EQUITY BANCSHARES INC - Quarter Report: 2022 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, 2022

☐ 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, 2022, the registrant had 15,938,074 shares of Class A 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 Income	6
	Consolidated Statements of Comprehensive Income	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	45
	Overview	46
	Critical Accounting Policies	47
	Results of Operations	48
	Financial Condition	57
	Liquidity and Capital Resources	66
	Non-GAAP Financial Measures	67
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	70
Item 4.	Controls and Procedures	72
Part II	Other Information	73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 3.	Defaults Upon Senior Securities	73
Item 4.	Mine Safety Disclosures	73
Item 5.	Other Information	73
Item 6.	Exhibits	74

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 9, 2022, 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:

•

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, or 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;

•

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

•

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;

•

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

•

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;

•

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

•

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

•

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

•

the impact of the transition from London Interbank Offered Rate (“LIBOR”) and our ability to adequately manage such transition;

•

an economic downturn related to a pandemic, especially one affecting our core market areas;

•

inability of borrowers on deferral to make payments on their loans following the end of the deferral period;

•

potential fraud related to Small Business Administration (“SBA”) loan applications through the Paycheck Protection Program (“PPP”) as part of the U.S. Coronavirus Aid, Relief and Economic Security Act (“CARES Act”);

•

the effects of a pandemic or other widespread public health emergencies;

•

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

•

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

•

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;

•

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

•

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

•

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 our existing recognition practices;

•

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

•

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

•

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;

•

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

•

a failure in the internal controls we have implemented to address the risks inherent to the banking industry;

•

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;

•

the occurrence of adverse weather or manmade events, which could negatively affect our core markets or disrupt our operations;

•

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

•

the obligation associated with being a public company requires significant resources and management attention;

•

the findings from our investigations into the cyber-attack we suffered in November 2021, including our understanding of the nature, source and duration of the attack, indicate that our products and internal systems are secure and the success of our related mitigation and remediation efforts; and

•

other factors, if any, or changes to previously disclosed risk factors 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, 2022, and December 31, 2021

(Dollar amounts in thousands)


	(Unaudited) September 30,			December 31,
	2022			2021
ASSETS
Cash and due from banks	$	155,039		$	259,131
Federal funds sold		374			823
Cash and cash equivalents		155,413			259,954
Available-for-sale securities		1,198,962			1,327,442
Loans held for sale		1,518			4,214
Loans, net of allowance for credit losses of $46,499 and $48,365		3,208,524			3,107,262
Other real estate owned, net		10,412			9,523
Premises and equipment, net		100,566			104,038
Bank-owned life insurance		122,418			120,787
Federal Reserve Bank and Federal Home Loan Bank stock		24,428			17,510
Interest receivable		18,497			18,048
Goodwill		53,101			54,465
Core deposit intangibles, net		11,598			14,879
Other		94,978			99,509
Total assets	$	5,000,415		$	5,137,631
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand	$	1,217,094		$	1,244,117
Total non-interest-bearing deposits		1,217,094			1,244,117
Demand, savings and money market		2,335,847			2,522,289
Time		673,670			653,598
Total interest-bearing deposits		3,009,517			3,175,887
Total deposits		4,226,611			4,420,004
Federal funds purchased and retail repurchase agreements		47,443			56,006
Federal Home Loan Bank advances		186,001			—
Subordinated debt		96,263			95,885
Contractual obligations		15,562			17,692
Interest payable and other liabilities		32,729			47,413
Total liabilities		4,604,609			4,637,000
Commitments and contingent liabilities, see Notes 11 and 12
Stockholders’ equity, see Note 7
Common stock		204			203
Additional paid-in capital		482,668			478,862
Retained earnings		130,114			88,324
Accumulated other comprehensive income (loss), net of tax		(120,918	)		1,776
Treasury stock		(96,262	)		(68,534	)
Total stockholders’ equity		395,806			500,631
Total liabilities and stockholders’ equity	$	5,000,415		$	5,137,631

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months ended September 30, 2022, and 2021

(Dollar amounts in thousands, except per share data)


	(Unaudited) Three Months Ended September 30,						(Unaudited) Nine Months Ended September 30,
	2022			2021			2022			2021
Interest and dividend income
Loans, including fees	$	41,555		$	37,581		$	114,710		$	102,392
Securities, taxable		5,792			3,920			16,767			11,242
Securities, nontaxable		687			655			2,020			2,096
Federal funds sold and other		514			290			1,327			846
Total interest and dividend income		48,548			42,446			134,824			116,576
Interest expense
Deposits		4,403			1,881			8,308			6,316
Federal funds purchased and retail repurchase agreements		71			24			150			72
Federal Home Loan Bank advances		409			10			594			155
Subordinated debt		1,721			1,556			4,973			4,669
Total interest expense		6,604			3,471			14,025			11,212
Net interest income		41,944			38,975			120,799			105,364
Provision (reversal) for credit losses		(136	)		1,058			276			(6,355	)
Net interest income after provision (reversal) for credit losses		42,080			37,917			120,523			111,719
Non-interest income
Service charges and fees		2,788			2,360			7,927			6,125
Debit card income		2,682			2,574			8,120			7,603
Mortgage banking		310			801			1,300			2,584
Increase in value of bank-owned life insurance		754			1,169			2,355			2,446
Net gain on acquisition and branch sales		—			—			540			585
Net gain (loss) from securities transactions		(17	)		381			(9	)		398
Other		2,452			546			7,395			3,902
Total non-interest income		8,969			7,831			27,628			23,643
Non-interest expense
Salaries and employee benefits		15,442			13,588			45,893			39,079
Net occupancy and equipment		3,127			2,475			9,304			7,170
Data processing		4,138			3,257			11,549			9,394
Professional fees		1,265			1,076			3,547			3,148
Advertising and business development		1,191			760			3,139			2,241
Telecommunications		487			439			1,399			1,531
FDIC insurance		340			465			780			1,305
Courier and postage		436			344			1,348			1,040
Free nationwide ATM cost		551			519			1,593			1,504
Amortization of core deposit intangibles		957			1,030			3,118			3,094
Loan expense		174			207			566			626
Other real estate owned		188			(342	)		201			(805	)
Loss on debt extinguishment		—			372			—			372
Merger expenses		115			4,015			526			4,627
Other		3,825			2,484			10,168			7,050
Total non-interest expense		32,236			30,689			93,131			81,376
Income (loss) before income taxes		18,813			15,059			55,020			53,986
Provision (benefit) for income taxes		3,642			3,286			8,940			11,972
Net income (loss) and net income (loss) allocable to common stockholders	$	15,171		$	11,773		$	46,080		$	42,014
Basic earnings (loss) per share	$	0.94		$	0.82		$	2.83		$	2.92
Diluted earnings (loss) per share	$	0.93		$	0.80		$	2.79		$	2.86

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months ended September 30, 2022, and 2021

(Dollar amounts in thousands)


	(Unaudited) Three Months Ended September 30,						(Unaudited) Nine Months Ended September 30,
	2022			2021			2022			2021
Net income	$	15,171		$	11,773		$	46,080		$	42,014
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period on available-for-sale securities		(55,639	)		(5,683	)		(160,342	)		(14,141	)
Less: reclassification for net gains included in net income		—			373			(77	)		373
Unrealized holding gains (losses) arising during the period on cash flow hedges		(2,149	)		—			(2,616	)		—
Total other comprehensive income (loss)		(57,788	)		(5,310	)		(163,035	)		(13,768	)
Tax effect		14,296			1,335			40,341			3,462
Other comprehensive income (loss), net of tax		(43,492	)		(3,975	)		(122,694	)		(10,306	)
Comprehensive income (loss)	$	(28,321	)	$	7,798		$	(76,614	)	$	31,708

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months ended September 30, 2022, and 2021

(Unaudited)

(Dollar amounts in thousands, except share and per share data)


	Common Stock					Additional					Accumulated Other						Total
	Shares Outstanding			Amount		Paid-In Capital		Retained Earnings			Comprehensive Income (Loss)			Treasury Stock			Stockholders’ Equity
Balance at July 1, 2021		14,360,172		$	176	$	389,394	$	68,625		$	13,450		$	(58,650	)	$	412,995
Net income		—			—		—		11,773			—			—			11,773
Other comprehensive income (loss), net of tax effects		—			—		—		—			(3,975	)		—			(3,975	)
Cash dividends - common stock, $0.08 per share		—			—		—		(1,172	)		—			—			(1,172	)
Stock-based compensation		891			—		566		—			—			—			566
Common stock issued upon exercise of stock options		139,456			1		2,032		—			—			—			2,033
Common stock issued under stock-based incentive plan		380			—		—		—			—			—			—
Common stock issued under employee stock purchase plan		16,034			1		329		—			—			—			330
Treasury stock purchase		(151,148	)		—		—		—			—			(4,801	)		(4,801	)
Balance at September 30, 2021		14,365,785		$	178	$	392,321	$	79,226		$	9,475		$	(63,451	)	$	417,749

Balance at July 1, 2022		16,106,818		$	204	$	480,897	$	116,576		$	(77,426	)	$	(92,136	)	$	428,115
Net income		—			—		—		15,171			—			—			15,171
Other comprehensive income (loss), net of tax effects		—			—		—		—			(43,492	)		—			(43,492	)
Cash dividends - common stock, $0.10 per share		—			—		—		(1,600	)		—			—			(1,600	)
Dividend equivalents- restricted stock units, $0.10 per share		—			—		—		(33	)		—			—			(33	)
Stock-based compensation		—			—		888		—			—			—			888
Common stock issued upon exercise of stock options		21,500			—		482		—			—			—			482
Common stock issued under stock-based incentive plan		1,861			—		—		—			—			—			—
Common stock issued under employee stock purchase plan		14,555			—		401											401
Treasury stock purchases		(126,900	)		—		—		—			—			(4,126	)		(4,126	)
Balance at September 30, 2022		16,017,834		$	204	$	482,668	$	130,114		$	(120,918	)	$	(96,262	)	$	395,806

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months ended September 30, 2022, and 2021

(Unaudited)

(Dollar amounts in thousands, except share and per 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, 2021		14,540,556		$	174	$	386,820		$	50,787		$	19,781		$	(43	)	$	(49,870	)	$	407,649
Implementation of ASU 2016-13, current expected credit losses		—			—		—			(12,403	)		—			—			—			(12,403	)
Net income		—			—		—			42,014			—			—			—			42,014
Other comprehensive income (loss), net of tax effects		—			—		—			—			(10,306	)		—			—			(10,306	)
Cash dividends - common stock, $0.08 per share		—			—		—			(1,172	)		—			—			—			(1,172	)
Stock-based compensation		10,242			—		2,226			—			—			—			—			2,226
Common stock issued upon exercise of stock options		188,692			2		2,706			—			—			—			—			2,708
Common stock issued under stock-based incentive plan		72,804			1		(1	)		—			—			—			—			—
Common stock issued under employee stock purchase plan		33,655			1		570			—			—			—			—			571
Repayment on employee stock loans		—					—			—			—			43						43
Treasury stock purchase		(480,164	)		—		—			—			—			—			(13,581	)		(13,581	)
Balance at September 30, 2021		14,365,785		$	178	$	392,321		$	79,226		$	9,475		$	—		$	(63,451	)	$	417,749

Balance at January 1, 2022		16,760,115		$	203	$	478,862		$	88,324		$	1,776		$	—		$	(68,534	)	$	500,631
Net income		—			—		—			46,080			—			—			—			46,080
Other comprehensive income (loss), net of tax effects		—			—		—			—			(122,694	)		—			—			(122,694	)
Cash dividends - common stock, $0.26 per share		—			—		—			(4,208	)		—			—			—			(4,208	)
Dividend equivalents- restricted stock units, $0.26 per share		—			—		—			(82	)		—			—			—			(82	)
Stock-based compensation		624			—		2,436			—			—			—			—			2,436
Common stock issued upon exercise of stock options		28,656			—		579			—			—			—			—			579
Common stock issued under stock-based incentive plan		66,737			1		(1	)		—			—			—			—			—
Common stock issued under employee stock purchase plan		28,829			—		792			—			—			—			—			792
Treasury stock purchases		(867,127	)		—		—			—			—			—			(27,728	)		(27,728	)
Balance at September 30, 2022		16,017,834		$	204	$	482,668		$	130,114		$	(120,918	)	$	—		$	(96,262	)	$	395,806

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months ended September 30, 2022, and 2021

(Dollar amounts in thousands)


	(Unaudited) September 30,
	2022			2021
Cash flows from operating activities
Net income	$	46,080		$	42,014
Adjustments to reconcile net income to net cash from operating activities:
Stock-based compensation		2,436			2,226
Depreciation		3,391			3,038
Amortization of operating lease right-of-use asset		533			302
Amortization of cloud computing implementation costs		141			124
Provision (reversal) for credit losses		276			(6,355	)
Net amortization (accretion) of purchase valuation adjustments		(3,437	)		16,405
Amortization (accretion) of premiums and discounts on securities		5,059			7,275
Amortization of intangible assets		3,225			3,126
Deferred income taxes		484			(2,311	)
Federal Home Loan Bank stock dividends		(181	)		(23	)
Loss (gain) on sales and valuation adjustments on other real estate owned		(202	)		(1,263	)
Net loss (gain) on sales and settlements of securities		(78	)		(373	)
Change in unrealized (gains) losses on equity securities		87			(25	)
Loss (gain) on disposal of premises and equipment		(83	)		(18	)
Loss (gain) on lease termination	—				(2	)
Loss (gain) on sales of foreclosed assets		(355	)		(28	)
Loss (gain) on sales of loans		(994	)		(2,205	)
Originations of loans held for sale		(42,443	)		(76,982	)
Proceeds from the sale of loans held for sale		45,925			87,325
Increase in the value of bank-owned life insurance		(2,355	)		(2,446	)
Change in fair value of derivatives recognized in earnings		(1,684	)		(197	)
Gain on acquisition and branch sales		(540	)		(585	)
Payments on operating lease payable		(622	)		(374	)
Net change in:
Interest receivable		(840	)		312
Other assets		21,614			10,113
Interest payable and other liabilities		(17,741	)		562
Net cash provided by (used in) operating activities		57,696			79,635
Cash flows (to) from investing activities
Purchases of available-for-sale securities		(178,313	)		(633,884	)
Proceeds from sales, calls, pay-downs and maturities of available-for-sale securities		141,392			339,702
Net change in interest-bearing time deposits in other banks	—				249
Net change in loans		(126,122	)		127,770
Purchase of mortgage loans		(794	)		(214,181	)
Purchase of government guaranteed loans		(2,293	)		(10,958	)
Purchase of premises and equipment		(1,199	)		(4,358	)
Proceeds from sale of premises and equipment		139			24
Proceeds from sale of foreclosed assets		29,678			152
Net redemptions (purchases) of Federal Home Loan Bank and Federal Reserve Bank stock		(6,736	)		1,898
Net redemptions (purchases) of correspondent and miscellaneous other stock		(3,673	)		(68	)
Proceeds from sale of other real estate owned		3,518			3,102
Purchase of bank-owned life insurance	—				(25,000	)
Proceeds from bank-owned life insurance death benefits		723			1,059
Net cash paid from branch sale to United Bank and Trust		(22,940	)	—
Net cash provided by (used in) investing activities		(166,620	)		(414,493	)
Cash flows (to) from financing activities
Net increase (decrease) in deposits		(140,607	)		215,171


Net change in federal funds purchased and retail repurchase agreements		(8,563	)		3,108
Net borrowings (repayments) on Federal Home Loan Bank line of credit		186,001			—
Proceeds from Federal Home Loan Bank term advances		403,501			70,000
Principal repayments on Federal Home Loan Bank term advances		(403,501	)		(80,107	)
Proceeds from Federal Reserve Bank discount window		1,000			1,000
Principal payments on Federal Reserve Bank discount window		(1,000	)		(1,000	)
Principal payments on employee stock loans	—				43
Proceeds from the exercise of employee stock options		579			2,708
Proceeds from employee stock purchase plan		792			571
Debt issuance cost	—				(16	)
Purchase of treasury stock		(27,728	)		(13,581	)
Net change in contractual obligations		(2,130	)		(1,419	)
Dividends paid on common stock		(3,961	)		—
Net cash provided by (used in) financing activities		4,383			196,478
Net change in cash and cash equivalents		(104,541	)		(138,380	)
Cash and cash equivalents, beginning of period		259,954			280,698
Ending cash and cash equivalents	$	155,413		$	142,318
Supplemental cash flow information:
Interest paid	$	14,471		$	10,228
Income taxes paid, net of refunds		666			11,990
Supplemental noncash disclosures:
Other real estate owned acquired in settlement of loans		2,224			876
Other repossessed assets acquired in settlement of loans		771			68
Investment securities purchased but not settled	—				12,084
Purchase of low-income tax credit investment and resulting contractual obligations	—				15,000
Other real estate owned recorded as a result of transferring non-operational branch right-of-use-asset	$	2,210		$	—

See accompanying condensed notes to interim consolidated financial statements.

EQUITY BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

(Dollar amounts in thousands, except per share data)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 the information and footnotes required by GAAP 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, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 9, 2022. Operating results for the nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, 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.

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include contract modifications; hedging relationships; and sale or transfer of debt securities classified as held-to-maturity. The guidance was effective immediately for the Company and the amendments may be applied prospectively through December 31, 2022. The Company’s contracts issued prior to December 31, 2021, are primarily LIBOR tenures that will continue to be published until June 30, 2023, and the Company has reviewed the respective fallback language of these contracts and believes that the language is operational. The Company will continually evaluate these contracts until the indexes are no longer published; however, the financial impact on our financial condition, results of operations and cash flows will depend on the population of contracts that are still outstanding on the date the underlying indexes are no longer published.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). ASU 2021-01 clarify that certain optional expedients and exceptions that are noted in Topic 848 apply to derivatives that are affected by the discounting transition. Certain provisions, if elected by the Company, apply to derivative instruments that use an interest rate for managing, discounting or contract price alignment that is modified as a result of reference rate reform. The guidance was effective immediately for the Company and the amendments may be applied prospectively through December 31, 2022. The Company’s contracts issued prior to December 31, 2021, are primarily LIBOR tenures that will continue to be published until June 30, 2023, and the Company has reviewed the respective fallback language of these contracts and believes that the language is operational. The Company will continually evaluate these contracts until the indexes are no longer published; however, the financial impact on the Company’s financial condition, results of operations and cash flows will depend on the population of contracts that are still outstanding on the date the underlying indexes are no longer published.

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815), Fair Value Hedging – Portfolio Layer Method. ASU 2022-01 expands the current last-of-layer method to allow multiple hedged layers of a single closed portfolio; expands

the scope of the portfolio layer method to include nonprepayable financial assets; addresses the types of hedging instruments that are eligible in a single-layer hedge; provided additional guidance on the accounting for and disclosure of hedging basis adjustments; and provided guidance on how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. The guidance will be effective for the Company in fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This guidance requires a modified retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings on the initial application date. The Company is currently evaluating the guidance but does not expect it will have a material financial impact on its financial condition, results of operations or cash flows.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326), Trouble Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for loan restructurings by creditor when a borrower is experiencing financial difficulty. Creditors will be required to apply the refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU 2022-02 requires that public business entities disclose gross write offs by year of origination for financing receivables and net investment in leases within the scope of Financial Instruments – Credit Losses – Measured at Amortized Cost of the Accounting Standards Codification. The guidance is effective for the Company for fiscal years beginning after December 31, 2022, including interim periods within those fiscal years. The Company is permitted to apply the guidance prospectively or through a modified retrospective method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Since the Company had adopted ASU 2016-13 effective January 1, 2021, the Company is permitted to early adopt the guidance in totality or individually for the topics covered in this update. The Company will not be early adopting this guidance and does not expect the guidance to have a material financial impact on our financial condition, results of operations or cash flows, but will impact the Company’s future loan disclosures.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and the restriction is not considered in measuring fair value. In addition, the guidance clarifies that the contractual restriction cannot be valued as a separate unit of account or be recognized separately. This guidance provides additional disclosures for equity securities subject to contractual sale restrictions. The guidance is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not been issued or made available for issuance. The Company does not expect this guidance to have a material financial impact on our financial condition, results of operations or cash flows.

3NOTE 2 – INVESTMENTS

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			Allowance for Credit Losses		Fair Value
September 30, 2022
Available-for-sale securities
U.S. Government-sponsored entities	$	123,375	$	—	$	(17,428	)	$	—	$	105,947
U.S. Treasury securities		257,508		—		(27,397	)		—		230,111
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		577,485		—		(67,009	)		—		510,476
Private label residential mortgage-backed securities		192,585		—		(27,324	)		—		165,261
Corporate		56,620		—		(3,264	)		—		53,356
Small Business Administration loan pools		13,376		—		(782	)		—		12,594
State and political subdivisions		136,005		2		(14,790	)		—		121,217
	$	1,356,954	$	2	$	(157,994	)	$	—	$	1,198,962


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Allowance for Credit Losses		Fair Value
December 31, 2021
Available-for-sale securities
U.S. Government-sponsored entities	$	124,898	$	13	$	(1,504	)	$	—	$	123,407
U.S. Treasury securities		157,289		—		(1,687	)		—		155,602
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		661,584		10,215		(6,912	)		—		664,887
Private label residential mortgage-backed securities		173,717		—		(2,029	)		—		171,688
Corporate		52,555		1,437		(215	)		—		53,777
Small Business Administration loan pools		16,568		13		(106	)		—		16,475
State and political subdivisions		138,404		3,618		(416	)		—		141,606
	$	1,325,015	$	15,296	$	(12,869	)	$	—	$	1,327,442

The fair value and amortized cost of debt securities at September 30, 2022, 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
	Amortized Cost		Fair Value
Within one year	$	4,658	$	4,645
One to five years		269,309		245,211
Five to ten years		239,362		211,250
After ten years		73,555		62,119
Mortgage-backed securities		770,070		675,737
Total debt securities	$	1,356,954	$	1,198,962

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $800,325 at September 30, 2022, and $892,182 at December 31, 2021.

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, 2022, and December 31, 2021.


	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
September 30, 2022
Available-for-sale securities
U.S. Government-sponsored entities	$	29,551	$	(5,489	)	$	76,396	$	(11,939	)	$	105,947	$	(17,428	)
U.S. Treasury securities		179,477		(19,214	)		50,634		(8,183	)		230,111		(27,397	)
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		302,167		(33,447	)		208,309		(33,562	)		510,476		(67,009	)
Private label residential mortgage-backed securities		75,120		(12,466	)		90,141		(14,858	)		165,261		(27,324	)
Corporate		49,106		(2,514	)		4,250		(750	)		53,356		(3,264	)
Small Business Administration loan pools		5,290		(773	)		7,304		(9	)		12,594		(782	)
State and political subdivisions		107,965		(11,657	)		10,582		(3,133	)		118,547		(14,790	)
Total temporarily impaired securities	$	748,676	$	(85,560	)	$	447,616	$	(72,434	)	$	1,196,292	$	(157,994	)
December 31, 2021
Available-for-sale securities
U.S. Government-sponsored entities	$	117,618	$	(1,504	)	$	—	$	—		$	117,618	$	(1,504	)
U.S. Treasury securities		155,601		(1,687	)		—		—			155,601		(1,687	)
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		378,057		(6,860	)		2,868		(52	)		380,925		(6,912	)
Private label residential mortgage-backed securities		159,381		(1,978	)		2,208		(51	)		161,589		(2,029	)
Corporate		4,785		(215	)		—		—			4,785		(215	)
Small Business Administration loan pools		15,459		(106	)		—		—			15,459		(106	)
State and political subdivisions		28,443		(416	)		—		—			28,443		(416	)
Total temporarily impaired securities	$	859,344	$	(12,766	)	$	5,076	$	(103	)	$	864,420	$	(12,869	)

As of September 30, 2022, the Company held 587 available-for-sale 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, it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and the fair value is expected to recover as the securities approach maturity.

The Company's available-for-sale investments that carry some form of credit risk are the investments in private label residential mortgage-backed securities, corporate securities and state and political subdivisions securities.

All private label residential mortgage-backed securities held by the Company are senior in the capital structure, carry substantial credit enhancement and are 20% risk weighted by the Simplified Supervisory Formula Approach ("SSFA"). At September 30, 2022, the Company does not anticipate any credit losses in the private label residential mortgage-backed securities portfolio.

The Company's corporate debt exposure consists of 14 separate positions in U.S. financial institutions, all of which the Company has determined to be investment grade. Substantially all of the positions are subordinated debt issued by bank holding companies. The Company periodically reviews financial data of the issuers to ensure their continued investment grade status. At September 30, 2022, the Company does not anticipate any credit losses in the corporate debt securities portfolio.

The Company's portfolio of state and political subdivisions securities is comprised of 211 positions of which 90% of the positions are rated "A" or better by a Nationally Recognized Statistical Ratings Organization ("NRSRO"), and 65% of the overall portfolio is made up of general obligation bonds. The Company periodically reviews financial data of the entities and regularly monitors credit ratings changes of the entities. At September 30, 2022, the Company does not anticipate any credit losses in the state and political subdivisions securities portfolio.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Proceeds	$	—	$	7,347	$	3,265	$	7,347
Gross gain		—		373		115		373
Gross losses		—		—		36		—
Income tax expense on net realized gains		—		94		779		94

The Company also invests in several other investments, including investments in stocks and partnerships, which are included in other assets. The following table shows the various investment balances and method of accounting at September 30, 2022, and December 31, 2022.


	September 30, 2022		December 31, 2021
Investments in stocks
Accounted for at fair value through net income	$	556	$	644
Accounted for at amortized cost assessed for impairment		1,398		223
Total investments in stocks		1,954		867
Investments in partnerships
Accounted for at equity method		1,651		924
Accounted for at hypothetical liquidation book value		1,836		2,223
Accounted for at historical amortized cost		20,244		21,390
Total investments in partnerships		23,731		24,537
Total other investments	$	25,685	$	25,404

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Types of loans and normal collateral securing those loans are listed below.

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.

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. Loans are normally secured by the assets being purchased or already owned by the borrower, inventory or accounts receivable. These may include SBA and other guaranteed or partially guaranteed types of loans.

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

Agricultural real estate: Agricultural real estate loans are loans typically secured by farmland.

Agricultural: Agricultural loans are primarily operating lines subject to annual farming revenues including productivity/yield of the agricultural commodities produced. These loans may be secured by growing crops, stored crops, livestock, equipment, and miscellaneous receivables.

Consumer: Consumer loans may include installment loans, unsecured and secured personal lines of credit, overdraft protection and letters of credit. These loans are generally secured by consumer assets but may be unsecured.

The following table lists categories of loans at September 30, 2022, and December 31, 2021.


	September 30, 2022			December 31, 2021
Commercial real estate	$	1,655,646		$	1,486,148
Commercial and industrial		607,722			567,497
Residential real estate		573,431			638,087
Agricultural real estate		200,415			198,330
Agricultural		115,048			166,975
Consumer		102,761			98,590
Total loans		3,255,023			3,155,627
Allowance for credit losses		(46,499	)		(48,365	)
Net loans	$	3,208,524		$	3,107,262

Included in the commercial and industrial loan balances at September 30, 2022, and December 31, 2021, are $7,152 and $44,783 of loans that were originated under the SBA PPP program. At September 30, 2022, and December 31, 2021, unamortized loan fees on these loans were $114 and $1,252.

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 nine months ended September 30, 2022, the Company purchased one pool of residential mortgage loans totaling $795. During the first nine months of 2021, the Company purchased five pools of residential real estate loans totaling $214,181. As of September 30, 2022, and December 31, 2021, residential real estate loans include $334,241 and $372,069 of purchased residential real estate loans.

The Company occasionally purchases the government guaranteed portion of loans originated by other financial institutions to hold for investment. During the nine months ended September 30, 2022, the Company purchased $2,293 in loans guaranteed by governmental agencies. Government guaranteed loans totaling $10,958 were purchased in the nine months ended September 30, 2021.

The unamortized discount of merger purchase accounting adjustments related to non-purchase credit deteriorated loans included in the loan totals above are $3,947 with related loans of $312,707 at September 30, 2022, and $6,649 with related loans of $527,422 at December 31, 2021.

Overdraft deposit accounts are reclassified and included in consumer loans above. These accounts totaled $642 at September 30, 2022, and $886 at December 31, 2021.

The following tables present the activity in the allowance for credit losses by class for the three month periods ended September 30, 2022 and 2021.


September 30, 2022	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate		Agricultural			Consumer			Total
Allowance for credit losses:
Beginning balance	$	22,665		$	13,209		$	6,818		$	1,007	$	2,289		$	2,250		$	48,238
Provision for credit losses		(1,712	)		911			486			40		(202	)		341			(136	)
Loans charged-off		(612	)		(706	)		(51	)		—		(44	)		(266	)		(1,679	)
Recoveries		7			1			7			1		—			60			76
Total ending allowance balance	$	20,348		$	13,415		$	7,260		$	1,048	$	2,043		$	2,385		$	46,499


September 30, 2021	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Agricultural			Consumer			Total
Allowance for credit losses:
Beginning balance	$	15,225		$	18,690		$	9,808		$	847		$	4,695		$	2,569		$	51,834
Provision for credit losses		(2,723	)		5,473			(1,473	)		145			(366	)		2			1,058
Loans charged-off		(116	)		(37	)		—			(3	)		—			(200	)		(356	)
Recoveries		96			1			4			15			—			111			227
Total ending allowance balance	$	12,482		$	24,127		$	8,339		$	1,004		$	4,329		$	2,482		$	52,763

The following tables present the activity in the allowance for credit losses by class for the nine month periods ended September 30, 2022 and 2021.


September 30, 2022	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Agricultural			Consumer			Total
Allowance for credit losses:
Beginning balance	$	22,478		$	12,248		$	5,560		$	2,235		$	3,756		$	2,088		$	48,365
Provision for credit losses		(1,293	)		1,833			1,758			(1,195	)		(1,668	)		841			276
Loans charged-off		(906	)		(785	)		(99	)		—			(45	)		(760	)		(2,595	)
Recoveries		69			119			41			8			—			216			453
Total ending allowance balance	$	20,348		$	13,415		$	7,260		$	1,048		$	2,043		$	2,385		$	46,499


September 30, 2021	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Agricultural			Consumer			Total
Allowance for credit losses:
Beginning balance, prior to adoption of ASC 326	$	9,012		$	12,456		$	4,559		$	904		$	758		$	6,020		$	33,709
Cumulative effect adjustment of adopting ASC 326		5,612			4,167			8,870			167			(207	)		(2,877	)		15,732
Impact of adopting ASC 326 - PCD loans		4,571			(218	)		220			960			4,905			—			10,438
Provision for credit losses		(6,767	)		7,749			(5,307	)		(555	)		(1,130	)		(345	)		(6,355	)
Loans charged-off		(169	)		(98	)		(12	)		(505	)		(1	)		(575	)		(1,360	)
Recoveries		223			71			9			33			4			259			599
Total ending allowance balance	$	12,482		$	24,127		$	8,339		$	1,004		$	4,329		$	2,482		$	52,763

The following tables present the recorded investment in loans and the balance in the allowance for credit losses by portfolio and class based on method to determine allowance for credit loss as of September 30, 2022, and December 31, 2021.


September 30, 2022	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Agricultural Real Estate		Agricultural		Consumer		Total
Allowance for credit losses:
Individually evaluated for credit losses	$	856	$	1,606	$	816	$	253	$	1,745	$	67	$	5,343
Collectively evaluated for credit losses		19,492		11,809		6,444		795		298		2,318		41,156
Total	$	20,348	$	13,415	$	7,260	$	1,048	$	2,043	$	2,385	$	46,499
Loan Balance:
Individually evaluated for credit losses	$	5,528	$	8,345	$	3,407	$	3,882	$	4,558	$	289	$	26,009
Collectively evaluated for credit losses		1,650,118		599,377		570,024		196,533		110,490		102,472		3,229,014
Total	$	1,655,646	$	607,722	$	573,431	$	200,415	$	115,048	$	102,761	$	3,255,023


December 31, 2021	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Agricultural Real Estate		Agricultural		Consumer		Total
Allowance for credit losses:
Individually evaluated for credit losses	$	4,381	$	3,650	$	892	$	1,488	$	3,546	$	75	$	14,032
Collectively evaluated for credit losses		18,097		8,598		4,668		747		210		2,013		34,333
Total	$	22,478	$	12,248	$	5,560	$	2,235	$	3,756	$	2,088	$	48,365
Loan Balance:
Individually evaluated for credit losses	$	45,421	$	13,786	$	5,362	$	14,959	$	13,049	$	357	$	92,934
Collectively evaluated for credit losses		1,440,727		553,711		632,725		183,371		153,926		98,233		3,062,693
Total	$	1,486,148	$	567,497	$	638,087	$	198,330	$	166,975	$	98,590	$	3,155,627

The following table presents information related to nonaccrual loans at September 30, 2022, and December 31, 2021.


	September 30, 2022
	Unpaid Principal Balance		Recorded Investment		Allowance for Credit Losses Allocated
With no related allowance recorded:
Commercial real estate	$	4,590	$	2,965	$	—
Commercial and industrial		2,745		1,995		—
Residential real estate		30		—		—
Agricultural real estate		2,812		1,758		—
Agricultural		9		9		—
Consumer		17		10		—
Subtotal		10,203		6,737		—
With an allowance recorded:
Commercial real estate		2,574		2,376		775
Commercial and industrial		9,903		5,541		1,246
Residential real estate		3,534		3,269		807
Agricultural real estate		1,965		1,510		237
Agricultural		6,231		3,432		1,478
Consumer		324		264		66
Subtotal		24,531		16,392		4,609
Total	$	34,734	$	23,129	$	4,609


	December 31, 2021
	Unpaid Principal Balance		Recorded Investment		Allowance for Credit Losses Allocated
With no related allowance recorded:
Commercial real estate	$	—	$	—	$	—
Commercial and industrial		6,060		1,964		—
Residential real estate		609		429		—
Agricultural real estate		1,795		1,660		—
Agricultural		—		—		—
Consumer		49		49		—
Subtotal		8,513		4,102		—
With an allowance recorded:
Commercial real estate		7,690		6,833		1,632
Commercial and industrial		4,976		4,593		1,800
Residential real estate		5,170		4,646		888
Agricultural real estate		3,726		2,738		637
Agricultural		8,836		6,175		2,307
Consumer		314		274		74
Subtotal		30,712		25,259		7,338
Total	$	39,225	$	29,361	$	7,338

The table below presents average recorded investment and interest income related to nonaccrual loans for the three and nine months ended September 30, 2022, and 2021. 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, 2022				September 30, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	2,646	$	—	$	—	$	—
Commercial and industrial		1,979		157		—		—
Residential real estate		—		—		—		—
Agricultural real estate		1,449		—		3,022		—
Agricultural		5		—		884		—
Consumer		5		1		—		—
Subtotal		6,084		158		3,906		—
With an allowance recorded:
Commercial real estate		2,577		20		7,107		1
Commercial and industrial		3,464		97		36,720		—
Residential real estate		3,086		18		2,870		24
Agricultural real estate		1,924		2		2,501		—
Agricultural		3,594		—		7,576		69
Consumer		266		2		215		1
Subtotal		14,911		139		56,989		95
Total	$	20,995	$	297	$	60,895	$	95


	As of and for the nine months ended
	September 30, 2022				September 30, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	1,528	$	—	$	421	$	3
Commercial and industrial		1,480		157		161		35
Residential real estate		384		1		51		2
Agricultural real estate		1,554		—		2,307		82
Agricultural		2		—		2,156		—
Consumer		15		1		—		—
Subtotal		4,963		159		5,096		122
With an allowance recorded:
Commercial real estate		3,702		20		7,022		19
Commercial and industrial		3,808		97		31,203		119
Residential real estate		3,559		19		2,843		26
Agricultural real estate		2,251		5		3,346		54
Agricultural		4,437		—		5,991		113
Consumer		291		2		245		2
Subtotal		18,048		143		50,650		333
Total	$	23,011	$	302	$	55,746	$	455

The following tables present the aging of the recorded investment in past due loans as of September 30, 2022, and December 31, 2021, by portfolio and class of loans.


September 30, 2022	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	$	787	$	940	$	—	$	5,341	$	1,648,578	$	1,655,646
Commercial and industrial		1,545		201		—		7,536		598,440		607,722
Residential real estate		626		2,525		—		3,269		567,011		573,431
Agricultural real estate		26		2		—		3,268		197,119		200,415
Agricultural		200		117		—		3,441		111,290		115,048
Consumer		490		77		—		274		101,920		102,761
Total	$	3,674	$	3,862	$	—	$	23,129	$	3,224,358	$	3,255,023


December 31, 2021	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	$	4,633	$	408	$	256	$	6,833	$	1,474,018	$	1,486,148
Commercial and industrial		424		88		—		6,557		560,428		567,497
Residential real estate		620		1,126		—		5,075		631,266		638,087
Agricultural real estate		28		57		—		4,398		193,847		198,330
Agricultural		5		—		—		6,175		160,795		166,975
Consumer		316		61		—		323		97,890		98,590
Total	$	6,026	$	1,740	$	256	$	29,361	$	3,118,244	$	3,155,627

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. Loans that participated in the short-term deferral program are not automatically considered classified solely due to a deferral, are subject to ongoing monitoring and will be downgraded or placed on nonaccrual if a noted weakness exists. The Company uses the following definitions for risk ratings.

Pass: Loans classified as pass include all loans that do not fall under one of the three following categories.

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.

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.

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.

Based on the most recent analysis performed, the risk category of loans, by type and year of origination, at September 30, 2022, is as follows.


September 30, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term		Total
Commercial real estate
Risk rating
Pass	$	301,156	$	266,358	$	204,570	$	101,138	$	122,674	$	183,136	$	466,019	$	762	$	1,645,813
Special mention		294		220		—		—		—		572		—		—		1,086
Substandard		79		4,346		364		119		—		3,506		333		—		8,747
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial real estate	$	301,529	$	270,924	$	204,934	$	101,257	$	122,674	$	187,214	$	466,352	$	762	$	1,655,646
Commercial and industrial
Risk rating
Pass	$	154,208	$	93,861	$	73,112	$	43,101	$	7,352	$	12,248	$	187,129	$	6,857	$	577,868
Special mention		—		—		—		—		683		3,857		—		—		4,540
Substandard		314		4,227		2,208		10,144		1,470		811		6,140		—		25,314
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial and industrial	$	154,522	$	98,088	$	75,320	$	53,245	$	9,505	$	16,916	$	193,269	$	6,857	$	607,722
Residential real estate
Risk rating
Pass	$	24,760	$	304,919	$	6,340	$	14,632	$	49,317	$	109,027	$	60,725	$	277	$	569,997
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		50		188		313		2,800		83		—		3,434
Doubtful		—		—		—		—		—		—		—		—		—
Total residential real estate	$	24,760	$	304,919	$	6,390	$	14,820	$	49,630	$	111,827	$	60,808	$	277	$	573,431
Agricultural real estate
Risk rating
Pass	$	26,733	$	21,192	$	29,551	$	13,296	$	7,995	$	20,043	$	75,339	$	300	$	194,449
Special mention		874		—		—		—		—		612		750		—		2,236
Substandard		31		1,353		—		116		491		1,702		37		—		3,730
Doubtful		—		—		—		—		—		—		—		—		—
Total agricultural real estate	$	27,638	$	22,545	$	29,551	$	13,412	$	8,486	$	22,357	$	76,126	$	300	$	200,415
Agricultural
Risk rating
Pass	$	17,159	$	9,796	$	10,165	$	3,363	$	2,484	$	2,353	$	62,356	$	150	$	107,826
Special mention		—		—		1		92		22		375		665		—		1,155
Substandard		—		1,017		1,838		2,003		397		230		582		—		6,067
Doubtful		—		—		—		—		—		—		—		—		—
Total agricultural	$	17,159	$	10,813	$	12,004	$	5,458	$	2,903	$	2,958	$	63,603	$	150	$	115,048
Consumer
Risk rating
Pass	$	48,732	$	19,701	$	9,513	$	4,002	$	1,752	$	3,820	$	14,976	$	1	$	102,497
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		102		25		86		16		35		—		—		264
Doubtful		—		—		—		—		—		—		—		—		—
Total consumer	$	48,732	$	19,803	$	9,538	$	4,088	$	1,768	$	3,855	$	14,976	$	1	$	102,761
Total loans
Risk rating
Pass	$	572,748	$	715,827	$	333,251	$	179,532	$	191,574	$	330,627	$	866,544	$	8,347	$	3,198,450
Special mention		1,168		220		1		92		705		5,416		1,415		—		9,017
Substandard		424		11,045		4,485		12,656		2,687		9,084		7,175		—		47,556
Doubtful		—		—		—		—		—		—		—		—		—
Total loans	$	574,340	$	727,092	$	337,737	$	192,280	$	194,966	$	345,127	$	875,134	$	8,347	$	3,255,023

Based on the analysis performed at December 31, 2021, the risk category of loans, by type and year of origination is as follows.


December 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term		Total
Commercial real estate
Risk rating
Pass	$	301,947	$	212,444	$	159,374	$	134,465	$	72,249	$	164,363	$	409,109	$	594	$	1,454,545
Special mention		126		885		—		11,817		1,168		8,705		—		—		22,701
Substandard		1,687		401		145		77		828		5,764		—		—		8,902
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial real estate	$	303,760	$	213,730	$	159,519	$	146,359	$	74,245	$	178,832	$	409,109	$	594	$	1,486,148
Commercial and industrial
Risk rating
Pass	$	170,263	$	100,457	$	57,955	$	11,019	$	17,327	$	8,855	$	155,181	$	9,726	$	530,783
Special mention		19		—		1,958		1,482		284		5,750		—		—		9,493
Substandard		4,200		5,410		10,238		1,417		444		43		5,469		—		27,221
Doubtful		—		—		—		—		—		—		—		—		—
Total commercial and industrial	$	174,482	$	105,867	$	70,151	$	13,918	$	18,055	$	14,648	$	160,650	$	9,726	$	567,497
Residential real estate
Risk rating
Pass	$	336,775	$	24,633	$	22,520	$	60,461	$	34,453	$	102,363	$	51,584	$	184	$	632,973
Special mention		—		—		—		—		—		25		—		—		25
Substandard		—		79		48		159		1,909		2,740		154		—		5,089
Doubtful		—		—		—		—		—		—		—		—		—
Total residential real estate	$	336,775	$	24,712	$	22,568	$	60,620	$	36,362	$	105,128	$	51,738	$	184	$	638,087
Agricultural real estate
Risk rating
Pass	$	38,412	$	36,667	$	18,442	$	12,142	$	14,432	$	21,792	$	42,541	$	—	$	184,428
Special mention		682		—		—		—		40		456		32		—		1,210
Substandard		1,705		206		6,020		592		2,530		554		1,085		—		12,692
Doubtful		—		—		—		—		—		—		—		—		—
Total agricultural real estate	$	40,799	$	36,873	$	24,462	$	12,734	$	17,002	$	22,802	$	43,658	$	—	$	198,330
Agricultural
Risk rating
Pass	$	27,637	$	17,393	$	6,391	$	2,399	$	2,930	$	1,593	$	93,982	$	172	$	152,497
Special mention		—		—		90		1,299		—		645		—		—		2,034
Substandard		3,456		2,112		1,414		1,651		137		1,164		2,510		—		12,444
Doubtful		—		—		—		—		—		—		—		—		—
Total agricultural	$	31,093	$	19,505	$	7,895	$	5,349	$	3,067	$	3,402	$	96,492	$	172	$	166,975
Consumer
Risk rating
Pass	$	40,692	$	15,171	$	7,186	$	3,640	$	2,228	$	3,551	$	25,799	$	1	$	98,268
Special mention		—		—		—		—		—		—		—		—		—
Substandard		6		154		94		15		24		29		—		—		322
Doubtful		—		—		—		—		—		—		—		—		—
Total consumer	$	40,698	$	15,325	$	7,280	$	3,655	$	2,252	$	3,580	$	25,799	$	1	$	98,590
Total loans
Risk rating
Pass	$	915,726	$	406,765	$	271,868	$	224,126	$	143,619	$	302,517	$	778,196	$	10,677	$	3,053,494
Special mention		827		885		2,048		14,598		1,492		15,581		32		—		35,463
Substandard		11,054		8,362		17,959		3,911		5,872		10,294		9,218		—		66,670
Doubtful		—		—		—		—		—		—		—		—		—
Total loans	$	927,607	$	416,012	$	291,875	$	242,635	$	150,983	$	328,392	$	787,446	$	10,677	$	3,155,627

Troubled Debt Restructurings (“TDR”)

Consistent with accounting and regulatory guidance, the Company recognizes a TDR when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that would not normally be considered. Regardless of the form of concession granted, the Company’s objective in offering a TDR is to increase the probability of repayment of a borrower’s loans. Qualified modifications under the CARES Act or Consolidated Appropriations Act ("CAA") are not considered TDRs and have been separately disclosed following the TDR discussion.

The following table summarizes the Company’s TDRs by accrual status at September 30, 2022, and December 31, 2021. The allowance for credit losses on nonaccrual loans represents specific loan reserves, while the allowance on accrual loans represents collectively evaluated estimated losses.


September 30, 2022	Nonaccrual Loan Balance		Nonaccural Related Allowance for Credit Losses		Accrual Loan Balance		Accrual Related Allowance for Credit Losses		Total TDR Loan Balance		Total Related Allowance for Credit Losses
Commercial real estate	$	4,653	$	610	$	2,937	$	90	$	7,590	$	700
Commercial and industrial		4,103		888		—		—		4,103		888
Residential real estate		—		—		—		—		—		—
Agricultural real estate		2,863		126		—		—		2,863		126
Agricultural		946		265		1,650		271		2,596		536
Total troubled debt restructurings	$	12,565	$	1,889	$	4,587	$	361	$	17,152	$	2,250


December 31, 2021	Nonaccrual		Related Allowance for Credit Losses
Commercial real estate	$	5,784	$	1,370
Commercial and industrial		54		27
Residential real estate		1,547		13
Agricultural real estate		2,122		488
Agricultural		1,292		480
Total troubled debt restructurings	$	10,799	$	2,378

At September 30, 2022, and December 31, 2021, there were no commitments to lend additional amounts on these loans.

There were no loan modifications during the three month period ending September 30, 2022, and $8,328 in loan modifications during the nine month period ending September 30, 2022, that were considered to be troubled debt restructurings. There was a total of $1,460 in loan modifications considered to be troubled debt restructurings that occurred during the three and nine month periods ended September 30, 2021. There was $89 and $104 in interest income recognized on loans modified as TDRs during the three and nine month periods ended September 30, 2022.

The following table shows loans that subsequently defaulted on their modified terms within the twelve months preceding September 30, 2022, and September 30, 2021. Default is determined at 90 or more days past due, charge-off, or foreclosure.


	As of September 30,
	2022		2021
Commercial and industrial	$	3,778	$	—
Agricultural		1,329		—
Total TDR loans subsequently defaulted	$	5,107	$	—

As of September 30, 2022, in connection with the COVID-19 relief provided by the CARES Act, the Company had no loans deferred as compared to December 31, 2021, with 20 deferrals of either the full loan payment or the principal component of the loan payment on outstanding loan balances of $36.3 million. These deferrals were not considered troubled debt restructurings based on the CARES Act or regulatory guidance.

The following table lists loans included in the payment deferral program under the CARES Act by deferment type and category at December 31, 2021. There were no CARES Act deferred loans at September 30, 2022.


	December 31, 2021
	Commercial Real Estate		Commercial and Industrial		Total
3 months principal and interest, then 6 months principal only	$	31,884	$	3,052	$	34,936
6 months principal and interest, then 9 months principal only		971		398		1,369
Total loans	$	32,855	$	3,450	$	36,305

The classification status of loans participating in the payment deferral program at December 31, 2021, is listed below. There were no such deferrals at September 30, 2022.


	December 31, 2021
	Unclassified		Classified		Total
Commercial real estate	$	32,855	$	—	$	32,855
Commercial and industrial		3,450		—		3,450
Total loans	$	36,305	$	—	$	36,305

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit loss expense recognized within other non-interest expense on the consolidated statements of income and included in other liabilities on the consolidated balance sheets. The estimated credit loss includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate of expected credit loss is based on the historical loss rate for the class of loan the commitments would be classified as if funded.

The following table lists allowance for credit losses on off-balance-sheet credit exposures as of September 30, 2022, and December 31, 2021.


	Allowance for Credit Losses
		September 30, 2022		December 31, 2021
Commercial real estate		$	319	$	484
Commercial and industrial			851		1,323
Residential real estate			46		16
Agricultural			2		3
Consumer			285		397
Total allowance for credit losses		$	1,503	$	2,223

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 LIBOR plus a spread to this index and pays a fixed-rate cash flow equal to the customer loan rate. At September 30, 2022, the portfolio of interest rate swaps had a weighted average maturity of 8.8 years, a weighted average pay rate of 4.53% and a weighted average rate received of 5.38%. At December 31, 2021, the portfolio of interest rate swaps had a weighted average maturity of 8.8 years, a weighted average pay rate of 4.63% and a weighted average rate received of 3.11%.

Interest Rate Swaps Designated as Cash Flow Hedges

The Company has entered into cash flow hedges to hedge future cash flows related to subordinated notes interest expense and prime rate adjustable rate loans interest income. These agreements are designated as cash flow hedges and are marked to market through other comprehensive income.


	September 30, 2022								December 31, 2021
	Weighted average Maturity in years		Weighted average pay rate			Weighted average rate received			Weighted average Maturity in years		Weighted average pay rate			Weighted average rate received
Subordinated note hedges		13.0		2.81	%		1.80	%		13.7		2.81	%		1.92	%
Fixed rate loan hedges		1.5		5.50	%		5.60	%		—		—			—
Total cash flow hedges		2.1		5.37	%		5.42	%		13.7		2.81	%		1.92	%

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, in addition to stand alone interest-rate swaps designed to offset the economic impact of fixed rate loans. Neither swap is designated as a hedge, and both are marked to market through earnings. At September 30, 2022, this portfolio of interest rate swaps had a weighted average maturity of 8.4 years, weighted average pay rate of 5.5% and a weighted average rate received of 5.5%. At December 31, 2021, this portfolio of interest rate swaps had a weighted average maturity of 8.2 years, weighted average pay rate of 4.35% and weighted average rate received of 4.16%.

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, 2022, and December 31, 2021.


	September 30, 2022								December 31, 2021
	Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	21,777	$	2,482		$	—		$	26,663	$	—	$	369
Derivatives designated as cash flow hedges:
Interest rate swaps		157,500		2,131			4,172			7,500		602		—
Total derivatives designated as hedging relationships		179,277		4,613			4,172			34,163		602		369
Derivatives not designated as hedging instruments:
Interest rate swaps		110,411		4,221			3,446			150,780		4,419		5,184
Total derivatives not designated as hedging instruments		110,411		4,221			3,446			150,780		4,419		5,184
Total	$	289,688		8,834			7,618		$	184,943		5,021		5,553
Cash collateral				—			1,613					—		(8,441	)
Netting adjustments				(5,769	)		(5,769	)				2,994		2,994
Net amount presented in Balance Sheet			$	3,065		$	3,462				$	8,015	$	106

The table below lists designated and qualifying hedged items in fair value hedges at September 30, 2022, and December 31, 2021.


	September 30, 2022							December 31, 2021
	Carrying Amount		Hedging Fair Value Adjustment			Fair Value Adjustments on Discontinued Hedges		Carrying Amount		Hedging Fair Value Adjustment		Fair Value Adjustments on Discontinued Hedges
Commercial real estate loans	$	17,305	$	(2,479	)	$	—	$	26,661	$	213	$	—
Total	$	17,305	$	(2,479	)	$	—	$	26,661	$	213	$	—

The Company reports hedging derivative gains (losses) as adjustments to loan interest income and loan interest expense along with the related net interest settlements. The non-hedging derivative gains (losses) and related net interest settlements for economic derivatives are reported in other income. For the three and nine month periods ended September 30, 2022, and 2021, the Company recorded net gains (losses) on derivatives and hedging activities as shown in the table below.


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022		2021
Derivatives designated as hedging instruments:
Interest rate swaps	$	46	$	—		$	148	$	—
Total net gain (loss) related to derivatives designated as hedging instruments		46		—			148		—
Derivatives designated as cash flow hedges:
Interest rate swaps		—		—			—		—
Total net gain (loss) related to derivatives designated as cash flow hedges		—		—			—		—
Total net gains (losses) related to hedging relationships		46		—			148		—
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps		402		(49	)		1,544		196
Total net gains (losses) related to derivatives not designated as hedging instruments		402		(49	)		1,544		196
Net gains (losses) on derivatives and hedging activities	$	448	$	(49	)	$	1,692	$	196

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, 2022 and 2021.


	September 30, 2022
	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	$	761	$	(715	)	$	46	$	(154	)
Total	$	761	$	(715	)	$	46	$	(154	)


	September 30, 2021
	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	$	(20	)	$	20	$	—	$	(25	)
Total	$	(20	)	$	20	$	—	$	(25	)

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, 2022 and 2021.


	September 30, 2022
	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	$	2,840	$	(2,692	)	$	148	$	(626	)
Total	$	2,840	$	(2,692	)	$	148	$	(626	)


	September 30, 2021
	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	$	(191	)	$	191	$	—	$	(81	)
Total	$	(191	)	$	191	$	—	$	(81	)

NOTE 5 – LEASE OBLIGATIONS

Right-of-use asset and lease obligations by type of property for the periods ended September 30, 2022, and December 31, 2021, are listed below.


	September 30, 2022
Operating Leases	Right-of-Use Asset		Lease Liability		Weighted Average Lease Term in Years		Weighted Average Discount Rate
Land and building leases	$	5,447	$	5,421		13.2		2.31	%
Total operating leases	$	5,447	$	5,421		13.2		2.31	%

Right-of-use-asset reported in premise and equipment	$	3,316
Right-of-use-asset not in operation, reported in other real estate owned		2,131
Total	$	5,447

During the quarter ended June 30, 2022, one of our bank locations became non-operational. The right-of-use-asset for this location was transferred to other real estate owned, the weighted average lease term is 8.5 years.


	December 31, 2021
Operating Leases	Right-of-Use Asset		Lease Liability		Weighted Average Lease Term in Years		Weighted Average Discount Rate
Land and building leases	$	5,963	$	5,928		13.3		2.30	%
Total operating leases	$	5,963	$	5,928		13.3		2.30	%

Operating lease costs for the three and nine month periods ended September 30, 2022 and 2021, are listed below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating lease cost	$	213	$	127	$	632	$	378
Short-term lease cost		—		—		—		—
Variable lease cost		17		8		44		21
Total operating lease cost	$	230	$	135	$	676	$	399

There were no sale 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, 2022.

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, 2022
Due in one year or less	$	686
Due after one year through two years		572
Due after two years through three years		555
Due after three years through four years		554
Due after four years through five years		553
Thereafter		3,594
Total undiscounted cash flows		6,514
Discount on cash flows		(1,093	)
Total operating lease liability	$	5,421

NOTE 6 – BORROWINGS

Federal funds purchased and retail repurchase agreements

Federal funds purchased and retail repurchase agreements as of September 30, 2022, and December 31, 2021, are listed below.


	September 30, 2022		December 31, 2021
Federal funds purchased	$	—	$	—
Retail repurchase agreements		47,443		56,006

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 $55,465 and $55,605 at September 30, 2022, and December 31, 2021. The agreements are on a day-to-day basis and can be terminated on demand.

The following table presents the borrowing usage and interest rate information for federal funds purchased and retail repurchase agreements at September 30, 2022, and December 31, 2021.


	September 30, 2022			December 31, 2021
Average daily balance during the period	$	55,506		$	45,819
Average interest rate during the period		0.33	%		0.23	%
Maximum month-end balance year-to-date	$	64,323		$	56,006
Weighted average interest rate at period-end		0.36	%		0.23	%

Federal Home Loan Bank advances

Federal Home Loan Bank advances include both draws against the Company’s line of credit and fixed rate term advances. In July 2021, all the Company’s then outstanding Federal Home Loan Bank term advances were prepaid. The Company recorded a loss on debt extinguishment related to this prepayment of $372 for the nine months ended September 30, 2021.

Federal Home Loan Bank advances as of September 30, 2022, are as follows.


	September 30, 2022		Weighted Average Rate			Weighted Average Term in Years
Federal Home Loan Bank line of credit advances	$	186,001		2.68	%	—
Federal Home Loan Bank fixed-rate term advances		—		0.00	%	—
Total Federal Home Loan Bank advances	$	186,001

There were no Federal Home Loan Bank advances outstanding as of December 31, 2021.

At September 30, 2022, and December 31, 2021, the Company had undisbursed advance commitments (letters of credit) with the Federal Home Loan Bank of $18,320 and $17,025. These letters of credit were obtained in lieu of pledging securities to secure public fund deposits that are over the FDIC insurance limit.

The advances, Mortgage Partnership Finance credit enhancement obligations and letters of credit were collateralized by certain qualifying loans of $674,472 and securities of $76,760 for a total of $751,232 at September 30, 2022, and qualifying loans of $694,892 and securities of $15,409 for a total of $710,302 at December 31, 2021. Based on this collateral and the Company’s holdings of Federal Home Loan Bank stock, the Company was eligible to borrow an additional $544,927 and $691,149 at September 30, 2022, and December 31, 2021.

Federal Reserve Bank discount window

At September 30, 2022, the Company had a borrowing capacity of $327,312, for which the Company has pledged loans with an outstanding balance of $391,998 and securities with a fair value of $35,590. No borrowings were secured from this facility at periods ended September 30, 2022, or December 31, 2021.

Bank stock loan

The Company entered into an agreement with an unaffiliated financial institution that provided for a maximum borrowing facility of $40,000, secured by the Company’s stock in Equity Bank. The loan was renewed and amended on June 30, 2020, with a maturity date of August 15, 2021, and was extended to February 11, 2022. 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 the greater of 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, or a floor of 3.50%. 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.

The loan was renewed and amended on February 11, 2022, with a new maturity date of February 11, 2023. With this amendment, the maximum borrowing amount was decreased from $40,000 to $25,000. Each note will bear interest at the greater of 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, or a floor of 3.25%. 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 due on the maturity date of the renewal.

There were no outstanding principal balances on the bank stock loan at September 30, 2022, or December 31, 2021.

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 debt

Subordinated debt as of September 30, 2022, and December 31, 2021, are listed below.


	September 30, 2022		December 31, 2021
Subordinated debentures	$	23,171	$	22,924
Subordinated notes		73,092		72,961
Total	$	96,263	$	95,885

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. These subordinated debentures have the same terms as the trust preferred securities issued by the special purpose unconsolidated subsidiaries.

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

American State Bank Statutory Trust I (“ASBSTI”): The trust preferred securities issued by ASBSTI accrue and pay distributions quarterly at three-month LIBOR plus 1.80% on the stated liquidation amount of the trust preferred securities. These trust preferred securities are mandatorily redeemable upon maturity on September 15, 2035, or upon earlier redemption.

Subordinated debentures as of September 30, 2022, and December 31, 2021, are listed below.


	September 30, 2022			Weighted Average Rate			Weighted Average Term in Years
CTII subordinated debentures	$	10,310			4.51	%		12.5
CTIII subordinated debentures		5,155			3.72	%		14.7
CFSTI subordinated debentures		5,155			5.45	%		10.2
ASBII subordinated debentures		7,732			3.63	%		13.0
Total contractual balance		28,352
Fair market value adjustments		(5,181	)
Total subordinated debentures	$	23,171


	December 31, 2021			Weighted Average Rate			Weighted Average Term in Years
CTII subordinated debentures	$	10,310			2.12	%	13.3
CTIII subordinated debentures		5,155			2.08	%		15.5
CFSTI subordinated debentures		5,155			3.47	%		11.0
ASBII subordinated debentures		7,732			2.00	%		13.8
Total contractual balance		28,352
Fair market value adjustments		(5,428	)
Total subordinated debentures	$	22,924

Subordinated notes

On June 29, 2020, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and institutional accredited investors pursuant to which the Company issued and sold $42,000 in aggregate principal amount of its 7.00% Fixed-to-Floating Rate Subordinated notes due 2030. The notes were issued under an Indenture, dated as of June 29, 2020 (the “Indenture”), by and between the Company and UMB Bank, N.A., as trustee. The notes will mature on June 30, 2030. From June 29, 2020, through June 29, 2025, the Company will pay interest on the notes semi-annually in arrears on June 30 and December 30 of each year, commencing on December 30, 2020, at a fixed interest rate of 7.00%. Beginning June 30, 2025, the notes convert to a floating interest rate, to be reset quarterly, equal to the then-current Three-Month Term SOFR, as defined in the Indenture, plus 688 basis points. Interest payments during the floating-rate period will be paid quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, commencing on September 30, 2025. On July 23, 2020, the Company closed on an additional $33,000 of subordinated notes with the same terms as the June 29, 2020, issue.

Subordinated notes as of September 30, 2022, are listed below.


	September 30, 2022			Weighted Average Rate			Weighted Average Term in Years
Subordinated notes	$	75,000			7.00	%		7.8
Total principal outstanding		75,000
Debt issuance cost		(1,908	)
Total subordinated notes	$	73,092

Subordinated notes as of December 31, 2021, are listed below.


	December 31, 2021			Weighted Average Rate			Weighted Average Term in Years
Subordinated notes	$	75,000			7.00	%		8.5
Total principal outstanding		75,000
Debt issuance cost		(2,039	)
Total subordinated notes	$	72,961

Future principal repayments

Future principal repayments of the September 30, 2022, outstanding balances are as follows.


	Retail Repurchase Agreements		FHLB Advances		Subordinated Debentures		Subordinated Notes		Total
Due in one year or less	$	47,443	$	186,001	$	—	$	—	$	233,444
Due after one year through two years		—		—		—		—		—
Due after two years through three years		—		—		—		—		—
Due after three years through four years		—		—		—		—		—
Due after four years through five years		—		—		—		—		—
Thereafter		—		—		23,171		73,092		96,263
Total	$	47,443	$	186,001	$	23,171	$	73,092	$	329,707

NOTE 7 – STOCKHOLDERS’ EQUITY

Preferred stock

The Company’s articles of incorporation provide for the issuance of shares of preferred stock. At September 30, 2022, and December 31, 2021, 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 per share.

The following table presents shares that were issued, held in treasury or were outstanding at September 30, 2022, and December 31, 2021.


	September 30, 2022			December 31, 2021
Class A common stock – issued		20,201,905			20,077,059
Class A common stock – held in treasury		(4,184,071	)		(3,316,944	)
Class A common stock – outstanding		16,017,834			16,760,115
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		—			—

In 2019, the Company’s Board of Directors adopted the Equity Bancshares, Inc. 2019 Employee Stock Purchase Plan (“ESPP”). 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. ESPP compensation expense of $30 and $108 was recorded for the three and nine month periods ended September 30, 2022. ESPP compensation expense of $33 and $88 was

recorded for the three and nine month periods ended September 30, 2021.The following table presents the offering periods and costs associated with this program during the reporting period.


Offering Period	Shares Purchased		Cost Per Share		Compensation Expense
August 15, 2020 to February 14, 2021		17,621	$	13.68	$	42
February 15, 2021 to August 14, 2021		16,034		20.50		58
August 15, 2021 to February 14, 2022		14,274		27.37		69
February 15, 2022 to August 14, 2022		14,555		27.61		84

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

In September of 2020, the Company’s Board of Directors authorized the repurchase of up to 800,000 shares of the Company’s outstanding common stock, from time to time, beginning October 30, 2020, and concluding October 29, 2021. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and it could be extended, modified or discontinued at any time without notice. Under this program, during the years ended December 31, 2021, and 2020, the Company repurchased a total of 679,557 shares of the Company’s outstanding common stock at an average price paid of $24.12 per share.

In September of 2021, the Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock, from time to time, beginning October 29, 2021, and concluding October 28, 2022. The repurchase program did 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 year ended December 31, 2021, the Company repurchased a total of 132,873 shares of the Company’s outstanding common stock at an average price paid of $32.99 per share. During the nine months ended September 30, 2022, the Company repurchased a total of 867,127 shares of the Company’s outstanding common stock at an average price paid of $31.98 per share. At September 30, 2022, there are zero shares remaining available for repurchase under the program.

In September of 2022, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's outstanding common stock, from time to time, beginning October 1,2022, and concluding on September 30, 2023. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and it could be extended, modified or discontinued at any time without notice.

Accumulated other comprehensive income (loss)

At September 30, 2022, and December 31, 2021, accumulated other comprehensive income (loss) consisted of (i) the after-tax effect of unrealized gains (losses) on available-for-sale securities and (ii) unrealized gains (losses) on cash flow hedges.

Components of accumulated other comprehensive income as of September 30, 2022, and December 31, 2021, are listed below.


	Available-for- Sale Securities			Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)
September 30, 2022
Net unrealized or unamortized gains (losses)	$	(157,992	)	$	(2,674	)	$	(160,666	)
Tax effect		39,088			660			39,748
	$	(118,904	)	$	(2,014	)	$	(120,918	)
December 31, 2021
Net unrealized or unamortized gains (losses)	$	2,427		$	(58	)	$	2,369
Tax effect		(607	)		14		$	(593	)
	$	1,820		$	(44	)	$	1,776

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 Basel III rules require banks to maintain a Common Equity Tier 1 capital ratio of 6.5%, a total Tier 1 capital ratio of 8%, a total capital ratio of 10% and a leverage ratio of 5% to be deemed “well capitalized” for purposes of certain rules and prompt corrective action requirements. The risk-based ratios include a “capital conservation buffer” of 2.5% which can limit certain activities of an institution, including payment of dividends, share repurchases and discretionary bonuses to executive officers,

if its capital level is below the buffer amount. Management believes as of September 30, 2022, the Company and Bank meet all capital adequacy requirements to which they are subject.

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

As of September 30, 2022, 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 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. 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, 2022, and December 31, 2021, are presented in the table below. The Company was able to take advantage of the accumulated other comprehensive income exception on capital calculations that was made available by regulators in order to maintain strong regulatory ratios. 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					To Be Well Capitalized Under Prompt Corrective Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2022
Total capital to risk weighted assets
Equity Bancshares, Inc.	$	595,343		16.06	%	$	389,286		10.50	%		$N/A	N/A
Equity Bank		572,158		15.45	%		388,805		10.50	%		370,290		10.00	%
Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		475,887		12.84	%		315,137		8.50	%	N/A		N/A
Equity Bank		525,851		14.20	%		314,747		8.50	%		296,232		8.00	%
Common equity Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		452,716		12.21	%		259,524		7.00	%	N/A		N/A
Equity Bank		525,851		14.20	%		259,203		7.00	%		240,689		6.50	%
Tier 1 leverage to average assets
Equity Bancshares, Inc.		475,887		9.46	%		201,210		4.00	%	N/A		N/A
Equity Bank		525,851		10.47	%		200,987		4.00	%		251,234		5.00	%
December 31, 2021
Total capital to risk weighted assets
Equity Bancshares, Inc.	$	571,514		15.96	%	$	376,013		10.50	%		$N/A	N/A
Equity Bank		546,503		15.28	%		375,646		10.50	%		357,758		10.00	%
Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		453,718		12.67	%		304,391		8.50	%	N/A		N/A
Equity Bank		501,711		14.02	%		304,094		8.50	%		286,206		8.00	%
Common equity Tier 1 capital to risk weighted assets
Equity Bancshares, Inc.		430,794		12.03	%		250,675		7.00	%	N/A		N/A
Equity Bank		501,711		14.02	%		250,430		7.00	%		232,543		6.50	%
Tier 1 leverage to average assets
Equity Bancshares, Inc.		453,718		9.09	%		199,563		4.00	%	N/A		N/A
Equity Bank		501,711		10.07	%		199,381		4.00	%		249,226		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, 2022, and 2021.


	Three months ended				Nine months ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Basic:
Net income (loss) allocable to common stockholders	$	15,171	$	11,773	$	46,080	$	42,014
Weighted average common shares outstanding		16,056,366		14,384,285		16,301,500		14,393,853
Weighted average vested restricted stock units		292		17		2,086		3,293
Weighted average shares		16,056,658		14,384,302		16,303,586		14,397,146
Basic earnings (loss) per common share	$	0.94	$	0.82	$	2.83	$	2.92
Diluted:
Net income (loss) allocable to common stockholders	$	15,171	$	11,773	$	46,080	$	42,014
Weighted average common shares outstanding for:
Basic earnings per common share		16,056,658		14,384,302		16,303,586		14,397,146
Dilutive effects of the assumed exercise of stock options		88,530		158,768		95,435		178,314
Dilutive effects of the assumed vesting of restricted stock units		126,138		125,321		115,844		110,617
Dilutive effects of the assumed exercise of ESPP purchases		1,905		921		1,922		2,015
Average shares and dilutive potential common shares		16,273,231		14,669,312		16,516,787		14,688,092
Diluted earnings (loss) per common share	$	0.93	$	0.80	$	2.79	$	2.86

Average shares not included in the computation of diluted earnings per share because they were antidilutive are shown in the following table for the three and nine month periods ended September 30, 2022, and 2021.


	Three months ended				Nine months ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Stock options		275,471		291,680		204,982		298,629
Restricted stock units		1		—		—		—
Total antidilutive shares		275,472		291,680		204,982		298,629

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 tables as of September 30, 2022, and December 31, 2021.


	September 30, 2022
	(Level 1)			(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
U.S. Government-sponsored entities	$	—		$	105,947	$	—
U.S. Treasury securities		230,111			—		—
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		—			510,476		—
Private label residential mortgage-backed securities		—			165,261		—
Corporate		—			53,356		—
Small Business Administration loan pools		—			12,594		—
State and political subdivisions		—			—		—
Derivative assets:
Derivative assets (included in other assets)		—			8,834		—
Cash collateral held by counterparty and netting adjustments		(5,769	)		—		—
Total derivative assets		(5,769	)		8,834		—
Other assets:
Equity securities with readily determinable fair value		556			—		—
Total other assets		556			—		—
Total assets	$	224,898		$	856,468	$	—
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)	$	—		$	7,618	$	—
Cash collateral held by counterparty and netting adjustments		(4,156	)		—		—
Total derivative liabilities		(4,156	)		7,618		—
Total liabilities	$	(4,156	)	$	7,618	$	—


	December 31, 2021
	(Level 1)			(Level 2)		(Level 3)
Assets:
Available-for-sale securities:
U.S. Government-sponsored entities	$	—		$	123,407	$	—
U.S. Treasury securities		155,602			—		—
Mortgage-backed securities
Government-sponsored residential mortgage- backed securities		—			664,887		—
Private label residential mortgage-backed securities		—			171,688		—
Corporate		—			53,777		—
Small Business Administration loan pools		—			16,475		—
State and political subdivisions		—			141,606		—
Derivative assets:
Derivative assets (included in other assets)		—			5,021		—
Cash collateral held by counterparty and netting adjustments		2,994			—		—
Total derivative assets		2,994			5,021		—
Other assets:
Equity securities with readily determinable fair value		644			—		—
Total other assets		644			—		—
Total assets	$	159,240		$	1,176,861	$	—
Liabilities:
Derivative liabilities:
Derivative liabilities (included in other liabilities)	$	—		$	5,553	$	—
Cash collateral held by counterparty and netting adjustments		(5,447	)		—		—
Total derivative liabilities		(5,447	)		5,553		—
Total liabilities	$	(5,447	)	$	5,553	$	—

There were no material transfers between levels during the nine months ended September 30, 2022, or the year ended December 31, 2021. 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 individually evaluated securities is determined as discussed previously for available-for-sale securities. The fair values of individually evaluated loans with specific allocations of the allowance for credit 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 estimated 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 as of September 30, 2022, and December 31, 2021.


	September 30, 2022
	(Level 1)		(Level 2)		(Level 3)
Individually evaluated loans:
Commercial real estate	$	—	$	—	$	1,601
Commercial and industrial		—		—		4,295
Residential real estate		—		—		2,462
Agricultural real estate		—		—		1,273
Other		—		—		2,152
Other real estate owned:
Commercial real estate		—		—		1,127
Residential real estate		—		—		48


	December 31, 2021
	(Level 1)		(Level 2)		(Level 3)
Individually evaluated loans:
Commercial real estate	$	—	$	—	$	5,201
Commercial and industrial		—		—		2,793
Residential real estate		—		—		3,758
Agricultural real estate		—		—		2,101
Other		—		—		4,068
Other real estate owned:
Commercial real estate		—		—		2,043
Residential real estate		—		—		191

The Company did not record any liabilities for which the fair value was measured on a non-recurring basis at September 30, 2022, or December 31, 2021.

Valuations of individually evaluated 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 as of September 30, 2022, and December 31, 2021.


	Fair Value		Valuation Technique	Unobservable Input	Range (weighted average) or Multiple of Earnings
September 30, 2022
Individually evaluated real estate loans	$	11,783	Sales Comparison Approach	Adjustments for differences between comparable sales	7% - 33% (20%)
Individually evaluated other real estate owned	$	1,175	Sales Comparison Approach	Adjustments for differences between comparable sales	3% - 22% 13%
December 31, 2021
Individually evaluated real estate loans	$	17,921	Sales Comparison Approach	Adjustments for differences between comparable sales	5% - 31% (18%)
Individually evaluated other real estate owned	$	2,234	Sales Comparison Approach	Adjustments for differences between comparable sales	3% - 20% (12%)

Carrying amount and estimated fair values of financial instruments at period end were as follows for September 30, 2022, and December 31, 2021.


	September 30, 2022
	Carrying Amount			Estimated Fair Value			(Level 1)			(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	155,413		$	155,413		$	155,413		$	—	$	—
Available-for-sale securities		1,198,962			1,198,962			—			1,198,962		—
Loans held for sale		1,518			1,518			—			1,518		—
Loans, net of allowance for credit losses		3,208,524			3,146,650			—			—		3,146,650
Federal Reserve Bank and Federal Home Loan Bank stock		24,428			24,428			—			24,428		—
Interest receivable		18,497			18,497			—			18,497		—
Derivative assets		8,834			8,834			—			8,834		—
Cash collateral held by derivative counterparty and netting adjustments		(5,769	)		(5,769	)		(5,769	)		—		—
Total derivative assets		3,065			3,065			(5,769	)		8,834		—
Equity securities with readily determinable fair value		556			556			556			—		—
Total assets	$	4,610,963		$	4,549,089		$	150,200		$	1,252,239	$	3,146,650
Financial liabilities:
Deposits	$	4,226,611		$	4,216,839		$	—		$	4,216,839	$	—
Federal funds purchased and retail repurchase agreements		47,443			47,443			—			47,443		—
Federal Home Loan Bank advances		186,001			186,001			—			186,001		—
Subordinated debentures		23,171			23,171			—			23,171		—
Subordinated notes		73,092			72,155			—			72,155		—
Contractual obligations		15,562			15,562			—			15,562		—
Interest payable		1,145			1,145			—			1,145		—
Derivative liabilities		7,618			7,618			—			7,618		—
Cash collateral held by derivative counterparty and netting adjustments		(4,156	)		(4,156	)		(4,156	)		—		—
Total derivative liabilities		3,462			3,462			(4,156	)		7,618		—
Total liabilities	$	4,576,487		$	4,565,778		$	(4,156	)	$	4,569,934	$	—


	December 31, 2021
	Carrying Amount			Estimated Fair Value			(Level 1)			(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	259,954		$	259,954		$	259,954		$	—	$	—
Available-for-sale securities		1,327,442			1,327,442			155,601			1,171,841		—
Loans held for sale		4,214			4,214			—			4,214		—
Loans, net of allowance for credit losses		3,107,262			3,100,232			—			—		3,100,232
Federal Reserve Bank and Federal Home Loan Bank stock		17,510			17,510			—			17,510		—
Interest receivable		18,048			18,048			—			18,048		—
Derivative assets		5,021			5,021			—			5,021		—
Cash collateral held by derivative counterparty and netting adjustments		2,994			2,994			2,994			—		—
Total derivative assets		8,015			8,015			2,994			5,021		—
Equity securities with readily determinable fair value		644			644			644			—		—
Total assets	$	4,743,089		$	4,736,059		$	419,193		$	1,216,634	$	3,100,232
Financial liabilities:
Deposits	$	4,420,004		$	4,421,441		$	—		$	4,421,441	$	—
Federal funds purchased and retail repurchase agreements		56,006			56,006			—			56,006		—
Subordinated debentures		22,924			22,924			—			22,924		—
Subordinated notes		72,961			80,880			—			80,880		—
Contractual obligations		17,692			17,692			—			17,692		—
Interest payable		3,187			3,187			—			3,187		—
Derivative liabilities		5,553			5,553			—			5,553		—
Cash collateral held by derivative counterparty and netting adjustments		(5,447	)		(5,447	)		(5,447	)		—		—
Total derivative liabilities		106			106			(5,447	)		5,553		—
Total liabilities	$	4,592,880		$	4,602,236		$	(5,447	)	$	4,607,683	$	—

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, 2022, and December 31, 2021, were as follows.


	September 30, 2022				December 31, 2021
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	95,908	$	190,352	$	101,923	$	173,976
Mortgage loans in the process of origination		2,818		4,239		7,404		2,353
Unused lines of credit		140,475		375,948		106,291		317,249

The fixed rate loan commitments have interest rates ranging from 3.25% to 18.00% and maturities ranging from 1 month to 228 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, 2022, and December 31, 2021, were as follows.


	September 30, 2022				December 31, 2021
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Standby letters of credit	$	14,990	$	25,244	$	14,656	$	5,799

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, results of operations or cash flows. A loss contingency is recorded when the outcome is probable and reasonably able to be estimated. Any loss contingency described below has been identified by the Company as reasonably possible to result in an unfavorable outcome for the Company or the Bank.

Equity Bank is party to a lawsuit was filed on January 28, 2022, in the Sedgwick County, Kansas District Court on behalf of one of our customers alleging improperly collected overdraft fees. The plaintiff seeks to have the case certified as a class action. The Bank has filed a motion to dismiss this claim on its merits and on the grounds that the defendant must litigate any such claims in arbitration. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against the claim asserted. At this time, the Company is unable to reasonably estimate the potential loss amount associated with this litigation.

Equity Bank is party to a lawsuit was filed on February 2, 2022, in the Jackson County, Missouri District Court on behalf of one of our customers alleging improperly collected overdraft fees. The plaintiff seeks to have the case certified as a class action. The Bank has filed a motion to dismiss this claim on its merits and on the grounds that the defendant must litigate any such claims in arbitration. The Company believes that the lawsuit is without merit, and it intends to vigorously defend against the claim asserted. At this time, the Company is unable to reasonably estimate the potential loss amount associated with 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, 2022, and 2021.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Non-interest income
Service charges and fees	$	2,788		$	2,360		$	7,927		$	6,125
Debit card income		2,682			2,574			8,120			7,603
Mortgage banking(a)		310			801			1,300			2,584
Increase in bank-owned life insurance(a)		754			1,169			2,355			2,446
Net gain (loss) on acquisition(a)		—			—			540			585
Net gain (loss) from securities transactions(a)		(17	)		381			(9	)		398
Other
Investment referral income		137			189			420			506
Trust income		249			340			806			836
Insurance sales commissions		242			217			354			323
Recovery on zero-basis purchased loans(a)		129			9			163			62
Income (loss) from equity method investments(a)		(56	)		(56	)		(167	)		(167	)
Other non-interest income related to loans and deposits		1,708			(178	)		5,752			2,270
Other non-interest income not related to loans and deposits(a)		43			25			67			72
Total other non-interest income		2,452			546			7,395			3,902
Total	$	8,969		$	7,831		$	27,628		$	23,643
(a) Not within the scope of ASC 606.

NOTE 14 – BUSINESS COMBINATIONS AND BRANCH SALES

At the close of business on October 1, 2021, the Company acquired the 100% of the outstanding common shares of American State Bancshares, Inc. (“ASBI”), based in Wichita, Kansas. Costs related to this acquisition during the three and nine months ended September 30, 2022, were $97 and $371 ($73 and $279 on an after-tax basis).

At the close of business on December 3, 2021, the Company acquired the assets and assumed the deposits and certain other liabilities of three bank locations in St. Joseph, Missouri, from Security Bank of Kansas City, based in Kansas City Kansas (“Security”). Costs related to this acquisition during the three and nine months ended September 30, 2022, were $0 and $137 ($0 and $103 on an after-tax basis).

At the close of business on October 25, 2021, the Company announced a definitive purchase and assumption agreement with United Bank & Trust in Marysville, Kansas, (“UBT”) with UBT acquiring certain assets and assuming deposits of bank locations in Concordia, Belleville and Clyde, Kansas from Equity Bank. This transaction was completed on June 24, 2022. The completed transaction resulted in a net gain of $540. Costs related to this branch sale for both the three and nine months ended September 30, 2022, were $18 ($14 on an after-tax basis).

The following table summarizes the carrying value of assets and liabilities sold on June 24, 2022.


Summary of assets sold and liabilities
assumed by UBT:
Cash and due from banks	$	508
Loans		26,110
Premises and equipment		1,225
Goodwill		1,364
Core deposit intangible		164
Other assets		391
Total assets sold		29,762
Deposits		52,714
Interest payable and other liabilities		19
Total liabilities assumed by UBT		52,733
Total net assets		(22,971	)

Cash paid		22,431
Gain on Branch Sale	$	(540	)

The following tables present the carrying value of loans and deposits sold to UBT on June 24, 2022.


Commercial real estate	$	793
Commercial and industrial		537
Residential real estate		521
Agricultural real estate		23,685
Consumer		574
Carry value of sold loans	$	26,110


Demand	$	15,817
Total non-interest-bearing deposits		15,817
Demand, savings and money markets		28,615
Time		8,282
Total interest-bearing deposits		36,897
Total deposits	$	52,714

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 9, 2022, 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:

•

Table containing selected financial data and ratios for the periods;

•

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.


(Dollars in thousands, except per share data)	September 30, 2022			June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021
Statement of Income Data (for the quarterly period ended)
Interest and dividend income	$	48,548		$	43,624		$	42,652		$	40,792		$	42,446
Interest expense		6,604			4,058			3,363			3,577			3,471
Net interest income		41,944			39,566			39,289			37,215			38,975
Provision (reversal) for credit losses		(136	)		824			(412	)		(2,125	)		1,058
Net gain on acquisition and branch sales		—			540			—			—			—
Net gain (loss) from securities transactions		(17	)		(32	)		40			8			381
Other non-interest income		8,986			9,129			8,982			9,191			7,450
Loss on debt extinguishment		—			—			—			—			372
Merger expenses		115			88			323			4,562			4,015
Other non-interest expense		32,121			31,348			29,136			33,527			26,302
Income (loss) before income taxes		18,813			16,943			19,264			10,450			15,059
Provision for income taxes		3,642			1,684			3,614			(16	)		3,286
Net income (loss)		15,171			15,259			15,650			10,466			11,773
Net income (loss) allocable to common stockholders		15,171			15,259			15,650			10,466			11,773
Basic earnings (loss) per share	$	0.94		$	0.95		$	0.94		$	0.62		$	0.82
Diluted earnings (loss) per share	$	0.93		$	0.94		$	0.93		$	0.61		$	0.80
Balance Sheet Data (at period end)
Cash and cash equivalents	$	155,413		$	103,584		$	90,050		$	259,954		$	142,318
Available-for-sale securities		1,198,962			1,288,180			1,352,894			1,327,442			1,157,423
Loans held for sale		1,518			1,714			1,575			4,214			4,108
Gross loans held for investment		3,255,023			3,223,446			3,242,577			3,155,627			2,685,911
Allowance for credit losses		46,499			48,238			47,590			48,365			52,763
Loans held for investment, net of allowance for credit losses		3,208,524			3,175,208			3,194,987			3,107,262			2,633,148
Goodwill and core deposit intangibles, net		64,699			65,655			68,295			69,344			44,564
Mortgage servicing asset, net		201			226			251			276			—
Naming rights, net		1,054			1,065			1,076			1,087			1,098
Total assets		5,000,415			5,002,156			5,078,623			5,137,631			4,263,268
Total deposits		4,226,611			4,291,771			4,379,670			4,420,004			3,662,777
Borrowings		329,707			228,885			194,209			151,891			127,167
Total liabilities		4,604,609			4,574,041			4,626,608			4,637,000			3,845,519
Total stockholders’ equity		395,806			428,115			452,015			500,631			417,749
Tangible common equity*		329,852			361,169			382,393			429,924			372,087
Performance ratios
Return on average assets (ROAA) annualized		1.21	%		1.21	%		1.24	%		0.82	%		1.09	%
Return on average equity (ROAE) annualized		13.80	%		13.99	%		12.88	%		7.37	%		11.05	%
Return on average tangible common equity (ROATCE) annualized		17.12	%		17.60	%		15.85	%		8.97	%		13.27	%
Yield on loans annualized		5.09	%		4.59	%		4.61	%		4.36	%		5.43	%
Cost of interest-bearing deposits annualized		0.57	%		0.28	%		0.22	%		0.25	%		0.28	%
Net interest margin annualized		3.62	%		3.39	%		3.38	%		3.13	%		3.86	%
Efficiency ratio*		63.07	%		64.38	%		60.36	%		72.25	%		56.65	%
Non-interest income / average assets annualized		0.71	%		0.76	%		0.72	%		0.72	%		0.73	%
Non-interest expense / average assets annualized		2.56	%		2.49	%		2.34	%		2.98	%		2.85	%
Capital Ratios
Tier 1 Leverage Ratio		9.46	%		9.11	%		9.07	%		9.09	%		9.02	%
Common Equity Tier 1 Capital Ratio		12.21	%		12.08	%		11.81	%		12.03	%		12.39	%
Tier 1 Risk Based Capital Ratio		12.84	%		12.71	%		12.43	%		12.67	%		12.90	%
Total Risk Based Capital Ratio		16.06	%		15.97	%		15.66	%		15.96	%		16.63	%
Equity / Assets		7.92	%		8.56	%		8.90	%		9.74	%		9.80	%
Tangible common equity to tangible assets*		6.68	%		7.32	%		7.63	%		8.48	%		8.82	%
Dividend payout ratio		10.78	%		8.61	%		8.58	%		13.05	%		9.96	%
Book value per share	$	24.71		$	26.58		$	27.47		$	29.87		$	29.08
Tangible common book value per share*	$	20.59		$	22.42		$	23.24		$	25.65		$	25.90
Tangible common book value per diluted share*	$	20.33		$	22.17		$	22.95		$	25.22		$	25.42

* 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.

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 66 full-service banking sites located in Arkansas, Kansas, Missouri, and Oklahoma. As of September 30, 2022, we had consolidated total assets of $5.00 billion, total loans held for investment, net of allowance, of $3.21 billion, total deposits of $4.23 billion, and total stockholders’ equity of $395.8 million. During the three and nine month periods ended September 30, 2022, the Company had net

income of $15.2 million and $46.1 million. The Company had net income of $11.8 million and $42.0 million for the three and nine month periods ended September 30, 2021.

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, 2021, audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 9, 2022. The preparation of our financial statements in accordance with GAAP requires management to make a number of judgements and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements. Our accounting policies are described in “NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Notes to Interim Consolidated Financial Statements.

The accounting policies that management believes are the most critical to an understanding of our financial condition and results of operations and require complex management judgement are described below.

Allowance for Credit Losses: The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications, and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date; however, determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. The allowance for credit losses for loans, as reported in our consolidated balance sheets, is adjusted by provision for credit losses, which is recognized in earnings and is reduced by the charge-off of loan amounts, net of recoveries.

The allowance represents management’s best estimate, but significant changes in circumstances relating to loan quality and economic conditions could result in significantly different results than what is reflected in the consolidated balance sheet as of September 30, 2022. Likewise, an improvement in loan quality or economic conditions may allow for a further reduction in the required allowance. Changing credit conditions would be expected to impact realized losses, driving variability in specifically assessed allowances, as well as calculated quantitative and more subjectively analyzed qualitative factors. Depending on the volatility in these conditions, material impacts could be realized within the Company’s operations. Likewise, significant changes in economic conditions, both positive and negative, could result in unexpected realization of provision or reversal of allowance for credit losses due to its impact on the quantitative and qualitative inputs to the Company’s calculation. Under the CECL methodology, the impact of these conditions has the potential to further exacerbate periodic differences due to its life of loan perspective. The life of loans calculated under the methodology is based in contractual duration and modified for prepayment expectations, making significant variation in periodic results possible due to changing contractual or adjusted duration of the assets within the calculation.

Goodwill: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized and expensed in the period identified. Goodwill will be assessed more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired. We have selected December 31 as the date to perform our annual goodwill impairment test. Goodwill is the only intangible asset with an indefinite useful life. For the quarter ended September 30, 2022, based on the improving market conditions and strong earnings performance by the Company, management has determined there was not evidence of a triggering event as of or during the period then ended. Based on this qualitative analysis and conclusion, it was determined that a more robust quantitative assessment was not necessary at our measurement date.

When performing quantitative goodwill impairment assessments, management is required to estimate the fair value of the Company’s equity in a change in control transaction. To complete this valuation, management is required to derive assumptions related to industry performance, reporting unit business performance, economic and market conditions, and various other assumptions, many of which require significant management judgement.

Although management believes that the judgements and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.

Results of Operations

We generate our revenue from interest income and fees on loans, interest and dividends on investment securities, and non-interest income, such as service charges and fees, debit card income, trust and wealth management fees, and mortgage banking income. We incur interest expense on deposits and other borrowed funds and non-interest expense, such as salaries and employee benefits, occupancy expenses and technology.

Changes in interest rates on interest-earning assets or on interest-bearing liabilities, as well as the volume and types of interest-earning assets and interest-bearing liabilities, are 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 environments, 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, 2022, compared with three months ended September 30, 2021: Net income allocable to common stockholders for the three months ended September 30, 2022, was $15.2 million as compared to $11.8 million for the three months ended September 30, 2021, an increase of $3.4 million. The increase during the three month period ended September 30, 2022, was largely due to an increase in loan interest income of $4.0 million and an increase in non-interest income of $1.1 million. These increases were partially offset by an increase in non-interest expense of $1.5 million.

Nine months ended September 30, 2022, compared with nine months ended September 30, 2021: Net income allocable to common stockholders for the nine months ended September 30, 2022, was $46.1 million as compared to $42.0 million for the nine months ended September 30, 2021, an increase of $4.1 million. The increase during the nine month period ended September 30, 2022, was primarily due to an increase in net interest income of $15.4 million and an increase in non-interest income of $4.0 million. These increases were partially offset by an increase in non-interest expense of $11.8 million when compared with the nine months ended September 30, 2021. The changes in the components of net income are discussed in more detail in the following “Results of Operations” sections.

Net Interest Income and Net Interest Margin Analysis

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

Three months ended September 30, 2022, compared with three months ended September 30, 2021: 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, 2022, and 2021. 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, 2022, and 2021



	2022							2021
(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)
Commercial and industrial	$	575,149	$	7,750		5.35	%	$	630,622	$	13,646		8.59	%
Commercial real estate		1,307,244		18,023		5.47	%		1,009,141		12,072		4.75	%
Real estate construction		360,579		4,847		5.33	%		283,106		2,664		3.73	%
Residential real estate		582,938		5,464		3.72	%		512,135		5,073		3.93	%
Agricultural real estate		200,534		2,740		5.42	%		134,673		1,819		5.36	%
Agricultural		113,351		1,406		4.92	%		91,878		1,370		5.92	%
Consumer		101,203		1,325		5.20	%		86,647		937		4.29	%
Total loans		3,240,998		41,555		5.09	%		2,748,202		37,581		5.43	%
Taxable securities		1,164,697		5,793		1.97	%		966,651		3,920		1.61	%
Nontaxable securities		107,717		687		2.53	%		94,527		655		2.75	%
Total Securities		1,272,414		6,480		2.02	%		1,061,178		4,575		1.71	%
Federal funds sold and other		89,156		513		2.29	%		196,129		290		0.59	%
Total interest-earning assets		4,602,568		48,548		4.18	%		4,005,509		42,446		4.20	%
Non-interest-earning assets:
Other real estate owned, net		11,914							10,395
Premises and equipment, net		101,035							90,911
Bank-owned life insurance		121,970							103,425
Goodwill, core deposit and other intangibles, net		66,445							46,335
Other non-interest-earning assets		84,823							18,723
Total assets	$	4,988,755						$	4,275,298
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,112,901		2,257		0.80	%	$	989,798		503		0.20	%
Savings and money market		1,312,923		861		0.26	%		1,092,717		359		0.13	%
Demand, savings and money market		2,425,824		3,118		0.51	%		2,082,515		862		0.16	%
Certificates of deposit		655,421		1,285		0.78	%		619,525		1,019		0.65	%
Total interest-bearing deposits		3,081,245		4,403		0.57	%		2,702,040		1,881		0.28	%
FHLB term and line of credit advances		71,415		409		2.27	%		1,401		10		2.78	%
Subordinated debt		96,200		1,721		7.10	%		87,960		1,556		7.02	%
Other borrowings		53,899		71		0.52	%		43,220		24		0.23	%
Total interest-bearing liabilities		3,302,759		6,604		0.79	%		2,834,621		3,471		0.49	%
Non-interest-bearing liabilities and stockholders’ equity:
Non-interest-bearing checking accounts		1,202,610							984,129
Non-interest-bearing liabilities		47,195							33,669
Stockholders’ equity		436,191							422,879
Total liabilities and stockholders’ equity	$	4,988,755						$	4,275,298
Net interest income			$	41,944						$	38,975
Interest rate spread						3.39	%						3.71	%
Net interest margin(2)						3.62	%						3.86	%
Total cost of deposits, including non-interest bearing deposits	$	4,283,855	$	4,403		0.41	%	$	3,686,169	$	1,881		0.20	%
Average interest-earning assets to interest-bearing liabilities						139.36	%						141.31	%

(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, 2022, and 2021.

Analysis of Changes in Net Interest Income

For the Three Months Ended September 30, 2022, and 2021


	Increase (Decrease) Due to:						Total Increase /
(Dollars in thousands)	Volume(1)			Yield/Rate(1)			(Decrease)
Interest-earning assets:
Loans
Commercial and industrial	$	(1,114	)	$	(4,782	)	$	(5,896	)
Commercial real estate		3,925			2,026			5,951
Real estate construction		851			1,332			2,183
Residential real estate		674			(283	)		391
Agricultural real estate		900			21			921
Agricultural		289			(253	)		36
Consumer		170			218			388
Total loans		5,695			(1,721	)		3,974
Taxable securities		890			983			1,873
Nontaxable securities		88			(56	)		32
Total securities		978			927			1,905
Federal funds sold and other		(232	)		455			223
Total interest-earning assets		6,441			(339	)		6,102
Interest-bearing liabilities:
Interest-bearing demand deposits		70			1,684			1,754
Savings and money market		84			418			502
Demand, savings and money market		154			2,102			2,256
Certificates of deposit		63			203			266
Total interest-bearing deposits		217			2,305			2,522
FHLB term and line of credit advances		401			(2	)		399
Subordinated debt		147			18			165
Other borrowings		8			39			47
Total interest-bearing liabilities		773			2,360			3,133
Net Interest Income	$	5,668		$	(2,699	)	$	2,969

(1)

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

Interest income on interest-earning assets increased $6.1 million for the quarter ended September 30, 2022, as compared to the quarter ended September 30, 2021. Of this increase, $4.0 million and $1.9 million are attributable to increases in loan and taxable securities volume. Yield on loans decreased by 34 basis points and yield on total securities increased by 31 basis points for the quarter ended September 30, 2022, as compared to September 30, 2021. The increase in interest income on loans is due to higher volume and yield on commercial real estate, real estate construction and agricultural real estate loans, offset by decreases in volume and yield on commercial and industrial loans. The decrease in both volume yield on commercial and industrial loans was primarily due to the acceleration of fee income associated with payoff of PPP loans during the third quarter 2021. Exclusive of PPP loan impacts, volume and coupon rates within the commercial and industrial portfolio have increased period over period.

There was an increase in interest expense on interest-bearing deposits of $2.5 million due to a general increase in the cost of interest-bearing deposits and, specifically, an increase in the cost of interest-bearing demand deposits from 0.20% to 0.80%.

When compared to the quarter ended September 30, 2021, net interest margin decreased 24 basis points during the quarter ended September 30, 2022. Comparing the same periods, net interest spread decreased by 32 basis points to 3.39% from 3.71%. Exclusive of the impacts of PPP, both net interest margin and spread increased over the comparative period as the re-pricing of our interest-earning asset portfolio outpaced the re-pricing of our interest-bearing liability portfolio for market interest rate changes experience during the first nine months of 2022.

Nine months ended September 30, 2022, compared with nine months ended September 30, 2021: 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, 2022, and 2021. 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, 2022, and 2021



	2022							2021
(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)
Commercial and industrial	$	579,610	$	22,994		5.30	%	$	752,795	$	34,609		6.15	%
Commercial real estate		1,236,282		45,995		4.97	%		990,803		34,943		4.72	%
Real estate construction		362,543		12,443		4.59	%		264,344		7,195		3.64	%
Residential real estate		604,218		16,336		3.61	%		457,761		14,167		4.14	%
Agricultural real estate		201,566		8,046		5.34	%		135,795		5,203		5.12	%
Agricultural		132,485		5,254		5.30	%		93,680		3,432		4.90	%
Consumer		101,341		3,642		4.80	%		84,285		2,843		4.51	%
Total loans		3,218,045		114,710		4.77	%		2,779,463		102,392		4.93	%
Taxable securities		1,220,045		16,767		1.84	%		898,461		11,242		1.67	%
Nontaxable securities		109,142		2,020		2.47	%		100,495		2,096		2.79	%
Total securities		1,329,187		18,787		1.89	%		998,956		13,338		1.79	%
Federal funds sold and other		116,997		1,327		1.52	%		175,761		846		0.64	%
Total interest-earning assets		4,664,229		134,824		3.86	%		3,954,180		116,576		3.94	%
Non-interest-earning assets:
Other real estate owned, net		10,377							10,659
Premises and equipment, net		102,491							90,483
Bank-owned life insurance		121,398							97,445
Goodwill, core deposit and other intangibles, net		68,521							47,341
Other non-interest-earning assets		87,399							17,204
Total assets	$	5,054,415						$	4,217,312
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,158,343		3,702		0.43	%	$	1,007,582		1,608		0.21	%
Savings and money market		1,321,770		1,759		0.18	%		1,069,061		1,120		0.14	%
Demand, savings and money market		2,480,113		5,461		0.29	%		2,076,643		2,728		0.18	%
Certificates of deposit		638,692		2,847		0.60	%		606,151		3,588		0.79	%
Total interest-bearing deposits		3,118,805		8,308		0.36	%		2,682,794		6,316		0.31	%
FHLB term and line of credit advances		54,100		594		1.47	%		16,325		155		1.27	%
Federal Reserve Bank discount window		4		—		0.25	%		4		—		0.25	%
Subordinated debt		96,067		4,973		6.92	%		87,839		4,669		7.11	%
Other borrowings		56,611		150		0.35	%		43,673		72		0.22	%
Total interest-bearing liabilities		3,325,587		14,025		0.56	%		2,830,635		11,212		0.53	%
Non-interest-bearing liabilities and stockholders’ equity:
Non-interest-bearing checking accounts		1,220,073							947,185
Non-interest-bearing liabilities		53,510							31,874
Stockholders’ equity		455,245							407,618
Total liabilities and stockholders’ equity	$	5,054,415						$	4,217,312
Net interest income			$	120,799						$	105,364
Interest rate spread						3.30	%						3.41	%
Net interest margin(2)						3.46	%						3.56	%
Total cost of deposits, including non-interest bearing deposits	$	4,338,878	$	8,308		0.26	%	$	3,629,979	$	6,316		0.23	%
Average interest-earning assets to interest-bearing liabilities						140.25	%						139.69	%

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, 2022, and 2021.

Analysis of Changes in Net Interest Income

For the Nine Months Ended September 30, 2022, and 2021


	Increase (Decrease) Due to:						Total Increase /
(Dollars in thousands)	Volume(1)			Yield/Rate(1)			(Decrease)
Interest-earning assets:
Loans
Commercial and industrial	$	(7,278	)	$	(4,337	)	$	(11,615	)
Commercial real estate		9,049			2,003			11,052
Real estate construction		3,083			2,165			5,248
Residential real estate		4,122			(1,953	)		2,169
Agricultural real estate		2,617			226			2,843
Agricultural		1,519			303			1,822
Consumer		604			195			799
Total loans		13,716			(1,398	)		12,318
Taxable securities		4,334			1,191			5,525
Nontaxable securities		172			(248	)		(76	)
Total securities		4,506			943			5,449
Federal funds sold and other		(359	)		840			481
Total interest-earning assets		17,863			385			18,248
Interest-bearing liabilities:
Interest-bearing demand deposits		272			1,822			2,094
Savings and money market		298			341			639
Demand, savings and money market		570			2,163			2,733
Certificates of deposit		184			(925	)		(741	)
Total interest-bearing deposits		754			1,238			1,992
FHLB term and line of credit advances		411			28			439
Subordinated debt		428			(124	)		304
Other borrowings		26			52			78
Total interest-bearing liabilities		1,619			1,194			2,813
Net Interest Income	$	16,244		$	(809	)	$	15,435

Interest income on interest-earning assets increased $18.2 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. This increase in interest income is primarily due to increases in average loans and taxable securities volume, which can be attributed to $13.7 million and $4.3 million of the change in total interest income. Yield on loans decreased by 16 basis points while yield on total securities increased 10 basis points from the nine months ended September 30, 2021, to the nine months ended September 30, 2022.

The cost of interest-bearing liabilities increased $2.8 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. Of this change, $1.2 million is attributable to increases in rate and $1.6 million is due to increases in volume. Increases in rate on interest-bearing deposits were responsible for $1.2 million and increases in volume on non-deposit interest-bearing liabilities were responsible for $865 thousand of the increase in interest expense for the nine months ended September 30, 2021, to September 30, 2022.

When compared to the nine months ended September 30, 2021, net interest margin decreased 10 basis points during the quarter ended September 30, 2022. This is due to payoff of PPP loans in 2021 and higher interest income from increased volume, offset by rising costs of deposits . Comparing the same periods, net interest spread decreased 11 basis points, primarily due to decreased yield on total interest-earning assets.

Provision for Credit Losses

We maintain an allowance for credit losses for estimated losses in our loan portfolio. The allowance for credit losses is increased by a provision for credit losses, which is a charge to earnings, and subsequent recoveries of amounts previously charged-off, but is decreased by charge-offs when the collectability of a loan balance is unlikely. Management estimates the allowance balance required using past loan loss experience within the Company’s portfolio. This historical loss calculation is then modified to reflect quantitative economic circumstances based on evidenced economic conditions and regression formulas, which incorporate lag factors in identifying a sufficiently predictive adjusted-R square, as well as qualitative factors not inherently reflected in our historical loss or quantitative economic inputs. Included in our qualitative assessment is the consideration of a prospective adjustment based on

economic conditions over the preceding 12 months, which is considered the Company’s reasonable, supportable forecast period. As these factors change, the amount of the credit loss provision changes.

Three months ended September 30, 2022, compared with three months ended September 30, 2021: During the three months ended September 30, 2022, there was a net release of $136 thousand compared to a provision for credit losses of $1.1 million during the three months ended September 30, 2021. The minimal release of provision for the quarter is the result of having a relatively similarly sized loan portfolio and similarly realized loss rates; however, the Company continues to estimate the allowance for credit loss with assumptions that anticipate slowing prepayment rates and continued market disruption caused by elevated inflation, supply chain issues and the impact of monetary policy on consumers and businesses. Net charge-offs for the three months ended September 30, 2022, were $1.6 million compared to net charge-offs of $129 thousand for the three months ended September 30, 2021. For the three months ended September 30, 2022, gross charge-offs were $1.7 million, offset by gross recoveries of $76 thousand. In comparison, gross charge-offs were $356 thousand for the three months ended September 30, 2021, offset by gross recoveries of $227 thousand.

Nine months ended September 30, 2022, compared with nine months ended September 30, 2021: During the nine months ended September 30, 2022, there was a provision of $276 thousand compared to a provision reversal of $6.4 million for the nine months ended September 30, 2021. The provision for the nine months ending September 30, 2022, was largely due to increases in pool assessed loan balances, higher qualitative adjustments due to elevated market risk caused by monetary policy, and increased reserve for specifically impaired loans, partially offset by decreases in reserve on PCD assets. The large reversal of provision in the nine months ended September 30, 2021, was primarily due to improvements in economic inputs to the CECL model at that time, along with improvements in historical loss experience. Net charge-offs for the nine months ended September 30, 2022, were $2.1 million compared to net charge-offs of $761 thousand for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, gross charge-offs were $2.6 million, offset by gross recoveries of $453 thousand. In comparison, gross charge-offs were $1.4 million for the nine months ended September 30, 2021, offset by gross recoveries of $599 thousand.

Non-Interest Income

The primary sources of non-interest income are service charges and fees, debit card income, mortgage banking income, and increases in the value of bank-owned life insurance. Non-interest income does not include loan origination or other loan fees, which are recognized as an adjustment to yield using the interest method.

Three months ended September 30, 2022, compared with three months ended September 30, 2021: The following table provides a comparison of the major components of non-interest income for the three months ended September 30, 2022, and 2021.

Non-Interest Income

For the Three Months Ended September 30,


							2022 vs. 2021
(Dollars in thousands)	2022			2021			Change			%
Service charges and fees	$	2,788		$	2,360		$	428			18.1	%
Debit card income		2,682			2,574			108			4.2	%
Mortgage banking		310			801			(491	)		(61.3	)%
Increase in value of bank-owned life insurance		754			1,169			(415	)		(35.5	)%
Other
Investment referral income		137			189			(52	)		(27.5	)%
Trust income		249			340			(91	)		(26.8	)%
Insurance sales commissions		242			217			25			11.5	%
Recovery on zero-basis purchased loans		129			9			120			1333.3	%
Income (loss) from equity method investments		(56	)		(56	)		—			—	%
Other non-interest income		1,751			(153	)		1,904			(1244.4	)%
Total other		2,452			546			1,906			349.1	%
Subtotal		8,986			7,450			1,536			20.6	%
Net gain (loss) from securities transactions		(17	)		381			(398	)		(104.5	)%
Total non-interest income	$	8,969		$	7,831		$	1,138			14.5	%

Total non-interest income increased $1.1 million during the three months ended September 30, 2022, as compared to the same period in 2021. The increase is largely attributable to increases in other non-interest income of $1.9 million and service charges and fees of $428 thousand. Included in service charges and fees were increases in non-sufficient funds fees of $389 thousand, with the

remaining increase primarily from service charges. The decrease in mortgage banking income is due to decreased activity in held for sale mortgage activity. Included in other non-interest income were increases in credit card fees of $112 thousand, increases in derivatives not designated as hedging relationships of $482 thousand, and increases in loan repurchase obligation reversal of $1.1 million.

During the quarter, management’s continued focus on relationship development and provision of value to our customer base, resulted in a comparative increase in service charges and fees, and debit card income through increasing product adoption and utilization.

Nine months ended September 30, 2022, compared with nine months ended September 30, 2021: The following table provides a comparison of the major components of non-interest income for the nine months ended September 30, 2022, and 2021.

Non-Interest Income

For the Nine Months Ended September 30,


							2022 vs. 2021
(Dollars in thousands)	2022			2021			Change			%
Service charges and fees	$	7,927		$	6,125		$	1,802			29.4	%
Debit card income		8,120			7,603			517			6.8	%
Mortgage banking		1,300			2,584			(1,284	)		(49.7	)%
Increase in value of bank-owned life insurance		2,355			2,446			(91	)		(3.7	)%
Other
Investment referral income		420			506			(86	)		(17.0	)%
Trust income		806			836			(30	)		(3.6	)%
Insurance sales commissions		354			323			31			9.6	%
Recovery on zero-basis purchased loans		163			62			101			162.9	%
Income from equity method investments		(167	)		(167	)		—			—	%
Other non-interest income		5,819			2,342			3,477			148.5	%
Total other		7,395			3,902			3,493			89.5	%
Subtotal		27,097			22,660			4,437			19.6	%
Net gain (loss) on acquisition and branch sales		540			585			(45	)		(7.7	)%
Net gain (loss) from securities transactions		(9	)		398			(407	)		(102.3	)%
Total non-interest income	$	27,628		$	23,643		$	3,985			16.9	%

Total non-interest income increased $4.0 million during the nine months ended September 30, 2022, as compared to the same period in 2021. The increase is largely attributable to increases in other non-interest income of $3.5 million and services charges and fees of $1.8 million, partially offset by decreases in mortgage banking income of $1.3 million. Included in service charges and fees were increases in non-sufficient funds fees of $1.2 million with the remaining increase primarily from service charges. These increases are primarily due to the addition of accounts related to the ASBI acquisition in October 2021 and the Security acquisition in December 2021.The decrease in mortgage banking income is due to decreased activity in held for sale mortgage activity. Included in the change in other non-interest income were increases in credit card fees of $372 thousand, increases in value of derivatives not designated as hedging relationships of $1.3 million, and a comparative improvement in repurchase obligations associated with acquired, guaranteed loan assets of $1.4 million.

Non-Interest Expense

Three months ended September 30, 2022, compared with three months ended September 30, 2021: For the three months ended September 30, 2022, non-interest expense totaled $32.2 million, an increase of $1.5 million, when compared to the three months ended September 30, 2021. Changes in the various components of non-interest expense for the three months ended September 30, 2022, and 2021, are discussed in more detail in the following table.

Non-Interest Expense

For the Three Months Ended September 30,


						2022 vs. 2021
(Dollars in thousands)	2022		2021			Change			%
Salaries and employee benefits	$	15,442	$	13,588		$	1,854			13.6	%
Net occupancy and equipment		3,127		2,475			652			26.3	%
Data processing		4,138		3,257			881			27.0	%
Professional fees		1,265		1,076			189			17.6	%
Advertising and business development		1,191		760			431			56.7	%
Telecommunications		487		439			48			10.9	%
FDIC insurance		340		465			(125	)		(26.9	)%
Courier and postage		436		344			92			26.7	%
Free nationwide ATM cost		551		519			32			6.2	%
Amortization of core deposit intangible		957		1,030			(73	)		(7.1	)%
Loan expense		174		207			(33	)		(15.9	)%
Other real estate owned		188		(342	)		530			(155.0	)%
Other		3,825		2,484			1,341			54.0	%
Subtotal		32,121		26,302			5,819			22.1	%
Loss on debt extinguishment		—		372			(372	)		(100.0	)%
Merger expenses		115		4,015			(3,900	)		(97.1	)%
Total non-interest expense	$	32,236	$	30,689		$	1,547			5.0	%

Salaries and employee benefits: There was a $1.9 million increase in salaries for the period ended September 30, 2022, as compared to the same period in 2021. The increase was primarily due to the addition of staff related to the ASBI acquisition in October 2021 and the Security acquisition in December 2021.

Net occupancy and equipment: Net occupancy and equipment costs increased $652 thousand for the period ended September 30, 2022, as compared to the same period in 2021. Increased occupancy expenses are due to additional locations from the ASBI acquisition in October 2021 and the Security acquisition in December 2021.

Data Processing: Data processing expenses increased $881 thousand for the period ended September 30, 2022, as compared to the same period in 2021. Included in the total increase were increases in software license expense of $240 thousand, debit card processing of $147 thousand, and credit card processing of $116 thousand.

Other: Other non-interest expenses consists of subscriptions, memberships and dues, employee expenses, including travel, meals, entertainment and education, supplies, printing, insurance, account related losses, correspondent bank fees, customer program expenses, losses net of gains on the sale of fixed assets, losses net of gains on the sale of repossessed assets other than real estate, other operating expenses, such as settlement of claims, losses from limited partnerships entered into for tax credits and provision for unfunded commitments. Overall, in the other expense category, there was a net $1.3 million increase, or 54.0%, between the quarters ending September 30, 2022, and 2021. The increase was primarily due to an increase in write-off of tax investments of $1.2 million.

Nine months ended September 30, 2022, compared with nine months ended September 30, 2021: For the nine months ended September 30, 2022, non-interest expense totaled $93.1 million, an increase of $11.8 million, when compared to the nine months ended September 30, 2021. Changes in the various components of non-interest expense for the nine months ended September 30, 2022, and 2021, are discussed in more detail in the following table.

Non-Interest Expense

For the Nine Months Ended September 30,


						2022 vs. 2021
(Dollars in thousands)	2022		2021			Change			%
Salaries and employee benefits	$	45,893	$	39,079		$	6,814			17.4	%
Net occupancy and equipment		9,304		7,170			2,134			29.8	%
Data processing		11,549		9,394			2,155			22.9	%
Professional fees		3,547		3,148			399			12.7	%
Advertising and business development		3,139		2,241			898			40.1	%
Telecommunications		1,399		1,531			(132	)		(8.6	)%
FDIC insurance		780		1,305			(525	)		(40.2	)%
Courier and postage		1,348		1,040			308			29.6	%
Free nationwide ATM cost		1,593		1,504			89			5.9	%
Amortization of core deposit intangibles		3,118		3,094			24			0.8	%
Loan expense		566		626			(60	)		(9.6	)%
Other real estate owned		201		(805	)		1,006			(125.0	)%
Other		10,168		7,050			3,118			44.2	%
Sub-Total		92,605		76,377			16,228			21.2	%
Loss on debt extinguishment		—		372			(372	)		(100.0	)%
Merger expenses		526		4,627			(4,101	)		(88.6	)%
Total non-interest expense	$	93,131	$	81,376		$	11,755			14.4	%

Salaries and employee benefits: There was a $6.8 million increase in salaries for the nine month periods ended September 30, 2022, as compared to the same period in 2021. The increase was primarily due to the addition of staff related to the ASBI acquisition in October 2021 and the Security acquisition in December 2021.

Net occupancy and equipment: Net occupancy and equipment costs increased $2.1 million for the nine month periods ended September 30, 2022, as compared to the same period in 2021. Increased occupancy expenses are due to additional locations from the ASBI acquisition in October 2021 and the Security acquisition in December 2021.

Data processing: Data processing costs increased $2.2 million for the nine month periods ended September 30, 2022, as compared to the same period in 2021. The increase was due to software licenses of $708 thousand, debit card expenses of $309 thousand, and credit card processing expenses of $216 thousand.

Other: Other non-interest expenses consists of subscriptions, memberships and dues, employee expenses, including travel, meals, entertainment and education, supplies, printing, insurance, account related losses, correspondent bank fees, customer program expenses, losses net of gains on the sale of fixed assets, losses net of gains on the sale of repossessed assets other than real estate, other operating expenses, such as settlement of claims, losses from limited partnerships entered into for tax credits and provision for unfunded commitments. Overall, in the other expense, category there was a net $3.1 million increase, or 44.2%, between the nine month periods ending September 30, 2022, and 2021. The increase is largely due to losses from limited partnerships entered into for tax credits of $2.6 million, ATM and debit card losses of $479 thousand and increased operating expenses following the integration of ASBI and Security, partially offset by a $1.2 million reversal of provision for unfunded commitments for the nine months ended September 30, 2022.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in the internal evaluation of performance and is not defined under GAAP. For a reconciliation of non-GAAP financial measures see “Non-GAAP Financial Measures” in this Item 2. Our efficiency ratio is computed by dividing non-interest expense, excluding loss on debt extinguishment, merger expenses, and goodwill impairment, by the sum of net interest income and non-interest income, excluding net gain on acquisition and 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 63.1% for the three months ended September 30, 2022, compared with 56.7% for the three months ended September 30, 2021. The increase was primarily due to an increase in non-interest expense, partially offset by increases in net interest income and non-interest income.

The efficiency ratio was 62.6% for the nine months ended September 30, 2022, compared with 59.7% for the nine months ended September 30, 2021. The increase was primarily due to an increase in non-interest expense, partially offset by increases in net interest income and non-interest income.

Income Taxes

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

Three months ended September 30, 2022, compared with three months ended September 30, 2021: The effective income tax rate for the three month period ended September 30, 2022, was 19.4% as compared to 21.8% for the three month period ended September 30, 2021. Income tax expense for the three month period ended September 30, 2022, includes $24 thousand of tax benefit attributable to the settlement in stock of restricted stock units and the exercise of options and $1.0 million of benefit related to the recognition of federal tax credits.

Nine months ended September 30, 2022, compared with nine months ended September 30, 2021: The effective income tax rate for the nine month period ended September 30, 2022, was 16.3% as compared to 22.2% for the nine month period ended September 30, 2021. Income tax expense for the nine month period ended September 30, 2022, includes $150 thousand of tax benefit attributable to the settlement in stock of restricted stock units and the exercise of options and $4.6 million of benefit related to the recognition of federal tax credits.

Financial Condition

Total assets decreased $137.2 million from December 31, 2021, to $5.00 billion at September 30, 2022. This variance was primarily due to decreases of $128.5 million in securities and $104.1 million in cash and due from banks, partially offset by an increase of $101.3 million of loans, net of allowance for credit losses. Total liabilities decreased $32.4 million to $4.60 billion at September 30, 2022. The change in total liabilities is mostly due to a decline in total deposits of $193.4 million and a $14.7 million reduction in interest payable and other liabilities, partially offset by an additional $186.0 million in Federal Home Loan Bank advances. Total stockholders’ equity decreased $104.8 million from $500.6 million at December 31, 2021, to $395.8 million at September 30, 2022, principally due to unrealized holding losses, net of tax, in the investment securities portfolio.

Loan Portfolio

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

Composition of Loan Portfolio


	September 30, 2022					December 31, 2021
	Amount		Percent			Amount		Percent			Change			%
	(Dollars in thousands)
Commercial and industrial	$	607,722		18.7	%	$	567,497		18.0	%	$	40,225			7.1	%
Real estate loans:
Commercial real estate		1,655,646		50.9	%		1,486,148		47.1	%		169,498			11.4	%
Residential real estate		573,431		17.6	%		638,087		20.2	%		(64,656	)		(10.1	)%
Agricultural real estate		200,415		6.2	%		198,330		6.3	%		2,085			1.1	%
Total real estate loans		2,429,492		74.7	%		2,322,565		73.6	%		106,927			4.6	%
Agricultural		115,048		3.5	%		166,975		5.3	%		(51,927	)		(31.1	)%
Consumer		102,761		3.2	%		98,590		3.1	%		4,171			4.2	%
Total loans held for investment	$	3,255,023		100.0	%	$	3,155,627		100.0	%	$	99,396			3.1	%
Total loans held for sale	$	1,518		100.0	%	$	4,214		100.0	%	$	(2,696	)		(64.0	)%
Total loans held for investment (net of allowances)	$	3,208,524		100.0	%	$	3,107,262		100.0	%	$	101,262			3.3	%

Our commercial loan portfolio consists of various types of loans, most of which are generally 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. Most 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 economies in which they operate.

At September 30, 2022, gross total loans, including loans held for sale, were 77.0% of deposits and 65.1% of total assets. At December 31, 2021, gross total loans, including loans held for sale, were 71.5% of deposits and 61.5% of total assets.

We provide commercial lines of credit, working capital loans, commercial real estate 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.

Commercial and industrial: Commercial and industrial loans include loans used to purchase fixed assets, to 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 multifamily residential properties, as well as 1-4 family investment-purpose real estate loans.

Residential real estate: Residential real estate loans include loans secured by primary or secondary personal residences. Pools of mortgages are occasionally purchased to expand our loan portfolio and provide additional loan income.

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, 2022, are summarized in the following table.

Loan Maturity and Sensitivity to Changes in Interest Rates


	As of September 30, 2022
	One year or less		After one year through five years		After five years through fifteen years		After fifteen years		Total
	(Dollars in thousands)
Commercial and industrial	$	200,104	$	321,412	$	82,373	$	3,833	$	607,722
Real Estate:
Commercial real estate		368,799		948,645		275,467		62,735		1,655,646
Residential real estate		2,209		9,664		120,659		440,899		573,431
Agricultural real estate		49,590		108,711		33,599		8,515		200,415
Total real estate		420,598		1,067,020		429,725		512,149		2,429,492
Agricultural		72,714		33,780		3,967		4,587		115,048
Consumer		34,578		43,323		22,515		2,345		102,761
Total	$	727,994	$	1,465,535	$	538,580	$	522,914	$	3,255,023
Loans with a predetermined fixed interest rate	$	257,079	$	805,630	$	192,864	$	309,892	$	1,565,465
Loans with an adjustable/floating interest rate		470,915		659,905		345,716		213,022		1,689,558
Total	$	727,994	$	1,465,535	$	538,580	$	522,914	$	3,255,023

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, 2021, are summarized in the following table.

Loan Maturity and Sensitivity to Changes in Interest Rates


	As of December 31, 2021
	One year or less		After one year through five years		After five years through fifteen years		After fifteen years		Total
	(Dollars in thousands)
Commercial and industrial	$	172,409	$	300,312	$	88,124	$	6,652	$	567,497
Real Estate:
Commercial real estate		247,339		834,277		355,479		49,053		1,486,148
Residential real estate		6,594		14,066		136,994		480,433		638,087
Agricultural real estate		53,703		83,861		47,176		13,590		198,330
Total real estate		307,636		932,204		539,649		543,076		2,322,565
Agricultural		113,138		41,003		6,809		6,025		166,975
Consumer		36,714		40,361		18,352		3,163		98,590
Total	$	629,897	$	1,313,880	$	652,934	$	558,916	$	3,155,627
Loans with a predetermined fixed interest rate	$	258,334	$	875,796	$	235,609	$	334,122	$	1,703,861
Loans with an adjustable/floating interest rate		371,563		438,084		417,325		224,794		1,451,766
Total	$	629,897	$	1,313,880	$	652,934	$	558,916	$	3,155,627

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, current economic trends, and 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.

For additional information, see “NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES” in the Condensed Notes to Interim Consolidated Financial Statements.

Nonperforming Assets

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

Nonperforming Assets


	September 30, 2022			December 31, 2021
	(Dollars in thousands)
Nonaccrual loans	$	23,129		$	29,361
Accruing loans 90 or more days past due		—			256
OREO acquired through foreclosure, net		6,341			7,582
Other repossessed assets		221			28,799
Total nonperforming assets	$	29,691		$	65,998
Ratios:
Nonperforming assets to total assets		0.59	%		1.28	%
Nonperforming assets to total loans plus OREO and repossessed assets		0.91	%		2.07	%

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 earned in the current year is reversed against income and unpaid interest earned in prior years is charged off. Future interest income may be recorded on a cash basis after recovery of principal is reasonably assured. Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The nonperforming loans at September 30, 2022, consisted of 165 separate credits and 138 separate borrowers. We had 8 non-performing loan relationships, totaling $13.1 million, with an outstanding balance in excess of $1.0 million as of September 30, 2022.

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 we 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 are 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, 2022, the Company had $30.6 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $32.6 million at December 31, 2021.

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 credit 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.

Allowance for Credit Losses

Please see “Critical Accounting Policies – Allowance for Credit 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 is 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.

•

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

•

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.

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


Allowance for Credit Losses
For the Quarters Ended,
(Dollars in thousands)
September 30, 2022	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Agricultural			Consumer			Total
Allowance for credit losses (ACL)	$	20,348		$	13,415		$	7,260		$	1,048		$	2,043		$	2,385		$	46,499
Total loans outstanding (1)		1,655,646			607,722			573,431			200,415			115,048			102,760			3,255,022
Net (charge-offs) recoveries QTD		(605	)		(705	)		(44	)		1			(44	)		(206	)		(1,603	)
Net (charge-offs) recoveries YTD		(837	)		(666	)		(58	)		8			(45	)		(544	)		(2,142	)
Average loan balance (1) QTD		1,667,823			575,149			581,389			200,534			113,351			101,205			3,239,451
Average loan balance (1) YTD		1,598,825			579,610			602,271			201,566			132,485			101,340			3,216,097
Non-accrual loan balance		5,341			7,536			3,269			3,268			3,441			274			23,129
Loans to total loans outstanding		50.9	%		18.7	%		17.6	%		6.2	%		3.5	%		3.2	%		100.0	%
ACL to total loans		1.2	%		2.2	%		1.3	%		0.5	%		1.8	%		2.3	%		1.4	%
Net charge-offs to average loans QTD		0.0	%		(0.1	)%		0.0	%		0.0	%		0.0	%		(0.2	)%		0.0	%
Net charge-offs to average loans YTD		(0.1	)%		(0.1	)%		0.0	%		0.0	%		0.0	%		(0.5	)%		(0.1	)%
Non-accrual loans to total loans		0.3	%		1.2	%		0.6	%		1.6	%		3.0	%		0.3	%		0.7	%
ACL to non-accrual loans		381.0	%		178.0	%		222.1	%		32.1	%		59.4	%		870.4	%		201.0	%



September 30, 2021	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Agricultural			Consumer			Total
Allowance for credit losses (ACL)	$	12,482		$	24,127		$	8,339		$	1,004		$	4,329		$	2,482		$	52,763
Total loans outstanding (1)		1,308,707			569,513			490,633			138,793			93,767			84,498			2,685,911
Net (charge-offs) recoveries QTD		(20	)		(36	)		4			12			-			(89	)		(129	)
Net (charge-offs) recoveries YTD		54			(27	)		(3	)		(472	)		3			(316	)		(761	)
Average loan balance (1) QTD		1,292,247			630,622			507,910			134,673			91,878			86,647			2,743,977
Average loan balance (1) YTD		1,255,147			752,795			450,697			135,795			93,680			84,285			2,772,399
Non-accrual loan balance		6,171			43,929			3,094			4,510			7,078			200			64,982
Loans to total loans outstanding		48.7	%		21.2	%		18.3	%		5.2	%		3.5	%		3.1	%		100.0	%
ACL to total loans		1.0	%		4.2	%		1.7	%		0.7	%		4.6	%		2.9	%		2.0	%
Net charge-offs to average loans QTD		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		(0.1	)%		0.0	%
Net charge-offs to average loans YTD		0.0	%		0.0	%		0.0	%		(0.3	)%		0.0	%		(0.4	)%		0.0	%
Non-accrual loans to total loans		0.5	%		7.7	%		0.6	%		3.2	%		7.5	%		0.2	%		2.4	%
ACL to non-accrual loans		202.3	%		54.9	%		269.5	%		22.3	%		61.2	%		1241.0	%		81.2	%

(1)

Excluding loans held for sale.

Management believes that the allowance for credit losses at September 30, 2022, was adequate to cover current expected credit 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, 2022.

The allowance for credit losses on loans measured on a collective basis totaled $41.2 million, or 1.3% of the $3.26 billion in loans measured on a collective basis at September 30, 2022, compared to an allowance for credit losses of $34.3 million, or 1.12%, of the $3.06 billion in loans measured on a collective basis at December 31, 2021. The total reserve percentage decreased 10 basis points from 1.5% to 1.4% at December 31, 2021, to September 30, 2022.

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, 2022, securities represented 24.0% of total assets, staying consistent with 25.8% at December 31, 2021.

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, carried at cost, and adjusted for the amortization of premiums and the accretion of discounts, 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, 2022				December 31, 2021
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
U.S. Government-sponsored entities	$	123,375	$	105,947	$	124,898	$	123,407
U.S. Treasury securities		257,508		230,111		157,289		155,602
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		577,485		510,476		661,584		664,887
Private label residential mortgage-backed securities		192,585		165,261		173,717		171,688
Corporate		56,620		53,356		52,555		53,777
Small Business Administration loan pools		13,376		12,594		16,568		16,475
State and political subdivisions		136,005		121,217		138,404		141,606
Total available-for-sale securities	$	1,356,954	$	1,198,962	$	1,325,015	$	1,327,442

At September 30, 2022, and December 31, 2021, we did not own any securities classified as held-to-maturity.

At September 30, 2022, and December 31, 2021, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which aggregate par value 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, 2022, and December 31, 2021. 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.


	September 30, 2022
	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:
U.S. Government-sponsored entities	$	—		—	%	$	47,105		72.00	%	$	55,640		1.50	%	$	3,202		1.96	%	$	105,947		1.17	%
U.S. Treasury securities		—		—	%		170,241		1.21	%		59,870		1.14	%		—	—%				230,111		1.19	%
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		—		—	%		70,061		1.46	%		179,154		1.80	%		261,261		2.44	%		510,476		2.08	%
Private label residential mortgage-backed securities		—		—	%		—		—	%		—		—	%		165,261		2.13	%		165,261		2.13	%
Corporate		—		—	%		7,950		4.54	%		45,406		4.65	%		—		—	%		53,356		4.64	%
Small Business Administration loan pools		—		—	%		—		—	%		7,897		2.17	%		4,697		1.78	%		12,594		2.02	%
State and political subdivisions(1)		4,645		2.68	%		19,915		2.41	%		42,438		2.32	%		54,219		2.45	%		121,217		2.41	%
Total available-for-sale securities		4,645		2.68	%		315,272		1.35	%		390,405		2.05	%		488,640		2.33	%		1,198,962		1.98	%
Total debt securities	$	4,645		2.68	%	$	315,272		1.35	%	$	390,405		2.05	%	$	488,640		2.33	%	$	1,198,962		1.98	%

(1)

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


	December 31, 2021
	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:
U.S. Government-sponsored entities	$	1,001		2.78	%	$	29,524		0.50	%	$	84,810		1.37	%	$	8,072		1.89	%	$	123,407		1.21	%
U.S. Treasury securities		—		—	%		48,008		1.14	%		107,594		1.10	%		—		—	%		155,602		1.11	%
Mortgage-backed securities
Government-sponsored residential mortgage-backed securities		—		—	%		69,734		1.35	%		211,965		1.65	%		383,188		2.05	%		664,887		1.85	%
Private label residential mortgage-backed securities		—		—	%		—		—	%		—		—	%		171,688		1.62	%		171,688		1.62	%
Corporate		—		—	%		—		—	%		53,777		4.18	%		—		—	%		53,777		4.18	%
Small Business Administration loan pools		—		—	%		—		—	%		9,669		0.93	%		6,806		1.76	%		16,475		1.27	%
State and political subdivisions(1)		7,259		2.60	%		21,038		2.43	%		44,640		2.26	%		68,669		2.36	%		141,606		2.35	%
Total available-for-sale securities		8,260		2.62	%		168,304		1.28	%		512,455		1.79	%		638,423		1.96	%		1,327,442		1.81	%
Total debt securities	$	8,260		2.62	%	$	168,304		1.28	%	$	512,455		1.79	%	$	638,423		1.96	%	$	1,327,442		1.81	%

(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 homeowners 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, 2022, and December 31, 2021, 63.1% and 66.3% of the residential mortgage-backed securities held by us had contractual final maturities of more than ten years, with a weighted average life of 5.2 years and 4.4 years and a modified duration of 4.4 years and 4.1 years.

Goodwill Impairment Assessment

At September 30, 2022, we performed an interim qualitative analysis and concluded there were no indications that goodwill was impaired.

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, 2022, and December 31, 2021.

Composition of Deposits


	September 30, 2022					December 31, 2021
	Amount		Percent of Total			Amount		Percent of Total
	(Dollars in thousands)
Non-interest-bearing demand	$	1,217,094		28.8	%	$	1,244,117		28.1	%
Interest-bearing demand and NOW accounts		1,045,831		24.8	%		1,202,408		27.2	%
Savings and money market		1,290,016		30.5	%		1,319,881		29.9	%
Time		673,670		15.9	%		653,598		14.8	%
Total deposits	$	4,226,611		100.0	%	$	4,420,004		100.0	%

Total deposits at September 30, 2022, were $4.23 billion, a decrease of $193.4 million, or 4.4%, compared to total deposits of $4.42 billion at December 31, 2021.

Equity Bank participates in the Insured Cash Sweep (“ICS”) service that allows the 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. The Bank also participates in the Certificate of Deposit Account Registry Service (“CDARS”) program. CDARS allows the 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 lists reciprocal and brokered deposits included in total deposits categorized by type at September 30, 2022, and December 31, 2021.


	September 30, 2022		December 31, 2021
Interest-bearing demand
Reciprocal	$	219,184	$	308,374
Total interest-bearing demand		219,184		308,374
Savings and money market
Reciprocal		17,327		52,173
Total savings and money market		17,327		52,173
Time
Reciprocal		17,410		2,969
Non-reciprocal brokered		131,000		10,000
Total time		148,410		12,969
Total reciprocal and brokered deposits	$	384,921	$	373,516

The following table provides information on the maturity distribution of time deposits of $250 thousand or more as of September 30, 2022, and December 31, 2021.


	September 30, 2022		December 31, 2021		Change			%
	(Dollars in thousands)
3 months or less	$	23,625	$	88,969	$	(65,344	)		(73.4	)%
Over 3 through 6 months		37,137		115,063		(77,926	)		(67.7	)%
Over 6 through 12 months		44,876		14,047		30,829			219.5	%
Over 12 months		33,477		15,381		18,096			117.7	%
Total Time Deposits	$	139,115	$	233,460	$	(94,345	)		(40.4	)%

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, Federal Reserve Bank discount

window, a bank stock loan, and subordinated debt. For additional information see “NOTE 6 – BORROWINGS” in the Condensed Notes to Interim Consolidated Financial Statement.

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 considering 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 the way they combine to provide adequate liquidity to meet our needs.

During the nine months ended September 30, 2022, and 2021, 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, borrowings from the FHLB, and the Federal Reserve discount window.

Our largest sources of funds are deposits and FHLB borrowings and largest uses of funds are loans and securities. Average loans were $3.22 billion for the nine months ended September 30, 2022, an increase of 11.7% over the December 31, 2021, average balance. Excess deposits are primarily invested in our interest-bearing deposit account with the Federal Reserve Bank of Kansas City, investment securities, federal funds sold or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio has a weighted average life of 4.8 years and a modified duration of 4.5 years at September 30, 2022.

Cash and cash equivalents were $155.4 million at September 30, 2022, a decrease of $104.5 million from the $260.0 million cash and cash equivalents at December 31, 2021. The decrease in cash and cash equivalents is driven primarily by $166.6 million net cash used in investing activities, partially offset by $4.4 million used in financing activities and $57.7 million provided by operating activities. Cash and cash equivalents at January 1, 2022, plus liquidity provided by operating activities, pay downs, sales, and maturities of investment securities and FHLB borrowings during the first nine months of 2022 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, the 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.

Standby and Performance Letters of Credit: For additional information see “NOTE 11 – COMMITMENTS AND CREDIT RISK” in the Condensed Notes to Interim Consolidated Financial Statement.

Commitments to Extend Credit: For additional information see “NOTE 11 – COMMITMENTS AND CREDIT RISK” in the Condensed Notes to Interim Consolidated Financial Statement.

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, 2022, and December 31, 2021, the Company and Equity Bank meet all capital adequacy requirements to which they are subject.

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

Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver. As of September 30, 2022, 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 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 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 way 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 to, or with names like, 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 accumulated 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 (c) 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.


	As of the period ended
	September 30, 2022		June 30, 2022		March 31, 2022		December 31, 2021		September 30, 2021
	(Dollars in thousands, except per share data)
Total stockholders’ equity	$	395,806	$	428,115	$	452,015	$	500,631	$	417,749
Less: goodwill		53,101		53,101		54,465		54,465		31,601
Less: core deposit intangibles, net		11,598		12,554		13,830		14,879		12,963
Less: mortgage servicing asset, net		201		226		251		276		—
Less: naming rights, net		1,054		1,065		1,076		1,087		1,098
Tangible common equity	$	329,852	$	361,169	$	382,393	$	429,924	$	372,087
Common shares issued at period end		16,017,834		16,106,818		16,454,966		16,760,115		14,365,785
Diluted common shares outstanding at period end		16,476,715		16,289,635		16,662,779		17,050,115		14,637,306
Book value per common share	$	24.71	$	26.58	$	27.47	$	29.87	$	29.08
Tangible book value per common share	$	20.59	$	22.42	$	23.24	$	25.65	$	25.90
Tangible book value per diluted common share	$	20.33	$	22.17	$	22.95	$	25.22	$	25.42

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.


	As of the period ended
	September 30, 2022			June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021
	(Dollars in thousands)
Total stockholders’ equity	$	395,806		$	428,115		$	452,015		$	500,631		$	417,749
Less: goodwill		53,101			53,101			54,465			54,465			31,601
Less: core deposit intangibles, net		11,598			12,554			13,830			14,879			12,963
Less: mortgage servicing asset, net		201			226			251			276			—
Less: naming rights, net		1,054			1,065			1,076			1,087			1,098
Tangible common equity	$	329,852		$	361,169		$	382,393		$	429,924		$	372,087
Total assets	$	5,000,415		$	5,002,156		$	5,078,623		$	5,137,631		$	4,263,268
Less: goodwill		53,101			53,101			54,465			54,465			31,601
Less: core deposit intangibles, net		11,598			12,554			13,830			14,879			12,963
Less: mortgage servicing asset, net		201			226			251			276			—
Less: naming rights, net		1,054			1,065			1,076			1,087			1,098
Tangible assets	$	4,934,461		$	4,935,210		$	5,009,001		$	5,066,924		$	4,217,606
Equity to assets		7.92	%		8.56	%		8.90	%		9.74	%		9.80	%
Tangible common equity to tangible assets		6.68	%		7.32	%		7.63	%		8.48	%		8.82	%

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 (net of taxes); 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, 2022			June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021
	(Dollars in thousands)
Total average stockholders’ equity	$	436,191		$	437,483		$	492,599		$	563,046		$	422,879
Less: average intangible assets		66,445			68,978			70,181			61,186			46,335
Average tangible common equity	$	369,746		$	368,505		$	422,418		$	501,860		$	376,544
Net income (loss) allocable to common stockholders	$	15,171		$	15,259		$	15,650		$	10,466		$	11,773
Amortization of intangible assets		992			1,148			1,085			1,116			1,040
Less: tax effect		208			241			228			234			218
Adjusted net income allocable to common stockholders	$	15,955		$	16,166		$	16,507		$	11,348		$	12,595
Return on total average stockholders’ equity (ROAE) annualized		13.80	%		13.99	%		12.88	%		7.37	%		11.05	%
Return on average tangible common equity (ROATCE) annualized		17.12	%		17.60	%		15.85	%		8.97	%		13.27	%

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


	For the three months ended
	September 30, 2022			June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021
	(Dollars in thousands)
Non-interest expense	$	32,236		$	31,436		$	29,459		$	38,089		$	30,689
Less: loss on debt extinguishment		—			—			—			—			372
Less: merger expense		115			88			323			4,562			4,015
Non-interest expense, excluding loss on debt extinguishment and merger expense	$	32,121		$	31,348		$	29,136		$	33,527		$	26,302
Net interest income	$	41,944		$	39,566		$	39,289		$	37,215		$	38,975
Non-interest income	$	8,969		$	9,637		$	9,022		$	9,199		$	7,831
Less: net gain on acquisition and branch sales		—			540			—			—			—
Less: net gain (loss) from securities transactions		(17	)		(32	)		40			8			381
Non-interest income, excluding net gain (loss) from securities transactions and net gain on acquisition and branch sales	$	8,986		$	9,129		$	8,982		$	9,191		$	7,450
Net interest income plus non-interest income, excluding net gain on acquisition and branch sales and net gain (loss) from securities transactions	$	50,930		$	48,695		$	48,271		$	46,406		$	46,425
Non-interest expense to net interest income plus non-interest income		63.32	%		63.89	%		60.98	%		82.06	%		65.57	%
Efficiency Ratio		63.07	%		64.38	%		60.36	%		72.25	%		56.65	%

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 futures 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. ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, 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. 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 purchased and sale activities, commitments to originate loans and the maturities of investment securities and borrowings. Additionally, 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, 2022, and December 31, 2021, 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 level of fixed rate investments and loans receivable that will not reprice to higher rates; variable rate advances; the variable rate subordinated debentures; the non-term deposits that will reprice up based on the projected interest rate beta; term deposits that mature and reprice at 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 primarily comprised of fixed rate investments and as rates decrease, the level of prepayments is 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. 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, 2022, and December 31, 2021, is due to being in a liability sensitive position and the level of convexity in pre-payable assets. Generally, with a liability sensitive position, as interest rates increase, the value of assets decrease faster than the value of liabilities and as interest rates decrease, the value of assets increase at a faster rate than liabilities. However, due to the level of convexity in fixed rate pre-payable assets, we do not experience a similar change in the value of assets in a down interest rate shock scenario. In addition, the mix of interest-bearing deposit and non-interest-bearing deposits impact the level of deposit decay and the resulting benefit of discounting from the non-interest-bearing deposits. At September 30, 2022, non-interest-bearing deposits were approximately $27.0 million or 2.2% lower than that deposit type at December 31, 2021. Substantially all investments and approximately 52.0% 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, 2022			December 31, 2021
+300 basis points		(1.5	)%		(4.4	)%
+200 basis points		(0.9	)%		(2.4	)%
+100 basis points		(0.4	)%		(1.0	)%
0 basis points		—			—
-100 basis points		(3.0	)%		(4.4	)%

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, 2022			December 31, 2021
+300 basis points		(8.6	)%		(2.8	)%
+200 basis points		(6.0	)%		0.7	%
+100 basis points		(2.8	)%		2.7	%
0 basis points		—			—
-100 basis points		0.2	%		(14.8	)%

Item 4: Controls and Procedures

Evaluation of disclosure controls and procedures

An evaluation of the effectiveness of the design and operation of 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 the Chief Executive Officer and Chief Financial Officer. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply judgement in evaluating its controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms.

Changes in internal control over financial reporting

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

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 have 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 9, 2022.

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

Repurchase of Common Stock

In September of 2021, the Company’s Board of Directors authorized an additional repurchase of up to 1,000,000 shares of the Company’s outstanding common stock, from time to time, beginning October 29, 2021, and concluding October 28, 2022. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and it could be extended, modified or discontinued at any time without notice. On October 20, 2021, the Federal Reserve Bank of Kansas City advised the Company that it had no objection to the Company’s authorization to repurchase of up to an additional 1,000,000 shares of the Company’s Class A Voting Common Stock.

The following table presents shares that have been repurchased under the program during the third quarter of 2022.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
July 1, 2022 through July 31, 2022		15,412	$	31.84		15,412		111,488
August 1, 2022 through August 31, 2022		111,488	$	32.60		111,488		—
September 1, 2022 through September 30, 2022		—	$	—		—		—
Total		126,900	$	32.51		126,900		—

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
10.1*		Equity Bank Executive Deferred Compensation Plan, dated October 25, 2022.
10.2†		Equity Bancshares, Inc. 2022 Employee Stock Purchase Plan (incorporated by reference to Appendix A to Equity Bancshares, Inc.’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on September 20, 2022).
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*		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*		Inline XBRL Taxonomy Extension Schema Document.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

* 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 8, 2022	By:	/s/ Brad S. Elliott
Date		Brad S. Elliott
		Chairman and Chief Executive Officer

November 8, 2022	By:	/s/ Eric R. Newell
Date		Eric R. Newell
		Executive Vice President and Chief Financial Officer