EQUITY BANCSHARES INC - Quarter Report: 2019 September (Form 10-Q)

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 September 30, 2019

☐	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 October 31, 2019, the registrant had 15,442,584 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	41
	Overview	41
	Critical Accounting Policies	43
	Results of Operations	45
	Financial Condition	55
	Liquidity and Capital Resources	67
	Non-GAAP Financial Measures	69
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	71
Item 4.	Controls and Procedures	73
Part II	Other Information	75
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibits	75

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.

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;

•

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;

•

our ability to remediate, on a timely basis, our material weakness in our control over financial reporting, relating to the reconciliation process, for a portion of our corporate accounts to our general ledger, 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.

PART I

Item 1: Financial Statements

EQUITY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2019 and December 31, 2018

(Dollar amounts in thousands)

	(Unaudited) September 30,			December 31,
	2019			2018
ASSETS
Cash and due from banks	$	167,895		$	192,735
Federal funds sold		158			83
Cash and cash equivalents		168,053			192,818
Interest-bearing time deposits in other banks		3,497			4,991
Available-for-sale securities		152,680			168,875
Held-to-maturity securities, fair value of $778,966 and $739,989		764,163			748,356
Loans held for sale		8,784			2,972
Loans, net of allowance for loan losses of $17,875 and $11,454		2,583,049			2,563,954
Other real estate owned, net		5,944			6,372
Premises and equipment, net		84,481			80,442
Bank-owned life insurance		74,599			73,105
Federal Reserve Bank and Federal Home Loan Bank stock		31,710			29,214
Interest receivable		16,994			17,372
Goodwill		136,432			131,712
Core deposit intangibles, net		20,727			21,725
Other		23,550			19,808
Total assets	$	4,074,663		$	4,061,716
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand	$	488,214		$	503,831
Total non-interest-bearing deposits		488,214			503,831
Savings, NOW, and money market		1,689,606			1,611,710
Time		929,109			1,007,906
Total interest-bearing deposits		2,618,715			2,619,616
Total deposits		3,106,929			3,123,447
Federal funds purchased and retail repurchase agreements		40,652			50,068
Federal Home Loan Bank advances		410,093			384,898
Bank stock loan		14,770			15,450
Subordinated debentures		14,485			14,260
Contractual obligations		3,744			3,965
Interest payable and other liabilities		16,940			13,687
Total liabilities		3,607,613			3,605,775
Commitments and contingent liabilities, see Notes 11 and 12
Stockholders’ equity, see Note 7
Common stock		174			173
Additional paid-in capital		382,155			379,085
Retained earnings		115,743			101,326
Accumulated other comprehensive loss		(423	)		(4,867	)
Employee stock loans		(77	)		(121	)
Treasury stock		(30,522	)		(19,655	)
Total stockholders’ equity		467,050			455,941
Total liabilities and stockholders’ equity	$	4,074,663		$	4,061,716

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months ended September 30, 2019 and 2018

(Dollar amounts in thousands, except per share data)

	(Unaudited) Three Months Ended September 30,						(Unaudited) Nine Months Ended September 30,
	2019			2018			2019		2018
Interest and dividend income
Loans, including fees	$	38,051		$	36,335		$	112,611	$	98,484
Securities, taxable		4,673			4,836			14,724		12,671
Securities, nontaxable		1,045			1,097			3,143		3,001
Federal funds sold and other		780			754			2,037		1,820
Total interest and dividend income		44,549			43,022			132,515		115,976
Interest expense
Deposits		10,507			6,510			32,381		16,566
Federal funds purchased and retail repurchase agreements		50			30			116		77
Federal Home Loan Bank advances		1,957			3,155			5,103		6,548
Bank stock loan		198			265			507		448
Subordinated debentures		311			307			955		875
Total interest expense		13,023			10,267			39,062		24,514
Net interest income		31,526			32,755			93,453		91,462
Provision for loan losses		679			1,291			17,299		3,211
Net interest income after provision for loan losses		30,847			31,464			76,154		88,251
Non-interest income
Service charges and fees		2,268			1,912			6,431		5,221
Debit card income		2,205			1,667			6,129		4,442
Mortgage banking		820			392			1,699		1,017
Increase in value of bank-owned life insurance		507			521			1,494		1,681
Net gain (loss) from securities transactions		4			(4	)		17		(14	)
Other		768			945			2,577		1,929
Total non-interest income		6,572			5,433			18,347		14,276
Non-interest expense
Salaries and employee benefits		13,039			12,361			40,204		34,881
Net occupancy and equipment		2,177			2,125			6,332		5,938
Data processing		2,673			2,195			7,436		5,837
Professional fees		991			686			3,375		2,245
Advertising and business development		806			802			2,174		2,086
Telecommunications		523			451			1,593		1,252
FDIC insurance		111			457			1,119		1,211
Courier and postage		352			321			1,020		879
Free nationwide ATM cost		459			364			1,240		986
Amortization of core deposit intangibles		784			694			2,348		1,703
Loan expense		165			319			608		810
Other real estate owned		(88	)		355			326		(48	)
Merger expenses		—			757			915		6,524
Other		2,231			1,760			6,099		4,945
Total non-interest expense		24,223			23,647			74,789		69,249
Income before income taxes		13,196			13,250			19,712		33,278
Provision for income taxes		2,790			2,928			4,147		7,378
Net income and net income allocable to common stockholders	$	10,406		$	10,322		$	15,565	$	25,900
Basic earnings per share	$	0.67		$	0.65		$	0.99	$	1.70
Diluted earnings per share	$	0.66		$	0.64		$	0.98	$	1.66

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months ended September 30, 2019 and 2018

(Dollar amounts in thousands)

	(Unaudited) Three Months Ended September 30,						(Unaudited) Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	10,406		$	10,322		$	15,565		$	25,900
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period on available-for-sale securities		952			(1,565	)		5,240			(5,701	)
Amortization of unrealized losses on held-to-maturity securities		209			114			714			348
Total other comprehensive income (loss)		1,161			(1,451	)		5,954			(5,353	)
Tax effect		(293	)		368			(1,510	)		1,357
Other comprehensive income (loss), net of tax		868			(1,083	)		4,444			(3,996	)
Comprehensive income	$	11,274		$	9,239		$	20,009		$	21,904

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended September 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 July 1, 2018		15,780,777		$	173	$	377,800	$	81,079	$	(5,994	)	$	(121	)	$	(19,655	)	$	433,282
Net income		—			—		—		10,322		—			—			—			10,322
Other comprehensive loss, net of tax effects		—			—		—		—		(1,083	)		—			—			(1,083	)
Stock based compensation		—			—		611		—		—			—			—			611
Common stock issued upon exercise of stock options		5,150			—		105		—		—			—			—			105
Common stock issued under stock-based incentive plan		6,768			—		—		—		—			—			—			—
Balance at September 30, 2018		15,792,695		$	173	$	378,516	$	91,401	$	(7,077	)	$	(121	)	$	(19,655	)	$	443,237

Balance at July 1, 2019		15,563,873		$	173	$	381,133	$	105,337	$	(1,291	)	$	(83	)	$	(26,863	)	$	458,406
Net income		—			—		—		10,406		—			—			—			10,406
Other comprehensive income, net of tax effects		—			—		—		—		868			—			—			868
Stock based compensation		—			—		617		—		—			—			—			617
Common stock issued upon exercise of stock options		—			—		—		—		—			—			—			—
Common stock issued under stock-based incentive plan		450			1		—		—		—			—			—			1
Common stock issued under employee stock purchase plan		19,221			—		405		—		—			—			—			405
Treasury stock purchases		(143,210	)		—		—		—		—			—			(3,659	)		(3,659	)
Repayment on employee stock loans		—			—		—		—		—			6			—			6
Balance at September 30, 2019		15,440,334		$	174	$	382,155	$	115,743	$	(423	)	$	(77	)	$	(30,522	)	$	467,050

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months ended September 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		—			—		—		25,900			—			—			—			25,900
Other comprehensive loss, net of tax effects		—			—		—		—			(3,996	)		—			—			(3,996	)
Stock based compensation		1,375			—		1,950		—			—			—			—			1,950
Common stock issued upon exercise of stock options		6,400			—		123		—			—			—			—			123
Common stock issued under stock-based incentive plan		14,401			—		—		—			—			—			—			—
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 September 30, 2018		15,792,695		$	173	$	378,516	$	91,401		$	(7,077	)	$	(121	)	$	(19,655	)	$	443,237

Balance at January 1, 2019		15,793,095		$	173	$	379,085	$	101,326		$	(4,867	)	$	(121	)	$	(19,655	)	$	455,941
Net income		—			—		—		15,565			—			—			—			15,565
Other comprehensive income, net of tax effects		—			—		—		—			4,444			—			—			4,444
Stock based compensation		9,104			—		2,349		—			—			—			—			2,349
Common stock issued upon exercise of stock options		17,502			—		316		—			—			—			—			316
Common stock issued under stock-based incentive plan		22,428			1		—		—			—			—			—			1
Common stock issued under employee stock purchase plan		19,221			—		405		—			—			—			—			405
Treasury stock purchases		(421,016	)		—		—		—			—			—			(10,867	)		(10,867	)
Repayment on employee stock loans		—			—		—		—			—			44			—			44
Cumulative effect of change in accounting principle from implementation of ASU 2017-08		—			—		—		(1,148	)		—			—			—			(1,148	)
Balance at September 30, 2019		15,440,334		$	174	$	382,155	$	115,743		$	(423	)	$	(77	)	$	(30,522	)	$	467,050

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months ended September 30, 2019 and 2018

(Dollar amounts in thousands, except per share data)

	(Unaudited) September 30,
	2019			2018
Cash flows from operating activities
Net income	$	15,565		$	25,900
Adjustments to reconcile net income to net cash from operating activities:
Stock-based compensation		2,349			1,950
Depreciation		2,637			2,276
Amortization of operating lease right-of-use asset		465			—
Amortization of cloud computing implementation costs		73			—
Provision for loan losses		17,299			3,211
Net (accretion) amortization of purchase accounting adjustments		(3,639	)		(4,090	)
Amortization of premiums and discounts on securities		4,315			2,364
Amortization of intangibles		2,385			1,740
Deferred income taxes		(383	)		(150	)
FHLB stock dividends		(704	)		(1,053	)
Loss (gain) on sales and valuation adjustments on other real estate owned		(143	)		(384	)
Net loss (gain) on securities transactions		—			(1	)
Change in unrealized loss (gain) on equity securities		(17	)		15
Loss (gain) on disposal of premises and equipment		(10	)		(189	)
Loss (gain) on sale of foreclosed assets		11			(7	)
Loss (gain) on sales of loans		(1,405	)		(842	)
Originations of loans held for sale		(71,483	)		(35,285	)
Proceeds from the sale of loans held for sale		67,076			36,783
Increase in the value of bank-owned life insurance		(1,494	)		(1,681	)
Change in fair value of derivatives		502			(9	)
Payments on operating lease payable		(583	)		—
Net change in:
Interest receivable		394			(2,012	)
Other assets		(3,104	)		90
Interest payable and other liabilities		760			953
Net cash provided by (used in) operating activities		30,866			29,579
Cash flows from (to) investing activities
Purchases of available-for-sale securities		—			(36,007	)
Purchases of held-to-maturity securities		(106,019	)		(96,239	)
Proceeds from sales, calls, pay-downs and maturities of available-for-sale securities		20,096			52,571
Proceeds from calls, pay-downs and maturities of held-to-maturity securities		86,565			53,707
Net change in interest-bearing time deposits in other banks		1,494			992
Net change in loans		(26,499	)		(160,479	)
Capitalized construction cost of other real estate owned		(56	)	—
Purchase of premises and equipment		(6,020	)		(7,081	)
Proceeds from sale of premises and equipment		10			1,200
Proceeds from sale of foreclosed assets		312			170
Net redemption (purchase) of FHLB and FRB stock		(1,792	)		(11,864	)
Proceeds from sale of other real estate owned		1,331			2,991
Proceeds from bank-owned life insurance death benefits		—			347
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	)
Purchase of City Bank, net of cash acquired		—			8,759
Net cash received from acquisition of MidFirst locations		85,360			—
Net cash provided by (used in) investing activities		54,782			(179,599	)
Cash flows from (to) financing activities

Net increase (decrease) in deposits		(115,208	)		(73,220	)
Net change in federal funds purchased and retail repurchase agreements		(9,416	)		5,758
Net borrowings (payments) on Federal Home Loan Bank line of credit		27,453			205,365
Principal payments on Federal Home Loan Bank term advances		(2,240	)		(500	)
Proceeds from bank stock loan		7,208			22,500
Principal payments on bank stock loan		(7,888	)		(588	)
Principal payments on employee stock loans		44			—
Proceeds from the exercise of employee stock options		317			123
Proceeds from employee stock purchase plan		405			—
Purchase of treasury stock		(10,867	)		—
Net change in contractual obligations		(221	)		(234	)
Net cash provided by (used in) financing activities		(110,413	)		159,204
Net change in cash and cash equivalents		(24,765	)		9,184
Cash and cash equivalents, beginning of period		192,818			52,195
Ending cash and cash equivalents	$	168,053		$	61,379
Supplemental cash flow information:
Interest paid	$	37,536		$	22,894
Income taxes paid, net of refunds		1,786			7,281
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans	$	906		$	1,408
Operating leases recognized		3,546			—
Total fair value of assets acquired in purchase of KBC, net of cash		—			294,215
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 City Bank, net of cash		—			129,758
Total fair value of liabilities assumed in purchase of City Bank		—			144,353
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.

EQUITY BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine months ended September 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

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 finalizing the testing of the model and ensuring all internal controls related to model processing, ongoing data validation and reporting are in place and operating as intended for processing a parallel run as of September 30, 2019. 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
September 30, 2019
Available-for-sale securities
Residential mortgage-backed securities (issued by government-sponsored entities)	$	152,068	$	1,024	$	(412	)	$	152,680
	$	152,068	$	1,024	$	(412	)	$	152,680
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

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
September 30, 2019
Held-to-maturity securities
U.S. Government-sponsored entities	$	2,739	$	25	$	(4	)	$	2,760
Residential mortgage-backed (securities issued by government sponsored entities)		584,230		11,339		(681	)		594,888
Corporate		22,992		366		(39	)		23,319
Small Business Administration loan pools		1,478		37		—			1,515
State and political subdivisions		152,724		3,783		(23	)		156,484
	$	764,163	$	15,550	$	(747	)	$	778,966
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 September 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	$	—	$	—	$	15,851	$	15,888
One to five years		—		—		33,321		34,018
Five to ten years	—		—			54,978		56,338
After ten years		—		—		75,783		77,834
Mortgage-backed securities		152,068		152,680		584,230		594,888
Total debt securities	$	152,068	$	152,680	$	764,163	$	778,966

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $750,299 at September 30, 2019 and $800,744 at December 31, 2018.

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 September 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
September 30, 2019
Available-for-sale securities
Residential mortgage-backed (issued by government-sponsored entities)	$	9,842	$	(12	)	$	39,655	$	(400	)	$	49,497	$	(412	)
Total temporarily impaired securities	$	9,842	$	(12	)	$	39,655	$	(400	)	$	49,497	$	(412	)
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
September 30, 2019
Held-to-maturity securities
U.S. Government-sponsored entities	$	—	$	—		$	996	$	(4	)	$	996	$	(4	)
Residential mortgage-backed (issued by government-sponsored entities)		19,383		(65	)		128,867		(811	)		148,250		(876	)
Corporate		7,840		(39	)		—		—			7,840		(39	)
Small Business Administration loan pools		818		(8	)		—		—			818		(8	)
State and political subdivisions		2,431		(4	)		785		(2	)		3,216		(6	)
Total temporarily impaired securities	$	30,472	$	(116	)	$	130,648	$	(817	)	$	161,120	$	(933	)
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 September 30, 2019, the Company held 18 available-for-sale securities and 106 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.

The proceeds from sales and the associated gains and losses on available-for-sale securities reclassified from other comprehensive income to income are listed in the table below.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Proceeds	$	—	$	—	$	—	$	33,419
Gross gains		—		—		—		—
Gross losses		—		—		—		—
Income tax expense on net realized gains		—		—		—		—

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	September 30, 2019			December 31, 2018
Commercial real estate	$	1,183,305		$	1,231,217
Commercial and industrial		585,797			601,782
Residential real estate		531,257			446,060
Agricultural real estate		143,718			139,332
Consumer		70,944			62,894
Agricultural		85,903			94,123
Total loans		2,600,924			2,575,408
Allowance for loan losses		(17,875	)		(11,454	)
Net loans	$	2,583,049		$	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 nine months of 2019, the Company purchased eight pools of residential real estate loans totaling $130,502. As of September 30, 2019 and December 31, 2018, residential real estate loans include $161,548 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 $8,990 with related loans of $666,671 at September 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 $916 at September 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 September 30, 2019 and 2018.

September 30, 2019	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	4,712		$	7,948		$	2,908		$	525		$	1,344		$	340		$	17,777
Provision for loan losses		396			49			(324	)		131			241			186			679
Loans charged-off		(506	)		(18	)		(355	)		(9	)		(313	)		(5	)		(1,206	)
Recoveries		47			17			450			38			73			—			625
Total ending allowance balance	$	4,649		$	7,996		$	2,679		$	685		$	1,345		$	521		$	17,875

September 30, 2018	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	3,495		$	2,254		$	2,663		$	334		$	983		$	354		$	10,083
Provision for loan losses		734			287			(20	)		28			330			(68	)		1,291
Loans charged-off		(90	)		(3	)		(91	)		(13	)		(526	)		—			(723	)
Recoveries		11			22			56			13			256			1			359
Total ending allowance balance	$	4,150		$	2,560		$	2,608		$	362		$	1,043		$	287		$	11,010

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

September 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		981			13,979			805			299			973			262			17,299
Loans charged-off		(1,114	)		(8,756	)		(934	)		(43	)		(994	)		(47	)		(11,888	)
Recoveries		120			66			488			38			296			2			1,010
Total ending allowance balance	$	4,649		$	7,996		$	2,679		$	685		$	1,345		$	521		$	17,875

September 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		1,241			483			455			120			865			47			3,211
Loans charged-off		(119	)		(89	)		(362	)		(93	)		(1,035	)		(43	)		(1,741	)
Recoveries		288			30			253			16			445			10			1,042
Total ending allowance balance	$	4,150		$	2,560		$	2,608		$	362		$	1,043		$	287		$	11,010

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 September 30, 2019 and December 31, 2018.

September 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	$	436	$	5,238	$	364	$	157	$	63	$	101	$	6,359
Collectively evaluated for impairment		3,343		2,744		2,293		430		1,282		325		10,417
Purchased credit impaired loans		870		14		22		98		—		95		1,099
Total	$	4,649	$	7,996	$	2,679	$	685	$	1,345	$	521	$	17,875
Loan Balance:
Individually evaluated for impairment	$	5,327	$	21,341	$	8,682	$	1,115	$	624	$	749	$	37,838
Collectively evaluated for impairment		1,165,740		558,958		519,818		137,063		70,292		83,044		2,534,915
Purchased credit impaired loans		12,238		5,498		2,757		5,540		28		2,110		28,171
Total	$	1,183,305	$	585,797	$	531,257	$	143,718	$	70,944	$	85,903	$	2,600,924

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

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 September 30, 2019 and December 31, 2018. The recorded investment in loans excludes accrued interest receivable due to immateriality.

	September 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	$	3,287	$	2,962	$	—	$	1,685	$	1,647	$	—
Commercial and industrial		557		546		—		22,701		22,651		—
Residential real estate		5,072		5,040		—		533		527		—
Agricultural real estate		964		933		—		2,038		2,035		—
Consumer		32		—		—		61		55		—
Agricultural		—		—		—		756		756		—
Subtotal		9,912		9,481		—		27,774		27,671		—
With an allowance recorded:
Commercial real estate		8,434		6,830		1,305		8,700		7,179		967
Commercial and industrial		21,108		20,933		5,252		2,255		1,911		214
Residential real estate		4,073		3,859		387		4,934		4,582		459
Agricultural real estate		1,560		1,439		255		261		242		24
Consumer		689		624		63		1,144		859		145
Agricultural		1,843		1,591		196		162		106		11
Subtotal		37,707		35,276		7,458		17,456		14,879		1,820
Total	$	47,619	$	44,757	$	7,458	$	45,230	$	42,550	$	1,820

The tables below present average recorded investment and interest income related to impaired loans for the three and nine months ended September 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
	September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	3,327	$	3	$	1,938	$	14
Commercial and industrial		808		—		4,664		—
Residential real estate		7,800		19		918		6
Agricultural real estate		1,750		—		2,299		6
Consumer		15		—		53		—
Agricultural		161		—		417		—
Subtotal		13,861		22		10,289		26
With an allowance recorded:
Commercial real estate		7,032		—		2,463		79
Commercial and industrial		21,066		9		856		16
Residential real estate		3,891		20		4,309		16
Agricultural real estate		1,296		2		264		—
Consumer		728		4		480		1
Agricultural		1,128		—		143		—
Subtotal		35,141		35		8,515		112
Total	$	49,002	$	57	$	18,804	$	138

	As of and for the nine months ended
	September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	7,427	$	82	$	1,840	$	132
Commercial and industrial		2,064		5		6,188		66
Residential real estate		4,161		50		798		16
Agricultural real estate		1,804		—		1,196		18
Consumer		31		—		26		—
Agricultural		300		—		324		18
Subtotal		15,787		137		10,372		250
With an allowance recorded:
Commercial real estate		7,140		74		1,847		81
Commercial and industrial		18,528		12		858		16
Residential real estate		6,965		28		4,090		38
Agricultural real estate		907		2		476		2
Consumer		772		9		495		4
Agricultural		663		2		496		4
Subtotal		34,975		127		8,262		145
Total	$	50,762	$	264	$	18,634	$	395

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

September 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	$	2,514	$	704	$	—	$	12,311	$	1,167,776	$	1,183,305
Commercial and industrial		413		315		—		21,945		563,124		585,797
Residential real estate		779		1,582		3		9,342		519,551		531,257
Agricultural real estate		67		46		—		5,206		138,399		143,718
Consumer		246		147		49		624		69,878		70,944
Agricultural		73		—		—		1,591		84,239		85,903
Total	$	4,092	$	2,794	$	52	$	51,019	$	2,542,967	$	2,600,924

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

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 September 30, 2019 and December 31, 2018.

September 30, 2019	Unclassified		Classified		Total
Commercial real estate	$	1,165,707	$	17,598	$	1,183,305
Commercial and industrial		535,939		49,858		585,797
Residential real estate		521,906		9,351		531,257
Agricultural real estate		130,920		12,798		143,718
Consumer		70,320		624		70,944
Agricultural		80,259		5,644		85,903
Total	$	2,505,051	$	95,873	$	2,600,924

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 September 30, 2019 and December 31, 2018.

	September 30, 2019			December 31, 2018
Contractually required principal payments	$	36,150		$	40,772
Discount		(7,979	)		(10,077	)
Recorded investment	$	28,171		$	30,695

The accretable yield associated with these loans was $3,758 and $3,785 as of September 30, 2019 and December 31, 2018. The interest income recognized on these loans for the three-month periods ended September 30, 2019, and 2018, was $1,479 and $631. The interest income recognized on these loans for the nine-month periods ended September 30, 2019, and 2018, was $2,011 and

$2,009. For the three and nine-month periods ended September 30, 2019, there was a provision for loan losses of $28 and $191 recorded for these loans. For the three and nine-month periods ended September 30, 2018, there was a provision for loan losses of $612 and $466 for these loans.

Troubled Debt Restructurings

The Company had no loans modified under troubled debt restructurings as of September 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 September 30, 2019, the portfolio of interest rate swaps had a weighted average maturity of 7.5 years, a weighted average pay rate of 5.19% and a weighted average rate received of 5.10%. 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 September 30, 2019, this portfolio of interest rate swaps had a weighted average maturity of 9.0 years, weighted average pay rate of 5.04% and a weighted average rate received of 5.04%. 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 September 30, 2019, the interest rate cap had a term of 0.1 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.

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

	September 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	$	5,848	$	3	$	251		$	16,743	$	242		$	—
Total derivatives designated as hedging relationships		5,848		3		251			16,743		242			—
Derivatives not designated as hedging instruments:
Interest rate swaps		114,835		4,536		5,125			38,073		690			777
Interest rate caps/floors		2,046		—		—			2,264		1			—
Total derivatives not designated as hedging instruments		116,881		4,536		5,125			40,337		691			777
Total	$	122,729		4,539		5,376		$	57,080		933			777
Cash collateral				—		(5,740	)				(531	)		(541	)
Netting adjustments				364		364					289			289
Net amount presented in Balance Sheet			$	4,903	$	—				$	691		$	525

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

	September 30, 2019
	Carrying Amount		Hedging Fair Value Adjustment		Fair Value Adjustments on Discontinued Hedges
Commercial real estate loans	$	6,094	$	248	$	—
Total	$	6,094	$	248	$	—

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 nine-month periods ended September 30, 2019 and 2018, the Company recorded net gains/(losses) on derivatives and hedging activities.

	Three months ended					Nine months ended
	September 30, 2019			September 30, 2018		September 30, 2019			September 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		(180	)		82		(501	)		82
Interest rate caps/floors		—			—		(1	)		—
Total net gains (losses) related to derivatives not designated as hedging instruments		(180	)		82		(502	)		82
Net gains (losses) on derivatives and hedging activities	$	(180	)	$	82	$	(502	)	$	82

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 September 30, 2019 and 2018.

	September 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	$	307	$	(307	)	$	—	$	2
Total	$	307	$	(307	)	$	—	$	2

	September 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	$	157	$	(157	)	$	—	$	(6	)
Total	$	157	$	(157	)	$	—	$	(6	)

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 nine-month periods ended September 30, 2019 and 2018.

	September 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	$	(489	)	$	489	$	—	$	21
Total	$	(489	)	$	489	$	—	$	21

	September 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	$	740	$	(740	)	$	—	$	(44	)
Total	$	740	$	(740	)	$	—	$	(44	)

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.

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 September 30, 2019, the Company had lease liabilities totaling $3,031 and right-of-use assets totaling $3,075 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.

	September 30, 2019
Operating Leases	Right-of-Use Asset		Lease Liability		Weighted Average Lease Term in Years		Weighted Average Discount Rate
Land and building leases	$	3,048	$	2,998		13.9		3.08	%
Equipment leases		27		33		2.3		2.59	%
Total operating leases	$	3,075	$	3,031		13.8		3.08	%

Operating lease costs are listed below.

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	185	$	540
Short-term lease cost		—		—
Variable lease cost		12		35
Total operating lease cost	$	197	$	575

Rent expense for the three and nine-month periods ending September 30, 2018, prior to the adoption of ASU 2016-02, were $189 and $512.

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 nine-month periods ended September 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	September 30, 2019
Due in one year or less	$	628
Due after one year through two years		488
Due after two years through three years		431
Due after three years through four years		357
Due after four years through five years		163
Thereafter		1,815
Total undiscounted cash flows		3,882
Discount on cash flows		(851	)
Total operating lease liability	$	3,031

NOTE 6 – BORROWINGS

Federal funds purchased and retail repurchase agreements

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

September 30,

2019

December 31,

2018

Federal funds purchased

—

Retail repurchase agreements

40,652

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 $49,571 and $51,701 at September 30, 2019 and December 31, 2018. The agreements are on a day-to-day basis and can be terminated on demand.

	September 30, 2019			December 31, 2018
Year-to-date average daily balance during the period	$	43,054		$	43,536
Maximum month-end balance year-to-date	$	45,575		$	53,815
Weighted average interest rate at period-end		0.46	%		0.28	%

Federal Home Loan Bank advances

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

	September 30, 2019		Weighted Average Rate			Weighted Average Term in Years
Federal Home Loan Bank line of credit advances	$	396,223		2.20	%	—
Federal Home Loan Bank fixed-rate term advances		13,809		2.80	%		2.8
Total principal outstanding		410,032
Merger purchase accounting adjustment		61
Total Federal Home Loan Bank advances	$	410,093

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 $864,569 and $951,196 at September 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 $415,089 and $534,627 at September 30, 2019 and December 31, 2018.

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

Due in one year or less	$	399,211
Due after one year through two years		2,357
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		1,643
Total	$	410,032

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 September 30, 2019 are listed below.

September 30,

2019

Weighted Average Rate

Weighted Average Term in Years

Bank stock loan

14,770

5.00

4.2

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 September 30, 2019 outstanding balances are as follows.

Due in one year or less	$	2,326
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		3,626
Due after four years through five years		4,166
Thereafter		—
Total	$	14,770

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.

Subordinated Debentures

In conjunction with prior acquisitions, the Company assumed certain subordinated debentures owed to special purpose unconsolidated subsidiaries that are controlled by the Company.

FCB Capital Trust II (“CTII”): 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 securities. These trust preferred securities are mandatorily redeemable upon maturity on April 15, 2035, or upon earlier redemption.

FCB Capital Trust III (“CTIII”): 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 securities. These trust preferred securities are mandatorily redeemable upon maturity on June 15, 2037, or upon earlier redemption.

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 securities. These trust preferred securities are mandatorily redeemable upon maturity on December 26, 2032, or upon earlier redemption.

Subordinated debentures as of September 30, 2019 and December 31, 2018 are listed below.

	September 30, 2019			Weighted Average Rate			Weighted Average Term in Years
CTII subordinated debentures	$	10,310			4.30	%	15.6
CTIII subordinated debentures		5,155			4.01	%		17.7
CFSTI subordinated debentures		5,155			5.36	%	13.2
Total contractual balance		20,620
Fair market value adjustments		(6,135	)
Total subordinated debentures	$	14,485

	December 31, 2018			Weighted Average Rate			Weighted Average Term in Years
CTII subordinated debentures	$	10,310			4.44	%	16.3
CTIII subordinated debentures		5,155			4.68	%		18.5
CFSTI subordinated debentures		5,155			6.07	%		14.0
Total contractual balance		20,620
Fair market value adjustments		(6,360	)
Total subordinated debentures	$	14,260

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 September 30, 2019 and December 31, 2018, there was no preferred stock outstanding.

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 September 30, 2019 and December 31, 2018.

	September 30, 2019			December 31, 2018
Class A common stock – issued		17,132,393			17,064,138
Class A common stock – held in treasury		(1,692,059	)		(1,271,043	)
Class A common stock – outstanding		15,440,334			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 ended on August 14, 2019. In connection with the first offering, a total of 19,221 shares were purchased at a price of $21.07 per share. The second offering period began August 15, 2019, and will end February 14, 2020. ESPP compensation expense of $27 and $89 was recorded for the three and nine-month periods ended September 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 third quarter of 2019, the Company repurchased a total of 143,210 shares of the Company’s outstanding common stock at an average price paid of $25.55 per share. A total of 421,016 shares have been purchased pursuant to the repurchase program at an average price paid of $25.81.

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 $77 at September 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 September 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 September 30, 2019 and December 31, 2018, are listed below.

	Available-for- Sale Securities			Held-to- Maturity Securities			Accumulated Other Comprehensive Income (Loss)
September 30, 2019
Net unrealized or unamortized gains (losses)	$	612		$	(1,177	)	$	(565	)
Tax effect		(154	)		296			142
	$	458		$	(881	)	$	(423	)
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	)

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 September 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.

The Company’s and Equity Bank’s capital amounts and ratios at September 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
September 30, 2019
Total capital to risk weighted assets
Equity Bancshares, Inc.	$	347,082		12.21	%	$	298,357		10.50	%	$	298,357		10.50	%	$	N/A	N/A
Equity Bank		342,244		12.06	%		298,044		10.50	%		298,044		10.50	%		283,851		10.00	%
Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		329,207		11.59	%		241,527		8.50	%		241,527		8.50	%	N/A		N/A
Equity Bank		324,369		11.43	%		241,274		8.50	%		241,274		8.50	%		227,081		8.00	%
Common equity Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		314,722		11.08	%		198,905		7.00	%		198,905		7.00	%	N/A		N/A
Equity Bank		324,369		11.43	%		198,696		7.00	%		198,696		7.00	%		184,503		6.50	%
Tier 1 leverage to average assets
Equity Bancshares, Inc.		329,207		8.49	%		155,020		4.00	%		155,020		4.00	%	N/A		N/A
Equity Bank		324,369		8.38	%		154,778		4.00	%		154,778		4.00	%		193,473		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.

NOTE 9 – EARNINGS PER SHARE

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

	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Basic:
Net income allocable to common stockholders	$	10,406	$	10,322	$	15,565	$	25,900
Weighted average common shares outstanding		15,513,969		15,787,760		15,677,972		15,253,589
Weighted average vested restricted stock units		73		1,692		1,584		5,887
Weighted average shares		15,514,042		15,789,452		15,679,556		15,259,476
Basic earnings per common share	$	0.67	$	0.65	$	0.99	$	1.70
Diluted:
Net income allocable to common stockholders	$	10,406	$	10,322	$	15,565	$	25,900
Weighted average common shares outstanding for:
Basic earnings per common share		15,514,042		15,789,452		15,679,556		15,259,476
Dilutive effects of the assumed exercise of stock options		178,285		316,181		201,024		300,171
Dilutive effects of the assumed vesting of restricted stock units		15,711		30,974		16,025		18,370
Average shares and dilutive potential common shares		15,708,038		16,136,607		15,896,605		15,578,017
Diluted earnings per common share	$	0.66	$	0.64	$	0.98	$	1.66

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				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Stock options		347,528		35,305		315,522		23,425
Restricted stock units		141,693		—		2,197		—
Total antidilutive shares		489,221		35,305		317,719		23,425

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 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 and equity securities with readily determinable fair value 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.

	September 30, 2019
	(Level 1)			(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
Residential mortgage-backed securities (issued by government-sponsored entities)	$	—		$	152,680	$	—
Derivative assets:
Derivative assets (included in other assets)		—			4,539		—
Cash collateral held by counterparty and netting adjustments		364			—		—
Total derivative assets		364			4,539		—
Other assets:
Equity securities with readily determinable fair value		492			—		—
Total other assets		492			—		—
Total assets	$	856		$	157,219	$	—
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)	$	—		$	5,376	$	—
Cash collateral held by counterparty and netting adjustments		(5,376	)		—		—
Total derivative liabilities		(5,376	)		5,376		—
Total liabilities	$	(5,376	)	$	5,376	$	—

	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 nine months ended September 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.

	September 30, 2019
	(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate	$	—	$	—	$	5,525
Commercial and industrial		—		—		15,681
Residential real estate		—		—		3,472
Agricultural real estate		—		—		1,184
Other		—		—		1,956
Other real estate owned:
Commercial real estate		—		—		1,667
Residential real estate		—		—		33

	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 September 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 (weighted average) or Multiple of Earnings
September 30, 2019
Impaired real estate loans	$	13,553	Sales Comparison Approach	Adjustments for differences between comparable sales	9% - 26% (17%)
Impaired other loans	$	14,265	Multiple of Earnings	Multiples of earnings for comparable entities	5.3X
December 31, 2018
Impaired loans	$	13,059	Sales Comparison Approach	Adjustments for differences between comparable sales	4% - 22% (13%)

Measurable inputs for other real estate owned were not material.

Carrying amount and estimated fair values of financial instruments at period end were as follows.

	September 30, 2019
	Carrying Amount			Estimated Fair Value			Level 1			Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	168,053		$	168,053		$	168,053		$	—	$	—
Interest-bearing time deposits in other banks		3,497			3,497			—			3,497		—
Available-for-sale securities		152,680			152,680			—			152,680		—
Held-to-maturity securities		764,163			778,966			—			778,966		—
Loans held for sale		8,784			8,784			—			8,784		—
Loans, net of allowance for loan losses		2,583,049			2,572,294			—			—		2,572,294
Federal Reserve Bank and Federal Home Loan Bank stock		31,710		N/A			N/A			N/A		N/A
Interest receivable		16,994			16,994			—			16,994		—
Derivative assets		4,539			4,539			—			4,539		—
Cash collateral held by derivative counterparty and netting adjustments		364			364			364			—		—
Total derivative assets		4,903			4,903			364			4,539		—
Equity securities with readily determinable fair value		492			492			492			—		—
Total assets	$	3,734,325		$	3,706,663		$	168,909		$	965,460	$	2,572,294
Financial liabilities:
Deposits	$	3,106,929		$	3,116,023		$	—		$	3,116,023	$	—
Federal funds purchased and retail repurchase agreements		40,652			40,652			—			40,652		—
Federal Home Loan Bank advances		410,093			410,093			—			410,093		—
Bank stock loan		14,770			14,770			—			14,770		—
Subordinated debentures		14,485			14,485			—			14,485		—
Contractual obligations		3,744			3,744			—			3,744		—
Interest payable		4,821			4,821			—			4,821		—
Derivative liabilities		5,376			5,376			—			5,376		—
Cash collateral held by derivative counterparty and netting adjustments		(5,376	)		(5,376	)		(5,376	)		—		—
Total derivative liabilities		—			—			(5,376	)		5,376		—
Total liabilities	$	3,595,494		$	3,604,588		$	(5,376	)	$	3,609,964	$	—

	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.

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

	September 30, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	20,568	$	176,297	$	29,543	$	171,857
Mortgage loans in the process of origination		11,691		5,966		6,785		2,860
Unused lines of credit		89,245		156,375		92,225		167,218

The fixed rate loan commitments have interest rates ranging from 3.75% to 8.09% and maturities ranging from 1 month to 73 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 September 30, 2019 and December 31, 2018 were as follows.

September 30, 2019

December 31, 2018

Fixed

Rate

Variable

Rate

Fixed

Rate

Variable

Rate

Standby letters of credit

2,923

2,959

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. On November 6, 2019, the Eighth Circuit Court of Appeals issued a decision affirming the trial court’s findings dismissing Citi’s claims with regard to six loans and holding Equity Bank liable with regard to six loans. Equity Bank has not yet determined to appeal the ruling. If not appealed by either party, Equity Bank will be required to satisfy the total judgment of $1,474, but shall be entitled to a reassignment of loans in which there is existing collateral. At the time of the January 2018 judgment, Citi held four loans with collateral having a total balance of $1,129.

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.

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. On August 16, 2019, the court appointed lead plaintiffs and on October 15, 2019, the plaintiffs filed an amended complaint on behalf of a putative class of persons who purchased Company securities between April 20, 2018 and April 23, 2019. Plaintiffs allege that the Company made materially misleading statements about the Company’s financial results, business, operations and prospects starting on April 20, 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 other real estate owned, 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 nine-month periods ended September 30, 2019, and 2018.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Non-interest income
Service charges and fees	$	2,268	$	1,912		$	6,431	$	5,221
Debit card income		2,205		1,667			6,129		4,442
Mortgage banking^(a)		820		392			1,699		1,017
Increase in bank-owned life insurance^(a)		507		521			1,494		1,681
Net gain (loss) from securities transactions^(a)		4		(4	)		17		(14	)
Other
Investment referral income		165		121			489		301
Trust income		61		20			181		20
Insurance sales commissions		61		85			106		147
Recovery on zero-basis purchased loans^(a)		28		248			106		381
Income from equity method investments^(a)		10		7			23		6
Other non-interest income related to loans and deposits		440		436			1,659		1,056
Other non-interest income not related to loans and deposits^(a)		3		28			13		18
Total other non-interest income		768		945			2,577		1,929
Total	$	6,572	$	5,433		$	18,347	$	14,276
^(a) Not within 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.

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 commissions 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 nine months ended September 30, 2019.

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

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 September 30, 2019, we had consolidated total assets of $4.07 billion, total loans held for investment of $2.58 billion, net of allowances, total deposits of $3.11 billion and total stockholders’ equity of $467.1 million. During the three-month periods ended September 30, 2019 and September 30, 2018, net income was $10.4 million and $10.3 million and for the nine-month periods ended September 30, 2019 and September 30, 2018, net income was $15.6 million and $25.9 million.

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

	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
Statement of Income Data (for the quarterly period ended)
Interest and dividend income	$	44,549		$	44,764		$	43,202		$	45,580		$	43,022
Interest expense		13,023			13,476			12,563			12,244			10,267
Net interest income		31,526			31,288			30,639			33,336			32,755
Provision for loan losses		679			974			15,646			750			1,291
Net gain (loss) from securities transactions		4			7			6			5			(4	)
Other non-interest income		6,568			6,444			5,318			5,444			5,437
Merger expenses		—			276			639			938			757
Other non-interest expense		24,223			24,747			24,904			24,200			22,890
Income (loss) before income taxes		13,196			11,742			(5,226	)		12,897			13,250
Provision for income taxes		2,790			2,510			(1,153	)		2,972			2,928
Net income (loss)		10,406			9,232			(4,073	)		9,925			10,322
Net income (loss) allocable to common stockholders		10,406			9,232			(4,073	)		9,925			10,322
Basic earnings (loss) per share	$	0.67		$	0.59		$	(0.26	)	$	0.63		$	0.65
Diluted earnings (loss) per share	$	0.66		$	0.58		$	(0.26	)	$	0.62		$	0.64
Balance Sheet Data (at period end)
Cash and cash equivalents	$	168,053		$	181,418		$	167,453		$	192,818		$	61,379
Available-for-sale securities		152,680			161,082			166,355			168,875			172,388
Held-to-maturity securities		764,163			766,950			749,493			748,356			713,899
Loans held for sale		8,784			6,761			2,140			2,972			1,698
Gross loans held for investment		2,600,924			2,679,985			2,618,986			2,575,408			2,598,729
Allowance for loan losses		17,875			17,777			26,340			11,454			11,010
Loans held for investment, net of allowance for loan losses		2,583,049			2,662,208			2,592,646			2,563,954			2,587,719
Goodwill and core deposit intangibles, net		157,159			157,944			158,728			153,437			154,189
Other intangible assets		1,191			1,203			1,216			1,228			1,241
Total assets		4,074,663			4,180,074			4,065,354			4,061,716			3,931,036
Total deposits		3,106,929			3,185,893			3,260,870			3,123,447			2,821,246
Borrowings		480,000			515,582			331,221			464,676			652,755
Total liabilities		3,607,613			3,721,668			3,611,891			3,605,775			3,487,799
Total stockholders’ equity		467,050			458,406			453,463			455,941			443,237
Tangible common equity*		308,700			299,259			293,519			301,276			287,807
Performance ratios
Return on average assets (ROAA) annualized		1.02	%		0.92	%		(0.42	)%		1.00	%		1.08	%
Return on average equity (ROAE) annualized		8.91	%		8.10	%		(3.59	)%		8.76	%		9.31	%
Return on average tangible common equity (ROATCE) annualized*		14.38	%		13.29	%		(4.62	)%		14.17	%		14.91	%
Yield on loans annualized		5.70	%		5.74	%		5.79	%		5.91	%		5.73	%
Cost of interest-bearing deposits annualized		1.56	%		1.64	%		1.61	%		1.45	%		1.15	%
Net interest margin annualized		3.42	%		3.42	%		3.49	%		3.70	%		3.76	%
Efficiency ratio*		63.59	%		65.59	%		69.26	%		62.40	%		59.93	%
Non-interest income / average assets annualized		0.65	%		0.64	%		0.55	%		0.55	%		0.57	%
Non-interest expense / average assets annualized		2.38	%		2.49	%		2.64	%		2.53	%		2.47	%
Capital Ratios
Tier 1 Leverage Ratio		8.49	%		8.26	%		8.37	%		8.60	%		8.60	%
Common Equity Tier 1 Capital Ratio		11.08	%		10.46	%		10.46	%		10.95	%		10.49	%
Tier 1 Risk Based Capital Ratio		11.59	%		10.95	%		10.96	%		11.45	%		10.99	%

Total Risk Based Capital Ratio		12.21	%		11.56	%		11.87	%		11.86	%		11.37	%
Equity / Assets		11.46	%		10.97	%		11.15	%		11.23	%		11.28	%
Tangible common equity to tangible assets*		7.88	%		7.44	%		7.52	%		7.71	%		7.62	%
Book value per share	$	30.25		$	29.45		$	28.66		$	28.87		$	28.07
Tangible common book value per share*	$	19.99		$	19.23		$	18.55		$	19.08		$	18.22
Tangible common book value per diluted share*	$	19.73		$	18.99		$	18.30		$	18.73		$	17.86

* 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 judgment and complexity. We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our financial statements to those judgments 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

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 September 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.

Results of Operations

We generate the majority 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 September 30, 2019 compared with three months ended September 30, 2018: Net income and net income allocable to common stockholders for the three months ended September 30, 2019 was $10.4 million as compared to $10.3 million for the three months ended September 30, 2018, an increase of $84 thousand. During the three-month period ended September 30, 2019, increases in non-interest income of $1.1 million, a decrease in provision for loan losses of $612 thousand and a decrease in provision for income taxes of $138 thousand were partially offset by a decrease in net interest income of $1.2 million and an increase in non-interest expense of $576 thousand when compared to the three-month period ended September 30, 2018. The changes in the components of net income are discussed in more detail in the following sections of “Results of Operations.”

Nine months ended September 30, 2019 compared with nine months ended September 30, 2018: Net income and net income allocable to common stockholders for the nine months ended September 30, 2019 was $15.6 million as compared to $25.9 million for the nine months ended September 30, 2018, a decrease of $10.3 million. During the nine-month period ended September 30, 2019, increases in non-interest income of $4.1 million and net interest income of $2.0 million complemented by a decrease in provision for income taxes of $3.2 million were offset by an increase in provision for loan losses of $14.1 million and an increase in non-interest expense of $5.5 million when compared to the nine-month period ended September 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.”

Three months ended September 30, 2019 compared with three months ended September 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 September 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 September 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⁾	$	2,646,454	$	38,051		5.70	%	$	2,516,833	$	36,335		5.73	%
Taxable securities		782,994		4,673		2.37	%		716,499		4,836		2.68	%
Nontaxable securities		143,845		1,045		2.88	%		144,441		1,097		3.01	%
Federal funds sold and other		84,677		780		3.66	%		80,098		754		3.74	%
Total interest-earning assets		3,657,970	$	44,549		4.83	%		3,457,871	$	43,022		4.94	%
Non-interest-earning assets:
Other real estate owned, net		5,795							7,274
Premises and equipment, net		84,797							76,650
Bank-owned life insurance		74,266							72,246
Goodwill, core deposit and other intangibles, net		158,760							150,256
Other non-interest-earning assets		49,018							39,817
Total assets	$	4,030,606						$	3,804,114
Interest-bearing liabilities:
Interest-bearing demand deposits	$	674,681	$	2,012		1.18	%	$	613,473	$	1,303		0.84	%
Savings and money market		1,032,778		3,377		1.30	%		825,143		2,039		0.98	%
Savings, NOW and money market		1,707,459		5,389		1.25	%		1,438,616		3,342		0.92	%
Certificates of deposit		965,548		5,118		2.10	%		813,321		3,168		1.55	%
Total interest-bearing deposits		2,673,007		10,507		1.56	%		2,251,937		6,510		1.15	%
FHLB term and line of credit advances		320,528		1,957		2.42	%		565,715		3,155		2.21	%
Bank stock loan		14,770		198		5.32	%		20,678		265		5.08	%
Subordinated borrowings		14,437		311		8.52	%		14,142		307		8.63	%
Other borrowings		40,827		50		0.48	%		42,040		30		0.28	%
Total interest-bearing liabilities		3,063,569	$	13,023		1.69	%		2,894,512	$	10,267		1.41	%
Non-interest-bearing liabilities and stockholders’ equity:
Non-interest-bearing checking accounts		479,778							457,804
Non-interest-bearing liabilities		24,007							12,027
Stockholders’ equity		463,252							439,771
Total liabilities and stockholders’ equity	$	4,030,606						$	3,804,114
Net interest income			$	31,526						$	32,755
Interest rate spread						3.14	%						3.53	%
Net interest margin⁽²⁾						3.42	%						3.76	%
Total cost of deposits, including non-interest bearing deposits	$	3,152,785	$	10,507		1.32	%	$	2,709,741	$	6,510		0.95	%
Average interest-earning assets to interest-bearing liabilities						119.40	%						119.46	%

(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.

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, 2019 and 2018.

Analysis of Changes in Net Interest Income

For the Three Months Ended September 30, 2019 and 2018

	Increase (Decrease) Due to:						Total Increase /
(Dollars in thousands)	Volume⁽¹⁾			Yield/Rate⁽¹⁾			(Decrease)
Interest-earning assets:
Loans	$	1,864		$	(148	)	$	1,716
Taxable securities		426			(589	)		(163	)
Nontaxable securities		(5	)		(47	)		(52	)
Federal funds sold and other		42			(16	)		26
Total interest-earning assets	$	2,327		$	(800	)	$	1,527
Interest-bearing liabilities:
Savings, NOW and money market	$	726		$	1,321		$	2,047
Certificates of deposit		666			1,284			1,950
Total interest-bearing deposits		1,392			2,605			3,997
FHLB term and line of credit advances		(1,474	)		276			(1,198	)
Bank stock loan		(79	)		12			(67	)
Subordinated borrowings		7			(3	)		4
Other borrowings		(1	)		21			20
Total interest-bearing liabilities	$	(155	)	$	2,911		$	2,756
Net Interest Income	$	2,482		$	(3,711	)	$	(1,229	)

⁽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 was partially offset by a 3 basis point decrease in yield on the loan portfolio from 5.73% for the three months ended September 30, 2018 to 5.70% for the three months ended September 30, 2019. The impact to net interest income from loan fees for the three months ended September 30, 2019 was $1.3 million compared to $1.4 million for the three months ended September 30, 2018.

Average balances of borrowings from the FHLB decreased by $245.2 million from an average balance of $565.7 million for the three months ended September 30, 2018 to an average balance of $320.5 million for the three months ended September 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 21 basis points from 2.21% for the three months ended September 30, 2018 to 2.42% for the three months ended September 30, 2019. Interest expense on our bank stock loan for the three months ended September 30, 2019 was $198 thousand compared to $265 thousand for the same time period in 2018. Total cost of interest-bearing liabilities increased 28 basis points to 1.69% for the three months ended September 30, 2019 from 1.41% for the three months ended September 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.

Nine months ended September 30, 2019 compared with nine months ended September 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 nine months ended September 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 Nine Months Ended September 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⁾	$	2,620,897	$	112,611		5.74	%	$	2,320,402	$	98,484		5.67	%
Taxable securities		780,813		14,724		2.52	%		645,293		12,671		2.63	%
Nontaxable securities		142,735		3,143		2.94	%		130,978		3,001		3.06	%
Federal funds sold and other		84,045		2,037		3.24	%		72,102		1,820		3.38	%
Total interest-earning assets		3,628,490	$	132,515		4.88	%		3,168,775	$	115,976		4.89	%
Non-interest-earning assets:
Other real estate owned, net		6,079							7,374
Premises and equipment, net		83,151							69,848
Bank-owned life insurance		73,772							70,459
Goodwill, core deposit and other intangibles, net		158,551							133,802
Other non-interest-earning assets		44,583							35,150
Total assets	$	3,994,626						$	3,485,408
Interest-bearing liabilities:
Interest-bearing demand deposits	$	695,807	$	6,515		1.25	%	$	602,602	$	3,629		0.81	%
Savings and money market		1,009,805		10,399		1.38	%		757,055		4,526		0.80	%
Savings, NOW and money market		1,705,612		16,914		1.33	%		1,359,657		8,155		0.80	%
Certificates of deposit		997,270		15,467		2.07	%		789,133		8,411		1.43	%
Total interest-bearing deposits		2,702,882		32,381		1.60	%		2,148,790		16,566		1.03	%
FHLB term and line of credit advances		266,118		5,103		2.56	%		442,370		6,548		1.98	%
Bank stock loan		12,518		507		5.42	%		11,964		448		5.00	%
Subordinated borrowings		14,364		955		8.89	%		14,070		875		8.32	%
Other borrowings		43,162		116		0.36	%		41,610		77		0.25	%
Total interest-bearing liabilities		3,039,044	$	39,062		1.72	%		2,658,804	$	24,514		1.23	%
Non-interest-bearing liabilities and stockholders’ equity:
Non-interest-bearing checking accounts		474,217							404,835
Non-interest-bearing liabilities		21,329							11,091
Stockholders’ equity		460,036							410,678
Total liabilities and stockholders’ equity	$	3,994,626						$	3,485,408
Net interest income			$	93,453						$	91,462
Interest rate spread						3.16	%						3.66	%
Net interest margin⁽²⁾						3.44	%						3.86	%
Total cost of deposits, including non-interest bearing deposits	$	3,177,099	$	32,381		1.36	%	$	2,553,625	$	16,566		0.87	%
Average interest-earning assets to interest-bearing liabilities						119.40	%						119.18	%

(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.

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, 2019 and 2018.

Analysis of Changes in Net Interest Income

For the Nine Months Ended September 30, 2019 and 2018

	Increase (Decrease) Due to:						Total Increase /
(Dollars in thousands)	Volume(1)			Yield/Rate(1)			(Decrease)
Interest-earning assets:
Loans	$	12,897		$	1,230		$	14,127
Taxable securities		2,572			(519	)		2,053
Nontaxable securities		263			(121	)		142
Federal funds sold and other		292			(75	)		217
Total interest-earning assets	$	16,024		$	515		$	16,539
Interest-bearing liabilities:
Savings, NOW and money market	$	2,485		$	6,274		$	8,759
Certificates of deposit		2,589			4,467			7,056
Total interest-bearing deposits		5,074			10,741			15,815
FHLB term and line of credit advances		(3,052	)		1,607			(1,445	)
Bank stock loan		21			38			59
Subordinated borrowings		19			61			80
Other borrowings		3			36			39
Total interest-bearing liabilities	$	2,065		$	12,483		$	14,548
Net Interest Income	$	13,959		$	(11,968	)	$	1,991

(1)

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 7 basis point increase in yield on the loan portfolio from 5.67% for the nine months ended September 30, 2018 to 5.74% for the nine months ended September 30, 2019. The impact to net interest income from loan fees for the nine months ended September 30, 2019 was $3.3 million compared to $4.8 million for the nine months ended September 30, 2018.

Average balances of borrowings from the FHLB decreased by $176.3 million from an average balance of $442.4 million for the nine months ended September 30, 2018 to an average balance of $266.1 million for the nine months ended September 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 58 basis points from 1.98% for the nine months ended September 30, 2018 to 2.56% for the nine months ended September 30, 2019. Interest expense on our bank stock loan for the nine months ended September 30, 2019 was $507 thousand compared to $448 thousand for the same time period in 2018. Total cost of interest-bearing liabilities increased 49 basis points to 1.72% for the nine months ended September 30, 2019 from 1.23% for the nine months ended September 30, 2018.

The decrease in net interest margin is partly due to an increase in cost of funds, a reduction in loan fees, additional callable bond premium amortization related to the adoption of ASU 2017-08 and the movement of a large credit relationship to nonaccrual during the first quarter of 2019. 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.

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

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 September 30, 2019 compared with three months ended September 30, 2018: The provision for loan losses for the three months ended September 30, 2019 was $679 thousand compared with $1.3 million for the three months ended September 30, 2018. Net charge-offs for the three months ended September 30, 2019 were $581 thousand compared to net charge offs of $364 thousand for the three months ended September 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. During the third quarter of 2019, there were total charge-offs of $390 thousand 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 September 30, 2019, gross charge-offs were $1.2 million offset by gross recoveries of $625 thousand. In comparison, gross charge-offs were $723 thousand for the three months ended September 30, 2018 offset by gross recoveries of $359 thousand.

Nine months ended September 30, 2019 compared with nine months ended September 30, 2018: The provision for loan losses for the nine months ended September 30, 2019 was $17.3 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 $3.2 million for the nine months ended September 30, 2018. Net charge-offs for the nine months ended September 30, 2019 were $10.9 million, of which $10.2 million was directly related to the above mentioned credit relationship, compared to net charge-offs of $699 thousand for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, gross charge-offs were $11.9 million offset by gross recoveries of $1.0 million. In comparison, gross charge-offs were $1.7 million for the nine months ended September 30, 2018 offset by gross recoveries of $1.0 million.

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

Non-Interest Income

For the Three Months Ended September 30,

						2019 vs. 2018
(Dollars in thousands)	2019		2018			Change			%
Service charges and fees	$	2,268	$	1,912		$	356			18.6	%
Debit card income		2,205		1,667			538			32.3	%
Mortgage banking		820		392			428			109.2	%
Increase in value of bank-owned life insurance		507		521			(14	)		(2.7	)%
Other
Investment referral income		165		121			44			36.4	%
Trust income		61		20			41			205.0	%
Insurance sales commissions		61		85			(24	)		(28.2	)%
Recovery on zero-basis purchased loans		28		248			(220	)		(88.7	)%
Income from equity method investments		10		7			3			42.9	%
Other non-interest income		443		464			(21	)		(4.5	)%
Total other		768		945			(177	)		(18.7	)%
Sub-Total		6,568		5,437			1,131			20.8	%
Net gain (loss) from securities transactions		4		(4	)		8			(200.0	)%
Total non-interest income	$	6,572	$	5,433		$	1,139			21.0	%

Debit card income was $2.2 million for the three months ended September 30, 2019, an increase of $538 thousand, or 32.3%, from $1.7 million for the three months ended September 30, 2018, largely due to increased volume related to mergers and acquisitions. Service charges and fees increased $356 thousand during the three months ended September 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 $28 thousand and $248 thousand for the three months ended September 30, 2019 and 2018.

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

Non-Interest Income

For the Nine Months Ended September 30,

						2019 vs. 2018
(Dollars in thousands)	2019		2018			Change			%
Service charges and fees	$	6,431	$	5,221		$	1,210			23.2	%
Debit card income		6,129		4,442			1,687			38.0	%
Mortgage banking		1,699		1,017			682			67.1	%
Increase in value of bank-owned life insurance		1,494		1,681			(187	)		(11.1	)%
Other
Investment referral income		489		301			188			62.5	%
Trust income		181		20			161			805.0	%
Insurance sales commissions		106		147			(41	)		(27.9	)%
Recovery on zero-basis purchased loans		106		381			(275	)		(72.2	)%
Income from equity method investments		23		6			17			283.3	%
Other non-interest income		1,672		1,074			598			55.7	%
Total other		2,577		1,929			648			33.6	%
Sub-Total		18,330		14,290			4,040			28.3	%
Net gain (loss) from securities transactions		17		(14	)		31			(221.4	)%
Total non-interest income	$	18,347	$	14,276		$	4,071			28.5	%

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 $844 thousand gain on swap fees during the nine months ending September 30, 2019.

Non-Interest Expense

Three months ended September 30, 2019 compared with three months ended September 30, 2018: For the three months ended September 30, 2019, non-interest expense totaled $24.2 million, an increase of $576 thousand, or 2.4%, compared with the three months ended September 30, 2018. Changes in the various components of non-interest expense for the three months ended September 30, 2019 and 2018 are discussed in more detail in the following table.

Non-Interest Expense

For the Three Months Ended September 30,

						2019 vs. 2018
(Dollars in thousands)	2019			2018		Change			%
Salaries and employee benefits	$	13,039		$	12,361	$	678			5.5	%
Net occupancy and equipment		2,177			2,125		52			2.4	%
Data processing		2,673			2,195		478			21.8	%
Professional fees		991			686		305			44.5	%
Advertising and business development		806			802		4			0.5	%
Telecommunications		523			451		72			16.0	%
FDIC insurance		111			457		(346	)		(75.7	)%
Courier and postage		352			321		31			9.7	%
Free nationwide ATM cost		459			364		95			26.1	%
Amortization of core deposit intangible		784			694		90			13.0	%
Loan expense		165			319		(154	)		(48.3	)%
Other real estate owned		(88	)		355		(443	)		(124.8	)%
Other		2,231			1,760		471			26.8	%
Sub-Total		24,223			22,890		1,333			5.8	%
Merger expenses		—			757		(757	)		(100.0	)%
Total non-interest expense	$	24,223		$	23,647	$	576			2.4	%

Salaries and employee benefits: There was a $678 thousand increase in salaries and employee benefits for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This increase reflects approximately $175 thousand, or 25.8%, of this increase was directly associated with 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, 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 $305 thousand, or 44.5%, is principally due to an increase in accounting fees of $178 thousand and an increase in attorney fees of $76 thousand. During the third quarter of 2019, there was $78 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.

FDIC insurance: The decrease in FDIC insurance expense was due to the FDIC’s application of a $505 thousand credit to our third quarter 2019 insurance assessment.

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 September 30, 2019, there was $230 thousand gain on the sale of other real estate owned and $8 thousand of other income, partially offset by $112 thousand in other real estate owned expense, including provision for unrealized losses. For the three months ended September 30, 2018, there was $211 thousand loss on the sale of other real estate owned and $146 thousand in other real estate owned expense, including provision for unrealized losses, partially offset by $2 thousand of other income.

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 September 30, 2019, employee expenses, including travel, meals, entertainment and education, were $459 thousand, insurance expense was $247 thousand and correspondent bank fees were $79 thousand. For the three months ended September 30, 2018, employee expenses, including travel, meals, entertainment and education, were $483 thousand, insurance expense was $198 thousand and correspondent bank fees were $125 thousand.

Merger expenses: For the three months ended September 30, 2019 there were no merger expenses. Merger expenses were $757 thousand for the three months ended September 30, 2018.

Nine months ended September 30, 2019 compared with nine months ended September 30, 2018: For the nine months ended September 30, 2019, non-interest expense totaled $74.8 million, an increase of $5.5 million, or 8.0%, compared with the nine months ended September 30, 2018. Changes in the various components of non-interest expense for the nine months ended September 30, 2019 and 2018 are discussed in more detail in the following table.

Non-Interest Expense

For the Nine Months Ended September 30,

						2019 vs. 2018
(Dollars in thousands)	2019		2018			Change			%
Salaries and employee benefits	$	40,204	$	34,881		$	5,323			15.3	%
Net occupancy and equipment		6,332		5,938			394			6.6	%
Data processing		7,436		5,837			1,599			27.4	%
Professional fees		3,375		2,245			1,130			50.3	%
Advertising and business development		2,174		2,086			88			4.2	%
Telecommunications		1,593		1,252			341			27.2	%
FDIC insurance		1,119		1,211			(92	)		(7.6	)%
Courier and postage		1,020		879			141			16.0	%
Free nationwide ATM cost		1,240		986			254			25.8	%
Amortization of core deposit intangibles		2,348		1,703			645			37.9	%
Loan expense		608		810			(202	)		(24.9	)%
Other real estate owned		326		(48	)		374			(779.2	)%
Other		6,099		4,945			1,154			23.3	%
Sub-Total		73,874		62,725			11,149			17.8	%
Merger expenses		915		6,524			(5,609	)		(86.0	)%
Total non-interest expense	$	74,789	$	69,249		$	5,540			8.0	%

Salaries and employee benefits: There was a $5.3 million increase in salaries and employee benefits for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Roughly $2.0 million, or 37.9%, of this increase reflects the addition of staff related to the May 2018 KBC and Adams mergers, the addition of staff related to the August 2018 City Bank acquisition and 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, one 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 $1.1 million, or 50.3%, is principally due to an increase in accounting fees of $412 thousand, an increase in advisor services of $289 thousand, an increase in attorney fees of $200 thousand and an increase in consulting fees of $169. During the nine-month period ended September 30, 2019, there was $55 thousand in accounting fees and $362 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 nine months ended September 30, 2019, there was $632 thousand in other real estate owned expense, including provision for unrealized losses, partially offset by $291 thousand gain on the sale of other real estate owned and $15 thousand of other income. For the nine months ended September 30, 2018, there were gains on the sale of other real estate owned of $642 thousand and other income of $109 thousand partially offset by other real estate owned expense, including provision for unrealized losses, of $703 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 nine months ended September 30, 2019, employee expenses, including travel, meals, entertainment and education, were $1.2 million, insurance expense was $687 thousand and correspondent bank fees were $400 thousand. For the nine months ended September 30, 2018, employee expenses, including travel, meals, entertainment and education, were $1.1 million, insurance expense was $531 thousand and correspondent bank fees were $412 thousand.

Merger expenses: Merger expenses were $915 thousand for the nine months ended September 30, 2019 and $6.5 million for the nine months ended September 30, 2018. The merger expenses for the nine-month period ended September 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.

The efficiency ratio was 63.6% for the three months ended September 30, 2019, compared with 59.9% for the three months ended September 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.”

The efficiency ratio was 66.1% for the nine months ended September 30, 2019, compared with 59.3% for the nine months ended September 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 September 30, 2019 compared with three months ended September 30, 2018: The effective income tax rate for the quarter ended September 30, 2019 was 21.1% as compared to 22.1% for the quarter ended September 30, 2018. Additional expense associated with the settlement in stock of restricted stock units recorded in the third quarter of 2019 was $4 thousand. Excess tax benefits associated with share-based compensation of $19 thousand were recognized in the comparable period of 2018.

Nine months ended September 30, 2019 compared with nine months ended September 30, 2018: The effective income tax rate for the nine months ended September 30, 2019 was 21.0% as compared to 22.2% for the nine months ended September 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 nine months of 2019 were $14 thousand as compared to $25 thousand in the comparable period of 2018.

Impact of Inflation

The 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

Total assets increased $12.9 million from December 31, 2018 to $4.07 billion at September 30, 2019. The increase in total assets was primarily from a $19.1 million increase in net loans held for investment. Our total liabilities increased $1.8 million to $3.61 billion at September 30, 2019. The change in total liabilities came primarily from increases in FHLB borrowings of $25.2 million and interest payable and other liabilities of $3.3 million, partially offset by decreases in total deposits of $16.5 million and retail repurchase agreements of $9.4 million. Total stockholders’ equity increased $11.1 million from $455.9 million at December 31, 2018 to $467.1 million at September 30, 2019.

Loan Portfolio

Loans are our largest category of earning assets and typically provide higher yields than other types of earning assets. At September 30, 2019, our gross loans held for investment totaled $2.60 billion, an increase of $25.5 million, or 1.0%, compared with December 31, 2018. The overall increase in loan volume consisted of $85.2 million from residential real estate, $79.8 million from real estate construction, $8.1 million from consumer and $4.4 million from agricultural real estate, partially offset by reductions of $127.7 million in commercial real estate, $16.0 million from commercial and industrial and $8.2 million from agricultural. We also had loans classified as held-for-sale totaling $8.8 million at September 30, 2019, as compared to $3.0 million at December 31, 2018.

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 September 30, 2019, there was no concentration of loans to any one type of industry exceeding 10% of total loans.

At September 30, 2019, gross total loans, including loans held-for-sale, were 84.0% of deposits and 64.0% 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

	September 30, 2019					December 31, 2018
	Amount		Percent			Amount		Percent			Change			%
	(Dollars in thousands)
Commercial and industrial	$	585,797		22.5	%	$	601,782		23.4	%	$	(15,985	)		(2.7	)%
Real estate loans:
Commercial real estate		979,124		37.7	%		1,106,871		43.0	%		(127,747	)		(11.5	)%
Real estate construction		204,181		7.9	%		124,346		4.8	%		79,835			64.2	%
Residential real estate		531,257		20.4	%		446,060		17.3	%		85,197			19.1	%
Agricultural real estate		143,718		5.5	%		139,332		5.4	%		4,386			3.1	%
Total real estate loans		1,858,280		71.5	%		1,816,609		70.5	%		41,671			2.3	%
Consumer		70,944		2.7	%		62,894		2.4	%		8,050			12.8	%
Agricultural		85,903		3.3	%		94,123		3.7	%		(8,220	)		(8.7	)%
Total loans held for investment	$	2,600,924		100.0	%	$	2,575,408		100.0	%	$	25,516			1.0	%
Total loans held for sale	$	8,784		100.0	%	$	2,972		100.0	%	$	5,812			195.6	%
Total loans held for investment (net of allowances)	$	2,583,049		100.0	%	$	2,563,954		100.0	%	$	19,095			0.7	%

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.

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 September 30, 2019 are summarized in the following table.

Loan Maturity and Sensitivity to Changes in Interest Rates

	As of September 30, 2019
	One year or less		After one year through five years		After five years		Total
	(Dollars in thousands)
Commercial and industrial	$	235,511	$	209,044	$	141,242	$	585,797
Real Estate:
Commercial real estate		140,631		526,880		311,613		979,124
Real estate construction		68,436		97,004		38,741		204,181
Residential real estate		13,900		13,291		504,066		531,257
Agricultural real estate		55,936		52,821		34,961		143,718
Total real estate		278,903		689,996		889,381		1,858,280
Consumer		16,917		45,200		8,827		70,944
Agricultural		64,977		18,931		1,995		85,903
Total	$	596,308	$	963,171	$	1,041,445	$	2,600,924
Loans with a predetermined fixed interest rate		269,531		584,316		340,426		1,194,273
Loans with an adjustable/floating interest rate		326,777		378,855		701,019		1,406,651
Total	$	596,308	$	963,171	$	1,041,445	$	2,600,924

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

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.

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 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.

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

Risk Category of Loans by Class

	As of September 30, 2019
	Unclassified		Classified		Total
	(Dollars in thousands)
Commercial and industrial	$	535,939	$	49,858	$	585,797
Real estate:
Commercial real estate		963,159		15,965		979,124
Real estate construction		202,548		1,633		204,181
Residential real estate		521,906		9,351		531,257
Agricultural real estate		130,920		12,798		143,718
Total real estate		1,818,533		39,747		1,858,280
Consumer		70,320		624		70,944
Agricultural		80,259		5,644		85,903
Total	$	2,505,051	$	95,873	$	2,600,924

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 September 30, 2019, loans considered unclassified decreased to 96.3% of total loans, down from 96.7% of total loans at December 31, 2018. Classified loans were $95.9 million at September 30, 2019, an increase of $9.8 million, or 11.4%, from $86.1 million at December 31, 2018. Classified balances related to one credit relationship were $23.6 million at September 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

	September 30, 2019			December 31, 2018
	(Dollars in thousands)
Nonaccrual loans	$	51,019		$	33,203
Accruing loans 90 or more days past due		52			18
Restructured loans-accruing		—			—
OREO acquired through foreclosure, net		5,944			6,372
Other repossessed assets		121			56
Total nonperforming assets	$	57,136		$	39,649
Ratios:
Nonperforming assets to total assets		1.40	%		0.98	%
Nonperforming assets to total loans plus OREO		2.19	%		1.54	%

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. Nonaccrual loans include purchased loans that were identified upon acquisition as having experienced credit deterioration since origination (“purchased credit impaired loans”). However, if the purchased credit impaired loan included in nonaccrual loans has not experienced further deterioration since acquisition the loan is not considered impaired for purposes of determining the allowance for loan losses. See the “Critical Accounting Policies – Impaired Loans and Allowance for Loan Losses” sections for information regarding the review of loans for determining impairment and the allowance for loan losses.

The nonperforming loans at September 30, 2019 consisted of 305 separate credits and 228 separate borrowers. We had six non-performing loan relationships, totaling $30.5 million, with an outstanding balance in excess of $1.0 million as of September 30, 2019. At September 30, 2019 there were nonperforming loans of $161 thousand directly related to the KBC merger, $1.1 million directly related to the Adams merger, $2.1 million directly related to the City Bank acquisition and $18 thousand directly related to the MidFirst acquisition. The nonaccrual balance at September 30, 2019 included $23.6 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 September 30, 2019, the Company had $44.9 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 the following items.

•

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 September 30, 2019, the allowance for loan losses totaled $17.9 million, or 0.69%, 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 $10.4 million, or 0.41%, of the $2.53 billion in loans collectively evaluated for impairment at September 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 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 0.09%, or 0.03%, adjusted for one credit relationship, for the three months ended September 30, 2019, as compared to 0.06% for the three months ended September 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 0.55%, or 0.04% adjusted for the one credit relationship mentioned earlier, for the nine months ended September 30, 2019, as compared to 0.04% for the nine months ended September 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 September 30,						As of and for the Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands)						(Dollars in thousands)
Average loans outstanding	$	2,646,454		$	2,516,833		$	2,620,897		$	2,320,402
Gross loans outstanding at end of period⁽¹⁾	$	2,600,924		$	2,598,729		$	2,600,924		$	2,598,729
Allowance for loan losses at beginning of the period	$	17,777		$	10,083		$	11,454		$	8,498
Provision for loan losses		679			1,291			17,299			3,211
Charge-offs:
Commercial and industrial		(18	)		(3	)		(8,756	)		(89	)
Real estate:
Commercial real estate		(506	)		(90	)		(1,114	)		(119	)
Real estate construction		—			—			—			—
Residential real estate		(355	)		(91	)		(934	)		(362	)
Agricultural real estate		(9	)		(13	)		(43	)		(93	)
Consumer		(313	)		(526	)		(994	)		(1,035	)
Agricultural		(5	)		—			(47	)		(43	)
Total charge-offs		(1,206	)		(723	)		(11,888	)		(1,741	)
Recoveries:
Commercial and industrial		17			22			66			30
Real estate:
Commercial real estate		47			11			96			288
Real estate construction		—			—			24			—
Residential real estate		450			56			488			253
Agricultural real estate		38			13			38			16
Consumer		73			256			296			445
Agricultural		—			1			2			10
Total recoveries		625			359			1,010			1,042
Net recoveries (charge-offs)		(581	)		(364	)		(10,878	)		(699	)
Allowance for loan losses at end of the period	$	17,875		$	11,010		$	17,875		$	11,010
Ratio of allowance to period-end loans		0.69	%		0.42	%		0.69	%		0.42	%
Annualized ratio of net charge-offs (recoveries) to average loans		0.09	%		0.06	%		0.55	%		0.04	%

(1)Excluding loans held for sale.

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

	September 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	$	7,996		44.7	%	$	2,707		23.6	%
Real estate:
Commercial real estate		3,604		20.2	%		3,108		27.1	%
Real estate construction		1,045		5.9	%		1,554		13.6	%
Residential real estate		2,679		15.0	%		2,320		20.3	%
Agricultural real estate		685		3.8	%		391		3.4	%
Consumer		1,345		7.5	%		1,070		9.3	%
Agricultural		521		2.9	%		304		2.7	%
Total allowance for loan losses	$	17,875		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. This credit relationship, with potential problems, 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, a total of $10.2 million of the relationship was charged off during the first nine months of 2019.

In addition, the Company has a loan totaling $4.4 million, at September 30, 2019, against personal assets of one of the two principals of the companies noted above. This loan is secured by residential real estate.

Reorganization under Chapter 11 of the bankruptcy code was recently approved. 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 September 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 September 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 September 30, 2019, the carrying amount of investment securities totaled $916.8 million, a decrease of $388 thousand compared with December 31, 2018. At September 30, 2019, securities represented 22.5% of total assets compared with 22.6% at December 31, 2018.

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

	September 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)	$	152,068	$	152,680	$	173,503	$	168,875
Total available-for-sale securities	$	152,068	$	152,680	$	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

	September 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
U.S. government-sponsored entities	$	2,739	$	2,760	$	3,873	$	3,860
Residential mortgage-backed securities (issued by government-sponsored entities)		584,230		594,888		567,766		560,467
Corporate		22,992		23,319		22,993		22,901
Small Business Administration loan pools		1,478		1,515		1,746		1,728
State and political subdivisions		152,724		156,484		151,978		151,033
Total held-to-maturity securities	$	764,163	$	778,966	$	748,356	$	739,989

At September 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.

The following tables summarize the contractual maturity of debt securities and their weighted average yields as of September 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.

	September 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)	$	—	—%			$	5		3.50	%	$	54		2.50	%	$	152,621		2.56	%	$	152,680		2.56	%
Total available-for-sale securities	$	—	—%			$	5		3.50	%	$	54		2.50	%	$	152,621		2.56	%	$	152,680		2.56	%
Held-to-maturity securities:
U.S. government-sponsored entities	$	748		2.44	%	$	1,991		2.21	%	$	—	—%			$	—	—%			$	2,739		2.28	%
Residential mortgage-backed securities (issued by government-sponsored entities)		—	—%				2,971		2.76	%		68,279		2.95	%		512,980		2.85	%		584,230		2.86	%
Corporate		—	—%				5,113		2.74	%		17,879		5.07	%		—	—%				22,992		4.56	%
Small Business Administration loan pools		—	—%				—	—%				—	—%				1,478		2.73	%		1,478		2.73	%
State and political subdivisions⁽¹⁾		15,103		1.09	%		26,217		2.78	%		37,099		2.92	%		74,305		3.15	%		152,724		2.83	%
Total held-to-maturity securities	$	15,851		1.15	%	$	36,292		2.74	%	$	123,257		3.25	%	$	588,763		2.88	%	$	764,163		2.90	%
Total debt securities	$	15,851		1.15	%	$	36,297		2.74	%	$	123,311		3.25	%	$	741,384		2.82	%	$	916,843		2.84	%

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

	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 September 30, 2019 and December 31, 2018, 90.3% 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 3.7 years and 5.0 years and a modified duration of 3.4 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.

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

Composition of Deposits

	September 30, 2019					December 31, 2018
	Amount		Percent of Total			Amount		Percent of Total
	(Dollars in thousands)
Non-interest-bearing demand	$	488,214		15.7	%	$	503,831		16.1	%
Interest-bearing demand		638,427		20.6	%		671,320		21.5	%
Savings and money market		1,051,179		33.8	%		940,390		30.1	%
Time		929,109		29.9	%		1,007,906		32.3	%
Total deposits	$	3,106,929		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 September 30, 2019 were $3.11 billion, a decrease of $16.5 million, or 0.5%, compared to total deposits of $3.12 billion at December 31, 2018.

Included in interest-bearing demand deposits are brokered deposit balances of $46.0 million at September 30, 2019 and $33.3 million at December 31, 2018. Also, included in savings and money market deposits are brokered deposit balances of $19.9 million as of September 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. These deposits are placed through ICS services, but are Equity Bank’s customer relationships that management views as core funding. Brokered certificates of deposit as of September 30, 2019 were $26.4 million and $131.1 million at December 31, 2018. Of these balances, $13.9 million at September 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 September 30, 2019 and December 31, 2018.

	September 30, 2019		December 31, 2018		Change			%
	(Dollars in thousands)
3 months or less	$	155,396	$	157,033	$	(1,637	)		(1.0	)%
Over 3 through 6 months		101,880		160,259		(58,379	)		(36.4	)%
Over 6 through 12 months		198,456		183,862		14,594			7.9	%
Over 12 months		163,798		204,991		(41,193	)		(20.1	)%
Total Time Deposits	$	619,530	$	706,145	$	(86,615	)		(12.3	)%

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. For additional information see “NOTE 6 – BORROWINGS” in the Condensed Notes to Interim Consolidated Financial Statements for additional information.

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.

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 nine-month periods ended September 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 $2.62 billion for the nine months ended September 30, 2019, an increase of 9.7% over the 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 3.8 years and a modified duration of 3.5 years at September 30, 2019.

Cash and cash equivalents were $168.1 million at September 30, 2019, a decrease of $24.8 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 $110.4 million net cash used in financing activities, partially offset by $54.8 million net cash provided by investing activities and $30.9 million net cash provided by operating 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 nine 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 September 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 September 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	$	5,017	$	783	$	82	$	—	$	5,882
Commitments to extend credit		247,652		58,633		30,824		123,033		460,142
Total	$	252,669	$	59,416	$	30,906	$	123,033	$	466,024

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.

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. Commitments to extend credit include mortgage loans in the process of origination that we plan to fund within a normal period of 60 to 90 days and 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 September 30, 2019, and December 31, 2018, the Company and Equity Bank meet all capital adequacy requirements to which they are subject.

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 September 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 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.

	September 30, 2019		June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018
	(Dollars in thousands, except per share data)
Total stockholders’ equity	$	467,050	$	458,406	$	453,463	$	455,941	$	443,237
Less: goodwill		136,432		136,432		136,432		131,712		131,723
Less: core deposit intangibles, net		20,727		21,512		22,296		21,725		22,466
Less: mortgage servicing asset, net		7		8		10		11		13
Less: naming rights, net		1,184		1,195		1,206		1,217		1,228
Tangible common equity	$	308,700	$	299,259	$	293,519	$	301,276	$	287,807
Common shares issued at period end		15,440,334		15,563,873		15,820,303		15,793,095		15,792,695
RSU shares vested	—		—			108	—		—
Common shares outstanding at period end		15,440,334		15,563,873		15,820,411		15,793,095		15,792,695
Diluted common shares outstanding at period end		15,647,456		15,758,747		16,036,700		16,085,729		16,118,067
Book value per common share	$	30.25	$	29.45	$	28.66	$	28.87	$	28.07
Tangible book value per common share	$	19.99	$	19.23	$	18.55	$	19.08	$	18.22
Tangible book value per diluted common share	$	19.73	$	18.99	$	18.30	$	18.73	$	17.86

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.

	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
	(Dollars in thousands)
Total stockholders’ equity	$	467,050		$	458,406		$	453,463		$	455,941		$	443,237
Less: goodwill		136,432			136,432			136,432			131,712			131,723
Less: core deposit intangibles, net		20,727			21,512			22,296			21,725			22,466
Less: mortgage servicing asset, net		7			8			10			11			13
Less: naming rights, net		1,184			1,195			1,206			1,217			1,228
Tangible common equity	$	308,700		$	299,259		$	293,519		$	301,276		$	287,807
Total assets	$	4,074,663		$	4,180,074		$	4,065,354		$	4,061,716		$	3,931,036
Less: goodwill		136,432			136,432			136,432			131,712			131,723
Less: core deposit intangibles, net		20,727			21,512			22,296			21,725			22,466
Less: mortgage servicing asset, net		7			8			10			11			13
Less: naming rights, net		1,184			1,195			1,206			1,217			1,228
Tangible assets	$	3,916,313		$	4,020,927		$	3,905,410		$	3,907,051		$	3,775,606
Equity to assets		11.46	%		10.97	%		11.15	%		11.23	%		11.28	%
Tangible common equity to tangible assets		7.88	%		7.44	%		7.52	%		7.71	%		7.62	%

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.

	For the three months ended
	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
	(Dollars in thousands)
Total average stockholders’ equity	$	463,252		$	457,103		$	459,713		$	449,450		$	439,771
Less: average intangible assets		158,760			159,562			157,315			154,944			150,256
Average tangible common equity	$	304,492		$	297,541		$	302,398		$	294,506		$	289,515
Net income (loss) allocable to common stockholders	$	10,406		$	9,232		$	(4,073	)	$	9,925		$	10,322
Amortization of intangible assets		797			797			791			752			707
Less: tax effect of intangible assets amortization		167			167			166			158			148
Adjusted net income (loss) allocable to common stockholders	$	11,036		$	9,862		$	(3,448	)	$	10,519		$	10,881
Return on total average stockholders’ equity (ROAE) annualized		8.91	%		8.10	%		(3.59	)%		8.76	%		9.31	%
Return on average tangible common equity (ROATCE) annualized		14.38	%		13.29	%		(4.62	)%		14.17	%		14.91	%

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, by the sum of net interest income and non-interest income, excluding net gain (loss) from securities transactions. The GAAP-based efficiency ratio is non-interest expense 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
	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
	(Dollars in thousands)
Non-interest expense	$	24,223		$	25,023		$	25,543		$	25,138		$	23,647
Less: merger expenses		—			276			639			938			757
Non-interest expense, excluding merger expenses	$	24,223		$	24,747		$	24,904		$	24,200		$	22,890
Net interest income	$	31,526		$	31,288		$	30,639		$	33,336		$	32,755
Non-interest income	$	6,572		$	6,451		$	5,324		$	5,449		$	5,433
Less: net gain (loss) from securities transactions		4			7			6			5			(4	)
Non-interest income, excluding net gain (loss) from securities transactions	$	6,568		$	6,444		$	5,318		$	5,444		$	5,437
Net interest income plus non-interest income, excluding net gain (loss) from securities transactions	$	38,094		$	37,732		$	35,957		$	38,780		$	38,192
Non-interest expense to net interest income plus non-interest income		63.58	%		66.31	%		71.03	%		64.81	%		61.92	%
Efficiency Ratio		63.59	%		65.59	%		69.26	%		62.40	%		59.93	%

Item 3: Quantitative and Qualitative Disclosures about Market Risk

Our asset-liability policy provides guidelines 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 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 interest rate exposure 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.

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 September 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 September 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 45.9% 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	September 30, 2019			December 31, 2018
+300 basis points		(12.7	)%		(13.0	)%
+200 basis points		(7.7	)%		(8.0	)%
+100 basis points		(3.3	)%		(3.8	)%
0 basis points		—			—
-100 basis points		1.6	%		2.0	%

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	September 30, 2019			December 31, 2018
+300 basis points		(7.2	)%		(16.2	)%
+200 basis points		(2.5	)%		(8.2	)%
+100 basis points		0.5	%		(2.5	)%
0 basis points		—			—
-100 basis points		(5.7	)%		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 principal executive officer and principal financial officer. Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective as of such date due to the material weakness in internal control over financial reporting, described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. 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 judgment in evaluating its controls and procedures.

Changes in internal control over financial reporting

Following the close of the quarter ended September 30, 2019, senior management of the Company identified material weaknesses in its control over financial reporting relating to its reconciliation process for a portion of the Company’s corporate accounts to its general ledger. Since April 2019, such reconciliations were not performed correctly or timely by Company personnel with responsibility for that function and the review of the reconciliation process also did not operate effectively, which caused senior management of the Company to believe that the reconciliations had been properly and timely completed. The Company believes that the deficiencies identified represent operating deficiencies as opposed to design deficiencies as the Company’s internal control requires reconciliation of all corporate accounts to the Company’s general ledger along with the review of such reconciliations.

The Company has commenced the reconciliation process, implemented new supervision and review processes and assigned knowledgeable and trained personnel dedicated to the reconciliation of the Company’s corporate accounts, which management believes will remediate the material weaknesses identified and will strengthen the Company’s internal control over financial reporting. Management has not identified any material misstatements to any of the Company’s previously issued consolidated financial statements related to these control deficiencies. The Company continues to reconcile the accounts to the general ledger and, at this time, the Company does not expect to recognize a material charge to its results of operations or financial condition.

The control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and therefore, management concluded that the deficiencies represent a material weakness in internal control over financial reporting and that internal control over financial reporting was not effective as of September 30, 2019.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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 12 – 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

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
July 1, 2019 through July 31, 2019		—	$	—		—		822,194
August 1, 2019 through August 31, 2019		110,406	$	25.47		110,406		711,788
September 1, 2019 through September 30, 2019		32,804	$	25.84		32,804		678,984
Total		421,016	$	25.81		421,016		678,984

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.

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.

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.

November 12, 2019	By:	/s/ Brad S. Elliott
Date		Brad S. Elliott
		Chairman and Chief Executive Officer

November 12, 2019	By:	/s/ Gregory H. Kossover
Date		Gregory H. Kossover
		Executive Vice President and Chief Financial Officer