HOME BANCSHARES INC 10-Q

Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on February 24, 2022, which includes the audited financial statements for the year ended December 31, 2021. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refer to Home BancShares, Inc. on a consolidated basis. General We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly-owned bank subsidiary, Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of March 31, 2022, we had, on a consolidated basis, total assets of $18.62 billion, loans receivable, net of $10.05 billion, total deposits of $14.58 billion, and stockholders’ equity of $2.69 billion. We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income. Deposits and Federal Home Loan Bank (“FHLB”) and other borrowed funds are our primary source of funding. Our largest expenses are interest on our funding sources, salaries and related employee benefits and occupancy and equipment. We measure our performance by calculating our return on average common equity, return on average assets and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a non-GAAP measure and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding adjustments such as merger and acquisition expenses and/or certain gains, losses and other non-interest income and expenses. Table 1: Key Financial Measures As of or for the Three Months Ended March 31, 2022 2021 (Dollars in thousands, except per share data) Total assets $ 18,617,995 $ 17,240,241 Loans receivable 10,052,714 10,778,493 Allowance for credit losses 234,768 242,932 Total deposits 14,580,934 13,512,594 Total stockholders’ equity 2,686,703 2,645,204 Net income 64,892 91,602 Basic earnings per share 0.40 0.55 Diluted earnings per share 0.40 0.55 Book value per share 16.41 16.02 Tangible book value per share (non-GAAP) (1) 10.32 9.95 Annualized net interest margin – FTE 3.21% 4.02% Efficiency ratio 46.15 36.60 Efficiency ratio, as adjusted (non-GAAP) (2) 47.33 40.68 Annualized return on average assets 1.43 2.22 Annualized return on average common equity 9.58 14.15 (1) See Table 19 for the non-GAAP tabular reconciliation. (2) See Table 23 for the non-GAAP tabular reconciliation. 51 Table of Contents Results of Operations for the Three Months Ended March 31, 2022 and 2021 Our net income decreased $26.7 million, or 29.2%, to $64.9 million for the three-month period ended March 31, 2022, from $91.6 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.40 per share for the three-month period ended March 31, 2022 compared to $0.55 per share for the three-month period ended March 31, 2021. During the three-month periods ended March 31, 2022 and March 31, 2021, the Company did not record any provision for credit losses. The markets in which we operate have begun to experience significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest. However, the Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of March 31, 2022. The Company recorded a $2.1 million adjustment for the increase in fair value of marketable securities, $3.3 million recovery on historic losses for a single borrower and $863,000 in merger and acquisition expenses. Total interest income decreased by $17.7 million, or 10.9%, non-interest expense increased by $4.0 million, or 5.5%, and non-interest income decreased by $14.6 million, or 32.3%. This was partially offset by an $808,000, or 5.5%, decrease in total interest expense. The decrease in interest income was due to a $21.5 million decrease in loan interest income, which was partially offset by a $2.5 million increase in investment income and a $1.3 million increase in interest income on deposits at other banks. The increase in non-interest expense was due to a $1.5 million, or 3.5%, increase in salaries and employee benefits, a $1.2 million, or 19.9%, increase in data processing expense, a $863,000 increase in merger and acquisition expense, and a $599,000, or 3.8%, increase in other operating expenses. The decrease in non-interest income was primarily due to a $7.9 million, or 91.9%, decrease in dividends from FHLB, FRB, FNBB and other, a $4.3 million, or 52.1%, decrease in mortgage lending income, a $3.7 million, or 63.2%, decrease in fair value adjustment for marketable securities which was partially offset by a $1.1 million, or 22.8%, increase in service charges on deposit accounts. The decrease in interest expense was primarily due to a $2.8 million, or 36.5%, decrease in interest on deposits, which was partially offset by a $2.1 million, or 43.5%, increase in interest on subordinated debentures resulting from the completion of the new subordinated debt issue in January 2022. Income tax expense decreased by $8.9 million, or 30.7%, during the quarter due to a decrease in net income. Our net interest margin decreased from 4.02% for the three-month period ended March 31, 2021 to 3.21% for the three-month period ended March 31, 2022. The yield on interest earning assets was 3.55% and 4.41% for the three months ended March 31, 2022 and 2021, respectively, as average interest earning assets increased from $15.12 billion to $16.77 billion. The increase in average earning assets is primarily the result of a $1.89 billion increase in average interest-bearing balances due from banks and an $851.9 million increase in average investment securities. This was partially offset by the $1.09 billion decrease in average loans receivable. Average PPP loan balances were $78.0 million for the three months ended March 31, 2022, compared to $633.8 million for the three months ended March 31, 2021. These loans bear interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $2.2 million on PPP loans for the three months ended March 31, 2022 compared to $11.9 million for the three months ended March 31, 2021. The PPP loans were accretive to the net interest margin by 4 basis points for the three months ended March 31, 2022 compared to 16 basis points for the three months ended March 31, 2021. As of March 31, 2022, the Company had $1.6 million in remaining unamortized PPP fees. The market has continued to experience significant amounts of excess liquidity, and the Company completed an underwritten public offering of $300.0 million in aggregate principal of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 during January 2022. As a result, we had an increase of $1.89 billion in average interest-bearing cash balances for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The excess liquidity was dilutive to the net interest margin by 34 basis points, and the additional liquidity resulting from the subordinated debt issuance was dilutive to the net interest margin by 5 basis points. In addition, the increase in interest expense for the subordinated debentures was dilutive to the net interest margin by 5 basis points. For the three months ended March 31, 2022 and 2021, we recognized $3.1 million and $5.5 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 6 basis points. We recognized $1.4 million in event interest income for the three months ended March 31, 2022 compared to $1.1 million for the three months ended March 31, 2021. This increased the net interest margin by 1 basis point. Our efficiency ratio was 46.15% for the three months ended March 31, 2022, compared to 36.60% for the same period in 2021. For the first quarter of 2022, our efficiency ratio, as adjusted (non-GAAP), was 47.33%, compared to 40.68% reported for the first quarter of 2021. (See Table 23 for the non-GAAP tabular reconciliation). Our annualized return on average assets was 1.43% for the three months ended March 31, 2022, compared to 2.22% for the same period in 2021. Our annualized return on average common equity was 9.58% and 14.15% for both the three months ended March 31, 2022, and 2021. 52 Table of Contents Financial Condition as of and for the Period Ended March 31, 2022 and December 31, 2021 Our total assets as of March 31, 2022 increased $565.9 million to $18.62 billion from the $18.05 billion reported as of December 31, 2021. Cash and cash equivalents decreased $30.9 million, for the three months ended March 31, 2022. Our loan portfolio balance increased to $10.05 billion as of March 31, 2022 from $9.84 billion at December 31, 2021. The increase in loans was primarily due to the acquisition of $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $27.6 million in organic loan growth, partially offset by $53.2 million of PPP loan decline. Total deposits increased $320.4 million to $14.58 billion as of March 31, 2022 from $14.26 billion as of December 31, 2021. Stockholders’ equity decreased $79.0 million to $2.69 billion as of March 31, 2022, compared to $2.77 billion as of December 31, 2021. The $79.0 million decrease in stockholders’ equity is primarily associated with the $115.0 million in other comprehensive loss for the three months ended March 31, 2022, $27.0 million of shareholder dividends paid and stock repurchases of $4.1 million in 2022, partially offset by $64.9 million in net income for the three months ended March 31, 2022. Our non-performing loans were $44.7 million, or 0.44% of total loans as of March 31, 2022, compared to $50.2 million, or 0.51% of total loans as of December 31, 2021. The allowance for credit losses as a percentage of non-performing loans increased to 525.50% as of March 31, 2022, from 471.61% as of December 31, 2021. Non-performing loans from our Arkansas franchise were $13.2 million at March 31, 2022 compared to $13.9 million as of December 31, 2021. Non-performing loans from our Florida franchise were $24.8 million at March 31, 2022 compared to $26.8 million as of December 31, 2021. Non-performing loans from our Alabama franchise were $480,000 at March 31, 2022 compared to $470,000 as of December 31, 2021. Non-performing loans from our Shore Premier Finance ("SPF") franchise were $1.4 million at March 31, 2022 compared to $1.5 million as of December 31, 2021. Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $4.8 million at March 31, 2022 compared to $7.5 million as of December 31, 2021. As of March 31, 2022, our non-performing assets decreased to $45.8 million, or 0.25% of total assets, from $51.8 million, or 0.29% of total assets, as of December 31, 2021. Non-performing assets from our Arkansas franchise were $13.2 million at March 31, 2022 compared to $14.4 million as of December 31, 2021. Non-performing assets from our Florida franchise were $25.9 million at March 31, 2022 compared to $27.9 million as of December 31, 2021. Non-performing assets from our Alabama franchise were $480,000 at March 31, 2022 compared to $470,000 as of December 31, 2021. Non-performing assets from our SPF franchise were $1.4 million at March 31, 2022 compared to $1.5 million as of December 31, 2021. Non-performing assets from our CFG franchise were $4.8 million at March 31, 2022 compared to $7.5 million as of December 31, 2021. The $4.8 million balance of non-accrual loans for our Centennial CFG market consists of one loan that is assessed for credit risk by the Federal Reserve under the Shared National Credit Program. The decision to place this loan on non-accrual status was made by the Federal Reserve and not the Company. The loan that makes up the total balance is still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because the Federal Reserve required us to place this loan on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve. Critical Accounting Policies and Estimates Overview. We prepare our consolidated financial statements based on the selection of certain accounting policies, generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. Our accounting policies are described in detail in the notes to our consolidated financial statements included as part of this document. We consider a policy critical if (i) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate; and (ii) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that the accounting policies most critical to us are those associated with our lending practices, including revenue recognition and the accounting for the allowance for credit losses, foreclosed assets, investments, intangible assets, income taxes and stock options. 53 Table of Contents Revenue Recognition. Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our income statements as components of non-interest income are as follows: • Service charges on deposit accounts – These represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. • Other service charges and fees – These represent credit card interchange fees and Centennial CFG loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310. Interchange fees were $3.9 million and $3.8 million for the three months ended March 31, 2022 and 2021, respectively. Centennial CFG loan fees were $1.8 million and $2.0 million for the three months ended March 31, 2022 and 2021, respectively. Investments – Available-for-sale. Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments ("CECL"). The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Investments – Held-to-Maturity. Securities held-to-maturity, which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. 54 Table of Contents Loans Receivable and Allowance for Credit Losses. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, deferred fees or costs on originated loans. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding. Loan origination fees and direct origination costs are capitalized and recognized as adjustments to yield on the related loans. The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, rental vacancy rate, housing price index and national retail sales index. The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows: • 1-4 family construction • All other construction • 1-4 family revolving home equity lines of credit (“HELOC”) & junior liens • 1-4 family senior liens • Multifamily • Owner occupied commercial real estate • Non-owner occupied commercial real estate • Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other • Consumer auto • Other consumer • Other consumer - SPF The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. For loans that are not considered to be collateral dependent, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: • Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower. • The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factors ("Q-Factor") and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) changes in nature and volume of the portfolio; (iii) staff experience; (iv) changes in volume and trends in classified loans, delinquencies and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral values; (vii) external factors such as competition, legal and regulatory environment; (viii) changes in the quality of the loan review system and (ix) economic conditions. 55 Table of Contents Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for credit losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest. Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements . The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Foreclosed Assets Held for Sale. Real estate and personal properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Valuations are periodically performed by management, and the real estate and personal properties are carried at fair value less costs to sell. Gains and losses from the sale of other real estate and personal properties are recorded in non-interest income, and expenses used to maintain the properties are included in non-interest expenses. Intangible Assets. Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles are being amortized over 48 to 121 months on a straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual impairment test of goodwill and core deposit intangibles as required by FASB ASC 350, Intangibles - Goodwill and Other, in the fourth quarter or more often if events and circumstances indicate there may be an impairment. 56 Table of Contents Income Taxes. We account for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes ). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Both we and our subsidiary file consolidated tax returns. Our subsidiary provides for income taxes on a separate return basis, and remits to us amounts determined to be currently payable. Stock Compensation. In accordance with FASB ASC 718, Compensation - Stock Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees , the fair value of each option award is estimated on the date of grant. We recognize compensation expense for the grant-date fair value of the option award over the vesting period of the award. Acquisitions Acquisition of Marine Portfolio On February 4, 2022, the Company completed the purchase of the performing marine loan portfolio of Utah-based LendingClub Bank (“LendingClub”). Under the terms of the purchase agreement with LendingClub, the Company acquired yacht loans totaling approximately $242.2 million. This portfolio of loans is housed within the Company's Shore Premier Finance division, which is responsible for servicing the acquired loan portfolio and originating new loan production. Acquisition of Happy Bancshares, Inc. Effective April 1, 2022, pursuant to an Agreement and Plan of Merger, dated as of September 15, 2021, as amended on October 18, 2021 and further amended on November 8, 2021 (the “Merger Agreement”) among the Company, Centennial, the Company’s acquisition subsidiary, HOMB Acquisition Sub III, Inc. (“Acquisition Sub”), Happy Bancshares, Inc. (“Happy”), and its wholly-owned bank subsidiary, Happy State Bank (“HSB”), Acquisition Sub merged with and into Happy and Happy merged with and into the Company, with the Company as the surviving entity (collectively, the “Merger”). HSB also merged with and into Centennial, with Centennial as the surviving entity. Under the terms of the Merger Agreement, the Company issued approximately 42.4 million shares of its common stock valued at approximately $958.8 million as of April 1, 2022. In addition, the holders of stock appreciation rights of Happy received approximately $3.1 million in cash in cancellation of their stock appreciation rights immediately before the Merger, for a total transaction value of approximately $961.9 million. For further discussion of the acquisition, see Note 22 to the Condensed Notes to Consolidated Financial Statements. We will continue evaluating all types of potential bank acquisitions, which may include FDIC-assisted acquisitions as opportunities arise, to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors. 57 Table of Contents Branches As opportunities arise, we will continue to open new (commonly referred to as de novo ) branches in our current markets and in other attractive market areas. As of March 31, 2022, we had 160 branch locations. There were 76 branches in Arkansas, 78 branches in Florida, five branches in Alabama and one branch in New York City. With the completion of the acquisition of Happy as of April 1, 2022, the Company now operates 62 branches in Texas. Results of Operations For the three months ended March 31, 2022 and 2021 Our net income decreased $26.7 million, or 29.2%, to $64.9 million for the three-month period ended March 31, 2022, from $91.6 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.40 per share for the three-month period ended March 31, 2022 compared to $0.55 per share for the three-month period ended March 31, 2021. During the three-month periods ended March 31, 2022 and March 31, 2021, the Company did not record any provision for credit losses. The markets in which we operate have begun to experience significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest. However, the Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of March 31, 2022. The Company recorded a $2.1 million adjustment for the increase in fair value of marketable securities, $3.3 million recovery on historic losses for a single borrower and $863,000 in merger and acquisition expenses. Net Interest Income Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments, rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (26.135% for 2022 and 25.74% for 2021). The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. In 2020, the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in effect throughout all of 2021. On March 16, 2022, the target rate was increased to 0.25% to 0.50%. Presently, the Federal Reserve has indicated they are anticipating multiple rate increases for 2022. Our net interest margin decreased from 4.02% for the three-month period ended March 31, 2021 to 3.21% for the three-month period ended March 31, 2022. The yield on interest earning assets was 3.55% and 4.41% for the three months ended March 31, 2022 and 2021, respectively, as average interest earning assets increased from $15.12 billion to $16.77 billion. The increase in average earning assets is primarily the result of a $1.89 billion increase in average interest-bearing balances due from banks and an $851.9 million increase in average investment securities. This was partially offset by the $1.09 billion decrease in average loans receivable. Average PPP loan balances were $78.0 million for the three months ended March 31, 2022, compared to $633.8 million for the three months ended March 31, 2021. These loans bear interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $2.2 million on PPP loans for the three months ended March 31, 2022 compared to $11.9 million for the three months ended March 31, 2021. The PPP loans were accretive to the net interest margin by 4 basis points for the three months ended March 31, 2022 compared to 16 basis points for the three months ended March 31, 2021. As of March 31, 2022, the Company had $1.6 million in remaining unamortized PPP fees. The market has continued to experience significant amounts of excess liquidity, and the Company completed an underwritten public offering of $300.0 million in aggregate principal of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 during January 2022. As a result, we had an increase of $1.89 billion in average interest-bearing cash balances for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The excess liquidity was dilutive to the net interest margin by 34 basis points, and the additional liquidity resulting from the subordinated debt issuance was dilutive to the net interest margin by 5 basis points. In addition, the increase in interest expense for the subordinated debentures was dilutive to the net interest margin by 5 basis points. For the three months ended March 31, 2022 and 2021, we recognized $3.1 million and $5.5 million, 58 Table of Contents respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 6 basis points. We recognized $1.4 million in event interest income for the three months ended March 31, 2022 compared to $1.1 million for the three months ended March 31, 2021. This increased the net interest margin by 1 basis point. Net interest income on a fully taxable equivalent basis decreased $17.0 million, or 11.4%, to $132.9 million for the three-month period ended March 31, 2022, from $149.9 million for the same period in 2021. This decrease in net interest income for the three-month period ended March 31, 2022 was the result of a $17.8 million decrease in interest income, partially offset by an $808,000 decrease in interest expense, on a fully taxable equivalent basis. The $17.8 million decrease in interest income was primarily the result of higher levels of interest earning assets at lower yields. Although our interest earning assets increased, our average loan balances decreased by $1.09 billion while average interest-bearing balances due from banks increased by $1.89 billion. The lower yield on earning assets resulted in a decrease in interest income of approximately $7.3 million, and the change in composition of earning assets at lower yields resulted in a decrease in interest income of approximately $10.5 million. The lower yield was primarily driven by the decrease in income on loans of $21.5 million, which was partially offset by an increase in income on investment securities of $2.4 million and a $1.3 million increase in income on interest-bearing balances due from banks. The $808,000 decrease in interest expense is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which reduced interest expense by $3.4 million, partially offset by a $2.6 million increase in interest expense resulting from a change in the composition of average interest bearing liabilities. The decrease in interest expense was primarily driven by a $2.8 million decrease in interest expense on deposits, which was partially offset by a $2.1 million increase in interest expense on subordinated debentures resulting from the Company's issuance of $300.0 million in aggregate principal of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 during January 2022. Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three months ended March 31, 2022 and 2021, as well as changes in fully taxable equivalent net interest margin for the three months ended March 31, 2022 compared to the same period in 2021. Table 2: Analysis of Net Interest Income Three Months Ended March 31, 2022 2021 (Dollars in thousands) Interest income $ 144,903 $ 162,651 Fully taxable equivalent adjustment 1,738 1,821 Interest income – fully taxable equivalent 146,641 164,472 Interest expense 13,755 14,563 Net interest income – fully taxable equivalent $ 132,886 $ 149,909 Yield on earning assets – fully taxable equivalent 3.55 % 4.41 % Cost of interest-bearing liabilities 0.49 0.56 Net interest spread – fully taxable equivalent 3.06 3.85 Net interest margin – fully taxable equivalent 3.21 4.02 Table 3: Changes in Fully Taxable Equivalent Net Interest Margin Three Months Ended March 31, 2022 vs. 2021 (In thousands) Decrease in interest income due to change in earning assets $ (10,536) Decrease in interest income due to change in earning asset yields (7,295) Increase in interest expense due to change in interest-bearing liabilities (2,577) Decrease in interest expense due to change in interest rates paid on interest-bearing liabilities 3,385 Decrease in net interest income $ (17,023) 59 Table of Contents Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three months ended March 31, 2022 and 2021, respectively. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans. Table 4: Average Balance Sheets and Net Interest Income Analysis Three Months Ended March 31, 2022 2021 Average Balance Income / Expense Yield / Rate Average Balance Income / Expense Yield / Rate (Dollars in thousands) ASSETS Earnings assets Interest-bearing balances due from banks $ 3,497,894 $ 1,673 0.19 % $ 1,610,463 $ 410 0.10 % Federal funds sold 1,751 1 0.23 119 — — Investment securities – taxable 2,486,401 9,080 1.48 1,637,061 6,253 1.55 Investment securities – non-taxable 850,722 6,284 3.00 848,158 6,700 3.20 Loans receivable 9,937,993 129,603 5.29 11,023,139 151,109 5.56 Total interest-earning assets 16,774,761 146,641 3.55 % 15,118,940 164,472 4.41 % Non-earning assets 1,618,314 1,599,950 Total assets $ 18,393,075 $ 16,718,890 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Interest-bearing liabilities Savings and interest-bearing transaction accounts $ 9,363,793 $ 3,873 0.17 % $ 8,338,791 4,716 0.23 % Time deposits 854,593 1,021 0.48 1,209,431 2,989 1.00 Total interest-bearing deposits 10,218,386 4,894 0.19 9,548,222 7,705 0.33 Securities sold under agreement to repurchase 137,565 108 0.32 159,697 190 0.48 FHLB and other borrowed funds 400,000 1,875 1.90 400,000 1,875 1.90 Subordinated debentures 611,888 6,878 4.56 370,421 4,793 5.25 Total interest-bearing liabilities 11,367,839 13,755 0.49 % 10,478,340 14,563 0.56 % Non-interest-bearing liabilities Non-interest-bearing deposits 4,155,894 3,480,050 Other liabilities 121,362 134,882 Total liabilities 15,645,095 14,093,272 Stockholders’ equity 2,747,980 2,625,618 Total liabilities and stockholders’ equity $ 18,393,075 $ 16,718,890 Net interest spread 3.06 % 3.85 % Net interest income and margin $ 132,886 3.21 % $ 149,909 4.02 % 60 Table of Contents Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three months ended March 31, 2022 compared to the same period in 2021, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume. Table 5: Volume/Rate Analysis Three Months Ended March 31, 2022 over 2021 Volume Yield/Rate Total (In thousands) Increase (decrease) in: Interest income: Interest-bearing balances due from banks $ 722 $ 541 $ 1,263 Federal funds sold — 1 1 Investment securities – taxable 3,113 (286) 2,827 Investment securities – non-taxable 20 (436) (416) Loans receivable (14,391) (7,115) (21,506) Total interest income (10,536) (7,295) (17,831) Interest expense: Interest-bearing transaction and savings deposits 531 (1,374) (843) Time deposits (713) (1,255) (1,968) Federal funds purchased — — — Securities sold under agreement to repurchase (24) (58) (82) FHLB borrowed funds — — — Subordinated debentures 2,783 (698) 2,085 Total interest expense 2,577 (3,385) (808) Increase (decrease) in net interest income $ (13,113) $ (3,910) $ (17,023) Provision for Credit Losses The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. In addition, ASC 326 requires credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not, they will be required to sell. Loans. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, rental vacancy rate, housing price index and national retail sales index. Acquired loans . In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. This is commonly referred to as “double accounting.” 61 Table of Contents The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows: • 1-4 family construction • All other construction • 1-4 family revolving HELOC & junior liens • 1-4 family senior liens • Multifamily • Owner occupied commercial real estate • Non-owner occupied commercial real estate • Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other • Consumer auto • Other consumer • Other consumer - SPF The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. During the three-month periods ended March 31, 2022 and March 31, 2021, the Company did not record any provision for credit losses. The markets in which we operate have begun to experience significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest. However, the Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of March 31, 2022. Net charge-offs to average total loans was 0.08% for the three months ended March 31, 2022 compared to 0.09% for the three months ended March 31, 2021. Investments – Available-for-sale : The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments . The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. During the three-month periods ended March 31, 2022 and March 31, 2021, the Company did not record any provision for credit losses on available-for-sale securities. At March 31, 2022, the Company determine the allowance for credit losses of $842,000, resulting from economic uncertainties was adequate for the investment portfolio. No additional provision for credit losses was considered necessary for the portfolio. Investments – Held-to-Maturity. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. 62 Table of Contents During the three months ended March 31, 2022, the Company purchased $500.0 million of U.S. Treasury Securities with an initial book value of $498.9 million. These investments are classified as held-to-maturity, and mature within one year. As of March 31, 2022, the amortized cost of these securities was $499.3 million. Management has determined that recording a provision for credit losses on these investments was not necessary due to the inherent low risk of U.S. Treasury Securities and the short-term maturities of these investments. As of March 31, 2021, the Company did not hold any held-to-maturity securities. Non-Interest Income Total non-interest income was $30.7 million for the three months ended March 31, 2022, compared to $45.3 million for the same period in 2021. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending income, insurance commissions, increase in cash value of life insurance, fair value adjustment for marketable securities and dividends. Table 6 measures the various components of our non-interest income for the three months ended March 31, 2022 and 2021, respectively, as well as changes for the three months ended March 31, 2022 compared to the same period in 2021. Table 6: Non-Interest Income Three Months Ended March 31, 2021 Change from 2020 2022 2021 (Dollars in thousands) Service charges on deposit accounts $ 6,140 $ 5,002 $ 1,138 22.8 % Other service charges and fees 7,733 7,608 125 1.6 Trust fees 574 522 52 10.0 Mortgage lending income 3,916 8,167 (4,251) (52.1) Insurance commissions 480 492 (12) (2.4) Increase in cash value of life insurance 492 502 (10) (2.0) Dividends from FHLB, FRB, FNBB & other 698 8,609 (7,911) (91.9) Gain on sale of SBA loans 95 — 95 100.0 Gain (loss) on sale of branches, equipment and other assets, net 16 (29) 45 155.2 Gain on OREO, net 478 401 77 19.2 Gain on securities, net — 219 (219) (100.0) Fair value adjustment for marketable securities 2,125 5,782 (3,657) (63.2) Other income 7,922 8,001 (79) (1.0) Total non-interest income $ 30,669 $ 45,276 $ (14,607) (32.3) % Non-interest income decreased $14.6 million, or 32.3%, to $30.7 million for the three months ended March 31, 2022 from $45.3 million for the same period in 2021. The primary factors that resulted in this decrease were the reduction in dividends from FHLB, FRB, FNBB & other as well as the lower level of mortgage lending income. Other factors were changes related to service charges on deposit accounts and fair value adjustment for marketable securities. Additional details for the three months ended March 31, 2022 on some of the more significant changes are as follows: • The $1.1 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees resulting from increased economic activity. • The $4.3 million decrease in mortgage lending income is primarily due to a decrease in volume of secondary market loans from the high volume of loans during 2021. • The $7.9 million decrease for dividends from FHLB, FRB, FNBB & other is primarily due to a decrease in special dividends from equity investments. • The $3.7 million decrease in the fair value adjustment for marketable securities is due to a reduction in the increase of the fair market values of marketable securities held by the Company. 63 Table of Contents Non-Interest Expense Non-interest expense primarily consists of salaries and employee benefits, occupancy and equipment, data processing, and other expenses such as advertising, merger and acquisition expenses, amortization of intangibles, electronic banking expense, FDIC and state assessment, insurance, legal and accounting fees and other professional fees. Table 7 below sets forth a summary of non-interest expense for the three months ended March 31, 2022 and 2021, as well as changes for the three months ended March 31, 2022 compared to the same period in 2021. Table 7: Non-Interest Expense Three Months Ended March 31, 2022 Change from 2021 2022 2021 (Dollars in thousands) Salaries and employee benefits $ 43,551 $ 42,059 $ 1,492 3.5 % Occupancy and equipment 9,144 9,237 (93) (1.0) Data processing expense 7,039 5,870 1,169 19.9 Merger and acquisition expenses 863 — 863 100.0 Other operating expenses: Advertising 1,266 1,046 220 21.0 Amortization of intangibles 1,421 1,421 — — Electronic banking expense 2,538 2,238 300 13.4 Directors' fees 404 383 21 5.5 Due from bank service charges 270 249 21 8.4 FDIC and state assessment 1,668 1,363 305 22.4 Insurance 770 781 (11) (1.4) Legal and accounting 797 846 (49) (5.8) Other professional fees 1,609 1,613 (4) (0.2) Operating supplies 754 487 267 54.8 Postage 306 338 (32) (9.5) Telephone 337 346 (9) (2.6) Other expense 4,159 4,589 (430) (9.4) Total non-interest expense $ 76,896 $ 72,866 $ 4,030 5.5 % Non-interest expense increased $4.0 million, or 5.5%, to $76.9 million for the three months ended March 31, 2022 from $72.9 million for the same period in 2021. The primary factors that resulted in this increase were the changes related to salaries and employee benefits, data processing expense and merger and acquisition expense. Additional details for the three months ended March 31, 2022 on some of the more significant changes are as follows: • The $1.5 million increase in salaries and employee benefits expense is primarily due to increased salary expenses related to the normal increased cost of doing business. • The $1.2 million increase in data processing expense is primarily related to the normal increased cost of doing business such as the increase in software, licensing, core processing expense, telecommunication services, internet banking and cash management expense and mobile banking expenses. • The $863,000 increase in merger and acquisition expense is related to costs associated with the acquisition of Happy Bancshares, Inc. Income Taxes Income tax expense decreased $8.9 million, or 30.7%, to $20.0 million for the three-month period ended March 31, 2022, from $28.9 million for the same period in 2021. The effective income tax rate was 23.59% for the three month period ended March 31, 2022, compared to 23.98% for the same period in 2021. 64 Table of Contents Financial Condition as of and for the Period Ended March 31, 2022 and December 31, 2021 Our total assets as of March 31, 2022 increased $565.9 million to $18.62 billion from the $18.05 billion reported as of December 31, 2021. Cash and cash equivalents decreased $30.9 million, for the three months ended March 31, 2022. Our loan portfolio balance increased to $10.05 billion as of March 31, 2022 from $9.84 billion at December 31, 2021. The increase in loans was primarily due to the acquisition of $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $27.6 million in organic loan growth, partially offset by $53.2 million of PPP loan decline. Total deposits increased $320.4 million to $14.58 billion as of March 31, 2022 from $14.26 billion as of December 31, 2021. Stockholders’ equity decreased $79.0 million to $2.69 billion as of March 31, 2022, compared to $2.77 billion as of December 31, 2021. The $79.0 million decrease in stockholders’ equity is primarily associated with the $115.0 million in other comprehensive loss for the three months ended March 31, 2022, $27.0 million of shareholder dividends paid and stock repurchases of $4.1 million in 2022, partially offset by $64.9 million in net income for the three months ended March 31, 2022. Loan Portfolio Loans Receivable Our loan portfolio averaged $9.94 billion and $11.02 billion during the three months ended March 31, 2022 and 2021, respectively. Loans receivable were $10.05 billion and $9.84 billion as of March 31, 2022 and December 31, 2021, respectively. From December 31, 2021 to March 31, 2022, the Company experienced an increase of approximately $216.6 million in loans. The increase in loans was primarily due to the acquisition of $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $27.6 million in organic loan growth, partially offset by $53.2 million of PPP loan decline. The $27.6 million in organic loan growth included $225.6 million in loan growth for Centennial CFG, while the remaining footprint experienced $198.0 million in loan decline during the first three months of 2022. As of March 31, 2022, the Company had $59.6 million of PPP loans. The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property. Although these loans are primarily originated within our franchises in Arkansas, Florida, South Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas of Arkansas, Florida, Alabama and New York. Loans receivable were approximately $3.02 billion, $3.56 billion, $217.6 million, $1.11 billion and $2.15 billion as of March 31, 2022 in Arkansas, Florida, Alabama, SPF and Centennial CFG, respectively. As of March 31, 2022, we had approximately $308.3 million of construction land development loans which were collateralized by land. This consisted of approximately $46.4 million for raw land and approximately $261.9 million for land with commercial and or residential lots. 65 Table of Contents Table 8 presents our loans receivable balances by category as of March 31, 2022 and December 31, 2021. Table 8: Loans Receivable March 31, 2022 December 31, 2021 (In thousands) Real estate: Commercial real estate loans: Non-farm/non-residential $ 3,810,383 $ 3,889,284 Construction/land development 1,856,096 1,850,050 Agricultural 142,920 130,674 Residential real estate loans: Residential 1-4 family 1,223,890 1,274,953 Multifamily residential 248,650 280,837 Total real estate 7,281,939 7,425,798 Consumer 1,059,342 825,519 Commercial and industrial 1,510,205 1,386,747 Agricultural 48,095 43,920 Other 153,133 154,105 Total loans receivable $ 10,052,714 $ 9,836,089 Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized (where defined) over a 15 to 30-year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis. As of March 31, 2022, commercial real estate loans totaled $5.81 billion, or 57.8%, of loans receivable, as compared to $5.87 billion, or 59.7%, of loans receivable, as of December 31, 2021. Commercial real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $2.00 billion, $2.27 billion, $97.5 million, zero and $1.44 billion at March 31, 2022, respectively. Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 35.9% and 52.2% of our residential mortgage loans consist of owner occupied 1-4 family properties and non-owner occupied 1-4 family properties (rental), respectively, as of March 31, 2022, with the remaining 11.9% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio. As of March 31, 2022, residential real estate loans totaled $1.47 billion, or 14.6%, of loans receivable, compared to $1.56 billion, or 15.8%, of loans receivable, as of December 31, 2021. Residential real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $404.2 million, $884.3 million, $57.4 million, zero and $126.6 million at March 31, 2022, respectively. Consumer Loans. Our consumer loans are composed of secured and unsecured loans originated by our bank, the primary portion of which consists of loans to finance USCG registered high-end sail and power boats within our SPF division. The performance of consumer loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics. 66 Table of Contents As of March 31, 2022, consumer loans totaled $1.06 billion, or 10.5%, of loans receivable, compared to $825.5 million, or 8.4%, of loans receivable, as of December 31, 2021. Consumer loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $19.6 million, $7.8 million, $710,000, $1.03 billion and zero at March 31, 2022, respectively. Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. The terms for commercial loans are generally one to seven years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally, accounts receivable are financed at between 50% and 80% of accounts receivable less than 60 days past due. Inventory financing will range between 50% and 80% (with no work in process) depending on the borrower and nature of inventory. We require a first lien position for those loans. As of March 31, 2022, commercial and industrial loans totaled $1.51 billion, or 15.0%, of loans receivable, compared to $1.39 billion, or 14.1%, of loans receivable, as of December 31, 2021. Commercial and industrial loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $470.1 million, $328.5 million, $52.1 million, $78.2 million and $581.3 million at March 31, 2022, respectively. Non-Performing Assets We classify our problem loans into three categories: past due loans, special mention loans and classified loans (accruing and non-accruing). When management determines that a loan is no longer performing, and that collection of interest appears doubtful, the loan is placed on non-accrual status. Loans that are 90 days past due are placed on non-accrual status unless they are adequately secured and there is reasonable assurance of full collection of both principal and interest. Our management closely monitors all loans that are contractually 90 days past due, treated as “special mention” or otherwise classified or on non-accrual status. Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. T he Company held approximately $439,000 and $448,000 in PCD loans, as of March 31, 2022 and December 31, 2021 , respectively. Table 9 sets forth information with respect to our non-performing assets as of March 31, 2022 and December 31, 2021. As of these dates, all non-performing restructured loans are included in non-accrual loans. 67 Table of Contents Table 9: Non-performing Assets As of March 31, 2022 As of December 31, 2021 (Dollars in thousands) Non-accrual loans $ 44,629 $ 47,158 Loans past due 90 days or more (principal or interest payments) 46 3,035 Total non-performing loans 44,675 50,193 Other non-performing assets Foreclosed assets held for sale, net 1,144 1,630 Other non-performing assets — — Total other non-performing assets 1,144 1,630 Total non-performing assets $ 45,819 $ 51,823 Allowance for credit losses to non-accrual loans 526.04 % 501.96 % Allowance for credit losses to non-performing loans 525.50 471.61 Non-accrual loans to total loans 0.44 0.48 Non-performing loans to total loans 0.44 0.51 Non-performing assets to total assets 0.25 0.29 Our non-performing loans are comprised of non-accrual loans and accruing loans that are contractually past due 90 days. Our bank subsidiary recognizes income principally on the accrual basis of accounting. When loans are classified as non-accrual, the accrued interest is charged off and no further interest is accrued, unless the credit characteristics of the loan improve. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for credit losses. Total non-performing loans were $44.7 million and $50.2 million as of March 31, 2022 and December 31, 2021, respectively. Non-performing loans at March 31, 2022 were $13.2 million, $24.8 million, $480,000, $1.4 million and $4.8 million in the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively. The $4.8 million balance of non-accrual loans for our Centennial CFG market consists of one loan that is assessed for credit risk by the Federal Reserve under the Shared National Credit Program. The decision to place this loan on non-accrual status was made by the Federal Reserve and not the Company. The loan that makes up the total balance is still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because the Federal Reserve required us to place this loan on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve. Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan. As of March 31, 2022, we had $6.1 million of restructured loans that are in compliance with the modified terms and are not reported as past due or non-accrual in Table 9. Our Florida market contains $3.6 million and our Arkansas market contains $2.5 million of these restructured loans. A loan modification that might not otherwise be considered may be granted resulting in classification as a TDR. These loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on an accrual status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of nine months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can pay under the new terms and may result in the loan being returned to an accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan will remain in a non-accrual status. 68 Table of Contents The majority of the Bank’s loan modifications relates to commercial lending and involves reducing the interest rate, changing from a principal and interest payment to interest-only, lengthening the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. At March 31, 2022 and December 31, 2021, the amount of TDRs was $6.9 million and $7.5 million, respectively. As of March 31, 2022 and December 31, 2021, 88.6% and 85.7%, respectively, of all restructured loans were performing to the terms of the restructure. Total foreclosed assets held for sale were $1.1 million as of March 31, 2022, compared to $1.6 million as of December 31, 2021 for a decrease of $486,000. The foreclosed assets held for sale as of March 31, 2022 are comprised of $8,000 of assets located in Arkansas, $1.14 million located in Florida, and zero from Alabama, SPF and Centennial CFG. Table 10 shows the summary of foreclosed assets held for sale as of March 31, 2022 and December 31, 2021. Table 10: Foreclosed Assets Held For Sale As of March 31, 2022 As of December 31, 2021 (In thousands) Commercial real estate loans Non-farm/non-residential $ 275 $ 536 Construction/land development 609 834 Agricultural — — Residential real estate loans Residential 1-4 family 260 260 Multifamily residential — — Total foreclosed assets held for sale $ 1,144 $ 1,630 A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and non-accrual loans), criticized and/or classified loans with a specific allocation, loans categorized as TDRs and certain other loans identified by management that are still performing (loans included in multiple categories are only included once). As of March 31, 2022 and December 31, 2021, impaired loans were $321.5 million and $331.5 million, respectively. The amortized cost balance for loans with a specific allocation decreased from $284.0 million to $276.8 million, and the specific allocation for impaired loans decreased by approximately $1.4 million for the period ended March 31, 2022 compared to the period ended December 31, 2021. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary. As of March 31, 2022, our Arkansas, Florida, Alabama, SPF and Centennial CFG markets accounted for approximately $174.6 million, $140.2 million, $480,000, $1.4 million and $4.8 million of the impaired loans, respectively. 69 Table of Contents Past Due and Non-Accrual Loans Table 11 shows the summary of non-accrual loans as of March 31, 2022 and December 31, 2021: Table 11: Total Non-Accrual Loans As of March 31, 2022 As of December 31, 2021 (In thousands) Real estate: Commercial real estate loans Non-farm/non-residential $ 11,477 $ 11,923 Construction/land development 1,042 1,445 Agricultural 367 897 Residential real estate loans Residential 1-4 family 18,167 16,198 Multifamily residential 156 156 Total real estate 31,209 30,619 Consumer 1,400 1,648 Commercial and industrial 11,104 13,875 Agricultural & other 916 1,016 Total non-accrual loans $ 44,629 $ 47,158 If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $407,000 and $904,000, respectively, would have been recorded for the three-month periods ended March 31, 2022 and 2021. Table 12 shows the summary of accruing past due loans 90 days or more as of March 31, 2022 and December 31, 2021: Table 12: Loans Accruing Past Due 90 Days or More As of March 31, 2022 As of December 31, 2021 (In thousands) Real estate: Commercial real estate loans Non-farm/non-residential $ — $ 2,225 Construction/land development — — Agricultural — — Residential real estate loans Residential 1-4 family 46 701 Multifamily residential — — Total real estate 46 2,926 Consumer — 2 Commercial and industrial — 107 Other — — Total loans accruing past due 90 days or more $ 46 $ 3,035 Our ratio of total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.44% and 0.51% at March 31, 2022 and December 31, 2021, respectively. 70 Table of Contents Allowance for Credit Losses Overview. The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company uses the discounted cash flow (“DCF”) method to estimate expected losses for all of Company’s loan pools. These pools are as follows: construction & land development; other commercial real estate; residential real estate; commercial & industrial; and consumer & other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council. For each of these loan pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, rental vacancy rate, housing price index and national retail sales index. The combination of adjustments for credit expectations (default and loss) and time expectations prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis. The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factors and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) changes in nature and volume of the portfolio; (iii) staff experience; (iv) changes in volume and trends in classified loans, delinquencies and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral values; (vii) external factors such as competition, legal and regulatory environment; (viii) changes in the quality of the loan review system and (ix) economic conditions. 71 Table of Contents Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for credit losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest. Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements . The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Specific Allocations. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. Typically, when it becomes evident through the payment history or a financial statement review that a loan or relationship is no longer supported by the cash flows of the asset and/or borrower and has become collateral dependent, we will use appraisals or other collateral analysis to determine if collateral impairment has occurred. The amount or likelihood of loss on this credit may not yet be evident, so a charge-off would not be prudent. However, if the analysis indicates that an impairment has occurred, then a specific allocation will be determined for this loan. If our existing appraisal is outdated or the collateral has been subject to significant market changes, we will obtain a new appraisal for this impairment analysis. The majority of our impaired loans are collateral dependent at the present time, so third-party appraisals were used to determine the necessary impairment for these loans. Cash flow available to service debt was used for the other impaired loans. This analysis is performed each quarter in connection with the preparation of the analysis of the adequacy of the allowance for credit losses, and if necessary, adjustments are made to the specific allocation provided for a particular loan. For collateral dependent loans, we do not consider an appraisal outdated simply due to the passage of time. However, if an appraisal is older than 13 months and if market or other conditions have deteriorated and we believe that the current market value of the property is not within approximately 20% of the appraised value, we will consider the appraisal outdated and order either a new appraisal or an internal validation report for the impairment analysis. The recognition of 72 Table of Contents any provision or related charge-off on a collateral dependent loan is either through annual credit analysis or, many times, when the relationship becomes delinquent. If the borrower is not current, we will update our credit and cash flow analysis to determine the borrower's repayment ability. If we determine this ability does not exist and it appears that the collection of the entire principal and interest is not likely, then the loan could be placed on non-accrual status. In any case, loans are classified as non-accrual no later than 105 days past due. If the loan requires a quarterly impairment analysis, this analysis is completed in conjunction with the completion of the analysis of the adequacy of the allowance for credit losses. Any exposure identified through the impairment analysis is shown as a specific reserve on the individual impairment. If it is determined that a new appraisal or internal validation report is required, it is ordered and will be taken into consideration during completion of the next impairment analysis. In estimating the net realizable value of the collateral, management may deem it appropriate to discount the appraisal based on the applicable circumstances. In such case, the amount charged off may result in loan principal outstanding being below fair value as presented in the appraisal. Between the receipt of the original appraisal and the updated appraisal, we monitor the loan's repayment history. If the loan is $3.0 million or greater or the total loan relationship is $5.0 million or greater, our policy requires an annual credit review. For these loans, our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually on these loans. As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or by law at 105 days past due, we will reflect that loan as non-performing. It will remain non-performing until it performs in a manner that it is reasonable to expect that we will collect the full principal and accrued interest. When the amount or likelihood of a loss on a loan has been determined, a charge-off should be taken in the period it is determined. If a partial charge-off occurs, the quarterly impairment analysis will determine if the loan is still impaired, and thus continues to require a specific allocation. The Company had $321.5 million and $331.5 million in collateral-dependent impaired loans for the periods ended March 31, 2022 and December 31, 2021 , respectively. Loans Collectively Evaluated for Impairment . Loans receivable collectively evaluated for impairment increased by approximately $213.1 million from $9.54 billion at December 31, 2021 to $9.75 billion at March 31, 2022. The percentage of the allowance for credit losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment was 1.89% and 1.94% at March 31, 2022 and December 31, 2021, respectively . Charge-offs and Recoveries. Total charge-offs decreased to $2.3 million for the three months ended March 31, 2022, compared to $3.0 million for the same period in 2021. Total recoveries were $364,000 and $506,000 for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, net charge-offs were $268,000 for Arkansas, $1.2 million for Florida, $1,000 for Alabama, $458,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $1.9 million. We have not charged off an amount less than what was determined to be the fair value of the collateral as presented in the appraisal, less estimated costs to sell (for collateral dependent loans), for any period presented. Loans partially charged-off are placed on non-accrual status until it is proven that the borrower's repayment ability with respect to the remaining principal balance can be reasonably assured. This is usually established over a period of 6-12 months of timely payment performance. 73 Table of Contents Table 13 shows the allowance for credit losses, charge-offs and recoveries as of and for the three months ended March 31, 2022 and 2021. Table 13: Analysis of Allowance for Credit Losses Three Months Ended March 31, 2022 2021 (Dollars in thousands) Balance, beginning of year $ 236,714 $ 245,473 Loans charged off Real estate: Commercial real estate loans: Non-farm/non-residential — 19 Construction/land development — — Agricultural — — Residential real estate loans: Residential 1-4 family 250 226 Multifamily residential — — Total real estate 250 245 Consumer 63 67 Commercial and industrial 1,416 2,279 Agricultural — — Other 581 456 Total loans charged off 2,310 3,047 Recoveries of loans previously charged off Real estate: Commercial real estate loans: Non-farm/non-residential 26 14 Construction/land development 15 22 Agricultural — — Residential real estate loans: Residential 1-4 family 26 62 Multifamily residential — — Total real estate 67 98 Consumer 11 46 Commercial and industrial 109 76 Agricultural — — Other 177 286 Total recoveries 364 506 Net loans charged off 1,946 2,541 Provision for credit loss - loans — — Balance, March 31 $ 234,768 $ 242,932 Net charge-offs to average loans receivable 0.08 % 0.09 % Allowance for credit losses to total loans 2.34 2.25 Allowance for credit losses to net charge-offs 2,974.72 2,357.38 74 Table of Contents Table 14 presents the allocation of allowance for credit losses as of March 31, 2022 and December 31, 2021. Table 14: Allocation of Allowance for Credit Losses As of March 31, 2022 As of December 31, 2021 Allowance Amount % of loans(1) Allowance Amount % of loans(1) (Dollars in thousands) Real estate: Commercial real estate loans: Non-farm/non- residential $ 95,322 37.9 % $ 86,910 39.5 % Construction/land development 26,349 18.5 28,415 18.8 Agricultural residential real estate loans 554 1.4 308 1.3 Residential real estate loans: Residential 1-4 family 34,732 12.2 45,364 13.0 Multifamily residential 2,379 2.5 3,094 2.9 Total real estate 159,336 72.5 164,091 75.5 Consumer 20,690 10.5 16,612 8.4 Commercial and industrial 52,326 15.0 52,910 14.1 Agricultural 166 0.5 152 0.4 Other 2,250 1.5 2,949 1.6 Total $ 234,768 100.0 % $ 236,714 100.0 % (1) Percentage of loans in each category to total loans receivable. Investment Securities Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. The estimated effective duration of our securities portfolio was 3.7 years as of March 31, 2022. Securities held-to-maturity, which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. As of March 31, 2022, we had $499.3 million of held-to-maturity securities. Of the $499.3 million of held-to-maturity securities as of March 31, 2022, all were invested in U.S. Government-sponsored enterprises. Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity as other comprehensive income. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. Available-for-sale securities were $2.96 billion and $3.12 billion as March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022, $1.41 billion, or 47.7%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $1.54 billion, or 49.3%, of our available-for-sale securities as of December 31, 2021. To reduce our income tax burden, $928.9 million, or 31.4%, of our available-for-sale securities portfolio as of March 31, 2022, were primarily invested in tax-exempt obligations of state and political subdivisions, compared to $997.0 million, or 32.0%, of our available-for-sale securities as of December 31, 2021. We had $410.8 million, or 13.9%, invested in obligations of U.S. Government-sponsored enterprises as of March 31, 2022, compared to $433.0 million, or 13.9%, of our available-for-sale securities as of December 31, 2021. Also, we had approximately $207.1 million, or 7.0%, invested in other securities as of March 31, 2022, compared to $151.9 million, or 4.9% of our available-for-sale securities as of December 31, 2021. 75 Table of Contents The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments . The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Management has determined that recording a provision for credit losses on the Company's held-to-maturity investments was not necessary due to the inherent low risk of the U.S. Treasury Securities, which comprise the entire balance of the held-to-maturity U.S. Government-sponsored enterprises investments, as well as the short-term maturities of these investments. At March 31, 2022, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainty, was adequate for the available-for-sale investment portfolio. No additional provision for credit losses was considered necessary for the portfolio. See Note 3 “Investment Securities” in the Condensed Notes to Consolidated Financial Statements for the carrying value and fair value of investment securities. Deposits Our deposits averaged $14.37 billion and $13.03 billion for the three months ended March 31, 2022 and March 31, 2021, respectively. Total deposits were $14.58 billion as of March 31, 2022, and $14.26 billion as of December 31, 2021. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions. Our policy also permits the acceptance of brokered deposits. From time to time, when appropriate in order to fund strong loan demand, we accept brokered time deposits, generally in denominations of less than $250,000, from a regional brokerage firm, and other national brokerage networks. We also participate in the One-Way Buy Insured Cash Sweep (“ICS”) service and similar services, which provide for one-way buy transactions among banks for the purpose of purchasing cost-effective floating-rate funding without collateralization or stock purchase requirements. Management believes these sources represent a reliable and cost-efficient alternative funding source for the Company. However, to the extent that our condition or reputation deteriorates, or to the extent that there are significant changes in market interest rates which we do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding. Table 15 reflects the classification of the brokered deposits as of March 31, 2022 and December 31, 2021. Table 15: Brokered Deposits March 31, 2022 December 31, 2021 (In thousands) Time Deposits $ — $ — CDARS — — Insured Cash Sweep and Other Transaction Accounts 625,721 625,704 Total Brokered Deposits $ 625,721 $ 625,704 76 Table of Contents The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing. We may allow higher rate deposits to run off during periods of limited loan demand. We believe that additional funds can be attracted, and deposit growth can be realized through deposit pricing if we experience increased loan demand or other liquidity needs. The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. In 2020, the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in effect throughout all of 2021. On March 16, 2022, the target rate was increased to 0.25% to 0.50%. Presently, the Federal Reserve has indicated they are anticipating multiple rate increases for 2022. Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits, for the three months ended March 31, 2022 and 2021. Table 16: Average Deposit Balances and Rates Three Months Ended March 31, 2022 2021 Average Amount Average Rate Paid Average Amount Average Rate Paid (Dollars in thousands) Non-interest-bearing transaction accounts $ 4,155,894 — % $ 3,480,050 — % Interest-bearing transaction accounts 8,389,038 0.18 7,547,556 0.25 Savings deposits 974,755 0.06 791,235 0.07 Time deposits: $100,000 or more 518,864 0.60 834,628 1.17 Other time deposits 335,729 0.31 374,803 0.62 Total $ 14,374,280 0.14 % $ 13,028,272 0.24 % Securities Sold Under Agreements to Repurchase We enter into short-term purchases of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) of substantially identical securities. The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the balance sheet at the amount advanced. Interest incurred on repurchase agreements is reported as interest expense. Securities sold under agreements to repurchase increased $10.3 million, or 7.3%, from $140.9 million as of December 31, 2021 to $151.2 million as of March 31, 2022. FHLB and Other Borrowed Funds The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $400.0 million at both March 31, 2022 and December 31, 2021. The Company had no other borrowed funds as of March 31, 2022 or December 31, 2021. At March 31, 2022 and December 31, 2021, all of the outstanding balances were classified as long-term advances. The FHLB advances mature in 2033 with fixed interest rates ranging from 1.76% to 2.26%. Expected maturities could differ from contractual maturities because FHLB may have the right to call or the Company may have the right to prepay certain obligations. Subordinated Debentures Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $667.9 million and $371.1 million as of March 31, 2022 and December 31, 2021, respectively. The Company holds trust preferred securities with a face amount of $73.3 million which are currently callable without penalty based on the terms of the specific agreements. The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. However, now that the Company has exceeded $15 billion in assets, the Tier 1 treatment of the Company’s outstanding trust preferred securities will be eliminated because of the completion of the acquisition of Happy Bancshares, but these securities will still be treated as Tier 2 capital. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s subordinated debentures, the sole asset of 77 Table of Contents each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. The Company wholly owns the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related subordinated debentures. The Company’s obligations under the subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust. The Company has received approval from the Federal Reserve to redeem all of the trust preferred securities. On January 18, 2022, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “2032 Notes”) for net proceeds, after underwriting discounts and issuance costs of approximately $296.4 million. The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. From and including the date of issuance to, but excluding January 30, 2027 or the date of earlier redemption, the 2032 Notes will bear interest at an initial rate of 3.125% per annum, payable in arrears on January 30 and July 30 of each year. From and including January 30, 2027 to, but excluding the maturity date or earlier redemption, the 2032 Notes will bear interest at a floating rate equal to the Benchmark rate (which is expected to be Three-Month Term SOFR), each as defined in and subject to the provisions of the applicable supplemental indenture for the 2032 Notes, plus 182 basis points, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, commencing on April 30, 2027. The Company may, beginning with the interest payment date of January 30, 2027, and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior to January 30, 2027, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date. On April 3, 2017, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The 2027 Notes are unsecured, subordinated debt obligations and mature on April 15, 2027. From and including the date of issuance to, but excluding April 15, 2022, the 2027 Notes bear interest at an initial rate of 5.625% per annum. From and including April 15, 2022 to, but excluding the maturity date or earlier redemption, the 2027 Notes bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination plus a spread of 3.575%; provided, however, that in the event three-month LIBOR is less than zero, then three-month LIBOR shall be deemed to be zero. On April 15, 2022, the Company completed the payoff of its $300.0 million in aggregate principal amount of the 2027 Notes. Each 2027 Note was redeemed pursuant to the terms of the Subordinated Indenture, as supplemented by the First Supplemental Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank Trust Company, National Association, the Trustee for the 2027 Notes, at the redemption price of 100% of its principal amount, plus accrued and unpaid interest to, but excluding, the Redemption Date. 78 Table of Contents Stockholders’ Equity Stockholders’ equity decreased $79.0 million to $2.69 billion as of March 31, 2022, compared to $2.77 billion as of December 31, 2021. The $79.0 million decrease in stockholders’ equity is primarily associated with the $115.0 million in other comprehensive loss for the three months ended March 31, 2022, $27.0 million of shareholder dividends paid and stock repurchases of $4.1 million in 2022, partially offset by $64.9 million in net income for the three months ended March 31, 2022. The annualized decrease in stockholders’ equity for the first three months of 2022 was 11.6%. As of March 31, 2022 and December 31, 2021, our equity to asset ratio was 14.43% and 15.32%, respectively. Book value per share was $16.41 as of March 31, 2022, compared to $16.90 as of December 31, 2021, an 11.8% annualized decrease. Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.165 and $0.14 per share for the three months ended March 31, 2022 and 2021, respectively. The common stock dividend payout ratio for the three months ended March 31, 2022 and 2021 was 41.7% and 25.3%, respectively. On April 21, 2022, the Board of Directors declared a regular $0.165 per share quarterly cash dividend payable June 8, 2022, to shareholders of record May 18, 2022. Stock Repurchase Program. On January 22, 2021, the Company’s Board of Directors authorized the repurchase of up to an additional 20,000,000 shares of its common stock under the previously approved stock repurchase program. We repurchased a total of 180,000 shares with a weighted-average stock price of $22.69 per share during the first three months of 2022. The remaining balance available for repurchase was 21,910,665 shares at March 31, 2022. Liquidity and Capital Adequacy Requirements Risk-Based Capital. We, as well as our bank subsidiary, are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and other discretionary actions by regulators that, if enforced, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings and other factors. In July 2013, the Federal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank Act (“Basel III”). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary on January 1, 2015. The capital conservation buffer requirement began being phased in beginning January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019 when the phase-in period ended, and the full capital conservation buffer requirement became effective. Basel III permanently grandfathers trust preferred securities and other non-qualifying capital instruments that were issued and outstanding as of May 19, 2010 in the Tier 1 capital of bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. The rule phases out of Tier 1 capital these non-qualifying capital instruments issued before May 19, 2010 by all other bank holding companies. Because our total consolidated assets were less than $15 billion as of December 31, 2009, our outstanding trust preferred securities continue to be treated as Tier 1 capital. However, now that the Company has exceeded $15 billion in assets, the Tier 1 treatment of the Company’s outstanding trust preferred securities will be eliminated because of the completion of the acquisition of Happy Bancshares, but these securities will still be treated as Tier 2 capital. Basel III amended the prompt corrective action rules to incorporate a “common equity Tier 1 capital” requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an 8% “total risk-based capital” ratio. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of March 31, 2022 and December 31, 2021, we met all regulatory capital adequacy requirements to which we were subject. 79 Table of Contents On January 18, 2022, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “2032 Notes”). The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. The Company may, beginning with the interest payment date of January 30, 2027, and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior to January 30, 2027, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date. On April 3, 2017, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”). The 2027 Notes are unsecured, subordinated debt obligations and mature on April 15, 2027. On April 15, 2022, the Company completed the payoff of its $300.0 million in aggregate principal amount of the 2027 Notes. Each 2027 Note was redeemed pursuant to the terms of the Subordinated Indenture, as supplemented by the First Supplemental Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank Trust Company, National Association, the Trustee for the 2027 Notes, at the redemption price of 100% of its principal amount, plus accrued and unpaid interest to, but excluding, the Redemption Date. On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 27, 2020, the federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. The Company has elected to adopt the interim final rule, which is reflected in the risk-based capital ratios presented below. 80 Table of Contents Table 17 presents our risk-based capital ratios on a consolidated basis as of March 31, 2022 and December 31, 2021. Table 17: Risk-Based Capital As of March 31, 2022 As of December 31, 2021 (Dollars in thousands) Tier 1 capital Stockholders’ equity $ 2,686,703 $ 2,765,721 ASC 326 transitional period adjustment 24,369 55,143 Goodwill and core deposit intangibles, net (996,184) (997,605) Unrealized (gain) loss on available-for-sale securities 104,557 (10,462) Total common equity Tier 1 capital 1,819,445 1,812,797 Qualifying trust preferred securities 71,305 71,270 Total Tier 1 capital 1,890,750 1,884,067 Tier 2 capital Allowance for credit losses 234,768 236,714 ASC 326 transitional period adjustment (24,369) (55,143) Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets) (56,444) (33,514) Qualifying allowance for credit losses 153,955 148,057 Qualifying subordinated notes 596,563 299,824 Total Tier 2 capital 750,518 447,881 Total risk-based capital $ 2,641,268 $ 2,331,948 Average total assets for leverage ratio $ 17,443,200 $ 16,960,683 Risk weighted assets $ 12,239,536 $ 11,793,539 Ratios at end of period Common equity Tier 1 capital 14.87 % 15.37 % Leverage ratio 10.84 11.11 Tier 1 risk-based capital 15.45 15.98 Total risk-based capital 21.58 19.77 Minimum guidelines – Basel III Common equity Tier 1 capital 7.00 % 7.00 % Leverage ratio 4.00 4.00 Tier 1 risk-based capital 8.50 8.50 Total risk-based capital 10.50 10.50 Well-capitalized guidelines Common equity Tier 1 capital 6.50 % 6.50 % Leverage ratio 5.00 5.00 Tier 1 risk-based capital 8.00 8.00 Total risk-based capital 10.00 10.00 As of the most recent notification from regulatory agencies, our bank subsidiary was “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” we, as well as our banking subsidiary, must maintain minimum common equity Tier 1 capital, leverage, Tier 1 risk-based capital, and total risk-based capital ratios as set forth in the table. There are no conditions or events since that notification that we believe have changed the bank subsidiary’s category. 81 Table of Contents Non-GAAP Financial Measurements Our accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, this report contains financial information determined by methods other than in accordance with GAAP, including earnings, as adjusted; diluted earnings per common share, as adjusted; tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity, excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted. We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. The tables below present non-GAAP reconciliations of earnings, as adjusted, and diluted earnings per share, as adjusted as well as the non-GAAP computations of tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted. The items used in these calculations are included in financial results presented in accordance with GAAP. Earnings, as adjusted, and diluted earnings per common share, as adjusted, are meaningful non-GAAP financial measures for management, as they exclude certain items such as merger expenses and/or certain gains and losses. Management believes the exclusion of these items in expressing earnings provides a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business, because management does not consider these items to be relevant to ongoing financial performance. In Table 18 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated. Table 18: Earnings, As Adjusted Three Months Ended March 31, 2022 2021 (Dollars in thousands) GAAP net income available to common shareholders (A) $ 64,892 $ 91,602 Adjustments: Fair value adjustment for marketable securities (2,125) (5,782) Gain on securities — (219) Recoveries on historic losses (3,288) (5,107) Special dividend from equity investment — (8,073) Merger and acquisition expenses 863 — Total adjustments (4,550) (19,181) Tax-effect of adjustments(1) (1,220) (4,937) Total adjustments after-tax (3,330) (14,244) Earnings, as adjusted (C) $ 61,562 $ 77,358 Average diluted shares outstanding (D) 164,196 165,446 GAAP diluted earnings per share: A/D $ 0.40 $ 0.55 Adjustments after-tax: B/D (0.03) (0.08) Diluted earnings per common share excluding adjustments: C/D $ 0.37 $ 0.47 (1) Blended statutory rate of 26.135% for 2022 and 25.74% for 2021 82 Table of Contents We had $996.6 million, $998.1 million, and $1.00 billion total goodwill, core deposit intangibles and other intangible assets as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets excluding intangible amortization, return on average tangible equity, return on average tangible equity excluding intangible amortization, and tangible equity to tangible assets are useful in evaluating our company. Management also believes return on average assets, as adjusted, return on average equity, as adjusted, and return on average tangible equity, as adjusted, are meaningful non-GAAP financial measures, as they exclude items such as certain non-interest income and expenses that management believes are not indicative of our primary business operating results. These calculations, which are similar to the GAAP calculations of book value per share, return on average assets, return on average equity, and equity to assets, are presented in Tables 19 through 22, respectively. Table 19: Tangible Book Value Per Share As of March 31, 2022 As of December 31, 2021 (In thousands, except per share data) Book value per share: A/B $ 16.41 $ 16.90 Tangible book value per share: (A-C-D)/B 10.32 10.80 (A) Total equity $ 2,686,703 $ 2,765,721 (B) Shares outstanding 163,758 163,699 (C) Goodwill 973,025 973,025 (D) Core deposit and other intangibles 23,624 25,045 Table 20: Return on Average Assets Three Months Ended March 31, 2022 2021 (Dollars in thousands) Return on average assets: A/D 1.43 % 2.22 % Return on average assets excluding intangible amortization: (A+B)/(D-E) 1.54 2.39 Return on average assets excluding fair value adjustment for marketable securities, gain on securities, recoveries on historic losses, special dividend from equity investment and merger and acquisition expenses: (ROA, as adjusted) (A+C)/D 1.36 1.88 (A) Net income $ 64,892 $ 91,602 Intangible amortization after-tax 1,049 1,055 (B) Earnings excluding intangible amortization $ 65,941 $ 92,657 (C) Adjustments after-tax $ (3,330) $ (14,244) (D) Average assets 18,393,075 16,718,890 (E) Average goodwill, core deposits and other intangible assets 997,338 1,003,011 83 Table of Contents Table 21: Return on Average Equity Three Months Ended March 31, 2022 2021 (Dollars in thousands) Return on average equity: A/D 9.58 % 14.15 % Return on average common equity excluding fair value adjustment for marketable securities, gain on securities, recoveries on historic losses, special dividend from equity investment and merger and acquisition expenses: (ROE, as adjusted) (A+C)/D 9.09 11.95 Return on average tangible equity excluding intangible amortization: B/(D-E) 15.28 23.16 Return on average tangible common equity excluding fair value adjustment for marketable securities, gain on securities, recoveries on historic losses, special dividend from equity investment and merger and acquisition expenses: (ROTCE, as adjusted) (A+C)/(D-E) 14.26 19.33 (A) Net income $ 64,892 $ 91,602 (B) Earnings excluding intangible amortization 65,941 92,657 (C) Adjustments after-tax (3,330) (14,244) (D) Average equity 2,747,980 2,625,618 (E) Average goodwill, core deposits and other intangible assets 997,338 1,003,011 Table 22: Tangible Equity to Tangible Assets As of March 31, 2022 As of December 31, 2021 (Dollars in thousands) Equity to assets: B/A 14.43 % 15.32 % Tangible equity to tangible assets: (B-C-D)/(A-C-D) 9.59 10.36 (A) Total assets $ 18,617,995 $ 18,052,138 (B) Total equity 2,686,703 2,765,721 (C) Goodwill 973,025 973,025 (D) Core deposit and other intangibles 23,624 25,045 The efficiency ratio is a standard measure used in the banking industry and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a meaningful non-GAAP measure for management, as it excludes certain items and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding items such as merger expenses and/or certain gains, losses and other non-interest income and expenses. In Table 23 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated. 84 Table of Contents Table 23: Efficiency Ratio, As Adjusted Three Months Ended March 31, 2022 2021 (Dollars in thousands) Net interest income (A) $ 131,148 $ 148,088 Non-interest income (B) 30,669 45,276 Non-interest expense (C) 76,896 72,866 FTE Adjustment (D) 1,738 1,821 Amortization of intangibles (E) 1,421 1,421 Adjustments: Non-interest income: Fair value adjustment for marketable securities $ 2,125 $ 5,782 Special dividend from equity investment — 8,073 Gain on OREO, net 478 401 Gain (loss) on branches, equipment and other assets, net 16 (29) Gain on securities, net — 219 Recoveries on historic losses 3,288 5,107 Total non-interest income adjustments (F) $ 5,907 $ 19,553 Non-interest expense: Merger and acquisition expenses $ 863 $ — Total non-core non-interest expense (G) $ 863 $ — Efficiency ratio (reported): ((C-E)/(A+B+D)) 46.15 % 36.60 % Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F)) 47.33 40.68 Recently Issued Accounting Pronouncements See Note 21 in the Condensed Notes to Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.