SIMMONS FIRST NATIONAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Our net income for the three months ended September 30, 2021 was $80.6 million, or $0.74 diluted earnings per share, increases of $14.7 million and $0.14, respectively, compared to the third quarter of 2020. Included in both third quarter 2021 and 2020 results were non-core items related to our acquisitions and branch right sizing initiatives. Also included in 2020 results were non-core items related to early retirement programs. Excluding all non-core items, core earnings for the three months ended September 30, 2021 were $79.4 million, or $0.73 core diluted earnings per share, compared to $68.3 million, or $0.63 core diluted earnings per share for the three months ended September 30, 2020. Net income for the first nine months of 2021 was $222.9 million, or $2.05 diluted earnings per share, compared to $201.9 million, or $1.83 diluted earnings per share, for the same period in 2020. In addition to the non-core items referenced above, gains associated with the sale of branch operations were included in the results for the first nine months of both 2021 and 2020. Excluding these non-core items, year-to-date core earnings were $218.8 million, an increase of $16.5 million compared to the same period in the prior year. Core diluted earnings per share for the first half of 2021 were $2.01 compared to $1.83 for the same period in 2020. In June 2021, we announced the acquisitions of Landmark, previously based in Collierville, TN, and Triumph, previously based in Memphis, TN. These acquisitions were completed on October 8, 2021. We were able to obtain all necessary approvals, close and simultaneously complete the systems conversions of the two banks within approximately four months of the announcement, which we believe speaks to the outstanding team we have developed. We continuously evaluate our branch network to ensure it reflects our core footprint and changes in customer behavior which allows us to efficiently serve our customers’ evolving needs. We closed 13 branches during July 2021 as part of our ongoing branch right sizing initiative. Simmons Bank was 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. We continue to introduce new and innovative products and services using digital channels to provide an enhanced customer experience to “bank when you want, where you want”. On March 12, 2021, we completed the 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 delivered solid performance in multiple areas while continuing to navigate the challenging environment. 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 continued to show marked improvement during the third quarter of 2021. Nonperforming loans declined for the fourth consecutive quarter and are now at their lowest levels since December of 2018. Stockholders’ equity as of September 30, 2021 was $3.0 billion, book value per share was $28.42 and tangible book value per share was $17.39. Our ratio of common stockholders’ equity to total assets was 13.04% and the ratio of tangible common stockholders’ equity to tangible assets was 8.41% at September 30, 2021. The Company’s Tier 1 leverage ratio of 9.07%, 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). We repurchased approximately 1.8 million shares of our common stock during the third quarter of 2021. Total deposits were $18.1 billion at September 30, 2021, compared to $17.0 billion at December 31, 2020 and $16.2 billion at September 30, 2020. The increase in total deposits is, in significant part, a 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 increase in customer cash balances are pay downs on loans, decreased loan demand, reduced credit card balances and fewer overdraft activities. Total loans were $10.8 billion at September 30, 2021, compared to $12.9 billion at December 31, 2020 and $14.0 billion at September 30, 2020. Total loan production (loan originations and advances) during the third quarter of 2021 totaled $1.5 billion, which along with the production during the first half of the year positions us to exceed loan production volume reported for the full year of 2020. While loan originations and advances are outpacing prior year production, the decline in loan balances reflects, in significant part, the substantial government stimulus to support the economy during the COVID-19 pandemic which contributed to an increase in the level of loan paydowns, payoffs and corresponding sluggish loan demand throughout the financial services industry during the majority of 2021. In addition, the decline in balances has also been due to our strategic right-sizing of our commercial real estate construction portfolio as several large projects were completed. 50 Our commercial pipeline rose for the fourth consecutive quarter to $1.5 billion and was up 15% from the prior quarter end and we are seeing activity from repeat customers across most of our business lines. For these reasons, amongst others, we are continuing to actively recruit loan producers across all of our business units. As of September 30, 2021, we had $212.1 million in loans outstanding under the PPP. The change in total PPP loan balances during the third 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 — 318,919 318,919 PPP loan forgiveness and repayments (882,295) (129,210) (1,011,505) Ending balance, September 30, 2021 $ 22,378 $ 189,709 $ 212,087 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 13.16% and tangible common equity to tangible assets was 8.49% as of September 30, 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. 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 September 30, 2021, has approximately $23.2 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. 51 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. 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 16, 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 52 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. 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 43% of our loans and 84% 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, 2021, net interest income on a fully taxable equivalent basis was $150.2 million, a decrease of $6.3 million, or 4.0%, over the same period in 2020. The decrease in net interest income was primarily the result of a $13.7 million decrease in fully tax equivalent interest income partially offset by a $7.4 million decrease in interest expense. The reduction in interest income primarily resulted from a $31.0 million decrease in interest income on loans partially offset by an increase of $17.9 million in interest income on investment securities. Regarding the decrease in interest income on loans during the third quarter of 2021, the decline in loan volume resulted in a decrease $39.1 million, partially offset by $8.1 million of interest income from a 22 basis point increase in loan yield. The loan yield for the third quarter of 2021 was 4.76% compared to 4.54% from the same period in 2020. We generated additional interest income on investment securities by redeploying a portion of excess cash to purchase $1.2 billion of investment securities during the third quarter of 2021, which included $226.3 million of short-term, variable rate securities. The $7.4 million decrease in interest expense is mostly due to the decline in our deposit account rates. Interest expense decreased $7.2 million due to the decrease in yield of 27 basis points on interest-bearing deposit accounts. Net Interest Income Year-to-Date Analysis For the nine month period ended September 30, 2021, net interest income on a fully taxable equivalent basis was $452.1 million, a decrease of $40.2 million, or 8.2%, over the same period in 2020. The decrease in net interest income was the result of a $74.1 million decrease in fully tax equivalent interest income partially offset by a $34.0 million decrease in interest expense. The decrease in interest income during the nine month period ended September 30, 2021 primarily resulted from a $110.3 million decrease in interest income on loans, that reflects a decrease in loan volume of $98.2 million coupled with an 11 basis point decline in yield that resulted in a $12.1 million decrease, partially offset by an increase in interest income on investment securities of $38.3 million. The decrease in our loan volume during the first nine months of 2021 was primarily due to weak loan demand throughout 2020 and into the first nine months of 2021 as a result of the COVID-19 pandemic. Furthermore, the decline in loan volume also reflects the substantial governmental stimulus to support the economy during the COVID-19 pandemic which contributed to an increase in the level of loan paydowns and payoffs, including loan forgiveness in accordance with the PPP. We sold approximately $342.6 million of investment securities during the first nine months of 2021 compared to $1.7 billion of investment securities during the same period in 2020. During the second quarter of 2020, in response to the unfolding events of the COVID-19 pandemic, 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 continued throughout the nine month period ended September 30, 2021. 53 The $34.0 million decrease in interest expense is mostly due to the decrease in our deposit account rates. Interest expense decreased $34.5 million due to the decrease in rate of 39 basis points on interest-bearing deposit accounts, partially offset by an increase of $2.1 million related to approximately $1.1 billion in average deposit growth. Net Interest Margin Our net interest margin on a fully tax equivalent basis decreased 36 basis points to 2.85% for the three month period ended September 30, 2021, when compared to 3.21% for the same period in 2020. Normalized for all accretion, our core net interest margin for the three months ended September 30, 2021 and 2020 was 2.77% and 3.02%, respectively. For the nine month period ended September 30, 2021, our net interest margin decreased 52 basis points to 2.91% when compared to 3.43% for the same period in 2020. The decreases in the net interest margin during the three and nine months ended September 30, 2021 compared to the same periods in 2020, were primarily due to the aforementioned decline in net interest income coupled with a $934.7 million 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 $3.5 billion to our average investment securities portfolio during the first nine months of 2021. The impact of these items on net interest margin for the nine months ended September 30, 2021 was 18 basis points, bringing the net interest margin adjusted for PPP loans and additional liquidity to 3.09%. 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 third 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 last quarter of 2021. 54 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, 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 September 30, Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Interest income $ 163,926 $ 179,725 $ 500,329 $ 580,610 FTE adjustment 4,941 2,864 13,652 7,519 Interest income – FTE 168,867 182,589 513,981 588,129 Interest expense 18,689 26,115 61,878 95,836 Net interest income – FTE $ 150,178 $ 156,474 $ 452,103 $ 492,293 Yield on earning assets – FTE 3.21 % 3.74 % 3.31 % 4.10 % Cost of interest bearing liabilities 0.49 % 0.74 % 0.54 % 0.90 % Net interest spread – FTE 2.72 % 3.00 % 2.77 % 3.20 % Net interest margin – FTE 2.85 % 3.21 % 2.91 % 3.43 % Table 2: Changes in Fully Taxable Equivalent Net Interest Margin Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2021 vs. 2020 2021 vs. 2020 Decrease due to change in earning assets $ (16,818) $ (43,521) Increase (decrease) due to change in earning asset yields 3,096 (30,627) Increase (decrease) due to change in interest bearing liabilities 93 (1,472) Increase due to change in interest rates paid on interest bearing liabilities 7,333 35,430 Decrease in net interest income $ (6,296) $ (40,190) 55 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, 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. 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 September 30, 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 $ 1,866,530 $ 763 0.16 $ 2,265,233 $ 623 0.11 Investment securities - taxable 5,475,932 17,076 1.24 1,534,742 7,193 1.86 Investment securities - non-taxable 2,496,958 18,399 2.92 1,155,099 10,382 3.58 Mortgage loans held for sale 32,134 230 2.84 145,226 1,012 2.77 Loans - including fees 11,030,438 132,399 4.76 14,315,014 163,379 4.54 Total interest earning assets 20,901,992 168,867 3.21 19,415,314 182,589 3.74 Non-earning assets 2,353,549 2,350,007 Total assets $ 23,255,541 $ 21,765,321 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Interest bearing liabilities: Interest bearing transaction and savings deposits $ 10,629,142 $ 4,369 0.16 $ 8,977,886 $ 6,769 0.30 Time deposits 2,645,896 4,747 0.71 2,998,091 9,437 1.25 Total interest bearing deposits 13,275,038 9,116 0.27 11,975,977 16,206 0.54 Federal funds purchased and securities sold under agreements to repurchase 219,604 70 0.13 386,631 335 0.34 Other borrowings 1,338,866 4,893 1.45 1,357,278 4,943 1.45 Subordinated debt and debentures 383,213 4,610 4.77 382,672 4,631 4.81 Total interest bearing liabilities 15,216,721 18,689 0.49 14,102,558 26,115 0.74 Non-interest bearing liabilities: Non-interest bearing deposits 4,803,171 4,529,782 Other liabilities 167,677 190,169 Total liabilities 20,187,569 18,822,509 Stockholders’ equity 3,067,972 2,942,812 Total liabilities and stockholders’ equity $ 23,255,541 $ 21,765,321 Net interest spread – FTE 2.72 3.00 Net interest margin – FTE $ 150,178 2.85 $ 156,474 3.21 56 Nine Months Ended September 30, 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 $ 2,676,911 $ 2,212 0.11 $ 1,742,166 $ 3,667 0.28 Investment securities - taxable 4,081,927 41,790 1.37 1,832,577 27,319 1.99 Investment securities - non-taxable 2,193,431 50,737 3.09 974,748 26,888 3.68 Mortgage loans held for sale 59,362 1,255 2.83 91,889 1,961 2.85 Loans - including fees 11,772,077 417,987 4.75 14,530,938 528,294 4.86 Total interest earning assets 20,783,708 513,981 3.31 19,172,318 588,129 4.10 Non-earning assets 2,302,279 2,331,246 Total assets $ 23,085,987 $ 21,503,564 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Interest bearing liabilities: Interest bearing transaction and savings deposits $ 10,377,609 $ 15,178 0.20 $ 9,040,053 $ 31,926 0.47 Time deposits 2,871,519 17,899 0.83 3,068,459 33,563 1.46 Total interest bearing deposits 13,249,128 33,077 0.33 12,108,512 65,489 0.72 Federal funds purchased and securities sold under agreements to repurchase 255,684 507 0.27 370,116 1,431 0.52 Other borrowings 1,339,970 14,592 1.46 1,357,543 14,783 1.45 Subordinated debt and debentures 383,078 13,702 4.78 386,129 14,133 4.89 Total interest bearing liabilities 15,227,860 61,878 0.54 14,222,300 95,836 0.90 Non-interest bearing liabilities: Non-interest bearing deposits 4,684,485 4,164,189 Other liabilities 165,694 205,942 Total liabilities 20,078,039 18,592,431 Stockholders’ equity 3,007,948 2,911,133 Total liabilities and stockholders’ equity $ 23,085,987 $ 21,503,564 Net interest spread – FTE 2.77 3.20 Net interest margin – FTE $ 452,103 2.91 $ 492,293 3.43 57 Table 4 shows changes in interest income and interest expense resulting from changes in both volume and interest rates for the three and nine month periods ended September 30, 2021, as compared to the same periods 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 September 30, Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 (In thousands, on a fully taxable equivalent basis) Volume Yield/ Rate Total Volume Yield/ Rate Total Increase (decrease) in: Interest income: Interest bearing balances due from banks and federal funds sold $ (124) $ 264 $ 140 $ 1,407 $ (2,862) $ (1,455) Investment securities - taxable 13,003 (3,120) 9,883 25,164 (10,693) 14,471 Investment securities - non-taxable 10,180 (2,163) 8,017 28,811 (4,962) 23,849 Mortgage loans held for sale (808) 26 (782) (688) (18) (706) Loans - including fees (39,069) 8,089 (30,980) (98,215) (12,092) (110,307) Total (16,818) 3,096 (13,722) (43,521) (30,627) (74,148) Interest expense: Interest bearing transaction and savings accounts 1,082 (3,482) (2,400) 4,166 (20,914) (16,748) Time deposits (1,007) (3,683) (4,690) (2,034) (13,630) (15,664) Federal funds purchased and securities sold under agreements to repurchase (108) (157) (265) (358) (566) (924) Other borrowings (67) 17 (50) (191) — (191) Subordinated notes and debentures 7 (28) (21) (111) (320) (431) Total (93) (7,333) (7,426) 1,472 (35,430) (33,958) Decrease in net interest income $ (16,725) $ 10,429 $ (6,296) $ (44,993) $ 4,803 $ (40,190) 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 and nine months ended September 30, 2021 was a recapture of $19.9 million and $31.4 million, respectively, compared to an expense of $23.0 million and $68.0 million for the same periods ended September 30, 2020. The recapture of credit losses was driven by improved credit quality metrics and improved macroeconomic factors. The increase during the nine month period ended September 30, 2020 included provision related to problem energy credits which were negatively impacted by the sharp decline in commodity pricing, and ultimately charged-off during the second quarter of 2020 for a total of $32.6 million. In addition, uncertain economic forecasts during the first nine months of 2020 due to the impact of the COVID-19 pandemic drove higher provisions for credit losses during that period, a portion of which has been subsequently released. 58 NON-INTEREST INCOME Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and debit and credit card fees. Non-interest income also includes income on the sale of mortgage and SBA loans, investment banking income, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities. Total non-interest income was $48.6 million for the three month period September 30, 2021, a decrease of approximately $20.9 million, or 30.1%, compared to the same period in 2020, primarily driven by decreases in mortgage lending income and the difference in gains on sale of securities recognized during the periods. Conversely, we had increases in total service charges on deposit accounts and fees of $1.4 million, or 11.3%, primarily attributable to additional customer transactions related to changes in customer spending habits during the third quarter of 2021. For the nine month period ended September 30, 2021, total non-interest income was $145.2 million, a decrease of approximately $52.8 million, or 26.7%, compared to the same period in 2020, primarily due to decreases in the gains on sale of securities and mortgage lending income. During the first nine months of 2021, we sold approximately $342.6 million of investment securities resulting in a net gain of $15.8 million, compared to $1.7 billion of investment securities sold for a net gain of $54.8 million in the first nine months of 2020. Additionally, the gain on sale of branches, which we consider a non-core item, decreased approximately $2.8 million, compared to the same period in 2020. An increase of $2.5 million in debit and credit fees partially offset the overall decrease in non-interest income during the first nine months of 2021 as a result of additional transactions due to the changes in customer spending habits. Decreases of $8.2 million and $14.7 million in mortgage lending income for the three and nine month periods ended September 30, 2021 were largely a result of decreases in the value of derivative contracts related to the mortgage banking operations partially offset by gains on the sale of mortgage loans that were driven by an increase in volume of loans sold during the first nine months of 2021 compared to the same period in 2020. Beginning in 2020 and continuing into 2021, we experienced an increase in mortgage lending transactions as a result of the low mortgage interest rate environment due to the COVID-19 pandemic. However, we expect mortgage lending volume to continue to decline for the remainder of 2021 given the current environment. Table 5 shows non-interest income for the three and nine month periods ended September 30, 2021 and 2020, respectively, as well as changes in 2021 from 2020. Table 5: Non-Interest Income Three Months Ended September 30, 2021 Change from Nine Months Ended September 30, 2021 Change from (Dollars in thousands) 2021 2020 2020 2021 2020 2020 Trust income $ 7,145 $ 6,744 $ 401 6.0% $ 21,049 $ 21,148 $ (99) (0.5)% Service charges on deposit accounts 11,557 10,385 1,172 11.3 31,322 32,283 (961) (3.0) Other service charges and fees 1,964 1,764 200 11.3 5,934 4,841 1,093 22.6 Mortgage lending income 5,818 13,971 (8,153) (58.4) 16,755 31,476 (14,721) (46.8) SBA lending income 191 304 (113) (37.2) 718 845 (127) (15.0) Investment banking income 732 557 175 31.4 2,081 2,005 76 3.8 Debit and credit card fees (1) 7,102 6,478 624 9.6 20,785 18,296 2,489 13.6 Bank owned life insurance income 2,573 1,591 982 61.7 6,134 4,334 1,800 41.5 Gain on sale of securities, net 5,248 22,305 (17,057) (76.5) 15,846 54,790 (38,944) (71.1) Gain on sale of branches — — — — 5,316 8,093 (2,777) (34.3) Other income 6,220 5,380 840 15.6 19,274 19,897 (623) (3.1) Total non-interest income $ 48,550 $ 69,479 $ (20,929) (30.1)% $ 145,214 $ 198,008 $ (52,794) (26.7)% _________________________ (1) During the second and third quarters of 2021, certain debit and credit card transaction fees were reclassified from non-interest expense to non-interest income. Prior periods have been adjusted to reflect this reclassification. Recurring fee income (total service charges, trust fees, debit and credit card fees) for the three month period ended September 30, 2021 was $27.8 million, an increase of $2.4 million from the same period in 2020. Recurring fee income for the nine month period ended September 30, 2021, was $79.1 million, an increase of $2.5 million from the nine month period ended September 30, 2020. The increases in the periods presented are primarily the result of changes in total service charges and debit and credit card fees, previously discussed. 59 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. For the three month period ended September 30, 2021, non-interest expense was $114.3 million, a decrease of $2.2 million, or 1.9%, from the three month period ended September 30, 2020. Salaries and employee benefits expense increased $3.1 million during the three month period of 2021 due to associates being hired in lending, wealth and mortgage as we continue to actively recruit new producers. Non-interest expense for the nine months ended September 30, 2021 was $342.0 million, a decrease of $16.9 million, or 4.7%, from the same period in 2020. Normalizing for the non-core costs, core non-interest expense for the nine months ended September 30, 2021 decreased $8.0 million, or 2.3%, from the same period in 2020. The decreases in non-interest expense were 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 during the nine month period September 30, 2021 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 and nine month periods ended September 30, 2021 and 2020, respectively, as well as changes in 2021 from 2020. Table 6: Non-Interest Expense Three Months Ended September 30, 2021 Change from Nine Months Ended September 30, 2021 Change from (Dollars in thousands) 2021 2020 2020 2021 2020 2020 Salaries and employee benefits $ 61,902 $ 58,798 $ 3,104 5.3% $ 182,503 $ 183,873 $ (1,370) (0.8)% Early retirement expense — 2,346 (2,346) (100.0) — 2,839 (2,839) (100.0) Occupancy expense, net 9,361 9,647 (286) (3.0) 27,764 28,374 (610) (2.2) Furniture and equipment expense 4,895 6,231 (1,336) (21.4) 15,169 18,098 (2,929) (16.2) Other real estate and foreclosure expense 339 602 (263) (43.7) 1,545 1,201 344 28.6 Deposit insurance 1,870 2,244 (374) (16.7) 4,865 7,557 (2,692) (35.6) Merger related costs 1,401 902 499 55.3 2,320 3,800 (1,480) (39.0) Other operating expenses: Professional services 4,399 3,779 620 16.4 14,207 13,529 678 5.0 Postage 1,964 1,932 32 1.7 6,277 5,937 340 5.7 Telephone 1,516 2,103 (587) (28.0) 4,758 6,738 (1,980) (29.4) Debit and credit card (1) 2,727 2,818 (91) (3.2) 7,588 7,690 (102) (1.3) Marketing 5,019 3,517 1,502 42.7 12,912 11,430 1,482 13.0 Software and technology 10,134 9,552 582 6.1 30,242 29,021 1,221 4.2 Operating supplies 605 824 (219) (26.6) 2,013 2,588 (575) (22.2) Amortization of intangibles 3,332 3,362 (30) (0.9) 10,008 10,144 (136) (1.3) Branch right sizing (3,280) 442 (3,722) * (2,187) 2,401 (4,588) (191.1) Other 8,149 7,478 671 9.0 22,008 23,676 (1,668) (7.1) Total non-interest expense $ 114,333 $ 116,577 $ (2,244) (1.9)% $ 341,992 $ 358,896 $ (16,904) (4.7)% _________________________ (1) During the second and third quarters of 2021, certain debit and credit card transaction fees were reclassified from non-interest expense to non-interest income. Prior periods have been adjusted to reflect this reclassification. * Not meaningful 60 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, MBS and municipal securities. Our general policy is not to invest in derivative type investments or high-risk securities, except for collateralized MBS for which collection of principal and interest is not subordinated to significant superior rights held by others. HTM and AFS investment securities were $1.5 billion and $6.8 billion, respectively, at September 30, 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 nine months of 2021 as we reinvested PPP loan repayments and utilized additional liquidity held in cash and cash equivalents. During the third quarter of 2021, we purchased $1.2 billion of investment securities, including strategically redeploying $226.3 million of excess cash into short-term, variable rate securities. 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 September 30, 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. During the third quarter of 2021, the Company began utilizing interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of $1.0 billion of fixed rate callable municipal securities held in the AFS portfolio. These swap agreements involve the payment of fixed interest rates with a weighted average of 1.21% in exchange for variable interest rates based on federal funds rates and consist of a two year forward start date and maturity dates varying between 2028 and 2029. LOAN PORTFOLIO Our loan portfolio averaged $11.77 billion and $14.53 billion during the first nine months of 2021 and 2020, respectively. As of September 30, 2021, total loans were $10.83 billion, a decrease of $2.1 billion from December 31, 2020. The decline in the average loan balance during the first nine months 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 and has continued through 2021 largely 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. 61 The balances of loans outstanding at the indicated dates are reflected in Table 7, according to type of loan. Table 7: Loan Portfolio September 30, December 31, (In thousands) 2021 2020 Consumer: Credit cards $ 175,884 $ 188,845 Other consumer 182,492 202,379 Total consumer 358,376 391,224 Real estate: Construction and development 1,229,740 1,596,255 Single family residential 1,540,701 1,880,673 Other commercial 5,308,902 5,746,863 Total real estate 8,079,343 9,223,791 Commercial: Commercial 1,821,905 2,574,386 Agricultural 216,735 175,905 Total commercial 2,038,640 2,750,291 Other 348,868 535,591 Total loans before allowance for credit losses $ 10,825,227 $ 12,900,897 Consumer loans consist of credit card loans and other consumer loans. Consumer loans were $358.4 million at September 30, 2021, or 3.3% 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 September 30, 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 C&D loans, single-family residential loans and CRE loans. Real estate loans were $8.08 billion at September 30, 2021, or 74.6% of total loans, compared to $9.22 billion, or 71.5%, of total loans at December 31, 2020, a decrease of $1.1 billion, or 12.4%. Our C&D loans decreased by $366.5 million, or 23.0%, single family residential loans decreased by $340.0 million, or 18.1%, and CRE loans decreased by $438.0 million, or 7.6%. The decreases were largely 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 $2.04 billion at September 30, 2021, or 18.8% of total loans, compared to $2.75 billion, or 21.3% of total loans at December 31, 2020, a decrease of $711.7 million, or 25.9%. During the first nine months of 2021, we originated $318.9 million under the PPP Round 2 program. As a result of expected reimbursements from the SBA related to PPP loan forgiveness of both PPP Round 1 and Round 2 loans, PPP loan balances declined by $1.0 billion during the same period. We expect PPP balances to continue to decline through the remainder of the year. Agricultural loans increased $40.8 million, or 23.2%, primarily due to seasonality of the portfolio, which normally peaks in the third quarter. In addition, we are continuing with our planned exit of the energy portfolio. Other loans mainly consists of mortgage warehouse lending. Mortgage volume, while still strong, declined during the first nine months of 2021 when compared to 2020, leading to a decrease of $186.7 million in other loans primarily from mortgage warehouse lines of credit. Loan demand appears to be returning to more normalized levels. For the fourth consecutive quarter, we have experienced an increase in commercial loan demand. Our loan pipeline consisting of all loan opportunities was $1.5 billion at September 30, 2021 compared to $673.7 million at December 31, 2020. Loans approved and ready to close at the end of the quarter totaled $492.8 million. 62 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. Simmons 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 $71.0 million from December 31, 2020 to September 30, 2021. Nonaccrual loans decreased by $63.8 million during the period and foreclosed assets held for sale and other real estate owned decreased by $6.6 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 0.33% at September 30, 2021, compared to 0.66% at December 31, 2020. From time to time, certain borrowers experience declines in income and cash flow. As a result, these borrowers seek 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 for a borrower experiencing financial difficulty and grant a concession we would not otherwise consider, a “troubled debt restructuring” occurs and the loan is classified 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 due to 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 $6.8 million as of September 30, 2021, decreasing $712,000 from December 31, 2020. TDRs are individually evaluated for expected credit losses. We assess the exposure for each modification, using either 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. 63 During 2020 and the first half of 2021, we processed over 3,700 COVID-19 loan modifications in excess of $3.0 billion. At September 30, 2021, the Company had 35 COVID-19 loan modifications outstanding in the amount of $82.0 million. 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. At September 30, 2021, the majority of these balances have returned to regular payments and we expect most of the remaining COVID-19 loan modifications to return to regular payments with no credit downgrade or long-term restructure. We continue to maintain good asset quality compared to the industry and strong asset quality remains a primary focus of our strategy. The allowance for credit losses as a percent of total loans was 1.87% as of September 30, 2021. Non-performing loans equaled 0.55% of total loans. Non-performing assets were 0.31% of total assets, a 33 basis point decrease from December 31, 2020. The allowance for credit losses was 341% of non-performing loans. Our annualized net charge-offs to average total loans for the first nine months of 2021 was 0.06%. Excluding credit cards, the annualized net charge-offs to average total loans for the same period was 0.04%. Annualized net credit card charge-offs to average total credit card loans were 1.38%, compared to 1.60% during the full year 2020, and 116 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 September 30, December 31, (Dollars in thousands) 2021 2020 Nonaccrual loans (1) $ 59,054 $ 122,879 Loans past due 90 days or more (principal or interest payments) 334 578 Total non-performing loans 59,388 123,457 Other non-performing assets: Foreclosed assets held for sale and other real estate owned 11,759 18,393 Other non-performing assets 1,724 2,016 Total other non-performing assets 13,483 20,409 Total non-performing assets $ 72,871 $ 143,866 Performing TDRs $ 4,251 $ 3,138 Allowance for credit losses to non-performing loans 341 % 193 % Non-performing loans to total loans 0.55 % 0.96 % Non-performing assets (including performing TDRs) to total assets 0.33 % 0.66 % Non-performing assets to total assets 0.31 % 0.64 % _______________________________________ (1) Includes nonaccrual TDRs of approximately $2,550,000 at September 30, 2021 and $4,375,000 at December 31, 2020. The interest income on nonaccrual loans is not considered material for the three and nine month periods ended September 30, 2021 and 2020. 64 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. 65 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 2,759 3,326 Other consumer 1,577 3,062 Real estate 8,068 3,373 Commercial 2,099 40,537 Total loans charged off 14,503 50,298 Recoveries of loans previously charged off: Credit card 801 773 Other consumer 1,136 1,110 Real estate 3,995 474 Commercial 2,930 1,381 Total recoveries 8,862 3,738 Net loans charged off 5,641 46,560 Provision for credit losses (29,901) 75,190 Balance, September 30, $ 202,508 $ 248,251 Loans charged off: Credit card 787 Other consumer 960 Real estate 10,415 Commercial 8,199 Total loans charged off 20,361 Recoveries of loans previously charged off: Credit card 241 Other consumer 355 Real estate 431 Commercial 1,835 Total recoveries 2,862 Net loans charged off 17,499 Provision for credit losses 7,298 Balance, end of year $ 238,050 Provision for Credit Losses The amount of provision added to or released from the allowance during the three and nine months ended September 30, 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. 66 Allowance for Credit Losses Allocation As of September 30, 2021, the allowance for credit losses reflected a decrease of approximately $35.5 million from December 31, 2020 while total loans decreased $2.1 billion over the same nine 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 nine 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 September 30, 2021 was considered appropriate given the considerable amount of uncertainty as to the structure and timing of potential economic recovery, the impact of new COVID-19 variants, future of government assistance related to COVID-19 recovery efforts 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 September 30, 2021 December 31, 2020 (Dollars in thousands) Allowance Amount % of loans (1) Allowance Amount % of loans (1) Credit cards $ 4,751 1.7 % $ 7,472 1.4 % Other consumer 1,234 1.7 % 4,100 1.6 % Real estate 176,847 74.6 % 182,868 71.5 % Commercial 17,471 18.8 % 42,093 21.3 % Other 2,205 3.2 % 1,517 4.2 % Total $ 202,508 100.0 % $ 238,050 100.0 % _______________________________________ (1) Percentage of loans in each category to total loans. 67 DEPOSITS Deposits are our primary source of funding for earning assets and are primarily developed through our network of approximately 185 financial centers as of September 30, 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, 2021, core deposits comprised 88.1% 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 September 30, 2021, were $18.07 billion, an increase of $1.09 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 $15.62 billion at September 30, 2021, compared to $14.15 billion at December 31, 2020, an increase of $1.46 billion. Total time deposits decreased $376.6 million to $2.46 billion at September 30, 2021, from $2.83 billion at December 31, 2020. We had $388.6 million and $512.3 million of brokered deposits at September 30, 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 September 30, 2021 and December 31, 2020. The outstanding balance for September 30, 2021 includes $1.3 billion in FHLB long-term advances; $330.0 million in subordinated notes; $53.3 million of trust preferred securities and unamortized debt issuance costs; and $32.2 million of other long-term debt. The FHLB long-term advances outstanding at the end of the third quarter 2021 are primarily 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, 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 September 30, 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. 68 CAPITAL Overview At September 30, 2021, total capital was $3.03 billion. Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities. At September 30, 2021, our common equity to asset ratio was 13.04% 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 October 29, 2019, we filed 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. Stock Repurchase Program Effective July 23, 2021, our Board of Directors approved an amendment to the Company’s current stock repurchase program (“Program”) that increases the amount of our common stock that may be repurchased under the Program from a maximum of $180 million to a maximum of $276.5 million and extends the term of the Program from October 31, 2021, to October 31, 2022 (unless terminated sooner). The Program was originally approved on October 17, 2019 and first amended in March 2020. 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 and nine month periods ended September 30, 2021, we repurchased 1,806,205 shares at an average price per share of $28.48 and 1,937,121 shares at an average price per share of $28.14, respectively, under the Program. During the nine month period ended September 30, 2020, 4,922,336 shares at an average price per share of $18.96 were repurchased under the Program. No shares were repurchased under the Program during the three months ended September 30, 2020. Cash Dividends We declared cash dividends on our common stock of $0.54 per share for the first nine months of 2021 compared to $0.51 per share for the first nine months of 2020, an increase of $0.03, 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. 69 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 September 30, 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, 2021 and December 31, 2020 are presented in Table 12 below: Table 12: Risk-Based Capital September 30, December 31, (Dollars in thousands) 2021 2020 Tier 1 capital: Stockholders’ equity $ 3,030,531 $ 2,976,656 CECL transition provision 122,787 131,430 Goodwill and other intangible assets (1,152,688) (1,163,797) Unrealized loss (gain) on available-for-sale securities, net of income taxes 11,429 (59,726) Total Tier 1 capital 2,012,059 1,884,563 Tier 2 capital: Trust preferred securities and subordinated debt 383,278 382,874 Qualifying allowance for credit losses and reserve for unfunded commitments 60,700 89,546 Total Tier 2 capital 443,978 472,420 Total risk-based capital $ 2,456,037 $ 2,356,983 Risk weighted assets $ 14,098,320 $ 14,048,608 Assets for leverage ratio $ 22,189,921 $ 20,765,127 Ratios at end of period: Common equity Tier 1 ratio (CET1) 14.27 % 13.41 % Tier 1 leverage ratio 9.07 % 9.08 % Tier 1 leverage ratio, excluding average PPP loans (non-GAAP) (1) 9.22 % 9.50 % Tier 1 risk-based capital ratio 14.27 % 13.41 % Total risk-based capital ratio 17.42 % 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. 70 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. 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 $383.3 million is included as Tier 2 and total capital as of September 30, 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. 71 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, completed acquisitions, revenue, expenses, assets, asset quality, profitability, earnings, accretion, customer service, lending capacity and lending activity, 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 and activity, 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 and developments with respect to COVID-19 variants; 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. 72 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 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), and net interest income and net interest margin, each adjusted for PPP loans and additional liquidity (each 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 $1.176 billion and $1.186 billion total goodwill and other intangible assets for the periods ended September 30, 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). 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. 73 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 September 30, Nine Months Ended September 30, (In thousands, except per share data) 2021 2020 2021 2020 Net income available to common stockholders $ 80,561 $ 65,885 $ 222,879 $ 201,897 Non-core items: Gain on sale of branches — — (5,316) (8,093) Merger related costs 1,401 902 2,320 3,800 Early retirement program — 2,346 — 2,839 Branch right sizing (net) (3,041) 72 (2,554) 2,031 Tax effect (1) 429 (867) 1,451 (151) Net non-core items (1,211) 2,453 (4,099) 426 Core earnings (non-GAAP) $ 79,350 $ 68,338 $ 218,780 $ 202,323 Diluted earnings per share (2) $ 0.74 $ 0.60 $ 2.05 $ 1.83 Non-core items: Gain on sale of branches — — (0.05) (0.07) Merger related costs 0.01 0.01 0.02 0.03 Early retirement program — 0.02 — 0.02 Branch right sizing (net) (0.03) — (0.02) 0.02 Tax effect (1) 0.01 — 0.01 — Net non-core items (0.01) 0.03 (0.04) — Core diluted earnings per share (non-GAAP) $ 0.73 $ 0.63 $ 2.01 $ 1.83 _______________________________________ (1) Effective tax rate of 26.135%. (2) See Note 17, Earnings Per Share, for number of shares used to determine EPS. 74 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 September 30, Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Other income $ 6,220 $ 5,380 $ 24,590 $ 27,990 Gain on sale of branches — — (5,316) (8,093) Branch right sizing 239 (370) (367) (370) Core other income (non-GAAP) $ 6,459 $ 5,010 $ 18,907 $ 19,527 Non-interest expense $ 114,333 $ 116,577 $ 341,992 $ 358,896 Non-core items: Merger related costs (1,401) (902) (2,320) (3,800) Early retirement program — (2,346) — (2,839) Branch right sizing 3,280 (442) 2,187 (2,401) Total non-core items 1,879 (3,690) (133) (9,040) Core non-interest expense (non-GAAP) $ 116,212 $ 112,887 $ 341,859 $ 349,856 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) September 30, December 31, (In thousands, except per share data) 2021 2020 Total stockholders’ equity $ 3,030,531 $ 2,976,656 Preferred stock (767) (767) Total common stockholders’ equity 3,029,764 2,975,889 Intangible assets: Goodwill (1,075,305) (1,075,305) Other intangible assets (100,428) (111,110) Total intangibles (1,175,733) (1,186,415) Tangible common stockholders’ equity $ 1,854,031 $ 1,789,474 Shares of common stock outstanding 106,603,231 108,077,662 Book value per common share $ 28.42 $ 27.53 Tangible book value per common share (non-GAAP) $ 17.39 $ 16.56 75 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) September 30, December 31, (Dollars in thousands) 2021 2020 Total common stockholders’ equity $ 3,029,764 $ 2,975,889 Intangible assets: Goodwill (1,075,305) (1,075,305) Other intangible assets (100,428) (111,110) Total intangibles (1,175,733) (1,186,415) Tangible common stockholders’ equity $ 1,854,031 $ 1,789,474 Total assets $ 23,225,930 $ 22,359,752 Intangible assets: Goodwill (1,075,305) (1,075,305) Other intangible assets (100,428) (111,110) Total intangibles (1,175,733) (1,186,415) Tangible assets $ 22,050,197 $ 21,173,337 Paycheck Protection Program (“PPP”) loans (212,087) (904,673) Total assets excluding PPP loans $ 23,013,843 $ 21,455,079 Tangible assets excluding PPP loans $ 21,838,110 $ 20,268,664 Ratio of common equity to assets 13.04 % 13.31 % Ratio of tangible common equity to tangible assets (non-GAAP) 8.41 % 8.45 % Ratio of common equity to assets excluding PPP loans (non-GAAP) 13.16 % 13.87 % Ratio of tangible common equity to tangible assets excluding PPP loans (non-GAAP) 8.49 % 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 September 30, 2021 Total Tier 1 capital $ 2,012,059 Adjusted average assets for leverage ratio $ 22,189,921 Average PPP loans (359,828) Adjusted average assets excluding average PPP loans $ 21,830,093 Tier 1 leverage ratio 9.07 % Tier 1 leverage ratio excluding average PPP loans (non-GAAP) 9.22 % 76 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 September 30, Nine Months Ended September 30, (Dollars in thousands) 2021 2020 2021 2020 Net interest income $ 145,237 $ 153,610 $ 438,451 $ 484,774 FTE adjustment 4,941 2,864 13,652 7,519 Fully tax equivalent net interest income 150,178 156,474 452,103 492,293 Total accretable yield (4,122) (8,948) (16,371) (32,508) Core net interest income $ 146,056 $ 147,526 $ 435,732 $ 459,785 PPP loan and additional liquidity (1) interest income (10,064) (6,131) (32,013) Net interest income adjusted for PPP loans and additional liquidity (1) $ 140,114 $ 150,343 $ 420,090 Average earning assets $ 20,901,992 $ 19,415,314 $ 20,783,708 $ 19,172,318 Average PPP loan balance and additional liquidity (1) (1,475,098) (2,359,928) (2,601,327) Average earning assets adjusted for PPP loans and additional liquidity (1) $ 19,426,894 $ 17,055,386 $ 18,182,381 Net interest margin 2.85 % 3.21 % 2.91 % 3.43 % Core net interest margin (non-GAAP) 2.77 % 3.02 % 2.80 % 3.20 % Net interest margin adjusted for PPP loans and additional liquidity (1) (non-GAAP) 2.86 % 3.51 % 3.09 % _______________________________________ (1) Additional liquidity is estimated as the average interest bearing balances due from banks and federal funds sold greater than $750.0 million. 77