What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-06 · 216 added, 376 removed, 561 unchanged (51% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our net income for the three months ended September 30, 2020 was $65.9 million, or $0.60 diluted earnings per share, a decrease of $15.9 million and of $0.24, respectively, compared to the third quarter of 2019.

Included in both third quarter 2020 and 2019 results were non-core items related to our acquisitions, early retirement programs and branch right sizing initiatives.

Excluding all non-core items, core earnings for the three months ended September 30, 2020 were $68.3 million, or $0.63 core diluted earnings per share, compared to $84.0 million, or $0.87 core diluted earnings per share for the three months ended September 30, 2019.

Net income for the first nine months of 2020 was $201.9 million, or $1.83 diluted earnings per share, compared to $185.1 million, or $1.94 diluted earnings per share, for the same period in 2019.

In addition to the non-core items related to acquisitions, early retirement programs and branch right sizing initiatives, gains associated with the Texas Branch Sale and the Colorado Branch Sale were included in the results for the first nine months of 2020.

Excluding the non-core items, year-to-date core earnings were $202.3 million, an increase of $3.8 million compared to the same period in prior year.

Core diluted earnings per share for the first nine months of 2020 were $1.83 compared to $2.08 for the same period in 2019.

We completed the acquisition of The Landrum Company, 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 Condensed Notes to Consolidated Financial Statements for additional information related to this acquisition.

On February 28, 2020, we completed the Texas Branch Sale of five Simmons Bank locations in Austin, San Antonio and Tilden, Texas.

Additionally, on May 18, 2020 we completed the Colorado Branch Sale of four Simmons Bank locations in Denver, Englewood, Highlands Ranch and Lone Tree, Colorado.

We recognized a combined gain on sale of $8.1 million on the Texas Branches and Colorado Branches.

Early in 2020, we offered qualifying associates an early retirement option resulting in $2.8 million of non-core expense during the first nine months of 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 our 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.

We added over 38,000 new digital banking users since the end of February 2020 through June 30, 2020.

Digital users continue to grow in the third quarter of 2020, adding over 15,000 additional users, a 7% increase.

In March 2020, for the first time, we had more weekly transactions using digital channels than at the branches, and our mobile deposit usage has seen an increase of 75% since the end of February.

During May 2020, we completed the conversion of all consumer customers to our new online platform.

All consumer 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 mobile and online banking to display credit card balances, line of credit utilization, recent transactions and minimum payment details, all with real-time information.

Stockholders’ equity as of September 30, 2020 was $2.9 billion, book value per share was $26.98 and tangible book value per share was $16.07.

Our ratio of common stockholders’ equity to total assets was 13.72% and the ratio of tangible common stockholders’ equity to tangible assets was 8.65% at September 30, 2020.

The Company’s Tier 1 leverage ratio of 9.05%, as well as our other regulatory capital ratios, remain significantly above the “well capitalized” levels (see Table 13 in the Capital section of this Item).

Total loans were $14.02 billion at September 30, 2020, compared to $14.61 billion at June 30, 2020 and $13.00 billion at September 30, 2019.

The increase from prior year is primarily due to the Landrum acquisition.

Sequentially, total loans decreased $589.5 million from the second quarter of 2020.

During 2020, we had $970.5 million in loan originations under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

See the COVID-19 Impact section below for additional information.

At September 30, 2020, the allowance for credit losses on loans was $248.3 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 earnings net of taxes.

Net income for the three months ended March 31, 2021 was $67.4 million, or $0.62 diluted earnings per share, compared to $77.2 million, or $0.68 diluted earnings per share, for the same period in 2020.

Included in both first quarter 2021 and 2020 results were non-core items related to merger-related costs, branch right sizing initiatives, and gains associated with the sale of banking operations.

Excluding all non-core items, core earnings for the three months ended March 31, 2021 were $64.0 million, a decrease of $9.8 million compared to the same period in the prior year.

Core diluted earnings per share for the first three months of 2021 were $0.59 compared to $0.65 for the three months ended March 31, 2020.

The decrease was due in significant part to the difference in the gains on sales of securities recognized during the periods.

Simmons Bank was recently named to Forbes magazine’s list of “World’s Best Banks” for the second consecutive year and ranked among the top 30 banks in Forbes’ list of “America’s Best Banks” for 2021.

On March 12, 2021, we completed the Illinois Branch Sale of four Simmons Bank locations in the Metro East area of Southern Illinois, near St.

We recognized a gain of $5.3 million on the sale of the Illinois Branches.

We recorded solid operating results in the first quarter which reflects the benefit of our diverse operating model.

We are still feeling the effects of the COVID-19 pandemic in the economy and some industries are still struggling to return to pre-COVID levels of performance;

however, our asset quality has improved compared to 2020 and we are optimistic that trend will continue.

Stockholders’ equity as of March 31, 2021 was $2.9 billion, book value per share was $27.04 and tangible book value per share was $16.13.

Our ratio of common stockholders’ equity to total assets was 12.55% and the ratio of tangible common stockholders’ equity to tangible assets was 7.88% at March 31, 2021.

The Company’s Tier 1 leverage ratio of 8.95%, as well as our other regulatory capital ratios, remain significantly above the “well capitalized” guidelines (see Table 12 in the Capital section of this Item).

Total deposits were $18.2 billion at March 31, 2021, compared to $17.0 billion at December 31, 2020 and $15.6 billion at March 31, 2020.

The increase from the prior year is a direct reflection of the multiple rounds of economic stimulus legislation in response to the COVID-19 pandemic that have created a rapid rise in liquidity and have led to changes in customer spending habits.

Trends affected by the increasing customer cash balances are pay downs on loans, decreased loan demand, reduced credit card balances and fewer overdraft activities.

Total loans were $12.2 billion at March 31, 2021, compared to $12.9 billion at December 31, 2020 and $14.4 billion at March 31, 2020.

The decrease from the prior year was related in significant part to planned payoffs, normal pay downs and weakened loan demand as a result of the economic uncertainty stemming from the COVID-19 pandemic.

Sequentially, total loans decreased $705.0 million from the fourth quarter of 2020 due, in part to seasonal decreases in the credit card and agricultural portfolios as well as fluctuations in the mortgage warehouse line of credit.

While loan demand has been well below historical levels, the demand appears to be recovering going into the second quarter of 2021.

Our total loan pipeline consisting of all loan opportunities was $1.2 billion at March 31, 2021, compared to $673.7 million at December 31, 2020.

Loans approved and ready to close were $284.5 million as of March 31, 2021.

As of March 31, 2021, we had $797.6 million in loans outstanding under the PPP.

The change in total PPP loan balance during the first quarter of 2021 was as follows:

PPP PPP Total

(Dollars in thousands) Round 1 Round 2 PPP Loans

Beginning balance, January 1, 2021 $ 904,673 $ — $ 904,673

PPP loan originations — 227,902 227,902

PPP loan forgiveness and repayments (334,946) — (334,946)

Ending balance, March 31, 2021 $ 569,727 $ 227,902 $ 797,629

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 13.00% and tangible common equity to tangible assets was 8.18% as of March 31, 2021.

We continue to closely monitor the COVID-19 pandemic and expect to make future changes to respond as this situation continues to evolve.

Further economic downturns accompanying this pandemic, or a delayed economic recovery from this pandemic, 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.

In our discussion and analysis of our financial condition and results of operation in this Item 2, “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.

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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 September 30, 2020, has approximately $21.4 billion in consolidated assets and, through its subsidiaries, conducts financial operations in Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.

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 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;

• 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 will 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 September 30, 2020, the Company has approximately $2.5 billion in cash and cash equivalents and is well capitalized, which management believes has allowed us to continue to approach the crisis from a position of strength.

Through August 8, 2020, when the PPP program ended to new applicants, we had originated 8,199 PPP loans with an average balance of $118,000 per loan.

Approximately 93% of our PPP loans had a balance of less than $350,000 at the end of the quarter.

The following table categorizes our PPP loans by outstanding balance as of September 30, 2020:

PPP Loans Number of Balance

(Dollars in thousands) Loans % of Loans September 30, 2020 % of Balance

Less than $50,000 5,216 63 % $ 94,401 10 %

$50,000 to $350,000 2,441 30 % 304,815 31 %

More than $350,000 to less than $2 million 481 6 % 357,943 37 %

$2 million to $10 million 61 1 % 213,329 22 %

Total 8,199 100 % $ 970,488 100 %

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 14.4% and tangible common equity to tangible assets was 9.1% as of September 30, 2020.

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 eight months.

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.

Simmons First National Corporation is a Mid-South based financial holding company that, as of March 31, 2021, has approximately $23.3 billion in consolidated assets and, through its subsidiaries, conducts financial operations in Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas.

CRITICAL ACCOUNTING POLICIES

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 generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

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.

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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 loan losses and risks inherent in the loan portfolio.

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 ASC Topic 326-20, Financial Instruments - Credit Losses .

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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.

In accordance with ASC 326, we record both a discount and an allowance for credit losses on acquired loans.

Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820.

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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.

Once more, we performed an interim goodwill impairment assessment during the third quarter of 2020 and concluded no impairment existed.

While our goodwill impairment analysis indicated no impairment at September 30, 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

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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.

Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of restricted stock, restricted stock units or performance stock units 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.

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Our current interest rate sensitivity shows that approximately 41% of our loans and 85% of our time deposits will reprice in the next year.

Net Interest Income Quarter-to-Date Analysis

For the three month period ended September 30, 2020, net interest income on a fully taxable equivalent basis was $156.5 million, an increase of $5.4 million, or 3.6%, over the same period in 2019.

The increase in net interest income was primarily the result of a $21.0 million decrease in interest expense partially offset by a reduction in interest income of $15.7 million.

The reduction in interest income primarily resulted from a decrease of $16.7 million in interest income on loans partially offset by an increase of $1.4 million in interest income on investment securities.

During the third quarter of 2020, we generated $16.3 million of additional interest income due to an increase in loan volume, primarily from our Landrum acquisition completed during the fourth quarter of 2019, while a 93 basis point decline in yield resulted in a $33.0 million decrease in interest income.

The loan yield for the third quarter of 2020 was 4.54% compared to 5.47% for the same period in 2019.

The PPP loan yield was approximately 2.37% (including accretion of net fees), which decreased the loan yield by 16 basis points.

Excluding the PPP loans, loan yield for the third quarter of 2020 was 4.70%.

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 three months ended September 30, 2020 and 2019, interest income included $8.9 million and $9.3 million, respectively, for the yield accretion recognized on loans acquired.

The $21.0 million decrease in interest expense is mostly due to the decline in our deposit account rates and our FHLB borrowing rates.

Interest expense decreased $24.1 million due to the decrease in yield of 86 basis points on interest-bearing deposit accounts and $1.4 million due to the decrease in yield of 44 basis points on FHLB borrowings.

These decreases were partially offset by an increase of $3.4 million related to deposit growth primarily due to the Landrum acquisition.

Net Interest Income Year-to-Date Analysis

For the nine month period ended September 30, 2020, net interest income on a fully taxable equivalent basis was $492.3 million, an increase of $52.5 million, or 11.9%, over the same period in 2019.

The increase in net interest income was the result of a $13.2 million increase in interest income coupled with a $39.2 million decrease in interest expense.

The increase in interest income primarily resulted from a $10.5 million increase in interest income on loans and an increase of $2.9 million in interest income on investment securities.

The increase in loan volume during the first nine months of 2020 generated $77.0 million of additional interest income, primarily from our Landrum and Reliance acquisitions completed during 2019, while a 66 basis point decline in yield resulted in a $66.5 million decrease in interest income.

For the nine months ended September 30, 2020 and 2019, interest income included $32.5 million and $26.1 million, respectively, for the yield accretion recognized on loans acquired.

The $39.2 million decrease in interest expense is mostly due to the decrease in our deposit account rates and our FHLB borrowing rates.

Interest expense decreased $51.6 million due to the decrease in yield of 64 basis points on interest-bearing deposit accounts

and $5.7 million due to the decrease in yield of 58 basis points on FHLB borrowings.

These decreases were partially offset by an increase of $14.6 million related to deposit growth primarily due to the Landrum and Reliance acquisitions completed in 2019.

Net Interest Income

For the three month period ended March 31, 2021, net interest income on a fully taxable equivalent basis was $150.8 million, a decrease of $18.9 million, or 11.2%, over the same period in 2020.

The decrease in net interest income was the result of a $37.9 million decrease in fully tax equivalent interest income partially offset by a $19.0 million decrease in interest expense.

The decrease in interest income primarily resulted from a $41.1 million decrease in interest income on loans, that consisted of a decrease in loan volume of $24.7 million coupled with a 44 basis point decline in yield that resulted in a $16.4 million decrease in interest income.

The decrease in our loan volume during the first three months of 2021 was primarily due to weak loan demand throughout 2020 and into the first quarter of 2021 as a result of the COVID-19 pandemic.

Furthermore, during the first quarter of 2020, we sold approximately $1.1 billion of investment securities 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 began to re-invest in our investment security portfolio during the fourth quarter of 2020 and the first quarter of 2021.

The $19.0 million decrease in interest expense is mostly due to the decrease in our deposit account rates.

Interest expense decreased $19.6 million due to the decrease in yield of 62 basis points on interest-bearing deposit accounts, partially offset by an increase of $1.5 million related to approximately $1.0 billion in average deposit growth.

Net Interest Margin

Our net interest margin on a fully tax equivalent basis decreased 61 basis points to 3.21% for the three month period ended September 30, 2020, when compared to 3.82% for the same period in 2019.

Normalized for all accretion, our core net interest margin for the three months ended September 30, 2020 and 2019 was 3.02% and 3.59%, respectively.

For the nine month period ended September 30, 2020, our net interest margin on a fully tax equivalent basis decreased 45 basis points to 3.43% when compared to 3.88% for the same period in 2019.

The decreases in the net interest margin during the three and nine months ended September 30, 2020 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 third quarter 2020 was 30 basis points, bringing the net interest margin adjusted for PPP loans and excess liquidity to 3.51%.

During March 2020, the Federal Open Market Committee, or FOMC, of the Federal Reserve substantially reduced interest rates in response to the economic crisis brought on by the COVID-19 pandemic and rates have continued to remain low through the third quarter of 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 is being driven by the decrease in our non-PPP loan portfolio and we expect continued pressure on the net interest margin for the remainder of 2020.

Our net interest margin on a fully tax equivalent basis decreased 69 basis points to 2.99% for the three month period ended March 31, 2021, when compared to 3.68% for the same period in 2020.

Normalized for all accretion, our core net interest margin at March 31, 2021 and 2020 was 2.86% and 3.42%, respectively.

The decreases in the net interest margin during the three months ended March 31, 2021 compared to the same period in 2020, were primarily due to the aforementioned decline in net interest income coupled with a $2.7 billion increase in average cash and equivalents driven by the lower interest rate environment and additional liquidity created in response to the COVID-19 pandemic.

We purchased investment securities which added approximately $1.2 billion to our average investment securities portfolio.

The impact of these items on net interest margin for the first quarter of 2021 was 35 basis points, bringing the net interest margin adjusted for PPP loans and additional liquidity to 3.33%.

As such, our variable rate loan portfolio has repriced to a lower yield and, in response to offset the decline, we have worked to lower our cost of deposits.

In addition, our decreased net interest margin is being driven by the decrease in our non-PPP loan portfolio as a result of COVID-19 but our loan pipeline has started to rebuild and we expect modest organic loan growth during the second half of 2021.

Net Interest Income Tables

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2020 and 2019, respectively, as well as changes in fully taxable equivalent net interest margin for the three and nine months ended September 30, 2020 versus September 30, 2019.

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three months ended March 31, 2021 and 2020, respectively.

Analysis of Net Interest Margin

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Three Months Ended

September 30, Nine Months Ended

September 30,

(In thousands) 2021 2020

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Three Months Ended

September 30, Nine Months Ended

September 30,

(In thousands) 2021 vs.

2019 2020 vs.

Increase due to change in earning assets $ 22,956 $ 97,238

Decrease due to change in earning assets $ (13,110)

Decrease due to change in earning asset yields (24,829)

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Increase due to change in interest rates paid on interest bearing liabilities 20,459

Increase in net interest income $ 5,367 $ 52,456

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 the three and nine months ended September 30, 2020 and 2019.

Decrease in net interest income $ (18,944)

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.

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(FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%)

Three Months Ended September 30,

Average Income/ Yield/ Average Income/ Yield/

(In thousands) Balance Expense Rate (%) Balance Expense Rate (%)

Earning assets:

Interest bearing balances due from banks and federal funds sold

$ 2,265,233 $ 623 0.11 $ 344,761 $ 1,586 1.83

Investment securities - taxable

1,534,742 7,193 1.86 1,561,308 9,514 2.42

Investment securities - non-taxable

1,155,099 10,382 3.58 681,505 6,687 3.89

Mortgage loans held for sale

145,226 1,012 2.77 39,551 382 3.83

14,315,014 163,379 4.54 13,053,540 180,080 5.47

Total interest earning assets 19,415,314 182,589 3.74 15,680,665 198,249 5.02

Non-earning assets 2,350,007 2,039,933

Total assets $ 21,765,321 $ 17,720,598

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest bearing liabilities:

Interest bearing transaction and savings deposits

$ 8,977,886 $ 6,769 0.30 $ 7,322,395 $ 21,363 1.16

Time deposits 2,998,091 9,437 1.25 3,122,422 15,573 1.98

Total interest bearing deposits 11,975,977 16,206 0.54 10,444,817 36,936 1.40

Federal funds purchased and securities sold under agreements to repurchase

386,631 335 0.34 123,883 249 0.80

Other borrowings 1,357,278 4,943 1.45 1,127,886 5,381 1.89

Subordinated debt and debentures 382,672 4,631 4.81 354,178 4,576 5.13

Total interest bearing liabilities 14,102,558 26,115 0.74 12,050,764 47,142 1.55

Non-interest bearing liabilities:

Non-interest bearing deposits 4,529,782 3,012,544

Other liabilities 190,169 288,517

Total liabilities 18,822,509 15,351,825

Stockholders’ equity 2,942,812 2,368,773

Total liabilities and stockholders’ equity

$ 21,765,321 $ 17,720,598

Net interest spread 3.00 3.47

Net interest margin $ 156,474 3.21 $ 151,107 3.82

Nine Months Ended September 30,

Three Months Ended March 31,

Average Income/ Yield/ Average Income/ Yield/

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$ 22,738,821 $ 20,920,223

Net interest spread 3.20 3.53

Net interest margin $ 492,293 3.43 $ 439,837 3.88

Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine month periods ended September 30, 2020, as compared to the same periods of the prior year.

Net interest spread – FTE 2.83 3.40

Net interest margin – FTE $ 150,844 2.99 $ 169,788 3.68

Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three month period ended March 31, 2021, as compared to the same period of the prior year.

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.

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Three Months Ended

September 30, Nine Months Ended

September 30,

2019 2020 vs.

(In thousands, on a fully taxable equivalent basis) Volume Yield/

Rate Total Volume Yield/

Increase (decrease) in:

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Total 1,464 (20,459) (18,995)

Increase (decrease) in net interest income $ 17,940 $ (12,573) $ 5,367 $ 78,403 $ (25,947) $ 52,456

Decrease in net interest income $ (14,574) $ (4,370) $ (18,944)

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.

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, reasonable and supportable forecasts, 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.

The provision for credit losses for the three and nine month periods ended September 30, 2020, was $23.0 million and $68.0 million, respectively, compared to $22.0 million and $38.3 million for the same periods ended September 30, 2019, increases of $1.0 million and $29.7 million.

The increase during the quarter ended September 30, 2020 was primarily based on additional qualitative adjustments specific to industries that are more adversely impacted by the current and expected economic scenarios, such as the restaurant, retail, and hotel industries.

These adjustments are intended to account for potential problem credits that have not materialized into any identifiable metrics or delinquencies.

We additionally updated the credit loss forecast models using multiple Moody’s economic scenarios.

The updates to the credit loss forecast models capture the possibility of a more prolonged recovery to the economies than originally expected that affect our loan portfolio.

The increase during the nine month period ended September 30, 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 the Company’s allowance for credit losses.

The provision for credit losses for the three months ended March 31, 2021 was $1.4 million, and was entirely related to activity in the investment securities portfolio during the first quarter of 2021, compared to $23.1 million for the same period ended March 31, 2020, a decrease of $21.7 million.

The decrease was primarily due to two energy credits that experienced further deterioration and were negatively impacted by the sharp decline in commodity pricing during the first quarter of 2020, resulting in incremental provision expense of $22.0 million during that quarter.

NON-INTEREST INCOME

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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 $71.9 million for the three month period ended September 30, 2020, a decrease of approximately $12.8 million, or 15.1%, compared to the same period in 2019, primarily due to the gain on sale of Visa Inc.

class B common stock of $42.9 million that was recognized during the third quarter of 2019.

We benefited from additional gains on the sale of securities and incremental mortgage lending income, collectively $24.4 million, during the third quarter of 2020.

During the third quarter of 2020, we evaluated our security portfolio and projected calls that we expected to occur over the next year and a half with large gains.

As a result, we sold approximately $515.6 million of investment securities resulting in a net gain of $22.3 million during the third quarter of 2020.

For the nine month period ended September 30, 2020, total non-interest income was $204.5 million, an increase of approximately $45.1 million, or 28.3%, compared to the same period in 2019.

During the first nine months of 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 when the PPP loans are repaid, subject to economic conditions and other concerns at such time.

Additionally, the gains on sale from the Texas Branch Sale and Colorado Branch Sales of $8.1 million, which we consider a non-core item, contributed to the increase during 2020.

The increases of $9.5 million and $20.5 million in mortgage lending income in the three and nine month periods ended September 30, 2020, respectively, was a result of the current low mortgage interest rate environment as well as increased business related to our Landrum and Reliance acquisitions.

Table 5 shows non-interest income for the three and nine month periods ended September 30, 2020 and 2019, respectively, as well as changes in 2020 from 2019.

For the three month period ended March 31, 2021, total non-interest income was $51.9 million, a decrease of approximately $30.5 million, or 37.0%, compared to the same period in 2020.

During the first three months of 2021, we sold approximately $135.7 million of investment securities resulting in a net gain of $5.5 million, compared to $1.1 billion of investment securities sold for a net gain of $32.1 million in the first quarter of 2020.

Additionally, the gain on sale from the Illinois Branch Sale of $5.3 million, which we consider a non-core item, is included in non-interest income for the first quarter of 2021.

Increases of $1.4 million in mortgage lending income and $1.1 million in debit and credit card fees in the three month period ended March 31, 2021, largely was a result of the current low mortgage interest rate environment and changes in consumer spending habits along with the effects of the government stimulus payments in response to the COVID-19 pandemic, respectively.

Table 5 shows non-interest income for the three month periods ended March 31, 2021 and 2020, respectively, as well as changes in 2021 from 2020.

Non-Interest Income

Three Months Ended

September 30, 2020

Change from Nine Months Ended

September 30, 2020

March 31, 2021

(Dollars in thousands) 2021 2020 2020

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Gain on sale of securities, net 5,471 32,095 (26,624) (83.0)

Gain on sale of Visa, Inc.

class B common stock — 42,860 (42,860) * — 42,860 (42,860) (100.0)

Gain on sale of banking operations, net — — — — 8,093 — 8,093 *

Gain on sale of branches 5,477 5,889 (412) (7.0)

Other income 4,783 6,912 (2,129) (30.8)

Total non-interest income $ 51,903 $ 82,394 $ (30,491) (37.0)%

_____________________________

* Not meaningful

Recurring fee income (total service charges, trust fees, debit and credit card fees) for the three month period ended September 30, 2020 was $27.7 million, an increase of $2.4 million from the same period in 2019.

Recurring fee income for the nine month period ended September 30, 2020, was $83.0 million, an increase of $9.7 million from the nine month period ended September 30, 2019, primarily the result of the Landrum and Reliance acquisitions completed during 2019.

Recurring fee income (total service charges, trust fees, debit and credit card fees) for the three month period ended March 31, 2021, was $27.3 million, a decrease of $2.7 million from the three month period ended March 31, 2020, primarily the result of fewer service charges on deposit accounts, reflecting the additional liquidity currently held by our customers.

NON-INTEREST EXPENSE

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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 the three months ended September 30, 2020 was $118.9 million, an increase of $12.1 million, or 11.3%, from the same period in 2019.

Non-interest expense during the third quarter of 2020 included $3.7 million of pre-tax non-core items:

$902,000 of merger-related costs, $2.3 million of early retirement program expenses, and $442,000 of net branch right sizing costs.

Normalizing for these non-core costs, core non-interest expense for the three months ended September 30, 2020 increased $11.3 million, or 10.9%, from the same period in 2019.

Non-interest expense for the nine months ended September 30, 2020 was $365.4 million, an increase of $46.3 million, or 14.5%, from the same period in 2019.

Normalizing for the non-core costs, core non-interest expense for the nine months ended September 30, 2020 increased $55.4 million, or 18.4%, from the same period in 2019.

The increases during both periods were 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 $12.4 million during the first nine months of 2020 were primarily related to this initiative.

Table 6 below shows non-interest expense for the three and nine month periods ended September 30, 2020 and 2019, respectively, as well as changes in 2020 from 2019.

Non-interest expense for the three months ended March 31, 2021 was $115.4 million, a decrease of $13.5 million, or 10.5%, from the same period in 2020.

Normalizing for the non-core costs, core non-interest expense for the three months ended March 31, 2021 decreased $13.0 million, or 10.2%, from the same period in 2020.

The decrease in non-interest expense was primarily related to the realization of expected synergies from the continuous evaluation of our branch network and the branch sales and closures that began in 2020 and have continued in 2021.

Additionally, salaries and employee benefits expense was impacted by savings resulting from the early retirement program offered in the prior year.

Table 6 below shows non-interest expense for the three month periods ended March 31, 2021 and 2020, respectively, as well as changes in 2021 from 2020.

Non-Interest Expense

Three Months Ended

September 30, 2020

Change from Nine Months Ended

September 30, 2020

March 31, 2021

(Dollars in thousands) 2021 2020 2020

Salaries and employee benefits $ 60,340 $ 67,924 $ (7,584) (11.2)%

Early retirement program 2,346 177 2,169 * 2,839 3,464 (625) (18.0)

Occupancy expense, net 9,300 9,510 (210) (2.2)

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Telephone 1,632 2,185 (553) (25.3)

Credit card expenses 5,190 4,200 990 23.6 14,154 11,822 2,332 19.7

Credit card 4,685 4,382 303 6.9

Marketing 3,153 4,385 (1,232) (28.1)

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Amortization of intangibles 3,344 3,413 (69) (2.0)

Branch right sizing expense 442 160 282 176.3 2,401 3,092 (691) (22.4)

Other expense 7,478 8,240 (762) (9.3) 23,676 24,195 (519) (2.2)

Branch right sizing 625 238 387 162.6

Other 6,540 8,739 (2,199) (25.2)

Total non-interest expense $ 115,356 $ 128,813 $ (13,457) (10.5)%

_____________________________

* Not meaningful

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 HTM or AFS.

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.

HTM and AFS investment securities were $609.5 million and $4.5 billion, respectively, at March 31, 2021, compared to the HTM amount of $333.0 million and AFS amount of $3.5 billion at December 31, 2020.

As anticipated, our security portfolio increased during the first quarter of 2021 as we reinvested PPP loan repayments and utilized additional liquidity held in Cash and Cash Equivalents.

We will continue to look for opportunities to maximize the value of the investment portfolio.

Management has the ability and intent to hold the securities classified as HTM 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 March 31, 2021, management also had the ability and intent to hold the securities classified as AFS 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.

LOAN PORTFOLIO

Our loan portfolio averaged $14.53 billion and $12.53 billion during the first nine months of 2020 and 2019, respectively.

As of September 30, 2020, total loans were $14.02 billion, a decrease of $408.3 million from December 31, 2019.

Our loan portfolio averaged $12.52 billion and $14.55 billion during the first three months of 2021 and 2020, respectively.

As of March 31, 2021, total loans were $12.20 billion, a decrease of $705.0 million from December 31, 2020.

The decline in the average loan balance during the first quarter of 2021 when compared to the same period in 2020 was due to the tepid loan demand that began in late first quarter of 2020 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).

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Loan Portfolio

September 30, December 31,

March 31, December 31,

(In thousands) 2021 2020

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Consumer loans consist of credit card loans and other consumer loans.

Consumer loans were $363.6 million at September 30, 2020, or 2.6% of total loans, compared to $454.0 million, or 3.1% of total loans at December 31, 2019.

The decrease in consumer loans from December 31, 2019, to September 30, 2020, was primarily due to the expected seasonal decline in our credit card portfolio.

Consumer loans were $348.4 million at March 31, 2021, or 2.9% of total loans, compared to $391.2 million, or 3.0% of total loans at December 31, 2020.

The decrease in consumer loans from December 31, 2020, to March 31, 2021, was primarily due to the expected seasonal decline in our credit card portfolio as well as loan payoffs and pay downs due to additional customer liquidity driven by the government economic stimulus programs in response to the COVID-19 pandemic.

Real estate loans consist of construction and development (“C&D”) loans, single-family residential loans and commercial real estate (“CRE”) loans.

Real estate loans were $9.98 billion at September 30, 2020, or 71.2% of total loans, compared to $11.02 billion, or 76.4%, of total loans at December 31, 2019, a decrease of $1.0 billion, or 9.4%.

Real estate loans were $8.82 billion at March 31, 2021, or 72.3% of total loans, compared to $9.22 billion, or 71.5%, of total loans at December 31, 2020, a decrease of $403.9 million, or 4.4%.

Our C&D loans decreased by $144.4 million, or 9.0%, single family residential loans decreased by $150.6 million, or 8.0%, and CRE loans decreased by $108.9 million, or 1.9%.

Real estate loans declined approximately $104.6 million due to the Colorado Branch Sale.

The remaining decrease was due to less activity as a result of the pandemic and our effort to manage our real estate portfolio concentration.

The decreases were due to less activity as a result of the 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 $3.15 billion at September 30, 2020, or 22.5% of total loans, compared to $2.64 billion, or 18.3% of total loans at December 31, 2019, an increase of $506.8 million, or 19.2%, that is mostly in our non-agricultural commercial loan portfolio.

The $970.5 million in PPP loan originations drove the increase in commercial loans during the first nine months of 2020.

Management believes that loan demand is very weak in almost every aspect of our commercial economy, which we believe we see through our lower loan pipeline.

Our customers appear to be deleveraging and not taking on new risks due to the economic uncertainty stemming from the COVID-19 pandemic.

We believe that trend will continue until our customers are more confident in the economy.

Total commercial loans were $2.60 billion at March 31, 2021, or 21.3% of total loans, compared to $2.75 billion, or 21.3% of total loans at December 31, 2020, a decrease of $149.7 million, or 5.4%.

PPP loan balances declined by $334.9 million during the first three months of 2021 as a result of expected reimbursements from the SBA related to PPP loan forgiveness, partially offset by PPP Round 2 loan originations of $227.9 million during the first quarter of 2021.

Agricultural loans decreased $20.0 million, or 11.4%, primarily due to seasonality of the portfolio, which normally peaks in the third quarter and is at its lowest point at the end of the first quarter.

Other loans mainly consists of mortgage warehouse lending.

Mortgage volume surged during the second and third quarters of 2020 due to the low interest rate environment leading to an increase of $214.0 million in other loans primarily from mortgage warehouse lines of credit.

Mortgage volume, while still strong, declined during the first quarter of 2021 when compared to 2020, leading to a decrease of $108.7 million in other loans primarily from mortgage warehouse lines of credit.

ASSET QUALITY

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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 $67.2 million from December 31, 2019 to September 30, 2020.

Nonaccrual loans increased by $74.4 million during the period and foreclosed assets held for sale and other real estate owned decreased by $6.5 million.

The increase in nonaccrual loans during 2020 is primarily in our CRE loan portfolio.

Approximately $31.1 million and $18.2 million related to hotel real estate and student housing accommodations, respectively, moved to nonaccrual during the first nine months of the year.

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 0.87% at September 30, 2020, compared to 0.57% at December 31, 2019.

Total non-performing assets decreased $16.0 million from December 31, 2020 to March 31, 2021.

Nonaccrual loans decreased by $8.0 million during the period and foreclosed assets held for sale and other real estate owned decreased by $7.2 million.

The decrease in nonaccrual loans was primarily due to an overall improvement in economic conditions while the decrease in foreclosed assets held for sale and other real estate owned is mainly the result of the disposition of one commercial building in the St.

Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.56% at March 31, 2021, compared to 0.66% at December 31, 2020.

From time to time, certain borrowers are experiencing declines in income and cash flow.

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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 to $8.6 million at September 30, 2020 from $7.4 million at December 31, 2019.

Our TDR balance remained relatively flat at $7.3 million as of March 31, 2021, decreasing $230,000 from December 31, 2020.

TDRs are individually evaluated for expected credit losses.

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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.

We have more than 3,900 loans totaling approximately $3.2 billion which have received a COVID-19 modification.

See Note 5, Loans and Allowance for Credit Losses, in the accompanying Condensed Notes to Consolidated Financial Statements for additional information related to these loans.

Of these COVID-19 loan modifications, approximately $550.8 million, or 17.4%, are commercial loan modifications that are in an internal COVID-19 status category of 4-7 as of mid-October 2020, further discussed below, comprised of the following industries:

Commercial COVID-19 Loan Modifications Status Category 4-7 by Industry

(Dollars in thousands) Loan Balance %

Hotels $ 319,991 58.1 %

Restaurants - Real Estate 7,209 1.3

Restaurants - Non-Real Estate 1,897 0.4

Retail 15,836 2.9

Nursing/Extended Care 42,674 7.7

Multifamily 62,320 11.3

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 late in the fourth quarter of 2020 to extend COVID-19 relief related to loan modifications to the earlier of (i) January 1, 2022 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration.

During 2020 and the first three months of 2021, we processed over 3,700 COVID-19 loan modifications in excess of $3.0 billion.

At March 31, 2021, the majority of these balances have returned to regular payments.

The table below presents COVID-19 loan modifications outstanding at March 31, 2021 by industry.

COVID-19 Loan Modifications Outstanding at March 31, 2021 by Industry

(Dollars in thousands) Number Loan Balance % of Balance

Assisted living 1 $ 17,310 8.3 %

Transportation 5 783 0.4

Consumer 37 3,776 1.8

Hotel 17 152,864 73.3

Food service 3 2,683 1.3

All other 16 31,029 14.9

Total 79 $ 208,445 100.0 %

Commercial COVID-19 Loan Modifications Status Category 4-7

(Dollars in thousands) Loan Balance Number of Loans

Internal Status Category 4 $ 335,798 105

Internal Status Category 5 195,312 71

Internal Status Category 6 17,242 44

Internal Status Category 7 2,480 8

Total $ 550,832 228

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 require loan modifications.

We expect most of the commercial COVID-19 loan modifications listed above, as illustrated in Table 9, to return to regular payments with no credit downgrade or long-term restructure.

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.

The COVID-19 pandemic has had an unprecedented impact on the hotel, restaurant and retail industries, causing our borrowers in those industries to require loan modifications.

We expect most of the COVID-19 loan modifications listed above to return to regular payments with no credit downgrade or long-term restructure.

We continue to maintain good asset quality, compared to the industry.

Strong asset quality remains a primary focus of our strategy.

The allowance for credit losses as a percent of total loans was 1.77% as of September 30, 2020.

The allowance for credit losses as a percent of total loans was 1.93% as of March 31, 2021.

Non-performing loans equaled 0.95% of total loans.

Non-performing assets were 0.85% of total assets, a 31 basis point increase from December 31, 2019.

Non-performing assets were 0.55% of total assets, a 9 basis point decrease from December 31, 2020.

The allowance for credit losses was 204% of non-performing loans.

Our annualized net charge-offs to total loans for the first nine months of 2020 was 0.43%.

Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.41%.

Annualized net credit card charge-offs to total credit card loans were 1.75%, compared to 1.86% during the full year 2019, and 229 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.

Our annualized net charge-offs to average total loans for the first three months of 2021 was 0.10%.

Excluding credit cards, the annualized net charge-offs to average total loans for the same period was 0.07%.

Annualized net credit card charge-offs to average total credit card loans were 1.39%, compared to 1.60% during the full year 2020, and 114 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.

Table 9 presents information concerning non-performing assets, including nonaccrual loans at amortized cost and foreclosed assets held for sale.

Non-performing Assets

September 30, December 31,

March 31, December 31,

(Dollars in thousands) 2021 2020

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_______________________________________

(1) Includes nonaccrual TDRs of approximately $5,177,000 at September 30, 2020 and $1,561,000 at December 31, 2019.

There was no interest income on nonaccrual loans recorded for the three and nine month periods ended September 30, 2020 and 2019.

(1) Includes nonaccrual TDRs of approximately $3,478,000 at March 31, 2021 and $4,375,000 at December 31, 2020.

The interest income on nonaccrual loans is not considered material for the three month periods ended March 31, 2021 and 2020.

ALLOWANCE FOR CREDIT LOSSES

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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 asset quality - Adjustments related to trending credit quality metrics including delinquency, non-performing 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.

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• 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.

• Data imprecision 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.

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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 for loans is shown in Table 11.

An analysis of the allowance for credit losses on loans is shown in Table 10.

Allowance for Credit Losses

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Provision for credit losses — 26,197

Balance, September 30 $ 248,251 $ 66,590

Balance, March 31, $ 235,116 $ 243,195

Loans charged off:

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Provision for Credit Losses

The amount of provision added to the allowance during the three and nine months ended September 30, 2020 and 2019, and for the year ended December 31, 2019, 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.

The amount of provision added to the allowance during the three months ended March 31, 2021 and 2020, and for the year ended December 31, 2020, 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 September 30, 2020, the allowance for credit losses reflected an increase of approximately $180.0 million from December 31, 2019 while loans decreased $408.3 million over the same nine month period.

As of March 31, 2021, the allowance for credit losses reflected a decrease of approximately $2.9 million from December 31, 2020 while total loans decreased $705.0 million over the same three month 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 adoption was driven by the substantial amount of loans acquired held by the Company.

The significant impact to the allowance for credit losses at the date of CECL 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 the first nine months of 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 September 30, 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/election, and other related factors.

The decrease in the allowance for credit losses during the first three months of 2021 was predominately related to economic recovery from the effects of the COVID-19 pandemic and the decline in our loan portfolio.

While the economic conditions appear to be improving, certain industries continue to be more adversely impacted than others by this pandemic, such as the restaurant, retail and hotel industries, and there remains uncertainty regarding how borrowers in these industries will recover.

Our allowance for credit losses at March 31, 2021 was considered appropriate given the considerable amount of uncertainty as to the structure and timing of potential economic recovery, future of government assistance related to COVID-19 recovery efforts, the effects of the recent change in Presidential administrations, 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.

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Allocation of Allowance for Credit Losses

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(Dollars in thousands) Allowance

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(1) Percentage of loans in each category to total loans.

Deposits are our primary source of funding for earning assets and are primarily developed through our network of approximately 226 financial centers as of September 30, 2020.

Deposits are our primary source of funding for earning assets and are primarily developed through our network of approximately 198 financial centers as of March 31, 2021.

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 September 30, 2020, core deposits comprised 84.9% of our total deposits.

As of March 31, 2021, core deposits comprised 85.1% 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.

Because of our community banking philosophy, our executives in the local markets, with oversight by the Chief Deposit Officer, 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.

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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 September 30, 2020, were $16.25 billion, an increase of $137.7 million from December 31, 2019.

Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $13.4 billion at September 30, 2020, compared to $12.8 billion at December 31, 2019, an increase of $612.7 million.

Total time deposits decreased $475.0 million to $2.8 billion at September 30, 2020, from $3.3 billion at December 31, 2019.

We had $513.4 million and $1.1 billion of brokered deposits at September 30, 2020, and December 31, 2019, respectively.

Our total deposits as of March 31, 2021, were $18.19 billion, an increase of $1.20 billion from December 31, 2020, primarily driven by the government economic stimulus programs and changes in customer spending resulting from the COVID-19 pandemic.

Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $15.16 billion at March 31, 2021, compared to $14.15 billion at December 31, 2020, an increase of $1.01 billion.

Total time deposits increased $192.4 million to $3.02 billion at March 31, 2021, from $2.83 billion at December 31, 2020.

We had $448.6 million and $512.3 million of brokered deposits at March 31, 2021, and December 31, 2020, respectively.

Both consumer and commercial deposit balances have grown since the COVID-19 related 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.

OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES

Our total debt was $1.73 billion and $1.69 billion at September 30, 2020 and December 31, 2019, respectively.

The outstanding balance for September 30, 2020 includes $1.3 billion in FHLB short-term advances;

$9.0 million in FHLB long-term advances;

Our total debt was $1.72 billion at March 31, 2021 and December 31, 2020.

The outstanding balance for March 31, 2021 includes $1.3 billion in FHLB long-term advances;

$330.0 million in subordinated notes;

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and $33.0 million of other long-term debt.

The FHLB short-term advances outstanding at the end of the third quarter 2020 are FHLB Owns the Option (“FOTO”) advances which 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 September 30, 2020 have 10 to 15 year maturity dates with lockout periods that have expired and, as a result, are considered and monitored as short-term advances.

We analyze the possibility of the FHLB exercising the options along with the market expected rate outcome.

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.

The FHLB long-term advances outstanding at the end of the first quarter 2021 are primarily FHLB Owns the Option (“FOTO”) advances which 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 March 31, 2021 had original maturity dates of 10 years to 15 years with lockout periods that have expired.

We expect the FHLB to not exercise the options to terminate the FOTO advances prior to their stated maturity dates due to the current low interest rate environment.

We continually analyze the possibility of the FHLB exercising the options along with the market expected rate outcome.

As of March 31, 2021, there were no FHLB short-term advances outstanding.

In March 2018, we issued $330 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.

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The Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of its subsidiaries.

At September 30, 2020, total capital was $2.94 billion.

At March 31, 2021, total capital was $2.93 billion.

Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities.

At September 30, 2020, our common equity to asset ratio was 13.72% compared to 14.06% at year-end 2019.

At March 31, 2021, our common equity to asset ratio was 12.55% compared to 13.31% at year-end 2020.

Capital Stock

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We anticipate funding for this Program to come from available sources of liquidity, including cash on hand and future cash flow.

During the nine month period ended September 30, 2020, we repurchased 4,922,336 shares at an average price of $18.96 under the Program.

No shares have been repurchased since March 31, 2020.

We had no stock repurchases during the first nine months of 2019.

On October 22, 2020, we announced the resumption of stock repurchases under the Program.

During the three month periods ended March 31, 2021 and 2020, we repurchased 130,916 shares at an average price per share of $23.53 and 4,922,336 shares at an average price per share of $18.96, respectively, under the Program.

Cash Dividends

We declared cash dividends on our common stock of $0.51 per share for the first nine months of 2020 compared to $0.48 per share for the first nine months of 2019, an increase of $0.03, or 6%.

We declared cash dividends on our common stock of $0.18 per share for the first three months of 2021 compared to $0.17 per share for the first three months of 2020, an increase of $0.01, 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.

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Parent Company Liquidity

The primary liquidity needs of the Parent Company are the payment of dividends to shareholders and the funding of debt obligations and cash needs for acquisitions.

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.

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See the Liquidity and Market Risk Management discussions of Item 3 – Quantitative and Qualitative Disclosures About Market Risk for additional information regarding the parent company’s liquidity.

The Company continually assesses its capital and liquidity needs and the best way to meet them, including, without limitation, through capital raising via, among other things, equity or debt offerings.

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.

Risk Based Capital

Our bank subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies.

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.

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Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Company and Simmons Bank, must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements.

Failure to meet this capital conservation buffer would result in additional limits on dividends, other distributions and discretionary bonuses.

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 September 30, 2020, we meet all capital adequacy requirements to which we are subject.

As of the most recent notification from regulatory agencies, the bank subsidiary was well capitalized under the regulatory framework for prompt corrective action.

To be categorized as well capitalized, the Company and the 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.

Management believes that, as of March 31, 2021, we meet 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 institution’s categories.

Our risk-based capital ratios at September 30, 2020 and December 31, 2019 are presented in Table 13 below:

Our risk-based capital ratios at March 31, 2021 and December 31, 2020 are presented in Table 12 below:

Risk-Based Capital

September 30, December 31,

March 31, December 31,

(Dollars in thousands) 2021 2020

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Goodwill and other intangible assets (1,159,720) (1,163,797)

Unrealized gain on available-for-sale securities, net of income taxes (41,509) (20,891)

Unrealized loss (gain) on available-for-sale securities, net of income taxes 37,176 (59,726)

Total Tier 1 capital 1,939,868 1,884,563

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Tier 1 leverage ratio, excluding average PPP loans (non-GAAP) (1)

9.34 % 9.50 %

Tier 1 risk-based capital ratio 14.09 % 13.41 %

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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 $382.7 million is included as Tier 2 and total capital as of September 30, 2020.

Trust preferred securities and qualifying subordinated debt of $383.0 million is included as Tier 2 and total capital as of March 31, 2021.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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Certain statements contained in this quarterly report may not be based on historical facts and should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “believe,” “budget,” “expect,” “foresee,” “anticipate,” “intend,” “indicate,” “target,” “estimate,” “plan,” “project,” “continue,” “contemplate,” “positions,” “prospects,” “predict,” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could,” “might” or “may,” or by variations of such words or by similar expressions.

These forward-looking statements include, without limitation, those relating to the Company’s future growth, revenue, assets, asset quality, profitability and customer service, critical accounting policies, net interest margin, non-interest revenue, market conditions related to the Company’s stock repurchase program, acquisition strategy, balance sheet and liquidity management, NGB and other digital banking initiatives, the Company’s ability to recruit and retain key employees, the benefits associated with the Company’s early retirement program and branch closures, the adequacy of the allowance for credit losses, the ability of the Company to manage the impact of the COVID-19 pandemic, the effect of certain new accounting standards on the Company’s financial statements (including, without limitation, the CECL methodology and its anticipated effect on the provision and allowance for credit losses), income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of future litigation, legal and regulatory limitations and compliance and competition.

These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “estimate,” “expect,” “foresee,” “intend,” “indicate,” “target,” “plan,” positions,” “prospects,” “project,” “predict,” or “potential,” by future conditional verbs such as “could,” “may,” “might,” “should,” “will,” or “would,” or by variations of such words or by similar expressions.

These forward-looking statements include, without limitation, those relating to the Company’s future growth, revenue, expenses, assets, asset quality, profitability, earnings, accretion, customer service, investment in digital channels, critical accounting policies, net interest margin, non-interest revenue, market conditions related to and the impact of the Company’s stock repurchase program, consumer behavior and liquidity, the adequacy of the allowance for credit losses, the impacts of the COVID-19 pandemic and the ability of the Company to manage the impacts of the COVID-19 pandemic, the impacts of the Company’s and its customers’ participation in the Paycheck Protection Program, the expected performance of COVID-19 loan modifications, income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, the Company’s expectations regarding actions by the FHLB including with respect to the FHLB’s option to terminate FOTO advances, capital resources, market risk, plans for investments in securities, effect of future litigation, including the results of the overdraft fee litigation against the Company that is described in this quarterly report, acquisition strategy, legal and regulatory limitations and compliance and competition.

These forward-looking statements involve risks and uncertainties, and may not be realized due to a variety of factors, including, without limitation:

changes in the Company’s operating, acquisition, or expansion strategy;

the effects of future economic conditions (including unemployment levels and slowdowns in economic growth), governmental monetary and fiscal policies, as well as legislative and regulatory changes;

the effects of future economic conditions (including unemployment levels and slowdowns in economic growth), governmental monetary and fiscal policies, as well as legislative and regulatory changes, including in response to the COVID-19 pandemic;

the impacts of the COVID-19 pandemic on the Company’s operations and performance;

the ultimate effect of measures the Company takes or has taken in response to the COVID-19 pandemic;

the severity and duration of the COVID-19 pandemic, including the effectiveness of vaccination efforts;

the pace of recovery when the COVID-19 pandemic subsides and the heightened impact it has on many of the risks described herein;

changes in real estate values;

the risks of changes in interest rates and their effects on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;

changes in interest rates;

changes in the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest sensitive assets and liabilities;

changes in the securities markets generally or the price of the Company’s common stock specifically;

the effect of the steps the Company takes in response to COVID-19, the severity and duration of the pandemic, including whether there is a widespread resurgence in COVID-19 infections and whether the impact of the COVID-19 pandemic is exacerbated by the seasonal flu, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein;

the effects of the COVID-19 pandemic on, among other things, the Company’s operations, liquidity, and credit quality;

developments in information technology affecting the financial industry;

cyber threats, attacks or events;

reliance on third parties for key services;

changes in the assumptions, forecasts, models, and methodology used to calculate the impact of CECL on the Company’s financial statements;

possible adverse rulings, judgements, settlements and other outcomes of pending or future litigation or government actions (including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic (including, among other things, the PPP loan program authorized by the CARES Act));

reliance on third parties for the provision of key services;

further changes in accounting principles relating to loan loss recognition;

uncertainty and disruption associated with the discontinued use of the London Inter-Bank Offered Rate;

the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions;

possible adverse rulings, judgements, settlements, and other outcomes of pending or future litigation, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic (including, among others, the PPP);

the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;

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In addition, as a result of these and other factors, our past financial performance should not be relied upon as an indication of future performance.

We believe the expectations reflected in our forward-looking statements are reasonable, based on information available to us on the date hereof.

However, given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements.

We believe the assumptions and expectations that underlie or are reflected in our forward-looking statements are reasonable, based on information available to us on the date hereof.

However, given the described uncertainties and risks, we cannot guarantee our future performance or results of operations or whether our future performance will differ materially from the performance reflected in or implied by our forward-looking statements, and you should not place undue reliance on these forward-looking statements.

Any forward-looking statement speaks only as of the date hereof, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and all written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this section.

GAAP RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The tables below present computations of core earnings (net income excluding non-core items {gain on sale of branches, merger related costs, early retirement program costs and the net one-time costs of branch right sizing}) (non-GAAP) 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) and the core net interest margin (non-GAAP).

The tables below present computations of core earnings (net income excluding non-core items {gain on sale of branches, merger related costs, and the net branch right sizing costs}) (non-GAAP) 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), the core net interest margin (non-GAAP), core other income (non-GAAP) and core non-interest expense (non-GAAP).

Non-core items are included in financial results presented in accordance with generally accepted accounting principles (US 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 excess liquidity (each non-GAAP), and loan yield excluding PPP loans (non-GAAP).

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).

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.

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• Investor presentations of Company performance

We have $1.190 billion and $1.183 billion total goodwill and other intangible assets for the periods ended September 30, 2020 and December 31, 2019, respectively.

We have $1.182 billion and $1.186 billion total goodwill and other intangible assets for the periods ended March 31, 2021 and December 31, 2020, 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) and tangible common equity to tangible assets (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 excess liquidity (each non-GAAP), and “loan yield excluding PPP loans” (non-GAAP).

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), and “net interest margin,” adjusted for PPP loans and additional liquidity (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.

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Three Months Ended

September 30, Nine Months Ended

September 30,

(In thousands, except per share data) 2021 2020

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Merger related costs 233 1,068

Early retirement program 2,346 177 2,839 3,464

Branch right sizing 625 238

Tax effect (1)

(867) (756) (151) (4,731)

Net non-core items (3,412) (3,385)

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Merger related costs — 0.01

Early retirement program 0.02 — 0.02 0.04

Branch right sizing 0.01 —

Tax effect (1)

— (0.01) — (0.05)

Net non-core items (0.03) (0.03)

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Three Months Ended

September 30, Nine Months Ended

September 30,

(In thousands) 2021 2020

Other income $ 10,260 $ 12,801

Gain on sale of banking operations — — (8,093) —

Branch right sizing (370) — (370) —

Gain on sale of branches (5,477) (5,889)

Core other income (non-GAAP) $ 4,783 $ 6,912

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Merger related costs (233) (1,068)

Early retirement program (2,346) (177) (2,839) (3,464)

Branch right sizing (625) (238)

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Reconciliation of Tangible Book Value per Common Share (non-GAAP)

September 30, December 31,

March 31, December 31,

(In thousands, except per share data) 2021 2020

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Reconciliation of Tangible Common Equity and the Ratio of Tangible Common Equity to Tangible Assets (non-GAAP)

September 30, December 31,

March 31, December 31,

(Dollars in thousands) 2021 2020

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(Dollars in thousands) Three Months Ended

September 30, 2020

March 31, 2021

Total Tier 1 capital $ 1,939,868

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Tier 1 leverage ratio excluding average PPP loans (non-GAAP) 9.34 %

See Table 19 below for the calculation of core net interest margin and net interest margin adjusted for PPP loans and excess liquidity for the periods presented.

See Table 18 below for the calculation of core net interest margin and net interest margin adjusted for PPP loans and additional liquidity for the periods presented.

Reconciliation of Core Net Interest Margin (non-GAAP)

Three Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2021 2020

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Core net interest income $ 144,214 $ 157,951

PPP loan and excess liquidity interest income (6,131)

Net interest income adjusted for PPP loans and excess liquidity $ 150,343

PPP loan and additional liquidity (1) interest income

Net interest income adjusted for PPP loans and additional liquidity (1)

Average earning assets – quarter-to-date $ 20,484,908 $ 18,581,491

Average PPP loan balance and excess liquidity (2,359,928)

Average earning assets adjusted for PPP loans and excess liquidity $ 17,055,386

Average PPP loan balance and additional liquidity (1)

Average earning assets adjusted for PPP loans and additional liquidity (1)

Net interest margin 2.99 % 3.68 %

Core net interest margin (non-GAAP) 2.86 % 3.42 %

Net interest margin adjusted for PPP loans and excess liquidity (non-GAAP) 3.51 %

See Table 20 below for the calculation of loan yield excluding PPP loans for the period presented.

Reconciliation of Loan Yield Excluding PPP Loans (non-GAAP)

(Dollars in thousands) Three Months Ended

September 30, 2020

Loan interest income $ 163,379

PPP loan interest income (5,782)

Loan interest income excluding PPP loans $ 157,597

Average loan balance $ 14,315,014

Average PPP loan balance (967,152)

Average loan balance excluding PPP loans $ 13,347,862

Loan yield 4.54 %

Loan yield excluding PPP loans (non-GAAP) 4.70 %

Net interest margin adjusted for PPP loans and additional liquidity (1) (non-GAAP)

_______________________________________

(1) Additional liquidity is estimated as the average interest bearing balances due from banks and federal funds sold greater than $750.0 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis