SIMMONS FIRST NATIONAL CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies & Estimates Overview We follow accounting and reporting policies that conform, in all material respects, to US GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. The accounting policies that we view as critical to us are those relating to estimates and judgments regarding (a) the determination of the adequacy of the allowance for credit losses, (b) acquisition accounting and valuation of loans, (c) the valuation of goodwill and the useful lives applied to intangible assets, (d) the valuation of stock-based compensation plans and (e) income taxes. Allowance for Credit Losses The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. The allowance, in the judgment of management, is necessary to reserve for expected credit losses and risks inherent in the loan portfolio. Our allowance for credit loss methodology includes reserve factors calculated to estimate current expected credit losses to amortized cost balances over the remaining contractual life of the portfolio, adjusted for prepayments, in accordance with Accounting Standard Codification (“ASC”) Topic 326-20, Financial Instruments - Credit Losses . Accordingly, the methodology is based on our reasonable and supportable economic forecasts, historical loss experience, and other qualitative adjustments. For further information see the section Allowance for Credit Losses below. Our evaluation of the allowance for credit losses is inherently subjective as it requires material estimates. The actual amounts of credit losses realized in the near term could differ from the amounts estimated in arriving at the allowance for credit losses reported in the financial statements. On January 1, 2020, the Company adopted the new Current Expected Credit Losses, or “CECL”, methodology. See Note 20, New Accounting Standards, in the accompanying Notes to Consolidated Financial Statements for additional information. Prior to the adoption of the CECL methodology in 2020, the allowance for credit losses was calculated monthly based on management’s assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for credit losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) external factors and pressure from competition, (6) the experience, ability and depth of lending management and staff, (7) seasoning of new products obtained and new markets entered through acquisition and (8) other factors and trends that affected specific loans and categories of loans. We established general allocations for each major loan category. This category also included allocations to loans which were collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans. General reserves were established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances were accrued for probable losses on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeded the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral. 35 Acquisition Accounting, Loans We account for our acquisitions under ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. Our historical acquisitions all occurred under previous US GAAP prior to our adoption of CECL. No allowance for loan losses related to the acquired loans was recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. The fair value estimates associated with the loans included estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. We evaluate loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs . The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. Goodwill and Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. We perform an annual goodwill impairment test, and more than annually if circumstances warrant, in accordance with ASC Topic 350, Intangibles – Goodwill and Other , as amended by ASU 2011-08 – T esting Goodwill for Impairment and ASU 2017-04 - Intangibles – Goodwill and Other . ASC Topic 350 requires that goodwill and intangible assets that have indefinite lives be reviewed for impairment annually or more frequently if certain conditions occur. Impairment losses on recorded goodwill, if any, will be recorded as operating expenses. During the first quarter of 2020, our share price began to decline as the markets in the United States responded to the global COVID-19 pandemic. As a result of that economic decline, the effect on our share price and other factors, we performed an interim goodwill impairment qualitative assessment during the first quarter and concluded no impairment existed. During the second quarter of 2020, we performed our annual goodwill impairment test and concluded that it is more likely-than-not that the fair value of our goodwill continues to exceed its carrying value and therefore, goodwill is not impaired. Furthermore, we performed an interim goodwill impairment assessment during both the third and fourth quarters of 2020 and concluded no impairment existed. While our goodwill impairment analysis indicated no impairment at December 31, 2020, our assessment depends on several assumptions which are dependent on market and economic conditions, and future changes in those conditions could impact our assessment in the future. Stock-Based Compensation Plans We have adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of performance or bonus shares granted to directors, officers and other key employees. In accordance with ASC Topic 718, Compensation – Stock Compensation , the fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses various assumptions. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. For additional information, see Note 15, Employee Benefit Plans, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. Income Taxes We are subject to the federal income tax laws of the United States, and the tax laws of the states and other jurisdictions where we conduct business. Due to the complexity of these laws, taxpayers and the taxing authorities may subject these laws to different interpretations. Management must make conclusions and estimates about the application of these innately intricate laws, related regulations, and case law. When preparing the Company’s income tax returns, management attempts to make reasonable interpretations of the tax laws. Taxing authorities have the ability to challenge management’s analysis of the tax law or any reinterpretation management makes in its ongoing assessment of facts and the developing case law. Management assesses the reasonableness of its effective tax rate quarterly based on its current estimate of net income and the applicable taxes expected for the full year. On a quarterly basis, management also reviews circumstances and developments in tax law affecting the reasonableness of deferred tax assets and liabilities and reserves for contingent tax liabilities. The adoption of ASU 2016-09 – Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting decreased the effective tax rate during 2017 and 2018 as the standard impacted how the income tax effects associated with stock-based compensation are recognized. 36 2020 Overview The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2020 and 2019 and results of operations for each of the years then ended. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2019 Form 10-K filed with the SEC on February 27, 2020 for a discussion and analysis of the more significant factors that affected periods prior to 2019. Certain reclassifications have been made to make prior periods comparable. This discussion and analysis should be read in conjunction with our financial statements, notes thereto and other financial information appearing elsewhere in this report, as well as the cautionary note regarding forward-looking statements and the risks discussed in Item 1A of Part I of this Form 10-K. Our net income available to common shareholders for the year ended December 31, 2020 was $254.9 million, or $2.31 diluted earnings per share, compared to $237.8 million, or $2.41 diluted earnings per share, for the same period in 2019. Included in both 2020 and 2019 results were non-core items related to our acquisitions, early retirement program expenses and branch right sizing initiatives, and with respect to our 2020 results only, gains associated with the sale of branches. Excluding all non-core items, core earnings for the year ended December 31, 2020 were $264.3 million, or $2.40 core diluted earnings per share, compared to $269.6 million, or $2.73 core diluted earnings per share, in 2019. See GAAP Reconciliation of Non-GAAP Financial Measures for additional discussion and reconciliation of non-GAAP measures. We completed the acquisition of The Landrum Company (or “Landrum”), including its wholly-owned bank subsidiary, Landmark Bank, in October 2019. The systems conversion of Landmark Bank was completed during February 2020. See Note 2, Acquisitions, in the accompanying Notes to Consolidated Financial Statements for additional information related to this acquisition. On February 28, 2020, we completed the sale of certain assets and assumptions of certain liabilities (“Texas Branch Sale”) associated with five Simmons Bank locations in Austin, San Antonio and Tilden, Texas to Spirit of Texas Bank, SSB, a wholly-owned subsidiary of Spirit of Texas Bancshares, Inc.. Additionally, on May 18, 2020 we completed the sale of certain assets and assumptions of certain liabilities (“Colorado Branch Sale”) associated with four Simmons Bank locations in Denver, Englewood, Highlands Ranch and Lone Tree, Colorado to First Western Trust Bank, a wholly-owned subsidiary of First Western Financial, Inc. We recognized a combined gain on sale of $8.1 million on the Texas Branch Sale and Colorado Branch Sale. Early in 2020, we offered qualifying associates an early retirement option resulting in $2.9 million of non-core expense during 2020. We expect ongoing net annualized savings of approximately $2.9 million from this program. We continuously evaluate our branch network as part of our analysis of the profitability of our operations and the efficiency with which we deliver banking services to our markets, including, among other things, changes in customer traffic and preferences. As a result of this ongoing evaluation, we closed 11 branch locations during June 2020, with estimated net annual cost savings of approximately $2.4 million related to these locations. We closed an additional 23 branch locations on October 9, 2020, with an expected net annual cost savings of approximately $6.7 million. Related to these branch closures, we transferred $15.4 million in branch facilities to premises held for sale. During 2020, our digital banking users grew approximately 30% while the number of digital transactions increased by 38%, indicating not only a continued trend of increasing digital customers but also that customers are executing more of their banking transactions through digital channels. In March 2020, for the first time, we had more weekly transactions using digital channels than at the branches. Our mobile deposit usage has seen an increase of 170% since the end of 2019. Additionally, we developed a new mobile deposit process to fully automate user enrollment and mitigate our risk. During the last quarter of 2020, 84% of all accounts that had a banking transaction were enrolled in digital banking. During May 2020, we completed the conversion of all consumer deposit customers to our new online platform. All consumer deposit customers are now on the same online and mobile platforms, including acquired institutions. In September 2020, we completed the development of new credit card functionality which allows our mobile and online banking platform for consumer deposit customers to also display credit card balances, line of credit utilization, recent credit card transactions and minimum credit card payment details, all with real-time information. On November 30, 2020, we entered into a Branch Purchase and Assumption Agreement with Citizens Equity First Credit Union to sell four Simmons Bank locations in the Metro East area of Southern Illinois, near St. Louis. We expect to close the sale during the first quarter of 2021. See Note 4, Other Assets and Other Liabilities Held for Sale, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report for additional information related to the sale of these locations. 37 Also during 2020, we completed our regulatory exam cycle, including our first CFPB exam, and contributed $3.0 million to the Simmons First Foundation to support environmental conservation projects throughout our service area. During 2019, we had several notable events that affected our operating results. First, we recorded $15 million in provision expense primarily related to the charge-off of a participation interest in a shared national credit to White Star Petroleum, LLC (“White Star”) (further discussed below in Provision for Credit Losses ). Second, we sold Visa Inc. class B common stock resulting in a gain of $42.9 million, and in connection with that sale, we contributed $4 million to the Simmons First Foundation so it may continue its work to provide community development grants throughout our footprint. Third, we sold $114 million of primarily commercial real estate (“CRE”) loans resulting in a net loss of $5.1 million. In April 2019, we completed the acquisition of Reliance Bancshares, Inc. (“Reliance”). Contemporaneously with the Reliance acquisition, Reliance’s subsidiary bank, Reliance Bank, was merged with and into Simmons Bank, with Simmons Bank as the surviving entity. We are excited about the opportunities we continue to have in the St. Louis market resulting from our increased presence. See Note 2, Acquisitions, in the accompanying Notes to Consolidated Financial Statements included elsewhere in this report, for additional information related to the Landrum and Reliance acquisitions. Stockholders’ equity as of December 31, 2020 was $3.0 billion, book value per share was $27.53 and tangible book value per share was $16.56. Our ratio of common stockholders’ equity to total assets was 13.3% and the ratio of tangible common stockholders’ equity to tangible assets was 8.5% at December 31, 2020. See GAAP Reconciliation of Non-GAAP Financial Measures for additional discussion and reconciliation of non-GAAP measures. The Company’s Tier I leverage ratio of 9.1%, as well as our other regulatory capital ratios, remain significantly above the “well capitalized” minimum requirements. See Table 20 – Risk-Based Capital for regulatory capital ratios. Total interest bearing balances due from banks and federal funds sold were $3.3 billion at December 31, 2020, an increase of $2.5 billion from the same period in 2019 due to the additional liquidity that has accumulated as a result of the ongoing effects of the COVID-19 pandemic, including economic stimulus legislation, reduced credit card balances, tepid loan demand and fewer overdraft activities. Total loans were $12.9 billion at December 31, 2020, a decrease of $1.5 billion, or 10.6%, from the same period in 2019. During 2020, we provided $975.6 million in PPP loans to our customers. See the COVID-19 Impact section below for additional information. At December 31, 2020, the allowance for credit losses on loans was $238.1 million. We adopted the new credit loss methodology, CECL, on January 1, 2020. Upon adoption, we recorded an additional allowance for credit losses of approximately $151.4 million, an adjustment to the reserve for unfunded commitments of $24.0 million, and a related $128.1 million adjustment to retained earning net of taxes. In our discussion and analysis of our financial condition and results of operation in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we provide certain financial information determined by methods other than in accordance with US GAAP. We believe the presentation of non-GAAP financial measures provides a meaningful basis for period-to-period and company-to-company comparisons, which we believe will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. See the GAAP Reconciliation of Non-GAAP Measures section below for additional discussion and reconciliations of non-GAAP measures. Simmons First National Corporation is an Arkansas-based financial holding company that, as of December 31, 2020, has approximately $22.4 billion in consolidated assets and, through its subsidiaries, conducts financial operations in Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas. 38 COVID-19 Impact The coronavirus (“COVID-19”) pandemic has placed significant health, economic and other major pressure on the communities we serve, the United States and the entire world. In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was designed to provide comprehensive relief to individuals and businesses following the unprecedented impact of the COVID-19 pandemic. Additionally, we have been actively managing our response to the continuing COVID-19 pandemic and have implemented a number of procedures in response to the pandemic to support the safety and well being of our employees, customers and shareholders. Some of the implemented procedures include: • Addressing the safety of the Company’s branch network, following local, state, and federal guidelines; • Holding regular executive and pandemic task force meetings to address issues that change rapidly; • Implementing business continuity plans to help ensure that customers have adequate access to banking services; • Providing extensions and deferrals to loan customers affected by COVID-19 provided such customers were not 30 days or more past due at December 31, 2019. See further discussion in the Asset Quality section below; and • Participating in both appropriations of the CARES Act PPP that provides 100% federally guaranteed loans for small businesses to cover up to 24 weeks of payroll costs and assist with mortgage interest, rent and utilities. Notably, these small business loans may be forgiven by the SBA if borrowers maintain their payrolls and satisfy certain other conditions during this crisis. We have experienced meaningful shifts in consumer habits which we believe have impacted, and will continue to impact, our delivery of products and services as well as the retail delivery of everyday amenities. We believe that our investment in digital channels will continue to position our company for these changes. During the first quarter of 2020, we sold approximately $1.1 billion in securities to increase liquidity in response to potential customer withdrawals of deposits as well as for anticipated funding of PPP loans. As of December 31, 2020, we have approximately $3.5 billion in cash and cash equivalents and are well capitalized, which management believes has allowed us to continue to approach the crisis from a position of strength. During 2020, we originated 8,208 PPP loans with an average balance of $119,000 per loan. Approximately 94% of our PPP loans had a balance of less than $350,000 at the end of the year. The following table categorizes our PPP loans by outstanding balance as of December 31, 2020: PPP Loans Number of % of Original Balance at % of (Dollars in thousands) Loans Loans Balance December 31 Balance Less than $50,000 5,068 64 % $ 94,502 $ 90,759 10 % $50,000 to $350,000 2,329 30 % 305,191 285,206 32 % More than $350,000 to less than $2 million 431 5 % 357,947 315,379 35 % $2 million to $10 million 61 1 % 217,930 213,329 24 % Total 7,889 100 % $ 975,570 $ 904,673 100 % PPP loans are 100% federally guaranteed and have a zero percent risk-weight for regulatory capital ratios. As a result, excluding PPP loans from total assets, common equity to total assets was 13.9% and tangible common equity to tangible assets was 8.8% as of December 31, 2020. We are participating in the second round of PPP that passed legislation at the end of December 2020 and opened for funding in mid-January 2021. The new funding is available to both first-time applicants and returning borrowers who meet certain criteria. 39 We are dedicated to supporting our customers and communities throughout this period of uncertainty. As a show of this support, since March 2020, we have: • Donated masks, gloves and hand sanitizers to healthcare facilities, police and a community group delivering meals. • Sponsored a live streaming concert from Simmons Bank Arena to benefit the Feeding America food banks and the Hunger Relief Alliance, raising over $30,000. • Donated over $100,000 to various community support groups throughout our footprint to be used for COVID-19 response. • Delivered food and care packages to support police, firefighters, emergency responders and healthcare workers. We believe our associates have done a commendable job of adapting to the changes that have occurred over the past year. We continue to operate in an uncertain environment, and we expect to continue to adjust as necessary. We have consolidated various operations to provide capacity for continued service to our customers and communities. We continue to closely monitor this pandemic and expect to make future changes to respond as this situation continues to evolve. Further economic downturns accompanying this pandemic, a delayed economic recovery from this pandemic, or a delayed recovery from the pandemic due to difficulties with vaccine availability or distribution or new variants of the novel coronavirus, could result in increased deterioration in credit quality, past due loans, loans charge offs and collateral value declines, which could cause our results of operations and financial condition to be negatively impacted. Net Interest Income Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 26.135%. The FRB sets various benchmark interest rates which influence the general market rates of interest, including the deposit and loan rates offered by financial institutions. Between December 2015 and December 2018, the FRB had been gradually raising benchmark interest rates. The FRB target for the federal funds rate, which is the cost to banks of immediately available overnight funds, increased from 0% - 0.25% to 0.25% - 0.50% in December 2015 and gradually increased to 2.25% - 2.50% over a three year period. The federal funds rate was flat until the FRB began to lower the rate in August 2019 and ultimately reduced it to 1.50% - 1.75% in October 2019. During March 2020, the Federal Open Market Committee (“FOMC”) of the FRB substantially reduced interest rates in response to the economic crisis brought on by the COVID-19 pandemic. The federal funds rate was cut to a range of 0.00% - 0.25% and rates have continued to remain low through 2020. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, also increased from 3.25% to 5.50% during the years 2015 through 2018. The prime interest rate remained flat until it began to decrease in July 2019 and was eventually reduced to 4.75% in October 2019. Similarly to the reduction in the federal funds rate, the prime rate was cut to 3.25% in mid-March of 2020 in response to the COVID-19 pandemic. Our practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing. In the last several years, on average, approximately 41% of our loan portfolio and approximately 74% of our time deposits have repriced in one year or less. Our current interest rate sensitivity shows that approximately 41% of our loans and 85% of our time deposits will reprice in the next year. For the year ended December 31, 2020, net interest income on a fully taxable equivalent basis was $650.7 million, an increase of $41.7 million, or 6.8%, over the same period in 2019. The increase in net interest income was primarily the result of a $61.4 million decrease in interest expense partially offset by a reduction in interest income of $19.7 million. 40 The reduction in interest income primarily resulted from a decrease of $22.7 million in interest income on loans partially offset by an increase of $4.4 million in interest income on investment securities. The increase in average loan volume during 2020 generated $68.7 million of additional interest income, primarily from our Landrum and Reliance acquisitions completed during 2019, while a 67 basis point decline in yield resulted in a $91.4 million decrease in interest income during the year ended December 31, 2020. The loan yield for 2020 was 4.83% compared to 5.50% for 2019. The PPP loan yield was approximately 2.49% (including accretion of net fees), which decreased the loan yield by 11 basis points. Excluding the PPP loans, loan yield for 2020 was 4.94%. Included in interest income is the additional yield accretion recognized as a result of updated estimates of the cash flows of our loans acquired. Each quarter, we estimate the cash flows expected to be collected from the loans acquired, and adjustments may or may not be required. The cash flows estimate may increase or decrease based on payment histories and loss expectations of the loans. The resulting adjustment to interest income is spread on a level-yield basis over the remaining expected lives of the loans. For the years ended December 31, 2020, 2019 and 2018 interest income included $41.5 million, $41.2 million and $35.3 million, respectively, for the yield accretion recognized on loans acquired. The $61.4 million decrease in interest expense is mostly due to the decline in our deposit account rates and our FHLB borrowing rates. Interest expense decreased $73.0 million due to the decrease in yield of 66 basis points on interest-bearing deposit accounts and $6.1 million due to the decrease in yield of 47 basis points on FHLB borrowings. These decreases were partially offset by an increase of $13.8 million related to deposit growth primarily due to the Landrum and Reliance acquisitions completed in 2019. Our net interest margin on a fully tax equivalent basis was 3.38% for the year ended December 31, 2020, down 47 basis points from 2019. Normalized for all accretion, our core net interest margin (non-GAAP) at December 31, 2020 and 2019 was 3.16% and 3.59%, respectively. The decreases in the net interest margin and the core net interest margin were primarily driven by the lower interest rate environment, additional liquidity created in response to the COVID-19 pandemic, and the lower yielding PPP loans originated during the second and third quarters of 2020. The impact of these items on net interest margin for the year 2020 was 25 basis points, bringing the net interest margin adjusted for PPP loans and additional liquidity (non-GAAP) to 3.63%. See GAAP Reconciliation of Non-GAAP Financial Measures for additional discussion and reconciliation of non-GAAP measures. During March 2020, the FOMC substantially reduced interest rates in response to the economic crisis brought on by the COVID-19 pandemic and rates have continued to remain low throughout 2020. As such, our variable rate loan portfolio has repriced to a lower yield and we have worked to lower the cost of deposits. In addition, our decreased net interest margin was being driven by the decrease in our non-PPP loan portfolio during 2020. Over the course of 2021, we expect a slight improvement in our net interest margin. Our non-PPP loan portfolio declined during 2020 as a result of COVID-19 but our loan pipeline is beginning to rebuild and we expect modest organic loan growth during 2021. Additionally, PPP loans are expected to be forgiven or repaid and we also plan on re-investing these proceeds in our securities portfolio during 2021. Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2020, 2019 and 2018, respectively, as well as changes in fully taxable equivalent net interest margin for the years 2020 versus 2019 and 2019 versus 2018. 41 Table 1: Analysis of Net Interest Margin (FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%) Years Ended December 31, (In thousands) 2020 2019 2018 Interest income $ 759,718 $ 783,123 $ 676,829 FTE adjustment 11,001 7,322 5,297 Interest income - FTE 770,719 790,445 682,126 Interest expense 119,984 181,370 128,135 Net interest income - FTE $ 650,735 $ 609,075 $ 553,991 Yield on earning assets - FTE 4.00 % 5.00 % 4.91 % Cost of interest bearing liabilities 0.84 % 1.49 % 1.19 % Net interest spread - FTE 3.16 % 3.51 % 3.72 % Net interest margin - FTE 3.38 % 3.85 % 3.99 % Table 2: Changes in Fully Taxable Equivalent Net Interest Margin (In thousands) 2020 vs. 2019 2019 vs. 2018 Increase due to change in earning assets $ 96,617 $ 97,636 (Decrease) increase due to change in earning asset yields (116,343) 10,683 Decrease due to change in interest bearing liabilities (19,031) (17,139) Increase (decrease) due to change in interest rates paid on interest bearing liabilities 80,417 (36,096) Increase in net interest income $ 41,660 $ 55,084 Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for each of the years in the three-year period ended December 31, 2020. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Nonaccrual loans were included in average loans for the purpose of calculating the rate earned on total loans. 42 Table 3: Average Balance Sheets and Net Interest Income Analysis (FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%) Years Ended December 31, 2020 2019 2018 Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (In thousands) Balance Expense Rate (%) Balance Expense Rate (%) Balance Expense Rate (%) ASSETS Earning assets: Interest bearing balances due from banks and federal funds sold $ 1,970,852 $ 4,383 0.22 $ 451,946 $ 7,486 1.66 $ 409,092 $ 5,996 1.47 Investment securities - taxable 1,813,640 35,039 1.93 1,717,566 43,618 2.54 1,579,716 39,225 2.48 Investment securities - non-taxable 1,113,851 39,666 3.56 681,231 26,675 3.92 516,769 19,231 3.72 Mortgage loans held for sale 113,854 3,031 2.66 35,815 1,326 3.70 29,550 1,336 4.52 Loans 14,260,689 688,600 4.83 12,938,013 711,340 5.50 11,356,863 616,338 5.43 Total interest earning assets 19,272,886 770,719 4.00 15,824,571 790,445 5.00 13,891,990 682,126 4.91 Non-earning assets 2,317,859 2,047,177 1,879,372 Total assets $ 21,590,745 $ 17,871,748 $ 15,771,362 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Interest bearing liabilities: Interest bearing transaction and savings deposits $ 9,128,936 $ 38,462 0.42 $ 7,417,104 $ 80,314 1.08 $ 6,691,030 $ 56,903 0.85 Time deposits 3,006,768 41,398 1.38 3,094,094 58,697 1.90 2,344,303 30,307 1.29 Total interest bearing deposits 12,135,704 79,860 0.66 10,511,198 139,011 1.32 9,035,333 87,210 0.97 Federal funds purchased and securities sold under agreements to repurchase 362,629 1,715 0.47 128,547 1,010 0.79 110,986 423 0.38 Other borrowings 1,353,738 19,652 1.45 1,199,274 23,008 1.92 1,309,430 23,654 1.81 Subordinated debt and debentures 385,294 18,757 4.87 359,804 18,341 5.10 341,254 16,848 4.94 Total interest bearing liabilities 14,237,365 119,984 0.84 12,198,823 181,370 1.49 10,797,003 128,135 1.19 Non-interest bearing liabilities: Non-interest bearing deposits 4,225,618 3,021,917 2,697,235 Other liabilities 205,956 251,631 120,027 Total liabilities 18,668,939 15,472,371 13,614,265 Stockholders’ equity 2,921,806 2,399,377 2,157,097 Total liabilities and stockholders’ equity $ 21,590,745 $ 17,871,748 $ 15,771,362 Net interest spread 3.16 3.51 3.72 Net interest margin $ 650,735 3.38 $ 609,075 3.85 $ 553,991 3.99 43 Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the years 2020 versus 2019 and 2019 versus 2018. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates in proportion to the relationship of absolute dollar amounts of the changes in rates and volume. Table 4: Volume/Rate Analysis Years Ended December 31, 2020 vs. 2019 2019 vs. 2018 Yield/ Yield/ (In thousands, on a fully taxable equivalent basis) Volume Rate Total Volume Rate Total Increase (decrease) in: Interest income: Interest bearing balances due from banks and federal funds sold $ 7,840 $ (10,943) $ (3,103) $ 665 $ 825 $ 1,490 Investment securities - taxable 2,329 (10,908) (8,579) 3,485 908 4,393 Investment securities - non-taxable 15,597 (2,606) 12,991 6,395 1,049 7,444 Mortgage loans held for sale 2,170 (465) 1,705 256 (266) (10) Loans 68,681 (91,421) (22,740) 86,835 8,167 95,002 Total 96,617 (116,343) (19,726) 97,636 10,683 108,319 Interest expense: Interest bearing transaction and savings accounts 15,431 (57,283) (41,852) 6,655 16,756 23,411 Time deposits (1,615) (15,684) (17,299) 11,534 16,856 28,390 Federal funds purchased and securities sold under agreements to repurchase 1,238 (533) 705 76 511 587 Other borrowings 2,713 (6,069) (3,356) (2,061) 1,415 (646) Subordinated notes and debentures 1,264 (848) 416 935 558 1,493 Total 19,031 (80,417) (61,386) 17,139 36,096 53,235 Increase (decrease) in net interest income $ 77,586 $ (35,926) $ 41,660 $ 80,497 $ (25,413) $ 55,084 Provision for Credit Losses The provision for credit losses represents management’s determination of the amount necessary to be charged against the current period’s earnings in order to maintain the allowance for credit losses at a level considered appropriate in relation to the estimated lifetime risk inherent in the loan portfolio. The level of provision to the allowance is based on management’s judgment, with consideration given to the composition, maturity and other qualitative characteristics of the portfolio, assessment of current economic conditions, past due and non-performing loans and historical net credit loss experience. It is management’s practice to review the allowance on a monthly basis and, after considering the factors previously noted, to determine the level of provision made to the allowance. Management updates credit loss forecasts using multiple Moody’s economic scenarios, the most recent of which were published in December 2020. The baseline economic forecast was weighted 68%, while the downside scenario of S-2 was weighted 15% and the upside scenario of S-1 was weighted 17%. The weighting of the forecasts is characterized by, among others, market rates remaining low, the substantial decline of CRE prices, and the current national unemployment rate. The provision for credit losses for 2020, 2019 and 2018 was $75.0 million, $43.2 million and $38.1 million, respectively. The increase during 2020 was primarily driven by the adoption of CECL and the related change in methodology which is based on qualitative adjustments, intended to account for potential problem credits that have not materialized into any identifiable metrics or delinquencies. During 2020, certain industries were more adversely impacted by the current and expected economic scenarios, such as the restaurant, retail, and hotel industries. Additionally, 2020 also included an additional provision related to problem energy credits, ultimately charged-off during the second quarter of 2020 for a total of $32.6 million, that experienced further deterioration beginning in first quarter of 2020 and were negatively impacted by the sharp decline in commodity pricing. The remainder of the increase was related to the economic impact of the COVID-19 pandemic that is incorporated in our allowance for credit losses. 44 The increase in provision expense during 2019 was necessary to maintain an appropriate allowance for credit losses for the company’s growing portfolio. Significant loan growth in our markets required an allowance to be established for those loans through an increased provision. Additionally, during 2019, a special provision was made related to White Star, in which we were a participant in a shared national credit. White Star became the subject of bankruptcy proceedings during 2019, and in September 2019, the bankruptcy court authorized the sale of White Star assets through a Section 363 proceeding under the U.S. Bankruptcy Code. Our portion of the shared national credit was $19.1 million. Based upon the anticipated net proceeds from the pending bankruptcy sale, our loss recorded in 2019 was $14.7 million. As a result, we recorded additional provision expense of $15 million to increase the allowance to an appropriate level. Additionally, a provision of $2.5 million was made during 2019 as a result of identifying certain loans specific to an acquired portfolio in our Dallas market which were poorly structured or were poorly managed post-funding. The provision for credit losses for 2018 included $3.3 million due to decreases in the expected cash flows on certain purchased credit impaired loans as identified by our required ongoing evaluation of credit marks. Non-Interest Income Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and debit and credit card fees. Non-interest income also includes income on the sale of mortgage and SBA loans, investment banking income, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities. Total non-interest income was $248.5 million in 2020, compared to $205.0 million in 2019 and $147.8 million in 2018. Non-interest income for 2020 increased $43.5 million, or 21.2%, from 2019. During 2020, we sold approximately $1.7 billion of investment securities resulting in a net gain of $54.8 million. The majority of the investment securities were sold in March 2020, in response to the unfolding events of the COVID-19 pandemic, as we focused on the creation of additional liquidity and strengthening our balance sheet. We used a portion of the liquidity generated by these investment security sales to fund PPP loans originated during the second and third quarters of 2020. We plan to reinvest back into our investment portfolio over the next year as the PPP loans are repaid, subject to economic conditions and other concerns at such time. Additionally, mortgage lending income increased $19.5 million during 2020 as a result of the current low mortgage interest rate environment and strong housing markets, as well as increased business related to our Landrum and Reliance acquisitions. The gains on sale from the Texas Branch Sale and Colorado Branch Sale of $8.1 million, which we consider a non-core item, contributed to the increase in 2020. These increases were partially offset by the one-time gain on sale of the Visa Inc. class B common stock of $42.9 million during 2019. The majority of the increase in 2019 was related to the gain on sale of the Visa Inc. class B common stock. Also, during 2019, we were focused on rebalancing our investment portfolio and consequently recognized additional gains on the sale of securities. During 2019, we sold approximately $558.9 million of securities resulting in a net gain of $13.3 million. Increases in mortgage lending income were due to a strong real estate housing market driven by the interest rate decreases beginning in mid-2019. Conversely, debit and credit card fees decreased $3.0 million compared to 2018 primarily due to the effects of the interchange rate cap as established by the Durbin Amendment to which we became subject as of July 1, 2018. For further discussion regarding the Durbin Amendment, see the Impacts of Growth section in Part I, Item 1, Business. Table 5 shows non-interest income for the years ended December 31, 2020, 2019 and 2018, respectively, as well as changes in 2020 from 2019 and in 2019 from 2018. 45 Table 5: Non-Interest Income Years Ended December 31, 2020 Change from 2019 Change from (Dollars in thousands) 2020 2019 2018 2019 2018 Trust income $ 27,705 $ 25,040 $ 23,128 $ 2,665 10.6 % $ 1,912 8.3 % Service charges on deposit accounts 43,082 44,782 42,508 (1,700) (3.8) 2,274 5.4 Other service charges and fees 6,624 5,824 7,469 800 13.7 (1,645) (22.0) Mortgage lending income 34,469 15,017 9,230 19,452 129.5 5,787 62.7 SBA lending income 1,329 2,669 1,813 (1,340) (50.2) 856 47.2 Investment banking income 2,681 2,313 3,141 368 15.9 (828) (26.4) Debit and credit card fees 33,470 29,289 32,268 4,181 14.3 (2,979) (9.2) Bank owned life insurance income 5,815 4,768 4,415 1,047 22.0 353 8.0 Gain on sale of securities, net 54,806 13,314 61 41,492 * 13,253 * Gain on sale of Visa Inc. class B common stock — 42,860 — (42,860) (100.0) 42,860 * Gain on sale of branches 8,368 — — 8,368 * — — Other income 30,179 19,155 23,721 11,024 57.6 (4,566) (19.2) Total non-interest income $ 248,528 $ 205,031 $ 147,754 $ 43,497 21.2 % $ 57,277 38.8 % _________________________ *Not meaningful Recurring fee income (service charges, trust fees, debit and credit card fees and other fees) for 2020 was $110.9 million, an increase of $5.9 million, or 5.7%, when compared with the 2019 amounts, primarily the result of the Landrum and Reliance acquisitions completed during 2019. Non-Interest Expense Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for our operations. Management remains committed to controlling the level of non-interest expense through the continued use of expense control measures. We utilize an extensive profit planning and reporting system involving all subsidiaries. Based on a needs assessment of the business plan for the upcoming year, monthly and annual profit plans are developed, including manpower and capital expenditure budgets. These profit plans are subject to extensive initial reviews and monitored by management monthly. Variances from the plan are reviewed monthly and, when required, management takes corrective action intended to ensure financial goals are met. We also regularly monitor staffing levels at each subsidiary to ensure productivity and overhead are in line with existing workload requirements. Non-interest expense for 2020 was $493.5 million, an increase of $32.4 million, or 7.0%, from 2019. Included in 2020 were $21.5 million of pre-tax non-core items: $4.5 million of merger-related costs due to the Landrum and Reliance acquisitions, $2.9 million of early retirement program expenses and $14.1 million of net branch-right sizing costs. Normalizing for these non-core costs, core non-interest expense for the year ended December 31, 2020 increased $53.8 million, or 12.9%, from the prior year. See the Reconciliation of Non-GAAP Measures section for details of the non-core items. The increase during 2020 was primarily due to the incremental operating expenses from the Landrum and Reliance acquisitions completed during 2019. Also, our Next Generation Banking (“NGB”) technology initiative has made substantial progress and the incremental software and technology expenditures of $14.6 million were primarily related to this initiative. Marketing costs include a $3 million donation to the Simmons First Foundation for grants to support environmental conservation projects throughout the Simmons Bank footprint. Non-interest expense for 2019 was $461.1 million, an increase of $68.9 million, or 17.6%, from 2018. Normalizing for the non-core costs, core non-interest expense for 2019 increased $32.0 million, or 8.3%, from the prior year. The increase during 2019 was largely due to additional operating costs related to the Landrum and Reliance acquisitions and the NGB initiative. Marketing costs increased during 2019 due to incorporating a comprehensive community banking marketing philosophy over our expanded footprint and our $4 million contribution to the Simmons First Foundation. 46 The reduction in deposit insurance expense during 2019 was due to a credit assessment received from the FDIC during the third and fourth quarters of 2019 in the amount of $4.7 million. The FDIC’s Deposit Insurance Fund Reserve Ratio reached 1.35% as of September 30, 2018, and we were notified by the FDIC that Simmons Bank was entitled to $4.0 million in assessment credits. In addition, Landmark Bank had $745,000 in assessment credits at acquisition. We were able to utilize both the Simmons Bank and Landmark Bank credits during the last half of 2019, and, as of December 31, 2019, there are no assessment credits remaining. Amortization of intangibles recorded for the years ended December 31, 2020, 2019 and 2018, was $13.5 million, $11.8 million and $11.0 million, respectively. The increase during 2020 was due to a full year of amortization of intangibles being recorded for intangibles acquired from the 2019 acquisitions. See Note 8, Goodwill and Other Intangible Assets, in the accompanying Notes to Consolidated Financial Statements for additional information regarding our intangibles. Table 6 below shows non-interest expense for the years ended December 31, 2020, 2019 and 2018, respectively, as well as changes in 2020 from 2019 and in 2019 from 2018. Table 6: Non-Interest Expense Years Ended December 31, 2020 Change from 2019 Change from (Dollars in thousands) 2020 2019 2018 2019 2018 Salaries and employee benefits $ 239,573 $ 224,331 $ 216,743 $ 15,242 6.8 % $ 7,588 3.5 % Early retirement program 2,901 3,464 — (563) (16.3) 3,464 * Occupancy expense, net 37,556 32,008 29,610 5,548 17.3 2,398 8.1 Furniture and equipment expense 24,038 18,220 16,323 5,818 31.9 1,897 11.6 Other real estate and foreclosure expense 1,752 3,442 4,480 (1,690) (49.1) (1,038) (23.2) Deposit insurance 9,184 4,416 8,721 4,768 108.0 (4,305) (49.4) Merger related costs 4,531 36,379 4,777 (31,848) (87.6) 31,602 * Other operating expenses: Professional services 18,688 16,897 16,685 1,791 10.6 212 1.3 Postage 7,538 6,363 5,785 1,175 18.5 578 10.0 Telephone 8,833 7,685 5,947 1,148 14.9 1,738 29.2 Credit card expenses 18,960 16,163 14,338 2,797 17.3 1,825 12.7 Marketing 19,396 16,499 8,410 2,897 17.6 8,089 96.2 Software and technology 39,724 25,146 15,558 14,578 58.0 9,588 61.6 Operating supplies 3,322 2,322 2,346 1,000 43.1 (24) (1.0) Amortization of intangibles 13,495 11,805 11,009 1,690 14.3 796 7.2 Branch right sizing expense 14,097 3,129 1,341 10,968 * 1,788 133.3 Other expense 29,907 32,843 30,156 (2,936) (8.9) 2,687 8.9 Total non-interest expense $ 493,495 $ 461,112 $ 392,229 $ 32,383 7.0 % $ 68,883 17.6 % _________________________ *Not meaningful 47 Income Taxes The provision for income taxes for 2020 was $64.9 million, compared to $64.3 million in 2019 and $50.4 million in 2018. The effective income tax rates for the years ended 2020, 2019 and 2018 were 20.3%, 21.2% and 18.9%, respectively. During fourth quarter of 2017, the President signed tax reform legislation (“2017 Act”) which included a broad range of tax reform provisions affecting businesses, including corporate tax rates, business deductions, and international tax provisions. The 2017 Act reduced the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. The 2017 Act resulted in a one-time non-cash adjustment to income of $11.5 million during 2017. The effective income tax rate was lower during 2018 largely due to the 2017 Act, as well as the discrete tax benefits related to tax accounting for a cost segregation study, excess tax benefits related to restricted stock and a state tax deferred tax asset adjustment. See Note 10, Income Taxes, for further discussion related to these discrete tax benefits recognized during the year. Loan Portfolio Our loan portfolio averaged $14.26 billion during 2020 and $12.94 billion during 2019. As of December 31, 2020, total loans were $12.90 billion, compared to $14.43 billion on December 31, 2019, a decrease of $1.52 billion, or 10.6%. The decline in the overall loan balance during 2020 reflects the tepid loan demand as a result of the economic uncertainty stemming from the COVID-19 pandemic. The most significant components of the loan portfolio were loans to businesses (commercial loans, commercial real estate loans and agricultural loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans). We seek to manage our credit risk by diversifying our loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral, obtaining and monitoring collateral, providing an appropriate allowance for credit losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose, industry and geographic region. We seek to use diversification within the loan portfolio to reduce credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. We use the allowance for credit losses as a method to value the loan portfolio at its estimated collectible amount. Loans are regularly reviewed to facilitate the identification and monitoring of deteriorating credits. Consumer loans consist of credit card loans and other consumer loans. Consumer loans were $391.2 million at December 31, 2020, or 3.0% of total loans, compared to $454.5 million, or 3.2% of total loans at December 31, 2019. The decrease in consumer loans was primarily due to a decrease in the indirect lending portfolio associated with our discontinuance of the line of business in early 2017 and the portfolio continues to pay down. The credit card portfolio balance at December 31, 2020, decreased by $24.4 million when compared to the same period in 2019. Our credit card portfolio has remained a stable source of lending for several years. Real estate loans consist of construction and development (“C&D”) loans, single family residential loans and other CRE loans. Real estate loans were $9.22 billion at December 31, 2020, or 71.5% of total loans, compared to $10.88 billion, or 75.5% of total loans at December 31, 2019, a decrease of $1.7 billion, or 15.3%. Our C&D loans decreased by $640.6 million, or 28.6%, single family residential loans decreased by $561.4 million, or 23.0%, and CRE loans decreased by $458.7 million, or 7.4%. Real estate loans declined approximately $104.6 million due to loan dispositions in connection with the Colorado Branch Sale. The remaining decrease was due to less activity as a result of the COVID-19 pandemic and our effort to manage our real estate portfolio concentration. In the near term, we expect to continue to manage our C&D and CRE portfolio concentration by developing deeper relationships with our customers. Commercial loans consist of non-real estate loans related to business and agricultural loans. Total commercial loans were $2.75 billion at December 31, 2020, or 21.3% of total loans, compared to $2.81 billion, or 19.5% of total loans at December 31, 2019, a decrease of $60.7 million, or 2.2%, that is mostly in our agricultural loan portfolio. Our non-agricultural commercial loan portfolio increased during 2020 due to the $975.6 million in PPP loan originations. As of December 31, 2020, the balance in our PPP loan portfolio was $904.7 million. 48 Our total loan pipeline consisting of all loan opportunities, which was a robust $1.7 billion at December 31, 2019 fell to $374.4 million at September 30, 2020. The pipeline is starting to rebuild and ended 2020 at $673.7 million, including $176.6 million in loans approved and ready to close. Other loans mainly consists of mortgage warehouse lending. Mortgage volume surged during 2020 due to the low interest rate environment and robust singe family real estate market conditions in many locations within our market area, leading to an increase of $259.9 million in other loans primarily from mortgage warehouse lines of credit. The balances of loans outstanding at the indicated dates are reflected in Table 7, according to type of loan. Table 7: Loan Portfolio Years Ended December 31, (In thousands) 2020 2019 2018 2017 2016 Consumer: Credit cards $ 180,354 $ 204,802 $ 204,173 $ 185,422 $ 184,591 Other consumer 210,870 249,694 215,763 336,393 363,448 Total consumer 391,224 454,496 419,936 521,815 548,039 Real Estate: Construction and development 1,596,255 2,236,861 1,736,817 1,296,698 395,472 Single family residential 1,880,673 2,442,064 1,994,716 1,934,167 1,318,558 Other commercial 5,746,863 6,205,599 5,073,994 4,881,415 2,483,047 Total real estate 9,223,791 10,884,524 8,805,527 8,112,280 4,197,077 Commercial: Commercial 2,574,386 2,495,516 2,192,497 1,809,374 724,731 Agricultural 175,905 315,454 166,225 156,244 153,589 Total commercial 2,750,291 2,810,970 2,358,722 1,965,618 878,320 Other 535,591 275,714 139,081 180,390 10,407 Total loans before allowance for credit losses $ 12,900,897 $ 14,425,704 $ 11,723,266 $ 10,780,103 $ 5,633,843 Table 8 reflects the remaining maturities and interest rate sensitivity of loans at December 31, 2020. Table 8: Maturity and Interest Rate Sensitivity of Loans 1 year Over 1 year through Over (In thousands) or less 5 years 5 years Total Consumer $ 283,470 $ 92,512 $ 15,242 $ 391,224 Real estate 3,230,782 5,576,668 416,341 9,223,791 Commercial 1,904,394 747,966 97,931 2,750,291 Other 535,468 123 — 535,591 Total $ 5,954,114 $ 6,417,269 $ 529,514 $ 12,900,897 Predetermined rate $ 3,353,485 $ 3,527,234 $ 77,430 $ 6,958,149 Floating rate 2,600,629 2,890,035 329,190 5,819,854 Nonaccrual — — 122,894 122,894 Total $ 5,954,114 $ 6,417,269 $ 529,514 $ 12,900,897 49 Asset Quality Non-performing loans are comprised of (a) nonaccrual loans, (b) loans that are contractually past due 90 days and (c) other loans for which terms have been restructured to provide a reduction or deferral of interest or principal, because of deterioration in the financial position of the borrower. The subsidiary bank recognizes income principally on the accrual basis of accounting. When loans are classified as nonaccrual, generally, the accrued interest is charged off and no further interest is accrued. Loans, excluding credit card loans, are placed on a nonaccrual basis either: (1) when there are serious doubts regarding the collectibility of principal or interest, or (2) when payment of interest or principal is 90 days or more past due and either (i) not fully secured or (ii) not in the process of collection. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for credit losses. When credit card loans reach 90 days past due and there are attachable assets, the accounts are considered for litigation. Credit card loans are generally charged off when payment of interest or principal exceeds 150 days past due. The credit card recovery group pursues account holders until it is determined, on a case-by-case basis, to be uncollectible. Total non-performing assets increased $28.6 million from December 31, 2019 to December 31, 2020. Nonaccrual loans increased by $29.5 million during 2020, partially offset by a decrease in foreclosed assets held for sale of $728,000. The increase in nonaccrual loans during 2020 is primarily related to one energy loan totaling $22.0 million which moved to nonaccrual during the fourth quarter of 2020. The remaining increase was related to various other CRE loans and commercial loan relationships. We continue to actively pursue an exit of our energy lending portfolio, except for our customers who have a diversified relationship with us. Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.66% at December 31, 2020 compared to 0.57% at December 31, 2019. Total non-performing assets increased by $33.1 million from December 31, 2018 to December 31, 2019. Nonaccrual loans increased by $37.5 million during 2019, primarily commercial loans, partially offset by a decrease in foreclosed assets held for sale of $6.4 million. Total non-performing assets decreased by $23.2 million from December 31, 2017 to December 31, 2018. Nonaccrual loans decreased by $13.3 million during 2018, primarily commercial loans. Foreclosed assets held for sale decreased by $6.6 million. During 2018, we sold approximately $32 million of substandard rated loans that consisted of both legacy and acquired loans. The loans had adequate reserves, thus no provision expense was required. However, the sale increased net charge-offs by approximately $4.6 million. Total non-performing assets decreased by $8.2 million from December 31, 2016, to December 31, 2017. Total non-performing loans decreased by $13.6 million from December 31, 2016 to December 31, 2017. Nonaccrual loans decreased by $16.8 million during 2017. During 2017, $3.2 million of previously closed branch buildings and land was reclassified to OREO from premises held for sale. There was no deterioration or further write-down of these properties. Also, as part of the First South Bank conversion, 5 branches were closed during the third quarter of 2017. Under ASC Topic 360, there is a one year maximum holding period to classify premises as held for sale. However, under Arkansas state banking laws former branch buildings must be recorded as OREO. From time to time, including in connection with the COVID-19 pandemic, certain borrowers are experiencing declines in income and cash flow. As a result, these borrowers are seeking to reduce contractual cash outlays, the most prominent being debt payments. In an effort to preserve our net interest margin and earning assets, we are open to working with existing customers in order to maximize the collectibility of the debt. When we restructure a loan to a borrower that is experiencing financial difficulty and grant a concession that we would not otherwise consider, a “troubled debt restructuring,” or “TDR,” results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal. 50 Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. Our TDR balance increased slightly to $7.5 million at December 31, 2020 compared to $7.4 million at December 31, 2019, and decreased when compared to $10.8 million at December 31, 2018. TDRs are individually evaluated for expected credit losses. We assess the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and determine if a specific allowance for credit losses is needed. We return TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months. The provisions in the CARES Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act and is following the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by regulatory agencies. In response to the concerns related to the expiration of the applicable period for which the election to not apply the guidance on accounting for TDRs to loan modifications, the CARES Act was amended in late fourth quarter of 2020 to extend COVID-19 relief related to loan modifications from the earlier of (i) January 1, 2022 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. During 2020, we processed over 3,700 COVID-19 loan modifications in excess of $3.0 billion. As of mid-February 2021, approximately 85% of these balances have returned to regular payments or are expected to return to regular payments in the first quarter of 2021, with the remainder of the loans still in the modification period. See Note 5, Loans and Allowance for Credit Losses, in the accompanying Notes to Consolidated Financial Statements for additional information related to these loans. Of these COVID-19 loan modifications, approximately $390.0 million, or 13.0%, are commercial loan modifications that are in an internal COVID-19 status category of 4-7 as of mid-February 2021, further discussed below. Internal COVID-19 status categories are internal status categories that we use in connection with our COVID-19 loan modification program. A description of the general characteristics of the internal COVID-19 status categories 4-7 is as follows: • Category 4 – Borrower is still in the modification period and expected to need an additional modification. Financial projections show return to original terms, but not at the end of six months. The loan remains collateralized and fully supported by the guarantor. • Category 5 – Financial projections do not support return to regular payments OR collateral deterioration is likely, which would not fully support the loan. The guarantors remain engaged and cooperative. • Category 6 – Financial projections do not support return to regular payments AND collateral deterioration is likely, which would not fully support the loan. The guarantors remain engaged and cooperative. • Category 7 – Financial projections do not support return to regular payments OR collateral deterioration is likely, which would not fully support the loan. The guarantors lack the capacity and are unwilling or unable to develop a new operating strategy. We developed these status categories for internal purposes only and they are not a substitute or a replacement for loan risk ratings used by us under US GAAP. 51 Table 9: Commercial COVID-19 Loan Modifications Status Category 4-7 by Industry (Dollars in thousands) Loan Balance % Hotels $ 274,728 70.5 % Nursing/Extended Care 47,511 12.2 Restaurants 10,802 2.8 Transportation and Warehousing 5,226 1.3 All Other 51,696 13.3 Total $ 389,963 100.0 % Table 10: Commercial COVID-19 Loan Modifications Status Category 4-7 (Dollars in thousands) Loan Balance Number of Loans Internal Status Category 4 $ 229,712 30 Internal Status Category 5 102,101 33 Internal Status Category 6 55,679 13 Internal Status Category 7 2,471 6 Total $ 389,963 82 As previously discussed, the COVID-19 pandemic has had an unprecedented impact on the hotel, restaurant and retail industries, causing our borrowers in those industries to seek loan modifications. We expect most of the commercial COVID-19 loan modifications listed above, as illustrated in Table 10, to return to regular payments with no credit downgrade or long-term restructure. Management has identified certain loans within COVID-19 internal status categories 5-7 as likely to need further payment assistance. Management focus is currently on these perceived higher risk loans, including efforts to assist borrowers in obtaining COVID relief assistance that may be available. We continue to maintain good asset quality, compared to the industry. Strong asset quality remains a primary focus of our company. The allowance for credit losses as a percent of total loans was 1.85% as of December 31, 2020. Non-performing loans equaled 0.96% of total loans. Non-performing assets were 0.64% of total assets, a 10 basis point increase from December 31, 2019. The allowance for credit losses was 193% of non-performing loans. Our annualized net charge-offs to total loans for 2020 was 0.45%. Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.43%. Annualized net credit card charge-offs to total credit card loans were 1.62%, compared to 1.86% during 2019, and 172 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks. We do not own any securities backed by subprime mortgage assets, and offer no mortgage loan products that target subprime borrowers. Table 11 presents information concerning non-performing assets, including nonaccrual loans at amortized cost and foreclosed assets held for sale. 52 Table 11: Non-performing Assets Years Ended December 31, (Dollars in thousands) 2020 2019 2018 2017 2016 Nonaccrual loans (1) $ 122,879 $ 93,330 $ 55,841 $ 69,127 $ 85,936 Loans past due 90 days or more (principal or interest payments) 578 856 226 3,488 311 Total non-performing loans 123,457 94,186 56,067 72,615 86,247 Other non-performing assets: Foreclosed assets held for sale and other real estate owned 18,393 19,121 25,565 32,118 26,895 Other non-performing assets 2,016 1,964 553 675 471 Total other non-performing assets 20,409 21,085 26,118 32,793 27,366 Total non-performing assets $ 143,866 $ 115,271 $ 82,185 $ 105,408 $ 113,613 Performing TDRs $ 3,138 $ 5,887 $ 7,436 $ 7,925 $ 11,488 Allowance for credit losses to non-performing loans 193 % 72 % 101 % 58 % 43 % Non-performing loans to total loans 0.96 % 0.65 % 0.48 % 0.67 % 1.53 % Non-performing assets (including performing TDRs) to total assets 0.66 % 0.57 % 0.54 % 0.75 % 1.49 % Non-performing assets to total assets 0.64 % 0.54 % 0.50 % 0.70 % 1.35 % _________________________ (1) Includes nonaccrual TDRs of approximately $4.4 million, $1.6 million, $6.3 million, $3.4 million and $2.5 million at December 31, 2020, 2019, 2018, 2017 and 2016, respectively. There was no interest income on nonaccrual loans recorded for the years ended December 31, 2020, 2019 and 2018. Allowance for Credit Losses The allowance for credit losses is a reserve established through a provision for credit losses charged to expense which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated into homogeneous segments for assessment. Reserve factors are based on estimated probability of default and loss given default for each segment. The estimates are determined based on economic forecasts over the reasonable and supportable forecast period based on projected performance of economic variables that have a statistical correlation with the historical loss experience of the segments. For contractual periods that extend beyond the one-year forecast period, the estimates revert to average historical loss experiences over a one-year period on a straight-line basis. We also include qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. Qualitative adjustments include, but are not limited to: • Changes in asset quality - Adjustments related to trending credit quality metrics including delinquency, nonperforming loans, charge-offs, and risk ratings that may not be fully accounted for in the reserve factor. • Changes in the nature and volume of the portfolio - Adjustments related to current changes in the loan portfolio that are not fully represented or accounted for in the reserve factors. • Changes in lending and loan monitoring policies and procedures - Adjustments related to current changes in lending and loan monitoring procedures as well as review of specific internal policy compliance metrics. • Changes in the experience, ability, and depth of lending management and other relevant staff - Adjustments to measure increasing or decreasing credit risk related to lending and loan monitoring management. • Changes in the value of underlying collateral of collateralized loans - Adjustments related to improving or deterioration of the value of underlying collateral that are not fully captured in the reserve factors. 53 • Changes in and the existence and effect of any concentrations of credit - Adjustments related to credit risk of specific industries that are not fully captured in the reserve factors. • Changes in regional and local economic and business conditions and developments - Adjustments related to expected and current economic conditions at a regional or local-level that are not fully captured within our reasonable and supportable forecast. • Data imprecisions due to limited historical loss data - Adjustments related to limited historical loss data that is representative of the collective loan portfolio. Loans that do not share similar risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans with a deteriorated internal risk rating or that are classified as a TDR. The allowance for credit loss is determined based on several methods including estimating the fair value of the underlying collateral or the present value of expected cash flows. An analysis of the allowance for credit losses on loans is shown in Table 12. Table 12: Allowance for Credit Losses (Dollars in thousands) 2020 2019 2018 2017 2016 Balance, beginning of year $68,244 $56,694 $42,086 $37,240 $32,305 Impact of CECL adoption 151,377 — — — — Loans charged off: Credit card 4,113 4,585 4,051 3,905 3,195 Other consumer 4,022 5,007 6,675 3,880 1,975 Real estate 13,788 3,892 7,698 10,017 8,143 Commercial 48,736 23,352 8,414 8,098 3,956 Total loans charged off 70,659 36,836 26,838 25,900 17,269 Recoveries of loans previously charged off: Credit card 1,014 1,021 1,005 1,021 907 Other consumer 1,465 2,357 557 2,239 516 Real estate 905 501 991 990 351 Commercial 3,216 1,267 745 103 365 Total recoveries 6,600 5,146 3,298 4,353 2,139 Net loans charged off 64,059 31,690 23,540 21,547 15,130 Provision for credit losses 82,488 43,240 38,148 26,393 20,065 Balance, end of year $ 238,050 $ 68,244 $ 56,694 $ 42,086 $ 37,240 Net charge-offs to average loans 0.45 % 0.24 % 0.21 % 0.31 % 0.30 % Allowance for credit losses to period-end loans 1.85 % 0.47 % 0.48 % 0.39 % 0.66 % Allowance for credit losses to net charge-offs 371.61 % 215.35 % 240.84 % 195.32 % 246.13 % 54 Provision for Credit Losses The amount of provision added to the allowance each year was based on management’s judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic forecasts and conditions, past due and non-performing loans and net loss experience. It is management’s practice to review the allowance on a monthly basis, and after considering the factors previously noted, to determine the level of provision made to the allowance. Allowance for Credit Losses Allocation As of December 31, 2020, the allowance for credit losses reflected an increase of approximately $169.8 million from December 31, 2019 while loans decreased $1.5 billion over the same period. The allocation in each category within the allowance generally reflects the overall changes in the loan portfolio mix. During the first quarter of 2020, we recorded an additional allowance for credit losses for loans of approximately $151.4 million due to the adoption of CECL. The significant impact to the allowance for credit losses at the date of CECL’s adoption was driven by the substantial amount of loans acquired held by the Company. We had approximately one third of total loans categorized as acquired at the adoption date with very little reserve allocated to them due to the previous incurred loss impairment methodology. As such, the amount of the CECL adoption impact was greater on the Company when compared to a non-acquisitive bank. The remaining increase in the allowance for credit losses during 2020 was predominately related to updated credit loss forecast models using multiple Moody’s economic scenarios previously discussed in Provision for Credit Losses as well as continued economic uncertainty due to the COVID-19 pandemic. Certain industries are being more adversely impacted than others by this pandemic, such as the restaurant, retail and hotel industries, and there remains substantial uncertainty regarding how borrowers in these industries will recover. Our allowance for credit losses at December 31, 2020 was at the high-end of our calculated range, although it was considered appropriate given the considerable amount of uncertainty as to the structure and timing of potential economic recovery, future of government assistance in response to the COVID-19 pandemic, and other related factors. The following table sets forth the sum of the amounts of the allowance for credit losses attributable to individual loans within each category, or loan categories in general. The table also reflects the percentage of loans in each category to the total loan portfolio for each of the periods indicated. The allowance for credit losses by loan category is determined by i) our estimated reserve factors by category including applicable qualitative adjustments and ii) any specific allowance allocations that are identified on individually evaluated loans. The amounts shown are not necessarily indicative of the actual future losses that may occur within individual categories. Table 13: Allocation of Allowance for Credit Losses December 31, 2020 2019 2018 2017 2016 (Dollars in thousands) Allowance Amount % of loans (1) Allowance Amount % of loans (1) Allowance Amount % of loans (1) Allowance Amount % of loans (1) Allowance Amount % of loans (1) Credit cards $ 7,472 1.4% $ 4,051 1.4% $ 3,923 1.7% $ 3,784 1.7% $ 3,779 3.3% Other consumer 4,100 1.6% 1,998 1.7% 2,380 1.9% 3,489 3.1% 2,796 6.4% Real estate 182,868 71.5% 39,161 75.5% 29,838 75.1% 27,699 75.3% 22,771 74.5% Commercial 42,093 21.3% 22,863 19.5% 20,514 20.1% 7,007 18.2% 7,739 15.6% Other 1,517 4.2% 171 1.9% 39 1.2% 107 1.7% 155 0.2% Total $ 238,050 100.0% $ 68,244 100.0% $ 56,694 100.0% $ 42,086 100.0% $ 37,240 100.0% _________________________ (1) Percentage of loans in each category to total loans. 55 Investments and Securities Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as either held-to-maturity, available-for-sale or trading. Held-to-maturity securities, which include any security for which the Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity. Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders’ equity. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity. Our philosophy regarding investments is conservative based on investment type and maturity. Investments in the portfolio primarily include U.S. Treasury securities, U.S. Government agencies, mortgage-backed securities and municipal securities. Our general policy is not to invest in derivative type investments or high-risk securities, except for collateralized mortgage-backed securities for which collection of principal and interest is not subordinated to significant superior rights held by others. Held-to-maturity (or “HTM”) and available-for-sale (or “AFS”) investment securities were $333.0 million and $3.5 billion, respectively, at December 31, 2020, compared to the held-to-maturity amount of $40.9 million and available-for-sale amount of $3.3 billion at December 31, 2019. As of December 31, 2020, $477.2 million, or 13.7%, of the available-for-sale securities were invested in obligations of U.S. government agencies, 0.4% of which will mature in one year or less. Our investment portfolio as of December 31, 2020 also included $1.8 billion, or 46.8%, of tax-exempt obligations of state and political subdivisions. A portion of the state and political subdivision debt obligations are rated bonds, primarily issued in states in which we are located, and are evaluated on an ongoing basis. During 2020 in an effort to balance our interest risk profile, we decided to increase our asset allocation in the tax-exempt securities portfolio due to the acceleration of pre-payment speeds for mortgage-backed securities. We continue to invest in high credit tax-exempt securities with a weighted average rating of AA. There are no securities of any one state or political subdivision issuer exceeding ten percent of our stockholders’ equity at December 31, 2020. We had approximately $1.4 billion, or 37.2%, of our total portfolio invested in mortgaged-backed securities at December 31, 2020. These mortgage-backed securities were issued by agencies of the U.S. government. We anticipate our security portfolio to continue to increase during 2021 as we reinvest PPP loan repayments and utilize the additional liquidity currently held in Cash and Cash Equivalents. We will continue to look for opportunities to maximize the value of the investment portfolio. The adoption of ASU 2016-13 at the beginning of 2020 required us to replace the existing impairment models for financial assets, which includes investment securities. Under this model, an estimate of expected credit losses that represents all contractual cash flows that is deemed uncollectible over the contractual life of the financial asset must be recorded. Our allowance for credit losses related to HTM and AFS securities was $2.9 million and $312,000, respectively, at December 31, 2020. An allowance for credit losses related to mortgage-backed securities and U.S. government agencies was not recorded as of December 31, 2020 due to those securities being explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. See Note 3, Investment Securities, in the accompanying Notes to Consolidated Financial Statements for additional information related to our allowance for credit losses on investment securities held. We had $54.8 million of gross realized gains and $15,000 of gross realized losses from the sale of securities during the year ended December 31, 2020 compared to $13.3 million of gross realized gains and $4,000 of gross realized losses from the sale of securities during the year ended December 31, 2019. 56 Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time we expect to receive full value for the securities. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Furthermore, as of December 31, 2020, management also had the ability and intent to hold the securities classified as available-for-sale for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2020, management believes the declines in fair value detailed in the table below are temporary. Table 14 presents the amortized cost, fair value and allowance for credit losses on investment securities for each of the years indicated. Table 14: Investment Securities (In thousands) Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized (Losses) Estimated Fair Value Held-to-maturity December 31, 2020 Mortgage-backed securities $ 22,354 $ — $ 22,354 $ 683 $ — $ 23,037 State and political subdivisions 312,416 (2,307) 310,109 8,148 (30) 318,227 Other securities 1,176 (608) 568 93 — 661 Total HTM $ 335,946 $ (2,915) $ 333,031 $ 8,924 $ (30) $ 341,925 December 31, 2019 Mortgage-backed securities $ 10,796 $ — $ 10,796 $ 71 $ (59) $ 10,808 State and political subdivisions 27,082 — 27,082 849 — 27,931 Other securities 3,049 — 3,049 67 — 3,116 Total HTM $ 40,927 $ — $ 40,927 $ 987 $ (59) $ 41,855 (In thousands) Amortized Cost Allowance for Credit Losses Gross Unrealized Gains Gross Unrealized (Losses) Estimated Fair Value Available-for-sale December 31, 2020 U.S. Government agencies $ 477,693 $ — $ 844 $ (1,300) $ 477,237 Mortgage-backed securities 1,374,769 — 21,261 (1,094) 1,394,936 State and political subdivisions 1,416,136 (217) 55,111 (307) 1,470,723 Other securities 128,445 (95) 2,447 (95) 130,702 Total AFS $ 3,397,043 $ (312) $ 79,663 $ (2,796) $ 3,473,598 December 31, 2019 U.S. Treasury $ 449,729 $ — $ 112 $ (112) $ 449,729 U.S. Government agencies 194,207 — 1,313 (1,271) 194,249 Mortgage-backed securities 1,738,584 — 8,510 (4,149) 1,742,945 State and political subdivisions 860,539 — 20,983 (998) 880,524 Other securities 20,092 — 822 (18) 20,896 Total AFS $ 3,263,151 $ — $ 31,740 $ (6,548) $ 3,288,343 57 Table 15 reflects the amortized cost and estimated fair value of securities at December 31, 2020, by contractual maturity and the weighted average yields (for tax-exempt obligations on a fully taxable equivalent basis, assuming a 26.135% tax rate) of such securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. Table 15: Maturity Distribution of Investment Securities December 31, 2020 Over Over 1 year 5 years Total 1 year through through Over No fixed Amortized Par Fair (In thousands) or less 5 years 10 years 10 years maturity Cost Value Value Held-to-Maturity Mortgage-backed securities $ — $ — $ — $ — $ 22,354 $ 22,354 $ 22,000 $ 23,037 State and political subdivisions 5,821 10,708 4,051 291,836 — 312,416 311,301 318,227 Other securities — — 1,176 — — 1,176 1,200 661 Total $ 5,821 $ 10,708 $ 5,227 $ 291,836 $ 22,354 $ 335,946 $ 334,501 $ 341,925 Percentage of total 1.7 % 3.2 % 1.5 % 86.9 % 6.7 % 100.0 % Weighted average yield 2.4 % 2.9 % 6.3 % 2.2 % 2.2 % 2.3 % Available-for-Sale U.S. Government agencies $ — $ 3,768 $ 79,309 $ 394,616 $ — $ 477,693 $ 475,802 $ 477,237 Mortgage-backed securities — — — — 1,374,767 1,374,767 1,324,452 1,394,936 State and political subdivisions 14,017 21,683 27,404 1,353,034 — 1,416,138 1,396,550 1,470,723 Other securities — 5,183 122,329 — 933 128,445 128,183 130,702 Total $ 14,017 $ 30,634 $ 229,042 $ 1,747,650 $ 1,375,700 $ 3,397,043 $ 3,324,987 $ 3,473,598 Percentage of total 0.4 % 0.9 % 6.7 % 51.5 % 40.5 % 100.0 % Weighted average yield 2.4 % 3.0 % 3.5 % 2.4 % 1.4 % 2.1 % Deposits Deposits are our primary source of funding for earning assets and are primarily developed through our network of 204 financial centers. We offer a variety of products designed to attract and retain customers with a continuing focus on developing core deposits. Our core deposits consist of all deposits excluding time deposits of $100,000 or more and brokered deposits. As of December 31, 2020, core deposits comprised 85.0% of our total deposits. We continually monitor the funding requirements along with competitive interest rates in the markets we serve. Because of our community banking philosophy, our executives in the local markets, with oversight by the Asset Liability Committee and the Bank’s Treasury Department, establish the interest rates offered on both core and non-core deposits. This approach ensures that the interest rates being paid are competitively priced for each particular deposit product and structured to meet the funding requirements. We believe we are paying a competitive rate when compared with pricing in those markets. 58 We manage our interest expense through deposit pricing. We believe that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if we experience increased loan demand or other liquidity needs. We can also utilize brokered deposits as an additional source of funding to meet liquidity needs. We are continually monitoring and looking for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment. Our total deposits as of December 31, 2020, were $17.0 billion, an increase of $878.1 million from December 31, 2019. Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $14.2 billion at December 31, 2020, compared to $12.8 billion at December 31, 2019, a $1.3 billion increase. Total time deposits decreased $444.6 million to $2.8 billion at December 31, 2020, from $3.3 billion at December 31, 2019. We had $512.3 million and $1.1 billion of brokered deposits at December 31, 2020, and December 31, 2019, respectively. Both consumer and commercial deposit balances have grown since the economic stimulus legislation, including legislation that established the PPP program, was implemented in mid-2020. We are managing our balance sheet and our net interest margin by continuing to eliminate several high-cost deposits related to public funds and brokered deposits. Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category which is in excess of 10 percent of average total deposits for the three years ended December 31, 2020. Table 16: Average Deposit Balances and Rates December 31, 2020 2019 2018 (In thousands) Average Amount Average Rate Paid Average Amount Average Rate Paid Average Amount Average Rate Paid Non-interest bearing transaction accounts $ 4,225,618 — % $ 3,021,917 — % $ 2,697,235 — % Interest bearing transaction and savings deposits 9,128,936 0.42 % 7,417,104 1.08 % 6,691,030 0.85 % Time deposits $100,000 or more 1,823,198 1.37 % 1,994,276 2.02 % 1,366,745 1.50 % Other time deposits 1,183,570 1.39 % 1,099,818 1.67 % 977,558 1.00 % Total $ 16,361,322 0.49 % $ 13,533,115 1.03 % $ 11,732,568 0.74 % The Company’s maturities of large denomination time deposits at December 31, 2020 and 2019 are presented in Table 17. Table 17: Maturities of Large Denomination Time Deposits Time Certificates of Deposit ($100,000 or more) December 31, 2020 2019 (In thousands) Balance Percent Balance Percent Maturing Three months or less $ 431,819 21.3 % $ 676,042 31.4 % Over 3 months to 6 months 416,205 20.5 % 427,426 19.9 % Over 6 months to 12 months 960,589 47.4 % 650,906 30.2 % Over 12 months 219,527 10.8 % 399,050 18.5 % Total $ 2,028,140 100.0 % $ 2,153,424 100.0 % Fed Funds Purchased and Securities Sold under Agreements to Repurchase Federal funds purchased and securities sold under agreements to repurchase were $299.1 million at December 31, 2020, as compared to $150.1 million at December 31, 2019. We have historically funded our growth in earning assets through the use of core deposits, large certificates of deposits from local markets, reciprocal brokered deposits, FHLB borrowings and Federal funds purchased. Management anticipates that these sources will provide necessary funding in the foreseeable future. 59 Other Borrowings and Subordinated Debentures Our total debt was $1.72 billion and $1.69 billion at December 31, 2020 and December 31, 2019, respectively. The outstanding balance for December 31, 2020 includes $1.31 billion in FHLB long-term advances; $330.0 million in subordinated notes; $52.9 million of trust preferred securities and unamortized debt issuance costs; and $33.4 million of other long-term debt. The FHLB long-term advances outstanding at the end of 2020 included $1.30 billion of FHLB Owns the Option (“FOTO”) advances that are a low cost, fixed-rate source of funding in return for granting to FHLB the flexibility to choose a termination date earlier than the maturity date. Our FOTO advances outstanding at the end of the year had original maturity dates of 10 years to 15 years with lockout periods that have expired. During the fourth quarter of 2020, we reclassified the FOTO advances as long-term advances due to the current low interest rate environment and the expectation that FHLB will not exercise the option to terminate the FOTO advances prior to its stated maturity date. We continually analyze the possibility of the FHLB exercising the options along with the market expected rate outcome. We also held typical FHLB short-term advances, with original maturities of less than one year, at various times during 2020, as well as in previous years. At December 31, 2020, there were no FHLB short-term advances outstanding. A summary of information related to our FHLB short-term advances, including FOTO advances in 2019 and 2018, is presented in Table 18. Table 18: Short-Term Borrowings December 31, (Dollars in thousands) 2020 2019 2018 Amount outstanding at year-end $ — $ 1,250,000 $ 1,330,000 Weighted-average interest rate at year-end — % 1.44 % 2.12 % Maximum amount outstanding at any month-end during the year $ 1,350,000 $ 1,435,000 $ 1,435,000 Average amount outstanding during the year $ 1,094,808 $ 1,183,873 $ 1,276,685 Weighted-average interest rate for the year 1.69 % 1.89 % 1.75 % We assumed trust preferred securities and other subordinated debt in an aggregate principal amount, net of discounts, of $33.9 million related to the Landrum acquisition during 2019. During the second quarter of 2020, we repaid $5.9 million of other subordinated debt acquired from Landrum. During 2017, we entered into a Revolving Credit Agreement with U.S. Bank National Association and executed an unsecured Revolving Credit Agreement (“Credit Agreement”) pursuant to which we may borrow, prepay and reborrow up to $75.0 million, the proceeds of which were primarily used to pay off amounts outstanding under a term note assumed with the First Texas acquisition. In October 2018, we entered into a First Amendment to the Credit Agreement with U.S. Bank National Association, which primarily extended the expiration date to October 2019 and reduced the $75.0 million to $50.0 million. In December 2018, we entered into a Second Amendment to the Credit Agreement that clarified the financial metrics contained in certain affirmative covenants of the Credit Agreement are evaluated on a consolidated basis. We did not renew the Credit Agreement upon the expiration date in October 2019. In March 2018, we issued $330.0 million in aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes (“Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. We incurred $3.6 million in debt issuance costs related to the offering. The Notes will mature on April 1, 2028 and will be subordinated in right of payment to the payment of our other existing and future senior indebtedness, including all our general creditors. The Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of its subsidiaries. During 2018, the Company used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness, including the amounts borrowed under the Credit Agreement and the unsecured debt from correspondent banks. During 2018, we repaid the $75.0 million outstanding balance on the Credit Agreement, $43.3 million in notes payable, $94.9 million in trust preferred securities and $19.1 million in subordinated debt acquired from First Texas. 60 Aggregate annual maturities of debt at December 31, 2020 are presented in Table 19. Table 19: Maturities of Debt Annual Maturities Year (In thousands) 2021 $ 2,812 2022 1,921 2023 1,758 2024 2,399 2025 4,948 Thereafter 1,711,103 Total $ 1,724,941 Capital Overview At December 31, 2020, total capital was $2.98 billion. Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities. At December 31, 2020, our common equity to asset ratio was 13.31% compared to 14.06% at year-end 2019. Capital Stock On February 27, 2009, at a special meeting, our shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock, $0.01 par value. The aggregate liquidation preference of all shares of preferred stock cannot exceed $80,000,000. On February 12, 2019, we filed Amended and Restated Articles of Incorporation (“February Amended Articles”) with the Arkansas Secretary of State. The February Amended Articles classified and designated three series of preferred stock out of our authorized preferred stock: Series A Preferred Stock, Par Value $0.01 Per Share (having 40,000 authorized shares); Series B Preferred Stock, Par Value $0.01 Per Share (having 2,000.02 authorized shares); and 7% Perpetual Convertible Preferred Stock, Par Value $0.01 Per Share, Series C (having 140 authorized shares). On October 29, 2019, we filed our Amended and Restated Articles of Incorporation (“October Amended Articles”) with the Arkansas Secretary of State. The October Amended Articles classified and designated Series D Preferred Stock, Par Value $0.01 Per Share, out of our authorized preferred stock. The October Amended Articles also canceled our 7% Perpetual Convertible Preferred Stock, Par Value $0.01 Per Share, Series C Preferred Stock, of which no shares were ever issued or outstanding. On January 18, 2018, our Board of Directors approved a two-for-one stock split of the Company’s outstanding Class A common stock, $0.01 par value (“Common Stock”), in the form of a 100% stock dividend for shareholders of record as of the close of business on January 30, 2018. The new shares were distributed by our transfer agent, Computershare, and our common stock began trading on a split-adjusted basis on the Nasdaq Global Select Market on February 9, 2018. All previously reported share and per share data included in filings subsequent to February 8, 2018 are restated to reflect the retroactive effect of this two-for-one stock split. On March 19, 2018, we filed a shelf registration with the SEC. The shelf registration statement provides increased flexibility and more efficient access to raise capital from time to time through the sale of common stock, preferred stock, debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, units or a combination thereof, subject to market conditions. Specific terms and prices are determined at the time of any offering under a separate prospectus supplement that we are required to file with the SEC at the time of the specific offering. On April 19, 2018, shareholders of the Company approved an increase in the number of authorized shares of Common Stock from 120,000,000 to 175,000,000. 61 Stock Repurchase On July 23, 2012, our Board of Directors approved a stock repurchase program which authorized the repurchase of up to 1,700,000 shares (split adjusted) of common stock (“2012 Program”). On October 22, 2019, we announced a new stock repurchase program (the “Program”), under which we may repurchase up to $60,000,000 of our Class A common stock currently issued and outstanding. The Program replaced the 2012 Program. On March 5, 2020, we announced an amendment to the Program that increased the maximum amount that may be repurchased under the Program from $60,000,000 to $180,000,000. The Program will terminate on October 31, 2021 (unless terminated sooner). Under the Program, we may repurchase shares of our common stock through open market and privately negotiated transactions or otherwise. The timing, pricing, and amount of any repurchases under the Program will be determined by management at its discretion based on a variety of factors, including, but not limited to, trading volume and market price of our common stock, corporate considerations, our working capital and investment requirements, general market and economic conditions, and legal requirements. The Program does not obligate us to repurchase any common stock and may be modified, discontinued, or suspended at any time without prior notice. We anticipate funding for this Program to come from available sources of liquidity, including cash on hand and future cash flow. During 2020, we repurchased 5,956,700 shares at an average price of $19.03 per share under the Program. We repurchased 390,000 shares at an average price of $25.97 per share under the Program during 2019. Cash Dividends We declared cash dividends on our common stock of $0.68 per share for the twelve months ended December 31, 2020, compared to $0.64 per share for the twelve months ended December 31, 2019, an increase of $0.04, or 6%. The timing and amount of future dividends are at the discretion of our Board of Directors and will depend upon our consolidated earnings, financial condition, liquidity and capital requirements, the amount of cash dividends paid to us by our subsidiaries, applicable government regulations and policies and other factors considered relevant by our Board of Directors. Our Board of Directors anticipates that we will continue to pay quarterly dividends in amounts determined based on the factors discussed above. However, there can be no assurance that we will continue to pay dividends on our common stock at the current levels or at all. Parent Company Liquidity The primary liquidity needs of the Parent Company are the payment of dividends to shareholders, the funding of debt obligations and cash needs for acquisitions. The primary sources for meeting these liquidity needs are the current cash on hand at the parent company and the future dividends received from Simmons Bank. Payment of dividends by Simmons Bank is subject to various regulatory limitations. The Company continually assesses its capital and liquidity needs and the best way to meet them, including, without limitation, through capital raising in the market via stock or debt offerings. See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for additional information regarding the parent company’s liquidity. Risk-Based Capital The Company and Simmons Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2020, we met all capital adequacy requirements to which we are subject. As of the most recent notification from regulatory agencies, Simmons Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and Simmons Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the bank’s categories. 62 Our risk-based capital ratios at December 31, 2020 and 2019 are presented in Table 20 below: Table 20: Risk-Based Capital December 31, (Dollars in thousands) 2020 2019 Tier 1 capital: Stockholders’ equity $ 2,976,656 $ 2,988,924 CECL transition provision 131,430 — Goodwill and other intangible assets (1,163,797) (1,160,079) Unrealized gain on available-for-sale securities, net of income taxes (59,726) (20,891) Total Tier 1 capital 1,884,563 1,807,954 Tier 2 capital: Trust preferred securities and subordinated debt 382,874 388,260 Qualifying allowance for credit losses and reserve for unfunded commitments 89,546 76,644 Total Tier 2 capital 472,420 464,904 Total risk-based capital $ 2,356,983 $ 2,272,858 Risk weighted assets $ 14,048,608 $ 16,554,081 Assets for leverage ratio $ 20,765,127 $ 18,852,798 Ratios at end of year: Common equity Tier 1 ratio (CET1) 13.41 % 10.92 % Tier 1 leverage ratio 9.08 % 9.59 % Tier 1 leverage ratio, excluding average PPP loans (non-GAAP) (1) 9.50 % N/A Tier 1 risk-based capital ratio 13.41 % 10.92 % Total risk-based capital ratio 16.78 % 13.73 % Minimum guidelines: Common equity Tier 1 ratio (CET1) 4.50 % 4.50 % Tier 1 leverage ratio 4.00 % 4.00 % Tier 1 risk-based capital ratio 6.00 % 6.00 % Total risk-based capital ratio 8.00 % 8.00 % _________________________ (1) PPP loans are 100% federally guaranteed and have a zero percent risk-weight for regulatory capital ratios. Tier 1 leverage ratio, excluding average PPP loans is a non-GAAP measurement. Regulatory Capital Changes In July 2013, the Company’s primary federal regulator, the Federal Reserve, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banks. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards. The Basel III Capital Rules introduced substantial revisions to the risk-based capital requirements applicable to bank holding companies and depository institutions. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules expanded the risk-weighting categories from four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories, including many residential mortgages and certain commercial real estate. 63 The final rules included a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The Basel III Capital Rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance with all of the final rule’s requirements on January 1, 2019. Prior to December 31, 2017, Tier 1 capital included common equity Tier 1 capital and certain additional Tier 1 items as provided under the Basel III Capital Rules. The Tier 1 capital for the Company consisted of common equity Tier 1 capital and trust preferred securities. The Basel III Capital Rules include certain provisions that require trust preferred securities to be phased out of qualifying Tier 1 capital when assets surpass $15 billion. As of December 31, 2017, the Company exceeded $15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply and trust preferred securities are no longer included as Tier 1 capital. Trust preferred securities and qualifying subordinated debt of $382.9 million is included as Tier 2 and total capital as of December 31, 2020. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations In the normal course of business, the Company enters into a number of financial commitments. Examples of these commitments at December 31, 2020, include but are not limited to long-term debt financing, operating lease obligations, unfunded loan commitments and letters of credit. Our long-term debt at December 31, 2020, includes subordinated debt, notes payable and FHLB advances, all of which we are contractually obligated to repay in future periods. Beginning January 1, 2019, the Company recognizes all leases under ASC Topic 842, Leases , that requires lessees to record assets and liabilities on the balance sheet for all leases with a lease term of 12 months or longer. See Note 6, Right-of-Use Lease Assets and Lease Liabilities and Note 20, New Accounting Standards, for additional information regarding our operating leases and the impact of adoption of the new lease accounting standard. Commitments to extend credit and letters of credit are legally binding, conditional agreements generally having fixed expiration or termination dates. These commitments generally require customers to maintain certain credit standards and are established based on management’s credit assessment of the customer. The commitments may expire without being drawn upon. Therefore, the total commitment does not necessarily represent future funding requirements. The funding requirements of the Company’s most significant financial commitments at December 31, 2020 are shown in Table 21. Table 21: Funding Requirements of Financial Commitments Payments due by period Less than 1-3 3-5 Greater than (In thousands) 1 Year Years Years 5 Years Total Long-term debt $ 2,812 $ 3,679 $ 7,347 $ 1,711,103 $ 1,724,941 Undiscounted minimum lease payments 9,192 12,632 5,603 8,000 35,427 Credit card loan commitments 671,488 — — — 671,488 Other loan commitments 2,355,953 — — — 2,355,953 Letters of credit 49,029 — — — 49,029 64 GAAP Reconciliation of Non-GAAP Financial Measures The tables below present computations of core earnings (net income excluding non-core items {merger-related costs, early retirement program costs, net branch right sizing costs, gain on sale of branches, gain from early retirement of trust preferred securities, gain on sale of insurance lines of business, 2017 donation to the Simmons First Foundation and the one-time deferred income tax adjustment from tax reform}) and core diluted earnings per share (non-GAAP) as well as a computation of tangible book value per share (non-GAAP), tangible common equity to tangible assets (non-GAAP), core net interest margin (non-GAAP), core other income (non-GAAP), core non-interest expense (non-GAAP), core return on average assets (non-GAAP), return on tangible common equity (non-GAAP), core return on average common equity (non-GAAP), core return on tangible common equity (non-GAAP), and efficiency ratio (non-GAAP). The tables below also present computations of certain figures that are exclusive of the impact of PPP loans: the ratios of common equity to total assets and tangible common equity to tangible assets, each adjusted for PPP loans (each non-GAAP), Tier 1 leverage ratio excluding average PPP loans (non-GAAP), net interest income and net interest margin, each adjusted for PPP loans and additional liquidity (each Non-GAAP), and loan yield excluding PPP loans (non-GAAP). Non-core items are included in financial results presented in accordance with generally accepted accounting principles (GAAP). We believe the exclusion of these non-core items in expressing earnings and certain other financial measures, including “core earnings,” provides a meaningful basis for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of the Company’s business because management does not consider these non-core items to be relevant to ongoing financial performance. Management and the Board of Directors utilize “core earnings” (non-GAAP) for the following purposes: • Preparation of the Company’s operating budgets • Monthly financial performance reporting • Monthly “flash” reporting of consolidated results (management only) • Investor presentations of Company performance We believe the presentation of “core earnings” on a diluted per share basis, “core diluted earnings per share” (non-GAAP) and core net interest margin (non-GAAP), provides a meaningful basis for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of the Company’s business, because management does not consider these non-core items to be relevant to ongoing financial performance on a per share basis. Management and the Board of Directors utilize “core diluted earnings per share” (non-GAAP) for the following purposes: • Calculation of annual performance-based incentives for certain executives • Calculation of long-term performance-based incentives for certain executives • Investor presentations of Company performance We have $1.186 billion and $1.183 billion total goodwill and other intangible assets for the periods ended December 31, 2020 and 2019, respectively. Because our acquisition strategy has resulted in a high level of intangible assets, management believes useful calculations include tangible book value per share (non-GAAP), tangible common equity to tangible assets (non-GAAP) and return on tangible equity (non-GAAP). We believe the exclusion of PPP loans or their impact, as applicable, in expressing earnings and certain other financial measures provides a meaningful basis for period-to-period and company-to-company comparisons because PPP loans are 100% federally guaranteed and have very low interest rates. The Company’s non-GAAP financial measures that exclude PPP loans or their impact include the ratios of “common equity to total assets” and “tangible common equity to tangible assets,” each adjusted for PPP loans (each non-GAAP), “Tier 1 leverage ratio excluding average PPP loans” (non-GAAP), “core net interest income” and “net interest margin,” each adjusted for PPP loans and additional liquidity (each non-GAAP), and “loan yield excluding PPP loans” (non-GAAP). Additional liquidity is defined as average interest bearing balances due from banks greater than normal liquidity levels. Management believes these non-GAAP presentations will assist investors and analysts in analyzing the core financial measures of the Company, including the performance of the Company’s loan portfolio and the Company’s regulatory capital position, and predicting future performance. Management and the Board of Directors utilize these non-GAAP financial measures for financial performance reporting and investor presentations of Company performance. 65 We believe that presenting these non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that is applied by management and the Board of Directors. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, we have procedures in place to identify and approve each item that qualifies as non-core to ensure that the Company’s “core” results are properly reflected for period-to-period comparisons. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes non-core items does not represent the amount that effectively accrues directly to stockholders (i.e., non-core items are included in earnings and stockholders’ equity). Additionally, similarly titled non-GAAP financial measures used by other companies may not be computed in the same or similar fashion. All per share data has been restated to reflect the retroactive effect of the two-for-one stock split which occurred during February 2018. During 2020, non-core items consisted of $4.5 million of merger-related costs, related to the Landrum and Reliance acquisitions, and $2.9 million in early retirement program expenses. We also had non-core net branch right sizing costs of $13.7 million, primarily due to branch closures across our footprint during the year. Additionally, we had total gains on sale of branches of $8.4 million mostly due to the gains on sale from the Texas Branch Sale and Colorado Branch Sale. The net after-tax impact of these items was $9.4 million, or $0.09 per diluted earnings per share. During 2019, non-core items consisted of $36.4 million of merger-related costs, related to the Landrum and Reliance acquisitions, and $3.5 million in early retirement program expenses. In addition, we had non-core branch right sizing costs of $3.1 million, primarily related to the relocation of the Little Rock corporate offices. The net after-tax impact of these items was $31.7 million, or $0.32 per diluted earnings per share. During 2018, non-core items included $6.1 million of merger-related and branch right sizing costs. The net after-tax impact of these items was $4.5 million, or $0.05 per diluted earnings per share. During 2017, non-core items included $22.1 million of merger-related and branch right sizing costs, a one-time non-cash charge of $11.5 million from the revaluation of the deferred tax assets and liabilities as a result of the tax reform signed into law, a $5.0 million donation to the Simmons First Foundation and a $3.7 million gain on the sale of our property and casualty insurance lines of business. The net after-tax impact of these items was $26.1 million, or $0.37 per diluted earnings per share. During 2016, we recorded after-tax merger-related costs of $2.9 million, primarily related to the Citizens acquisition, resulting in a nonrecurring charge of $0.05 to diluted earnings per share and $2.0 million in after-tax branch-right sizing costs in relation to the closure of ten underperforming branches, resulting in a nonrecurring charge of $0.04 to diluted earnings per share. Also, during 2016, we recognized $361,000 in net after-tax gains from the early retirement of trust preferred securities. 66 See Table 22 below for the reconciliation of core earnings, which exclude non-core items for the periods presented. Table 22: Reconciliation of Core Earnings (non-GAAP) (In thousands, except per share data) 2020 2019 2018 2017 2016 Twelve months ended Net income available to common stockholders $ 254,852 $ 237,828 $ 215,713 $ 92,940 $ 96,790 Non-core items: Gain on sale of branches (8,368) — — — — Gain from early retirement of trust preferred securities — — — — (594) Gain on sale of insurance lines of business — — — (3,708) — Donation to Simmons First Foundation — — — 5,000 — Merger related costs 4,531 36,379 4,777 21,923 4,835 Early retirement program 2,901 3,464 — — — Branch right sizing, net 13,727 3,129 1,341 169 3,359 Tax effect (1) (3,343) (11,234) (1,598) (8,746) (2,981) Net non-core items (before SAB 118 adjustment) 9,448 31,738 4,520 14,638 4,619 SAB 118 adjustment (2) — — — 11,471 — Core earnings (non-GAAP) $ 264,300 $ 269,566 $ 220,233 $ 119,049 $ 101,409 Diluted earnings per share $ 2.31 $ 2.41 $ 2.32 $ 1.33 $ 1.56 Non-core items: Gain on sale of branches (0.07) — — — — Gain from early retirement of trust preferred securities — — — — (0.01) Gain on sale of insurance lines of business — — — (0.04) — Donation to Simmons First Foundation — — — 0.07 — Merger related costs 0.04 0.37 0.05 0.31 0.08 Early retirement program 0.03 0.03 — — — Branch right sizing, net 0.12 0.03 0.02 — 0.06 Tax effect (1) (0.03) (0.11) (0.02) (0.13) (0.05) Net non-core items (before SAB 118 adjustment) 0.09 0.32 0.05 0.21 0.08 SAB 118 adjustment (2) — — — 0.16 — Core diluted earnings per share (non-GAAP) $ 2.40 $ 2.73 $ 2.37 $ 1.70 $ 1.64 _________________________ (1) Effective tax rate of 26.135% for periods beginning on or after January 1, 2018 and 39.225% for periods prior to 2018 adjusted for non-deductible merger-related costs and deferred tax items on the sale of the insurance lines of business. (2) Tax adjustment to revalue deferred tax assets and liabilities to account for the future impact of lower corporate tax rates resulting from the 2017 Act, signed into law on December 22, 2017. 67 See Table 23 below for the reconciliation of core other income and core non-interest expense for the periods presented. Table 23: Reconciliation of Core Other Income and Core Non-Interest Expense (non-GAAP) (In thousands) 2020 2019 2018 2017 2016 Other income $ 38,547 $ 62,015 $ 23,721 $ 21,733 $ 20,498 Gain on sale of branches (8,368) — — — — Gain on sale of insurance lines of business — — — (3,708) — Branch right sizing (370) — — (265) (241) Core other income (non-GAAP) $ 29,809 $ 62,015 $ 23,721 $ 17,760 $ 20,257 Non-interest expense $ 493,495 $ 461,112 $ 392,229 $ 312,379 $ 255,085 Non-core items: Donation to Simmons Foundation — — — (5,000) — Merger related costs (4,531) (36,379) (4,777) (21,923) (4,835) Early retirement program (2,901) (3,464) — — — Branch right sizing (14,097) (3,129) (1,341) (434) (3,600) Total non-core items (21,529) (42,972) (6,118) (27,357) (8,435) Core non-interest expense (non-GAAP) $ 471,966 $ 418,140 $ 386,111 $ 285,022 $ 246,650 See Table 24 below for the reconciliation of tangible book value per common share. Table 24: Reconciliation of Tangible Book Value per Common Share (non-GAAP) (In thousands, except per share data) 2020 2019 2018 2017 2016 Total stockholders’ equity $ 2,976,656 $ 2,988,924 $ 2,246,434 $ 2,084,564 $ 1,151,111 Preferred stock (767) (767) — — — Total common stockholders’ equity 2,975,889 2,988,157 2,246,434 2,084,564 1,151,111 Intangible assets: Goodwill (1,075,305) (1,055,520) (845,687) (842,651) (348,505) Other intangible assets (111,110) (127,340) (91,334) (106,071) (52,959) Total intangibles (1,186,415) (1,182,860) (937,021) (948,722) (401,464) Tangible common stockholders’ equity $ 1,789,474 $ 1,805,297 $ 1,309,413 $ 1,135,842 $ 749,647 Shares of common stock outstanding 108,077,662 113,628,601 92,347,643 92,029,118 62,555,446 Book value per common share $ 27.53 $ 26.30 $ 24.33 $ 22.65 $ 18.40 Tangible book value per common share (non-GAAP) $ 16.56 $ 15.89 $ 14.18 $ 12.34 $ 11.98 68 See Table 25 below for the calculation of tangible common equity and the reconciliation of tangible common equity to tangible assets. Table 25: Reconciliation of Tangible Common Equity and the Ratio of Tangible Common Equity to Tangible Assets (non-GAAP) (Dollars in thousands) 2020 2019 2018 2017 2016 Total common stockholders’ equity $ 2,975,889 $ 2,988,157 $ 2,246,434 $ 2,084,564 $ 1,151,111 Intangible assets: Goodwill (1,075,305) (1,055,520) (845,687) (842,651) (348,505) Other intangible assets (111,110) (127,340) (91,334) (106,071) (52,959) Total intangibles (1,186,415) (1,182,860) (937,021) (948,722) (401,464) Tangible common stockholders’ equity $ 1,789,474 $ 1,805,297 $ 1,309,413 $ 1,135,842 $ 749,647 Total assets $ 22,359,752 $ 21,259,143 $ 16,543,337 $ 15,055,806 $ 8,400,056 Intangible assets: Goodwill (1,075,305) (1,055,520) (845,687) (842,651) (348,505) Other intangible assets (111,110) (127,340) (91,334) (106,071) (52,959) Total intangibles (1,186,415) (1,182,860) (937,021) (948,722) (401,464) Tangible assets $ 21,173,337 $ 20,076,283 $ 15,606,316 $ 14,107,084 $ 7,998,592 PPP loans (904,673) Total assets excluding PPP loans $ 21,455,079 Tangible assets excluding PPP loans $ 20,268,664 Ratio of common equity to assets 13.31 % 14.06 % 13.58 % 13.85 % 13.70 % Ratio of tangible common equity to tangible assets (non-GAAP) 8.45 % 8.99 % 8.39 % 8.05 % 9.37 % Ratio of common equity to assets excluding PPP loans (non-GAAP) 13.87 % Ratio of tangible common equity to tangible assets excluding PPP loans (non-GAAP) 8.83 % See Table 26 below for the calculation of Tier 1 leverage ratio excluding average PPP loans for the period presented. Table 26: Reconciliation of Tier 1 Leverage Ratio Excluding Average PPP Loans (non-GAAP) (Dollars in thousands) Three Months Ended December 31, 2020 Total Tier 1 capital $ 1,884,563 Adjusted average assets for leverage ratio $ 20,765,127 Average PPP loans (937,544) Adjusted average assets excluding average PPP loans $ 19,827,583 Tier 1 leverage ratio 9.08 % Tier 1 leverage ratio excluding average PPP loans (non-GAAP) 9.50 % 69 See Table 27 below for the calculation of core return on average assets. Table 27: Calculation of Core Return on Average Assets (non-GAAP) (Dollars in thousands) 2020 2019 2018 2017 2016 Twelve months ended Net income available to common stockholders $ 254,852 $ 237,828 $ 215,713 $ 92,940 $ 96,790 Net non-core items, net of taxes, adjustment 9,448 31,738 4,520 26,109 4,619 Core earnings $ 264,300 $ 269,566 $ 220,233 $ 119,049 $ 101,409 Average total assets $ 21,590,745 $ 17,871,748 $ 15,771,362 $ 10,074,951 $ 7,760,233 Return on average assets 1.18 % 1.33 % 1.37 % 0.92 % 1.25 % Core return on average assets (non-GAAP) 1.22 % 1.51 % 1.40 % 1.18 % 1.31 % See Table 28 below for the calculation of return on tangible common equity. Table 28: Calculation of Core Return on Tangible Common Equity (non-GAAP) (Dollars in thousands) 2020 2019 2018 2017 2016 Twelve months ended Net income available to common stockholders $ 254,852 $ 237,828 $ 215,713 $ 92,940 $ 96,790 Amortization of intangibles, net of taxes 9,968 8,720 8,132 4,659 3,611 Total income available to common stockholders $ 264,820 $ 246,548 $ 223,845 $ 97,599 $ 100,401 Net non-core items, net of taxes 9,448 31,738 4,520 26,109 4,619 Core earnings 264,300 269,566 220,233 119,049 101,409 Amortization of intangibles, net of taxes 9,968 8,720 8,132 4,659 3,611 Total core income available to common stockholders $ 274,268 $ 278,286 $ 228,365 $ 123,708 $ 105,020 Average common stockholders’ equity $ 2,921,039 $ 2,396,024 $ 2,157,097 $ 1,390,815 $ 1,105,775 Average intangible assets: Goodwill (1,065,190) (921,635) (845,308) (455,453) (332,974) Other intangible assets (118,812) (104,000) (97,820) (68,896) (51,710) Total average intangibles (1,184,002) (1,025,635) (943,128) (524,349) (384,684) Average tangible common stockholders’ equity $ 1,737,037 $ 1,370,389 $ 1,213,969 $ 866,466 $ 721,091 Return on average common equity 8.72 % 9.93 % 10.00 % 6.68 % 8.75 % Return on average tangible common equity (non-GAAP) 15.25 % 17.99 % 18.44 % 11.26 % 13.92 % Core return on average common equity (non-GAAP) 9.05 % 11.25 % 10.21 % 8.56 % 9.17 % Core return on average tangible common equity (non-GAAP) 15.79 % 20.31 % 18.81 % 14.28 % 14.56 % 70 See Table 29 below for the calculation of core net interest margin for the periods presented. Table 29: Reconciliation of Core Net Interest Margin (non-GAAP) (Dollars in thousands) 2020 2019 2018 2017 2016 Twelve months ended Net interest income $ 639,734 $ 601,753 $ 548,694 $ 352,465 $ 277,496 FTE adjustment 11,001 7,322 5,297 7,723 7,722 Fully tax equivalent net interest income 650,735 609,075 553,991 360,188 285,218 Total accretable yield (41,507) (41,244) (35,263) (27,793) (24,257) Core net interest income $ 609,228 $ 567,831 $ 518,728 $ 332,395 $ 260,961 PPP loan and additional liquidity interest income (18,539) Net interest income adjusted for PPP loans and additional liquidity $ 632,196 Average earning assets $ 19,272,886 $ 15,824,571 $ 13,891,990 $ 8,838,549 $ 6,812,513 Average PPP loan balance and additional liquidity (1,854,016) Average earnings assets adjusted for PPP loans and additional liquidity $ 17,418,870 Net interest margin 3.38 % 3.85 % 3.99 % 4.08 % 4.19 % Core net interest margin (non-GAAP) 3.16 % 3.59 % 3.73 % 3.76 % 3.83 % Net interest margin adjusted for PPP loans and additional liquidity (non-GAAP) 3.63 % See Table 30 below for the calculation of the efficiency ratio for the periods presented. Table 30: Calculation of Efficiency Ratio (non-GAAP) (Dollars in thousands) 2020 2019 2018 2017 2016 Twelve months ended Non-interest expense $ 493,495 $ 461,112 $ 392,229 $ 312,379 $ 255,085 Non-core non-interest expense adjustment (21,529) (42,972) (6,118) (27,357) (8,435) Other real estate and foreclosure expense adjustment (1,706) (3,282) (4,240) (3,042) (4,389) Amortization of intangibles adjustment (13,495) (11,805) (11,009) (7,666) (5,942) Efficiency ratio numerator $ 456,765 $ 403,053 $ 370,862 $ 274,314 $ 236,319 Net-interest income $ 639,734 $ 601,753 $ 548,694 $ 352,465 $ 277,496 Non-interest income 248,528 205,031 147,754 141,230 141,092 Non-core non-interest income adjustment (8,738) — — (3,973) (241) Fully tax-equivalent adjustment 11,001 7,322 5,297 7,723 7,722 Gain on sale of securities (54,806) (13,314) (61) (1,059) (5,848) Efficiency ratio denominator $ 835,719 $ 800,792 $ 701,684 $ 496,386 $ 420,221 Efficiency ratio (non-GAAP) 54.66 % 50.33 % 52.85 % 55.26 % 56.24 % 71 See Table 31 below for the calculation of loan yield excluding PPP loans for the period presented. Table 31: Reconciliation of Loan Yield Excluding PPP Loans (non-GAAP) (Dollars in thousands) 2020 Loan interest income $ 688,600 PPP loan interest income (15,861) Loan interest income excluding PPP loans $ 672,739 Average loan balance $ 14,260,689 Average PPP loan balance (637,006) Average loan balance excluding PPP loans $ 13,623,683 Loan yield 4.83 % Loan yield excluding PPP loans (non-GAAP) 4.94 % Quarterly Results Selected unaudited quarterly financial information for the last eight quarters is shown in Table 32. Table 32: Quarterly Results Quarter (In thousands, except per share data) First Second Third Fourth Total 2020 Interest income $ 209,231 $ 191,654 $ 179,725 $ 179,108 $ 759,718 Interest expense 41,748 27,973 26,115 24,148 119,984 Net interest income 167,483 163,681 153,610 154,960 639,734 Provision for credit losses 23,134 21,915 22,981 6,943 74,973 Gain on sale of securities 32,095 390 22,305 16 54,806 Non-interest income, net of gain on sale of securities 50,299 49,837 49,546 44,040 193,722 Non-interest expense 128,813 117,598 118,949 128,135 493,495 Net income available to common stockholders 77,223 58,789 65,885 52,955 254,852 Basic earnings per share (1) 0.68 0.54 0.60 0.49 2.32 Diluted earnings per share (1) 0.68 0.54 0.60 0.49 2.31 2019 Interest income $ 178,085 $ 195,241 $ 196,406 $ 213,391 $ 783,123 Interest expense 42,090 45,813 47,142 46,325 181,370 Net interest income 135,995 149,428 149,264 167,066 601,753 Provision for credit losses 9,285 7,079 21,973 4,903 43,240 Gain on sale of securities 2,740 2,823 7,374 377 13,314 Non-interest income, net of gain on sale of securities 32,052 37,111 77,301 45,253 191,717 Non-interest expense 101,409 110,743 106,865 142,095 461,112 Net income available to common stockholders 47,695 55,598 81,826 52,709 237,828 Basic earnings per share (1) 0.52 0.58 0.85 0.49 2.42 Diluted earnings per share (1) 0.51 0.58 0.84 0.49 2.41 _________________________ (1) EPS are computed independently for each quarter and therefore the sum of each quarterly EPS may not equal the year-to-date EPS. As a result of the large stock issuances as part of the Company’s acquisitions, the computed independent quarterly average common shares outstanding and the computed year-to-date average common shares may differ significantly. The difference is based on the direct result of the varying denominator for each period presented. 72