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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-04 · 231 added, 342 removed, 492 unchanged (54% of the section changed)

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

As permitted by SEC rules, management presents a sequential quarterly analysis of the Company’s performance as we believe that comparing current quarter results to those of the immediately preceding fiscal quarter is more useful in identifying current business trends and provides a more relevant analysis of our business results than comparing to the same period in the prior year.

Accordingly, we have compared our results of operations for the three months ended September 30, 2022 to our results of operations for the three months ended June 30, 2022, as applicable, throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations.

For additional information regarding the Company’s results for the three months ended June 30, 2022, please refer to our second quarter Form 10-Q filed with the SEC on August 5, 2022.

Our net income for the three months ended September 30, 2022 was $80.6 million, or $0.63 diluted earnings per share, increases of $53.1 million and $0.42, respectively, compared to the three months ended June 30, 2022.

Included in both period end results were certain items related to our acquisitions and branch right sizing initiatives, while the results for the three months ended September 30, 2022 also include adjustments for the loss from early retirement of trust preferred securities and the gain on sale of intellectual property, and results for the three months ended June 30, 2022 also include Day 2 accounting provision required for loans and unfunded commitments acquired in connection with the Spirit acquisition.

Excluding these certain items, adjusted earnings for the three months ended September 30, 2022 were $82.3 million, or $0.64 adjusted diluted earnings per share, compared to $66.8 million, or $0.52 adjusted diluted earnings per share for the three months ended June 30, 2022.

Net income for the first nine months of 2022 was $173.2 million, or $1.40 diluted earnings per share, compared to $222.9 million, or $2.05 diluted earnings per share, for the same period in 2021.

In addition to the certain items referenced above, gains associated with the sale of branch operations were included in the results for the first nine months of 2021.

Excluding these certain items, year-to-date adjusted earnings were $216.3 million, a decrease of $2.5 million compared to the same period in the prior year.

Adjusted diluted earnings per share for the first nine months of 2022 were $1.75 compared to $2.01 for the same period in 2021.

Third quarter results were strong and demonstrate our ability to navigate the current economic environment and volatile market conditions.

Highlights for the quarter include an increase in revenue, well contained operating expense growth, improved asset quality, strong organic loan growth, marked improvement in the efficiency ratio, expansion of the net interest margin, and excellent capital ratios.

On April 8, 2022 we completed our acquisition of Spirit, headquartered in Conroe, Texas, including its wholly-owned bank subsidiary, Spirit of Texas Bank SSB.

We were able to obtain all necessary approvals, consummate the transaction and successfully complete the systems conversion less than five months after the announcement, which we believe speaks to the outstanding team we have developed.

See Note 2, Acquisitions, in the accompanying Notes to Consolidated Financial Statements for additional information related to this acquisition.

Simmons Bank was named to Forbes magazine’s list of “World’s Best Banks” for the third consecutive year and ranked among the top 45 banks in Forbes’ list of “America’s Best Banks” for 2022 and our Chief Digital Officer was recently recognized by American Banker as a 2022 Digital Banker of the Year.

We continue to work to develop new and innovative products and services using digital channels to provide an enhanced customer experience to “bank when you want, where you want”.

Accordingly, we have compared our results of operations for the three months ended March 31, 2023 to our results of operations for the three months ended December 31, 2022 and March 31, 2022, as applicable, throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations.

During the first quarter of 2023, significant turmoil within the financial services industry, was fueled by the failure of certain regional banks that utilized specialized business models, and continued inflationary pressures and recessionary fears, resulted in industry concerns around the level of uninsured deposits, liquidity, capital and operations.

Despite these challenges, our focus remained on the fundamentals that have served us well during our 120-year history.

We believe that our liquidity is solid and that our capital is strong:

• Deposits were relatively stable during the quarter, which highlights the granularity of our deposit base, as well as the long-term relationships we have with many of our customers.

Total deposits as of March 31, 2023 were $22.45 billion compared to $22.55 billion as of December 31, 2022.

Uninsured deposits as of March 31, 2023 were $5.27 billion or 23% of total deposits.

• Capital levels were steady during the quarter with all regulatory capital ratios remaining significantly above “well-capitalized” guidelines as of March 31, 2023 (see Table 12 in the Capital section below).

As of March 31, 2023, our ratio of common equity to total assets was 12.11%, the ratio of tangible common equity to tangible assets was 7.25% and our Tier 1 leverage ratio was 9.24%.

• Key credit quality metrics as of March 31, 2023 also remained solid with our nonperforming loan coverage ratio at 324% and our allowance for credit losses as a percent of total loans ratio was 1.25%.

• Significant liquidity position with a loan to deposit ratio of 74% as of March 31, 2023, compared to 72% as of December 31, 2022.

Additional liquidity sources available to us as of March 31, 2023 totaled $10.78 billion.

Our net income for the three months ended March 31, 2023 was $45.6 million, or $0.36 diluted earnings per share, compared to net income of $83.3 million, or $0.65 diluted earnings per share and $65.1 million, or $0.58 diluted earnings per share for the three months ended December 31, 2022 and March 31, 2022, respectively.

Included in each comparative period end results were certain items related to our acquisitions and branch right sizing initiatives, while the results for the three months ended December 31, 2022 also include adjustments for the gain on insurance settlement related to a weather event.

Excluding these certain items and the tax effect, adjusted earnings for the three months ended March 31, 2023 were $47.3 million, or $0.37 adjusted diluted earnings per share, compared to $81.1 million, or $0.64 adjusted diluted earnings per share and $67.2 million, or $0.59 adjusted diluted earnings per share for the three months ended December 31, 2022 and March 31, 2022, respectively.

Simmons Bank was named to Forbes magazine’s 2023 list of “World’s Best Banks” for the fourth consecutive year and recognized by Forbes’ as one of “America’s Best Midsize Employers” for 2023.

We continue to work to expand our suite of digital solutions to provide an enhanced customer experience to “bank when you want, where you want”.

Through our Better Bank Initiative, we have identified an estimated $15 million in annual noninterest expense cost savings that we expect to be fully incorporated by the end of 2023.

The programs under this initiative are designed to optimize operational processes, further improve the customer experience and increase our capacity to capitalize on organic growth opportunities, while at the same time improving our long-term growth profile.

Asset quality metrics remain at historically low-levels and reflect our conservative credit culture, as well as the impact of our strategic decision in 2019 designed to de-risk certain elements of loan portfolios that were acquired in connection with our geographic diversification and expansion.

As a result of this strategic decision, over the past two years we have prudently and systematically exited certain non-relationship credits and non-core industries while also significantly reducing its exposure to commercial real estate to more acceptable levels.

Total nonperforming loans as of September 30, 2022, December 31, 2021, and September 30, 2021 were $57.8 million, $68.6 million, and $59.4 million, respectively.

Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.24% at September 30, 2022, compared to 0.33% at December 31, 2021 and 0.33% at September 30, 2021.

Stockholders’ equity as of September 30, 2022 was $3.16 billion, book value per share was $24.87 and tangible book value per share was $13.51.

Our ratio of common stockholders’ equity to total assets was 11.66% and the ratio of tangible common stockholders’ equity to tangible assets was 6.69% at September 30, 2022.

The Company’s Tier 1 leverage ratio of 9.24%, 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).

In January 2022, our Board of Directors authorized the 2022 Program, which replaced the 2019 Program and under which we may repurchase up to $175.0 million of its Class A common stock currently issued and outstanding.

We repurchased approximately 1.9 million shares of our common stock under the 2022 Program during the third quarter of 2022.

Total loans were $15.61 billion at September 30, 2022, compared to $12.01 billion at December 31, 2021.The increase in total loans during these periods primarily reflects the acquisition of Spirit during the second quarter of 2022.

Net loan growth has also been driven by increased activity throughout our geographic footprint.

While activity in our commercial pipeline slowed to $1.55 billion due to, in large part, the impact of the rapidly rising interest rates and our emphasis on maintaining prudent underwriting standards and pricing discipline, our unfunded commitments increased for the sixth consecutive quarter to $5.14 billion, and were up 15% from the prior quarter end.

Our strategy of restructuring our loan portfolio over the past two years not only diversified the risk profile but also established capacity which should provide the foundation for additional loan and revenue growth, and which is evident in our loan pipeline and unfunded commitments.

Our liquidity is solid, and our capital is strong.

Total nonperforming loans as of March 31, 2023, December 31, 2022, and March 31, 2022 were $63.7 million, $58.9 million, and $64.3 million, respectively.

Non-performing assets as a percent of total assets were 0.26% at March 31, 2023, compared to 0.23% at December 31, 2022 and 0.29% at March 31, 2022.

Stockholders’ equity as of March 31, 2023 was $3.34 billion, book value per share was $26.24 and tangible book value per share was $14.88.

Total loans were $16.56 billion at March 31, 2023, compared to $16.14 billion at December 31, 2022.

The increase in total loans during the period was supported by diverse growth in terms of type and by geographic market.

Our unfunded commitments were $5.01 billion and $5.64 billion as of March 31, 2023 and December 31, 2022, respectively.

While unfunded commitments are considered a key indicator of future loan growth, higher interest rates, softening economic conditions and forecasts of a potential recession in the U.S.

have resulted in lower activity in our commercial loan pipeline which was $1.05 billion as of March 31, 2023, compared to $1.12 billion at December 31, 2022.

In our discussion and analysis of our financial condition and results of operation in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we provide certain financial information determined by methods other than in accordance with US GAAP.

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See the GAAP Reconciliation of Non-GAAP Financial 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, 2022, has approximately $27.1 billion in consolidated assets and, through its subsidiaries, conducts financial operations in Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas.

Simmons First National Corporation is a Mid-South based financial holding company that, as of March 31, 2023, has approximately $27.6 billion in consolidated assets and, through its subsidiaries, conducts financial operations in Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas.

CRITICAL ACCOUNTING ESTIMATES

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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 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, quantitative factors, 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.

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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.

In the first quarter of 2023, we refined the estimation process by improving systems, models, processes, methodology, and assumptions used within the calculation.

After multiple parallel runs with the former process, it was determined that the changes did not and are not expected to result in material differences of results.

Acquisition Accounting, Loans

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In the last several years, on average, approximately 42% of our loan portfolio and approximately 80% of our time deposits have repriced in one year or less.

As of September 30, 2022, our interest rate sensitivity shows that approximately 41% of our loans and 85% of our time deposits will reprice in the next year.

As of March 31, 2023, our interest rate sensitivity shows that approximately 39% of our loans and 91% of our time deposits will reprice in the next year.

Net Interest Income - Sequential Quarter Analysis

For the three month period ended September 30, 2022, net interest income on a fully taxable equivalent basis was $199.8 million, an increase of $8.6 million, or 4.5%, compared to the three months ended June 30, 2022.

The increase in net interest income was primarily the result of a $25.9 million increase in fully tax equivalent interest income partially offset by a $17.3 million increase in interest expense.

The increase in interest income primarily resulted from a $23.9 million increase in interest income on loans, coupled with an increase of $3.1 million in interest income on investment securities.

Regarding the increase in interest income on loans during the third quarter of 2022, the increase in loan volume resulted in an increase of $9.9 million, in addition to an increase of $14.0 million of interest income from a 32 basis point increase in loan yield.

The loan yield for the third quarter of 2022 was 4.86% compared to 4.54% from the preceding sequential quarter.

For the three month period ended March 31, 2023, net interest income on a fully taxable equivalent basis was $184.1 million, a decrease of $15.7 million, or 7.8%, compared to the three months ended December 31, 2022.

The decrease in net interest income was primarily the result of a $14.1 million increase in fully tax equivalent interest income, more than offset by a $29.7 million increase in interest expense.

The increase in interest income primarily resulted from an $11.5 million increase in interest income on loans, coupled with an increase of $2.6 million in interest income on investment securities.

Regarding the increase in interest income on loans during the first quarter of 2023, the increase in loan volume resulted in an increase of $5.5 million, in addition to an increase of $6.0 million of interest income from a 27 basis point increase in loan yield.

The loan yield for the first quarter of 2023 was 5.67% compared to 5.40% from the preceding sequential quarter.

The additional loan volume was due to strong organic loan growth which was widespread across our geographic markets.

The increase in both loan and investment yield was due to the rising rate environment and was also positively impacted by a significant decrease in the level of variable rate loans and securities at or below their interest rate floors during the quarter.

The $17.3 million increase in interest expense is mostly due to the increase in deposit account rates, as we continue to manage the challenging rising rate environment.

Interest expense increased $15.0 million due to the increase in rate of 40 basis points on interest-bearing deposit accounts.

Additionally, interest expense increased $1.7 million due to the increase in rate of 58 basis points on other borrowings.

The increase in interest income on investment securities was primarily due to a 39 basis point increase in our taxable security portfolio.

The increase in both loan and investment yield was due to the continued rising rate environment.

The $29.7 million increase in interest expense is mostly due to the increase in deposit account rates and change in deposit mix as consumers migrate toward higher rate deposits, principally certificates of deposits, in the current higher rate environment.

Interest expense increased $25.1 million due to the increase in rate of 69 basis points on interest-bearing deposit accounts and increased $5.4 million due to the increase in deposit volume over the period.

We continually monitor and look for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment.

Net Interest Income - Year-over-Year Analysis

For the nine month period ended September 30, 2022, net interest income on a fully taxable equivalent basis was $542.2 million, an increase of $90.1 million, or 19.9%, over the same period in 2021.

Net interest income on a fully taxable equivalent basis for the three month period ended March 31, 2023 increased $32.9 million, or 21.8%, over the same period in 2022.

The increase in net interest income was the result of a $118.1 million increase in fully tax equivalent interest income, partially offset by an $85.2 million increase in interest expense.

The increase in interest income during the nine month period ended September 30, 2022 resulted from increases in interest income on loans and investments.

The increase in interest income on loans of $61.3 million reflects an increase in loan volume of $74.0 million partially offset by a 14 basis point decline in loan yield that resulted in a $12.7 million decrease.

The increase in our loan volume during the first nine months of 2022 was primarily due to the Spirit acquisition in the second quarter of 2022, along with the acquisition of Landmark and Triumph in the fourth quarter of 2021, as well as organic loan growth.

Forgiveness of PPP loans partially offset the additional loan volume provided by these acquisitions.

The decline in loan yield for the nine month period ended September 30, 2022 compared to the same period in 2021 is primarily due to an 8 basis point positive impact of PPP loan accretion on loan yield in 2021.

The increase in interest income on investment securities of $29.9 million was due to our investment portfolio average balances which increased by $2.1 billion or 32.8%, as we re-invested excess liquidity in our investment security portfolio throughout 2021.

Additionally, an aggregated increase of $6.9 million in interest income on investment securities was due to yield increases over the nine month period of 18 basis points and 5 basis points for our taxable and non-taxable investment security portfolios, respectively.

The $11.0 million increase in interest expense is mainly due to the increase in our deposit account rates.

Interest expense increased $2.4 million due to the increase in deposit volume over the period and increased $6.5 million due to the increase in rate of 4 basis points on interest-bearing deposit accounts.

Impacts to our balance sheet that affected interest expense during the nine

month period ended September 30, 2022, as compared to the same period ended September 30, 2021, include the Spirit, Landmark and Triumph acquisitions noted above, as well as a rising interest rate environment throughout 2022, as the market experiences a shift in consumer sentiment given the attractiveness of higher yielding time deposits in the current higher interest rate environment.

The increase in interest income during the three month period ended March 31, 2023 resulted from increases in interest income on loans and investments.

The increase in interest income on loans of $100.9 million reflects an increase in loan volume of $55.5 million coupled with a 133 basis point rise in loan yield that resulted in a $45.4 million increase.

The increase in our loan volume during the first three months of 2023 was primarily due to the Spirit acquisition in the second quarter of 2022, combined with solid organic loan growth over the comparative period.

The increase of $15.2 million in interest income on investment securities reflects an increase of $19.6 million in interest income on investment securities due to yield increases over the period of 141 basis points and 35 basis points for our taxable and non-taxable investment security portfolios, respectively.

The increase in interest income on investment securities due to yield increases was mitigated by a $4.4 million decrease due to the decline in our investment portfolio average balances which decreased by $977.5 million or 11.5%, as our portfolio experienced pay downs and maturities over the period, which was reinvested into our loan portfolio.

The $85.2 million increase in interest expense is mainly due to the increase in our deposit account rates over the period, combined with the additional deposit base from the Spirit acquisition and change in deposit mix as the market experiences a shift in consumer sentiment given the attractiveness of higher yielding time deposits in the current higher interest rate environment.

Interest expense increased $74.1 million due to the increase in rate of 191 basis points on interest-bearing deposit accounts and increased $6.6 million due to the increase in deposit volume over the period.

Further, an increase of $4.1 million to interest expense was related to other borrowings.

The rate increase of 311 basis points in other borrowings resulted in an increase of $6.7 million, that was partially offset by a $2.6 million decrease in volume over the period.

We continually monitor and look for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment.

Net Interest Margin

Our net interest margin on a fully tax equivalent basis increased 10 basis points to 3.34% for the three month period ended September 30, 2022, when compared to 3.24% for the three months ended June 30, 2022.

For the nine month period ended September 30, 2022, our net interest margin increased 21 basis points to 3.12% when compared to 2.91% for the same period in 2021.

The increase in the net interest margin during the three months ended September 30, 2022 compared to the three months ended June 30, 2022 was primarily due to the rising rate environment and driven by increases in our loan and investment rates.

The increase in net interest margin on a year-over-year basis is primarily due to the overall increase in our earning assets average balances over the comparative periods which has improved interest income, coupled with the effective management of our interest bearing liabilities, as we continued our effort to improve the mix of deposits into lower cost deposits and manage rates effectively.

Our net interest margin on a fully tax equivalent basis was 3.09% for the three month period ended March 31, 2023, as compared to 3.31% and 2.76% for the three months ended December 31, 2022 and March 31, 2022, respectively.

The decrease of 22 basis points in the net interest margin during the three months ended March 31, 2023 compared to the three months ended December 31, 2022 was primarily due to the rising deposit rate pressure from increased market competition and consumer migration toward higher rate deposits.

The increase of 33 basis points in the net interest margin during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was due to the overall increase in our earning assets average balances over the comparative periods which has improved interest income, as we continued to manage rates effectively in the rapidly increasing rate environment experienced over the past year.

Net Interest Income Tables

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three months ended September 30, 2022 and June 30, 2022 and the nine months ended September 30, 2022 and 2021, respectively.

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three months ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively.

Analysis of Net Interest Margin

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

Three Months Ended Nine Months Ended

September 30, June 30, September 30, September 30,

Three Months Ended

March 31, December 31, March 31,

(In thousands) 2023 2022 2022

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Changes in Fully Taxable Equivalent Net Interest Margin

Three Months Ended Nine Months Ended

(In thousands) September 30, 2022 compared to June 30, 2022 September 30, 2022 compared to September 30, 2021

Three Months Ended

(In thousands) March 31, 2023 compared to December 31, 2022 March 31, 2023 compared to March 31, 2022

Increase due to change in earning assets $ 4,505 $ 49,883

Increase (decrease) due to change in earning asset yields 19,865 (234)

Increase due to change in earning asset yields 9,589 68,236

Decrease due to change in interest bearing liabilities (3,845) (3,695)

Decrease due to change in interest rates paid on interest bearing liabilities (25,899) (81,486)

Increase in net interest income $ 8,593 $ 90,088

Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three months ended September 30, 2022 and June 30, 2022 and the nine months ended September 30, 2022 and 2021, respectively.

(Decrease) increase in net interest income $ (15,650) $ 32,938

Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three months ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively.

The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods.

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Three Months Ended

September 30, 2022 June 30, 2022

Average Income/ Yield/ Average Income/ Yield/

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

Earning assets:

Interest bearing balances due from banks and federal funds sold $ 327,841 $ 1,141 1.38 $ 777,098 $ 1,117 0.58

Investment securities - taxable 5,408,189 24,848 1.82 5,674,470 21,794 1.54

Investment securities - non-taxable 2,665,515 21,805 3.25 2,725,610 21,733 3.20

Mortgage loans held for sale 13,280 178 5.32 17,173 200 4.67

Other loans held for sale 9,439 998 41.95 22,114 2,063 37.42

Loans - including fees 15,320,833 187,851 4.86 14,478,183 163,995 4.54

Total interest earning assets 23,745,097 236,821 3.96 23,694,648 210,902 3.57

Non-earning assets 3,123,634 3,074,384

Total assets $ 26,868,731 $ 26,769,032

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest bearing liabilities:

Interest bearing transaction and savings deposits

$ 12,264,655 $ 17,225 0.56 $ 12,807,502 $ 6,879 0.22

Time deposits 3,314,948 8,204 0.98 2,586,567 2,875 0.45

Total interest bearing deposits 15,579,603 25,429 0.65 15,394,069 9,754 0.25

Federal funds purchased and securities sold under agreements to repurchase

196,047 305 0.62 210,280 119 0.23

Other borrowings 1,123,797 6,048 2.14 1,241,501 4,844 1.56

Subordinated debt and debentures 411,018 5,251 5.07 418,327 4,990 4.78

Total interest bearing liabilities 17,310,465 37,033 0.85 17,264,177 19,707 0.46

Noninterest bearing liabilities:

Noninterest bearing deposits 6,022,899 5,926,304

Other liabilities 243,296 216,848

Total liabilities 23,576,660 23,407,329

Stockholders’ equity 3,292,071 3,361,703

Total liabilities and stockholders’ equity

$ 26,868,731 $ 26,769,032

Net interest spread – FTE 3.11 3.11

Net interest margin – FTE $ 199,788 3.34 $ 191,195 3.24

Nine Months Ended

September 30, 2022 September 30, 2021

Average Income/ Yield/ Average Income/ Yield/

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

March 31, 2023 December 31, 2022 March 31, 2022

Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/

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

Earning assets:

Interest bearing balances due from banks and federal funds sold $ 315,307 $ 2,783 3.58 $ 361,856 $ 2,593 2.84 $ 1,728,694 $ 649 0.15

$ 939,411 $ 2,907 0.41 $ 2,676,911 $ 2,212 0.11

Investment securities - taxable 4,930,945 32,804 2.70 5,085,960 29,645 2.31 5,688,306 18,148 1.29

5,589,298 64,791 1.55 4,081,927 41,790 1.37

Investment securities - non-taxable 2,624,642 21,522 3.33 2,582,050 22,123 3.40 2,844,777 20,937 2.98

2,744,644 64,474 3.14 2,193,431 50,737 3.09

Mortgage loans held for sale 5,470 82 6.08 8,601 152 7.01 27,633 190 2.79

19,309 568 3.93 59,362 1,255 2.83

Other loans held for sale — — — 1,704 59 13.74 — — —

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Interest bearing transaction and savings deposits $ 11,722,591 $ 47,990 1.66 $ 11,859,322 $ 34,615 1.16 $ 12,083,516 $ 4,314 0.14

$ 12,385,888 $ 28,418 0.31 $ 10,377,609 $ 15,178 0.20

Time deposits 5,155,055 39,538 3.11 4,212,271 22,434 2.11 2,241,123 2,503 0.45

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Federal funds purchased and securities sold under agreements to repurchase 148,673 323 0.88 178,948 449 1.00 218,186 68 0.13

208,090 492 0.32 255,684 507 0.27

Other borrowings 787,783 8,848 4.56 923,189 9,263 3.98 1,337,654 4,779 1.45

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Total liabilities and stockholders’ equity $ 27,488,732 $ 27,180,575 $ 24,826,199

$ 26,162,136 $ 23,085,987

Net interest spread – FTE 2.52 2.87 2.66

Net interest margin – FTE $ 184,146 3.09 $ 199,796 3.31 $ 151,208 2.76

Table 4 shows changes in interest income and interest expense resulting from changes in both volume and interest rates for the three months ended September 30, 2022 as compared to the three months ended June 30, 2022 and the nine months ended September 30, 2022 and 2021, respectively.

Table 4 shows changes in interest income and interest expense resulting from changes in both volume and interest rates for the three months ended March 31, 2023 as compared to the three months ended December 31, 2022 and March 31, 2022, respectively.

The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

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Three Months Ended

September 30, Nine Months Ended

September 30,

September 30, 2022 compared to June 30, 2022 September 30, 2022 compared to September 30, 2021

March 31, 2023 compared to December 31, 2022 March 31, 2023 compared to March 31, 2022

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

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It is management’s practice to review the allowance on a monthly basis and, after considering the factors previously noted, to determine the level of provision made to the allowance.

The provision for credit losses for the three months ended September 30, 2022 was an expense of $103,000 as compared to an expense of $33.9 million for the three months ended June 30, 2022.

For the nine months ended September 30, 2022, the Company’s provision for credit losses was $14.0 million as compared to a recapture of $31.4 million for the same period ended September 30, 2021.

During the three month period ended September 30, 2022, provision expense included the recapture of credit losses primarily driven by a reduction in qualitative factors for the restaurant, hospitality, student housing and office space industries due to the improvement from pandemic related stresses as well as improved credit quality metrics.

This recapture was offset by the additional reserve for unfunded commitments related to an overall increase in unfunded commitments, primarily made up of

commercial construction loans, which receive a higher reserve allocation than other loans.

The change for the three month period ended September 30, 2022 as compared to the preceding quarter is primarily due to the Spirit acquisition and the related Day 2 provision expense for the acquired loans and additional unfunded commitments added to the Company’s portfolio during the three month period ended June 30, 2022.

The provision for credit losses for the nine month period ended September 30, 2022 reflected the adjustments due to the Spirit Day 2 provision discussed above, offset by improved credit quality metrics and improved macroeconomic factors.

The recapture of credit losses for the nine month period ended September 30, 2021 was driven by improved credit quality metrics and improved macroeconomic factors.

For the three months ended March 31, 2023, our provision for credit losses was $24.2 million as compared to a recapture of $19.9 million for the same period ended March 31, 2022.

The provision expense during the first three months of 2023 consisted of $10.9 million expense related to loans and reflected loan growth in the quarter, as well as the impact of updated economic assumptions, combined with a $13.3 million expense related to securities and was due to decreases in the value of corporate bonds in the investment securities portfolio.

The recapture during the first three months of 2022 was driven by improved credit quality metrics and improved macroeconomic factors, coupled with the planned exit of several large oil and gas relationships during the quarter.

NONINTEREST INCOME

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Noninterest income also includes income on the sale of mortgage loans, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities.

Total noninterest income was $43.0 million for the three month period ended September 30, 2022, an increase of approximately $2.8 million, or 7.1%, as compared to the three month period ended June 30, 2022, primarily driven by the incremental increases in service charges on deposit accounts and wealth management fees.

For the nine month period ended September 30, 2022, total noninterest income was $125.4 million, a decrease of approximately $19.8 million, or 13.6%, compared to the same period in 2021, primarily due to decreases in the gains on sale of securities, gains on sale of branches 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.

Additionally, the Company recognized $5.3 million on the gain on sale of branches, which we exclude from adjusted earnings, during the first nine months of 2021, primarily related to the sale of Illinois branches.

A decrease of $7.4 million in mortgage lending income for the nine month period ended September 30, 2022 was due to the higher interest rate environment and softening market conditions.

An increase of $3.3 million in service charges on deposit accounts and an increase of $2.6 million in debit and credit card fees partially offset the overall decrease in noninterest income during the first nine months of 2022 as a result of the additional customer base from the Landmark, Triumph and Spirit acquisitions and additional transactions due to the changes in customer spending habits, respectively.

Table 5 shows noninterest income for the three month period ended September 30, 2022 as compared to the three month period ended June 30, 2022 and the nine month periods ended September 30, 2022 and 2021, respectively.

For the three month period ended March 31, 2023, total noninterest income was $45.8 million, an increase of approximately $1.2 million or 2.7%, compared to the three month period ended December 31, 2022 and was primarily driven by the incremental increases in service charges on deposit accounts due to increased consumer activity and a slight rebound in mortgage lending income as compared to the prior quarter.

Noninterest income for the three months ended March 31, 2023 increased by approximately $3.6 million or 8.6% as compared to the three months ended March 31, 2022 and was primarily due to the Spirit acquisition and attributable increased consumer base.

The increase was partially offset by a $3.0 million decrease in mortgage lending income due to the rising interest rate environment and softening market conditions over the period, which slowed the demand for mortgage loans compared to the demand associated with the previous lower interest rate environment.

Other income for the three month period ended March 31, 2023 increased by $4.7 million as compared to the preceding sequential quarter, and increased by $4.0 million when compared to the same period in the prior year.

The increases were primarily due to the recapture of a $4.0 million legal reserve during the first three months of 2023, related to legal matters previously disclosed.

Table 5 shows noninterest income for the three month periods ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively, as well as changes between periods.

Noninterest Income

Three Months Ended

September 30, Nine Months Ended

September 30,

30, June 30, Change Sept.

March 31, December 31, March 31, Change from Quarter - Sequential Change from Quarter - Year-over-Year

(Dollars in thousands) 2023 2022 2022

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Gain (loss) on sale of securities, net — (52) (54) 52 (100.0) 54 (100.0)

Gain on sale of branches — — — — — 5,316 (5,316) *

Gain on insurance settlement — 4,074 — (4,074) (100.0) — —

Other income 11,256 6,600 7,266 4,656 70.6 3,990 54.9

Total noninterest income $ 45,835 $ 44,647 $ 42,218 $ 1,188 2.7% $ 3,617 8.6%

Recurring fee income (total service charges, wealth management fees, debit and credit card fees) for the three month period ended September 30, 2022 was $30.9 million, an increase of $2.2 million as compared to the three month period ended June 30, 2022.

Recurring fee income for the nine month period ended September 30, 2022, was $87.3 million, an increase of $6.2 million from the nine month period ended September 30, 2021.

The increases in the periods presented are primarily the result of changes in total service charges and debit and credit card fees, previously discussed as well as the recent acquisitions.

Recurring fee income (total service charges, wealth management fees, debit and credit card fees) was $30.0 million, $29.9 million and $27.8 million for the three month periods ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively.

Recurring fee income was relatively flat as compared to the three month period ended December 31, 2022 and increased $2.3 million as compared to the three month period ended March 31, 2022 primarily due to the increased consumer base provided by the Spirit acquisition.

NONINTEREST EXPENSE

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We also regularly monitor staffing levels at each subsidiary to ensure productivity and overhead are in line with existing workload requirements.

For the three month period ended September 30, 2022, noninterest expense was $138.9 million, a decrease of $17.9 million, or 11.4%, from the three month period ended June 30, 2022.

Noninterest expense for the nine months ended September 30, 2022 was $424.2 million, an increase of $82.2 million, or 24.0%, from the same period in 2021.

Salaries and employee benefits expense decreased $2.2 million during the three month period ended September 30, 2022 as compared to the preceding sequential quarter and increased $31.5 million during the nine month period September 30, 2022 as compared to same period in 2021.

The decrease for the three month period reflects incentive accrual adjustments, while the increase for the nine month period includes impacts from the Landmark, Triumph and Spirit acquisitions.

In addition, the Bank has added associates in our lending, wealth and mortgage programs.

Merger related costs for the three and nine month periods ended September 30, 2022 as compared to the three months ended June 30, 2022 and nine months ended September 30, 2021, decreased by $17.7 million and increased by $20.1 million, respectively, and is primarily related to the timing of the Spirit acquisition which was completed during the three months ended June 30, 2022.

See Note 2, Acquisitions, in the accompanying Notes to Consolidated Financial Statements for additional information related to this acquisition.

Adjusted noninterest expense, which excludes branch right sizing and merger related costs, for the three and nine months ended September 30, 2022, decreased $1.0 million, or 0.8%, and increased $57.5 million, or 16.8%, respectively, as compared to the three months ended June 30, 2022 and nine months ended September 30, 2021.

Marketing expense decreased by $2.1 million during the three month period ended September 30, 2022 as compared to the three months ended June 30, 2022 and increased by $8.6 million during the nine month period ended September 30, 2022 as compared to the same period in 2021.

The decrease during the three month period ended September 30, 2022 was primarily related to a nonrecurrent $1.6 million contribution to the Simmons First Foundation Conservation Fund during the three months ended June 30, 2022, reflecting a portion of paper statement fees collected as part of a promotion to encourage customers to enroll in eStatements.

The increase during the nine month period ended September 30, 2022 includes the previously mentioned contribution related to paper statement fees, in addition to increased advertising and public relations expenses, including a multi-university corporate sponsorship program designed to support female student athletes and serve as a program for developing women leaders in the corporate world.

Table 6 below shows noninterest expense for the three month period ended September 30, 2022 as compared to the three month period ended June 30, 2022 and the nine month periods ended September 30, 2022 and 2021, respectively.

Noninterest expense was $143.2 million for the three month period ended March 31, 2023, and was relatively flat as compared to noninterest expense of $142.6 million for the three month period ended December 31, 2022, representing an increase of $653,000, or 0.5%, as compared to the preceding quarter.

Adjusted noninterest expense, which excludes branch right sizing and merger related costs, for the three months ended March 31, 2023, decreased $583,000, or 0.4%, as compared to the three months ended December 31, 2022.

Noninterest expense for the three months ended March 31, 2023 increased by approximately $14.8 million or 11.5% as compared to the three months ended March 31, 2022.

Adjusted noninterest expense, which excludes branch right sizing and merger related costs, for the three months ended March 31, 2023, increased $15.2 million, or 12.1%, as compared to the three months ended March 31, 2022.

Salaries and employee benefits expense increased $4.0 million during the three month period ended March 31, 2023 as compared to the preceding sequential quarter and increased $9.1 million when compared to the same period in the prior year.

The increase as compared to the preceding sequential quarter reflected seasonal payroll taxes incurred during the quarter, 401(k) profit sharing contribution and equity awards compensation, while the increase from the same period in the prior year is primarily due to the impact from the Spirit acquisition.

Deposit insurance expense for the three months ended March 31, 2023 increased by $1.2 million and $3.1 million compared to the three month periods ended December 31, 2022 and March 31, 2022, respectively.

Both comparative increases were largely due to an increased base rate related to changes in the mix of deposits, while the increase as compared to the same period in the prior year is also due to the increase in deposits from the Spirit acquisition.

Other operating expenses decreased by $3.5 million during the three months ended March 31, 2023 as compared to the three months ended December 31, 2022 and increased by $757,000 as compared to the three months ended March 31, 2022.

Sequentially, the decrease was primarily due to a focus on expense management of controllable expenses during the quarter, coupled with the impact of $1.2 million of accelerated amortization of certain tax credits recognized during the three month period ended December 31, 2022, the offset of which is recorded in provision for income taxes.

The increase when compared to the three months ended March 31, 2022 is primarily related to the Spirit acquisition and inflationary pressures over the period.

Table 6 below shows noninterest expense for the three month periods ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively, as well as changes between periods.

Noninterest Expense

Three Months Ended

September 30, Nine Months Ended

September 30,

30, June 30, Change Sept.

March 31, December 31, March 31, Change from Quarter - Sequential Change from Quarter - Year-over-Year

(Dollars in thousands) 2023 2022 2022

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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 $3.8 billion and $3.9 billion, respectively, at September 30, 2022, compared to the HTM amount of $1.5 billion and AFS amount of $7.1 billion at December 31, 2021.

HTM and AFS investment securities were $3.77 billion and $3.76 billion, respectively, at March 31, 2023, compared to the HTM amount of $3.76 billion and AFS amount of $3.85 billion at December 31, 2022.

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

During our second quarter review of the Company’s balance sheet composition, liquidity and capital levels, along with our analysis of the macroeconomic factors influencing interest rates, we determined the need to reclassify certain securities from the AFS portfolio to the HTM portfolio.

During the quarter ended June 30, 2022, the Company transferred, at fair value, $1.99 billion of securities from the AFS portfolio to the HTM portfolio.

Previously, during the quarter ended September 30, 2021, the Company transferred, at fair value, $500.8 million of securities from AFS to HTM.

The related remaining net unrealized losses of $148.3 million and net unrealized gains of $738,000, respectively, in accumulated other comprehensive income (loss) are being amortized over the remaining life of the securities.

During the quarters ended June 30, 2022 and September 30, 2021, we transferred, at fair value, $1.99 billion and $500.8 million, respectively, of securities from the AFS portfolio to the HTM portfolio.

The related remaining combined net unrealized losses of $141.0 million in accumulated other comprehensive income (loss) as of March 31, 2023 will be amortized over the remaining life of the securities.

No gains or losses on these securities were recognized at the time of transfer.

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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, 2022, 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.

We expect the cash flows from principal maturities of securities to provide flexibility to fund future loan growth or reduce wholesale funding.

Furthermore, as of March 31, 2023, we 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.

Maturity Distribution of Investment Securities

Table 7 reflects the amortized cost and estimated fair value of securities at September 30, 2022, by contractual maturity and the weighted average yields (for tax-exempt obligations on a fully taxable equivalent basis, assuming a 26.135% tax rate) of such securities and is presented due to the reclassification of certain securities during the quarter.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

September 30, 2022

1 year 5 years Total

1 year through through Over No fixed Amortized Par Fair

(In thousands) or less 5 years 10 years 10 years maturity Cost Value Value

Held-to-Maturity

Government agencies $ — $ — $ 57,027 $ 390,373 $ — $ 447,400 $ 480,246 $ 349,529

Mortgage-backed securities — — — — 1,214,882 1,214,882 1,281,190 1,084,514

State and political subdivisions 4,519 6,545 16,404 1,837,842 — 1,865,310 1,877,163 1,324,283

Other securities — 1,126 254,030 5,712 — 260,868 274,878 225,714

Total $ 4,519 $ 7,671 $ 327,461 $ 2,233,927 $ 1,214,882 $ 3,788,460 $ 3,913,477 $ 2,984,040

Percentage of total 0.1 % 0.2 % 8.6 % 59.0 % 32.1 % 100.0 %

Weighted average yield 3.0 % 3.4 % 3.4 % 2.5 % 3.1 % 2.7 %

Available-for-Sale

Treasury $ — $ 2,250 $ — $ — $ — $ 2,250 $ 2,300 $ 2,191

Government agencies 22 93,833 50,687 50,827 — 195,369 193,309 188,060

Mortgage-backed securities — — — — 2,959,882 2,959,882 2,900,916 2,670,348

State and political subdivisions 3,143 14,486 19,883 1,016,844 — 1,054,356 1,109,749 822,509

Other securities — 73,624 198,162 — 488 272,274 271,855 254,435

Total $ 3,165 $ 184,193 $ 268,732 $ 1,067,671 $ 2,960,370 $ 4,484,131 $ 4,478,129 $ 3,937,543

Percentage of total 0.1 % 4.1 % 6.0 % 23.8 % 66.0 % 100.0 %

Weighted average yield 2.2 % 2.2 % 3.7 % 2.2 % 1.8 % 2.0 %

During the first quarter of 2023, management recorded a $12.8 million provision for credit loss related to isolated corporate bonds within the AFS investment securities portfolio.

As of March 31, 2023, two nonperforming corporate bonds remained in the portfolio, and with the exception of these two bonds, management does not believe any of the securities are impaired due to reasons of credit quality.

During the third quarter of 2021, we 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 consist of a two year forward start date and 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 beginning in the third quarter of 2023.

Securities within these swap agreements have maturity dates varying between 2028 and 2029.

LOAN PORTFOLIO

Our loan portfolio averaged $13.91 billion and $11.77 billion during the first nine months of 2022 and 2021, respectively.

As of September 30, 2022, total loans were $15.61 billion, an increase of $3.6 billion from December 31, 2021.

The increase in the average loan balance during the first nine months of 2022 when compared to the same period in 2021 was due to the acquisitions of Spirit, Landmark and Triumph.

See Note 2, Acquisitions, in the accompanying Notes to Consolidated Financial Statements for additional information related to these acquisitions.

This period-to-period increase was partially offset by the decline in average PPP loan balance, which totaled $56.6 million for the nine months ended September 30, 2022 as compared to $675.8 million for the same period ended September 30, 2021.

Our loan portfolio averaged $16.33 billion and $11.90 billion during the first three months of 2023 and 2022, respectively.

As of March 31, 2023, total loans were $16.56 billion, an increase of $413.0 million from December 31, 2022.

The increase in the average loan balance during the first three months of 2023 when compared to the same period in 2022 is primarily due to the acquisition of Spirit which provided $2.29 billion in total loans after purchase accounting discounts, coupled with continued widespread organic loan growth throughout our geographic markets over the comparative period.

The most significant components of the loan portfolio were loans to businesses (commercial loans, commercial real estate loans and agricultural loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans).

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Loan Portfolio

September 30, December 31,

March 31, December 31,

(In thousands) 2023 2022

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

Consumer loans were $373.2 million at September 30, 2022, or 2.4% of total loans, compared to $355.4 million, or 3.0% of total loans at December 31, 2021.

The increase in consumer loans from December 31, 2021, to September 30, 2022, was primarily due to the combined acquired and organic growth in direct consumer loans.

Real estate loans consist of C&D loans, single-family residential loans and CRE loans.

Real estate loans were $12.09 billion at September 30, 2022, or 77.5% of total loans, compared to $9.17 billion, or 76.3%, of total loans at December 31, 2021, an increase of $2.92 billion, or 31.9%.

Our C&D loans increased by $1.05 billion, or 78.9%, single family residential loans increased by $365.0 million, or 17.4%, and CRE loans increased by $1.51 billion, or 26.3%.

The increases were largely due to the Spirit acquisition noted above, coupled with strong organic loan growth, particularly in the third quarter of 2022.

In the near term, we expect to continue to manage our C&D and CRE portfolio concentration by developing deeper relationships with our customers.

Consumer loans were $331.4 million at March 31, 2023, or 2.0% of total loans, compared to $349.8 million, or 2.2% of total loans at December 31, 2022.

The decrease in consumer loans from December 31, 2022, to March 31, 2023, was primarily due to the expected seasonal decline in our credit card portfolio and loan payoffs and pay downs in direct consumer loans.

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

Real estate loans were $12.89 billion at March 31, 2023, or 77.8% of total loans, compared to $12.58 billion, or 77.9%, of total loans at December 31, 2022, an increase of $306.7 million, or 2.4%.

Our C&D loans increased by $210.5 million, or 8.2%, single family residential loans increased by $43.7 million, or 1.7%, and CRE loans increased by $52.5 million, or 0.7%.

The increases were due to diversified organic growth by type and geographic market during the quarter.

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 $2.79 billion at September 30, 2022, or 17.9% of total loans, compared to $2.16 billion, or 18.0% of total loans at December 31, 2021, an increase of $628.0 million, or 29.1%, which was primarily due to the combined acquired and organic loan growth.

Agricultural loans increased $94.8 million, or 56.2%, primarily due to seasonality of the portfolio, which normally peaks in the third quarter.

Total commercial loans were $2.89 billion at March 31, 2023, or 17.5% of total loans, compared to $2.84 billion, or 17.6% of total loans at December 31, 2022, an increase of $52.5 million, or 1.8%, which was due to organic loan growth.

Agricultural loans increased $15.0 million, or 7.3%.

Other loans mainly consist of mortgage warehouse lending and municipal loans.

Mortgage volume experienced a market driven decline during the first nine months of 2022 when compared to 2021, but was more than offset by the Spirit acquisition combined with organic growth, leading to an increase of $26.9 million in other loans.

Loan growth was widespread throughout our geographic markets and was generally broad-based by loan type and more than offset continued market-driven weakness in mortgage warehouse lending.

We are seeing loan growth in our metro, community and corporate banking groups and continue to add new producers in these areas.

Additionally, loan growth was weighted toward the latter half of the quarter as period-end loans exceeded average total loans of $15.32 billion for the third quarter of 2022.

Our loan pipeline consisting of all loan opportunities was $1.55 billion at September 30, 2022 compared to $2.31 billion at December 31, 2021.

Mortgage volume experienced a slight increase in demand during the first three months of 2023 as compared to December 31, 2022, and was coupled with continued organic growth in our municipal loans during the quarter, leading to an increase of $72.3 million in other loans.

Loan growth was widespread throughout our geographic markets and was generally broad-based by loan type.

We are seeing loan growth in our metro, community and corporate banking groups.

Our commercial loan pipeline consisting of all commercial loan opportunities was $1.05 billion at March 31, 2023 compared to $1.12 billion at December 31, 2022.

Loans approved and ready to close at the end of the quarter totaled $503.0 million.

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The credit card recovery group pursues account holders until it is determined, on a case-by-case basis, to be uncollectible.

Total non-performing assets decreased $13.7 million from December 31, 2021 to September 30, 2022.

Nonaccrual loans decreased by $10.7 million during the period and foreclosed assets held for sale and other real estate owned decreased by $2.4 million.

The decrease in nonaccrual loans was primarily due to an improvement in economic conditions from pandemic related stresses.

Total non-performing assets increased $8.9 million from December 31, 2022 to March 31, 2023.

Nonaccrual loans increased by $4.8 million during the period and foreclosed assets held for sale and other real estate owned were relatively flat with a decrease of $166,000 as compared to December 31, 2022.

The increase in nonaccrual assets was in part due to two isolated nonperforming corporate bonds in the investment securities portfolio totaling approximately $4.0 million.

Non-performing assets, including modifications to borrowers experiencing financial difficulty (“FDMs”, formerly known as troubled debt restructurings, or TDRs) and acquired foreclosed assets, as a percent of total assets were 0.27% at March 31, 2023, compared to 0.23% at December 31, 2022.

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

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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 decreased to $4.9 million as of September 30, 2022, compared to $6.9 million as of December 31, 2021.

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.

We have internal loan modification programs for borrowers experiencing financial difficulties.

Modifications to borrowers experiencing financial difficulties may include interest rate reductions, principal or interest forgiveness and/or term extensions.

We primarily use interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.

There were no loans modified for borrowers experiencing financial difficulties during the three month period ending March 31, 2023.

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 1.27% as of September 30, 2022.

The allowance for credit losses as a percent of total loans was 1.25% as of March 31, 2023.

Non-performing loans equaled 0.38% of total loans.

Non-performing assets were 0.23% of total assets, an 8 basis point decrease from December 31, 2021.

Non-performing assets were 0.26% of total assets, a 3 basis point increase from December 31, 2022.

The allowance for credit losses was 324% of non-performing loans.

Our annualized net charge-offs to average total loans for the first nine months of 2022 was 0.07%.

Annualized net credit card charge-offs to average total credit card loans were 1.41% for the first nine months of 2022, compared to 1.40% during the full year 2021, and 56 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.

Our annualized net charge-offs to average total loans for the first three months of 2023 was 0.03%.

Annualized net credit card charge-offs to average total credit card loans were 1.69% for the first three months of 2023, compared to 1.49% during the full year 2022, and 75 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.

Table 8 presents information concerning non-performing assets, including nonaccrual loans at amortized cost and foreclosed assets held for sale.

Non-performing Assets

September 30, December 31,

March 31, December 31, March 31,

(Dollars in thousands) 2023 2022 2022

8 unchanged sentences

Total non-performing assets $ 71,388 $ 62,472 $ 70,933

Performing TDRs $ 1,869 $ 4,289

Performing FDMs (formerly TDRs) $ 2,183 $ 1,849 $ 3,424

Allowance for credit losses to non-performing loans 324 % 334 % 278 %

Non-performing loans to total loans 0.38 % 0.37 % 0.53 %

Non-performing assets (including performing TDRs) to total assets 0.24 % 0.33 %

Non-performing assets (including performing FDMs (formerly TDRs)) to total assets 0.27 % 0.23 % 0.30 %

Non-performing assets to total assets 0.26 % 0.23 % 0.29 %

_______________________________________

(1) Includes nonaccrual TDRs of approximately $3,027,000 at September 30, 2022 and $2,650,000 at December 31, 2021.

The interest income on nonaccrual loans is not considered material for the three and nine month periods ended September 30, 2022 and 2021.

(1) Includes nonaccrual FDMs (formerly known as TDRs) of approximately $481,000 at March 31, 2023 and $1,622,000 at December 31, 2022.

For additional information about our implementation of accounting for FDMs, which replaced the accounting for TDRs, see Note 5, Loans and Allowance for Credit Losses.

The interest income on nonaccrual loans is not considered material for the three month periods ended March 31, 2023 and 2022.

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.

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, quantitative factors, and other qualitative considerations.

Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated for collective assessment.

We use statistically-based models that leverage assumptions about current and future economic conditions throughout the contractual life of the loan.

Expected credit losses are estimated by either lifetime loss rates or expected loss cash flows based on three key parameters:

probability-of-default (“PD”), exposure-at-default (“EAD”), and loss-given-default (“LGD”).

Future economic conditions are incorporated to the extent that they are reasonable and supportable.

Beyond the reasonable and supportable periods, the economic variables revert to a historical equilibrium at a pace dependent on the state of the economy reflected within the economic scenarios.

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.

Loans that have unique risk characteristics are evaluated on an individual basis.

These evaluations are typically performed on loans with a deteriorated internal risk rating.

For a collateral-dependent loan, our evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate.

This valuation is compared to the remaining outstanding principal balance of the loan.

If a loss is determined to be probable, the loss is included in the allowance for credit losses as a specific allocation.

An analysis of the allowance for credit losses on loans is shown in Table 9.

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Provision for credit losses 10,916 (19,914)

Acquisition adjustment for PCD loans 5,100 —

Balance, September 30, $ 197,589 $ 202,508

Balance, March 31, $ 206,557 $ 178,924

Loans charged off:

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Provision for Credit Losses

The amount of provision added to or released from the allowance during the three and nine months ended September 30, 2022 and 2021, and for the year ended December 31, 2021, was based on management’s judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic forecasts and conditions, past due and non-performing loans and net loss experience.

The amount of provision added to or released from the allowance during the three months ended March 31, 2023 and 2022, and for the year ended December 31, 2022, was based on management’s judgment, with consideration given to the composition and asset quality of the portfolio, historical loan loss experience, and assessment of current and expected economic forecasts and conditions.

It is management’s practice to review the allowance on a monthly basis, and after considering the factors previously noted, to determine the level of provision made to the allowance.

Allowance for Credit Losses Allocation

As of September 30, 2022, the allowance for credit losses reflected a decrease of approximately $7.7 million from December 31, 2021 while total loans increased by $3.59 billion over the same nine month period.

As of March 31, 2023, the allowance for credit losses reflected an increase of approximately $9.6 million from December 31, 2022 while total loans increased by $413.0 million over the same three month period.

The allocation in each category within the allowance generally reflects the overall changes in the loan portfolio mix.

The decrease in the allowance for credit losses during the first nine months of 2022 was primarily due to improved credit quality metrics and improved macroeconomic factors, coupled with the planned exit of several large oil and gas relationships during the year.

Additionally, there was a reduction of pandemic-era qualitative factors that were established based on unidentifiable risks with borrowers in at-risk industries.

The decrease was partially offset due to the Spirit acquisition, which provided $2.29 billion in total loans after purchase accounting discounts.

Our allowance for credit losses at September 30, 2022 was considered appropriate given the current economic environment and other related factors.

The increase in the allowance for credit losses during the first three months of 2023 was primarily due to the loan growth experienced during the quarter, as well as refreshed economic forecasts.

Our allowance for credit losses at March 31, 2023 was considered appropriate given the current economic environment and other related factors.

The following table sets forth the sum of the amounts of the allowance for credit losses attributable to individual loans within each category, or loan categories in general.

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Allocation of Allowance for Credit Losses

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(Dollars in thousands) Allowance

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Commercial 30,256 17.5 % 34,406 17.6 %

Other 3,956 2.3 % 1,941 2.7 %

Total $ 206,557 100.0 % $ 196,955 100.0 %

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

Deposits are our primary source of funding for earning assets and are primarily developed through our network of 230 financial centers as of September 30, 2022.

Deposits are our primary source of funding for earning assets and are primarily developed through our network of 231 financial centers as of March 31, 2023.

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 $250,000 or more and brokered deposits.

As of September 30, 2022, core deposits comprised 86.1% of our total deposits.

As of March 31, 2023, core deposits comprised 80.3% of our total deposits.

We continually monitor the funding requirements along with competitive interest rates in the markets we serve.

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We are continually monitoring and looking for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment.

Our total deposits as of September 30, 2022, were $22.15 billion, an increase of $2.78 billion from December 31, 2021, primarily driven by the acquisition of Spirit, which contributed $2.72 billion, net of fair value adjustments.

Noninterest bearing transaction

accounts, interest bearing transaction accounts and savings accounts totaled $18.32 billion at September 30, 2022, compared to $16.91 billion at December 31, 2021, an increase of $1.41 billion.

Total time deposits increased $1.37 billion to $3.83 billion at September 30, 2022, from $2.45 billion at December 31, 2021.

We had $1.82 billion and $466.0 million of brokered deposits at September 30, 2022, and December 31, 2021, respectively.

These category increases were primarily related to the Spirit acquisition.

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 as well as hone our product offerings to give customers flexibility of choice while maintaining the ability to adjust interest rates timely in the current rate environment.

Our total deposits as of March 31, 2023, were $22.45 billion, compared to $22.55 billion as of December 31, 2022.

Noninterest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $16.77 billion at March 31, 2023, compared to $17.78 billion at December 31, 2022, a decrease of $1.01 billion.

Total time deposits increased $910.2 million to $5.68 billion at March 31, 2023, from $4.77 billion at December 31, 2022.

We had $2.95 billion and $2.75 billion of brokered deposits at March 31, 2023, and December 31, 2022, respectively.

The change in the mix of deposits at March 31, 2023 as compared to December 31, 2022 reflects increased market competition and consumer migration toward higher rate deposits, principally certificates of deposits, given the rapid increase in interest rates that has occurred over the past year.

We made the strategic decision during the fourth quarter of 2022 to extend the duration of select wholesale deposits to complement our core deposit base and, due to advantageous rates, added brokered certificates of deposit with maturities of 6-12 months.

Additionally, we are continuing to hone our product offerings to give customers flexibility of choice while maintaining the ability to adjust interest rates timely in the current rate environment.

OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES

Our total debt was $1.33 billion and $1.72 billion at September 30, 2022 and December 31, 2021, respectively.

The outstanding balance for September 30, 2022 includes $934.1 million in FHLB short-term advances;

Our total debt was $1.39 billion and $1.23 billion at March 31, 2023 and December 31, 2022, respectively.

The outstanding balance for March 31, 2023 includes $1.00 billion in FHLB short-term advances;

$366.0 million in subordinated notes and unamortized debt issuance costs;

and $20.4 million of other long-term debt.

All of the FHLB short-term advances outstanding at the end of the third quarter 2022 are 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.

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

All of the FHLB short-term advances outstanding at the end of the first quarter 2023 are fixed rate, fixed term advances, which are due less than one year from origination and therefore are classified as short-term advances.

In March 2018, we issued $330.0 million in aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes (“Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes.

The Company incurred $3.6 million in debt issuance costs related to the offering.

We 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.

The Company assumed Fixed-to-Floating Rate Subordinated Notes in an aggregate principal amount, net of premium adjustments, of $37.4 million in connection with the Spirit acquisition in April 2022.

We assumed Fixed-to-Floating Rate Subordinated Notes in an aggregate principal amount, net of premium adjustments, of $37.4 million in connection with the Spirit acquisition in April 2022 (the “Spirit Notes”).

The Spirit Notes will mature on July 31, 2030, and initially bear interest at a fixed annual rate of 6.00%, payable quarterly, in arrears, to, but excluding, July 31, 2025.

From and including July 31, 2025, to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be the then-current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York (provided, that in the event the benchmark rate is less than zero, the benchmark rate will be deemed to be zero) plus 592 basis points, payable quarterly, in arrears.

During the third quarter of 2022, the Company redeemed the five issuances of trust preferred securities which had an outstanding aggregate principal amount of $56.2 million.

The Company recorded a loss of $365,000 related to the early retirement of debt, which represented the unamortized purchase discounts associated with the previously acquired trust preferred securities.

At September 30, 2022, total capital was $3.16 billion.

At March 31, 2023, total capital was $3.34 billion.

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

At September 30, 2022, our common equity to asset ratio was 11.66% compared to 13.14% at year-end 2021.

At March 31, 2023, our common equity to asset ratio was 12.11% compared to 11.91% at year-end 2022.

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 April 27, 2022, our shareholders approved amendments to our Articles of Incorporation to remove an $80.0 million cap on the aggregate liquidation preference associated with the preferred stock and increase the number of authorized shares of our Class A common stock from 175,000,000 to 350,000,000.

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.

On November 30, 2021, the Company redeemed all of the Series D Preferred Stock, including accrued and unpaid dividends.

On April 27, 2022, shareholders of the Company approved an increase in the number of authorized shares of its Class A common stock from 175,000,000 to 350,000,000.

The October Amended Articles classified and designated Series D Preferred Stock, Par Value $0.01 Per Share (“Series D Preferred Stock”), out of our authorized preferred stock.

On April 27, 2022, our shareholders approved an amendment to our Articles of Incorporation to remove the classification and designation for the Series D Preferred Stock.

As of March 31, 2023, there were no shares of preferred stock issued or outstanding.

Stock Repurchase Program

Effective July 23, 2021, our Board of Directors approved an amendment to the Company’s stock repurchase program originally approved in October 2019 (“2019 Program”) that increased the amount of our common stock that could be repurchased under the 2019 Program from a maximum of $180 million to a maximum of $276.5 million and extended the term of the 2019 Program from October 31, 2021, to October 31, 2022.

During January 2022, the Company substantially exhausted the remaining capacity under the 2019 Program.

As a result, in January 2022, the Company’s Board of Directors authorized a new stock repurchase program (the “2022 Program”) under which the Company may repurchase up to $175.0 million of its Class A common stock currently issued and outstanding.

The 2022 Program will terminate on January 31, 2024 (unless terminated sooner).

During the three month period ended September 30, 2022, the Company repurchased 1,883,713 shares at an average price of $23.91 per share under the 2022 Program.

During the nine month period ended September 30, 2022, the Company repurchased 513,725 shares at an average price of $31.25 per share under the 2019 Program and 3,919,037 shares at an average price of $24.26 per share under the 2022 Program, respectively.

The 2022 Program repurchases were all completed during the second and third quarters of 2022.

During the three and nine month periods ended September 30, 2021, the Company repurchased 1,806,205 shares at an average pri ce of $28.48 per share and 1,937,121 shares at an average price of $28.14 per share, respectively, under the 2019 Program.

Under the 2022 Program, which replaced the 2019 Program, the Company may repurchase shares of its common stock through open market and privately negotiated transactions or otherwise.

The timing, pricing, and amount of any repurchases under the 2022 Program will be determined by the Company’s management at its discretion based on a variety of factors, including, but not limited to, trading volume and market price of the Company’s common stock, corporate considerations, the Company’s working capital and investment requirements, general market and economic conditions, and legal requirements.

The 2022 Program does not obligate the Company to repurchase any common stock and may be modified, discontinued, or suspended at any time without prior notice.

The Company anticipates funding for this 2022 Program to come from available sources of liquidity, including cash on hand and future cash flow.

Effective July 23, 2021, our Board of Directors approved an amendment to our stock repurchase program originally approved in October 2019 (“2019 Program”) that increased the amount of our common stock that could be repurchased under the 2019 Program from a maximum of $180.0 million to a maximum of $276.5 million and extended the term of the 2019 Program from October 31, 2021, to October 31, 2022.

During January 2022, we substantially exhausted the remaining capacity under the 2019 Program, and our Board of Directors authorized a new stock repurchase program (the “2022 Program”) under which we may repurchase up to $175.0 million of our Class A common stock currently issued and outstanding.

The 2022 Program replaced the 2019 Program and will terminate on January 31, 2024 (unless terminated sooner).

No shares were repurchased during the three month period ended March 31, 2023.

During the three month period ended March 31, 2022, we repurchased 513,725 shares at an average pri ce of $31.25 per share under the 2019 Program.

Under the 2022 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 2022 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 2022 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 2022 Program to come from available sources of liquidity, including cash on hand and future cash flow.

Cash Dividends

We declared cash dividends on our common stock of $0.57 per share for the first nine months of 2022 compared to $0.54 per share for the first nine months of 2021, an increase of $0.03, or 6%.

We declared cash dividends on our common stock of $0.20 per share for the first three months of 2023 compared to $0.19 per share for the first three months of 2022, an increase of $0.01, or 5%.

The timing and amount of future dividends are at the discretion of our Board of Directors and will depend upon our consolidated earnings, financial condition, liquidity and capital requirements, the amount of cash dividends paid to us by our subsidiaries, applicable government regulations and policies and other factors considered relevant by our Board of Directors.

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See the Liquidity and Market Risk Management discussions of Item 3 – Quantitative and Qualitative Disclosures About Market Risk of this Quarterly Report on Form 10Q for additional information regarding the parent company’s liquidity.

The redemption of our trust preferred securities during the third quarter of 2022 did not have a meaningful impact on the Parent Company’s liquidity.

We continually assess our 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.

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

The Company and Simmons Bank must hold a capital conservation buffer composed of

common equity Tier 1 capital above its minimum risk-based capital requirements.

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, 2022, we meet all capital adequacy requirements to which we are subject.

Management believes that, as of March 31, 2023, 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.

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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, 2022 and December 31, 2021 are presented in Table 12 below:

Our risk-based capital ratios at March 31, 2023 and December 31, 2022 are presented in Table 11 below:

Risk-Based Capital

September 30, December 31,

March 31, December 31,

(Dollars in thousands) 2023 2022

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Goodwill and other intangible assets (1,410,141) (1,412,667)

Unrealized loss (gain) on available-for-sale securities, net of income taxes 567,730 10,545

Unrealized loss on available-for-sale securities, net of income taxes 470,681 517,560

Total Tier 1 capital 2,462,187 2,466,874

Tier 2 capital:

Trust preferred securities and subordinated debt 365,951 384,131

Subordinated notes and debentures 366,027 365,989

Qualifying allowance for credit losses and reserve for unfunded commitments 173,077 115,627

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Total risk-based capital ratio 8.00 % 8.00 %

_______________________________________

Regulatory Capital

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 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.

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 rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios with a more risk-sensitive approach.

The Basel III Capital Rules established risk-weighting categories depending on the nature of the assets, generally ranging from 0% for U.S.

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As of December 31, 2017, the Company exceeded $15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply and trust preferred securities were no longer included as Tier 1 capital.

All of the Company’s trust preferred securities were redeemed during the quarter ended September 30, 2022.

Qualifying subordinated debt of $366.0 million is included as Tier 2 and total capital as of September 30, 2022.

All of the Company’s trust preferred securities were redeemed during the third quarter 2022.

Qualifying subordinated debt of $366.0 million is included as Tier 2 and total capital as of March 31, 2023.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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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, dividends, customer service, lending capacity and lending activity, investment in digital channels, critical accounting policies and estimates, net interest margin, noninterest 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, income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, repricing of loans and time deposits, 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 pending and future litigation, including the results of the overdraft fee litigation against the Company that is described in this quarterly report, staffing initiatives, 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:

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, dividends, customer service, lending capacity and lending activity, investment in digital channels, critical accounting policies and estimates, net interest margin, noninterest revenue, noninterest expense, 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, income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, repricing of loans and time deposits, 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 pending and future litigation, including the results of the overdraft fee litigation against the Company that is described in this quarterly report, staffing initiatives, estimated cost savings associated with the Company’s Better Bank Initiative, acquisition strategy and activity, legal and regulatory limitations and compliance and competition.

These forward-looking statements are based on various assumptions and involve inherent 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, including policies of the Federal Reserve, 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 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 interest rates and related governmental policies;

changes in the level and composition of deposits, loan demand, deposit flows, credit quality 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;

changes in customer behaviors, including consumer spending, borrowing and saving habits;

residual effects of the COVID-19 pandemic;

cyber threats, attacks or events;

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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;

possible adverse rulings, judgements, settlements, fines and other outcomes of pending or future litigation or government actions;

market disruptions, including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (including the ongoing military conflict between Russia and Ukraine) or other major events, or the prospect of these events;

soundness of other financial institutions and indirect exposure related to the closings of Silicon Valley Bank (SVB), Signature Bank, First Republic Bank and Silvergate Bank and their impact on the broader market through other customers, suppliers and partners (or that the conditions which resulted in the liquidity concerns with SVB, First Republic Bank, Signature Bank and Silvergate Bank may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships);

the loss of key employees;

increased unemployment;

labor shortages;

claims, damages;

changes in accounting principles relating to loan loss recognition (current expected credit losses);

the Company’s ability to manage and successfully integrate its mergers and acquisitions and to fully realize cost savings and other benefits associated with those transactions;

government legislation;

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, 2021, 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.

Additional information on factors that might affect the Company’s financial results is included in 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, 2022, 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.

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GAAP RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The tables below present computations of adjusted earnings (net income excluding certain items {gain on sale of branches, loss from early retirement of TruPS, gain on sale of intellectual property, merger related costs, net branch right sizing costs, and the Day 2 CECL Provision}) (non-GAAP), and adjusted 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), adjusted other income (non-GAAP) and adjusted noninterest expense (non-GAAP).

The tables below present computations of adjusted earnings (net income excluding certain items {gain on insurance settlement, merger related costs, and net branch right sizing costs}) (non-GAAP), and adjusted 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), adjusted noninterest income (non-GAAP) and adjusted noninterest expense (non-GAAP).

Adjusted items are included in financial results presented in accordance with generally accepted accounting principles (US GAAP).

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• Investor presentations of Company performance

We believe the presentation “adjusted earnings” on a diluted per share basis (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 adjusted financial measures of the Company and predicting future performance.

We believe the presentation of “adjusted earnings” on a diluted per share basis (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 adjusted 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 certain items to be relevant to ongoing financial performance on a per share basis.

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• Investor presentations of Company performance

We have $1.442 billion and $1.252 billion total goodwill and other intangible assets for the periods ended September 30, 2022 and December 31, 2021, respectively.

We have $1.446 billion and $1.449 billion total goodwill and other intangible assets for the periods ended March 31, 2023 and December 31, 2022, 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).

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Three Months Ended

September 30, Nine Months Ended

September 30,

September 30, June 30, September 30, September 30,

March 31, December 31, March 31,

(In thousands, except per share data) 2023 2022 2022

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Certain items:

Gain on sale of branches — — — (5,316)

Loss from early retirement of TruPS 365 — 365 —

Gain on sale of intellectual property (750) — (750) —

Gain on insurance settlement — (4,074) —

Merger related costs 1,396 35 1,886

Branch right sizing (net) 979 1,104 909

Day 2 CECL Provision — 33,779 33,779 —

Tax effect (1)

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Certain items:

Gain on sale of branches — — — (0.05)

Loss from early retirement of TruPS — — — —

Gain on sale of intellectual property (0.01) — (0.01) —

Gain on insurance settlement — (0.03) —

Merger related costs 0.01 — 0.01

Branch right sizing (net) 0.01 0.01 0.01

Day 2 CECL Provision — 0.27 0.28 —

Tax effect (1)

4 unchanged sentences

(1) Effective tax rate of 26.135%.

(2) See Note 17, Earnings Per Share, for number of shares used to determine EPS.

See Table 14 below for the reconciliation of adjusted other income and adjusted noninterest expense for the periods presented.

Reconciliation of Adjusted Other Income and Adjusted Noninterest Expense (non-GAAP)

(2) See Note 17, Earnings Per Share (“EPS”), for number of shares used to determine EPS.

See Table 13 below for the reconciliation of adjusted noninterest income and adjusted noninterest expense for the periods presented.

Reconciliation of Adjusted Noninterest Income and Adjusted Noninterest Expense (non-GAAP)

Three Months Ended

September 30, Nine Months Ended

September 30,

September 30, June 30, September 30, September 30,

March 31, December 31, March 31,

(In thousands) 2023 2022 2022

Other income $ 6,658 $ 6,837 $ 20,761 $ 25,308

Noninterest income $ 45,835 $ 44,647 $ 42,218

Certain items:

Gain on sale of branches — — — (5,316)

Loss from early retirement of TruPS 365 — 365 —

Gain on sale of intellectual property (750) — (750) —

Branch right sizing 65 88 153 (367)

Gain on insurance settlement — (4,074) —

Total certain items — (4,074) —

Adjusted other income (non-GAAP) $ 6,338 $ 6,925 $ 20,529 $ 19,625

Adjusted noninterest income (non-GAAP) $ 45,835 $ 40,573 $ 42,218

Noninterest expense $ 143,228 $ 142,575 $ 128,417

6 unchanged sentences

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

September 30, December 31,

March 31, December 31,

(In thousands, except per share data) 2023 2022

10 unchanged sentences

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

September 30, December 31,

March 31, December 31,

(Dollars in thousands) 2023 2022

14 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis