SIMMONS FIRST NATIONAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW 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. Louis. 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. 44 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. We believe the presentation of non-GAAP financial measures provides a meaningful basis for period-to-period and company-to-company comparisons, which we believe will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. See the GAAP Reconciliation of Non-GAAP Measures section below for additional discussion and reconciliations of non-GAAP measures. Simmons First National Corporation is 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 Overview We follow accounting and reporting policies that conform, in all material respects, to US GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. The accounting policies that we view as critical to us are those relating to estimates and judgments regarding (a) the determination of the adequacy of the allowance for credit losses, (b) acquisition accounting and valuation of loans, (c) the valuation of goodwill and the useful lives applied to intangible assets, (d) the valuation of stock-based compensation plans and (e) income taxes. Allowance for Credit Losses The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. The allowance, in the judgment of management, is necessary to reserve for expected credit losses and risks inherent in the loan portfolio. Our allowance for credit loss methodology includes reserve factors calculated to estimate current expected credit losses to amortized cost balances over the remaining contractual life of the portfolio, adjusted for prepayments, in accordance with ASC Topic 326-20, Financial Instruments - Credit Losses . Accordingly, the methodology is based on our reasonable and supportable economic forecasts, historical loss experience, and other qualitative adjustments. For further information see the section Allowance for Credit Losses below. Our evaluation of the allowance for credit losses is inherently subjective as it requires material estimates. The actual amounts of credit losses realized in the near term could differ from the amounts estimated in arriving at the allowance for credit losses reported in the financial statements. On January 1, 2020, the Company adopted the new CECL methodology. See Note 1, Preparation of Interim Financial Statements, in the accompanying Condensed Notes to Consolidated Financial Statements for additional information. 45 Acquisition Accounting, Loans We account for our acquisitions under ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. 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. The fair value estimates associated with the loans included estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. We evaluate loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs . The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. Goodwill and Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. We perform an annual goodwill impairment test, and more than annually if circumstances warrant, in accordance with ASC Topic 350, Intangibles – Goodwill and Other , as amended by ASU 2011-08 – Testing Goodwill for Impairment and ASU 2017-04 - Intangibles – Goodwill and Other. ASC Topic 350 requires that goodwill and intangible assets that have indefinite lives be reviewed for impairment annually or more frequently if certain conditions occur. Impairment losses on recorded goodwill, if any, will be recorded as operating expenses. Stock-Based Compensation Plans We have adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of 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. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. For additional information, see Note 15, Stock-Based Compensation, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report. Income Taxes We are subject to the federal income tax laws of the United States, and the tax laws of the states and other jurisdictions where we conduct business. Due to the complexity of these laws, taxpayers and the taxing authorities may subject these laws to different interpretations. Management must make conclusions and estimates about the application of these innately intricate laws, related regulations, and case law. When preparing the Company’s income tax returns, management attempts to make reasonable interpretations of the tax laws. Taxing authorities have the ability to challenge management’s analysis of the tax law or any reinterpretation management makes in its ongoing assessment of facts and the developing case law. Management assesses the reasonableness of its effective tax rate quarterly based on its current estimate of net income and the applicable taxes expected for the full year. On a quarterly basis, management also reviews circumstances and developments in tax law affecting the reasonableness of deferred tax assets and liabilities and reserves for contingent tax liabilities. 46 NET INTEREST INCOME Overview Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 26.135%. Our practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing. In the last several years, on average, approximately 41% of our loan portfolio and approximately 74% of our time deposits have repriced in one year or less. Our current interest rate sensitivity shows that approximately 41% of our loans and 85% of our time deposits will reprice in the next year. 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 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%. 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 at historically low levels through the first quarter of 2021. 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. 47 Net Interest Income Tables 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. Table 1: Analysis of Net Interest Margin (FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%) Three Months Ended March 31, (In thousands) 2021 2020 Interest income $ 169,434 $ 209,231 FTE adjustment 4,163 2,305 Interest income – FTE 173,597 211,536 Interest expense 22,753 41,748 Net interest income – FTE $ 150,844 $ 169,788 Yield on earning assets – FTE 3.44 % 4.58 % Cost of interest bearing liabilities 0.61 % 1.18 % Net interest spread – FTE 2.83 % 3.40 % Net interest margin – FTE 2.99 % 3.68 % Table 2: Changes in Fully Taxable Equivalent Net Interest Margin Three Months Ended March 31, (In thousands) 2021 vs. 2020 Decrease due to change in earning assets $ (13,110) Decrease due to change in earning asset yields (24,829) Decrease due to change in interest bearing liabilities (1,464) Increase due to change in interest rates paid on interest bearing liabilities 20,459 Decrease in net interest income $ (18,944) 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 months ended March 31, 2021 and 2020. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Nonaccrual loans were included in average loans for the purpose of calculating the rate earned on total loans. 48 Table 3: Average Balance Sheets and Net Interest Income Analysis (FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%) Three Months Ended March 31, 2021 2020 Average Income/ Yield/ Average Income/ Yield/ (In thousands) Balance Expense Rate (%) Balance Expense Rate (%) ASSETS Earning assets: Interest bearing balances due from banks and federal funds sold $ 3,477,989 $ 798 0.09 $ 764,639 $ 2,441 1.28 Investment securities - taxable 2,334,078 10,120 1.76 2,324,188 12,752 2.21 Investment securities - non-taxable 2,057,132 15,439 3.04 900,223 8,315 3.71 Mortgage loans held for sale 97,409 639 2.66 43,588 281 2.59 Loans 12,518,300 146,601 4.75 14,548,853 187,747 5.19 Total interest earning assets 20,484,908 173,597 3.44 18,581,491 211,536 4.58 Non-earning assets 2,253,913 2,338,732 Total assets $ 22,738,821 $ 20,920,223 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Interest bearing liabilities: Interest bearing transaction and savings deposits $ 10,093,868 $ 6,088 0.24 $ 9,005,701 $ 17,954 0.80 Time deposits 3,043,000 7,091 0.95 3,150,909 13,323 1.70 Total interest bearing deposits 13,136,868 13,179 0.41 12,156,610 31,277 1.03 Federal funds purchased and securities sold under agreements to repurchase 307,540 245 0.32 330,902 759 0.92 Other borrowings 1,341,059 4,802 1.45 1,320,245 4,877 1.49 Subordinated debt and debentures 382,943 4,527 4.79 388,330 4,835 5.01 Total interest bearing liabilities 15,168,410 22,753 0.61 14,196,087 41,748 1.18 Non-interest bearing liabilities: Non-interest bearing deposits 4,419,136 3,602,678 Other liabilities 177,819 251,514 Total liabilities 19,765,365 18,050,279 Stockholders’ equity 2,973,456 2,869,944 Total liabilities and stockholders’ equity $ 22,738,821 $ 20,920,223 Net interest spread – FTE 2.83 3.40 Net interest margin – FTE $ 150,844 2.99 $ 169,788 3.68 49 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. Table 4: Volume/Rate Analysis Three Months Ended March 31, 2021 vs. 2020 (In thousands, on a fully taxable equivalent basis) Volume Yield/ Rate Total Increase (decrease) in: Interest income: Interest bearing balances due from banks and federal funds sold $ 2,290 $ (3,933) $ (1,643) Investment securities - taxable 54 (2,686) (2,632) Investment securities - non-taxable 8,938 (1,814) 7,124 Mortgage loans held for sale 353 5 358 Loans (24,745) (16,401) (41,146) Total (13,110) (24,829) (37,939) Interest expense: Interest bearing transaction and savings accounts 1,946 (13,812) (11,866) Time deposits (441) (5,791) (6,232) Federal funds purchased and securities sold under agreements to repurchase (51) (463) (514) Other borrowings 76 (151) (75) Subordinated notes and debentures (66) (242) (308) Total 1,464 (20,459) (18,995) 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, 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 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. 50 NON-INTEREST INCOME Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and debit and credit card fees. Non-interest income also includes income on the sale of mortgage and SBA loans, investment banking income, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities. 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. Table 5: Non-Interest Income Three Months Ended March 31, 2021 Change from (Dollars in thousands) 2021 2020 2020 Trust income $ 6,666 $ 7,151 $ (485) (6.8)% Service charges on deposit accounts 9,715 13,328 (3,613) (27.1) Other service charges and fees 1,922 1,588 334 21.0 Mortgage lending income 6,447 5,046 1,401 27.8 SBA lending income 240 296 (56) (18.9) Investment banking income 695 877 (182) (20.8) Debit and credit card fees 8,964 7,914 1,050 13.3 Bank owned life insurance income 1,523 1,298 225 17.3 Gain on sale of securities, net 5,471 32,095 (26,624) (83.0) 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)% 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. 51 NON-INTEREST EXPENSE Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for our operations. Management remains committed to controlling the level of non-interest expense through the continued use of expense control measures. We utilize an extensive profit planning and reporting system involving all subsidiaries. Based on a needs assessment of the business plan for the upcoming year, monthly and annual profit plans are developed, including manpower and capital expenditure budgets. These profit plans are subject to extensive initial reviews and monitored by management monthly. Variances from the plan are reviewed monthly and, when required, management takes corrective action intended to ensure financial goals are met. We also regularly monitor staffing levels at each subsidiary to ensure productivity and overhead are in line with existing workload requirements. Non-interest expense for 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. Table 6: Non-Interest Expense Three Months Ended March 31, 2021 Change from (Dollars in thousands) 2021 2020 2020 Salaries and employee benefits $ 60,340 $ 67,924 $ (7,584) (11.2)% Occupancy expense, net 9,300 9,510 (210) (2.2) Furniture and equipment expense 5,415 5,723 (308) (5.4) Other real estate and foreclosure expense 343 325 18 5.5 Deposit insurance 1,308 2,475 (1,167) (47.2) Merger related costs 233 1,068 (835) (78.2) Other operating expenses: Professional services 5,247 5,829 (582) (10.0) Postage 2,370 2,236 134 6.0 Telephone 1,632 2,185 (553) (25.3) Credit card 4,685 4,382 303 6.9 Marketing 3,153 4,385 (1,232) (28.1) Software and technology 10,251 9,445 806 8.5 Operating supplies 570 936 (366) (39.1) Amortization of intangibles 3,344 3,413 (69) (2.0) 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)% 52 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 $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). We seek to manage our credit risk by diversifying our loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral, obtaining and monitoring collateral, providing an appropriate allowance for credit losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose, industry and geographic region. We seek to use diversification within the loan portfolio to reduce credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. We use the allowance for credit losses as a method to value the loan portfolio at its estimated collectible amount. Loans are regularly reviewed to facilitate the identification and monitoring of deteriorating credits. 53 The balances of loans outstanding at the indicated dates are reflected in Table 7, according to type of loan. Table 7: Loan Portfolio March 31, December 31, (In thousands) 2021 2020 Consumer: Credit cards $ 175,458 $ 188,845 Other consumer 172,965 202,379 Total consumer 348,423 391,224 Real estate: Construction and development 1,451,841 1,596,255 Single family residential 1,730,056 1,880,673 Other commercial 5,638,010 5,746,863 Total real estate 8,819,907 9,223,791 Commercial: Commercial 2,444,700 2,574,386 Agricultural 155,921 175,905 Total commercial 2,600,621 2,750,291 Other 426,922 535,591 Total loans before allowance for credit losses $ 12,195,873 $ 12,900,897 Consumer loans consist of credit card loans and other consumer loans. 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 $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%. 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 $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, 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. 54 ASSET QUALITY Non-performing loans are comprised of (a) nonaccrual loans, (b) loans that are contractually past due 90 days and (c) other loans for which terms have been restructured to provide a reduction or deferral of interest or principal, because of deterioration in the financial position of the borrower. The subsidiary bank recognizes income principally on the accrual basis of accounting. When loans are classified as nonaccrual, generally, the accrued interest is charged off and no further interest is accrued. Loans, excluding credit card loans, are placed on a nonaccrual basis either: (1) when there are serious doubts regarding the collectability of principal or interest, or (2) when payment of interest or principal is 90 days or more past due and either (i) not fully secured or (ii) not in the process of collection. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for credit losses. When credit card loans reach 90 days past due and there are attachable assets, the accounts are considered for litigation. Credit card loans are generally charged off when payment of interest or principal exceeds 150 days past due. The credit card recovery group pursues account holders until it is determined, on a case-by-case basis, to be uncollectible. Total non-performing assets 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. Louis area. 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. As a result, these borrowers are seeking to reduce contractual cash outlays, the most prominent being debt payments. In an effort to preserve our net interest margin and earning assets, we are open to working with existing customers in order to maximize the collectability of the debt. When we restructure a loan to a borrower that is experiencing financial difficulty and grant a concession that we would not otherwise consider, a “troubled debt restructuring” results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal. Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. Our TDR balance 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. We assess the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and determine if a specific allowance for credit losses is needed. We return TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months. The provisions in the CARES Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act and is following the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by regulatory agencies. In response to the concerns related to the expiration of the applicable period for which the election to not apply the guidance on accounting for TDRs to loan modifications, the CARES Act was amended 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. 55 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. Table 8: 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 % 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 1.93% as of March 31, 2021. Non-performing loans equaled 0.95% of total loans. 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 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. Table 9: Non-performing Assets March 31, December 31, (Dollars in thousands) 2021 2020 Nonaccrual loans (1) $ 114,856 $ 122,879 Loans past due 90 days or more (principal or interest payments) 635 578 Total non-performing loans 115,491 123,457 Other non-performing assets: Foreclosed assets held for sale and other real estate owned 11,168 18,393 Other non-performing assets 1,229 2,016 Total other non-performing assets 12,397 20,409 Total non-performing assets $ 127,888 $ 143,866 Performing TDRs $ 3,805 $ 3,138 Allowance for credit losses to non-performing loans 204 % 193 % Non-performing loans to total loans 0.95 % 0.96 % Non-performing assets (including performing TDRs) to total assets 0.56 % 0.66 % Non-performing assets to total assets 0.55 % 0.64 % _______________________________________ (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. 56 ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is a reserve established through a provision for credit losses charged to expense which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated into homogeneous segments for assessment. Reserve factors are based on estimated probability of default and loss given default for each segment. The estimates are determined based on economic forecasts over the reasonable and supportable forecast period based on projected performance of economic variables that have a statistical correlation with the historical loss experience of the segments. For contractual periods that extend beyond the one-year forecast period, the estimates revert to average historical loss experiences over a one-year period on a straight-line basis. We also include qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. Qualitative adjustments include, but are not limited to: • Changes in asset quality - Adjustments related to trending credit quality metrics including delinquency, 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. • Changes in lending and loan monitoring policies and procedures - Adjustments related to current changes in lending and loan monitoring procedures as well as review of specific internal policy compliance metrics. • Changes in the experience, ability, and depth of lending management and other relevant staff - Adjustments to measure increasing or decreasing credit risk related to lending and loan monitoring management. • Changes in the value of underlying collateral of collateralized loans - Adjustments related to improving or deterioration of the value of underlying collateral that are not fully captured in the reserve factors. • Changes in and the existence and effect of any concentrations of credit - Adjustments related to credit risk of specific industries that are not fully captured in the reserve factors. • Changes in regional and local economic and business conditions and developments - Adjustments related to expected and current economic conditions at a regional or local-level that are not fully captured within our reasonable and supportable forecast. • Data 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. These evaluations are typically performed on loans with a deteriorated internal risk rating or that are classified as a TDR. The allowance for credit loss is determined based on several methods including estimating the fair value of the underlying collateral or the present value of expected cash flows. 57 An analysis of the allowance for credit losses on loans is shown in Table 10. Table 10: Allowance for Credit Losses (In thousands) 2021 2020 Balance, beginning of year $ 238,050 $ 68,244 Impact of CECL adoption — 151,377 Loans charged off: Credit card 1,003 1,441 Other consumer 731 1,379 Real estate 1,687 396 Commercial 830 523 Total loans charged off 4,251 3,739 Recoveries of loans previously charged off: Credit card 290 225 Other consumer 314 443 Real estate 403 101 Commercial 310 347 Total recoveries 1,317 1,116 Net loans charged off 2,934 2,623 Provision for credit losses — 26,197 Balance, March 31, $ 235,116 $ 243,195 Loans charged off: Credit card 2,672 Other consumer 2,643 Real estate 13,392 Commercial 48,213 Total loans charged off 66,920 Recoveries of loans previously charged off: Credit card 789 Other consumer 1,022 Real estate 804 Commercial 2,869 Total recoveries 5,484 Net loans charged off 61,436 Provision for credit losses 56,291 Balance, end of year $ 238,050 Provision for Credit Losses 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. 58 Allowance for Credit Losses Allocation 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 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 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. The table also reflects the percentage of loans in each category to the total loan portfolio for each of the periods indicated. The allowance for credit losses by loan category is determined by i) our estimated reserve factors by category including applicable qualitative adjustments and ii) any specific allowance allocations that are identified on individually evaluated loans. The amounts shown are not necessarily indicative of the actual future losses that may occur within individual categories. Table 11: Allocation of Allowance for Credit Losses March 31, 2021 December 31, 2020 (Dollars in thousands) Allowance Amount % of loans (1) Allowance Amount % of loans (1) Credit cards $ 2,172 1.5 % $ 7,472 1.4 % Other consumer 1,266 1.4 % 4,100 1.6 % Real estate 195,826 72.3 % 182,868 71.5 % Commercial 34,633 21.3 % 42,093 21.3 % Other 1,219 3.5 % 1,517 4.2 % Total $ 235,116 100.0 % $ 238,050 100.0 % _______________________________________ (1) Percentage of loans in each category to total loans. 59 DEPOSITS 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 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 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. We believe we are paying a competitive rate when compared with pricing in those markets. We manage our interest expense through deposit pricing. We believe that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if we experience increased loan demand or other liquidity needs. We can also utilize brokered deposits as an additional source of funding to meet liquidity needs. We are continually monitoring and looking for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment. Our total deposits as of 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 $1.72 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; $53.0 million of trust preferred securities and unamortized debt issuance costs; and $33.0 million of other long-term debt. 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. The Company incurred $3.6 million in debt issuance costs related to the offering. The Notes will mature on April 1, 2028 and are subordinated in right of payment to the payment of our other existing and future senior indebtedness, including all our general creditors. The Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of its subsidiaries. 60 CAPITAL Overview 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 March 31, 2021, our common equity to asset ratio was 12.55% compared to 13.31% at year-end 2020. Capital Stock On February 27, 2009, at a special meeting, our shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock, $0.01 par value. The aggregate liquidation preference of all shares of preferred stock cannot exceed $80,000,000. On February 12, 2019, we filed Amended and Restated Articles of Incorporation (“February Amended Articles”) with the Arkansas Secretary of State. The February Amended Articles classified and designated three series of preferred stock out of our authorized preferred stock: Series A Preferred Stock, Par Value $0.01 Per Share (having 40,000 authorized shares); Series B Preferred Stock, Par Value $0.01 Per Share (having 2,000.02 authorized shares); and 7% Perpetual Convertible Preferred Stock, Par Value $0.01 Per Share, Series C (having 140 authorized shares). On October 29, 2019, we filed our Amended and Restated Articles of Incorporation (“October Amended Articles”) with the Arkansas Secretary of State. The October Amended Articles classified and designated Series D Preferred Stock, Par Value $0.01 Per Share, out of our authorized preferred stock. The October Amended Articles also canceled our 7% Perpetual Convertible Preferred Stock, Par Value $0.01 Per Share, Series C Preferred Stock, of which no shares were ever issued or outstanding. Stock Repurchase On July 23, 2012, our Board of Directors approved a stock repurchase program which authorized the repurchase of up to 1,700,000 shares of common stock (“2012 Program”). On October 22, 2019, we announced a new stock repurchase program (“Program”) that replaced the 2012 Program, under which we may repurchase up to $60,000,000 of our Class A common stock currently issued and outstanding. On March 5, 2020, we announced an amendment to the Program that increased the maximum amount that may be repurchased under the Program from $60,000,000 to $180,000,000. The Program will terminate on October 31, 2021 (unless terminated sooner). Under the Program, we may repurchase shares of our common stock through open market and privately negotiated transactions or otherwise. The timing, pricing, and amount of any repurchases under the Program will be determined by management at its discretion based on a variety of factors, including, but not limited to, trading volume and market price of our common stock, corporate considerations, our working capital and investment requirements, general market and economic conditions, and legal requirements. The Program does not obligate us to repurchase any common stock and may be modified, discontinued, or suspended at any time without prior notice. We anticipate funding for this Program to come from available sources of liquidity, including cash on hand and future cash flow. During 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. 61 Cash Dividends 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. Our Board of Directors anticipates that we will continue to pay quarterly dividends in amounts determined based on the factors discussed above. However, there can be no assurance that we will continue to pay dividends on our common stock at the current levels or at all. Parent Company Liquidity The primary liquidity needs of the Parent Company are the payment of dividends to shareholders, the funding of debt obligations and cash needs for acquisitions. The primary sources for meeting these liquidity needs are the current cash on hand at the parent company and the future dividends received from Simmons Bank. Payment of dividends by Simmons Bank is subject to various regulatory limitations. 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 in the market via stock or debt offerings. Risk Based Capital The Company and Simmons Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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 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. 62 Our risk-based capital ratios at March 31, 2021 and December 31, 2020 are presented in Table 12 below: Table 12: Risk-Based Capital March 31, December 31, (Dollars in thousands) 2021 2020 Tier 1 capital: Stockholders’ equity $ 2,930,775 $ 2,976,656 CECL transition provision 131,637 131,430 Goodwill and other intangible assets (1,159,720) (1,163,797) 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 Tier 2 capital: Trust preferred securities and subordinated debt 383,008 382,874 Qualifying allowance for credit losses and reserve for unfunded commitments 87,251 89,546 Total Tier 2 capital 470,259 472,420 Total risk-based capital $ 2,410,127 $ 2,356,983 Risk weighted assets $ 13,771,244 $ 14,048,608 Assets for leverage ratio $ 21,668,406 $ 20,765,127 Ratios at end of period: Common equity Tier 1 ratio (CET1) 14.08 % 13.41 % Tier 1 leverage ratio 8.95 % 9.08 % 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 % Total risk-based capital ratio 17.50 % 16.78 % Minimum guidelines: Common equity Tier 1 ratio (CET1) 4.50 % 4.50 % Tier 1 leverage ratio 4.00 % 4.00 % Tier 1 risk-based capital ratio 6.00 % 6.00 % Total risk-based capital ratio 8.00 % 8.00 % _______________________________________ (1) PPP loans are 100% federally guaranteed and have a zero percent risk-weight for regulatory capital ratios. Tier 1 leverage ratio, excluding average PPP loans is a non-GAAP measurement. Regulatory Capital Changes In December 2018, the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “agencies”) issued a final rule revising regulatory capital rules in anticipation of the adoption of ASU 2016-13 that provided an option to phase in over a three year period on a straight line basis the day-one impact of the adoption on earnings and Tier 1 capital (the “CECL Transition Provision”). In March 2020 and in response to the COVID-19 pandemic, the agencies issued a new regulatory capital rule revising the CECL Transition Provision to delay the estimated impact on regulatory capital stemming from the implementation of ASU 2016-13. The rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital, followed by a three-year transition period (the “2020 CECL Transition Provision”). The Company elected to apply the 2020 CECL Transition Provision. 63 In July 2013, the Company’s primary federal regulator, the Federal Reserve, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banks. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards. The Basel III Capital Rules introduced substantial revisions to the risk-based capital requirements applicable to bank holding companies and depository institutions. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules expanded the risk-weighting categories from four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories, including many residential mortgages and certain commercial real estate. The final rules included a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The Basel III Capital Rules became effective for the Company and its subsidiary bank on January 1, 2015, with full compliance with all of the final rule’s requirements on January 1, 2019. Prior to December 31, 2017, Tier 1 capital included common equity Tier 1 capital and certain additional Tier 1 items as provided under the Basel III Capital Rules. The Tier 1 capital for the Company consisted of common equity Tier 1 capital and trust preferred securities. The Basel III Capital Rules include certain provisions that require trust preferred securities to be phased out of qualifying Tier 1 capital when assets surpass $15 billion. As of December 31, 2017, the Company exceeded $15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply and trust preferred securities are no longer included as Tier 1 capital. Trust preferred securities and qualifying subordinated debt of $383.0 million is included as Tier 2 and total capital as of March 31, 2021. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See the Recently Issued Accounting Standards section in Note 1, Preparation of Interim Financial Statements, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on the Company’s ongoing financial position and results of operation. 64 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 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 “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, 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; 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; developments in information technology affecting the financial industry; cyber threats, attacks or events; 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; the failure of assumptions underlying the establishment of reserves for possible credit losses, fair value for loans, other real estate owned, and other cautionary statements set forth elsewhere in this report. Please also refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this quarterly report and the Company’s annual report on Form 10-K for the year ended December 31, 2020, and related disclosures in other filings, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov. Many of these factors are beyond our ability to predict or control, and actual results could differ materially from those in the forward-looking statements due to these factors and others. 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 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. 65 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, 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 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. These non-GAAP financial measures are also used by management to assess the performance of the Company’s business because management does not consider these non-core items to be relevant to ongoing financial performance. Management and the Board of Directors utilize “core earnings” (non-GAAP) for the following purposes: • Preparation of the Company’s operating budgets • Monthly financial performance reporting • Monthly “flash” reporting of consolidated results (management only) • Investor presentations of Company performance We believe the presentation of “core earnings” on a diluted per share basis, “core diluted earnings per share” (non-GAAP) and core net interest margin (non-GAAP), provides a meaningful basis for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of the Company’s business, because management does not consider these non-core items to be relevant to ongoing financial performance on a per share basis. Management and the Board of Directors utilize “core diluted earnings per share” (non-GAAP) for the following purposes: • Calculation of annual performance-based incentives for certain executives • Calculation of long-term performance-based incentives for certain executives • Investor presentations of Company performance We have $1.182 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), 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. Management and the Board of Directors utilize these non-GAAP financial measures for financial performance reporting and investor presentations of Company performance. We believe that presenting these non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that is applied by management and the Board of Directors. 66 Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, we have procedures in place to identify and approve each item that qualifies as non-core to ensure that the Company’s “core” results are properly reflected for period-to-period comparisons. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes non-core items does not represent the amount that effectively accrues directly to stockholders (i.e., non-core items are included in earnings and stockholders’ equity). Additionally, similarly titled non-GAAP financial measures used by other companies may not be computed in the same or similar fashion. See Table 13 below for the reconciliation of non-GAAP financial measures, which exclude non-core items for the periods presented. Table 13: Reconciliation of Core Earnings (non-GAAP) Three Months Ended March 31, (In thousands, except per share data) 2021 2020 Net income available to common stockholders $ 67,407 $ 77,223 Non-core items: Gain on sale of branches (5,477) (5,889) Merger related costs 233 1,068 Branch right sizing 625 238 Tax effect (1) 1,207 1,198 Net non-core items (3,412) (3,385) Core earnings (non-GAAP) $ 63,995 $ 73,838 Diluted earnings per share (2) $ 0.62 $ 0.68 Non-core items: Gain on sale of branches (0.05) (0.05) Merger related costs — 0.01 Branch right sizing 0.01 — Tax effect (1) 0.01 0.01 Net non-core items (0.03) (0.03) Core diluted earnings per share (non-GAAP) $ 0.59 $ 0.65 _______________________________________ (1) Effective tax rate of 26.135%. (2) See Note 16, Earnings Per Share, for number of shares used to determine EPS. 67 See Table 14 below for the reconciliation of core other income and core non-interest expense for the periods presented. Table 14: Reconciliation of Core Other Income and Core Non-Interest Expense (non-GAAP) Three Months Ended March 31, (In thousands) 2021 2020 Other income $ 10,260 $ 12,801 Gain on sale of branches (5,477) (5,889) Core other income (non-GAAP) $ 4,783 $ 6,912 Non-interest expense $ 115,356 $ 128,813 Non-core items: Merger related costs (233) (1,068) Branch right sizing (625) (238) Total non-core items (858) (1,306) Core non-interest expense (non-GAAP) $ 114,498 $ 127,507 See Table 15 below for the reconciliation of tangible book value per common share. Table 15: Reconciliation of Tangible Book Value per Common Share (non-GAAP) March 31, December 31, (In thousands, except per share data) 2021 2020 Total stockholders’ equity $ 2,930,775 $ 2,976,656 Preferred stock (767) (767) Total common stockholders’ equity 2,930,008 2,975,889 Intangible assets: Goodwill (1,075,305) (1,075,305) Other intangible assets (107,091) (111,110) Total intangibles (1,182,396) (1,186,415) Tangible common stockholders’ equity $ 1,747,612 $ 1,789,474 Shares of common stock outstanding 108,345,732 108,077,662 Book value per common share $ 27.04 $ 27.53 Tangible book value per common share (non-GAAP) $ 16.13 $ 16.56 68 See Table 16 below for the calculation of tangible common equity and the reconciliation of tangible common equity to tangible assets. Table 16: Reconciliation of Tangible Common Equity and the Ratio of Tangible Common Equity to Tangible Assets (non-GAAP) March 31, December 31, (Dollars in thousands) 2021 2020 Total common stockholders’ equity $ 2,930,008 $ 2,975,889 Intangible assets: Goodwill (1,075,305) (1,075,305) Other intangible assets (107,091) (111,110) Total intangibles (1,182,396) (1,186,415) Tangible common stockholders’ equity $ 1,747,612 $ 1,789,474 Total assets $ 23,348,117 $ 22,359,752 Intangible assets: Goodwill (1,075,305) (1,075,305) Other intangible assets (107,091) (111,110) Total intangibles (1,182,396) (1,186,415) Tangible assets $ 22,165,721 $ 21,173,337 Paycheck Protection Program (“PPP”) loans (797,629) (904,673) Total assets excluding PPP loans $ 22,550,488 $ 21,455,079 Tangible assets excluding PPP loans $ 21,368,092 $ 20,268,664 Ratio of common equity to assets 12.55 % 13.31 % Ratio of tangible common equity to tangible assets (non-GAAP) 7.88 % 8.45 % Ratio of common equity to assets excluding PPP loans (non-GAAP) 13.00 % 13.87 % Ratio of tangible common equity to tangible assets excluding PPP loans (non-GAAP) 8.18 % 8.83 % See Table 17 below for the calculation of Tier 1 leverage ratio excluding average PPP loans for the period presented. Table 17: Reconciliation of Tier 1 Leverage Ratio Excluding Average PPP Loans (non-GAAP) (Dollars in thousands) Three Months Ended March 31, 2021 Total Tier 1 capital $ 1,939,868 Adjusted average assets for leverage ratio $ 21,668,406 Average PPP loans (891,070) Adjusted average assets excluding average PPP loans $ 20,777,336 Tier 1 leverage ratio 8.95 % Tier 1 leverage ratio excluding average PPP loans (non-GAAP) 9.34 % 69 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. Table 18: Reconciliation of Core Net Interest Margin (non-GAAP) Three Months Ended March 31, (Dollars in thousands) 2021 2020 Net interest income $ 146,681 $ 167,483 FTE adjustment 4,163 2,305 Fully tax equivalent net interest income 150,844 169,788 Total accretable yield (6,630) (11,837) Core net interest income $ 144,214 $ 157,951 PPP loan and additional liquidity (1) interest income (12,257) Net interest income adjusted for PPP loans and additional liquidity (1) $ 138,587 Average earning assets – quarter-to-date $ 20,484,908 $ 18,581,491 Average PPP loan balance and additional liquidity (1) (3,617,567) Average earning assets adjusted for PPP loans and additional liquidity (1) $ 16,867,341 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 additional liquidity (1) (non-GAAP) 3.33 % _______________________________________ (1) Additional liquidity is estimated as the average interest bearing balances due from banks and federal funds sold greater than $750.0 million. 70