What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 407 added, 239 removed, 914 unchanged (41% of the section changed)

4 unchanged sentences

We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly-owned bank subsidiary, Centennial Bank (sometimes referred to as “Centennial” or the “Bank”).

As of March 31, 2023, we had, on a consolidated basis, total assets of $22.52 billion, loans receivable, net of allowance for credit losses of $14.10 billion, total deposits of $17.45 billion, and stockholders’ equity of $3.63 billion.

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

As of June 30, 2023, we had, on a consolidated basis, total assets of $22.13 billion, loans receivable, net of allowance for credit losses of $13.90 billion, total deposits of $17.00 billion, and stockholders’ equity of $3.65 billion.

We generate the majority 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.

4 unchanged sentences

Key Financial Measures

As of or for the Three Months Ended March 31,

(Dollars in thousands, except per share data)

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

2023 2022 2023 2022

(Dollars in thousands, except per share data) (Dollars in thousands, except per share data)

Total assets $ 22,126,429 $ 24,253,168 $ 22,126,429 $ 24,253,168

8 unchanged sentences

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

10.87 9.92 10.87 9.92

Annualized net interest margin - FTE 4.28% 3.64% 4.33% 3.46%

1 unchanged sentence

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

44.83 46.02 44.12 46.53

Return on average assets 1.90 0.26 1.87 0.75

2 unchanged sentences

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

Results of Operations for the Three Months Ended March 31, 2023 and 2022

Our net income increased $38.1 million, or 58.7%, to $103.0 million for the three-month period ended March 31, 2023, from $64.9 million for the same period in 2022.

On a diluted earnings per share basis, our earnings were $0.51 per share for the three-month period ended March 31, 2023 compared to $0.40 per share for the three-month period ended March 31, 2022.

The Company recorded a $1.2 million provision for credit losses for the quarter ended March 31, 2023.

However, the Company determined that a provision for unfunded commitments was not necessary as of March 31, 2023 as the current level was considered adequate.

During the three months ended March 31, 2023, the Company recorded $3.5 million in recoveries on historic losses and an $11.4 million decrease in the fair value of marketable securities.

Total interest income increased by $140.0 million, or 96.6%, and non-interest income increased by $3.5 million, or 11.4%.

This was partially offset by a $56.6 million, or 411.4%, increase in total interest expense and a $37.7 million, or 49.1%, 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 $107.6 million, or 83.1%, increase in loan interest income, a $29.5 million, or 213.7%, increase in investment income and a $3.0 million, or 180.0%, increase in interest income on deposits at other banks.

The increase in non-interest income was primarily due to a $4.3 million, or 747.4%, increase in trust fees, a $4.1 million, or 53.6%, increase in other services charges and fees, a $3.9 million, or 49.6%, increase in other income, a $3.7 million, or 60.3%, increase in service charges on deposit accounts, and a $2.1 million, or 300.3%, increase in dividends from FHLB, FRB, FNBB and other.

These increases were partially offset by a $13.5 million, or 636.8%, decrease in the fair value adjustment for marketable securities resulting from an $11.4 million decrease in the fair value of marketable securities, and a $1.3 million, or 34.3%, decrease in mortgage lending income.

Included within other income was $3.5 million in recoveries on historic losses.

The increase in interest expense was primarily due to a $54.3 million, or 1,108.9%, increase in interest on deposits and a $4.3 million, or 230.1%, increase in interest on FHLB and other borrowed funds which was partially offset by a $2.8 million, or 40.0%, decrease in interest on subordinated debentures.

The increase in non-interest expense was due to a $20.9 million, or 48.1%, increase in salaries and employee benefits, a $9.9 million, or 61.0%, increase in other operating expenses, a $5.8 million, or 63.5%, increase in occupancy and equipment and a $1.9 million, or 27.4%, increase in data processing expense, partially offset by a decrease of $863,000 in merger and acquisition expenses.

Results of Operations for the Three Months Ended June 30, 2023 and 2022

Our net income increased $89.3 million, or 558.8%, to $105.3 million for the three-month period ended June 30, 2023, from $16.0 million for the same period in 2022.

On a diluted earnings per share basis, our earnings were $0.52 per share for the three-month period ended June 30, 2023 compared to $0.08 per share for the three-month period ended June 30, 2022.

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

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

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

The Company recorded a $4.0 million provision for credit losses for the quarter ended June 30, 2023.

This consisted of a $2.3 million provision for credit losses on loans and a $1.7 million provision for credit losses on available-for-sale investment securities.

The Company determined that a provision for unfunded commitments was not necessary as of June 30, 2023 as the current level was considered adequate.

During the three months ended June 30, 2023, the Company recorded $2.8 million in bank owned life insurance ("BOLI") death benefits and a $783,000 increase in the fair value of marketable securities.

Total interest income increased by $72.6 million, or 33.5%, non-interest income increased by $4.9 million, or 11.1%, and non-interest expense decreased $49.2 million, or 29.73%.

This was partially offset by a $63.7 million, or 349.1%, increase in total interest expense.

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

The increase in interest income resulted from a $61.4 million, or 33.8%, increase in loan interest income and a $14.0 million, or 48.9%, increase in investment income, partially offset by a $2.8 million, or 43.2%, decrease in interest income on deposits at other banks.

The increase in non-interest income was primarily due to a $7.5 million, or 97.0%, increase in other income and a $2.6 million, or 143.5%, increase in the fair value adjustment for marketable securities, partially offset by a $3.3 million, or 55.8%, decrease in mortgage lending income and a $1.0 million, or 25.9%, decrease in dividends from FHLB, FRB, FNBB and other.

The increase in interest expense was primarily due to a $59.4 million, or 553.8%, increase in interest on deposits and a $4.7 million, or 247.9%, increase in interest on FHLB and other borrowed funds, partially offset by a $1.3 million, or 24.2%, decrease in interest on subordinated debentures.

The decrease in non-interest expense was due to a decrease of $48.7 million, or 100.00%, in merger and acquisition expenses, a $1.3 million, or 1.9%, decrease in salaries and employee benefits and a $943,000, or 9.3%, decrease in data processing expense, partially offset by a $1.1 million, or 4.0%, increase in other operating expenses and a $667,000, or 4.7%, increase in occupancy and equipment.

Income tax expense increased by $28.3 million, or 859.8%, during the quarter due to an increase in net income.

Our net interest margin increased from 3.21% for the three-month period ended March 31, 2022 to 4.37% for the three-month period ended March 31, 2023.

The yield on interest earning assets was 5.79% and 3.55% for the three months ended March 31, 2023 and 2022, respectively, as average interest earning assets increased from $16.77 billion to $20.06 billion.

The increase in average interest earning assets is primarily due to a $4.54 billion increase in average loans receivable and a $1.82 billion increase in average investment securities, largely resulting from the acquisition of Happy, partially offset by a $3.07 billion decrease in average interest-bearing balances due from banks.

For the three months ended March 31, 2023 and 2022, we recognized $3.2 million and $3.1 million, respectively, in total net accretion for acquired loans and deposits.

We recognized $2.1 million in event interest income for the three months ended March 31, 2023 compared to $1.4 million for the three months ended March 31, 2022 which increased the net interest margin by one basis point.

The overall increase in the net interest margin was due to an increase in interest income due to an increase in both average earning assets at higher yields, which was partially offset by an increase in interest expense due to an increase in average interest-bearing liabilities at higher interest rates primarily as a result of the Happy acquisition and the current rising interest rate environment.

Our efficiency ratio was 44.80% for the three months ended March 31, 2023, compared to 46.15% for the same period in 2022.

Our net interest margin increased from 3.64% for the three-month period ended June 30, 2022 to 4.28% for the three-month period ended June 30, 2023.

The yield on interest earning assets was 5.96% and 3.97% for the three months ended June 30, 2023 and 2022, respectively, as average interest earning assets decreased from $22.18 billion to $19.58 billion.

The decrease in average interest earning assets is primarily due to a $2.93 billion decrease in average interest-bearing balances due from banks and $88.7 million decrease in average investment securities, partially offset by a $421.0 million increase in average loans receivable.

For the three months ended June 30, 2023 and 2022, we recognized $2.7 million and $5.2 million, respectively, in total net accretion for acquired loans and deposits.

The reduction in accretion was dilutive to the net interest margin by five basis points.

We recognized $1.3 million in event interest income for the three months ended June 30, 2023 compared to $1.4 million for the three months ended June 30, 2022 .

The overall increase in the net interest margin was due to a decrease in average interest-bearing cash balances as well as an increase in interest income from higher yields on average interest-earning assets, which was partially offset by an increase in interest expense due to the higher yields on average interest-bearing liabilities as a result of the current rising interest rate environment.

Our efficiency ratio was 44.00% for the three months ended June 30, 2023, compared to 66.31% for the same period in 2022.

For the first quarter of 2023, our efficiency ratio, as adjusted (non-GAAP), was 44.83%, compared to 46.02% reported for the first quarter of 2022.

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

Our annualized return on average assets was 1.84% for the three months ended March 31, 2023, compared to 1.43% for the same period in 2022.

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

Our annualized return on average common equity was 11.70% and 9.58% for the three months ended March 31, 2023, and 2022, respectively.

Our annualized return on average assets was 1.90% for the three months ended June 30, 2023, compared to 0.26% for the same period in 2022.

(See Table 20 for the related non-GAAP financial measures and tabular reconciliation).

Our annualized return on average common equity was 11.63% and 1.78% for the three months ended June 30, 2023, and 2022, respectively.

(See Table 21 for the related non-GAAP financial measures and tabular reconciliation).

Results of Operations for the Six Months Ended June 30, 2023 and 2022

Our net income increased $127.4 million, or 157.5%, to $208.2 million for the six months ended June 30, 2023, from $80.9 million for the same period in 2022.

On a diluted earnings per share basis, our earnings were $1.02 per share for the six months ended June 30, 2023 compared to $0.44 per share for the six months ended June 30, 2022.

As a result of the acquisition of Happy, 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 $0.44 per share for the six-month period ended June 30, 2022.

The Company recorded a $5.2 million provision for credit losses for the six months ended June 30, 2023.

This consisted of a $3.5 million provision for credit losses on loans and a $1.7 million provision for credit losses on available-for-sale investment securities.

The Company determined that a provision for unfunded commitments was not necessary as of June 30, 2023 as the current level was considered adequate.

During the six months ended June 30, 2023, the Company recorded a $10.6 million decrease in the fair value of marketable securities, $3.5 million in recoveries on historic losses and $2.8 million in BOLI death benefits.

Total interest income increased by $212.7 million, or 58.8%, non-interest income increased by $8.4 million, or 11.2%, and non-interest expense decreased by $11.5 million, or 4.7%.

This was partially offset by a $120.3 million, or 375.9%, increase in total interest expense.

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

The increase in interest income resulted from a $168.9 million, or 54.3%, increase in loan interest income and a $43.5 million, or 102.4%, increase in investment income.

The increase in non-interest income was primarily due to an $11.4 million, or 72.9%, increase in other income, a $4.0 million, or 82.2%, increase in trust fees, a $3.4 million, or 16.6%, increase in other service charges and fees, a $2.8 million, or 17.6%, increase in service charges on deposit accounts, a $1.1 million, or 23.1%, increase in dividends from FHLB, FRB, FNBB and other, and a $906,000, or 5,033.3%, increase in gain on sale of branches, equipment and other assets, net.

These increases were partially offset by a $10.9 million, or 3,379.3%, decrease in the fair value adjustment for marketable securities and a $4.7 million, or 47.3%, decrease in mortgage lending income.

Included within other income was $3.5 million in recoveries on historic losses.

The increase in interest expense was primarily due to a $113.7 million, or 727.7%, increase in interest on deposits, a $9.0 million, or 239.1%, increase in interest on FHLB and other borrowed funds and a $1.7 million, or 574.2%, increase in interest on securities sold under agreements to repurchase, partially offset by a $4.1 million, or 33.1%, decrease in interest on subordinated debentures.

The decrease in non-interest expense was due to a $49.6 million, or 100.0%, decrease in merger and acquisition expense, partially offset by a $19.7 million, or 18.0%, increase in salaries and employee benefits, an $11.0 million, or 25.6%, increase in other operating expenses, a $6.5 million, or 27.7%, increase in occupancy and equipment and a $986,000, or 5.8%, increase in data processing expense.

Income tax expense increased by $38.2 million, or 164.0%, during the six months ended June 30, 2023 due to an increase in net income.

Our net interest margin increased from 3.46% for the six months ended June 30, 2022 to 4.33% for the six months ended June 30, 2023.

The yield on interest earning assets was 5.88% and 3.79% for the six months ended June 30, 2023 and 2022, respectively, as average interest earning assets increased from $19.49 billion to $19.82 billion.

The increase in average interest earning assets is primarily due to a $2.47 billion increase in average loans receivable and an $859.7 million increase in average investment securities, largely resulting from the acquisition of Happy, partially offset by a $3.00 billion decrease in average interest-bearing balances due from banks.

For the six months ended June 30, 2023 and 2022, we recognized $5.8 million and $8.3 million, respectively, in total net accretion for acquired loans and deposits.

The reduction in accretion was dilutive to the net interest margin by two basis points.

We recognized $3.4 million in event interest income for the six months ended June 30, 2023 compared to $2.0 million for the six months ended June 30, 2022, which increased the net interest margin by two basis points.

The overall increase in the net interest margin was due to a decrease in average interest-bearing cash balances as well as an increase in interest income from higher yields on average interest-earning assets, partially offset by an increase in interest expense due to an increase in average interest-bearing liabilities at higher interest rates primarily as a result of the Happy acquisition and the current rising interest rate environment.

Our efficiency ratio was 44.39% for the six months ended June 30, 2023, compared to 58.26% for the same period in 2022.

For the second quarter of 2023, our efficiency ratio, as adjusted (non-GAAP), was 44.12%, compared to 46.53% reported for the second quarter of 2022.

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

Financial Condition as of and for the Period Ended March 31, 2023 and December 31, 2022

Our total assets as of March 31, 2023 decreased $365.3 million to $22.52 billion from $22.88 billion reported as of December 31, 2022.

The decrease in total assets is primarily due to $270.8 million decrease in investment securities resulting from paydowns and maturities during the first quarter of 2023.

Cash and cash equivalents decreased $36.7 million, for the three months ended March 31, 2023.

Our loan portfolio balance decreased to $14.39 billion as of March 31, 2023 from $14.41 billion at December 31, 2022.

The decrease in loans was primarily due to $94.6 million of organic loan decline from our Centennial Commercial Finance Group franchise and $2.1 million in PPP loan decline, partially offset by $73.9 million organic loan growth in our remaining footprint.

Total deposits decreased $493.3 million to $17.45 billion as of March 31, 2023 from $17.94 billion as of December 31, 2022.

The decrease in deposits was primarily due to the runoff of deposits in the normal course of business during the first quarter of 2023 as a result of the current interest rate environment.

Stockholders’ equity increased $104.5 million to $3.63 billion as of March 31, 2023, compared to $3.53 billion as of December 31, 2022.

The $104.5 million increase in stockholders’ equity is primarily associated with the $103.0 million in net income for the three months ended March 31, 2023 and the $49.2 million in other comprehensive income, partially offset by the $36.6 million of shareholder dividends paid and stock repurchases of $13.5 million in 2023.

Our non-performing loans were $74.0 million, or 0.51% of total loans as of March 31, 2023, compared to $60.9 million, or 0.42% of total loans as of December 31, 2022.

The allowance for credit losses as a percentage of non-performing loans decreased slightly to 388.23% as of March 31, 2023, from 475.99% as of December 31, 2022.

Non-performing loans from our Arkansas franchise were $11.2 million at March 31, 2023 compared to $8.4 million as of December 31, 2022.

Non-performing loans from our Florida franchise were $20.0 million at March 31, 2023 compared to $20.5 million as of December 31, 2022.

Non-performing loans from our Texas franchise were $26.9 million at March 31, 2023 compared to $22.2 million as of December 31, 2022.

Non-performing loans from our Alabama franchise were $390,000 at March 31, 2023 compared to $404,000 as of December 31, 2022.

Non-performing loans from our Shore Premier Finance ("SPF") franchise were $2.1 million at March 31, 2023 compared to $2.3 million as of December 31, 2022.

Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $13.4 million at March 31, 2023 compared to $7.1 million as of December 31, 2022.

As of March 31, 2023, our non-performing assets increased to $74.5 million, or 0.33% of total assets, from $61.5 million, or 0.27% of total assets, as of December 31, 2022.

Non-performing assets from our Arkansas franchise were $11.2 million at March 31, 2023 compared to $8.5 million as of December 31, 2022.

Non-performing assets from our Florida franchise were $20.2 million at March 31, 2023 compared to $20.8 million as of December 31, 2022.

Non-performing assets from our Texas franchise were $27.1 million at March 31, 2023 compared to $22.4 million as of December 31, 2022.

Non-performing assets from our Alabama franchise were $390,000 at March 31, 2023 compared to $404,000 as of December 31, 2022.

Non-performing assets from our SPF franchise were $2.1 million at March 31, 2023 compared to $2.3 million as of December 31, 2022.

Non-performing assets from our CFG franchise were $13.4 million at March 31, 2023 compared to $7.1 million as of December 31, 2022.

The $13.4 million balance of non-accrual loans for our Centennial CFG market consists of four loans that are assessed for credit risk by the Federal Reserve under the Shared National Credit Program.

Due to the condition of the four loans, partial charge-offs for a total of $2.0 million were taken on these loans during the three months ended March 31, 2023.

Our annualized return on average assets was 1.87% for the six months ended June 30, 2023, compared to 0.75% for the same period in 2022.

(See Table 20 for the related non-GAAP financial measures and tabular reconciliation).

Our annualized return on average common equity was 11.66% and 5.14% for the six months ended June 30, 2023, and 2022, respectively.

(See Table 21 for the related non-GAAP financial measures and tabular reconciliation).

Financial Condition as of and for the Period Ended June 30, 2023 and December 31, 2022

Our total assets as of June 30, 2023 decreased $757.2 million to $22.13 billion from $22.88 billion reported as of December 31, 2022.

The decrease in total assets is primarily due to a $399.1 million decrease in investment securities resulting from paydowns and maturities during the first six months of 2023.

Cash and cash equivalents decreased $113.6 million for the six months ended June 30, 2023.

Our loan portfolio balance decreased to $14.18 billion as of June 30, 2023 from $14.41 billion at December 31, 2022.

The decrease in loans was primarily due to $409.0 million of organic loan decline from our Centennial Commercial Finance Group ("CFG") franchise, partially offset by $180.5 million organic loan growth in our remaining footprint.

Total deposits decreased $941.9 million to $17.00 billion as of June 30, 2023 from $17.94 billion as of December 31, 2022.

The decrease in deposits was primarily due to the runoff of deposits during the first six months of 2023 as a result of the current rising interest rate environment.

Stockholders’ equity increased $127.7 million to $3.65 billion as of June 30, 2023, compared to $3.53 billion as of December 31, 2022.

The $127.7 million increase in stockholders’ equity is primarily associated with the $208.2 million in net income for the six months ended June 30, 2023 and the $12.8 million in other comprehensive income, partially offset by the $73.1 million of shareholder dividends paid and stock repurchases of $25.3 million in 2023.

Our non-performing loans were $60.5 million, or 0.43% of total loans as of June 30, 2023, compared to $60.9 million, or 0.42% of total loans, as of December 31, 2022.

The allowance for credit losses as a percentage of non-performing loans decreased slightly to 472.23% as of June 30, 2023, from 475.99% as of December 31, 2022.

Non-performing loans from our Arkansas franchise were $11.2 million at June 30, 2023 compared to $8.4 million as of December 31, 2022.

Non-performing loans from our Florida franchise were $19.7 million at June 30, 2023 compared to $20.5 million as of December 31, 2022.

Non-performing loans from our Texas franchise were $22.6 million at June 30, 2023 compared to $22.2 million as of December 31, 2022.

Non-performing loans from our Alabama franchise were $382,000 at June 30, 2023 compared to $404,000 as of December 31, 2022.

Non-performing loans from our Shore Premier Finance ("SPF") franchise were $3.8 million at June 30, 2023 compared to $2.3 million as of December 31, 2022.

Non-performing loans from our Centennial CFG franchise were $2.8 million at June 30, 2023 compared to $7.1 million as of December 31, 2022.

As of June 30, 2023, our non-performing assets decreased to $61.3 million, or 0.28% of total assets, from $61.5 million, or 0.27% of total assets, as of December 31, 2022.

Non-performing assets from our Arkansas franchise were $11.4 million at June 30, 2023 compared to $8.5 million as of December 31, 2022.

Non-performing assets from our Florida franchise were $20.0 million at June 30, 2023 compared to $20.8 million as of December 31, 2022.

Non-performing assets from our Texas franchise were $23.0 million at June 30, 2023 compared to $22.4 million as of December 31, 2022.

Non-performing assets from our Alabama franchise were $382,000 at June 30, 2023 compared to $404,000 as of December 31, 2022.

Non-performing assets from our SPF franchise were $3.8 million at June 30, 2023 compared to $2.3 million as of December 31, 2022.

Non-performing assets from our Centennial CFG franchise were $2.8 million at June 30, 2023 compared to $7.1 million as of December 31, 2022.

The $2.8 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.

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.

30 unchanged sentences

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 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 evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326.

The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics.

28 unchanged sentences

The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan, net of estimated costs to sell.

For loans individually analyzed for credit losses for which a specific reserve has been recorded, non-accrual loans, loans past due 90 days or more and restructured loans made to borrowers experiencing financial difficulty (which we define as "impaired" loans), 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.

1 unchanged sentence

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.

• Management has a reasonable expectation at the reporting date that restructured loans made to borrowers experiencing financial difficulty 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.

72 unchanged sentences

As opportunities arise, we will continue to open new (commonly referred to as de novo ) branches in our current markets and in other attractive market areas.

As of March 31, 2023, we had 223 branch locations.

As of June 30, 2023, we had 223 branch locations.

There were 76 branches in Arkansas, 78 branches in Florida, 63 branches in Texas, five branches in Alabama and one branch in New York City.

Results of Operations

For the three months ended March 31, 2023 and 2022

Our net income increased $38.1 million, or 58.7%, to $103.0 million for the three-month period ended March 31, 2023, from $64.9 million for the same period in 2022.

On a diluted earnings per share basis, our earnings were $0.51 per share for the three-month period ended March 31, 2023 compared to $0.40 per share for the three-month period ended March 31, 2022.

The Company recorded a $1.2 million provision for credit losses on loans for the quarter ended March 31, 2023.

However, the Company determined that a provision for unfunded commitments was not necessary as of March 31, 2023 as the current level was considered adequate.

During the three months ended March 31, 2023, the Company recorded $3.5 million in recoveries on historic losses and an $11.4 million decrease in the fair value of marketable securities.

For the three and six months ended June 30, 2023 and 2022

Our net income increased $89.3 million, or 558.8%, to $105.3 million for the three-month period ended June 30, 2023, from $16.0 million for the same period in 2022.

On a diluted earnings per share basis, our earnings were $0.52 per share for the three-month period ended June 30, 2023 compared to $0.08 per share for the three-month period ended June 30, 2022.

During the second quarter of 2022, we completed the acquisition of Happy.

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

The Company recorded a $4.0 million provision for credit losses for the quarter ended June 30, 2023.

This consisted of a $2.3 million provision for credit losses on loans and a $1.7 million provision for credit losses on available-for-sale investment securities.

The Company determined that a provision for unfunded commitments was not necessary as of June 30, 2023 as the current level was considered adequate.

During the three months ended June 30, 2023, the Company recorded $2.8 million in BOLI death benefits and a $783,000 increase in the fair value of marketable securities.

Our net income increased $127.4 million, or 157.5%, to $208.2 million for the six months ended June 30, 2023, from $80.9 million for the same period in 2022.

On a diluted earnings per share basis, our earnings were $1.02 per share for the six months ended June 30, 2023 compared to $0.44 per share for the six months ended June 30, 2022.

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

The Company recorded a $5.2 million provision for credit losses for the six months ended June 30, 2023.

This consisted of a $3.5 million provision for credit losses on loans and a $1.7 million provision for credit losses on available-for-sale investment securities.

The Company determined that a provision for unfunded commitments was not necessary as of June 30, 2023 as the current level was considered adequate.

Net Interest Income

12 unchanged sentences

Seventh, on December 14, 2022, the target rate was increased to 4.25% to 4.50%.

The Federal Reserve increased the target rate twice during the first quarter of 2023.

First, on February 1, 2023, the target rate was increased to 4.50% to 4.75%, and second, on March 22, 2023, the target rate was increased to 4.75% to 5.00%.

Our net interest margin increased from 3.21% for the three-month period ended March 31, 2022 to 4.37% for the three-month period ended March 31, 2023.

For the three months ended March 31, 2023 and 2022, we recognized $3.2 million and $3.1 million, respectively, in total net accretion for acquired loans and deposits.

Net interest income on a fully taxable equivalent basis increased $83.3 million, or 62.7%, to $216.2 million for the three-month period ended March 31, 2023, from $132.9 million for the same period in 2022.

This increase in net interest income for the three-month period ended March 31, 2023 was the result of a $139.9 million increase in interest income, partially offset by a $56.6 million increase in interest expense, on a fully taxable equivalent basis.

The $139.9 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 $76.5 million, and the higher yield on earning assets resulted in an increase in interest income of approximately $63.5 million.

The Federal Reserve increased the target rate three times during the first six months 2023.

First, on February 1, 2023, the target rate was increased to 4.50% to 4.75%, second, on March 22, 2023, the target rate was increased to 4.75% to 5.00% and third, on May 3, 2023, the target rate was increased to 5.00% to 5.25%.

The Federal Reserve increased the target rate to 5.25% to 5.50% on July 26, 2023.

Our net interest margin increased from 3.64% for the three-month period ended June 30, 2022 to 4.28% for the three-month period ended June 30, 2023.

The decrease in average interest earning assets is primarily due to a $2.93 billion decrease in average interest-bearing balances due from banks and an $88.7 million decrease in average investment securities, partially offset by a $421.0 million increase in average loans receivable.

For the three months ended June 30, 2023 and 2022, we recognized $2.7 million and $5.2 million, respectively, in total net accretion for acquired loans and deposits.

The reduction in accretion was dilutive to the net interest margin by five basis points.

We recognized $1.3 million in event interest income for the three months ended June 30, 2023 compared to $1.4 million for the three months ended June 30, 2022 .

Our net interest margin increased from 3.46% for the six months ended June 30, 2022 to 4.33% for the six months ended June 30, 2023.

For the six months ended June 30, 2023 and 2022, we recognized $5.8 million and $8.3 million, respectively, in total net accretion for acquired loans and deposits.

The reduction in accretion was dilutive to the net interest margin by two basis points.

We recognized $3.4 million in event interest income for the six months ended June 30, 2023 compared to $2.0 million for the six months ended June 30, 2022 which increased the net interest margin by two basis points.

The overall increase in the net interest margin was due to a decrease in average interest-bearing cash balances as well as an increase in interest income from higher yields on average interest-earning assets, which was partially offset by an increase in interest expense due to an increase in average interest-bearing liabilities at higher interest rates primarily as a result of the Happy acquisition and the current rising interest rate environment.

Net interest income on a fully taxable equivalent basis increased $7.9 million, or 3.9%, to $209.1 million for the three-month period ended June 30, 2023, from $201.2 million for the same period in 2022.

This increase in net interest income for the three-month period ended June 30, 2023 was the result of a $71.6 million increase in interest income, mostly offset by a $63.7 million increase in interest expense, on a fully taxable equivalent basis.

The $71.6 million increase in interest income was primarily the result of the increasing interest rate environment.

The higher yield on earning assets resulted in an increase in interest income of approximately $76.8 million, which was partially offset by the decrease of $5.2 million in interest income due to the decrease in average interest earning asset balances.

The $63.7 million increase in interest expense is primarily the result of the increasing interest rate environment.

The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately $64.2 million, partially offset by the decrease in average interest bearing liabilities that reduced interest expense by approximately $475,000.

Net interest income on a fully taxable equivalent basis increased $91.2 million, or 27.3%, to $425.4 million for the six months ended June 30, 2023, from $334.1 million for the same period in 2022.

This increase in net interest income for the six months ended June 30, 2023 was the result of a $211.6 million increase in interest income, partially offset by a $120.3 million increase in interest expense, on a fully taxable equivalent basis.

The $211.6 million increase in interest income was primarily the result of the increasing interest rate environment and the higher level of average interest earning assets due to the acquisition of Happy during the second quarter of 2022.

The higher yield on earning assets resulted in an increase in interest income of approximately $142.2 million, and the increase in earning assets resulted in an increase in interest income of approximately $69.4 million.

The $120.3 million increase in interest expense is primarily the result of the increasing interest rate environment as well as the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022.

The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately $118.9 million, and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $1.4 million.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three months ended March 31, 2023 and 2022, as well as changes in fully taxable equivalent net interest margin for the three months ended March 31, 2023 compared to the same period in 2022.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and six months ended June 30, 2023 and 2022, as well as changes in fully taxable equivalent net interest margin for the three and six months ended June 30, 2023 compared to the same period in 2022.

Analysis of Net Interest Income

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

(Dollars in thousands)

9 unchanged sentences

Changes in Fully Taxable Equivalent Net Interest Margin

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2023 vs.

(In thousands)

Increase in interest income due to change in earning assets $ 76,466

(Decrease) increase in interest income due to change in earning assets $ (5,183) $ 69,405

Increase in interest income due to change in earning asset yields 76,825 142,163

Increase in interest expense due to change in interest-bearing liabilities (1,355)

Decrease (increase) in interest expense due to change in interest-bearing liabilities 475 (1,393)

Increase in interest expense due to change in interest rates paid on interest-bearing liabilities (64,209) (118,930)

Increase in net interest income $ 7,908 $ 91,245

Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three months ended March 31, 2023 and 2022, respectively.

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 six months ended June 30, 2023 and 2022, 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.

2 unchanged sentences

Average Balance Sheets and Net Interest Income Analysis

Three Months Ended March 31,

Three Months Ended June 30,

Expense Yield /

27 unchanged sentences

Net interest income and margin $ 209,137 4.28 % $ 201,229 3.64 %

Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three months ended March 31, 2023 compared to the same period in 2022, on a fully taxable basis.

Six Months Ended June 30,

Balance Income /

Expense Yield /

Balance Income /

Expense Yield /

(Dollars in thousands)

Earnings assets

Interest-bearing balances due from banks $ 372,752 $ 8,414 4.55 % $ 3,374,606 $ 8,238 0.49 %

Federal funds sold 2,926 74 5.10 1,805 4 0.45

Investment securities – taxable 3,791,872 70,039 3.72 3,155,481 30,021 1.92

Investment securities – non-taxable 1,285,148 18,814 2.95 1,061,822 16,339 3.10

Loans receivable 14,366,267 480,352 6.74 11,899,115 311,523 5.28

Total interest-earning assets 19,818,965 577,693 5.88 % 19,492,829 366,125 3.79 %

Non-earning assets 2,641,370 2,115,558

Total assets $ 22,460,335 $ 21,608,387

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities

Savings and interest- bearing transaction accounts $ 11,410,230 $ 117,493 2.08 % $ 11,007,232 13,643 0.25 %

Time deposits 1,123,793 11,816 2.12 1,013,600 1,980 0.39

Total interest-bearing deposits 12,534,023 129,309 2.08 12,020,832 15,623 0.26

Federal funds purchased 62 2 6.51 437 2 0.92

Securities sold under agreement to repurchase 139,477 1,989 2.88 130,248 295 0.46

FHLB borrowed funds 665,356 12,786 3.88 400,000 3,771 1.90

Subordinated debentures 440,273 8,247 3.78 589,917 12,319 4.21

Total interest-bearing liabilities 13,779,191 152,333 2.23 % 13,141,434 32,010 0.49 %

Non-interest-bearing liabilities

Non-interest-bearing deposits 4,879,521 5,152,673

Other liabilities 201,562 142,080

Total liabilities 18,860,274 18,436,187

Stockholders’ equity 3,600,061 3,172,200

Total liabilities and stockholders’ equity $ 22,460,335 $ 21,608,387

Net interest spread 3.65 % 3.30 %

Net interest income and margin $ 425,360 4.33 % $ 334,115 3.46 %

Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and six months ended June 30, 2023 compared to the same period in 2022, 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.

Volume/Rate Analysis

Three Months Ended March 31,

2023 over 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 over 2022 2023 over 2022

Volume Yield /

Rate Total Volume Yield /

(In thousands)

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Credit Loss Expense :

During the period ended March 31, 2023, the Company recorded a $1.2 million provision for credit losses on loans.

During the six months ended June 30, 2023, the Company recorded a $3.5 million provision for credit losses on loans and a $1.7 million provision for credit losses on investment securities.

However, the Company determined that no additional provision was necessary for unfunded commitments as the current level of the reserve was considered adequate.

Net charge-offs to average total loans was 0.10% for the three months ended March 31, 2023 compared to 0.08% for the three months ended March 31, 2022.

Net charge-offs to average total loans was 0.11% for the three months ended June 30, 2023 compared to 0.07% for the three months ended June 30, 2022, and net charge-offs to average total loans was 0.11% for the six months ended June 30, 2023 compared to 0.08% for the six months ended June 30, 2022.

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.

38 unchanged sentences

Losses are charged against the allowance when management believes the uncollectability of a security is confirmed.

At March 31, 2023, the Company determined that the allowance for credit losses of $842,000 was adequate for the available-for-sale investment portfolio, and the $2.0 million allowance for credit losses for the held-to-maturity portfolio was also considered adequate.

No additional provision for credit losses was considered necessary for the portfolio.

During the period ended June 30, 2023, one of the Company’s AFS subordinated debt investment securities was downgraded below investment grade.

As result, the Company wrote down the value of the investment to its unrealized loss position, which required a $1.7 million provision.

In addition, the Company reallocated the existing $842,000 allowance for credit losses on AFS investments to certain securities in the subordinated debt portfolio due to credit concerns across the banking sector.

These investments are classified within the other securities category of the AFS portfolio.

The $2.0 million allowance for credit losses for the held-to-maturity portfolio was considered adequate.

No additional provision for credit losses was considered necessary for the HTM portfolio.

Non-Interest Income

Total non-interest income was $34.2 million for the three months ended March 31, 2023, compared to $30.7 million for the same period in 2022.

Total non-interest income was $49.5 million and $83.7 million for the three and six months ended June 30, 2023, compared to $44.6 million and $75.3 million for the same periods in 2022.

Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending income, insurance commissions, increase in cash value of life insurance, fair value adjustment for marketable securities and dividends.

Table 6 measures the various components of our non-interest income for the three months ended March 31, 2023 and 2022.

Table 6 measures the various components of our non-interest income for the three and six months ended June 30, 2023 and 2022, respectively, as well as changes for the three and six months ended June 30, 2023 and 2022.

Non-Interest Income

Three Months Ended March 31, 2023 Change

Three Months Ended June 30, 2023 Change

from 2022 Six Months Ended June 30, 2023 Change

2023 2022 2023 2022

(Dollars in thousands)

9 unchanged sentences

Gain on OREO, net 319 9 310 3,444.4 319 487 (168) (34.5)

Gain on securities, net — — — 0.0

Fair value adjustment for marketable securities 783 (1,801) 2,584 143.5 (10,625) 324 (10,949) (3,379.3)

1 unchanged sentence

Total non-interest income $ 49,509 $ 44,581 $ 4,928 11.1 % $ 83,673 $ 75,250 $ 8,423 11.2 %

Non-interest income increased $3.5 million, or 11.4%, to $34.2 million for the three months ended March 31, 2023 from $30.7 million for the same period in 2022.

Non-interest income increased $4.9 million, or 11.1%, to $49.5 million for the three months ended June 30, 2023 from $44.6 million for the same period in 2022.

The primary factors that resulted in this increase were the increases in other income and fair value adjustment for marketable securities.

Other factors were changes related to increase in gain on sale of branches, equipment and other assets and gain on OREO, partially offset by decreases in mortgage lending income, dividends from FHLB, FRB, FNBB and other, service charges on deposit accounts and other service charges and fees.

Additional details for the three months ended June 30, 2023 on some of the more significant changes are as follows:

• The $853,000 decrease in service charges on deposit accounts is primarily related to a decrease in overdraft fees, service charge fees and account analysis fees, partially offset by an increase in ATM fees.

• The $778,000 decrease in other service charges and fees is primarily related to a decrease in Centennial CFG property finance loan fees and a decrease in interchange fees, partially offset by increases in Mastercard income and incentives and network income.

• The $3.3 million decrease in mortgage lending income is primarily related to a decrease in volume of secondary market loans from the higher volume of loans during 2022.

The decrease in volume is due to the increase in interest rates.

• The $1.0 million decrease for dividends from FHLB, FRB, FNBB & other is primarily due to a lower volume of dividends from equity investments, partially offset by an increase in dividends on FHLB and FRB stock holdings.

• The $915,000 increase in gain on sale of branches, equipment and other assets, net, is primarily due to the sale of a building in Texas during 2023.

• The $310,000 increase in gains on OREO resulted from the increased volume of sales of OREO during 2023.

• The $2.6 million increase in the fair value adjustment for marketable securities is due to the increase in the fair value of marketable securities held by the Company.

• The $7.5 million increase in other income is primarily due to $7.6 million of income for equity method investments and $2.8 million in BOLI death benefit income, partially offset by a $2.7 million decrease in recoveries on historic losses.

Non-interest income increased $8.4 million, or 11.2%, to $83.7 million for the six months ended June 30, 2023 from $75.3 million for the same period in 2022.

The primary factors that resulted in this increase were the increases in service charges on deposit accounts, trust fees, other service charges and fees and other income.

Other factors were changes related to increase in cash value of life insurance and dividends from FHLB, FRB, FNBB & other, partially offset by decreases in mortgage lending income and the fair value adjustment for marketable securities.

Additional details for the three months ended March 31, 2023 on some of the more significant changes are as follows:

Additional details for the six months ended June 30, 2023 on some of the more significant changes are as follows:

• The $2.8 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees and service charge fees related to the acquisition of Happy.

• The $4.1 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 $4.3 million increase in trust fees is primarily related to an increase in trust fees resulting from the acquisition of Happy.

• The $3.4 million increase in other service charges and fees is primarily related to increases in Centennial CFG property finance loan fees, Mastercard income and incentives and network income, partially offset by a decrease in interchange fees.

• The $4.0 million increase in trust fees is primarily related to an increase in trust fees resulting from the acquisition of Happy during 2022.

• The $4.7 million decrease in mortgage lending income is primarily related to a decrease in volume of secondary market loans from the higher volume of loans during 2022.

1 unchanged sentence

• The $683,000 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 $2.1 million increase for dividends from FHLB, FRB, FNBB & other is primarily due to an increase in dividend income from marketable securities and an increase in dividends on FHLB and FRB stock holdings related to the acquisition of Happy.

• The $1.1 million increase for dividends from FHLB, FRB, FNBB & other is primarily due to an increase in dividend income from FHLB and FRB stock holdings related to the acquisition of Happy, partially offset by lower volume of dividends from equity investments.

• The $906,000 increase in gain on sale of branches, equipment and other assets, net, is primarily due to the sale of a building in Texas during 2023.

• The $10.9 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 $3.9 million increase in other income is primarily due to $3.8 million of income for equity method investments and a $1.1 million increase in rental income related to the acquisition of Happy partially offset by a $1.2 million decrease in recoveries on historic losses.

• The $11.4 million increase in other income is primarily due to $11.4 million of income for equity method investments, $2.8 million in BOLI death benefit income and a $1.2 million increase in rental income related to the acquisition of Happy, partially offset by a $3.8 million decrease in recoveries on historic losses.

Non-Interest Expense

Non-interest expense primarily consists of salaries and employee benefits, occupancy and equipment, data processing, and other expenses such as advertising, merger and acquisition expenses, amortization of intangibles, electronic banking expense, FDIC and state assessment, insurance, legal and accounting fees and other professional fees.

Table 7 below sets forth a summary of non-interest expense for the three months ended March 31, 2023 and 2022.

Table 7 below sets forth a summary of non-interest expense for the three and six months ended June 30, 2023 and 2022.

Non-Interest Expense

Three Months Ended March 31, 2023 Change

Three Months Ended June 30, 2023 Change

from 2022 Six Months Ended June 30, 2023 Change

2023 2022 2023 2022

(Dollars in thousands)

18 unchanged sentences

Total non-interest expense $ 116,282 $ 165,482 $ (49,200) (29.7) % $ 230,926 $ 242,378 $ (11,452) (4.7) %

Non-interest expense increased $37.7 million, or 49.1%, to $114.6 million for the three months ended March 31, 2023 from $76.9 million for the same period in 2022.

The primary factor that resulted in this increase was the increase in salaries and employee benefits expense.

Other factors were changes related to occupancy and equipment, data processing expense, advertising expenses, amortization of intangibles, electronic banking expenses, FDIC and state assessment expense, other professional fees and other expenses partially offset by the change in merger and acquisition expenses.

Additional details for the three months ended March 31, 2023 on some of the more significant changes are as follows:

Non-interest expense decreased $49.2 million, or 29.7%, to $116.3 million for the three months ended June 30, 2023 from $165.5 million for the same period in 2022.

The primary factor that resulted in this decrease was the decrease in merger and acquisition expenses.

Other factors were changes related to salaries and employee benefits, data processing expenses and other expenses, partially offset by the increases in occupancy and equipment and FDIC and state assessment.

Additional details for the three months ended June 30, 2023 on some of the more significant changes are as follows:

• The $1.3 million decrease in salaries and employee benefits expense is primarily due to attrition as a result of the Happy acquisition, partially offset by increased salary expense and deferred loan costs.

• The $667,000 increase in occupancy and equipment expenses is primarily due to the normal increased cost of doing business.

• The $943,000 decrease in data processing expense is primarily due to decreased computer software maintenance fees, internet banking and cash management fees, software license subscriptions, partially offset by increases in core processing expense and telecommunication fees.

• The $48.7 million decrease in merger and acquisition expense is due to the costs associated with the acquisition of Happy during the first and second quarters of 2022.

• The $830,000 increase in FDIC and state assessment expense is primarily due to a two basis-point increase in assessment rate in the first quarter of 2023 implemented on large financial institutions to increase the FDIC reserves.

• The $956,000 decrease in other expenses is primarily related to $2.1 million in trust preferred securities ("TRUPS") redemption fees incurred during the second quarter of 2022.

Non-interest expense decreased $11.5 million, or 4.7%, to $230.9 million for the six months ended June 30, 2023 from $242.4 million for the same period in 2022.

The primary factor that resulted in this decrease was the decrease in merger and acquisition expense.

Other factors that partially offset this decrease were increases in salaries and employee benefits, occupancy and equipment, data processing expense, advertising expenses, amortization of intangibles, electronic banking expenses, FDIC and state assessment expense, other professional fees and other expenses.

Additional details for the six months ended June 30, 2023 on some of the more significant changes are as follows:

• The $19.7 million increase in salaries and employee benefits expense is primarily due to the acquisition of Happy.

5 unchanged sentences

property taxes and other occupancy expenses related to the acquisition of Happy.

• The $1.9 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.

• The $863,000 decrease in merger and acquisition expense is due to the costs associated with the acquisition of Happy being incurred during the first and second quarters of 2022.

• The $986,000 increase in data processing expense is primarily due to increases in telecommunication fees, depreciation of equipment and software, software licensing subscriptions, core processing expenses and computer expenses related to the acquisition of Happy.

• The $49.6 million decrease in merger and acquisition expense is due to the costs associated with the acquisition of Happy being incurred during the first and second quarters of 2022.

• The $946,000 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 $792,000 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 $1.1 million increase in electronic banking expense is primarily due to increased debit card processing fees and interchange network expenses resulting from the acquisition of Happy.

• The $2.7 million increase in FDIC and state assessment expense is primarily due to a two basis-point increase in assessment rate in the first quarter of 2023 implemented on large financial institutions to increase the FDIC reserves and the acquisition of Happy.

• The $675,000 increase in other professional fees is primarily related to the acquisition of Happy.

• The $3.8 million increase in other expenses is primarily related to the acquisition of Happy.

Income tax expense increased $9.9 million, or 49.5%, to $30.0 million for the three-month period ended March 31, 2023, from $20.0 million for the same period in 2022.

The effective income tax rate was 22.54% for the three months ended March 31, 2023, compared to 23.59% for the same periods in 2022.

The marginal tax rate was 24.6735% and 26.135% 2023 and 2022, respectively.