What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-09 · 484 added, 297 removed, 894 unchanged (47% of the section changed)

4 unchanged sentences

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.

As of June 30, 2022, we had, on a consolidated basis, total assets of $24.25 billion, loans receivable, net of allowance for credit losses of $13.63 billion, total deposits of $19.58 billion, and stockholders’ equity of $3.50 billion.

We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income.

5 unchanged sentences

Key Financial Measures

As of or for the Three Months Ended

As of or for the Three Months Ended June 30, As of or for the Six Months Ended June 30,

2022 2021 2022 2021

(Dollars in thousands, except per share data)

9 unchanged sentences

Tangible book value per share (non-GAAP) (1)

9.92 10.31 9.92 10.31

Annualized net interest margin - FTE 3.64% 3.61% 3.46% 3.81%

1 unchanged sentence

Efficiency ratio, as adjusted (non-GAAP) (2)

Annualized return on average assets 1.43 2.22

Annualized return on average common equity 9.58 14.15

46.02 42.07 46.53 41.36

Return on average assets 0.26 1.81 0.75 2.01

Return on average common equity 1.78 11.92 5.14 13.02

(1) See Table 19 for the non-GAAP tabular reconciliation.

(2) See Table 23 for the non-GAAP tabular reconciliation.

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.

Results of Operations for the Three Months Ended June 30, 2022 and 2021

Our net income decreased $63.1 million, or 79.8%, to $16.0 million for the three-month period ended June 30, 2022, from $79.1 million for the same period in 2021.

On a diluted earnings per share basis, our earnings were $0.08 per share for the three-month period ended June 30, 2022 compared to $0.48 per share for the three-month period ended June 30, 2021.

During the second quarter of 2022, we completed the previously announced acquisition of Happy Bancshares, Inc.

As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $48.7 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, a $2.0 million provision for credit losses on acquired held-to-maturity investment securities.

The summation of these items reduced earnings by $107.3 million and earnings per share by $0.39 per share for the three-month period ended June 30, 2022.

The markets in which we operate have been experiencing significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest.

However, excluding the impact of the acquisition of Happy, 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 June 30, 2022.

In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of June 30, 2022.

During the three months ended June 30, 2022, the Company recorded $1.4 million in special dividend from equity investments, $2.4 million in recoveries on historic losses, $1.8 million loss for the decrease in the fair value of marketable securities and $2.1 million in trust preferred securities ("TRUPS") redemption fees.

Total interest income increased by $62.5 million, or 40.5%, and non-interest income increased by $13.5 million, or 43.3%.

This was more than offset by a $5.0 million, or 38.0%, increase in total interest expense and a $92.5 million, or 126.7%, increase in non-interest expense.

The increase in interest income was due to a $40.1 million, or 28.3%, increase in loan interest income, a $16.6 million, or 137.1%, increase in investment income and a $5.9 million, or 828.6%, increase in interest income on deposits at other banks.

The increase in non-interest income was primarily due to a $5.0 million, or 97.1%, increase in service charges on deposit accounts, a $4.6 million, or 152.6%, increase in other income, a $3.9 million, or 873.0%, increase in trust fees, a $2.9 million, or 29.8%, increase in other services charges and fees and $1.3 million, or 49.1%, increase in dividends from FHLB, FRB, FNBB and other which was partially offset by a $3.1 million, or 244.1%, decrease in the fair value adjustment for marketable securities resulting from a $1.8 million loss for the decrease in the fair value of marketable securities, and a $1.1 million, or 100.0%, decrease in gain on sale of SBA loans.

Included within other income was $2.4 million in recoveries on historic losses, and included within dividends from FHLB, FRB, FNBB and other was $1.4 million in special dividends.

The increase in interest expense was primarily due to a $4.3 million, or 66.8%, increase in interest on deposits and a $649,000, or 13.5%, increase in interest on subordinated debentures as a result of the acquisition of $140.0 million of subordinated debt and $23.2 million in trust preferred securities from Happy during the quarter.

The increase in non-interest expense was due to $48.7 million in merger and acquisition expenses, a $23.3 million, or 55.0%, increase in salaries and employee benefits, an $11.0 million, or 70.7%, increase in other operating expenses, a $5.2 million, or 57.7%, increase in occupancy and equipment and a $4.2 million, or 71.3%, increase in data processing expense.

Included within other operating expense was $2.1 million in TRUPS redemption fees.

Income tax expense decreased by $21.8 million, or 86.9%, 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.

These fluctuations are primarily due to the acquisition of Happy during the quarter and the rising rate environment.

Our net interest margin increased from 3.61% for the three-month period ended June 30, 2021 to 3.64% for the three-month period ended June 30, 2022.

The yield on interest earning assets was 3.97% and 3.94% for the three months ended June 30, 2022 and 2021, respectively, as average interest earning assets increased from $15.89 billion to $22.18 billion.

The increase in average earning assets is primarily due to a $3.30 billion increase in average loans receivable, a $2.31 billion increase in average investment securities, and $675.6 million increase in average interest-bearing balances due from banks due to the acquisition of Happy during the quarter.

For the three months ended June 30, 2022 and 2021, we recognized $5.2 million and $5.8 million, respectively, in total net accretion for acquired loans and deposits.

The reduction in accretion was dilutive to the net interest margin by one basis point.

We recognized $1.4 million in event interest income for the three months ended June 30, 2022 compared to $942,000 for the three months ended June 30, 2021.

This increased the net interest margin by one basis point.

Our efficiency ratio was 66.31% for the three months ended June 30, 2022, compared to 41.09% for the same period in 2021.

For the second quarter of 2022, our efficiency ratio, as adjusted (non-GAAP), was 46.02%, compared to 42.07% reported for the second quarter of 2021.

(See Table 23 for the non-GAAP tabular reconciliation).

Our annualized return on average assets was 0.26% for the three months ended June 30, 2022, compared to 1.81% for the same period in 2021.

Our annualized return on average assets, as adjusted (non-GAAP), was 1.57% for the three months ended June 30, 2022, compared to 1.75% for the same period in 2021.

(See Table 20 for the non-GAAP tabular reconciliation).

Our annualized return on average common equity was 1.78% and 11.92% for the three months ended June 30, 2022, and 2021, respectively.

Our annualized return on average common equity, as adjusted (non-GAAP), was 10.83% for the three months ended June 30, 2022 and 11.54% for the same period in 2021.

(See Table 21 for the non-GAAP tabular reconciliation).

Results of Operations for the Six Months Ended June 30, 2022 and 2021

Our net income decreased $89.8 million, or 52.6%, to $80.9 million for the six-month period ended June 30, 2022, from $170.7 million for the same period in 2021.

On a diluted earnings per share basis, our earnings were $0.44 per share for the six-month period ended June 30, 2022 compared to $1.03 per share for the six-month period ended June 30, 2021.

As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $49.6 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, a $2.0 million provision for credit losses on acquired held-to-maturity investment securities.

The summation of these items reduced earnings by $108.2 million and earnings per share by $0.44 per share for the six-month period ended June 30, 2022.

In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of June 30, 2022.

During the six months ended June 30, 2022, the Company recorded a $324,000 adjustment for the increase in fair value of marketable securities, $1.4 million special dividend from equity investments, $2.1 million in TRUPS redemption fees and a $5.6 million recovery on historic losses.

Total interest income increased by $44.8 million, or 14.1%.

This was more than offset by a $1.1 million, or 1.5%, decrease in non-interest income, a $4.2 million, or 15.2%, increase in interest expense and a $96.5 million, or 66.2%, increase in non-interest expense.

The increase in interest income was due to an $18.6 million, or 6.4%, increase in loan interest income, a $19.0 million, or 81.3%, increase in investment income and a $7.1 million, or 637.5%, increase in interest income on deposits at other banks.

The decrease in non-interest income was primarily due to a $6.7 million, or 95.4%, decrease in income for the fair value adjustment for marketable securities resulting from a $324,000 increase in the fair value of marketable securities for the six months ended June 30, 2022 compared to a $7.0 million increase for the six months ended June 30, 2021, a $6.6 million, or 58.7%, decrease in dividends from FHLB, FRB, FNBB and other, a $4.5 million, or 31.0%, decrease in mortgage lending income, which was partially offset by a $6.1 million, or 60.3%, increase in service charges on deposit accounts, a $4.6 million, or 41.3%, increase in other income, a $3.9 million, or 406.6%, increase in trust fees and a $3.0 million, or 17.4%, increase in other service charges and fees.

Included within other income was $5.6 million recovery on historic losses, and included within dividends from FHLB, FRB, FNBB and other was $1.4 million in special dividends.

The increase in interest expense was primarily due to a $2.7 million, or 28.5%, increase in interest on subordinated debentures as a result of the acquisition of $140.0 million of subordinated debt and $23.2 million in trust preferred securities from Happy during the second quarter, and a $1.5 million, or 10.5%, increase in interest on deposits.

The increase in non-interest expense was due to $49.6 million in merger and acquisition expenses, a $24.8 million, or 29.4%, increase in salaries and employee benefits, an $11.6 million, or 37.1%, increase in other operating expenses, a $5.4 million, or 45.7%, increase in data processing expense and a $5.1 million, or 28.0% increase in occupancy and equipment.

Included within other operating expense was $2.1 million in TRUPS redemption fees.

Income tax expense decreased by $30.6 million, or 56.8%, during the quarter due to a decrease in net income.

These fluctuations are primarily due to the acquisition of Happy during the second quarter of 2022 and the rising rate environment.

Our net interest margin decreased from 3.81% for the six-month period ended June 30, 2021 to 3.46% for the six-month period ended June 30, 2022.

The yield on interest earning assets was 3.79% and 4.17% for the six-month period ended June 30, 2022 and 2021, respectively, as average interest earning assets increased from $15.51 billion to $19.49 billion.

The increase in average earning assets is primarily the result of a $1.59 billion increase in average investment securities, a $1.28 billion increase in average interest-bearing balances due from banks and a $1.12 billion increase in average loans receivable.

For the six months ended June 30, 2022 and 2021, we recognized $8.3 million and $11.3 million, respectively, in total net accretion for acquired loans and deposits.

The reduction in accretion was dilutive to the net interest margin by 3 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.

The Company experienced an $18.8 million reduction in interest income from PPP loans due to the forgiveness of the PPP loans and the acceleration of the deferred fees for the loans that were forgiven.

This was dilutive to the net interest margin by approximately 9 basis points.

Our efficiency ratio was 58.26% for the six-month period ended June 30, 2022, compared to 38.72% for the same period in 2021.

For the first six months of 2022, our efficiency ratio, as adjusted (non-GAAP), was 46.53%, compared to 41.36% reported for the first six months 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.

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.

Our annualized return on average assets was 0.75% for the six-month period ended June 30, 2022, compared to 2.01% for the same period in 2021.

Our annualized return on average assets, as adjusted (non-GAAP), was 1.48% for the six months ended June 30, 2022, compared to 1.81% for the same period in 2021.

(See Table 20 for the non-GAAP tabular reconciliation).

Our annualized return on average common equity was 5.14% and 13.02% for the six-month period ended June 30, 2022, and 2021, respectively.

Our annualized return on average common equity, as adjusted (non-GAAP), was 10.08% for the six months ended June 30, 2022 and 11.74% for the same period in 2021.

(See Table 21 for the non-GAAP tabular reconciliation).

Financial Condition as of and for the Period Ended June 30, 2022 and December 31, 2021

Our total assets as of June 30, 2022 increased $6.20 billion to $24.25 billion from the $18.05 billion reported as of December 31, 2021.

The increase in total assets is primarily due to the acquisition of $6.68 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022.

Cash and cash equivalents decreased $833.9 million, for the six months ended June 30, 2022.

Our loan portfolio balance increased to $13.92 billion as of June 30, 2022 from $9.84 billion at December 31, 2021.

The increase in loans was primarily due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $192.9 million in organic loan growth.

Total deposits increased $5.32 billion to $19.58 billion as of June 30, 2022 from $14.26 billion as of December 31, 2021.

The increase in deposits was primarily due to the acquisition of $5.86 billion in deposits, net of purchase accounting adjustments, from Happy in the second quarter of 2022.

Stockholders’ equity increased $732.8 million to $3.50 billion as of June 30, 2022, compared to $2.77 billion as of December 31, 2021.

The $732.8 million increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and the $80.9 million in net income for the six months ended June 30, 2022, partially offset by the $226.4 million in other comprehensive loss, the $61.0 million of shareholder dividends paid and stock repurchases of $26.6 million in 2022.

Our non-performing loans were $60.6 million, or 0.44% of total loans as of June 30, 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 485.57% as of June 30, 2022, from 471.61% as of December 31, 2021.

Non-performing loans from our Arkansas franchise were $15.0 million at June 30, 2022 compared to $13.9 million as of December 31, 2021.

Non-performing loans from our Florida franchise were $33.3 million at June 30, 2022 compared to $26.8 million as of December 31, 2021.

Non-performing loans from our Texas franchise were $5.5 million at June 30, 2022 compared to zero as of December 31, 2021.

Non-performing loans from our Alabama franchise were $813,000 at June 30, 2022 compared to $470,000 as of December 31, 2021.

Non-performing loans from our Shore Premier Finance ("SPF") franchise were $1.3 million at June 30, 2022 compared to $1.5 million as of December 31, 2021.

Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $4.7 million at June 30, 2022 compared to $7.5 million as of December 31, 2021.

As of June 30, 2022, our non-performing assets increased to $61.1 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 $15.0 million at June 30, 2022 compared to $14.4 million as of December 31, 2021.

Non-performing assets from our Florida franchise were $33.6 million at June 30, 2022 compared to $27.9 million as of December 31, 2021.

Non-performing assets from our Texas franchise were $5.7 million at June 30, 2022 compared to zero as of December 31, 2021.

Non-performing assets from our Alabama franchise were $813,000 at June 30, 2022 compared to $470,000 as of December 31, 2021.

Non-performing assets from our SPF franchise were $1.3 million at June 30, 2022 compared to $1.5 million as of December 31, 2021.

Non-performing assets from our CFG franchise were $4.7 million at June 30, 2022 compared to $7.5 million as of December 31, 2021.

The $4.7 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.

21 unchanged sentences

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.

Interchange fees were $6.5 million, $10.5 million, $4.3 million and $8.1 million for the three and six months ended June 30, 2022 and 2021, respectively.

Centennial CFG loan fees were $3.3 million, $5.1 million, $3.3 million and $5.3 million and for the three and six months ended June 30, 2022 and 2021, respectively.

Investments – Available-for-sale.

3 unchanged sentences

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.

The Company first assesses whether it intends to sell or if it 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.

7 unchanged sentences

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.

Securities held-to-maturity ("HTM"), 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.

35 unchanged sentences

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.

These qualitative factors ("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;

5 unchanged sentences

(vii) external factors such as competition, legal and regulatory environment;

(viii) changes in the quality of the loan review system and (ix) economic conditions.

(viii) changes in the quality of the loan review system;

and (ix) economic conditions.

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.

18 unchanged sentences

An allowance for credit losses is determined using the same methodology as other loans.

The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment.

The initial allowance for credit losses determined on a collective basis is allocated to individual loans.

41 unchanged sentences

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.

On April 1, 2022, the Company completed the acquisition of Happy Bancshares, Inc.

(“Happy”), and merged Happy State Bank into Centennial Bank.

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 certain Happy stock-based awards received approximately $3.7 million in cash in cancellation of such awards, for a total transaction value of approximately $962.5 million.

Including the effects of the known purchase accounting adjustments, as of the acquisition date, Happy had approximately $6.68 billion in total assets, $3.65 billion in loans and $5.86 billion in customer deposits.

Happy formerly operated its banking business from 62 locations in Texas.

For further discussion of the acquisition, see Note 2 "Business Combinations" 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.

1 unchanged sentence

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.

As of June 30, 2022, we had 222 branch locations.

There were 76 branches in Arkansas, 78 branches in Florida, 62 branches in Texas, five branches in Alabama and one branch in New York City.

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.

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.

For the three and six months ended June 30, 2022 and 2021