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, 2025, compared with three months ended March 31, 2024: Net income allocable to common stockholders for the three months ended March 31, 2025, was $15.0 million, or $0.85 diluted earnings per share as compared to $14.1 million, or $0.90 diluted earnings per share for the three months ended March 31, 2024, an increase of $973 thousand. The increase was largely due to an increase in net interest income of $4.4 million, offset by a decrease of $1.40 million in other income and an increase in other non-interest expense of $1.90 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, 2025, compared with three months ended March 31, 2024: 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, 2025, and 2024. 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 non-accrual 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, 2025, and 2024.

Analysis of Changes in Net Interest Income

(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 $2.9 million for the quarter ended March 31, 2025, as compared to the quarter ended March 31, 2024. Of this increase, $1.8 million is attributable to increases in volume of average asset and $1.1 million is attributable to an increase in the rate/yield on interest earning assets. Realized rate/yield increases on loan were attributable to 22 basis point (bp) increase from non-accrual interest adjustment, a 12 bp increase from hedge accounting net settlements, 3 bp increase from the accretion of merger purchase accounting adjustments and a 2 bp increase from fee income partially offset by a 4 bp decrease from the amortization of loan origination fees and a 2 bp decrease from changes in coupon rates. Interest Income on securities decreased primarily due to a decrease in volume due to maturities and calls and to a lesser extent a decrease in the rate/yield. The decrease in the interest income on federal funds sold and other was primarily due to a decrease in the rate/yield as well as a decrease in volume. The increase in interest income from interest earning assets was primarily from an increase in the rate/yield that was complemented by higher earning asset volume, accounting for the remaining $1.8 million in period over period growth.

The decrease in interest expense of $3.2 million was due to the deposit portfolio repricing, the decrease in Federal Reserve bank borrowing offset by the increased utilization of our FHLB borrowing line.

During the quarter ended March 31, 2025, when compared to the quarter ended March 31, 2024, net interest margin increased 52 basis points and net interest spread increased by 53 basis points to 3.63% from 3.10%. The increase in net interest margin and net interest spread is primarily driven by the increase in loan interest income and the decrease in the cost of interest-bearing deposits.

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, 2025, compared with three months ended March 31, 2024: During the three months ended March 31, 2025 and 2024, there was a provision for credit losses of $2.7 million compared to a provision for credit losses of $1.0 million. The comparatively higher provision for the three months ended March 31, 2025 is primarily attributable to the loan growth as well as a general decline in the economic outlook for the recent volatility and potential stress created by the recent changes to the US trade policy. The Company continues to estimate the allowance for credit losses with assumptions that anticipate slower prepayment rates and continued market disruption caused by trade policy, 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, 2025 and 2024, were $165 thousand and $668 thousand, respectively. For the three months ended March 31, 2025, gross charge-offs were $1.1 million, offset by gross recoveries of $974 thousand. In comparison, gross charge-offs were $882 thousand for the three months ended March 31, 2024, offset by gross recoveries of $215 thousand.

Non-Interest Income

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 March 31, 2025, compared with three months ended March 31, 2024: The following table provides a comparison of the major components of non-interest income for the three months ended March 31, 2025, and 2024.

Non-Interest Income

For the Three Months Ended March 31,

Total non-interest income decreased $1.4 million during the three months ended March 31, 2025, as compared to the same period in 2024. The decrease is largely attributable to a reduction in the recovery on zero basis loans and gain on acquisition offset by an increase in the value of bank owned life insurance. During the quarter, the Bank realized a death benefit on an insured under its bank owned life insurance program. This benefit drove the comparative increase noted above. The increase in other other non-interest income is comprised of a number of insignificant changes by other income categories.

Non-Interest Expense

Three months ended March 31, 2025, compared with three months ended March 31, 2024: For the three months ended March 31, 2025, non-interest expense totaled $39.1 million, an increase of $1.9 million, when compared to the three months ended March 31, 2024. Changes in the various components of non-interest expense for the three months ended March 31, 2025, and 2024, 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 $1.9 million for the period ended March 31, 2025, as compared to the same period in 2024. The increase in employee salaries and wages was primarily due to additional payroll costs as well as an increase in incentive compensation and stock related compensation expense, which is partially driven by the increase in staff from 2024 Rockhold and KansasLand mergers.

Data processing: There was an increase in data processing costs of $258 thousand for the period ended March 31, 2025, as compared to the same period in 2024. The increase is primarily due to the renewal of software licenses.

Amortization of core deposit intangible: Amortization of core deposit intangibles cost increased $146 thousand for the period ended March 31, 2025, as compared to the same period in 2024. 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 overall increase is comprised of a number of insignificant changes by expense categories noted above.

Merger expenses: The decrease is primarily due to the completion of the Rockhold merger in the prior period and the preliminary work for the recently announced NBC merger, which is expected to close in second quarter of 2025.

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 goodwill impairment, merger expenses and loss on debt extinguishment, by the sum of net interest income and non-interest income, excluding net gains on sales of and settlement of securities and gain on acquisition. 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 62.43% for the three months ended March 31, 2025, compared with 63.45% for the three months ended March 31, 2024. The improvement was primarily due to the a greater percentage increase in interest and other income compared to the percentage increase in non-interest expenses.

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 March 31, 2025, compared with three months ended March 31, 2024: The effective income tax rate for the three month period ended March 31, 2025, was 20.2% as compared to 20.8% for the three month period ended March 31, 2024. The decrease in rate for the quarter ended March 31, 2025 is the result of increased tax benefits related to non-taxable bank owned life insurance, stock compensation, and a reduction in non-deductible transaction costs in the current quarter when compared to the quarter ended March 31, 2024 offset by a tax benefit related to a bargain purchase gain recognized in the quarter ended March 31, 2024.