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 September 30, 2022, we had, on a consolidated basis, total assets of $23.16 billion, loans receivable, net of allowance for credit losses of $13.54 billion, total deposits of $18.54 billion, and stockholders’ equity of $3.46 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 sources 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 September 30, As of or for the Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in thousands, except per share data) Total assets $ 23,157,370 $ 17,765,056 $ 23,157,370 $ 17,765,056 Loans receivable 13,829,311 9,901,100 13,829,311 9,901,100 Allowance for credit losses (289,203) (238,673) (289,203) (238,673) Total deposits 18,542,324 14,003,371 18,542,324 14,003,371 Total stockholders’ equity 3,460,015 2,736,062 3,460,015 2,736,062 Net income 108,705 74,992 189,575 245,664 Basic earnings per share 0.53 0.46 0.99 1.49 Diluted earnings per share 0.53 0.46 0.99 1.49 Book value per share 16.94 16.68 16.94 16.68 Tangible book value per share (non-GAAP) (1) 9.82 10.59 9.82 10.59 Annualized net interest margin - FTE 4.05% 3.60% 3.67% 3.74% Efficiency ratio 43.24 42.26 52.44 39.86 Efficiency ratio, as adjusted (non-GAAP) (2) 42.97 42.29 45.13 41.67 Return on average assets 1.81 1.68 1.13 1.90 Return on average common equity 12.25 10.97 7.71 12.32 (1) See Table 19 for the non-GAAP tabular reconciliation. (2) See Table 23 for the non-GAAP tabular reconciliation. 57 Table of Contents Results of Operations for the Three Months Ended September 30, 2022 and 2021 Our net income increased $33.7 million, or 45.0%, to $108.7 million for the three-month period ended September 30, 2022, from $75.0 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.53 per share for the three-month period ended September 30, 2022 compared to $0.46 per share for the three-month period ended September 30, 2021. The Company determined that a provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2022. In addition, the Company determined that a provision for unfunded commitments was not necessary as of September 30, 2022. During the three months ended September 30, 2022, the Company recorded $1.1 million in recoveries on historic losses and a $2.6 million loss for the decrease in the fair value of marketable securities . Total interest income increased by $85.9 million, or 54.7%, and non-interest income increased by $14.0 million, or 47.9%. This was partially offset by a $17.4 million, or 139.8%, increase in total interest expense and a $38.7 million, or 51.2%, increase in non-interest expense. These fluctuations are primarily due to the acquisition of Happy Bancshares, Inc. ("Happy"),which we completed on April 1, 2022, and the rising rate environment. The increase in interest income resulted from a $53.2 million, or 37.3%, increase in loan interest income, a $23.0 million, or 172.6%, increase in investment income and a $9.6 million, or 863.6%, increase in interest income on deposits at other banks. The increase in non-interest income was primarily due to a $5.9 million, or 73.3%, increase in other services charges and fees, a $5.2 million, or 119.5%, increase in other income, a $4.8 million, or 81.0%, increase in service charges on deposit accounts, and a $3.5 million, or 730.9%, increase in trust fees. These increases were partially offset by a $2.7 million, or 4,408.2%, decrease in the fair value adjustment for marketable securities resulting from a $2.6 million decrease in the fair value of marketable securities, a $1.8 million, or 29.7%, decrease in mortgage lending income and a $920,000, or 34.6%, decrease in dividends from FHLB, FRB, FNBB and other. Included within other income was $1.1 million in recoveries on historic losses. The increase in interest expense was primarily due to a $17.7 million, or 313.8%, increase in interest on deposits which was partially offset by a $635,000, or 13.3%, decrease in interest on subordinated debentures. The increase in non-interest expense was due to a $22.8 million, or 53.7%, increase in salaries and employee benefits, an $8.4 million, or 49.7%, increase in other operating expenses, a $5.8 million, or 62.6%, increase in occupancy and equipment and a $2.7 million, or 45.2%, increase in data processing expense, partially offset by a decrease of $1.0 million in merger and acquisition expenses. Income tax expense increased by $10.0 million, or 43.3%, during the quarter due to an increase in net income. Our net interest margin increased from 3.60% for the three-month period ended September 30, 2021 to 4.05% for the three-month period ended September 30, 2022. The yield on interest earning assets was 4.62% and 3.91% for the three months ended September 30, 2022 and 2021, respectively, as average interest earning assets increased from $16.11 billion to $21.09 billion. The increase in average interest earning assets is primarily due to a $3.78 billion increase in average loans receivable and a $2.15 billion increase in average investment securities, largely resulting from the acquisition of Happy, partially offset by a $949.6 million decrease in average interest-bearing balances due from banks. For the three months ended September 30, 2022 and 2021, we recognized $4.6 million and $4.9 million, respectively, in total net accretion for acquired loans and deposits. We recognized $943,000 in event interest income for the three months ended September 30, 2022 compared to $3.5 million for the three months ended September 30, 2021 which reduced the net interest margin by five basis points. Our efficiency ratio was 43.24% for the three months ended September 30, 2022, compared to 42.26% for the same period in 2021. For the third quarter of 2022, our efficiency ratio, as adjusted (non-GAAP), was 42.97%, compared to 42.29% reported for the third quarter of 2021. (See Table 23 for the non-GAAP tabular reconciliation). Our annualized return on average assets was 1.81% for the three months ended September 30, 2022, compared to 1.68% for the same period in 2021. Our annualized return on average assets, as adjusted (non-GAAP), was 1.83% for the three months ended September 30, 2022, compared to 1.67% for the same period in 2021. (See Table 20 for the non-GAAP tabular reconciliation). Our annualized return on average common equity was 12.25% and 10.97% for the three months ended September 30, 2022, and 2021, respectively. Our annualized return on average common equity, as adjusted (non-GAAP), was 12.39% for the three months ended September 30, 2022 and 10.87% for the same period in 2021. (See Table 21 for the non-GAAP tabular reconciliation). 58 Table of Contents Results of Operations for the Nine Months Ended September 30, 2022 and 2021 Our net income decreased $56.1 million, or 22.8%, to $189.6 million for the nine-month period ended September 30, 2022, from $245.7 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.99 per share for the nine-month period ended September 30, 2022 compared to $1.49 per share for the nine-month period ended September 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, and 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 $0.42 per share for the nine-month period ended September 30, 2022. 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 September 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 September 30, 2022. During the nine months ended September 30, 2022, the Company recorded $6.7 million in recoveries on historic losses and a $1.4 million special dividend from equity investments which were partially offset by a $2.3 million loss for the decrease in fair value of marketable securities and $2.1 million in TRUPS redemption fees. Total interest income increased by $130.7 million, or 27.6%, and non-interest income increased by $12.8 million, or 12.2%. This was more than offset by a $135.3 million, or 61.1%, increase in non-interest expense and a $21.6 million, or 53.7%, increase in interest expense. These fluctuations are primarily due to the acquisition of Happy during the second quarter of 2022 and the rising rate environment. The increase in interest income resulted from a $71.9 million, or 16.5%, increase in loan interest income, a $42.0 million, or 114.4%, increase in investment income and a $16.8 million, or 750.5%, increase in interest income on deposits at other banks. The increase in non-interest income was primarily due to a $10.9 million, or 68.0%, increase in service charges on deposit accounts, a $9.7 million, or 63.3%, increase in other income, an $8.9 million, or 35.2%, increase in other service charges and fees, a $7.4 million, or 514.1%, increase in trust fees and a $1.2 million, or 75.8%, increase in the cash value of life insurance. These increases were partially offset by a $9.4 million, or 132.5%, decrease in income for the fair value adjustment for marketable securities resulting from a $2.3 million decrease in the fair value of marketable securities for the nine months ended September 30, 2022 compared to a $7.0 million increase for the nine months ended September 30, 2021, a $7.5 million, or 54.1%, decrease in dividends from FHLB, FRB, FNBB and other, a $6.2 million, or 30.6%, decrease in mortgage lending income and a $1.4 million, or 90.4%, decrease in the gain on sale of SBA loans. Included within other income was $6.7 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 non-interest expense was due to $48.6 million in merger and acquisition expenses, a $47.6 million, or 37.5%, increase in salaries and employee benefits, a $20.0 million, or 41.5%, increase in other operating expenses, a $10.9 million, or 39.7% increase in occupancy and equipment and an $8.1 million, or 45.5%, increase in data processing expense. Included within other operating expense was $2.1 million in TRUPS redemption fees. The increase in interest expense was primarily due to a $19.2 million, or 97.0%, increase in interest on deposits and a $2.1 million, or 14.6%, 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. Income tax expense decreased by $20.6 million, or 26.7%, during the quarter due to the decrease in net income. Our net interest margin decreased from 3.74% for the nine-month period ended September 30, 2021 to 3.67% for the nine-month period ended September 30, 2022. The yield on interest earning assets was 4.08% for the nine-month periods ended September 30, 2022 and 2021, as average interest earning assets increased from $15.71 billion to $20.03 billion. The increase in average earning assets is primarily the result of a $2.01 billion increase in average loans receivable, a $1.78 billion increase in average investment securities, and a $527.4 million increase in average interest-bearing balances due from banks. For the nine months ended September 30, 2022 and 2021, we recognized $12.8 million and $16.2 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 2 basis points. The Company experienced a $26.5 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 8 basis points. Our efficiency ratio was 52.44% for the nine-month period ended September 30, 2022, compared to 39.86% for the same period in 2021. For the first nine months of 2022, our efficiency ratio, as adjusted (non-GAAP), was 45.13%, compared to 41.67% reported for the first nine months of 2021. (See Table 23 for the non-GAAP tabular reconciliation). 59 Table of Contents Our annualized return on average assets was 1.13% for the nine-month period ended September 30, 2022, compared to 1.90% for the same period in 2021. Our annualized return on average assets, as adjusted (non-GAAP), was 1.61% for the nine months ended September 30, 2022, compared to 1.76% for the same period in 2021. (See Table 20 for the non-GAAP tabular reconciliation). Our annualized return on average common equity was 7.71% and 12.32% for the nine-month period ended September 30, 2022, and 2021, respectively. Our annualized return on average common equity, as adjusted (non-GAAP), was 10.91% for the nine months ended September 30, 2022 and 11.44% for the same period in 2021. (See Table 21 for the non-GAAP tabular reconciliation). Financial Condition as of and for the Period Ended September 30, 2022 and December 31, 2021 Our total assets as of September 30, 2022 increased $5.11 billion to $23.16 billion from $18.05 billion reported as of December 31, 2021. The increase in total assets is primarily due to the acquisition of $6.69 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022. Cash and cash equivalents decreased $2.07 billion, for the nine months ended September 30, 2022. Our loan portfolio balance increased to $13.83 billion as of September 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 $98.4 million in organic loan growth. Total deposits increased $4.28 billion to $18.54 billion as of September 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 $694.3 million to $3.46 billion as of September 30, 2022, compared to $2.77 billion as of December 31, 2021. The $694.3 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 $189.6 million in net income for the nine months ended September 30, 2022, partially offset by the $317.9 million in other comprehensive loss, the $94.8 million of shareholder dividends paid and stock repurchases of $50.9 million in 2022. Our non-performing loans were $61.7 million, or 0.45% of total loans as of September 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 decreased slightly to 468.77% as of September 30, 2022, from 471.61% as of December 31, 2021. Non-performing loans from our Arkansas franchise were $10.2 million at September 30, 2022 compared to $13.9 million as of December 31, 2021. Non-performing loans from our Florida franchise were $24.8 million at September 30, 2022 compared to $26.8 million as of December 31, 2021. Non-performing loans from our Texas franchise were $13.7 million at September 30, 2022 compared to zero as of December 31, 2021. Non-performing loans from our Alabama franchise were $204,000 at September 30, 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 September 30, 2022 compared to $1.5 million as of December 31, 2021. Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $11.4 million at September 30, 2022 compared to $7.5 million as of December 31, 2021. As of September 30, 2022, our non-performing assets increased to $62.2 million, or 0.27% 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 $10.2 million at September 30, 2022 compared to $14.4 million as of December 31, 2021. Non-performing assets from our Florida franchise were $25.0 million at September 30, 2022 compared to $27.9 million as of December 31, 2021. Non-performing assets from our Texas franchise were $14.0 million at September 30, 2022 compared to zero as of December 31, 2021. Non-performing assets from our Alabama franchise were $204,000 at September 30, 2022 compared to $470,000 as of December 31, 2021. Non-performing assets from our SPF franchise were $1.4 million at September 30, 2022 compared to $1.5 million as of December 31, 2021. Non-performing assets from our CFG franchise were $11.4 million at September 30, 2022 compared to $7.5 million as of December 31, 2021. The $11.4 million balance of non-accrual loans for our Centennial CFG market consists of two loans that are assessed for credit risk by the Federal Reserve under the Shared National Credit Program. Due to the condition of the two loans, partial charge-offs for a total of $2.2 million were taken on these loans during the third quarter of 2022. The loans are not current on either principal or interest, and we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve. Any interest payments that are received will be applied to the principal balance. 60 Table of Contents 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. 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 $6.1 million, $16.6 million, $4.2 million and $12.2 million for the three and nine months ended September 30, 2022 and 2021, respectively. Centennial CFG loan fees were $4.6 million, $9.7 million, $1.8 million and $7.1 million for the three and nine months ended September 30, 2022 and 2021, respectively. • Trust fees - The Company enters into contracts with its customers to manage assets for investment, and/or transact on their accounts. The Company generally satisfies its performance obligations as services are rendered. The management fees are percentage based, flat, percentage of income or a fixed percentage calculated upon the average balance of assets depending upon account type. Fees are collected on a monthly or annual basis. 61 Table of Contents 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 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. 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 ("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. 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. 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, national retail sales index, housing price indices and rental vacancy rate index. 62 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 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-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. 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. 63 Table of Contents 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 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. 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. 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. 64 Table of Contents 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 approximately $242.2 million of yacht loans. 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. 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 $6.69 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. Our goal in making these decisions is to maximize the return to our investors. 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 September 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 and nine months ended September 30, 2022 and 2021 Our net income increased $33.7 million, or 45.0%, to $108.7 million for the three-month period ended September 30, 2022, from $75.0 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.53 per share for the three-month period ended September 30, 2022 compared to $0.46 per share for the three-month period ended September 30, 2021. 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 September 30, 2022. In addition, the Company determined no additional provision for unfunded commitments was necessary as of September 30, 2022. During the three months ended September 30, 2022, the Company recorded $1.1 million in recoveries on historic losses and a $2.6 million loss for the decrease in the fair value of marketable securities . 65 Table of Contents Our net income decreased $56.1 million, or 22.8%, to $189.6 million for the nine-month period ended September 30, 2022, from $245.7 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.99 per share for the nine-month period ended September 30, 2022 compared to $1.49 per share for the nine-month period ended September 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 $0.42 per share for the nine-month period ended September 30, 2022. 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 September 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 September 30, 2022. During the nine months ended September 30, 2022, the Company recorded $6.7 million in recoveries on historic losses and a $1.4 million special dividend from equity investments, which were partially offset by a $2.3 million loss for the decrease in fair value of marketable securities and $2.1 million in TRUPS redemption fees. 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 (25.1475% 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%. On May 4, 2022, the target rate was increased to 0.75% to 1.00%. On June 15, 2022, the target rate was increased to 1.50% to 1.75%. On July 27, 2022, the target rate was increased to 2.25% to 2.50%. On September 21, 2022, the target rate was increased to 3.00% to 3.25%. Presently, the Federal Reserve has indicated they are anticipating further rate increases. Our net interest margin increased from 3.60% for the three-month period ended September 30, 2021 to 4.05% for the three-month period ended September 30, 2022. The yield on interest earning assets was 4.62% and 3.91% for the three months ended September 30, 2022 and 2021, respectively, as average interest earning assets increased from $16.11 billion to $21.09 billion. The increase in average earning assets is primarily due to a $3.78 billion increase in average loans receivable, and a $2.15 billion increase in average investment securities largely resulting from the acquisition of Happy, partially offset by a $949.6 million decrease in average interest-bearing balances due from banks. For the three months ended September 30, 2022 and 2021, we recognized $4.6 million and $4.9 million, respectively, in total net accretion for acquired loans and deposits. We recognized $943,000 in event interest income for the three months ended September 30, 2022 compared to $3.5 million for the three months ended September 30, 2021, which reduced the net interest margin by five basis points. Our net interest margin decreased from 3.74% for the nine-month period ended September 30, 2021 to 3.67% for the nine-month period ended September 30, 2022. The yield on interest earning assets was 4.08% for both of the nine-month periods ended September 30, 2022 and 2021, as average interest earning assets increased from $15.71 billion to $20.03 billion. The increase in average earning assets is primarily the result of a $2.01 billion increase in average loans receivable, a $1.78 billion increase in average investment securities, and a $527.4 million increase in average interest-bearing balances due from banks. For the nine months ended September 30, 2022 and 2021, we recognized $12.8 million and $16.2 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 2 basis points. The Company experienced a $26.5 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 8 basis points. 66 Table of Contents Net interest income on a fully taxable equivalent basis increased $69.2 million, or 47.3%, to $215.5 million for the three-month period ended September 30, 2022, from $146.4 million for the same period in 2021. This increase in net interest income for the three-month period ended September 30, 2022 was the result of an $86.6 million increase in interest income, partially offset by a $17.4 million increase in interest expense, on a fully taxable equivalent basis. The $86.6 million increase in interest income was primarily the result of the higher level of average interest earning assets due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The increase in earning assets resulted in an increase in interest income of approximately $65.5 million, and the higher yield on earning assets resulted in an increase in interest income of approximately $21.1 million. The $17.4 million increase in interest expense is primarily the result of the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately $14.7 million, and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $2.7 million. Net interest income on a fully taxable equivalent basis increased $110.4 million, or 25.1%, to $549.7 million for the nine-month period ended September 30, 2022, from $439.3 million for the same period in 2021. This increase in net interest income for the nine-month period ended September 30, 2022 was the result of a $132.0 million increase in interest income, partially offset by a $21.6 million increase in interest expense, on a fully taxable equivalent basis. The $132.0 million increase in interest income was primarily the result of the higher level of average interest earning assets due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The increase in earning assets resulted in an increase in interest income of approximately $110.8 million, and the higher yield on earning assets resulted in a increase in interest income of approximately $21.2 million. The $21.6 million increase in interest expense is primarily the result of the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately $11.6 million, and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $10.0 million. Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2022 and 2021, as well as changes in fully taxable equivalent net interest margin for the three and nine months ended September 30, 2022 compared to the same period in 2021. Table 2: Analysis of Net Interest Income Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in thousands) Interest income $ 242,955 $ 157,060 $ 604,871 $ 474,192 Fully taxable equivalent adjustment 2,437 1,748 6,646 5,343 Interest income – fully taxable equivalent 245,392 158,808 611,517 479,535 Interest expense 29,851 12,449 61,861 40,241 Net interest income – fully taxable equivalent $ 215,541 $ 146,359 $ 549,656 $ 439,294 Yield on earning assets – fully taxable equivalent 4.62 % 3.91 % 4.08 % 4.08 % Cost of interest-bearing liabilities 0.83 0.46 0.61 0.50 Net interest spread – fully taxable equivalent 3.79 3.45 3.47 3.58 Net interest margin – fully taxable equivalent 4.05 3.60 3.67 3.74 Table 3: Changes in Fully Taxable Equivalent Net Interest Margin Three Months Ended September 30, Nine Months Ended September 30, 2022 vs. 2021 2022 vs. 2021 (In thousands) Increase in interest income due to change in earning assets $ 65,504 $ 110,827 Increase in interest income due to change in earning asset yields 21,080 21,155 Increase in interest expense due to change in interest-bearing liabilities (2,742) (10,006) Increase in interest expense due to change in interest rates paid on interest-bearing liabilities (14,660) (11,614) Increase in net interest income $ 69,182 $ 110,362 67 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 and nine months ended September 30, 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 September 30, 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 $ 1,965,136 $ 10,763 2.17 % $ 2,914,785 $ 1,117 0.15 % Federal funds sold 1,176 9 3.04 82 — — Investment securities – taxable 4,008,230 28,273 2.80 2,289,680 8,495 1.47 Investment securities – non-taxable 1,292,702 10,370 3.18 862,586 6,416 2.95 Loans receivable 13,822,459 195,977 5.63 10,043,393 142,780 5.64 Total interest-earning assets 21,089,703 245,392 4.62 % 16,110,526 158,808 3.91 % Non-earning assets 2,689,066 1,584,700 Total assets $ 23,778,769 $ 17,695,226 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Interest-bearing liabilities Savings and interest-bearing transaction accounts $ 12,233,755 $ 22,388 0.73 % $ 8,794,657 3,613 0.16 % Time deposits 1,078,112 959 0.35 1,063,500 2,029 0.76 Total interest-bearing deposits 13,311,867 23,347 0.70 9,858,157 5,642 0.23 Federal funds purchased 14 — — — — — Securities sold under agreement to repurchase 126,770 434 1.36 143,937 102 0.28 FHLB and other borrowed funds 400,012 1,917 1.90 400,000 1,917 1.90 Subordinated debentures 442,312 4,153 3.73 370,805 4,788 5.12 Total interest-bearing liabilities 14,280,975 29,851 0.83 % 10,772,899 12,449 0.46 % Non-interest-bearing liabilities Non-interest-bearing deposits 5,779,082 4,091,174 Other liabilities 199,416 120,200 Total liabilities 20,259,473 14,984,273 Stockholders’ equity 3,519,296 2,710,953 Total liabilities and stockholders’ equity $ 23,778,769 $ 17,695,226 Net interest spread 3.79 % 3.45 % Net interest income and margin $ 215,541 4.05 % $ 146,359 3.60 % 68 Table of Contents Nine Months Ended September 30, 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 $ 2,899,620 $ 19,001 0.88 % $ 2,372,227 $ 2,234 0.13 % Federal funds sold 1,593 13 1.09 83 — — Investment securities – taxable 3,442,854 58,294 2.26 1,947,799 21,933 1.51 Investment securities – non-taxable 1,139,628 26,709 3.13 858,440 19,610 3.05 Loans receivable 12,547,275 507,500 5.41 10,532,411 435,758 5.53 Total interest-earning assets 20,030,970 611,517 4.08 % 15,710,960 479,535 4.08 % Non-earning assets 2,308,827 1,594,442 Total assets $ 22,339,797 $ 17,305,402 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Interest-bearing liabilities Savings and interest- bearing transaction accounts $ 11,420,566 $ 36,031 0.42 % $ 8,607,728 12,289 0.19 % Time deposits 1,035,340 2,939 0.38 1,131,538 7,492 0.89 Total interest-bearing deposits 12,455,906 38,970 0.42 9,739,266 19,781 0.27 Federal funds purchased 294 2 0.91 — — — Securities sold under agreement to repurchase 129,076 729 0.76 153,677 399 0.35 FHLB borrowed funds 400,004 5,688 1.90 400,000 5,688 1.90 Subordinated debentures 540,175 16,472 4.08 370,615 14,373 5.19 Total interest-bearing liabilities 13,525,455 61,861 0.61 % 10,663,558 40,241 0.50 % Non-interest-bearing liabilities Non-interest-bearing deposits 5,363,770 3,848,302 Other liabilities 161,402 127,656 Total liabilities 19,050,627 14,639,516 Stockholders’ equity 3,289,170 2,665,886 Total liabilities and stockholders’ equity $ 22,339,797 $ 17,305,402 Net interest spread 3.47 % 3.58 % Net interest income and margin $ 549,656 3.67 % $ 439,294 3.74 % 69 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 and nine months ended September 30, 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 September 30, Nine Months Ended September 30, 2022 over 2021 2022 over 2021 Volume Yield / Rate Total Volume Yield / Rate Total (In thousands) (Decrease) increase in: Interest income: Interest-bearing balances due from banks $ (480) $ 10,126 $ 9,646 $ 603 $ 16,164 $ 16,767 Federal funds sold — 9 9 — 13 13 Investment securities – taxable 8,987 10,791 19,778 21,955 14,406 36,361 Investment securities – non-taxable 3,416 538 3,954 6,578 521 7,099 Loans receivable 53,581 (384) 53,197 81,691 (9,949) 71,742 Total interest income 65,504 21,080 86,584 110,827 21,155 131,982 Interest expense: Interest-bearing transaction and savings deposits 1,909 16,866 18,775 5,049 18,693 23,742 Time deposits 28 (1,098) (1,070) (590) (3,963) (4,553) Federal funds purchased — — — 2 — 2 Securities sold under agreement to repurchase (14) 346 332 (73) 403 330 Subordinated debentures 819 (1,454) (635) 5,618 (3,519) 2,099 Total interest expense 2,742 14,660 17,402 10,006 11,614 21,620 Increase (decrease) in net interest income $ 62,762 $ 6,420 $ 69,182 $ 100,821 $ 9,541 $ 110,362 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, national retail sales index, housing price indices and rental vacancy rate 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" (or "double count"). 70 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. As a result of the Happy acquisition which was completed on April 1, 2022, the Company recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count" and an $11.4 million provision for credit losses on acquired unfunded commitments. 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 September 30, 2022. In addition, the Company determined no additional provision for unfunded commitments was necessary as of September 30, 2022. Net charge-offs to average total loans was 0.15% for the three months ended September 30, 2022 compared to 0.07% for the three months ended September 30, 2021. Net charge-offs to average total loans was 0.10% for the nine months ended September 30, 2022 compared to 0.09% for the nine months ended September 30, 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 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. 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. 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. The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.11 billion, or 88.7% are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S. government-sponsored enterprises and mortgage-backed securities all of which are guaranteed by the U.S. government. Due to the inherent low risk in these U.S. government guaranteed securities, no provision for credit loss was established on this portion of the portfolio. 71 Table of Contents At September 30, 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, and the allowance for credit losses for the HTM portfolio resulting from the Happy acquisition was considered adequate. No additional provision for credit losses was considered necessary for the portfolio. Non-Interest Income Total non-interest income was $43.2 million and $118.5 million for the three and nine months ended September 30, 2022, compared to $29.2 million and $105.6 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 and nine months ended September 30, 2022 and 2021, respectively, as well as changes for the three and nine months ended September 30, 2022 compared to the same period in 2021. Table 6: Non-Interest Income Three Months Ended September 30, 2021 Change from 2020 Nine Months Ended September 30, 2021 Change from 2020 2022 2021 2022 2021 (Dollars in thousands) Service charges on deposit accounts $ 10,756 $ 5,941 $ 4,815 81.0 % $ 26,980 $ 16,059 $ 10,921 68.0 % Other service charges and fees 13,951 8,051 5,900 73.3 34,225 25,318 8,907 35.2 Trust fees 3,980 479 3,501 730.9 8,874 1,445 7,429 514.1 Mortgage lending income 4,179 5,948 (1,769) (29.7) 14,091 20,317 (6,226) (30.6) Insurance commissions 601 586 15 2.6 1,739 1,556 183 11.8 Increase in cash value of life insurance 1,089 509 580 113.9 2,721 1,548 1,173 75.8 Dividends from FHLB, FRB, FNBB & other 1,741 2,661 (920) (34.6) 6,384 13,916 (7,532) (54.1) Gain on sale of SBA loans 58 439 (381) (86.8) 153 1,588 (1,435) (90.4) (Loss) gain on sale of branches, equipment and other assets, net (13) (34) 21 61.8 5 (86) 91 105.8 Gain on OREO, net — 246 (246) (100.0) 487 1,266 (779) (61.5) Gain on securities, net — — — 0.0 — 219 (219) (100.0) Fair value adjustment for marketable securities (2,628) 61 (2,689) (4408.2) (2,304) 7,093 (9,397) (132.5) Other income 9,487 4,322 5,165 119.5 25,096 15,366 9,730 63.3 Total non-interest income $ 43,201 $ 29,209 $ 13,992 47.9 % $ 118,451 $ 105,605 $ 12,846 12.2 % Non-interest income increased $14.0 million, or 47.9%, to $43.2 million for the three months ended September 30, 2022 from $29.2 million for the same period in 2021. The primary factors that resulted in this increase were the increases in other service charges and fees, other income and service charges on deposit accounts. Other factors were changes related to trust fees, mortgage lending income, increase in cash value of life insurance, dividends from FHLB, FRB, FNBB and other and fair value adjustment for marketable securities. Additional details for the three months ended September 30, 2022 on some of the more significant changes are as follows: • The $4.8 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees service charge fees related to the acquisition of Happy. • The $5.9 million increase in other service charges and fees is primarily related to an increase in Centennial CFG property finance loan fees and an increase in interchange fees related to the acquisition of Happy. • The $3.5 million increase in trust fees is primarily related to an increase in trust fees resulting from the acquisition of Happy. 72 Table of Contents • The $1.8 million decrease in mortgage lending income is primarily related to a decrease in volume of secondary market loans from the high volume of loans during 2021. The decrease in volume is due to the increase in interest rates. • The $580,000 increase in cash value of life insurance is primarily related to the increase in bank owned life insurance resulting from the acquisition of Happy. • The $920,000 decrease for dividends from FHLB, FRB, FNBB & other is primarily due to a decrease in special dividends from equity investments, partially offset by an increase in dividend income from marketable securities and an increase in FRB stock holdings related to the acquisition of Happy. • The $2.7 million decrease in the fair value adjustment for marketable securities is due to a reduction in the fair value of marketable securities held by the Company. • The $5.2 million increase in other income is primarily due to a $3.3 million adjustment for equity method investments. Other factors causing this increase were a $404,000 increase in additional income for items previously charged off, which includes the $1.1 million in recoveries on historic losses; a $618,000 increase in investment brokerage fee income; a $307,000 increase in real estate rental income and a $522,000 increase in building rental income related to the acquisition of Happy. Non-interest income increased $12.8 million, or 12.2%, to $118.5 million for the nine months ended September 30, 2022 from $105.6 million for the same period in 2021. The primary factors that resulted in this increase were the increase in service charges on deposit accounts and the increase in other income. Other factors were changes related to service charges and fees, trust fees, mortgage lending income, increase in cash value of life insurance, dividends from FHLB, FRB, FNBB and other, gain on sale of SBA loans and fair value adjustment for marketable securities. Additional details for the nine months ended September 30, 2022 on some of the more significant changes are as follows: • The $10.9 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees and service charge fees resulting from the acquisition of Happy. • The $8.9 million increase in other service charges and fees is primarily related to an increase in Centennial CFG property finance loan fees and an increase in interchange acquisition fees resulting from the acquisition of Happy. • The $7.4 million increase in trust fees is primarily related to an increase in trust fees resulting from the acquisition of Happy. • The $6.2 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 decrease in volume is due to the increase in interest rates. • The $1.2 million increase in cash value of life insurance is primarily related to BOLI acquired in the acquisition of Happy. • The $7.5 million decrease for dividends from FHLB, FRB, FNBB & other is primarily due to a decrease in special dividends from equity investments, partially offset by an increase in FRB stock holdings related to the acquisition of Happy. • The $1.4 million decrease in gains on sales of SBA loans is primarily due to decrease in the volume of SBA loan sales during 2022. • The $779,000 decrease in gains on OREO resulted from a reduction in the level of sales of OREO during 2022. • The $9.4 million decrease in the fair value adjustment for marketable securities is due to a reduction in the fair value of marketable securities held by the Company. • The $9.7 million increase in other income is primarily due to a $3.3 million adjustment for equity method investments and a $3.2 million increase in additional income for items previously charged off, which includes the $6.7 million recoveries on historic losses. Other factors causing this increase were a $2.0 million increase in investment brokerage fee income, a $529,000 increase in real estate rental income and a $1.0 million increase in building rental income related to the acquisition of Happy. 73 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 and nine months ended September 30, 2022 and 2021, as well as changes for the three and nine months ended September 30, 2022 compared to the same period in 2021. Table 7: Non-Interest Expense Three Months Ended September 30, 2022 Change from 2021 Nine Months Ended September 30, 2022 Change from 2021 2022 2021 2022 2021 (Dollars in thousands) Salaries and employee benefits $ 65,290 $ 42,469 $ 22,821 53.7 % $ 174,636 $ 126,990 $ 47,646 37.5 % Occupancy and equipment 15,133 9,305 5,828 62.6 38,533 27,584 10,949 39.7 Data processing expense 8,747 6,024 2,723 45.2 25,880 17,787 8,093 45.5 Merger and acquisition expenses — 1,006 (1,006) (100.0) 49,594 1,006 48,588 4829.8 Other operating expenses: Advertising 2,024 1,204 820 68.1 5,407 3,444 1,963 57.0 Amortization of intangibles 2,477 1,421 1,056 74.3 6,376 4,262 2,114 49.6 Electronic banking expense 3,828 2,521 1,307 51.8 9,718 7,375 2,343 31.8 Directors' fees 354 395 (41) (10.4) 1,133 1,192 (59) (4.9) Due from bank service charges 316 265 51 19.2 982 787 195 24.8 FDIC and state assessment 2,146 1,648 498 30.2 6,204 4,119 2,085 50.6 Insurance 959 749 210 28.0 2,702 2,317 385 16.6 Legal and accounting 1,581 1,050 531 50.6 3,439 2,954 485 16.4 Other professional fees 2,466 1,787 679 38.0 6,329 5,196 1,133 21.8 Operating supplies 681 474 207 43.7 2,430 1,426 1,004 70.4 Postage 614 301 313 104.0 1,476 931 545 58.5 Telephone 593 371 222 59.8 1,314 1,082 232 21.4 Other expense 7,137 4,629 2,508 54.2 20,571 13,015 7,556 58.1 Total non-interest expense $ 114,346 $ 75,619 $ 38,727 51.2 % $ 356,724 $ 221,467 $ 135,257 61.1 % Non-interest expense increased $38.7 million, or 51.2%, to $114.3 million for the three months ended September 30, 2022 from $75.6 million for the same period in 2021. The primary factors that resulted in this increase were the changes related to salaries and employee benefits. Other factors were changes related to occupancy and equipment, data processing expense, merger and acquisition expenses, advertising expenses, amortization of intangibles, electronic banking expense and other expenses. Additional details for the three months ended September 30, 2022 on some of the more significant changes are as follows: • The $22.8 million increase in salaries and employee benefits expense is primarily due to increased salary expenses and insurance expenses related to the acquisition of Happy. • The $5.8 million increase in occupancy and equipment expenses is primarily due to increases in depreciation on buildings, machinery and equipment; utility expenses; lease expense; equipment maintenance and repairs; janitorial expenses; property taxes and other occupancy expenses related to the acquisition of Happy. • The $2.7 million increase in data processing expense is primarily due to increases in telecommunication fees, depreciation of equipment and software, software maintenance and software licensing subscriptions related to the acquisition of Happy. 74 Table of Contents • The $1.0 million decrease in merger and acquisition expense is related to preliminary costs associated with the acquisition of Happy during 2021, and the merger expenses for the current year being recorded during the first and second quarters of 2022. • The $820,000 increase in advertising expense is related to the acquisition of Happy. • The $1.1 million increase in amortization of intangibles is due to the acquisition of Happy. • The $1.3 million increase in electronic banking expense is due to increased debit card processing fees and interchange network expenses resulting from the acquisition of Happy. • The $2.5 million increase in other expenses is primarily related to the acquisition of Happy. Non-interest expense increased $135.3 million, or 61.1%, to $356.7 million for the three months ended September 30, 2022 from $221.5 million for the same period in 2021. The primary factors that resulted in this increase were the changes related to salaries and employee benefits and merger and acquisition expense. Other factors were changes related to occupancy and equipment expense, data processing expense, advertising, advertising expenses, amortization of intangibles, electronic banking expense, FDIC and state assessment fees, other professional fees, operating supplies and other expenses. Additional details for the nine months ended September 30, 2022 on some of the more significant changes are as follows: • The $47.6 million increase in salaries and employee benefits expense is primarily due to the acquisition of Happy. • The $10.9 million increase in occupancy and equipment expenses is primarily due to increases in depreciation on buildings, machinery and equipment; utility expenses; lease expense; equipment maintenance and repairs; janitorial expenses; property taxes and other occupancy expenses related to the acquisition of Happy. • The $8.1 million increase in data processing expense is primarily due to increases in telecommunication fees, computer software fees, licensing fees, mobile banking, internet banking and cash management expenses related to the acquisition of Happy. • The $48.6 million increase in merger and acquisition expense is related to costs associated with the acquisition of Happy. • The $2.0 million increase in advertising expense is related to the acquisition of Happy. • The $2.1 million increase in amortization of intangibles is due to the acquisition of Happy. • The $2.3 million increase in electronic banking expense is due to increased debit card processing fees and interchange network expenses resulting from the acquisition of Happy. • The $2.1 million increase in FDIC and state assessment expense is primarily due to FDIC assessment reductions for 2021 and the acquisition of Happy during the second quarter of 2022. • The $1.1 million increase in other professional fees is primarily due to the acquisition of Happy. • The $1.0 million increase in operating supplies is primarily due to the acquisition of Happy. • The $7.6 million increase in other expenses is primarily related to the acquisition of Happy as well as $2.1 million in TRUPS redemption fees. Income Taxes Income tax expense increased $10.0 million, or 43.3%, to $33.3 million for the three-month period ended September 30, 2022, from $23.2 million for the same period in 2021. Income tax expense decreased $20.6 million, or 26.7%, to $56.6 million for the nine-month period ended September 30, 2022, from $77.2 million for the same period in 2021. The effective income tax rate was 23.43% and 22.98% for the three and nine months ended September 30, 2022, compared to 23.63% and 23.91% for the same periods in 2021. The marginal tax rate was 25.1475% and 25.74% 2022 and 2021, respectively. 75 Table of Contents Financial Condition as of and for the Period Ended September 30, 2022 and December 31, 2021 Our total assets as of September 30, 2022 increased $5.11 billion to $23.16 billion from $18.05 billion reported as of December 31, 2021. The increase in total assets is primarily due to the acquisition of $6.69 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022. Cash and cash equivalents decreased $2.07 billion for the nine months ended September 30, 2022. Our loan portfolio balance increased to $13.83 billion as of September 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 $98.4 million in organic loan growth. Total deposits increased $4.28 billion to $18.54 billion as of September 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 $694.3 million to $3.46 billion as of September 30, 2022, compared to $2.77 billion as of December 31, 2021. The $694.3 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 $189.6 million in net income for the nine months ended September 30, 2022, partially offset by the $317.9 million in other comprehensive loss, the $94.8 million of shareholder dividends paid and stock repurchases of $50.9 million in 2022. Loan Portfolio Loans Receivable Our loan portfolio averaged $13.82 billion and $10.04 billion during the three months ended September 30, 2022 and 2021, respectively. Our loan portfolio averaged $12.55 billion and $10.53 billion during the nine months ended September 30, 2022 and 2021, respectively. Loans receivable were $13.83 billion and $9.84 billion as of September 30, 2022 and December 31, 2021, respectively. From December 31, 2021 to September 30, 2022, the Company experienced an increase of approximately $3.99 billion in loans. 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 $98.4 million in organic loan growth. The $98.4 million in organic loan growth included $156.6 million in loan growth for Centennial CFG and $96.0 million in loan growth within the remaining footprint, which was partially offset by a $154.2 million in decline in PPP loans. As of September 30, 2022, the Company had $10.8 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, Texas, Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas of Arkansas, Florida, Texas, Alabama and New York. Loans receivable were approximately $3.06 billion, $3.62 billion, $3.74 billion, $183.5 million, $1.15 billion and $2.08 billion as of September 30, 2022 in Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG, respectively. As of September 30, 2022, we had approximately $921.3 million of construction land development loans which were collateralized by land. This consisted of approximately $148.9 million for raw land and approximately $772.4 million for land with commercial and/or residential lots. 76 Table of Contents Table 8 presents our loans receivable balances by category as of September 30, 2022 and December 31, 2021. Table 8: Loans Receivable September 30, 2022 December 31, 2021 (In thousands) Real estate: Commercial real estate loans: Non-farm/non-residential $ 5,156,438 $ 3,889,284 Construction/land development 2,232,906 1,850,050 Agricultural 330,748 130,674 Residential real estate loans: Residential 1-4 family 1,704,850 1,274,953 Multifamily residential 525,110 280,837 Total real estate 9,950,052 7,425,798 Consumer 1,120,250 825,519 Commercial and industrial 2,268,750 1,386,747 Agricultural 313,693 43,920 Other 176,566 154,105 Total loans receivable $ 13,829,311 $ 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 September 30, 2022, commercial real estate loans totaled $7.72 billion, or 55.8%, 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, Texas, Alabama, SPF and Centennial CFG markets were $1.95 billion, $2.36 billion, $2.21 billion, $80.7 million, zero and $1.12 billion at September 30, 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 40.0% and 50.1% 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 September 30, 2022, with the remaining 9.9% 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 September 30, 2022, residential real estate loans totaled $2.23 billion, or 16.1%, 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, Texas, Alabama, SPF and Centennial CFG markets were $423.2 million, $930.0 million, $552.1 million, $46.7 million, zero and $278.0 million at September 30, 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. 77 Table of Contents As of September 30, 2022, consumer loans totaled $1.12 billion, or 8.1%, 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, Texas, Alabama, SPF and Centennial CFG markets were $29.3 million, $8.4 million, $27.9 million, $890,000, $1.05 billion and zero at September 30, 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 September 30, 2022, commercial and industrial loans totaled $2.27 billion, or 16.4%, 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, Texas, Alabama, SPF and Centennial CFG markets were $482.6 million, $264.0 million, $691.8 million, $52.6 million, $97.5 million and $680.4 million at September 30, 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 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. 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 $146.0 million and $448,000 in PCD loans, as of September 30, 2022 and December 31, 2021 , respectively. 78 Table of Contents Table 9 sets forth information with respect to our non-performing assets as of September 30, 2022 and December 31, 2021. As of these dates, all non-performing restructured loans are included in non-accrual loans. Table 9: Non-performing Assets As of September 30, 2022 As of December 31, 2021 (Dollars in thousands) Non-accrual loans $ 56,796 $ 47,158 Loans past due 90 days or more (principal or interest payments) 4,898 3,035 Total non-performing loans 61,694 50,193 Other non-performing assets Foreclosed assets held for sale, net 365 1,630 Other non-performing assets 104 — Total other non-performing assets 469 1,630 Total non-performing assets $ 62,163 $ 51,823 Allowance for credit losses to non-accrual loans 509.20 % 501.96 % Allowance for credit losses to non-performing loans 468.77 471.61 Non-accrual loans to total loans 0.41 0.48 Non-performing loans to total loans 0.45 0.51 Non-performing assets to total assets 0.27 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 $61.7 million and $50.2 million as of September 30, 2022 and December 31, 2021, respectively. Non-performing loans at September 30, 2022 were $10.2 million, $24.8 million, $13.7 million, $204,000, $1.4 million and $11.4 million in the Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets, respectively. The $11.4 million balance of non-accrual loans for our Centennial CFG market consists of two loans that are assessed for credit risk by the Federal Reserve under the Shared National Credit Program. Due to the condition of the two loans, partial charge-offs for a total of $2.2 million were taken on these loans during the third quarter of 2022. The loans are not current on either principal or interest, and we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve. Any interest payments that are received will be applied to the principal balance. 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 September 30, 2022, we had $6.2 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 $3.5 million and our Arkansas market contains $2.7 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. 79 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 September 30, 2022 and December 31, 2021, the amount of TDRs was $7.6 million and $7.5 million, respectively. As of September 30, 2022 and December 31, 2021, 81.1% and 85.7%, respectively, of all restructured loans were performing to the terms of the restructure. Total foreclosed assets held for sale were $365,000 as of September 30, 2022, compared to $1.6 million as of December 31, 2021 for a decrease of $1.3 million. The foreclosed assets held for sale as of September 30, 2022 are comprised of zero assets located in Arkansas, $260,000 located in Florida, $105,000 located in Texas and zero from Alabama, SPF and Centennial CFG. Table 10 shows the summary of foreclosed assets held for sale as of September 30, 2022 and December 31, 2021. Table 10: Foreclosed Assets Held For Sale As of September 30, 2022 As of December 31, 2021 (In thousands) Commercial real estate loans Non-farm/non-residential $ 49 $ 536 Construction/land development 47 834 Residential real estate loans Residential 1-4 family 269 260 Total foreclosed assets held for sale $ 365 $ 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 September 30, 2022 and December 31, 2021, impaired loans were $229.3 million and $331.5 million, respectively. The amortized cost balance for loans with a specific allocation decreased from $284.0 million to $169.7 million, and the specific allocation for impaired loans decreased by approximately $21.9 million for the period ended September 30, 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 September 30, 2022, our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets accounted for approximately $24.2 million, $132.3 million, $59.8 million, $204,000, $1.4 million and $11.4 million of the impaired loans, respectively. 80 Table of Contents Past Due and Non-Accrual Loans Table 11 shows the summary of non-accrual loans as of September 30, 2022 and December 31, 2021: Table 11: Total Non-Accrual Loans As of September 30, 2022 As of December 31, 2021 (In thousands) Real estate: Commercial real estate loans Non-farm/non-residential $ 18,621 $ 11,923 Construction/land development 1,895 1,445 Agricultural 772 897 Residential real estate loans Residential 1-4 family 16,549 16,198 Multifamily residential 156 156 Total real estate 37,993 30,619 Consumer 1,778 1,648 Commercial and industrial 16,431 13,875 Agricultural & other 594 1,016 Total non-accrual loans $ 56,796 $ 47,158 If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $1.1 million and $662,000, respectively, would have been recorded for the three-month periods ended September 30, 2022 and 2021. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $3.2 million and $2.0 million, respectively, would have been recorded for the nine month periods ended September 30, 2022 and 2021. The interest income recognized on non-accrual loans for the three and nine months ended September 30, 2022 and 2021 was considered immaterial. Table 12 shows the summary of accruing past due loans 90 days or more as of September 30, 2022 and December 31, 2021: Table 12: Loans Accruing Past Due 90 Days or More As of September 30, 2022 As of December 31, 2021 (In thousands) Real estate: Commercial real estate loans Non-farm/non-residential $ 290 $ 2,225 Construction/land development 34 — Residential real estate loans Residential 1-4 family 1,445 701 Total real estate 1,769 2,926 Consumer 15 2 Commercial and industrial 2,901 107 Other 213 — Total loans accruing past due 90 days or more $ 4,898 $ 3,035 Our ratio of total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.45% and 0.51% at September 30, 2022 and December 31, 2021, respectively. 81 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 the 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, national retail sales index, housing price indices and rental vacancy rate 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 ("Q-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. 82 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 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. 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. 83 Table of Contents 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 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 $229.3 million and $331.5 million in collateral-dependent impaired loans for the periods ended September 30, 2022 and December 31, 2021 , respectively. Loans Collectively Evaluated for Impairment . Loans receivable collectively evaluated for impairment increased by approximately $4.10 billion from $9.54 billion at December 31, 2021 to $13.64 billion at September 30, 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 1.90% and 1.94% at September 30, 2022 and December 31, 2021, respectively. Charge-offs and Recoveries. Total charge-offs increased to $6.3 million for the three months ended September 30, 2022, compared to $2.5 million for the same period in 2021. Total charge-offs increased to $11.9 million for the nine months ended September 30, 2022, compared to $8.5 million for the same period in 2021. Total recoveries were $1.2 million and $691,000 for the three months ended September 30, 2022 and 2021, respectively. Total recoveries were $2.4 million and $1.7 million for the nine months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022, net charge-offs were $295,000 for Arkansas, $1.6 million for Florida, $1.0 million for Texas, $11,000 for Alabama and $2.2 million for Centennial CFG, partially offset by net recoveries of $3,000 for SPF. These equal a net charge-off position of $5.1 million. For the nine months ended September 30, 2022, net charge-offs were $825,000 for Arkansas, $4.3 million for Florida, $1.7 million for Texas, $47,000 for Alabama, $392,000 for SPF and $2.2 million for Centennial CFG. These equal a net charge-off position of $9.5 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. 84 Table of Contents Table 13 shows the allowance for credit losses, charge-offs and recoveries as of and for the three and nine months ended September 30, 2022 and 2021. Table 13: Analysis of Allowance for Credit Losses Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in thousands) Balance, beginning of period $ 294,267 $ 240,451 $ 236,714 $ 245,473 Allowance for credit losses on PCD loans - Happy acquisition — — 16,816 — Loans charged off Real estate: Commercial real estate loans: Non-farm/non-residential — 9 — 604 Construction/land development 11 — 11 — Agricultural — — — 42 Residential real estate loans: Residential 1-4 family 48 220 337 543 Total real estate 59 229 348 1,189 Consumer 47 21 2,284 143 Commercial and industrial 4,536 1,682 5,952 5,892 Other 1,671 537 3,304 1,315 Total loans charged off 6,313 2,469 11,888 8,539 Recoveries of loans previously charged off Real estate: Commercial real estate loans: Non-farm/non-residential 778 44 856 112 Construction/land development 8 8 325 47 Residential real estate loans: Residential 1-4 family 45 388 94 554 Total real estate 831 440 1,275 713 Consumer 42 19 90 51 Commercial and industrial 189 80 519 382 Other 187 152 507 593 Total recoveries 1,249 691 2,391 1,739 Net loans charged off 5,064 1,778 9,497 6,800 Provision for credit loss - acquired loans — — 45,170 — Balance, September 30 $ 289,203 $ 238,673 $ 289,203 $ 238,673 Net charge-offs to average loans receivable 0.15 % 0.07 % 0.10 % 0.09 % Allowance for credit losses to total loans 2.09 2.41 2.09 2.41 Allowance for credit losses to net charge-offs 1,439.47 3,383.50 2,277.65 2,625.21 85 Table of Contents Table 14 presents the allocation of allowance for credit losses as of September 30, 2022 and December 31, 2021. Table 14: Allocation of Allowance for Credit Losses As of September 30, 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 $ 90,655 37.3 % $ 86,910 39.5 % Construction/land development 34,687 16.1 28,415 18.8 Agricultural residential real estate loans 1,758 2.4 308 1.3 Residential real estate loans: Residential 1-4 family 45,074 12.3 45,364 13.0 Multifamily residential 4,747 3.8 3,094 2.9 Total real estate 176,921 71.9 164,091 75.5 Consumer 20,513 8.1 16,612 8.4 Commercial and industrial 88,143 16.4 52,910 14.1 Agricultural 1,278 2.3 152 0.4 Other 2,348 1.3 2,949 1.6 Total $ 289,203 100.0 % $ 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 5.2 years as of September 30, 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 September 30, 2022, we had $1.25 billion of held-to-maturity securities. As of September 30, 2022, $1.11 billion, or 88.7%, was invested in obligations of state and political subdivisions, $43.0 million, or 3.4%, were invested in obligations of U.S. Government-sponsored enterprises and $98.5 million, or 7.9%, were invested in mortgage-backed securities. The U.S. government-sponsored enterprises and mortgage-backed securities are guaranteed by the U.S. government. 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 (loss) 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 $4.09 billion and $3.12 billion as September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, $1.94 billion, or 47.5%, 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, $900.2 million, or 22.0%, of our available-for-sale securities portfolio as of September 30, 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 $682.0 million, or 16.7%, invested in obligations of U.S. Government-sponsored enterprises as of September 30, 2022, compared to $433.0 million, or 13.9%, of our available-for-sale securities as of December 31, 2021. Also, we had approximately $564.3 million, or 13.8%, invested in other securities as of September 30, 2022, compared to $151.9 million, or 4.9% of our available-for-sale securities as of December 31, 2021. 86 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 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. 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. The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.11 billion, or 88.7% are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S. government-sponsored enterprises and mortgage-backed securities all of which are guaranteed by the U.S. government. Due to the inherent low risk in these U.S. government guaranteed securities, no provision for credit loss was established on this portion of the portfolio. At September 30, 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, and the allowance for credit losses for the HTM portfolio was considered adequate. No additional provision for credit losses was considered necessary for the portfolio. See Note 3 to the Condensed Notes to Consolidated Financial Statements for the carrying value and fair value of investment securities. Deposits Our deposits averaged $19.09 billion and $17.82 billion for the three and nine months ended September 30, 2022, respectively. Our deposits averaged $13.95 billion and $13.59 billion for the three and nine months ended September 30, 2021, respectively. Total deposits were $18.54 billion as of September 30, 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. 87 Table of Contents Table 15 reflects the classification of the brokered deposits as of September 30, 2022 and December 31, 2021. Table 15: Brokered Deposits September 30, 2022 December 31, 2021 (In thousands) Insured Cash Sweep and Other Transaction Accounts 546,643 625,704 Total Brokered Deposits $ 546,643 $ 625,704 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%. On May 4, 2022, the target rate was increased to 0.75% to 1.00%. On June 15, 2022, the target rate was increased to 1.50% to 1.75%. On July 27, 2022, the target rate was increased to 2.25% to 2.50%. On September 21, 2022, the target rate was increased to 3.00% to 3.25%. Presently, the Federal Reserve has indicated they are anticipating further rate increases. 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 and nine months ended September 30, 2022 and 2021. Table 16: Average Deposit Balances and Rates Three Months Ended September 30, 2022 2021 Average Amount Average Rate Paid Average Amount Average Rate Paid (Dollars in thousands) Non-interest-bearing transaction accounts $ 5,779,082 — % $ 4,091,174 — % Interest-bearing transaction accounts 10,759,379 0.81 7,895,663 0.18 Savings deposits 1,474,376 0.09 898,994 0.06 Time deposits: $100,000 or more 654,550 0.37 708,524 0.94 Other time deposits 423,562 0.32 354,976 0.40 Total $ 19,090,949 0.49 % $ 13,949,331 0.16 % Nine Months Ended September 30, 2022 2021 Average Amount Average Rate Paid Average Amount Average Rate Paid (Dollars in thousands) Non-interest-bearing transaction accounts $ 5,363,770 — % $ 3,848,302 — % Interest-bearing transaction accounts 10,058,021 0.47 7,754,622 0.21 Savings deposits 1,362,545 0.07 853,106 0.06 Time deposits: $100,000 or more 635,555 0.43 767,594 1.06 Other time deposits 399,785 0.30 363,944 0.51 Total $ 17,819,676 0.29 % $ 13,587,568 0.19 % 88 Table of Contents 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 decreased $19.3 million, or 13.7%, from $140.9 million as of December 31, 2021 to $121.6 million as of September 30, 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 September 30, 2022 and December 31, 2021 . The Company had no other borrowed funds as of September 30, 2022 or December 31, 2021. At September 30, 2022 all of the outstanding balances were classified as short-term advances as the FHLB has provided notice of their intention to call all of the Company's FHLB borrowed funds within a year due to the low interest rates on the advances. At 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%. As noted above, 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 $440.6 million and $371.1 million as of September 30, 2022 and December 31, 2021, respectively. On April 1, 2022, the Company acquired $23.2 million in trust preferred securities from Happy which were currently callable without penalty based on the terms of the specific agreements. During the second and third quarters of 2022, the Company redeemed, without penalty, the $23.2 million of the trust preferred securities acquired from Happy. In addition, during the second and third quarters, the Company also redeemed, without penalty, the $73.3 million of trust preferred securities held prior to the Happy acquisition. As a result, the Company no longer holds any trust preferred securities. On April 1, 2022, the Company acquired $140.0 million of subordinated notes from Happy. These notes have a maturity date of July 31, 2030 and carry a fixed rate of 5.500% for the first five years. Thereafter, the notes bear interest at 3-month Secured Overnight Funding Rate (SOFR) plus 5.345% resetting quarterly. Interest payments are due semi-annually and the notes include a right of prepayment without penalty on or after July 31, 2025. 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. 89 Table of Contents 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 were unsecured, subordinated debt obligations and would have matured on April 15, 2027. From and including the date of issuance to, but excluding April 15, 2022, the 2027 Notes bore 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 were to 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 was less than zero, then three-month LIBOR would have been deemed to be zero. The Company, beginning with the interest payment date of April 15, 2022, and on any interest payment date thereafter, was permitted to redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. On April 15, 2022, the Company completed the payoff of the 2027 Notes in aggregate principal amount of $300.0 million. 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. Stockholders’ Equity Stockholders’ equity increased $694.3 million to $3.46 billion as of September 30, 2022, compared to $2.77 billion as of December 31, 2021. The $694.3 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 $189.6 million in net income for the nine months ended September 30, 2022, partially offset by the $317.9 million in other comprehensive loss, the $94.8 million of shareholder dividends paid and stock repurchases of $50.9 million in 2022. As of September 30, 2022 and December 31, 2021, our equity to asset ratio was 14.94% and 15.32%, respectively. Book value per share was $16.94 as of September 30, 2022, compared to $16.90 as of December 31, 2021, a 0.3% annualized increase. 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 September 30, 2022 and 2021, respectively. The common stock dividend payout ratio for the three months ended September 30, 2022 and 2021 was 31.1% and 30.6%, respectively. The common stock dividend payout ratio for the nine months ended September 30, 2022 and 2021 was 50.0% and 28.2%, respectively. On October 21, 2022, the Board of Directors declared a regular $0.165 per share quarterly cash dividend payable December 7, 2022, to shareholders of record November 16, 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 2,258,531 shares with a weighted-average stock price of $22.50 per share during the first nine months of 2022. The remaining balance available for repurchase was 19,832,134 shares at September 30, 2022. 90 Table of Contents 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. Basel III limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5% of common equity Tier 1 capital to risk-weighted assets, which is in addition to the amount necessary to meet its minimum risk-based capital requirements. 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 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 is 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 September 30, 2022 and December 31, 2021, we met all regulatory capital adequacy requirements to which we were subject. On January 18, 2022, the Company completed an underwritten public offering of the 2032 Notes in aggregate principal amount of $300.0 million. 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 1, 2022, the Company acquired $140.0 million of subordinated notes from Happy. These notes have a maturity date of July 31, 2030 and carry a fixed rate of 5.500% for the first five years. Thereafter, the notes bear interest at 3-month Secured Overnight Funding Rate (SOFR) plus 5.345% resetting quarterly. Interest payments are due semi-annually and the notes include a right of prepayment without penalty on or after July 31, 2025. On April 3, 2017, the Company completed an underwritten public offering of the 2027 Notes in aggregate principal amount of $300.0 million. The 2027 Notes were unsecured, subordinated debt obligations and would have matured on April 15, 2027. On April 15, 2022, the Company completed the payoff of the 2027 Notes in aggregate principal amount of $300.0 million. 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. 91 Table of Contents 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. Table 17 presents our risk-based capital ratios on a consolidated basis as of September 30, 2022 and December 31, 2021. Table 17: Risk-Based Capital As of September 30, 2022 As of December 31, 2021 (Dollars in thousands) Tier 1 capital Stockholders’ equity $ 3,460,015 $ 2,765,721 ASC 326 transitional period adjustment 24,369 55,143 Goodwill and core deposit intangibles, net (1,454,837) (997,605) Unrealized loss on available-for-sale securities 307,455 (10,462) Total common equity Tier 1 capital 2,337,002 1,812,797 Qualifying trust preferred securities — 71,270 Total Tier 1 capital 2,337,002 1,884,067 Tier 2 capital Allowance for credit losses 289,203 236,714 ASC 326 transitional period adjustment (24,369) (55,143) Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets) (39,796) (33,514) Qualifying allowance for credit losses 225,038 148,057 Qualifying subordinated notes 440,568 299,824 Total Tier 2 capital 665,606 447,881 Total risk-based capital $ 3,002,608 $ 2,331,948 Average total assets for leverage ratio $ 22,561,638 $ 16,960,683 Risk weighted assets $ 17,929,429 $ 11,793,539 Ratios at end of period Common equity Tier 1 capital 13.03 % 15.37 % Leverage ratio 10.36 11.11 Tier 1 risk-based capital 13.03 15.98 Total risk-based capital 16.75 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 92 Table of Contents 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. 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. 93 Table of Contents 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in thousands) GAAP net income available to common shareholders (A) $ 108,705 $ 74,992 $ 189,575 $ 245,664 Pre-tax adjustments: Merger and acquisition expenses — 1,006 49,594 1,006 Initial provision for credit losses - acquisition — — 58,585 — Fair value adjustment for marketable securities 2,628 (61) 2,304 (7,093) Special dividend from equity investment — (2,227) (1,434) (12,500) TRUPS redemption fees — — 2,081 — Recoveries on historic losses (1,065) — (6,706) (5,107) Gain on securities — — — (219) Total pre-tax adjustments 1,563 (1,282) 104,424 (23,913) Tax-effect of adjustments (1) 393 (587) 25,569 (6,412) Total adjustments after-tax (B) 1,170 (695) 78,855 (17,501) Earnings, as adjusted (C) $ 109,875 $ 74,297 $ 268,430 $ 228,163 Average diluted shares outstanding (D) 205,135 164,603 191,941 165,050 GAAP diluted earnings per share: A/D $ 0.53 $ 0.46 $ 0.99 $ 1.49 Adjustments after-tax: B/D 0.01 (0.01) 0.41 (0.11) Diluted earnings per common share excluding adjustments: C/D $ 0.54 $ 0.45 $ 1.40 $ 1.38 (1) Blended statutory rate of 25.1475% for 2022 and 25.74% for 2021 We had $1.46 billion, $998.1 million, and $999.5 million in total goodwill, core deposit intangibles and other intangible assets as of September 30, 2022, December 31, 2021 and September 30, 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 September 30, 2022 As of December 31, 2021 (In thousands, except per share data) Book value per share: A/B $ 16.94 $ 16.90 Tangible book value per share: (A-C-D)/B 9.82 10.80 (A) Total equity $ 3,460,015 $ 2,765,721 (B) Shares outstanding 204,219 163,699 (C) Goodwill 1,394,353 973,025 (D) Core deposit intangibles 60,932 25,045 94 Table of Contents Table 20: Return on Average Assets Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in thousands) Return on average assets: A/D 1.81 % 1.68 % 1.13 % 1.90 % Return on average assets, as adjusted: (A+C)/D 1.83 1.67 1.61 1.76 Return on average assets excluding intangible amortization: B/(D-E) 1.97 1.81 1.23 2.04 (A) Net income $ 108,705 $ 74,992 $ 189,575 $ 245,664 Intangible amortization after-tax 1,854 1,055 4,757 3,164 (B) Earnings excluding intangible amortization $ 110,559 $ 76,047 $ 194,332 $ 248,828 (C) Adjustments after-tax $ 1,170 $ (695) $ 78,855 $ (17,501) (D) Average assets 23,778,769 17,695,226 22,339,797 17,305,402 (E) Average goodwill, core deposits and other intangible assets 1,459,034 1,000,175 1,294,971 1,001,585 Table 21: Return on Average Equity Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in thousands) Return on average equity: A/D 12.25 % 10.97 % 7.71 % 12.32 % Return on average common equity, as adjusted: (A+C)/D 12.39 10.87 10.91 11.44 Return on average tangible common equity: A/(D-E) 20.93 17.39 12.71 19.74 Return on average tangible equity excluding intangible amortization: B/(D-E) 21.29 17.64 13.03 19.99 Return on average tangible common equity, as adjusted: (A+C)/(D-E) 21.16 17.23 18.00 18.33 (A) Net income $ 108,705 $ 74,992 $ 189,575 $ 245,664 (B) Earnings excluding intangible amortization 110,559 76,047 194,332 248,828 (C) Adjustments after-tax 1,170 (695) 78,855 (17,501) (D) Average equity 3,519,296 2,710,953 3,289,170 2,665,886 (E) Average goodwill, core deposits and other intangible assets 1,459,034 1,000,175 1,294,971 1,001,585 Table 22: Tangible Equity to Tangible Assets As of September 30, 2022 As of December 31, 2021 (Dollars in thousands) Equity to assets: B/A 14.94 % 15.32 % Tangible equity to tangible assets: (B-C-D)/(A-C-D) 9.24 10.36 (A) Total assets $ 23,157,370 $ 18,052,138 (B) Total equity 3,460,015 2,765,721 (C) Goodwill 1,394,353 973,025 (D) Core deposit intangibles 60,932 25,045 95 Table of Contents 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. Table 23: Efficiency Ratio, As Adjusted Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in thousands) Net interest income (A) $ 213,104 $ 144,611 $ 543,010 $ 433,951 Non-interest income (B) 43,201 29,209 118,451 105,605 Non-interest expense (C) 114,346 75,619 356,724 221,467 FTE Adjustment (D) 2,437 1,748 6,646 5,343 Amortization of intangibles (E) 2,477 1,421 6,376 4,262 Adjustments: Non-interest income: Fair value adjustment for marketable securities $ (2,628) $ 61 $ (2,304) $ 7,093 Special dividend from equity investment — 2,227 1,434 12,500 Gain on OREO, net — 246 487 1,266 Gain (loss) on branches, equipment and other assets, net (13) (34) 5 (86) Gain on securities, net — — — 219 Recoveries on historic losses 1,065 — 6,706 5,107 Total non-interest income adjustments (F) $ (1,576) $ 2,500 $ 6,328 $ 26,099 Non-interest expense: Merger and acquisition expenses — 1,006 49,594 1,006 TRUPS redemption fees — — 2,081 — Total non-core non-interest expense (G) $ — $ 1,006 $ 51,675 $ 1,006 Efficiency ratio (reported): ((C-E)/(A+B+D)) 43.24 % 42.26 % 52.44 % 39.86 % Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F)) 42.97 42.29 45.13 41.67 96 Table of Contents Recently Issued Accounting Pronouncements See Note 21 to the Condensed Notes to Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.