.5 million. The increase was largely due to an increase in net interest income of $5.0 million, a gain on disposition in other real estate owned of $8.5 million, offset by an increase in other non-interest expense of $3.9 million and an increase in the provision for Income taxes of $2.1 million.

Nine months ended September 30, 2024, compared with nine months ended September 30, 2023: Net income allocable to common stockholders for the nine months ended September 30, 2024, was $45.6 million, or $2.95 diluted earnings per share as compared to $36.1 million, or $2.30 diluted earnings per share for the nine months ended September 30, 2023, an increase of $9.5 million. The increase was largely due to an increase in net interest income of $17.1 million, an increase in non-interest income of $5.7 million, a gain on disposition in other real estate owned of $8.5 million, offset by an increase in other non-interest expense of $14.2 million, an increase in the provision for loan losses of $1.3 million and an increase in the provision for income taxes of $4.3 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 September 30, 2024, compared with three months ended September 30, 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 September 30, 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.

(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 September 30, 2024, and 2023.

Analysis of Changes in Net Interest Income

For the Three Months Ended September 30, 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 $9.9 million for the quarter ended September 30, 2024, as compared to the quarter ended September 30, 2023. Of this increase, $7.7 million is attributable to increases in average asset rate/yield. Realized rate increases were attributable to the higher coupons on loan production, purchase accounting accretion, as well as the Company's re-positioning of its investment portfolio in the fourth quarter of 2023. Rate increases were complemented by higher earning asset volume, accounting for the remaining $2.3 million in period over period growth.

The increase in interest expense of $4.9 million was due to the deposit portfolio repricing as market interest rates remained well above our historic cost of deposits as well as increased utilization of our FHLB borrowing line.

During the quarter ended September 30, 2024, when compared to the quarter ended September 30, 2023, net interest margin increased 36 basis points and net interest spread increased by 27 basis points to 3.19% from 2.92%. The increase in both is primarily due to the increase in yield on interest-earning assets, which outpaced the increases in the cost of interest-bearing liabilities.

Nine months ended September 30, 2024, compared with nine months ended September 30, 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 nine months ended September 30, 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.

(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 nine month periods ended September 30, 2024, and 2023.

Analysis of Changes in Net Interest Income

For the Nine Months Ended September 30, 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 on interest-earning assets increased $39.4 million for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. Of this increase, $32.4 million is attributable to increases in earning asset yields. Yield on loans increased by 72 basis points, driven by continued repricing in a higher interest rate environment as well as the purchase accounting accretion following the Rockhold and KansasLand mergers. Investment yields contributed a comparative improvement of $13.4 million, primarily attributable to the Company's strategic repositioning in the fourth quarter of 2023. Earning asset volume generated a comparative increase of $7.0 million, driven by the addition of assets through the Rockhold and KansasLand mergers.

There was an increase in interest expense on Total interest-bearing deposits of $22.3 million due to the deposit portfolio repricing as market interest rates remained well above our historic cost of deposits as well as increased utilization of our FHLB borrowing line.

When compared to the nine months ended September 30, 2023, net interest margin increased 41 basis points during the nine months ended September 30, 2024, while net interest spread increased by 30 basis points to 3.19% from 2.89%. The increase in both can be attributed to an increase in the rate/yield earned on interest-earning assets and to a lesser extent the increase in volume of interest earning assets, offset by an increase in the cost of interest-bearing liabilities portfolio and utilization level of our FHLB line.

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 September 30, 2024, compared with three months ended September 30, 2023: During the three months ended September 30, 2024 and 2003, there was a provision for credit losses of $1.2 million. The provision for the three months ended is primarily attributable to the establishment of reserves on non-PCD loans acquired in the KansasLand acquisitions and loan growth. The Company continues to estimate the allowance for credit losses with assumptions that anticipate slower 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 September 30, 2024 and 2023, were $1.6 million, respectively. For the three months ended September 30, 2024, gross charge-offs were $1.8 million, offset by gross recoveries of $197 thousand. In comparison, gross charge-offs were $1.7 million for the three months ended September 30, 2023, offset by gross recoveries of $65 thousand.

Nine months ended September 30, 2024, compared with nine months ended September 30, 2023: During the nine months ended September 30, 2024, there was a provision for credit losses of $2.4 million compared to a provision for credit losses of $1.2 million during the nine months ended September 30, 2023. The change in provision is primarily attributable to the establishment of reserves on non-PCD loans acquired in the Rockhold and KansasLand acquisitions and loan growth. Net charge-offs for the nine months ended September 30, 2024, were $3.5 million compared to net charge-offs of $2.8 million for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, gross charge-offs were $4.0 million, offset by gross recoveries of $564 thousand. In comparison, gross charge-offs were $3.4 million for the nine months ended September 30, 2023, offset by gross recoveries of $536 thousand.

The primary sources of non-interest income are service charges and fees, debit card income, mortgage banking income, trust 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 September 30, 2024, compared with three months ended September 30, 2023: The following table provides a comparison of the major components of non-interest income for the three months ended September 30, 2024, and 2023.

For the Three Months Ended September 30,

Total non-interest income increased $582 thousand during the three months ended September 30, 2024, as compared to the same period in 2023. The increase is largely attributable to a gain on the acquisition of KansasLand, an increase in bank owned life insurance as well as a decrease in losses on securities transactions, offset by a decrease in other non-interest income.

Nine months ended September 30, 2024, compared with nine months ended September 30, 2023: The following table provides a comparison of the major components of non-interest income for the nine months ended September 30, 2024, and 2023

For the Nine Months Ended September 30,

Total non-interest income increased $5.7 million during the nine months ended September 30, 2024, as compared to the same period in 2023. The increase is largely attributable to increases in recovery on zero-basis purchased loans, net gain on the Rockhold and KansasLand mergers, the lack of realized losses on securities transactions offset by a decrease in other non-interest income.

Three months ended September 30, 2024, compared with three months ended September 30, 2023: For the three months ended September 30, 2024, non-interest expense totaled $30.3 million, a decrease of $3.9 million, when compared to the three months ended September 30, 2023. Changes in the various components of non-interest expense for the three months ended September 30, 2024, and 2023, are discussed in more detail in the following table.

For the Three Months Ended September 30,

Salaries and employee benefits: There was an increase in salaries and employee benefits of $2.6 million for the period ended September 30, 2024, as compared to the same period in 2023. The increase is primarily due to increases in employee salaries, incentive compensation and employee benefits. The increase in employee salaries and wages was partially due to additional payroll costs from the Rockhold and KansasLand mergers.

Data processing: There was an increase in data processing costs of $599 thousand for the period ended September 30, 2024, as compared to the same period in 2023. The increase is primarily due to the renewal of software licenses.

Other real estate owned: The gain on disposition of other real estate owned resulted in a gain of $8.5 million. Excluding the one-time gain, other real estate owned increased by $653 thousand for the period ended September 30, 2024, as compared to the same period in 2023 due to the write-down of a previous bank location.

Amortization of core deposit intangible: Amortization of core deposit intangibles cost increased $313 thousand for the period ended September 30, 2024, as compared to the same period in 2023. The increase is due to additional amortization from the Rockhold and KansasLand mergers.

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 the maturing of legacy tax investments without comparative replacement. New solar tax investments now comply with PAM and no longer impact non-interest expense.

Merger expenses: To facilitate the KansasLand merger the Company realized expense of $618 thousand for the period ended September 30, 2024. No transactions were in process for the comparative period in 2023.

Nine months ended September 30, 2024, compared with nine months ended September 30, 2023: For the nine months ended September 30, 2024, non-interest expense totaled $106.4 million, an increase of $5.7 million, when compared to the nine months ended September 30, 2023. Changes in the various components of non-interest expense for the nine months ended September 30, 2024, and 2023, are discussed in more detail in the following table.

For the Nine Months Ended September 30,

Salaries and employee benefits: There was an increase in salaries and employee benefits of $6.6 million for the period ended September 30, 2024, as compared to the same period in 2023. The increase is primarily due to increases in employee salaries and incentive compensation. The increase in employee salaries and wages was partially due to additional payroll costs from the Rockhold and KansasLand mergers as well as additional staff added during the year. The increase in incentive compensation is partially due to the reversal of stock base compensation expense due to the departure of several senior management members in 2023.

Net occupancy and equipment: There was an increase in net occupancy and equipment costs of $1.7 million for the period ended September 30, 2024, as compared to the same period in 2023. The increase is primarily due to increases in repairs and maintenance expense, depreciation expense and utilities expense partially attributable to current year merger transactions.

Data processing: There was an increase in data processing costs of $2.1 million for the period ended September 30, 2024, as compared to the same period in 2023. The increase is primarily due to the renewal of software licenses.

Amortization of core deposit intangible: Amortization of core deposit intangibles cost increased $594 thousand for the period ended September 30, 2024, as compared to the same period in 2023. The increase is due to additional amortization from the Rockhold and KansasLand mergers.

Other real estate owned: The gain on disposition of other real estate owned resulted in a gain of $8.5 million. Excluding the one-time gain, Other real estate owned increased by $396 thousand for the period ended September 30, 2024, as compared to the same period in 2023.

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, provision for unfunded commitments and the maturing of legacy tax investments without comparative replacement. New solar tax investments now comply with PAM and no longer impact non-interest expense.

Merger expenses: To facilitate the Rockhold and KansasLand mergers the Company realized expense of $4.5 million for the period ended September 30, 2024.

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 54.7% for the three months ended September 30, 2024, compared with 68.8% for the three months ended September 30, 2023. The improvement was primarily due to the reduced non-interest expense from the gain on disposition of other real estate owned. Excluding the gain on disposition of other real estate owned, the efficiency ratio was 70.4% for the three months ended September 30, 2024, compared with 68.8% for the three months ended September 30, 2023.

The efficiency ratio was 62.0% for the nine months ended September 30, 2024, compared with 69.3% for the nine months ended September 30, 2023. The improvement was primarily due to the reduced non-interest expense from the gain on disposition of other real estate owned. Excluding the gain on disposition of other real estate owned, the efficiency ratio was 67.2% for the three months ended September 30, 2024, compared with 69.3% for the three months ended September 30, 2023.

Income Taxes

In general, the Company records income tax expense each quarter based on its estimate of 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 September 30, 2024, compared with three months ended September 30, 2023: The effective income tax rate for the three month period ended September 30, 2024, was 16.7% as compared to 13.5% for the three month period ended September 30, 2023. The increase in rate for the quarter ended September 30, 2024, was primarily attributable to an $11.5 million tax gain and related penalty recognized due to the surrender of BOLI in the second quarter of 2024 offset by the reversal of a deferred tax asset valuation allowance for the expected current and future utilization of state net operating loss carryforwards. In addition, there was a comparative reduction in the recognition of tax benefit related to solar tax investments recognized under the hypothetical liquidation book value, partially offset by a new solar tax investment entered into in the second quarter of 2024 which qualifies for the proportional amortization method.

Nine months ended September 30, 2024, compared with nine months ended September 30, 2023: The effective income tax rate for the nine month period ended September 30, 2024, was 21.2% as compared to 14.1% for the nine month period ended September 30, 2023. See drivers of change in the section above.