What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-26 compared with 2023-02-24 · 346 added, 323 removed, 1427 unchanged (32% of the section changed)

42 unchanged sentences

Results of Operations for the Years Ended December 31, 2023 and 2022

Our net income increased $87.7 million, or 28.7%, to $392.9 million for the year ended December 31, 2023, from $305.3 million for the same period in 2022.

On a diluted earnings per share basis, our earnings were $1.94 per share for the year ended December 31, 2023 and $1.57 per share for the year ended December 31, 2022.

The Company recorded $12.1 million in credit loss expense for the year ended December 31, 2023.

This consisted of a $12.0 million provision for credit losses on loans, a $1.7 million provision for credit losses on investment securities and a reversal of $1.5 million provision for unfunded commitments.

During the year ended December 31, 2023, the Company recorded $13.0 million in Federal Deposit Insurance Corporation ("FDIC") special assessment expense and $1.1 million loss for the decrease in fair value of marketable securities, which were partially offset by $3.5 million in recoveries on historic losses from loans charged off prior to acquisition and $3.1 million in bank owned life insurance ("BOLI") death benefits.

Total interest income increased by $297.3 million, or 33.9%, and non-interest expense decreased by $2.8 million, or 0.6%.

This was partially offset by a $229.0 million, or 192.3%, increase in interest expense and a $5.2 million, or 3.0%, decrease in non-interest income.

The increase in interest income resulted from a $261.3 million, or 35.9%, increase in loan interest income and a $49.9 million, or 41.5%, increase in investment income, partially offset by a $14.1 million, or 48.4%, decrease in interest income on deposits at other banks.

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 $20.5 million, or 20.7%, increase in other operating expenses, an $18.1 million, or 7.6%, increase in salaries and employee benefits, a $6.9 million, or 12.9%, increase in occupancy and equipment and a $1.4 million, or 4.0%, increase in data processing expense.

Included within other operating expense was $13.0 million in FDIC special assessment expense which was levied in order to recover the losses to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank.

The increase in interest expense was primarily due to a $210.0 million, or 244.2%, increase in interest on deposits, a $19.7 million, or 178.3%, increase in interest on FHLB and other borrowed funds and a $3.4 million, or 236.6%, increase in interest on securities sold under agreements to repurchase, which were partially offset by a $4.1 million, or 19.9%, decrease in interest on subordinated debentures.

The decrease in non-interest income was primarily due to a $9.8 million, or 20.3%, decrease in other income and a $6.9 million, or 39.2%, decrease in mortgage lending income, which were partially offset by a $5.0 million, or 39.2%, increase in trust fees, a $2.4 million, or 26.6%, increase in dividends from FHLB, FRB, FNBB & other, a $2.1 million, or 5.6%, increase in service charges on deposit accounts, and a $1.5 million, or 9,946.7%, increase in gain on branches, equipment and other assets, net.

Our net interest margin on a fully taxable equivalent basis increased from 3.81% for the year ended December 31, 2022 to 4.25% for the year ended December 31, 2023.

The yield on interest earning assets was 6.03% and 4.40% for the year ended December 31, 2023 and 2022, respectively, as average interest earning assets decreased from $20.15 billion to $19.57 billion.

The decrease in average interest earning assets is primarily due to a $2.12 billion decrease in average interest-bearing balances due from banks, which was partially offset by a $1.37 billion increase in average loans receivable and a $171.0 million increase in average investment securities.

For the years ended December 31, 2023 and 2022, we recognized $10.6 million and $16.3 million, respectively, in total net accretion for acquired loans and deposits.

The reduction in accretion was dilutive to the net interest margin by approximately 3 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 Bancshares, Inc.

acquisition and the increased interest rate environment.

Our efficiency ratio was 46.21% for the year ended December 31, 2023, compared to 49.53% for the same period in 2022.

For the year ended December 31, 2023, our efficiency ratio, as adjusted (non-GAAP), was 45.24%, compared to 44.55% reported for the year ended December 31, 2022.

(See Table 29 for the non-GAAP tabular reconciliation).

Our return on average assets was 1.77% for the year ended December 31, 2023, compared to 1.35% for the same period in 2022, and our return on average assets, as adjusted (non-GAAP) was 1.79% or the year ended December 31, 2023, compared to 1.67% for the same period in 2022.

Our return on average common equity was 10.82% for the year ended December 31, 2023, compared to 9.17% for the same period in 2022.

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

Our total assets as of December 31, 2023 decreased $226.9 million to $22.66 billion from the $22.88 billion reported as of December 31, 2022.

The decrease in total assets is primarily due to a $539.5 million decrease in investment securities resulting from paydowns and maturities, which was partially offset by a $275.4 million increase in cash and cash equivalents during the year.

Our loan portfolio balance increased $15.2 million to $14.42 billion as of December 31, 2023, from $14.41 billion as of December 31, 2022.

The increase in loans was due to $340.4 million in organic loan growth within our legacy footprint, which was partially offset by $325.2 million of organic loan decline from our Centennial Commercial Finance Group ("CFG") franchise during 2023.

Total deposits decreased $1.15 billion to $16.79 billion as of December 31, 2023 compared to $17.94 billion as of December 31, 2022.

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

Stockholders’ equity increased $264.7 million to $3.79 billion as of December 31, 2023, compared to $3.53 billion as of December 31, 2022.

The increase in stockholders’ equity is primarily associated with the $392.9 million in net income and the $56.4 million increase in accumulated other comprehensive income, which were partially offset by the $145.9 million of shareholder dividends paid and the repurchase of $48.3 million of our common stock during 2023.

The improvement in stockholders’ equity was 7.5% for the year ended December 31, 2023 compared to December 31, 2022.

As of December 31, 2023, our non-performing loans increased to $64.1 million, or 0.44%, of total loans from $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 to 449.66% as of December 31, 2023, compared to 475.99% as of December 31, 2022.

Non-performing loans from our Arkansas franchise were $15.4 million at December 31, 2023 compared to $8.4 million as of December 31, 2022.

Non-performing loans from our Florida franchise were $9.3 million at December 31, 2023 compared to $20.5 million as of December 31, 2022.

Non-performing loans from our Texas franchise were $33.5 million at December 31, 2023 compared to $22.2 million at December 31, 2022.

Non-performing loans from our Alabama franchise were $413,000 at December 31, 2023 compared to $404,000 as of December 31, 2022.

Non-performing loans from our Shore Premier Finance ("SPF") franchise were $2.8 million at December 31, 2023 compared to $2.3 million as of December 31, 2022.

Non-performing loans from our Centennial CFG franchise were $2.7 million at December 31, 2023 compared to $7.1 million as of December 31, 2022.

As of December 31, 2023, our non-performing assets increased to $95.4 million, or 0.42%, 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 $15.5 million at December 31, 2023 compared to $8.5 million as of December 31, 2022.

Non-performing assets from our Florida franchise were $17.3 million at December 31, 2023 compared to $20.8 million as of December 31, 2022.

Non-performing assets from our Texas franchise were $33.8 million at December 31, 2023 compared to $22.4 million at December 31, 2022.

Non-performing assets from our Alabama franchise were $413,000 at December 31, 2023 compared to $404,000 as of December 31, 2022.

Non-performing assets from our SPF franchise were $2.8 million at December 31, 2023 compared to $2.3 million as of December 31, 2022.

Non-performing assets from our CFG franchise were $25.6 million at December 31, 2023 compared to $7.1 million as of December 31, 2022.

The $2.7 million balance of non-accrual loans for our Centennial CFG Capital Markets Group 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.

Any interest payments that are received will be applied to the principal balance.

In addition, the $22.8 million balance of foreclosed assets held for sale for our Centennial CFG Property Finance Group consists of an office building located in California which was placed in foreclosed assets held for sale during the fourth quarter of 2023.

This represents the largest component of the Company's $30.5 million in foreclosed assets held for sale.

2022 Overview

Results of Operations for the Years Ended December 31, 2022 and 2021

Our net income decreased $13.8 million, or 4.3%, to $305.3 million for the year ended December 31, 2022, from $319.0 million for the same period in 2021.

5 unchanged sentences

However, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments or investment securities was necessary as of December 31, 2022.

During the year ended December 31, 2022, the Company recorded $10.0 million in income from the settlement of a lawsuit brought by the Company, net of legal expense, $6.7 million in recoveries on historic losses from loans charged off prior to acquisition, and $1.4 million in special dividends from equity investments, which were partially offset by $2.1 million in trust preferred securities ("TRUPS") redemption fees, $1.3 million loss for the decrease in fair value of marketable securities and $176,000 in hurricane expenses.

During the year ended December 31, 2022, the Company recorded $10.0 million in income from the settlement of a lawsuit brought by the Company, net of legal expense, $6.7 million in recoveries on historic losses from loans charged off prior to acquisition, and $1.4 million in special dividends from equity investments, which were partially offset by $2.1 million in trust preferred securities ("TRUPS") redemption fees, $1.3 million of loss for the decrease in fair value of marketable securities and $176,000 in hurricane expenses.

Total interest income increased by $252.6 million, or 40.4%, and non-interest income increased by $37.5 million, or 27.3%.

3 unchanged sentences

The increase in non-interest income was primarily due to a $27.6 million, or 133.2%, increase in other income, a $14.8 million, or 66.6%, increase in service charges on deposit accounts, a $10.9 million, or 555.9%, increase in trust fees, an $8.1 million, or 22.3%, increase in other service charges and fees and a $1.8 million, or 85.5%, increase in the cash value of life insurance.

These increases were partially offset by an $8.5 million, or 117.7%, decrease in income for the fair value adjustment for marketable securities resulting from a $1.3 million decrease in the fair value of marketable securities for the year ended December 31, 2022, compared to a $7.2 million increase for the year ended December 31, 2021, an $8.0 million, or 31.2%, decrease in mortgage lending income, a $5.6 million, or 38.0%, decrease in dividends from FHLB, FRB, FNBB and other, a $2.2 million, or 92.3%, decrease in the gain on sale of SBA loans and a $1.5 million, or 75.0%, decrease in gain on OREO.

Included within other income was $15.0 million in income from the settlement of a lawsuit brought by the Company and $6.7 million in recoveries on historic losses from loans charged off prior to acquisition, and included within dividends from FHLB, FRB, FNBB and other were $1.4 million in special dividends.

34 unchanged sentences

Non-performing loans from our new Texas franchise were $22.2 million at December 31, 2022.

Non-performing loans from our Alabama franchise were $404,000 at December 31, 2022 compared to $470,000 as of December 31, 2021.

Nonperforming loans from our Alabama franchise were $404,000 at December 31, 2022 compared to $470,000 as of December 31, 2021.

Non-performing loans from our SPF franchise were $2.3 million at December 31, 2022 compared to $1.5 million as of December 31, 2021.

11 unchanged sentences

Any interest payments that are received will be applied to the principal balance.

2021 Overview

Results of Operations for the Years Ended December 31, 2021 and 2020

Our net income increased $104.6 million, or 48.8%, to $319.0 million for the year ended December 31, 2021, from $214.4 million for the same period in 2020.

On a diluted earnings per share basis, our earnings were $1.94 per share for the year ended December 31, 2021 and $1.30 per share for the year ended December 31, 2020.

During the year ended December 31, 2021, the Company did not record a provision for credit losses but did record a $4.8 million negative provision for unfunded commitments compared to a $112.3 million provision for credit losses and a $17.0 million provision for unfunded commitments for a total credit loss expense of $129.3 million for the year ended December 31, 2020.

The $4.8 million negative provision for the year ended December 31, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position.

The $129.3 million of total credit loss expense for the year ended December 31, 2020 was primarily due to the uncertainty created by the COVID-19 pandemic, with $9.3 million as a result of the acquisition of LH-Finance on February 29, 2020.

The Company’s provisioning model is closely tied to unemployment rate projections which continued to improve following the fourth quarter of 2020.

The Company determined that an additional provision for credit losses was not necessary.

Despite the improvements in the economic and public health outlooks in the United States during 2021, the emergence of the Delta variant during the second quarter and the Omicron variant during the fourth quarter resulted in significant uncertainty about the future impact of the pandemic on our business, results of operations and financial condition.

As a result, the Company determined that a negative provision for credit losses was not appropriate at the end of 2021, and the level of the allowance for credit losses was considered adequate as of December 31, 2021.

The Company also recorded a $7.2 million adjustment for the increase in fair market value of marketable securities, $12.5 million of special dividend income from our equity investments, $5.1 million recovery on historic losses from loans charged-off prior to acquisition, $1.9 million of merger and acquisition expense and a $219,000 gain on sale of investment securities.

Total interest expense decreased by $41.2 million, or 44.1%, and non-interest income increased by $25.8 million, or 23.1%.

This was partially offset by a $50.8 million, or 7.5%, decrease in total interest income and a $11.1 million, or 3.9%, increase in non-interest expense.

The decrease in interest expense was primarily due to a $38.2 million decrease in interest on deposits and a $1.9 million decrease in interest on FHLB borrowed funds.

The increase in non-interest income was primarily due to a $9.2 million increase in the fair value adjustment on marketable securities, an $8.3 million increase in other income, a $5.8 million increase in other service charges and fees, a $2.4 million increase in dividends from FHLB, FRB, FNBB & other and a $1.7 million increase in gain on sale of SBA loans and was partially offset by a $3.4 million decrease in mortgage lending income.

The decrease in interest income was primarily due to a $53.4 million decrease in loan interest income.

The increase in non-interest expense was due to a $6.8 million increase in salaries and employee benefits, a $5.2 million increase in data processing expense and a $1.2 million increase in merger and acquisition expense and was partially offset by a $1.8 million decrease in occupancy and equipment expense.

Income tax expense increased by $34.5 million during 2021 due to an increase in net income.

Our net interest margin on a fully taxable equivalent basis decreased from 4.06% for the year ended December 31, 2020 to 3.66% for the year ended December 31, 2021.

The yield on interest earning assets was 3.99% and 4.70% for the year ended December 31, 2021 and 2020, respectively, as average interest earning assets increased from $14.50 billion to $15.86 billion.

The increase in average earning assets was primarily the result of a $1.84 billion increase in average interest-bearing balances due from banks and a $659.0 million increase in average investment securities, partially offset by the $1.13 billion decrease in average loans receivable.

Average PPP loan balances were $434.7 million for the year ended December 31, 2021.

These loans bore interest at 1.00% plus the accretion of the deferred origination fee.

Including deferred fees, we recognized total interest income of $35.6 million on PPP loans for the year ended December 31, 2021.

The PPP loans were accretive to the net interest margin by 13 basis points for the year ended December 31, 2021.

This was primarily due to approximately $910.1 million of the Company’s PPP loans being forgiven during 2021 which included the acceleration of $24.8 million in deferred fees for the loans that were forgiven.

As of December 31, 2021, the Company had $3.6 million in remaining unamortized PPP fees.

The COVID-19 pandemic and the resulting governmental response created a significant amount of excess liquidity in the market.

As a result, we had an increase of $1.84 billion in average interest-bearing cash balances for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This excess liquidity was dilutive to the net interest margin by 46 basis points.

For the years ended December 31, 2021 and 2020, we recognized $20.2 million and $27.4 million, respectively, in total net accretion for acquired loans and deposits.

The reduction in accretion was dilutive to the net interest margin by 4 basis points.

We recognized $6.7 million in event interest income for the year ended December 31, 2021 compared to $2.1 million in event income for the year ended December 31, 2020.

This increased the net interest margin by 3 basis points.

Our efficiency ratio was 40.81% for the year ended December 31, 2021, compared to 40.20% for the same period in 2020.

For the year ended December 31, 2021, our efficiency ratio, as adjusted (non-GAAP), was 42.12%, compared to 40.36% reported for the year ended December 31, 2020.

(See Table 29 for the non-GAAP tabular reconciliation).

Our return on average assets was 1.83% for the year ended December 31, 2021, compared to 1.33% for the same period in 2020.

Our return on average common equity was 11.89% for the year ended December 31, 2021, compared to 8.57% for the same period in 2020.

Financial Condition as of and for the Years Ended December 31, 2021 and 2020

Our total assets as of December 31, 2021 increased $1.65 billion to $18.05 billion from the $16.40 billion reported as of December 31, 2020.

Cash and cash equivalents increased $2.39 billion, or 188.8%.

The increase in cash and cash equivalents was due to loan paydowns as well as the significant amount of excess liquidity in the market as a continued result of the COVID-19 pandemic and the accompanying governmental response.

Our loan portfolio balance decreased $1.38 billion to $9.84 billion as of December 31, 2021, from $11.22 billion as of December 31, 2020.

The decrease in the loan portfolio was due to organic loan decline of $822.2 million and $910.1 million of the Company’s PPP loans being forgiven during 2021, which were partially offset by $347.7 million in new PPP loan originations during 2021 .

Total deposits increased $1.53 billion to $14.26 billion as of December 31, 2021 compared to $12.73 billion as of December 31, 2020, which was due to customers holding higher deposit balances in response to the COVID-19 pandemic as well as the resulting governmental response to the pandemic.

Stockholders’ equity increased $160.0 million to $2.77 billion as of December 31, 2021, compared to $2.61 billion as of December 31, 2020.

The increase in stockholders’ equity was primarily associated with the $319.0 million in net income, partially offset by the $33.7 million decrease in accumulated other comprehensive income, $92.1 million of shareholder dividends paid and the repurchase of $44.5 million of our common stock during 2021.

The improvement in stockholders’ equity was 6.1% for the year ended December 31, 2021 compared to December 31, 2020.

As of December 31, 2021, our non-performing loans decreased to $50.2 million, or 0.51%, of total loans from $74.1 million, or 0.66%, of total loans as of December 31, 2020.

The allowance for credit losses as a percentage of non-performing loans increased to 471.61% as of December 31, 2021, compared to 331.10% as of December 31, 2020.

Non-performing loans from our Arkansas franchise were $13.9 million at December 31, 2021 compared to $24.1 million as of December 31, 2020.

Non-performing loans from our Florida franchise were $26.8 million at December 31, 2021 compared to $43.1 million as of December 31, 2020.

Non-performing loans from our Alabama franchise were $470,000 at December 31, 2021 compared to $530,000 as of December 31, 2020.

Non-performing loans from our SPF franchise were $1.5 million at December 31, 2021 compared to $3.6 million as of December 31, 2020.

Non-performing loans from our Centennial CFG franchise were $7.5 million at December 31, 2021 compared to $2.8 million as of December 31, 2020.

As of December 31, 2021, our non-performing assets decreased to $51.8 million, or 0.29%, of total assets from $78.6 million, or 0.48%, of total assets as of December 31, 2020.

Non-performing assets from our Arkansas franchise were $14.4 million at December 31, 2021 compared to $25.6 million as of December 31, 2020.

Non-performing assets from our Florida franchise were $27.9 million at December 31, 2021 compared to $46.0 million as of December 31, 2020.

Non-performing assets from our Alabama franchise were $470,000 at December 31, 2021 compared to $564,000 as of December 31, 2020.

Non-performing assets from our SPF franchise were $1.5 million at December 31, 2021 compared to $3.6 million as of December 31, 2020.

Non-performing assets from our CFG franchise were $7.5 million at December 31, 2021 compared to $2.8 million as of December 31, 2020.

The $7.5 million balance of non-accrual loans for our Centennial CFG market consisted of two loans that are assessed for Credit risk by the Federal Reserve under the Shared National Credit Program.

The decision to place these loans on non-accrual status was made by the Federal Reserve and not the Company.

The loans that made up the total balance were still current on both principal and interest at December 31, 2021.

However, all interest payments were currently being applied to the principal balance.

Because the Federal Reserve required us to place these loans on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve.

Critical Accounting Policies and Estimates

24 unchanged sentences

We account for credit losses in accordance with ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments ("CECL").

Measurement of Credit Losses on Financial Instruments ("ASC 326" or "CECL").

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.

18 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.

24 unchanged sentences

• Other consumer - SPF

The allowance for credit losses for each segment is measured through the use of the discounted cash flow method.

Loans evaluated individually that are considered to be impaired are not 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 for which a specific reserve is not recorded, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded.

The allowance for credit losses for each segment is measured through the use of the discounted cash flow method ("DCF").

Loans evaluated individually that are considered to be collateral dependent are not included in the collective evaluation.

For these loans, where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral, net of estimated costs to sell, and the amortized cost basis of the loan as of the measurement date.

When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral.

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 individually analyzed loans which are not considered to be collateral dependent, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation.

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.

• 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.

9 unchanged sentences

(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.

51 unchanged sentences

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.

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

1 unchanged sentence

The acquisition added new markets for expansion and brought complementary businesses together to drive synergies and growth.

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.

Including the effects of 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.

4 unchanged sentences

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.

On February 29, 2020, the Company completed the acquisition of LH-Finance, the marine lending division of People’s United Bank, N.A.

The Company paid a purchase price of approximately $421.2 million in cash.

LH-Finance provided direct consumer financing for USCG registered high-end sail and power boats.

Additionally, LH-Finance provided inventory floor plan lines of credit to marine dealers, primarily those selling USCG documented vessels.

Including the purchase accounting adjustments, as of the acquisition date, LH-Finance had approximately $409.1 million in total assets, including $407.4 million in total loans, which resulted in goodwill of $14.6 million being recorded.

The acquired portfolio of loans is now housed in our SPF division.

The SPF division is responsible for servicing the acquired loan portfolio and originating new loan production.

In connection with this acquisition, we opened a new loan production office in Baltimore, Maryland.

See Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements for additional information regarding the acquisition of LH-Finance.

We will continue evaluating all types of potential bank acquisitions, which may include FDIC-assisted acquisitions as opportunities arise, to determine what is in the best interest of our Company.

1 unchanged sentence

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

We opened one de novo branch location in 2022 in Ft.

Worth, Texas.

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

1 unchanged sentence

Results of Operations for the Years Ended December 31, 2023, 2022 and 2021

Our net income increased $87.7 million, or 28.7%, to $392.9 million for the year ended December 31, 2023, from $305.3 million for the same period in 2022.

On a diluted earnings per share basis, our earnings were $1.94 per share for the year ended December 31, 2023 and $1.57 per share for the year ended December 31, 2022.

The Company recorded $12.1 million in credit loss expense for the year ended December 31, 2023.

During the year ended December 31, 2023, the Company recorded $13.0 million in FDIC special assessment expense and $1.1 million loss for the decrease in fair value of marketable securities, which were partially offset by $3.5 million in recoveries on historic losses from loans charged off prior to acquisition and $3.1 million in BOLI death benefits.

Our net income decreased $13.8 million, or 4.3%, to $305.3 million for the year ended December 31, 2022, from $319.0 million for the same period in 2021.

5 unchanged sentences

During the year ended December 31, 2022, the Company recorded $10.0 million in income from the settlement of a lawsuit brought by the Company, net of legal expense, $6.7 million in recoveries on historic losses from loans charged off prior to acquisition, and $1.4 million in special dividends from equity investments, which were partially offset by $2.1 million in TRUPS redemption fees, $1.3 million loss for the decrease in fair value of marketable securities and $176,000 in hurricane expenses.

Our net income increased $104.6 million, or 48.8%, to $319.0 million for the year ended December 31, 2021, from $214.4 million for the same period in 2020.

On a diluted earnings per share basis, our earnings were $1.94 per share for the year ended December 31, 2021 and $1.30 per share for the year ended December 31, 2020.

The Company’s provisioning model is closely tied to unemployment rate projections which continued to improve following the fourth quarter of 2020.

The Company determined that an additional provision for credit losses was not necessary.

Net Interest Income

4 unchanged sentences

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.

The Federal Reserve increased the target rate seven times during 2022.

6 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 to 4.50% to 4.75% on February 1, 2023.

The Federal Reserve increased the target rate four times during 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%, third, on May 3, 2023, the target rate was increased to 5.00% to 5.25% and fourth, on July 26, 2023, the target rate was increased to 5.25% to 5.50%.

Our net interest margin on a fully taxable equivalent basis increased from 3.81% for the year ended December 31, 2022 to 4.25% for the year ended December 31, 2023.

The yield on interest earning assets was 4.40% and 3.99% for the year ended December 31, 2022 and 2021, respectively, as average interest earning assets increased from $15.86 billion to $20.15 billion.

The yield on interest earning assets was 6.03% and 4.40% for the years ended December 31, 2023 and 2022, respectively, as average interest earning assets decreased from $20.15 billion to $19.57 billion.

For the years ended December 31, 2023 and 2022, we recognized $10.6 million and $16.3 million, respectively, in total net accretion for acquired loans and deposits.

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

Net interest income on a fully taxable equivalent basis increased $65.1 million, or 8.5%, to $832.5 million for the year ended December 31, 2023, from $767.3 million for the same period in 2022.

This increase in net interest income was the result of a $294.1 million increase in interest income, partially offset by a $229.0 million increase in interest expense on a fully taxable equivalent basis.

The $294.1 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 $248.5 million, and the change in earning assets resulted in an increase in interest income of approximately $45.6 million.

The $229.0 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 $224.1 million, and the change in interest bearing liabilities resulted in an increase in interest expense of approximately $4.9 million.

Our net interest margin on a fully taxable equivalent basis increased from 3.66% for the year ended December 31, 2021 to 3.81% for the year ended December 31, 2022.

The yield on interest earning assets was 4.40% and 3.99% for the years ended December 31, 2022 and 2021, respectively, as average interest earning assets increased from $15.86 billion to $20.15 billion.

The increase in average earning assets is primarily the result of a $2.57 billion increase in average loans receivable and a $1.87 billion increase in average investment securities, largely resulting from the acquisition of Happy, which were partially offset by a $151.9 million decrease in average interest-bearing balances due from banks.

12 unchanged sentences

The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately $52.8 million, and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $14.0 million.