# EQUITY BANCSHARES INC (EQBK) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from EQUITY BANCSHARES INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1227500/000095017024028081/eqbk-20231231.htm
Accession: 0000950170-24-028081
Filing date: 2024-03-07
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EQBK/
All MD&A years: /company/EQBK/mda/
Previous year: /company/EQBK/mda/fy2022/ (FY 2022)
Next year: /company/EQBK/mda/fy2024/ (FY 2024)

Item 7: 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 our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. 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 Statement Regarding Forward-Looking Statements.” Also, see the risk factors and other cautionary statements described under the heading “Item 1A – Risk Factors” included in Item 1A of this Annual Report on Form 10-K. 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;

•
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 – reconciliation of non-GAAP measures.

56

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Ratio","","","12.36","%","","","12.88","%","","","12.67","%","","","13.37","%","","","12.15","%"],["Total Risk Based Capital Ratio","","","15.48","%","","","16.08","%","","","15.96","%","","","17.35","%","","","12.59","%"],["Equity / Assets","","","8.99","%","","","8.23","%","","","9.74","%","","","10.16","%","","","12.10","%"],["Book value per share","","$","29.35","","","$","25.74","","","$","29.87","","","$","28.04","","","$","30.95"],["Tangible book value per share*","","$","25.37","","","$","21.67","","","$","25.65","","","$","24.68","","","$","20.75"],["Tangible common equity to tangible assets*","","","7.87","%","","","7.02","%","","","8.48","%","","","9.05","%","","","8.45","%"]]
[[/GREPCENT_TABLE]]

* Indicates non-GAAP financial measure. Please see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures” for reconciliation to the most directly comparable GAAP measure.

57

Overview

We are a financial 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 64 full-service branches located in Arkansas, Kansas, Missouri and Oklahoma. As of December 31, 2023, we had, on a consolidated basis, total assets of $5.03 billion, total deposits of $4.15 billion, total loans held for investment, net of allowances, of $3.29 billion and total stockholders’ equity of $452.9 million. Net income for the year ended December 31, 2023, was $7.8 million, compared to net income of $57.7 million for the year ended December 31, 2022.

History and Background

From 2003 through 2023, we completed a series of twenty acquisitions, two charter consolidations and two branch dispositions. We seek to integrate the banks we acquire into our existing operational platform and enhance stockholder value through the creation of efficiencies within the combined operations. In conjunction with our strategic acquisition growth, we strive to reposition and improve the loan portfolio and deposit mix of the banks we acquire. Following our acquisitions, we focus on identifying and disposing of problematic loans and replacing them with higher quality loans generated organically. In addition, we concentrate on growth in our commercial loan portfolio, which we believe generally offers higher return opportunities than our consumer loan portfolio, primarily by hiring additional talented bankers, particularly in our metropolitan markets, and incentivizing our bankers to expand their commercial banking relationships. We also seek to increase our most attractive deposit accounts primarily by growing deposits in our community markets and cross selling our depository products to our loan customers.

Our principal objective is to continually increase stockholder value and generate consistent earnings growth by expanding our commercial banking franchise both organically and through strategic acquisitions. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. We expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on continuing to grow organically and believe the markets in which we operate currently provide meaningful opportunities to expand our commercial customer base and increase our current market share. We believe our geographic footprint, which is strategically split between growing metropolitan markets, such as Kansas City, Tulsa and Wichita, and stable community markets within Western Kansas, Western Missouri, Topeka, Northern Arkansas and Northern Oklahoma, provides us with access to low cost stable core deposits in community markets that we can use to fund commercial loan growth in our metropolitan markets. We strive to provide an enhanced banking experience for our customers by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality relationship-based customer service of a community bank.

Highlights for the Year Ended December 31, 2023

•
Net income of $7.8 million, or $0.50 diluted earnings per share, for the year ended December 31, 2023. Adjusted to exclude the loss on re-positioning of the investment portfolio, net income was $48.9 million, or $3.13 diluted earnings per share.

•
Dividends declared of $6.9 million, or $0.44 per share, for the year ended December 31, 2023, compared to $5.4 million, or $0.36 per share, for the year ended December 31, 2022, an increase of 22.0%

•
Total loans held for investment increased to $3.33 billion at December 31, 2023, compared to $3.31 billion at December 31, 2022.

•
Announced the 10th whole-bank acquisition since the Company's initial public offering, with our merger with Rockhold BanCorp. The transaction was announced on December 6, 2023, and closed on February 9, 2024, adding approximately $340 million in deposits, eight banking locations and a new territory to the Equity Bank footprint.

•
Successfully reduced classified assets as a percentage of regulatory capital from 9.98% at the end of 2022 to 7.09% at the end of 2023. Current problem asset ratios are amongst the lowest the Company has seen in its history.

Critical Accounting Policies

The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments 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

58

accounting policies are described in “NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Notes to 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 judgment 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 actual realized facts and circumstances may be different than those currently estimated by management and may result in significant changes in the allowance for credit losses in future periods. 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 amounts, net of recoveries.

The Company utilizes primarily two methods for estimating the allowance for credit losses and the method used depends on the status of the underlying loans. Non-performing loans primarily utilize a collateral specific fair value impairment method and performing loans primarily utilize a historical loss method. The performing loan method utilizes a probability of default (PD) and loss given default (LGD) modeling approach for historical loss coupled with a macroeconomic factor analysis derived from a statistical regression of loss experience correlated to changes in economic factors for all commercial banks operating within our geographical footprint. The macroeconomic regression is based on a multivariate approach and includes key indicators that provide the highest cumulative adjusted R-square figure. Economic factors include, but are not limited to, national unemployment, gross domestic product, market interest rates and property pricing indices. To arrive at the most predictive calculation, a lag factor was applied to these inputs, resulting in current and historic economic inputs driving the projection of loss over our reasonable and supportable forecast period, which management has defined as 12 months for all portfolio segments. Following the reasonable and supportable forecast period, loss experience immediately reverts to the current historical loss experience of the Company. The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management but measured by objective measurements period over period. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in projected economic sentiment, portfolio concentrations, policy exceptions, personnel retention, independent loan review results, collateral considerations, risk ratings and competition. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors. The resultant loss rates are applied to the estimated future exposure at default (EAD), as determined based on contractual amortization terms through an average default month and estimated prepayment experience in arriving at the quantitative reserve within our allowance for credit losses.

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 December 31, 2023. 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, changing economic conditions, both positive and negative, to the extent significant 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 year ended December

59

31, 2023, management performed a qualitative analysis and has determined that there was not evidence of a triggering event during the period then ended. Our qualitative analysis process consists of using recent bank merger transactions, for companies that are similar to the Company based on financial performance, to calculate the average change in control premium from the merger data. The average change in control premium, number of shares and our current trading price is used to estimate the market value of our equity, which is compared to our book value of equity. In addition to estimating equity market value, we evaluate the qualitative considerations contained in current accounting guidance to identify any evidence of goodwill impairment. Based on this qualitative analysis and conclusion, it was determined that a more robust quantitative assessment was not necessary at our measurement date.

For additional information see “NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” and “NOTE 7 – GOODWILL AND CORE DEPOSIT INTANGIBLES” in the Notes to Consolidated Financial Statements.

Results of Operations

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

Changes in interest rates earned on interest-earning assets or incurred on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic change in net interest income. Fluctuations in interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international circumstances and domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Arkansas, Kansas, Missouri and Oklahoma, as well as developments affecting the consumer, commercial and real estate sectors within these markets.

For information comparing our results of operations for the year ended December 31, 2022, to year ended December 31, 2021, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 9, 2023.

Net Income

Year ended December 31, 2023, compared with year ended December 31, 2022

For the year ended December 31, 2023, there was net income allocable to common stockholders of $7.8 million, compared to net income allocable to common stockholders of $57.7 million for the year ended December 31, 2022, a decrease of $49.9 million. This change was primarily driven by the sale of $490.1 of investment securities at a loss of $52.0 million. The changes in the components of net income are discussed in more detail below in the following sections of “Results of Operations.”

Net Interest Income and Net Interest Margin Analysis

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

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 years ended December 31, 2023, 2022,

60

and 2021. The yields and rates are calculated by dividing income or expense by the average daily balances of the associated assets or liabilities.

Average Balance Sheets and Net Interest Analysis

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owned, net","","","3,991","","","","","","","","","","10,144","","","","","","","","","","10,510"],["Premises and equipment, net","","","107,297","","","","","","","","","","102,165","","","","","","","","","","93,539"],["Bank-owned life insurance","","","123,665","","","","","","","","","","121,741","","","","","","","","","","103,255"],["Goodwill and other intangibles, net","","","63,064","","","","","","","","","","67,747","","","","","","","","","","50,831"],["Other non-interest-earning assets","","","100,296","","","","","","","","","","88,840","","","","","","","","","","28,017"],["Total assets","","$","4,999,405","","","","","","","","","$","5,023,112","","","","","","","","","$","4,431,800"],["Interest-bearing liabilities"],["Interest-bearing demand deposits","","$","1,002,543","","","","22,681","","","","2.26","%","","$","1,124,828","","","","7,248","","","","0.64","%","","$","1,032,938","","","","2,165","","","","0.21","%"],["Savings and money market","","","1,359,822","","","","23,525","","","","1.73","%","","","1,308,536","","","","3,549","","","","0.27","%","","","1,129,869","","","","1,540","","","","0.14","%"],["Demand savings and money market","","","2,362,365","","","","46,206","","","","1.96","%","","","2,433,364","","","","10,797","","","","0.44","%","","","2,162,807","","","","3,705","","","","0.17","%"],["Certificates of deposit","","","827,652","","","","24,267","","","","2.93","%","","","663,790","","","","5,524","","","","0.83","%","","","625,562","","","","4,550","","","","0.73","%"],["Total interest-bearing deposits","","","3,190,017","","","","70,473","","","","2.21","%","","","3,097,154","","","","16,321","","","","0.53","%","","","2,788,369","","","","8,255","","","","0.30","%"],["FHLB term and line of credit advances","","","98,380","","","","3,944","","","","4.01","%","","","79,775","","","","2,094","","","","2.63","%","","","16,797","","","","169","","","","1.01","%"],["Federal Reserve Bank discount window","","","108,551","","","","4,755","","","","4.38","%","","","3","","","","\u2014","","","","0.25","%","","","3","","","","\u2014","","","","0.25","%"],["Subordinated borrowings","","","96,651","","","","7,591","","","","7.85","%","","","96,133","","","","6,771","","","","7.04","%","","","89,785","","","","6,261","","","","6.97","%"],["Other borrowings","","","49,464","","","","931","","","","1.88","%","","","55,036","","","","232","","","","0.42","%","","","45,819","","","","104","","","","0.23","%"],["Total interest-bearing liabilities","","","3,543,063","","","","87,694","","","","2.48","%","","","3,328,101","","","","25,418","","","","0.76","%","","","2,940,773","","","","14,789","","","","0.50","%"],["Non-interest-bearing liabilities and stockholders\u2019 equity"],["Non-interest-bearing checking accounts","","","979,410","","","","","","","","","","1,203,167","","","","","","","","","","1,021,261"],["Non-interest-bearing liabilities","","","53,210","","","","","","","","","","50,962","","","","","","","","","","22,971"],["Stockholders\u2019 equity","","","423,722","","","","","","","","","","440,882","","","","","","","","","","446,795"],["Total liabilities and stockholders\u2019 equity","","$","4,999,405","","","","","","","","","$","5,023,112","","","","","","","","","$","4,431,800"],["Net interest income","","","","","$","159,018","","","","","","","","","$","162,830","","","","","","","","","$","142,579"],["Interest rate spread","","","","","","","","","2.88","%","","","","","","","","","3.30","%","","","","","","","","","3.30","%"],["Net interest margin(2)","","","","","","","","","3.46","%","","","","","","","","","3.51","%","","","","","","","","","3.44","%"],["Total cost of deposits, including non-interest bearing deposits","","$","4,169,427","","","$","70,473","","","","1.69","%","","$","4,300,321","","","$","16,321","","","","0.38","%","","$","3,809,630","","","$","8,255","","","","0.22","%"],["Average interest-earning assets to interest-bearing liabilities","","","","","","","","","129.86","%","","","","","","","","","139.19","%","","","","","","","","","140.97","%"]]
[[/GREPCENT_TABLE]]

(1)Average loan balances include nonaccrual loans, hedge fair value adjustments and merger fair value adjustments.

(2)Net interest margin is calculated by dividing net interest income by average interest-earning assets for the period.

(3)Tax exempt income is not included in the above table on a tax equivalent basis.

(4)Actual un-rounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.

61

The following table analyzes the change in volume variances and yield/rate variances for the year ended December 31, 2023, as compared to the year ended December 31, 2022, and the year ended December 31, 2022, as compared to the year ended December 31, 2021.

Analysis of Changes in Net Interest Income

[[GREPCENT_TABLE]]
[["","","2023 vs. 2022","","","2022 vs. 2021"],["","","Increase (Decrease) Due to:","","","Increase (Decrease) Due to:"],["(Dollars in thousands)","","Volume(1)","","","Yield/Rate(1)","","","Total","","","Volume(1)","","","Yield/Rate(1)","","","Total"],["Interest-earning assets"],["Loans"],["Commercial and industrial","","$","(158",")","","$","10,801","","","$","10,643","","","$","(7,340",")","","$","(1,982",")","","$","(9,322",")"],["Commercial real estate","","","2,307","","","","16,012","","","","18,319","","","","10,956","","","","5,490","","","","16,446"],["Real estate construction","","","4,860","","","","10,635","","","","15,495","","","","3,736","","","","4,277","","","","8,013"],["Residential real estate","","","(1,205",")","","","3,000","","","","1,795","","","","3,689","","","","(1,026",")","","","2,663"],["Agricultural real estate","","","2","","","","2,419","","","","2,421","","","","2,667","","","","610","","","","3,277"],["Agricultural","","","(1,492",")","","","1,761","","","","269","","","","889","","","","447","","","","1,336"],["Consumer","","","226","","","","1,186","","","","1,412","","","","664","","","","448","","","","1,112"],["Total loans","","","4,540","","","","45,814","","","","50,354","","","","15,261","","","","8,264","","","","23,525"],["Taxable securities","","","(3,275",")","","","4,435","","","","1,160","","","","3,743","","","","2,974","","","","6,717"],["Nontaxable securities","","","(835",")","","","97","","","","(738",")","","","38","","","","(183",")","","","(145",")"],["Federal funds sold and other","","","2,473","","","","5,215","","","","7,688","","","","(658",")","","","1,441","","","","783"],["Total interest-earning assets","","$","2,903","","","$","55,561","","","$","58,464","","","$","18,384","","","$","12,496","","","$","30,880"],["Interest-bearing liabilities"],["Demand savings and money market","","$","(726",")","","$","36,135","","","$","35,409","","","$","486","","","$","6,606","","","$","7,092"],["Certificates of deposit","","","1,670","","","","17,073","","","","18,743","","","","290","","","","684","","","","974"],["Total interest-bearing deposits","","","944","","","","53,208","","","","54,152","","","","776","","","","7,290","","","","8,066"],["FHLB term and line of credit advances","","","567","","","","1,283","","","","1,850","","","","1,348","","","","577","","","","1,925"],["Federal Reserve Bank discount window","","","4,753","","","","2","","","","4,755","","","","\u2014","","","","\u2014","","","","\u2014"],["Subordinated borrowings","","","37","","","","783","","","","820","","","","446","","","","64","","","","510"],["Other borrowings","","","(26",")","","","725","","","","699","","","","25","","","","103","","","","128"],["Total interest-bearing liabilities","","","6,275","","","","56,001","","","","62,276","","","","2,595","","","","8,034","","","","10,629"],["Net Interest Income","","$","(3,372",")","","$","(440",")","","$","(3,812",")","","$","15,789","","","$","4,462","","","$","20,251"]]
[[/GREPCENT_TABLE]]

(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.

Year ended December 31, 2023, compared with year ended December 31, 2022

The decrease in net interest income is primarily due to a 172 basis point increase in average rates of interest bearing liabilities offset by a 130 basis point increase in yields on interest-earning assets. The change in yields and costs were driven, primarily, by rate increases within the marketplace over the past 20 months and their lagged impact on our balance sheet. Total fed fund rate increases of 525 basis points have been realized ratably within the asset portfolio while associated increases to liability costs have lagged and were more pronounced in 2023.

Following the banking turmoil in March of 2023, the Bank increased our FHLB and Federal Reserve Bank borrowings to maintain a heightened liquidity position. The amounts were materially offset by cash balances for the majority of the year, resulting in a small positive impact on net interest income and a reduction in net interest margin.

Net interest spread decreased from 3.30% at December 31, 2022 to 2.88% at December 31, 2023 primarily due to the increase in both the volume and cost of interest-bearing liabilities out-pacing the increase in the yield and change in volume in interest-earning assets. The primary driver of market interest rate changes in 2023 was the Federal Reserve raising the federal funds target rate four times for a total of 100 basis points. The decrease in net interest margin is driven by the lagging impact of interest rate changes on our interest-bearing liability balances coupled with the excess liquidity position maintained by the Company throughout 2023.

62

Provision for Credit Losses

We maintain an allowance for credit losses for estimated losses in our loan portfolio. The allowance for credit losses is increased by a provision for credit losses, which is a charge to earnings, and subsequent recoveries of amounts previously charged-off, but is decreased by charge-offs when the collectability of a loan balance is unlikely. Management estimates the allowance balance required using past loan loss experience within the Company’s portfolio. This historical loss calculation is then modified to reflect quantitative economic circumstances based on evidenced economic conditions and regression formulas which incorporate lag factors in identifying a sufficiently predictive adjusted-R square as well as qualitative factors not inherently reflected in our historical loss or quantitative economic inputs. Included in our qualitative assessment is the consideration of prospective economic conditions over the next 12 months, considered the Company’s reasonable and supportable forecast period. As these factors change, the amount of the credit loss provision changes.

Year ended December 31, 2023, compared with year ended December 31, 2022

There was a $1.9 million provision for credit losses for the year ended December 31, 2023, compared to a provision for credit losses of $125 thousand for the year ended December 31, 2022. The provision for credit losses recorded during the period ended December 31, 2023, is the result of overall portfolio loan growth, current realized loss rate, and net charge-offs during the period which were offset by decreases in projected future loss rates. The increase in impairments on specifically evaluated loans was primarily due to the charge-off of loans deemed uncollectible.

For additional detail see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Allowance for Credit Losses.” Net charge-offs for the year ended December 31, 2023, were $4.2 million as compared to net charge-offs of $2.6 million for the year ended December 31, 2022. For the year ended December 31, 2023, gross charge-offs were $5.0 million offset by gross recoveries of $800 thousand. In comparison, gross charge-offs were $3.3 million for the year ended December 31, 2022, offset by gross recoveries of $700 thousand.

Non-Interest Income

The following table provides a comparison of the major components of non-interest income for the years ended December 31, 2023, 2022, and 2021.

Non-Interest Income

For the Years Ended December 31,

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","2023 vs. 2022","","","2022 vs. 2021"],["(Dollars in thousands)","","2023","","","2022","","","2021","","","Change","","","%","","","Change","","","%"],["Service charges and fees","","$","10,187","","","$","10,632","","","$","8,596","","","$","(445",")","","","(4.2",")%","","$","2,036","","","","23.7","%"],["Debit card income","","","10,322","","","","10,677","","","","10,236","","","","(355",")","","","(3.3",")%","","","441","","","","4.3","%"],["Mortgage banking","","","652","","","","1,416","","","","3,306","","","","(764",")","","","(54.0",")%","","","(1,890",")","","","(57.2",")%"],["Increase in value of bank-owned life insurance","","","4,059","","","","3,113","","","","3,506","","","","946","","","","30.4","%","","","(393",")","","","(11.2",")%"],["Other"],["Investment referral income","","","424","","","","539","","","","678","","","","(115",")","","","(21.3",")%","","","(139",")","","","(20.5",")%"],["Trust income","","","1,123","","","","1,036","","","","1,140","","","","87","","","","8.4","%","","","(104",")","","","(9.1",")%"],["Insurance sales commissions","","","582","","","","566","","","","545","","","","16","","","","2.8","%","","","21","","","","3.9","%"],["Recovery on zero-basis purchased loans","","","517","","","","249","","","","85","","","","268","","","","107.6","%","","","164","","","","192.9","%"],["Income (loss) from equity method investments","","","(222",")","","","(222",")","","","(222",")","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%"],["Other non-interest income","","","5,136","","","","6,984","","","","3,981","","","","(1,848",")","","","(26.5",")%","","","3,003","","","","75.4","%"],["Total other","","","7,560","","","","9,152","","","","6,207","","","","(1,592",")","","","(17.4",")%","","","2,945","","","","47.4","%"],["Subtotal","","","32,780","","","","34,990","","","","31,851","","","","(2,210",")","","","(6.3",")%","","","3,139","","","","9.9","%"],["Gain on acquisition","","","\u2014","","","","962","","","","585","","","","(962",")","","","(100.0",")%","","","377","","","","64.4","%"],["Net gain (loss) from securities transactions","","","(51,909",")","","","5","","","","406","","","","(51,914",")","","","(100.0",")%","","","(401",")","","","(98.8",")%"],["Total non-interest income","","$","(19,129",")","","$","35,957","","","$","32,842","","","$","(55,086",")","","","(153.2",")%","","$","3,115","","","","9.5","%"]]
[[/GREPCENT_TABLE]]

63

Year ended December 31, 2023, compared with year ended December 31, 2022

Non-interest income, before gain on acquisition and gain (loss) on securities transactions decreased 6.3%. The decline was driven by service revenue lines, including service charges, debit card and mortgage banking fee income, as consumer spending activity decreased within our portfolio. In addition to declining service revenue, within the 'Other non-interest income' line item, derivative fair value gains of $1.8 million contributed to earnings in 2022 as the majority of market interest rate increases were realized. During 2023, this benefit was muted at $227 thousand, resulting in a comparative decline of $1.6 million.

During the year the Company sold securities to re-position aspects of the portfolio into higher yielding investments, including loans, securities and cash. The sale resulted in a realized loss of $52.0 million. During 2022, the Company completed two branch sale transactions resulting in realized gains of $962 thousand which did not repeat in 2023.

Non-Interest Expense

The following table provides a comparison of the major components of non-interest expense for the years ended December 31, 2023, 2022, and 2021.

Non-Interest Expense

For the Year Ended December 31,

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","2023 vs. 2022","","","2022 vs. 2021"],["(Dollars in thousands)","","2023","","","2022","","","2021","","","Change","","","%","","","Change","","","%"],["Salaries and employee benefits","","$","64,384","","","$","62,006","","","$","54,198","","","$","2,378","","","","3.8","%","","$","7,808","","","","14.4","%"],["Net occupancy and equipment","","","12,325","","","","12,223","","","","10,137","","","","102","","","","0.8","%","","","2,086","","","","20.6","%"],["Data processing","","","17,433","","","","15,883","","","","13,261","","","","1,550","","","","9.8","%","","","2,622","","","","19.8","%"],["Professional fees","","","5,754","","","","4,951","","","","4,713","","","","803","","","","16.2","%","","","238","","","","5.0","%"],["Advertising and business development","","","5,425","","","","5,042","","","","3,370","","","","383","","","","7.6","%","","","1,672","","","","49.6","%"],["Telecommunications","","","1,963","","","","1,916","","","","1,966","","","","47","","","","2.5","%","","","(50",")","","","(2.5",")%"],["FDIC insurance","","","2,195","","","","1,140","","","","1,665","","","","1,055","","","","92.5","%","","","(525",")","","","(31.5",")%"],["Courier and postage","","","2,046","","","","1,881","","","","1,429","","","","165","","","","8.8","%","","","452","","","","31.6","%"],["Free nationwide ATM expense","","","2,073","","","","2,103","","","","2,019","","","","(30",")","","","(1.4",")%","","","84","","","","4.2","%"],["Amortization of core deposit intangibles","","","3,374","","","","4,042","","","","4,174","","","","(668",")","","","(16.5",")%","","","(132",")","","","(3.2",")%"],["Loan expense","","","540","","","","828","","","","934","","","","(288",")","","","(34.8",")%","","","(106",")","","","(11.3",")%"],["Other real estate owned","","","542","","","","589","","","","(188",")","","","(47",")","","","(8.0",")%","","","777","","","","(413.3",")%"],["Loss on debt extinguishment","","","\u2014","","","","\u2014","","","","372","","","","\u2014","","","","100.0","%","","","(372",")","","","(100.0",")%"],["Other","","","17,250","","","","15,182","","","","12,226","","","","2,068","","","","13.6","%","","","2,956","","","","24.2","%"],["Subtotal","","","135,304","","","","127,786","","","","110,276","","","","7,518","","","","5.9","%","","","17,510","","","","15.9","%"],["Merger expenses","","","297","","","","594","","","","9,189","","","","(297",")","","","(50.0",")%","","","(8,595",")","","","(93.5",")%"],["Total non-interest expense","","$","135,601","","","$","128,380","","","$","119,465","","","$","7,221","","","","5.6","%","","$","8,915","","","","7.5","%"]]
[[/GREPCENT_TABLE]]

Year ended December 31, 2023, compared with year ended December 31, 2022

The increase in non-interest expense was primarily due to increases in salaries and employee benefits of $2.4 million, other non-interest expense of $2.1 million, data processing of $1.6 million and FDIC insurance of $1.1 million, offset by a decrease in the amortization of core deposits intangibles of $668 thousand. These items and other changes in the various components of non-interest expense are discussed in more detail below.

Salaries and employee benefits: There was a $2.4 million increase in salaries and benefits for the year ended December 31, 2023, as compared to the year ended December 31, 2022. Salaries and wages increased by $2.4 million, while deferral of cost associated with loan production declined by $743 thousand for the year ended December 31, 2023, as compared to the year ended December 31, 2022. Additionally, for the year ended December 31, 2023, there was an increase in employee insurance of $179 thousand and employee payroll taxes of $154 thousand offset by a decrease in share-based compensation expense of $641 thousand and incentive compensation of $521 thousand. Included in salaries and employee benefits is share-based compensation expense of $2.6 million for the year ended December 31, 2023, and $3.3 million for the year ended December 31, 2022.

Data processing: The $1.6 million increase was principally due to increased data processing expense of $939 thousand, debit card expense of $270 thousand, credit card processing expense of $250 thousand and software license expenses of $144 thousand.

64

FDIC Insurance: The $1.1 million increase was primarily due to the FDIC's increase in their insurance base assessment rate beginning in the first quarter of 2023.

Professional fees: The increase of $803 thousand was principally due to an increase in consulting fees of $1.1 million, including increases in BSA compliance fees, placement fees and trust management fees, partially offset by a decrease in accounting fees of $167 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, limited partnership tax credits and provision for unfunded commitments. There was a $2.1 million increase in other non-interest expense for the year ended December 31, 2023, as compared to the year ended December 31, 2022. This increase was primarily due to increases in recruiting of $508 thousand, auto and travel expenses of $601 thousand, and the write-off of tax credit investments of $315 thousand.

Merger expenses: Merger expenses include legal, advisory and accounting fees associated with services to facilitate the acquisition of other banks. Merger expenses also include data processing conversion costs and costs associated with the integration of personnel, processes, facilities and employee bonuses. During 2023, the Company incurred merger expenses of $297 thousand related to the Bank of Kirksville acquisition.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in the internal evaluation of our performance and is not defined under GAAP. Our efficiency ratio is computed by dividing non-interest expense, excluding goodwill impairment, merger expenses and loss on debt extinguishment, by the sum of net interest income and non-interest income, excluding net gains on sales of and settlement of securities and gain on acquisition. Generally, an increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. The ratio defined under GAAP that is most comparable to the efficiency ratio is non-interest expense to net interest income plus non-interest income which is discussed in “Results of Operations – Non-GAAP Financial Measures.”

The Company’s efficiency ratio increased in 2023 as compared to 2022 due to non-interest expense, excluding goodwill impairment and merger expenses, increasing at a higher proportional rate than net interest income and non-interest income, excluding net loss on security transactions and gain on acquisition, as discussed in “Results of Operations – Net Interest Income and Net Interest Margin Analysis” and “Results of Operations – Non-Interest Income.”

Income Taxes

The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income, the amount of non-deductible expenses and available tax credits.

Year ended December 31, 2023, compared with year ended December 31, 2022

The effective income tax rate for the year ended December 31, 2023, was -223.9% as compared to the U.S. statutory rate of 21.0% as a result of tax planning benefits and credits amplified by a reduction in pre-tax book income for the year due to the pre-tax losses generated in the fourth quarter related to the sale of bonds. The effective income tax rate for the year ended December 31, 2022, was 17.9% as compared to the U.S. statutory rate of 21.0%. As detailed in “NOTE 13 – INCOME TAXES” in the Notes to Consolidated Financial Statements, the income tax rates differed from the U.S. statutory rates primarily due to non-taxable income, non-deductible expenses, and tax credits. The Company made investments in solar tax credits during the years ended December 31, 2022, and December 31, 2023, which had a material impact on the effective income tax rate for each period.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities and are computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position will be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more likely than not to be realized on examination.

65

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There were no material amounts to report for interest or penalties incurred in 2023, 2022, or 2021.

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this annual report have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Unlike many industrial companies, substantially all our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

Financial Condition

Overview

Our total assets increased $52.9 million, or 1.06%, from $4.98 billion at December 31, 2022, to $5.03 billion at December 31, 2023. The increase in total assets was primarily from increases in cash and cash equivalents of $274.7 million, loans of $23.7 million and premises and equipment, net of $11.1 million, offset by a decrease in securities of $264.7 million. Our total liabilities increased $10.1 million, or 0.2%, from $4.57 billion at December 31, 2022, to $4.58 billion at December 31, 2023. The increase in total liabilities was from increases in Federal Reserve Bank borrowings of $140.0 million, offset by a decrease in total deposits of $96.4 million and FHLB advances of $38.9 million. Our total stockholders’ equity increased $42.8 million, or 10.4%, from $410.1 million at December 31, 2022, to $452.9 million at December 31, 2023.

Loan Portfolio

Our loan portfolio consists of various types of loans, most of which are made to borrowers located in the Wichita, Kansas City and Tulsa MSAs, as well as various community markets throughout Arkansas, Kansas, Missouri and Oklahoma. Although the portfolio is diversified and generally secured by various types of collateral, the majority of our loan portfolio consists of commercial and industrial and commercial real estate loans and a substantial portion of our borrowers’ ability to honor their obligations is dependent on local economic conditions in Arkansas, Kansas, Missouri and Oklahoma.

At December 31, 2023, gross total loans were 80.4% of deposits and 66.2% of total assets. At December 31, 2022, gross total loans were 78.1% of deposits and 66.5% of total assets.

The organic, or non-acquired, growth in our loan portfolio is attributable to our ability to attract new customers from other financial institutions and overall growth in our markets. Our lending staff has been successful in building banking relationships with new customers. Several new lenders have been hired in our markets and these employees have been successful in transitioning their former clients and attracting new clients. Lending activities originate from the efforts of our lenders with an emphasis on lending to individuals, professionals, small to medium-sized businesses and commercial companies located in the Wichita, Kansas City and Tulsa MSAs, as well as community markets in Arkansas, Kansas, Missouri and Oklahoma.

66

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

Composition of Loan Portfolio

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","2022","","","2021"],["","","Amount","","","Percent","","Amount","","","Percent","","","Amount","","","Percent"],["","","(Dollars in thousands)"],["Commercial and industrial","","$","598,327","","","","17.9","%","$","594,863","","","","18.0","%","","$","567,497","","","","18.0","%"],["Real estate loans:"],["Commercial real estate","","","1,759,855","","","","52.8","%","","1,721,268","","","","52.0","%","","","1,486,148","","","","47.1","%"],["Residential real estate","","","556,328","","","","16.7","%","","570,550","","","","17.2","%","","","638,087","","","","20.2","%"],["Agricultural real estate","","","196,114","","","","5.9","%","","199,189","","","","6.0","%","","","198,330","","","","6.3","%"],["Total real estate loans","","","2,512,297","","","","75.4","%","","2,491,007","","","","75.2","%","","","2,322,565","","","","73.6","%"],["Agricultural","","","118,587","","","","3.6","%","","120,003","","","","3.6","%","","","166,975","","","","5.3","%"],["Consumer","","","103,690","","","","3.1","%","","105,675","","","","3.2","%","","","98,590","","","","3.1","%"],["Total loans held for investment","","$","3,332,901","","","","100.0","%","$","3,311,548","","","","100.0","%","","$","3,155,627","","","","100.0","%"],["Total loans held for sale","","$","476","","","","100.0","%","$","349","","","","100.0","%","","$","4,214","","","","100.0","%"],["Total loans held for investment (net of allowances)","","$","3,289,381","","","","100.0","%","$","3,265,701","","","","100.0","%","","$","3,107,262","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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.

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 December 31, 2023, and December 31, 2022, are summarized in the following tables.

Loan Maturity and Sensitivity to Changes in Interest Rates

[[GREPCENT_TABLE]]
[["","","As of December 31, 2023"],["","","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","","$","171,879","","","$","345,693","","","$","77,886","","","$","2,869","","","$","598,327"],["Real Estate:"],["Commercial real estate","","","369,311","","","","1,063,226","","","","247,300","","","","80,018","","","","1,759,855"],["Residential real estate","","","1,447","","","","10,091","","","","128,077","","","","416,713","","","","556,328"],["Agricultural real estate","","","73,882","","","","84,802","","","","27,559","","","","9,871","","","","196,114"],["Total real estate","","","444,640","","","","1,158,119","","","","402,936","","","","506,602","","","","2,512,297"],["Agricultural","","","80,659","","","","30,948","","","","2,851","","","","4,129","","","","118,587"],["Consumer","","","31,832","","","","50,779","","","","19,077","","","","2,002","","","","103,690"],["Total","","$","729,010","","","$","1,585,539","","","$","502,750","","","$","515,602","","","$","3,332,901"],["Loans with a predetermined fixed interest rate","","$","289,816","","","$","685,903","","","$","127,602","","","$","273,488","","","$","1,376,809"],["Loans with an adjustable/floating interest rate","","","439,194","","","","899,636","","","","375,148","","","","242,114","","","","1,956,092"],["Total","","$","729,010","","","$","1,585,539","","","$","502,750","","","$","515,602","","","$","3,332,901"]]
[[/GREPCENT_TABLE]]

67

[[GREPCENT_TABLE]]
[["","","As of December 31, 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","","$","194,487","","","$","310,839","","","$","84,930","","","$","4,607","","","$","594,863"],["Real Estate:"],["Commercial real estate","","","331,226","","","","1,042,683","","","","279,759","","","","67,600","","","","1,721,268"],["Residential real estate","","","1,293","","","","9,647","","","","122,509","","","","437,101","","","","570,550"],["Agricultural real estate","","","47,696","","","","112,387","","","","31,295","","","","7,811","","","","199,189"],["Total real estate","","","380,215","","","","1,164,717","","","","433,563","","","","512,512","","","","2,491,007"],["Agricultural","","","79,055","","","","32,688","","","","3,714","","","","4,546","","","","120,003"],["Consumer","","","35,026","","","","45,258","","","","23,091","","","","2,300","","","","105,675"],["Total","","$","688,783","","","$","1,553,502","","","$","545,298","","","$","523,965","","","$","3,311,548"],["Loans with a predetermined fixed interest rate","","$","218,417","","","$","771,980","","","$","181,239","","","$","306,537","","","$","1,478,173"],["Loans with an adjustable/floating interest rate","","","470,366","","","","781,522","","","","364,059","","","","217,428","","","","1,833,375"],["Total","","$","688,783","","","$","1,553,502","","","$","545,298","","","$","523,965","","","$","3,311,548"]]
[[/GREPCENT_TABLE]]

Nonperforming Assets

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

Nonperforming Assets

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","","2022","","","2021"],["","","(Dollars in thousands)"],["Nonaccrual loans","","$","25,026","","","$","17,601","","","$","29,361"],["Accruing loans 90 or more days past due","","","279","","","","\u2014","","","","256"],["OREO acquired through foreclosure, net","","","772","","","","600","","","","7,582"],["Other repossessed assets","","","380","","","","47","","","","28,799"],["Total nonperforming assets","","$","26,457","","","$","18,248","","","$","65,998"],["Ratios:"],["Nonperforming assets to total assets","","","0.53","%","","","0.37","%","","","1.28","%"],["Nonperforming assets to total loans plus OREO","","","0.79","%","","","0.55","%","","","2.09","%"]]
[[/GREPCENT_TABLE]]

Nonperforming assets (“NPAs”) include loans on nonaccrual status, accruing loans 90 or more days past due, restructured loans, other real estate acquired through foreclosure and other repossessed assets. The change in NPAs is reflective of specific circumstances on specific borrower relationships and not considered indicative of broad declining credit quality as of the reporting date. NPAs and classified assets continue to be at historically low levels for the Company.

The nonperforming loans at December 31, 2023, consisted of 223 separate credits and 192 separate borrowers. We had five nonperforming loan relationships each with outstanding balances exceeding $1.0 million as of December 31, 2023. 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. 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.

Regulatory Loan Classification

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Loans are analyzed individually and classified based on credit risk. Consumer loans are considered pass

68

credits unless downgraded due to payment status or reviewed as part of a larger credit relationship. We use the following definitions for risk ratings:

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

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit position at some future date. These loans are considered classified.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. These loans are considered classified.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. These loans are considered classified.

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 December 31, 2023, the Company had $11.1 million in potential problem loans which were not included in either non-accrual or 90 days past due categories, compared to $37.6 million at December 31, 2022.

For additional information about the risk category by class of loans see “NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES” in the Notes to Consolidated Financial Statements. At December 31, 2023, loans considered unclassified increased to 98.8% of total loans from 98.2% of total loans at December 31, 2022.

Risk Category of Loans by Class

[[GREPCENT_TABLE]]
[["","","As of December 31, 2023"],["","","Unclassified","","","Classified","","","Total"],["","","(Dollars in thousands)"],["Commercial and industrial","","$","586,629","","","$","11,698","","","$","598,327"],["Real estate:"],["Commercial real estate","","","1,748,878","","","","10,977","","","","1,759,855"],["Residential real estate","","","549,014","","","","7,314","","","","556,328"],["Agricultural real estate","","","190,659","","","","5,455","","","","196,114"],["Total real estate","","","2,488,551","","","","23,746","","","","2,512,297"],["Agricultural","","","115,284","","","","3,303","","","","118,587"],["Consumer","","","103,066","","","","624","","","","103,690"],["Total","","$","3,293,530","","","$","39,371","","","$","3,332,901"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of December 31, 2022"],["","","Unclassified","","","Classified","","","Total"],["","","(Dollars in thousands)"],["Commercial and industrial","","$","566,549","","","$","28,314","","","$","594,863"],["Real estate:"],["Commercial real estate","","","1,714,793","","","","6,475","","","","1,721,268"],["Residential real estate","","","567,179","","","","3,371","","","","570,550"],["Agricultural real estate","","","186,760","","","","12,429","","","","199,189"],["Total real estate","","","2,468,732","","","","22,275","","","","2,491,007"],["Agricultural","","","112,880","","","","7,123","","","","120,003"],["Consumer","","","105,328","","","","347","","","","105,675"],["Total","","$","3,253,489","","","$","58,059","","","$","3,311,548"]]
[[/GREPCENT_TABLE]]

For additional information see “NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES” in the Notes to Consolidated Financial Statements.

69

In accordance with applicable regulation, appraisals or evaluations are required to independently value real estate and, as an important element, to consider when underwriting loans secured in part or in whole by real estate. The value of real estate collateral provides additional support to the borrower’s credit capacity.

With respect to potential problem loans, all monitored and under-performing loans are individually reviewed. If we determine that a loan has individually assessed credit loss, then we evaluate the borrower’s overall financial condition to determine the need, if any, for non-performing classification, 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. For additional information see “NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Notes to Consolidated Financial Statements.

Analysis of allowance for credit losses: At December 31, 2023, the allowance for credit losses totaled $43.5 million, or 1.31% of total loans. At December 31, 2022, the allowance for credit losses totaled $45.8 million, or 1.38% of total loans.

The $2.3 million decrease in the allowance for credit losses was the result of an increase in net charge offs of $1.5 million offset by the $2.1 million decrease in the allowance for credit losses on collectively evaluated loans and a $181 thousand decrease in specific reserves. The allowance for credit losses calculation on loans collectively evaluated at December 31, 2023, totaled $38.8 million, or 1.2%, of the $3.3 billion in loans collectively evaluated, compared to an allowance for credit losses of $40.9 million, or 1.2%, of the $3.3 billion in loans collectively evaluated at December 31, 2022. The decrease in the collectively evaluated calculation was primarily the result of a $1.0 million decrease in management qualitative adjustment coupled with a $889 thousand decrease in economic adjustment.

Net losses as a percentage of average loans was 0.13% for the twelve months ended December 31, 2023, as compared to 0.08% for the twelve months ended December 31, 2022, and 0.30% for the twelve months ended December 31, 2021.

70

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

(Dollars in thousands)

[[GREPCENT_TABLE]]
[["December 31, 2023","","Commercial Real Estate","","","Commercial and Industrial","","","Residential Real Estate","","","Agricultural Real Estate","","","Agricultural","","","Consumer","","","Total"],["Allowance for credit losses","","$","13,476","","","$","17,954","","","$","7,784","","","$","1,718","","","$","995","","","$","1,593","","","$","43,520"],["Total loans outstanding (1)","","","1,759,855","","","","598,327","","","","556,328","","","","196,114","","","","118,587","","","","103,690","","","","3,332,901"],["Net charge-offs","","","(75",")","","","3,700","","","","18","","","","46","","","","(47",")","","","558","","","","4,200"],["Average loan balance (1)","","","1,750,084","","","","580,451","","","","564,728","","","","201,326","","","","100,394","","","","106,542","","","","3,303,525"],["Non-accrual loan balance","","","5,447","","","","5,041","","","","7,251","","","","4,214","","","","2,470","","","","603","","","","25,026"],["Loans to total loans outstanding","","","52.8","%","","","18.0","%","","","16.7","%","","","5.9","%","","","3.6","%","","","3.1","%","","","100.0","%"],["ACL to total loans","","","0.8","%","","","3.0","%","","","1.4","%","","","0.9","%","","","0.8","%","","","1.5","%","","","1.3","%"],["Net charge-offs to average loans","","","\u2014","%","","","0.6","%","","","\u2014","%","","","\u2014","%","","","\u2014","%","","","0.5","%","","","0.1","%"],["Non-accrual loans to total loans","","","0.3","%","","","0.8","%","","","1.3","%","","","2.1","%","","","2.1","%","","","0.6","%","","","0.8","%"],["ACL to non-accrual loans","","","247.4","%","","","356.2","%","","","107.4","%","","","40.8","%","","","40.3","%","","","264.2","%","","","173.9","%"],["December 31, 2022","","Commercial Real Estate","","","Commercial and Industrial","","","Residential Real Estate","","","Agricultural Real Estate","","","Agricultural","","","Consumer","","","Total"],["Allowance for credit losses","","$","16,731","","","$","14,951","","","$","8,608","","","$","819","","","$","2,457","","","$","2,281","","","$","45,847"],["Total loans outstanding (1)","","","1,721,268","","","","594,863","","","","570,550","","","","199,189","","","","120,003","","","","105,675","","","","3,311,548"],["Net charge-offs","","","1,193","","","","590","","","","56","","","","27","","","","35","","","","742","","","","2,643"],["Average loan balance (1)","","","1,623,159","","","","583,295","","","","595,494","","","","201,295","","","","125,342","","","","102,186","","","","3,230,771"],["Non-accrual loan balance","","","2,689","","","","5,838","","","","3,206","","","","2,052","","","","3,468","","","","348","","","","17,601"],["Loans to total loans outstanding","","","52.0","%","","","18.0","%","","","17.2","%","","","6.0","%","","","3.6","%","","","3.2","%","","","100.0","%"],["ACL to total loans","","","1.0","%","","","2.5","%","","","1.5","%","","","0.4","%","","","2.0","%","","","2.2","%","","","1.4","%"],["Net charge-offs to average loans","","","0.1","%","","","0.1","%","","","\u2014","%","","","\u2014","%","","","\u2014","%","","","0.7","%","","","0.1","%"],["Non-accrual loans to total loans","","","0.2","%","","","1.0","%","","","0.6","%","","","1.0","%","","","2.9","%","","","0.3","%","","","0.5","%"],["ACL to non-accrual loans","","","622.2","%","","","256.1","%","","","268.5","%","","","39.9","%","","","70.8","%","","","655.5","%","","","260.5","%"],["December 31, 2021","","Commercial Real Estate","","","Commercial and Industrial","","","Residential Real Estate","","","Agricultural Real Estate","","","Agricultural","","","Consumer","","","Total"],["Allowance for loan losses","","$","22,478","","","$","12,248","","","$","5,560","","","$","2,235","","","$","3,756","","","$","2,088","","","$","48,365"],["Total loans outstanding (1)","","","1,486,148","","","","567,497","","","","638,087","","","","198,330","","","","166,975","","","","98,590","","","","3,155,627"],["Net charge-offs","","","(129",")","","","7,870","","","","(52",")","","","473","","","","(21",")","","","504","","","","8,645"],["Average loan balance (1)","","","1,317,750","","","","714,561","","","","491,747","","","","153,607","","","","108,276","","","","88,383","","","","2,874,324"],["Non-accrual loan balance","","","6,833","","","","6,557","","","","5,075","","","","4,398","","","","6,175","","","","323","","","","29,361"],["Loans to total loans outstanding","","","47.1","%","","","18.0","%","","","20.2","%","","","6.3","%","","","5.3","%","","","3.1","%","","","100.0","%"],["ACL to total loans","","","1.5","%","","","2.2","%","","","0.9","%","","","1.1","%","","","2.2","%","","","2.1","%","","","1.5","%"],["Net charge-offs to average loans","","","\u2014","%","","","1.1","%","","","\u2014","%","","","0.3","%","","","\u2014","%","","","0.6","%","","","0.3","%"],["Non-accrual loans to total loans","","","0.5","%","","","1.2","%","","","0.8","%","","","2.2","%","","","3.7","%","","","0.3","%","","","0.9","%"],["ACL to non-accrual loans","","","329.0","%","","","186.8","%","","","109.6","%","","","50.8","%","","","60.8","%","","","646.4","%","","","164.7","%"]]
[[/GREPCENT_TABLE]]

(1)
Excluding loans held for sale.

Management believes that the allowance for credit losses at December 31, 2023, is adequate to cover current expected losses in the loan portfolio as of such date. There can be no assurance, however, that we will not sustain losses in future periods that could be substantial in relation to the size of the allowance at December 31, 2023.

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 December 31, 2023, securities represented 18.3% of total assets compared with 23.8% at December 31, 2022.

At the date of purchase, debt securities are classified into one of two categories, held-to-maturity or available-for-sale. We do not purchase securities for trading purposes. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held-to-maturity and carried at cost, adjusted for the amortization of premiums and the accretion of discounts, in the financial statements only if management has the positive intent and ability to hold those securities to maturity. Debt securities not classified as held-to-maturity are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of deferred income 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

71

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

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022"],["","","Amortized Cost","","","Fair Value","","","Amortized Cost","","","Fair Value"],["","","(Dollars in thousands)"],["U.S. Government-sponsored entities","","$","39,103","","","$","33,087","","","$","123,196","","","$","106,406"],["U.S. Treasury securities","","","89,999","","","","89,256","","","","257,690","","","","232,158"],["Mortgage-backed securities"],["Government-sponsored residential mortgage-backed securities","","","560,674","","","","529,143","","","","560,776","","","","498,606"],["Private label residential mortgage-backed securities","","","161,174","","","","137,841","","","","190,889","","","","163,560"],["Corporate","","","56,722","","","","49,683","","","","56,642","","","","52,374"],["Small Business Administration loan pools","","","8,066","","","","7,727","","","","12,915","","","","12,181"],["State and local subdivisions","","","81,458","","","","72,911","","","","130,311","","","","119,105"],["Total available-for-sale securities","","$","997,196","","","$","919,648","","","$","1,332,419","","","$","1,184,390"]]
[[/GREPCENT_TABLE]]

The following table summarizes the amortized cost and fair value by classification of held-to-maturity securities as of the dates shown.

Held-To-Maturity Securities

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022"],["","","Amortized Cost","","","Fair Value","","","Amortized Cost","","","Fair Value"],["","","(Dollars in thousands)"],["Mortgage-backed securities"],["Government-sponsored residential mortgage-backed securities","","$","1,094","","","$","1,097","","","$","1,108","","","$","1,108"],["State and local subdivisions","","","1,115","","","","1,153","","","","840","","","","865"],["Total held-to-maturity securities","","$","2,209","","","$","2,250","","","$","1,948","","","$","1,973"]]
[[/GREPCENT_TABLE]]

72

The following tables summarize the contractual maturity of debt securities and their weighted average yields as of December 31, 2023, and December 31, 2022. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Available-for-sale securities are shown at fair value and held-to-maturity securities are shown at cost, adjusted for the amortization of premiums and the accretion of discounts.

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["","","Due in one year or less","","","Due after one year through five years","","","Due after five years through ten 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","","$","\u2014","","","","\u2014","%","","$","\u2014","","","","0.00","%","","$","31,337","","","","1.65","%","","$","1,750","","","","2.02","%","","$","33,087","","","","1.67","%"],["U.S. Treasury securities","","","69,843","","","","5.39","","","","19,413","","","","1.18","%","","","\u2014","","","","0.00","%","","","\u2014","","","","\u2014","%","","","89,256","","","","4.47","%"],["Mortgage-backed securities"],["Government-sponsored residential mortgage-backed securities","","","\u2014","","","","\u2014","%","","","40,978","","","","3.78","%","","","137,929","","","","2.62","%","","","350,236","","","","4.26","%","","","529,143","","","","3.80","%"],["Private label residential mortgage-backed securities","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","137,841","","","","2.27","%","","","137,841","","","","2.27","%"],["Corporate","","","\u2014","","","","\u2014","%","","","8,001","","","","7.49","%","","","41,682","","","","4.63","%","","","\u2014","","","","\u2014","%","","","49,683","","","","5.09","%"],["Small Business Administration loan pools","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","5,587","","","","5.44","%","","","2,140","","","","2.08","%","","","7,727","","","","4.51","%"],["State and political subdivisions(1)","","","3,963","","","","2.09","%","","","6,138","","","","2.34","%","","","30,789","","","","2.00","%","","","32,021","","","","2.38","%","","","72,911","","","","2.20","%"],["Total available-for-sale securities","","","73,806","","","","5.21","%","","","74,530","","","","3.38","%","","","247,324","","","","2.82","%","","","523,988","","","","3.60","%","","","919,648","","","","3.51","%"],["Held-to-maturity securities:"],["Mortgage-backed securities"],["Government-sponsored residential mortgage-backed securities","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%","","","1,094","","","","4.93","%","","","1,094","","","","4.93","%"],["State and political subdivisions(1)","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%","","","1,115","","","","4.62","%","","","1,115","","","","4.62","%"],["Total held-to-maturity securities","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%","","","2,209","","","","4.77","%","","","2,209","","","","4.77","%"],["Total debt securities","","$","73,806","","","","5.21","%","","$","74,530","","","","3.38","%","","$","247,324","","","","2.82","%","","$","526,197","","","","3.61","%","","$","921,857","","","","3.51","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","December 31, 2022"],["","","Due in one year or less","","","Due after one year through five years","","","Due after five years through ten 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","","$","\u2014","","","","\u2014","%","","$","49,100","","","","0.74","%","","$","54,094","","","","1.51","%","","$","3,212","","","","1.96","%","","$","106,406","","","","1.17","%"],["U.S. treasury securities","","","\u2014","","","","\u2014","%","","","222,552","","","","1.18","%","","","9,606","","","","1.32","%","","","\u2014","","","","\u2014","%","","","232,158","","","","1.19","%"],["Mortgage-backed securities"],["Government-sponsored residential mortgage-backed securities","","","\u2014","","","","\u2014","%","","","89,698","","","","1.44","%","","","161,354","","","","1.86","%","","","247,554","","","","2.50","%","","","498,606","","","","2.10","%"],["Private label residential mortgage-backed securities","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","163,560","","","","2.21","%","","","163,560","","","","2.21","%"],["Corporate","","","\u2014","","","","\u2014","%","","","7,904","","","","6.20","%","","","44,470","","","","4.65","%","","","\u2014","","","","\u2014","%","","","52,374","","","","4.88","%"],["Small Business Administration loan pools","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","7,676","","","","3.53","%","","","4,505","","","","1.79","%","","","12,181","","","","2.89","%"],["State and political subdivisions(1)","","","4,958","","","","2.61","%","","","18,601","","","","2.42","%","","","42,088","","","","2.31","%","","","53,458","","","","2.50","%","","","119,105","","","","2.43","%"],["Total available-for-sale securities","","","4,958","","","","2.61","%","","","387,855","","","","1.35","%","","","319,288","","","","2.27","%","","","472,289","","","","2.39","%","","","1,184,390","","","","2.02","%"],["Held-to-maturity securities:"],["Mortgage-backed securities"],["Government-sponsored residential mortgage-backed securities","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","1,108","","","","4.96","%","","","1,108","","","","4.96","%"],["State and political subdivisions(1)","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","840","","","","4.57","%","","","840","","","","4.57","%"],["Total held-to-maturity securities","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","\u2014","","","","\u2014","%","","","1,948","","","","4.79","%","","","1,948","","","","4.79","%"],["Total debt securities","","$","4,958","","","","2.61","%","","$","387,855","","","","1.35","%","","$","319,288","","","","2.27","%","","$","474,237","","","","2.40","%","","$","1,186,338","","","","2.02","%"]]
[[/GREPCENT_TABLE]]

(1)
The calculated yield is not calculated 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, Freddie Mac and non-agency private label providers. 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 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.

73

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 December 31, 2023, and 2022, 73.2% and 62.1% of the mortgage-backed securities held by us had contractual final maturities of more than ten years with a weighted average life of 5.3 years and 5.1 years and a modified duration of 4.4 years and 4.3 years.

Deposits

Our lending and investing activities are primarily funded by deposits. A variety of deposit accounts are offered with a wide range of interest rates and terms including demand, savings, money market and time deposits. We rely primarily on competitive pricing policies, convenient locations, comprehensive marketing strategy and personalized service to attract and retain these deposits. Overall, deposits have declined $96.4 million from December 31, 2022 to December 31, 2023 and deposits excluding brokered deposits have declined $44.5 million for the same time period. During 2023 there has been significant competition for deposits and continued pricing pressure which has caused deposit migration to higher earning deposit account types. In addition to competition, the overall decrease in deposits is due to a general decrease in excess liquidity in the market due to the impacts of elevated inflation and the effects of monetary policy, in the form of higher interest rates, on both consumer and business customers.

The following table shows our composition of deposits at December 31, 2023, 2022, and 2021.

Composition of Deposits

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["","","Amount","","","Percent of Total","","","Amount","","","Percent of Total","","","Amount","","","Percent of Total","","","Change","","","%","","","Change","","","%"],["","","(Dollars in thousands)"],["Non-interest-bearing demand","","$","898,129","","","","21.7","%","","$","1,097,899","","","","25.9","%","","$","1,244,117","","","","28.1","%","","$","(199,770",")","","","(18.2",")%","","$","(146,218",")","","","(11.8",")%"],["Interest-bearing demand","","","998,822","","","","24.1","%","","","1,061,264","","","","25.0","%","","","1,202,408","","","","27.2","%","","","(62,442",")","","","(5.9",")%","","","(141,144",")","","","(11.7",")%"],["Savings and money market","","","1,484,985","","","","35.8","%","","","1,268,320","","","","29.9","%","","","1,319,881","","","","29.9","%","","","216,665","","","","17.1","%","","","(51,561",")","","","(3.9",")%"],["Time","","","763,519","","","","18.4","%","","","814,324","","","","19.2","%","","","653,598","","","","14.8","%","","","(50,805",")","","","(6.2",")%","","","160,726","","","","24.6","%"],["Total deposits","","$","4,145,455","","","","100.0","%","","$","4,241,807","","","","100.0","%","","$","4,420,004","","","","100.0","%","","$","(96,352",")","","","(2.3",")%","","$","(178,197",")","","","(4.0",")%"]]
[[/GREPCENT_TABLE]]

The following tables show deposits sold in 2022 branch dispositions, as of the time of such dispositions.

[[GREPCENT_TABLE]]
[["","","United Bank and Trust Branch Sale"],["","","Amount","","","Percent of Total"],["","","(Dollars in thousands)"],["Non-interest-bearing demand","","$","15,817","","","","30.0","%"],["Interest-bearing demand","","","9,039","","","","17.2","%"],["Savings and money market","","","19,576","","","","37.1","%"],["Time","","","8,282","","","","15.7","%"],["Total deposits","","$","52,714","","","","100.0","%"],["","","High Plains Bank Branch Sale"],["","","Amount","","","Percent of Total"],["","","(Dollars in thousands)"],["Non-interest-bearing demand","","$","1,925","","","","10.1","%"],["Interest-bearing demand","","","3,664","","","","19.2","%"],["Savings and money market","","","7,300","","","","38.3","%"],["Time","","","6,168","","","","32.4","%"],["Total deposits","","$","19,057","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

74

The following tables show deposits assumed in 2021 acquisitions, as of the time of such acquisitions.

[[GREPCENT_TABLE]]
[["","","ASBI Acquisition"],["","","Amount","","","Percent of Total"],["","","(Dollars in thousands)"],["Non-interest-bearing demand","","$","254,944","","","","38.1","%"],["Interest-bearing demand","","","95,023","","","","14.2","%"],["Savings and money market","","","221,187","","","","33.1","%"],["Time","","","97,695","","","","14.6","%"],["Total deposits","","$","668,849","","","","100.0","%"],["","","Security Acquisition"],["","","Amount","","","Percent of Total"],["","","(Dollars in thousands)"],["Non-interest-bearing demand","","$","19,724","","","","26.3","%"],["Interest-bearing demand","","","13,713","","","","18.3","%"],["Savings and money market","","","26,132","","","","34.8","%"],["Time","","","15,509","","","","20.6","%"],["Total deposits","","$","75,078","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The following table shows the average deposit balance and average rate paid on deposits for the year ended December 31, 2023, 2022, and 2021.

Average Deposit Balances and Average Rate Paid

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022","","","2021"],["","","Average Balance","","","Average Rate Paid","","","Average Balance","","","Average Rate Paid","","","Average Balance","","","Average Rate Paid"],["","","(Dollars in thousands)"],["Non-interest-bearing demand","","$","979,410","","","","\u2014","%","","$","1,203,167","","","","\u2014","%","","$","1,021,261","","","","\u2014","%"],["Interest-bearing demand","","","1,002,543","","","","2.26","%","","","1,124,828","","","","0.64","%","","","1,032,938","","","","0.21","%"],["Savings and money market","","","1,359,822","","","","1.73","%","","","1,308,536","","","","0.27","%","","","1,129,869","","","","0.14","%"],["Time","","","827,652","","","","2.93","%","","","663,790","","","","0.83","%","","","625,562","","","","0.73","%"],["Total deposits","","$","4,169,427","","","","","","$","4,300,321","","","","","","$","3,809,630"]]
[[/GREPCENT_TABLE]]

75

Included in interest-bearing demand deposits are Insured Cash Sweep (“ICS”) reciprocal demand deposit balances of $382.6 million at December 31, 2023, and $282.7 million at December 31, 2022, and $308.4 million at December 31, 2021. Also included in savings and money market deposits at December 31, 2023, 2022, and 2021, are ICS reciprocal money-market deposit balances of $230.8 million, $17.7 million, and $52.2 million. These balances represent customer funds placed in ICS that allow Equity Bank to break large demand and 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 in ICS but are Equity Bank’s customer relationships that management views as core funding.

Included in time deposits are Certificate of Deposit Account Registry Service (“CDARS”) program balances of $21.8 million, $11.8 million, and $3.0 million at December 31, 2023, 2022, and 2021. CDARS allows Equity Bank to break large 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.

Also included in time deposits are brokered deposit balances totaling $200 million as of December 31, 2023, compared to $252 million as of December 31, 2022.

The following table provides information on the maturity distribution of time deposits of $250,000 or more as of December 31, 2023, and December 31, 2022.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022"],["","","(Dollars in thousands)"],["3 months or less","","$","65,449","","","$","40,578"],["Over 3 through 6 months","","","94,459","","","","51,365"],["Over 6 through 12 months","","","18,082","","","","19,191"],["Over 12 months","","","18,777","","","","34,586"],["Total Time Deposits","","$","196,767","","","$","145,720"]]
[[/GREPCENT_TABLE]]

Other Borrowed Funds

We utilize borrowings to supplement deposits to fund our lending and investing activities. Short-term borrowing and long-term borrowing consist of funds from the FHLB, Federal Reserve Bank, federal funds purchased and retail repurchase agreements, a bank stock loan and subordinated debt. The Company continually has short-term borrowings which are disclosed in “NOTE 10 – BORROWINGS” and “NOTE 11 – SUBORDINATED DEBT.”

Federal funds purchased and retail repurchase agreements: We have available federal funds lines of credit with our correspondent banks. Retail repurchase agreements outstanding represent the purchase of interests in securities by banking customers. Retail repurchase agreements are stated at the amount of cash received in connection with the transaction. We do not account for any of our retail repurchase agreements as sales for accounting purposes in our financial statements. Retail repurchase agreements with banking customers are settled on the following business day. See “NOTE 10 – BORROWINGS” in the Notes to Consolidated Financial Statements for additional information.

FHLB advances: FHLB advances include both draws against our line of credit and fixed rate term advances. Each term advance is payable in full at its maturity date and contains a provision for prepayment penalties. Our FHLB borrowings are used for operational liquidity needs for originating and purchasing loans, purchasing investments and general operating cash requirements. See “NOTE 10 – BORROWINGS” in the Notes to Consolidated Financial Statements for additional information.

Federal Reserve Bank: Federal Reserve Bank Term Funding Program borrowings are fixed rate term loans, secured by loans and qualifying pledged securities. Our Federal Reserve Bank borrowings are used for operational liquidity needs for originating and purchasing loans, purchasing investments and general operating cash requirements. see “NOTE 10 – BORROWINGS” in the Notes to Consolidated Financial Statements.

Bank stock loan: The Company maintains a borrowing facility through an unaffiliated financial institution. The terms of the loan require us and Equity Bank to maintain minimum capital ratios and other covenants. The loan and accrued interest may be prepaid at any time without penalty. In the event of default, the lender has the option to declare all outstanding balances as immediately due. For detailed information, see “NOTE 10 – BORROWINGS” in the Notes to Consolidated Financial Statements.

76

Subordinated debentures: In conjunction with the 2012 acquisition of First Community, we assumed certain subordinated debentures owed to special purpose unconsolidated subsidiaries that are controlled by us, FCB Capital Trust II and FCB Capital Trust III, (“CTII” and “CTIII,” respectively). In conjunction with the 2016 acquisition of Community First Bancshares, Inc., we assumed certain subordinated debentures owed to a special purpose unconsolidated subsidiary that is controlled by us, Community First (AR) Statutory Trust I, (“CFSTI”). In conjunction with the 2021 acquisition of ASBI, we assumed certain subordinated debentures owed to a special purpose unconsolidated subsidiary that is controlled by us, American State Bank Statutory Trust I, (“ASBSTI”). For additional information, see “NOTE 11 – SUBORDINATED DEBT” in the Notes to Consolidated Financial Statements.

Subordinated notes: In 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 a total of $75.0 million in aggregate principal amounts of its 7.00% Fixed-to-Floating Rate Subordinated Notes due in 2030. For additional information, see “NOTE 11 – SUBORDINATED DEBT” in the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Liquidity

Market and public confidence in our financial strength and financial institutions, in general, will largely determine access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.

Liquidity is defined as the ability to meet anticipated customer demands for future funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure our liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily, weekly and monthly basis.

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations in a cost-effective manner and to meet current and future potential obligations such as loan commitments, lease obligations and unexpected deposit outflows. In this process, we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet our needs.

During the years ended December 31, 2023, 2022, and 2021, our liquidity needs have primarily been met by core deposits, securities and loan maturities, as well as amortizing payment from investment securities and loans. Other funding sources include federal funds purchased, retail repurchase agreements, brokered certificates of deposit, subordinated notes, borrowings from the FHLB and from the Federal Reserve Bank.

Our largest sources of funds are deposits, fed funds sold, retail repurchase agreements and subordinated debt, and our largest uses of funds are the origination of loans or purchases of loans or investment securities. Average loans were $3.30 billion for the year ended December 31, 2023, an increase of 2.2% over average loans of $3.23 billion for the year ended December 31, 2022. Excess deposits are primarily invested in our interest-bearing deposit account with the Kansas City Federal Reserve Bank, investment securities, federal funds sold or other short-term liquid investments until the funds are needed to fund loan growth. Our investment securities portfolio has a weighted average life of 5.1 years and a modified duration of 4.3 years at December 31, 2023. We believe that our daily funding needs can be met through cash provided by operating activities, payments and maturities on loans and investment securities, our core deposit base, FHLB advances, Federal Reserve Bank and other borrowing relationships. For additional information, see "NOTE 10 - BORROWINGS" in the Notes to Consolidated Financial Statements.

Cash Flow Overview

During 2023, investing activities provided $232.2 million and operating activities provided $76.5 million of liquidity, which were offset by financing activities use of $34.0 million, ultimately increasing total cash and cash equivalents by $274.7 million. The cash provided by investing activities was driven mostly by the sale and maturity of securities of $789.4 million and mostly offset by the purchase of securities of $510.5 million, the purchase of correspondent and miscellaneous stock of $11.9 million and the purchase of premises and equipment of $15.6 million. The cash usage in financing activities was driven mostly by increases in proceeds from term FHLB advances of $100.0 million and FRB discount window of $140.0 million and decreases in deposits of $96.4 million and purchases of treasury stock of $17.9 million.

During 2022, operating activities provided $74.1 million of liquidity, which was offset by investing activities use of $214.2 million of cash assets and financing activities use of $15.4 million, ultimately decreasing total cash and cash equivalents by $155.5 million. The cash usage in investing activities was driven mostly by purchases of securities of $182.0 million and the net increase in

77

loans held for investment of $181.9 million, partially offset by proceeds from securities of $168.4 million and proceeds from sale of foreclosed assets of $29.9 million. The cash usage in financing activities was driven mostly by decreases in deposits of $106.3 million and purchases of treasury stock of $33.2 million.

For information related to cash flow during 2021, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 9, 2022.

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 20 – COMMITMENTS AND CREDIT RISK” in the Notes to Consolidated Financial Statements.

Commitments to Extend Credit: For additional information see “NOTE 20 – COMMITMENTS AND CREDIT RISK” in the Notes to Consolidated Financial Statements.

Future Debt Repayments

In the normal course of business, we enter into short-term and long-term debt obligations resulting in commitments to make future payments. For additional information see “NOTE 10 – BORROWINGS” and “NOTE 11 – SUBORDINATED DEBT.”

Capital Resources

Capital management consists of providing equity to support our current and future operations. The 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 that 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 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 December 31, 2023, and December 31, 2022, 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 December 31, 2023, 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. There are no conditions or events since that notification that management believes have changed Equity Bank’s category.

The total increase in stockholders’ equity of $42.8 million was principally attributable to an increase in accumulated other comprehensive income of $55.6 million, partially offset by a decrease in treasury stock of $17.9 million. For additional information about the Company’s capital see "NOTE 12 – STOCKHOLDERS' EQUITY", “NOTE 14 – REGULATORY MATTERS” and "NOTE 17 – SHARE-BASED PAYMENTS" in Notes to Consolidated Financial Statements.

78

Non-GAAP Financial Measures

We identify certain financial measures discussed in this Annual Report on Form 10-K as being “non-GAAP financial measures.” In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles as in effect from time to time in the United States in our statements of income, balance sheets 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 Annual Report on Form 10-K should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Annual Report on Form 10-K may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures that we have discussed in this Annual Report on Form 10-K when comparing such non-GAAP financial measures.

Adjusted Net Income and Earnings Per Share: Adjusted net income and adjusted earnings per share are non-GAAP financial measures generally used to disclose core net income from the Company's operations and earnings per share. We calculated this by taking GAAP net income less non-core impacts to net income to arrive at adjusted net income, basic earnings per share, and diluted earnings per share. These financial measures are used by financial statement users to evaluate the core financial performance of the Company.

Management believes that these measures are important to many investors who are interested in changes from period to period in the Company's financial performance and quality of earnings.

The following table reconciles as of the dates set forth below, adjusted net income and earnings per share and compares them to GAAP net income and earnings per share.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["","","(Dollars in thousands, except share data)"],["Net income (loss) allocable to common stockholders","","$","7,821","","","$","57,688","","","$","52,480","","","$","(74,970",")","","$","25,579"],["Less: gains (losses) from sale of securities net of tax","","","(41,090",")","","","4","","","","291","","","","\u2014","","","","\u2014"],["Plus: goodwill impairment, net of actual tax effect","","","\u2014","","","","\u2014","","","","\u2014","","","","99,526","","","","\u2014"],["Adjusted net income","","$","48,911","","","$","57,684","","","$","52,189","","","$","24,556","","","$","25,579"],["Weighted average common shares outstanding","","","15,535,772","","","","16,214,049","","","","15,019,221","","","","15,098,512","","","","15,619,891"],["Weighted average diluted shares","","","15,648,842","","","","16,437,906","","","","15,306,431","","","","15,238,499","","","","15,843,139"],["Earnings Per Share","","$","0.50","","","$","3.56","","","$","3.49","","","$","(4.97",")","","$","1.64"],["Diluted Earnings Per Share","","$","0.50","","","$","3.51","","","$","3.43","","","$","(4.97",")","","$","1.61"],["Adjusted Earnings Per Share","","$","3.15","","","$","3.56","","","$","3.47","","","$","1.63","","","$","1.64"],["Adjusted Diluted Earnings Per Share","","$","3.13","","","$","3.51","","","$","3.41","","","$","1.61","","","$","1.61"]]
[[/GREPCENT_TABLE]]

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, mortgage servicing asset, net of accumulated amortization, and naming rights, 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 shares of common stock outstanding plus the period-end dilutive effects of vested restricted stock units, the assumed exercise of stock options, redemption of non-vested restricted stock units, and pending employee stock purchase plan shares at period end. For tangible book value, the most directly comparable financial measure calculated in accordance with GAAP is book value.

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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.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["","","(Dollars in thousands, except share data)"],["Total stockholders\u2019 equity","","$","452,860","","","$","410,058","","","$","500,631","","","$","407,649","","","$","478,060"],["Less: goodwill","","","53,101","","","","53,101","","","","54,465","","","","31,601","","","","136,432"],["Less: core deposit intangibles, net","","","7,222","","","","10,596","","","","14,879","","","","16,057","","","","19,907"],["Less: mortgage servicing asset, net","","","75","","","","176","","","","276","","","","\u2014","","","","5"],["Less: naming rights, net","","","1,000","","","","1,044","","","","1,087","","","","1,130","","","","1,174"],["Tangible common equity","","$","391,462","","","$","345,141","","","$","429,924","","","$","358,861","","","$","320,542"],["Common shares outstanding at period end","","","15,428,251","","","","15,930,112","","","","16,760,115","","","","14,540,556","","","","15,444,434"],["Diluted common shares outstanding at period end","","","15,629,185","","","","16,163,253","","","","17,050,115","","","","14,540,556","","","","15,719,810"],["Book value per common share","","$","29.35","","","$","25.74","","","$","29.87","","","$","28.04","","","$","30.95"],["Tangible book value per common share","","$","25.37","","","$","21.67","","","$","25.65","","","$","24.68","","","$","20.75"],["Tangible book value per diluted common share","","$","25.05","","","$","21.35","","","$","25.22","","","$","24.68","","","$","20.39"]]
[[/GREPCENT_TABLE]]

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, mortgage servicing asset, net of accumulated amortization and naming rights, net of accumulated amortization; (b) tangible assets as total assets less goodwill, core deposit intangibles, net of accumulated amortization, mortgage servicing asset, net of accumulated amortization and naming rights, 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 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.

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The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["","","(Dollars in thousands)"],["Total stockholders\u2019 equity","","$","452,860","","","$","410,058","","","$","500,631","","","$","407,649","","","$","478,060"],["Less: goodwill","","","53,101","","","","53,101","","","","54,465","","","","31,601","","","","136,432"],["Less: core deposit intangibles, net","","","7,222","","","","10,596","","","","14,879","","","","16,057","","","","19,907"],["Less: mortgage servicing asset, net","","","75","","","","176","","","","276","","","","\u2014","","","","5"],["Less: naming rights, net","","","1,000","","","","1,044","","","","1,087","","","","1,130","","","","1,174"],["Tangible common equity","","$","391,462","","","$","345,141","","","$","429,924","","","$","358,861","","","$","320,542"],["Total assets","","$","5,034,592","","","$","4,981,651","","","$","5,137,631","","","$","4,013,356","","","$","3,949,578"],["Less: goodwill","","","53,101","","","","53,101","","","","54,465","","","","31,601","","","","136,432"],["Less: core deposit intangibles, net","","","7,222","","","","10,596","","","","14,879","","","","16,057","","","","19,907"],["Less: mortgage servicing asset, net","","","75","","","","176","","","","276","","","","\u2014","","","","5"],["Less: naming rights, net","","","1,000","","","","1,044","","","","1,087","","","","1,130","","","","1,174"],["Tangible assets","","$","4,973,194","","","$","4,916,734","","","$","5,066,924","","","$","3,964,568","","","$","3,792,060"],["Equity / assets","","","8.99","%","","","8.23","%","","","9.74","%","","","10.16","%","","","12.10","%"],["Tangible common equity to tangible assets","","","7.87","%","","","7.02","%","","","8.48","%","","","9.05","%","","","8.45","%"]]
[[/GREPCENT_TABLE]]

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 intangible assets and preferred stock; (b) adjusted net income allocable to common stockholders as net income allocable to common stockholders plus goodwill impairment, net of actual tax effect, plus amortization of intangible assets less estimated tax effect on amortization of intangible assets (tax rates used in this calculation were 21% for 2023, 2022, 2021, 2020 and 2019) (c) return on average tangible common equity as 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 because it measures the return on equity, exclusive of the effects of intangible assets on earnings and capital. Goodwill and other intangible assets have the effect of increasing average stockholders’ equity and, through amortization, decreasing net income allocable to common stockholders while not increasing average tangible common equity or decreasing adjusted net income allocable to common stockholders.

The following table reconciles, as of the dates set forth below, total average stockholders’ equity to average tangible common equity and net income allocable to common stockholders to adjusted net income allocable to common stockholders.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["","","(Dollars in thousands)"],["Total average stockholders\u2019 equity","","$","423,722","","","$","440,882","","","$","446,795","","","$","464,608","","","$","463,445"],["Less: average intangible assets","","","63,064","","","","67,746","","","","50,831","","","","130,329","","","","158,410"],["Average tangible common equity","","$","360,658","","","$","373,136","","","$","395,964","","","$","334,279","","","$","305,035"],["Net income (loss) allocable to common stockholders","","$","7,821","","","$","57,688","","","$","52,480","","","$","(74,970",")","","$","25,579"],["Plus: goodwill impairment, net of actual tax effect","","","\u2014","","","","\u2014","","","","\u2014","","","","99,526","","","","\u2014"],["Amortization of intangible assets","","","3,518","","","","4,186","","","","4,242","","","","3,898","","","","3,218"],["Less: estimated tax effect on intangible asset amortization","","","739","","","","879","","","","891","","","","819","","","","676"],["Adjusted net income allocable to common stockholders","","$","10,600","","","$","60,995","","","$","55,831","","","$","27,635","","","$","28,121"],["Return on average equity (ROAE)","","","1.85","%","","","13.08","%","","","11.75","%","","","(16.14",")%","","","5.52","%"],["Return on average tangible common equity (ROATCE)","","","2.94","%","","","16.35","%","","","14.10","%","","","8.27","%","","","9.22","%"]]
[[/GREPCENT_TABLE]]

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 goodwill impairment, merger expenses and loss on debt extinguishment, by the sum of net interest income and non-interest income, excluding net gains on

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the sale of available-for-sale securities and other securities transactions, and the net gain on acquisition. The GAAP-based efficiency ratio is non-interest expense less goodwill impairment, 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, loss on debt extinguishment, net gains on the sale of available-for-sale securities and other securities transactions, and the net gain on acquisition.

The following table reconciles, as of the dates set forth below, the efficiency ratio to the GAAP-based efficiency ratio.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022","","","2021","","","2020","","","2019"],["","","(Dollars in thousands)"],["Non-interest expense","","$","135,601","","","$","128,380","","","$","119,465","","","$","208,990","","","$","99,635"],["Less: goodwill impairment","","","\u2014","","","","\u2014","","","","\u2014","","","","104,831","","","","\u2014"],["Less: merger expenses","","","297","","","","594","","","","9,189","","","","299","","","","915"],["Less: loss on debt extinguishment","","","\u2014","","","","\u2014","","","","372","","","","\u2014","","","","\u2014"],["Non-interest expense, excluding merger expenses and loss on debt extinguishment","","$","135,304","","","$","127,786","","","$","109,904","","","$","103,860","","","$","98,720"],["Net interest income","","$","159,018","","","$","162,830","","","$","142,579","","","$","132,652","","","$","125,858"],["Non-interest income","","$","(19,129",")","","$","35,957","","","$","32,842","","","$","26,023","","","$","24,988"],["Less: gain on acquisition and branch sales","","","\u2014","","","","962","","","","585","","","","2,145","","","","\u2014"],["Less: net gains (losses) from securities transactions","","","(51,909",")","","","5","","","","406","","","","11","","","","14"],["Non-interest income, excluding net gains (losses) from security transactions and gain on acquisition","","$","32,780","","","$","34,990","","","$","31,851","","","$","23,867","","","$","24,974"],["Non-interest expense, less goodwill impairment, to net interest income plus non-interest income","","","96.93","%","","","64.58","%","","","68.10","%","","","65.64","%","","","66.05","%"],["Efficiency Ratio","","","70.55","%","","","64.60","%","","","63.01","%","","","66.36","%","","","65.45","%"]]
[[/GREPCENT_TABLE]]