SIMMONS FIRST NATIONAL CORP 10-Q

Item 1. Financial Statements (Unaudited) Simmons First National Corporation Consolidated Balance Sheets June 30, 2023 and December 31, 2022 June 30, December 31, (In thousands, except share data) 2023 2022 (Unaudited) ASSETS Cash and noninterest bearing balances due from banks $ 181,268 $ 200,616 Interest bearing balances due from banks and federal funds sold 564,644 481,506 Cash and cash equivalents 745,912 682,122 Interest bearing balances due from banks - time 545 795 Investment securities: Held-to-maturity, net of allowance for credit losses of $ 3,214 and $ 1,388 at June 30, 2023 and December 31, 2022, respectively 3,756,754 3,759,706 Available-for-sale, net of allowance for credit losses of $ 2,396 at June 30, 2023 (amortized cost of $ 4,012,265 and $ 4,331,413 at June 30, 2023 and December 31, 2022, respectively) 3,579,758 3,852,854 Total investments 7,336,512 7,612,560 Mortgage loans held for sale 10,342 3,486 Loans 16,833,653 16,142,124 Allowance for credit losses on loans ( 209,966 ) ( 196,955 ) Net loans 16,623,687 15,945,169 Premises and equipment 562,025 548,741 Foreclosed assets and other real estate owned 3,909 2,887 Interest receivable 103,431 102,892 Bank owned life insurance 494,370 491,340 Goodwill 1,320,799 1,319,598 Other intangible assets 120,758 128,951 Other assets 636,833 622,520 Total assets $ 27,959,123 $ 27,461,061 LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Noninterest bearing transaction accounts $ 5,264,962 $ 6,016,651 Interest bearing transaction accounts and savings deposits 10,866,078 11,762,885 Time deposits 6,357,682 4,768,558 Total deposits 22,488,722 22,548,094 Federal funds purchased and securities sold under agreements to repurchase 102,586 160,403 Other borrowings 1,373,339 859,296 Subordinated notes and debentures 366,065 365,989 Accrued interest and other liabilities 272,085 257,917 Total liabilities 24,602,797 24,191,699 Stockholders’ equity: Common stock, Class A, $ 0.01 par value; 350,000,000 shares authorized at June 30, 2023 and December 31, 2022; 126,224,707 and 127,046,654 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively 1,262 1,270 Surplus 2,516,398 2,530,066 Undivided profits 1,308,654 1,255,586 Accumulated other comprehensive loss ( 469,988 ) ( 517,560 ) Total stockholders’ equity 3,356,326 3,269,362 Total liabilities and stockholders’ equity $ 27,959,123 $ 27,461,061 See Condensed Notes to Consolidated Financial Statements. 3 Simmons First National Corporation Consolidated Statements of Income Three and Six Months Ended June 30, 2023 and 2022 Three Months Ended June 30, Six Months Ended June 30, (In thousands, except per share data) 2023 2022 2023 2022 (Unaudited) (Unaudited) INTEREST INCOME Loans, including fees $ 244,292 $ 163,578 $ 471,790 $ 290,754 Interest bearing balances due from banks and federal funds sold 4,023 1,117 6,806 1,766 Investment securities 48,751 37,848 97,525 71,560 Mortgage loans held for sale 154 200 236 390 Other loans held for sale — 2,063 — 2,063 TOTAL INTEREST INCOME 297,220 204,806 576,357 366,533 INTEREST EXPENSE Deposits 108,364 9,754 195,892 16,571 Federal funds purchased and securities sold under agreements to repurchase 318 119 641 187 Other borrowings 18,612 4,844 27,460 9,623 Subordinated notes and debentures 6,696 4,990 11,299 9,447 TOTAL INTEREST EXPENSE 133,990 19,707 235,292 35,828 NET INTEREST INCOME 163,230 185,099 341,065 330,705 Provision for credit losses 61 33,859 24,277 13,945 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 163,169 151,240 316,788 316,760 NONINTEREST INCOME Service charges on deposit accounts 12,882 11,379 25,319 22,075 Debit and credit card fees 7,986 8,224 15,938 15,673 Wealth management fees 7,440 7,214 14,805 15,182 Mortgage lending income 2,403 2,240 3,973 6,790 Bank owned life insurance income 2,555 2,563 5,528 5,269 Other service charges and fees 2,262 1,871 4,544 3,508 Loss on sale of securities, net ( 391 ) ( 150 ) ( 391 ) ( 204 ) Other income 9,843 6,837 21,099 14,103 TOTAL NONINTEREST INCOME 44,980 40,178 90,815 82,396 NONINTEREST EXPENSE Salaries and employee benefits 74,723 74,135 151,761 142,041 Occupancy expense, net 11,410 11,004 22,988 21,027 Furniture and equipment expense 5,128 5,104 10,179 9,879 Other real estate and foreclosure expense 289 142 475 485 Deposit insurance 5,201 2,812 10,094 4,650 Merger related costs 19 19,133 1,415 21,019 Other operating expenses 42,926 44,483 86,012 86,129 TOTAL NONINTEREST EXPENSE 139,696 156,813 282,924 285,230 INCOME BEFORE INCOME TAXES 68,453 34,605 124,679 113,926 Provision for income taxes 10,139 7,151 20,776 21,377 NET INCOME $ 58,314 $ 27,454 $ 103,903 $ 92,549 BASIC EARNINGS PER SHARE $ 0.46 $ 0.21 $ 0.82 $ 0.77 DILUTED EARNINGS PER SHARE $ 0.46 $ 0.21 $ 0.82 $ 0.77 See Condensed Notes to Consolidated Financial Statements. 4 Simmons First National Corporation Consolidated Statements of Comprehensive Income (Loss) Three and Six Months Ended June 30, 2023 and 2022 Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 (Unaudited) (Unaudited) NET INCOME $ 58,314 $ 27,454 $ 103,903 $ 92,549 OTHER COMPREHENSIVE INCOME (LOSS) Unrealized holding (losses) gains arising during the period on available-for-sale securities ( 34,464 ) 11,763 35,499 ( 453,777 ) Less: Reclassification adjustment for realized losses included in net income ( 391 ) ( 150 ) ( 391 ) ( 204 ) Less: Realized losses on available-for-sale securities interest rate hedges ( 28,506 ) ( 22,832 ) ( 14,961 ) ( 60,031 ) Net unrealized losses on securities transferred from available-for-sale to held-to-maturity during the period — ( 206,682 ) — ( 206,682 ) Less: Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity ( 6,505 ) ( 4,785 ) ( 13,553 ) ( 4,701 ) Other comprehensive income (loss), before tax effect 938 ( 167,152 ) 64,404 ( 595,523 ) Less: Tax effect of other comprehensive income (loss) 245 ( 43,685 ) 16,832 ( 155,640 ) TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 693 ( 123,467 ) 47,572 ( 439,883 ) COMPREHENSIVE INCOME (LOSS) $ 59,007 $ ( 96,013 ) $ 151,475 $ ( 347,334 ) See Condensed Notes to Consolidated Financial Statements. 5 Simmons First National Corporation Consolidated Statements of Cash Flows Six Months Ended June 30, 2023 and 2022 (In thousands) June 30, 2023 June 30, 2022 (Unaudited) OPERATING ACTIVITIES Net income $ 103,903 $ 92,549 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 23,954 24,230 Provision for credit losses 24,277 13,945 Loss on sale of investments 391 204 Net amortization (accretion) of investment securities and assets 6,295 ( 24,494 ) Net amortization on borrowings 76 192 Stock-based compensation expense 8,018 8,164 Gain on sale of foreclosed assets and other real estate owned ( 225 ) ( 290 ) Gain on sale of mortgage loans held for sale ( 3,683 ) ( 4,333 ) Gain on sale of loans — ( 228 ) Deferred income taxes ( 335 ) 917 Income from bank owned life insurance ( 6,716 ) ( 5,269 ) Originations of mortgage loans held for sale ( 133,076 ) ( 329,833 ) Proceeds from sale of mortgage loans held for sale 129,903 356,085 Changes in assets and liabilities: Interest receivable ( 539 ) ( 1,547 ) Other assets ( 1,548 ) ( 10,064 ) Accrued interest and other liabilities 27,658 57,874 Income taxes payable ( 19,421 ) ( 245 ) Net cash provided by operating activities 158,932 177,857 INVESTING ACTIVITIES Net change in loans ( 698,580 ) ( 835,002 ) Proceeds from sale of loans 6,657 15,556 Net change in due from banks - time 250 347 Purchases of premises and equipment, net ( 18,718 ) ( 17,000 ) Proceeds from sale of foreclosed assets and other real estate owned 1,477 2,819 Proceeds from maturities of available-for-sale securities 296,256 762,094 Purchases of available-for-sale securities ( 1,526 ) ( 259,586 ) Proceeds from maturities of held-to-maturity securities 36,583 30,848 Purchases of held-to-maturity securities ( 45,921 ) ( 329,660 ) Proceeds from bank owned life insurance death benefits 3,686 — Purchase of Spirit of Texas Bancshares, Inc. — 276,396 Net cash used in investing activities ( 419,836 ) ( 353,188 ) FINANCING ACTIVITIES Net change in deposits ( 59,003 ) ( 49,701 ) Dividends paid on common stock ( 50,835 ) ( 45,844 ) Net change in other borrowed funds 514,043 ( 315,778 ) Net change in federal funds purchased and securities sold under agreements to repurchase ( 57,817 ) ( 30,302 ) Net shares cancelled under stock compensation plans ( 2,505 ) ( 3,905 ) Shares issued under employee stock purchase plan 833 1,151 Repurchases of common stock ( 20,022 ) ( 66,096 ) Net cash provided by (used in) financing activities 324,694 ( 510,475 ) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 63,790 ( 685,806 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 682,122 1,650,653 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 745,912 $ 964,847 See Condensed Notes to Consolidated Financial Statements. 6 Simmons First National Corporation Consolidated Statements of Stockholders’ Equity Three Months Ended June 30, 2023 and 2022 (In thousands, except share data) Common Stock Surplus Accumulated Other Comprehensive (Loss) Income Undivided Profits Total Three Months Ended June 30, 2023 Balance, March 31, 2023 (Unaudited) $ 1,273 $ 2,533,589 $ ( 470,681 ) $ 1,275,720 $ 3,339,901 Comprehensive income — — 693 58,314 59,007 Stock-based compensation plans, net – 70,602 shares — 2,820 — — 2,820 Stock repurchases – 1,128,087 shares ( 11 ) ( 20,011 ) — — ( 20,022 ) Dividends on common stock – $ 0.20 per share — — — ( 25,380 ) ( 25,380 ) Balance, June 30, 2023 (Unaudited) $ 1,262 $ 2,516,398 $ ( 469,988 ) $ 1,308,654 $ 3,356,326 Three Months Ended June 30, 2022 Balance, March 31, 2022 (Unaudited) $ 1,125 $ 2,150,453 $ ( 326,961 ) $ 1,136,990 $ 2,961,607 Comprehensive (loss) income — — ( 123,467 ) 27,454 ( 96,013 ) Stock-based compensation plans, net – 42,459 shares — 3,893 — — 3,893 Stock issued for Spirit acquisition – 18,275,074 shares 183 464,735 — — 464,918 Stock repurchases – 2,035,324 shares ( 20 ) ( 50,021 ) — — ( 50,041 ) Dividends on common stock – $ 0.19 per share — — — ( 24,469 ) ( 24,469 ) Balance, June 30, 2022 (Unaudited) $ 1,288 $ 2,569,060 $ ( 450,428 ) $ 1,139,975 $ 3,259,895 See Condensed Notes to Consolidated Financial Statements. 7 Simmons First National Corporation Consolidated Statements of Stockholders’ Equity Six Months Ended June 30, 2023 and 2022 (In thousands, except share data) Common Stock Surplus Accumulated Other Comprehensive (Loss) Income Undivided Profits Total Six Months Ended June 30, 2023 Balance, December 31, 2022 $ 1,270 $ 2,530,066 $ ( 517,560 ) $ 1,255,586 $ 3,269,362 Comprehensive income — — 47,572 103,903 151,475 Stock issued for employee stock purchase plan – 42,510 shares — 833 — — 833 Stock-based compensation plans, net – 263,630 shares 3 5,510 — — 5,513 Stock repurchases – 1,128,087 shares ( 11 ) ( 20,011 ) — — ( 20,022 ) Dividends on common stock – $ 0.40 per share — — — ( 50,835 ) ( 50,835 ) Balance, June 30, 2023 (Unaudited) $ 1,262 $ 2,516,398 $ ( 469,988 ) $ 1,308,654 $ 3,356,326 Six Months Ended June 30, 2022 Balance, December 31, 2021 $ 1,127 $ 2,164,989 $ ( 10,545 ) $ 1,093,270 $ 3,248,841 Comprehensive (loss) income — — ( 439,883 ) 92,549 ( 347,334 ) Stock issued for employee stock purchase plan – 59,475 shares 1 1,150 — — 1,151 Stock-based compensation plans, net – 286,820 shares 2 4,257 — — 4,259 Stock issued for Spirit acquisition – 18,275,074 shares 183 464,735 — — 464,918 Stock repurchases – 2,549,049 shares ( 25 ) ( 66,071 ) — — ( 66,096 ) Dividends on common stock – $ 0.38 per share — — — ( 45,844 ) ( 45,844 ) Balance, June 30, 2022 (Unaudited) $ 1,288 $ 2,569,060 $ ( 450,428 ) $ 1,139,975 $ 3,259,895 See Condensed Notes to Consolidated Financial Statements. 8 SIMMONS FIRST NATIONAL CORPORATION CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: PREPARATION OF INTERIM FINANCIAL STATEMENTS Description of Business and Organizational Structure Simmons First National Corporation (“Company”) is a Mid-South financial holding company headquartered in Pine Bluff, Arkansas, and the parent company of Simmons Bank, an Arkansas state-chartered bank that has been in operation since 1903 (“Simmons Bank” or the “Bank”). Simmons First Insurance Services, Inc. and Simmons First Insurance Services of TN, LLC are wholly-owned subsidiaries of Simmons Bank and are insurance agencies that offer various lines of personal and corporate insurance coverage to individual and commercial customers. The Company, through its subsidiaries, offers, among other things, consumer, real estate and commercial loans; checking, savings and time deposits; and specialized products and services (such as credit cards, trust and fiduciary services, investments, agricultural finance lending, equipment lending, insurance and Small Business Administration (“SBA”) lending) from approximately 231 financial centers as of June 30, 2023, located throughout market areas in Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosures for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2022, was derived from audited financial statements. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of interim results of operations, including normal recurring accruals. Significant intercompany accounts and transactions have been eliminated in consolidation. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 27, 2023. The preparation of financial statements, in accordance with accounting principles generally accepted in the United States (“US GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income items and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements and actual results may differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, the valuation of acquired loans, valuation of goodwill and subsequent impairment analysis, stock-based compensation plans and income taxes. Management obtains third party valuations to assist in valuing certain aspects of these material estimates, as appropriate, including independent appraisals for significant properties in connection with the determination of the allowance for credit losses and the fair value of acquired loans. Assumptions used in the goodwill impairment analysis involve internally projected forecasts, coupled with market and third-party data. These material estimates could change as a result of the uncertainty in current macroeconomic conditions and other factors that are beyond the Company’s control and could cause actual results to differ materially from those projected. 9 Recently Adopted Accounting Standards Investment-Income Taxes - In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (“ASU 2023-02”), that introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of income tax expense (benefit). ASU 2023-02 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2023, with early adoption permitted. The Company elected to early adopt ASU 2023-02 and apply the proportional amortization method for all income tax credits during the first quarter 2023 by utilizing the modified retrospective method. The adoption of ASU 2023-02 did not have a material impact on the Company’s results of operations, financial position or disclosures. Credit Losses on Financial Instruments - In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings made to borrowers experiencing financial difficulty. ASU 2022-02 was effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2022-02 effective January 1, 2023 on a prospective basis. As a result, comparative disclosures to prior periods will not be available until such time as both periods disclosed are subject to the new guidance. The adoption of ASU 2022-02 did not have a material impact on the Company’s results of operations or financial position. See Note 5, Loans and Allowance for Credit Losses, for additional information. Fair Value Hedging - In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method (“ASU 2022-01”), which clarifies the guidance on fair value hedge accounting of interest rate risk for portfolios of financial assets. This ASU amends the guidance in ASU 2017-12 that, among other things, established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible. ASU 2022-01 renames that method the “portfolio layer” method and expands the scope of this guidance to allow entities to apply the portfolio layer method to portfolios of all financial assets, including both prepayable and nonprepayable financial assets. This scope expansion is consistent with the FASB’s efforts to simplify hedge accounting and allows entities to apply the same method to similar hedging strategies. ASU 2022-01 was effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The adoption of 2022-01 did not have a material impact on the Company’s results of operations, financial position or disclosures. Reference Rate Reform – In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides relief for companies preparing for discontinuation of interest rates such as LIBOR. LIBOR is a benchmark interest rate referenced in a variety of agreements that are used by numerous entities. On March 5, 2021, the U.K. Financial Conduct Authority (“FCA”) announced that the majority of LIBOR rates will no longer be published after December 31, 2021. Effective January 1, 2022, the ICE Benchmark Administration Limited, the administrator of the LIBOR, ceased the publication of one-week and two-month USD LIBOR and will cease the publications of the remaining tenors of USD LIBOR (one, three, six and 12-month) immediately after June 30, 2023. Other interest rates used globally could also be discontinued for similar reasons. ASU 2020-04 provides optional expedients and exceptions to contracts, hedging relationships and other transactions affected by reference rate reform. The main provisions for contract modifications include optional relief by allowing the modification as a continuation of the existing contract without additional analysis and other optional expedients regarding embedded features. Optional expedients for hedge accounting permits changes to critical terms of hedging relationships and to the designated benchmark interest rate in a fair value hedge and also provides relief for assessing hedge effectiveness for cash flow hedges. Companies are able to apply ASU 2020-04 immediately; however, the guidance will only be available for a limited time (generally through December 31, 2022). The Company formed a LIBOR Transition Team in 2020, has created standard LIBOR replacement language for new and modified loan notes, and is monitoring the remaining loans with LIBOR rates monthly to ensure progress in updating these loans with acceptable LIBOR replacement language or converting them to other interest rates. During 2021, the Company did not offer LIBOR-indexed rates on loans which it originated, although it did participate in some shared credit agreements originated by other banks subject to the Company’s determination that the LIBOR replacement language in the loan documents met the Company’s standards. Pursuant to the Joint Regulatory Statement on LIBOR transition issued in October 2021, the Company’s policy, as of January 1, 2022, is not 10 to enter into any new LIBOR-based credit agreements and not extend, renew, or modify prior LIBOR credit agreements without requiring conversion of the agreements to other interest rates. The adoption of ASU 2020-04 has not had a material impact on the Company’s financial position or results of operations. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), which clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the changes in the interest rates used for margining, discounting, or contract price alignment for derivative instruments that are being implemented as part of the market-wide transition to new reference rates (commonly referred to as the “discounting transition”). ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. ASU 2021-01 did not have a material impact on the Company’s financial position or results of operations. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”). ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. Leases - In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors-Certain Leases with Variable Lease Payments (“ASU 2021-05”), that amends lease classification requirements for lessors. In accordance with ASU 2021-05, lessors should classify and account for a lease that have variable lease payments that do not depend on a reference index rate as an operating lease if both of the following criteria are met: i) the lease would have been classified as a sales-type lease or a direct financing lease under the previous lease classification criteria and ii) sales-type or direct financing lease classification would result in a Day 1 loss. ASU 2021-05 was effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The adoption of ASU 2021-05 did not have a material impact on the Company’s results of operations, financial position or disclosures. In the first quarter of 2023, the Company refined the current expected credit losses calculation process by improving systems, models, processes, methodology, and assumptions used within the calculation. After multiple parallel runs during the first quarter 2023 with the former process, it was determined that the changes did not and are not expected to result in material differences of results. There have been no other significant changes to the Company’s accounting policies disclosed in Note 1, Summary of Significant Accounting Policies, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Presently, the Company is not aware of any other changes to the Accounting Standards Codification that will have a material impact on its present or future financial position or results of operations. NOTE 2: ACQUISITIONS Spirit of Texas Bancshares, Inc. On April 8, 2022, the Company completed its merger with Spirit of Texas Bancshares, Inc. (“Spirit”) pursuant to the terms of the Agreement and Plan of Merger dated as of November 18, 2021 (“Spirit Agreement”), at which time Spirit merged with and into the Company, with the Company continuing as the surviving corporation. The Company issued 18,275,074 shares of its common stock valued at approximately $ 464.9 million as of April 8, 2022, plus $ 1,393,508.90 in cash, in exchange for all outstanding shares of Spirit capital stock (and common stock equivalents) to effect the merger. Prior to the acquisition, Spirit, headquartered in Conroe, Texas, conducted banking business through its subsidiary bank, Spirit of Texas Bank SSB, from 35 branches located primarily in the Texas Triangle - consisting of Dallas-Fort Worth, Houston, San Antonio and Austin metropolitan areas - with additional locations in the Bryan-College Station, Corpus Christi and Tyler metropolitan areas, along with offices in North Central and South Texas. Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $ 3.11 billion in assets, including approximately $ 2.29 billion in loans (inclusive of loan discounts), and approximately $ 2.72 billion in deposits. Goodwill of $ 174.1 million was recorded as a result of the transaction. The merger strengthened the Company’s position in the Texas market and brought forth additional opportunities in the Company’s current footprint, which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes. 11 A summary, at fair value, of the assets acquired and liabilities assumed in the Spirit acquisition, as of the acquisition date, is as follows: (In thousands) Acquired from Spirit Fair Value Adjustments Fair Value Assets Acquired Cash and due from banks $ 277,790 $ — $ 277,790 Investment securities 362,088 ( 13,401 ) 348,687 Loans acquired 2,314,085 ( 19,925 ) 2,294,160 Allowance for credit losses on loans ( 17,005 ) 7,382 ( 9,623 ) Premises and equipment 84,135 ( 19,074 ) 65,061 Bank owned life insurance 36,890 — 36,890 Goodwill 77,681 ( 77,681 ) — Core deposit and other intangible assets 6,245 32,386 38,631 Other assets 58,403 ( 3,411 ) 54,992 Total assets acquired $ 3,200,312 $ ( 93,724 ) $ 3,106,588 Liabilities Assumed Deposits: Noninterest bearing transaction accounts $ 825,228 $ ( 534 ) $ 824,694 Interest bearing transaction accounts and savings deposits 1,383,663 — 1,383,663 Time deposits 509,209 1,081 510,290 Total deposits 2,718,100 547 2,718,647 Other borrowings 37,547 503 38,050 Subordinated debentures 36,491 879 37,370 Accrued interest and other liabilities 23,667 ( 3,311 ) 20,356 Total liabilities assumed 2,815,805 ( 1,382 ) 2,814,423 Equity 384,507 ( 384,507 ) — Total equity assumed 384,507 ( 384,507 ) — Total liabilities and equity assumed $ 3,200,312 $ ( 385,889 ) $ 2,814,423 Net assets acquired 292,165 Purchase price 466,311 Goodwill $ 174,146 During 2023, the Company finalized its analysis of the loans acquired along with other acquired assets and assumed liabilities related to the Spirit acquisition. The Company’s operating results include the operating results of the acquired assets and assumed liabilities of Spirit subsequent to the acquisition date. Summary of Unaudited Pro forma Information The unaudited pro forma information below for the years ended December 31, 2022 and 2021 gives effect to the Spirit acquisition as if the acquisition had occurred on January 1, 2021. Pro forma earnings for the year ended December 31, 2022 were adjusted to exclude $ 18.7 million of acquisition-related costs, net of tax, incurred by the Company during 2022. The pro forma financial information is not necessarily indicative of the results of operations if the acquisition had been effective as of this date. (In thousands, except per share data) 2022 2021 Revenue (1) $ 912,631 $ 927,061 Net income $ 264,522 $ 307,752 Diluted earnings per share $ 2.04 $ 2.40 _________________________ (1) Net interest income plus non-interest income. 12 As previously discussed, the Company’s acquisition of Spirit was completed on April 8, 2022, at which time Spirit was fully integrated into the Company’s operations. As a result, it is impracticable for the Company to provide certain post-closing information, such as revenue and earnings, as it relates to the Spirit acquisition. The following is a description of the methods used to determine the fair values of significant assets and liabilities presented in the acquisition above. Cash and due from banks – The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets. Investment securities – Investment securities were acquired with an adjustment to fair value based upon quoted market prices if material. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value. Loans acquired – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. See Note 5, Loans and Allowance for Credit Losses, in the accompanying Notes to Consolidated Financial Statements for additional information related to purchased financial assets with credit deterioration. Premises and equipment – Bank premises and equipment were acquired with an adjustment to fair value, which represents the difference between the Company’s current analysis of property and equipment values completed in connection with the acquisition and book value acquired. Bank owned life insurance – Bank owned life insurance is carried at its current cash surrender value, which is the most reasonable estimate of fair value. Goodwill – The consideration paid as a result of the acquisition exceeded the fair value of the assets acquired, resulting in an intangible asset, goodwill. Goodwill established prior to the acquisitions, if applicable, was written off. Core deposit intangible – This intangible asset represents the value of the relationships that the acquired banks had with their deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits. Any core deposit intangible established prior to the acquisitions, if applicable, was written off. Other assets – The fair value adjustment results from certain assets whose value was estimated to be more or less than book value, such as certain prepaid assets, receivables and other miscellaneous assets. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value. Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. The Company performed a fair value analysis of the estimated weighted average interest rate of the certificates of deposits compared to the current market rates and recorded a fair value adjustment for the difference when material. Other borrowings – The fair value of other borrowings is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities. Subordinated debentures – The fair value of subordinated debentures is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities. Accrued interest and other liabilities – The fair value adjustment results from certain liabilities whose value was estimated to be more or less than book value, such as certain accounts payable and other miscellaneous liabilities. The adjustment also establishes a liability for unfunded commitments equal to the fair value of that liability at the date of acquisition. The carrying amount of accrued interest and the remainder of other liabilities was deemed to be a reasonable estimate of fair value. 13 NOTE 3: INVESTMENT SECURITIES Held-to-maturity securities (“HTM”), which include any security for which the Company has both the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the security’s estimated life. Prepayments are anticipated for mortgage-backed and SBA securities. Premiums on callable securities are amortized to their earliest call date. Available-for-sale securities (“AFS”), which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders’ equity, further discussed below. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the estimated life of the security. Prepayments are anticipated for mortgage-backed and SBA securities. Premiums on callable securities are amortized to their earliest call date. During the quarters ended June 30, 2022 and September 30, 2021, the Company transferred, at fair value, $ 1.99 billion and $ 500.8 million, respectively, of securities from the available-for-sale portfolio to the held-to-maturity portfolio. As of June 30, 2023, the related remaining combined net unrealized losses of $ 136.0 million in accumulated other comprehensive income (loss) will be amortized over the remaining life of the securities. No gains or losses on these securities were recognized at the time of transfer. The amortized cost, fair value and allowance for credit losses of investment securities that are classified as HTM are as follows: (In thousands) Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized (Losses) Estimated Fair Value Held-to-maturity June 30, 2023 U.S. Government agencies $ 451,737 $ — $ 451,737 $ — $ ( 94,515 ) $ 357,222 Mortgage-backed securities 1,193,118 — 1,193,118 — ( 118,728 ) 1,074,390 State and political subdivisions 1,859,956 ( 934 ) 1,859,022 67 ( 415,230 ) 1,443,859 Other securities 255,157 ( 2,280 ) 252,877 — ( 33,490 ) 219,387 Total HTM $ 3,759,968 $ ( 3,214 ) $ 3,756,754 $ 67 $ ( 661,963 ) $ 3,094,858 December 31, 2022 U.S. Government agencies $ 448,012 $ — $ 448,012 $ — $ ( 102,558 ) $ 345,454 Mortgage-backed securities 1,190,781 — 1,190,781 227 ( 118,960 ) 1,072,048 State and political subdivisions 1,861,102 ( 110 ) 1,860,992 56 ( 446,198 ) 1,414,850 Other securities 261,199 ( 1,278 ) 259,921 — ( 29,040 ) 230,881 Total HTM $ 3,761,094 $ ( 1,388 ) $ 3,759,706 $ 283 $ ( 696,756 ) $ 3,063,233 Mortgage-backed securities (“MBS”) are commercial MBS, secured by commercial properties, and residential MBS, generally secured by single-family residential properties. All mortgage-backed securities included in the table above were issued by U.S. government agencies or corporations. As of June 30, 2023, HTM MBS consists of $ 144.9 million and $ 1.05 billion of commercial MBS and residential MBS, respectively. As of December 31, 2022, HTM MBS consists of $ 149.2 million and $ 1.04 billion of commercial MBS and residential MBS, respectively. 14 The amortized cost, fair value and allowance for credit losses of investment securities that are classified as AFS are as follows: (In thousands) Amortized Cost Allowance for Credit Losses Gross Unrealized Gains Gross Unrealized (Losses) Estimated Fair Value Available-for-sale June 30, 2023 U.S. Treasury $ 2,271 $ — $ — $ ( 62 ) $ 2,209 U.S. Government agencies 183,735 — 51 ( 7,222 ) 176,564 Mortgage-backed securities 2,532,234 — 4 ( 249,910 ) 2,282,328 State and political subdivisions 1,029,164 — 184 ( 143,843 ) 885,505 Other securities 264,861 ( 2,396 ) — ( 29,313 ) 233,152 Total AFS $ 4,012,265 $ ( 2,396 ) $ 239 $ ( 430,350 ) $ 3,579,758 December 31, 2022 U.S. Treasury $ 2,257 $ — $ — $ ( 60 ) $ 2,197 U.S. Government agencies 191,498 — 103 ( 7,322 ) 184,279 Mortgage-backed securities 2,809,319 — 20 ( 266,437 ) 2,542,902 State and political subdivisions 1,056,124 — 250 ( 185,300 ) 871,074 Other securities 272,215 — — ( 19,813 ) 252,402 Total AFS $ 4,331,413 $ — $ 373 $ ( 478,932 ) $ 3,852,854 As of June 30, 2023, AFS MBS consists of $ 898.2 million and $ 1.38 billion of commercial MBS and residential MBS, respectively. As of December 31, 2022, AFS MBS consists of $ 1.07 billion and $ 1.47 billion of commercial MBS and residential MBS, respectively. Accrued interest receivable on HTM and AFS securities at June 30, 2023 was $ 20.7 million and $ 16.6 million, respectively, and is included in interest receivable on the consolidated balance sheets. The Company has made the election to exclude all accrued interest receivable from securities from the estimate of credit losses. The following table summarizes the Company’s AFS investments in an unrealized loss position for which an allowance for credit loss has not been recorded as of June 30, 2023, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position: Less Than 12 Months 12 Months or More Total (In thousands) Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Available-for-sale U.S. Treasury $ 776 $ ( 21 ) $ 1,433 $ ( 41 ) $ 2,209 $ ( 62 ) U.S. Government agencies 22,246 ( 95 ) 149,445 ( 7,127 ) 171,691 ( 7,222 ) Mortgage-backed securities 2,707 ( 85 ) 2,270,299 ( 249,825 ) 2,273,006 ( 249,910 ) State and political subdivisions 17,045 ( 379 ) 846,298 ( 143,464 ) 863,343 ( 143,843 ) Other securities 48,806 ( 7,261 ) 173,215 ( 19,656 ) 222,021 ( 26,917 ) Total AFS $ 91,580 $ ( 7,841 ) $ 3,440,690 $ ( 420,113 ) $ 3,532,270 $ ( 427,954 ) As of June 30, 2023, the Company’s investment portfolio included $ 3.58 billion of AFS securities, of which $ 3.53 billion, or 98.7 %, were in an unrealized loss position that were not deemed to have credit losses. A portion of the unrealized losses were related to the Company’s MBS, which are issued and guaranteed by U.S. government-sponsored entities and agencies, and the Company’s state and political subdivision securities, specifically investments in insured fixed rate municipal bonds for which the issuers continue to make timely principal and interest payments under the contractual terms of the securities. 15 Furthermore, the decline in fair value for each of the above AFS securities is attributable to the rates for those investments yielding less than current market rates. Management does not believe any of the securities are impaired due to reasons of credit quality. Management believes the declines in fair value for the securities are temporary. Management does not have the intent to sell the securities, and management believes it is more likely than not the Company will not have to sell the securities before recovery of their amortized cost basis. Allowance for Credit Losses All MBS held by the Company are issued by U.S. government-sponsored entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, highly rated by major rating agencies and have a long history of no credit losses. Accordingly, no allowance for credit losses has been recorded for these securities. Regarding securities issued by state and political subdivisions and other HTM securities, the adequacy of the reserve for credit loss is determined quarterly based on methodology similar to the methodology for determining the allowance for credit losses on loans. The methodology considers, but is not limited to: (i) issuer bond ratings, (ii) issuer geography, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) probability-weighted multiple scenario forecasts, and (v) the issuers’ size. The following table details activity in the allowance for credit losses by investment security type for the three and six months ended June 30, 2023 on the Company’s HTM and AFS securities portfolios. (In thousands) State and Political Subdivisions Other Securities Total Three Months Ended June 30, 2023 Held-to-maturity Beginning balance, April 1, 2023 $ 362 $ 1,526 $ 1,888 Provision for credit loss expense 572 754 1,326 Ending balance, June 30, 2023 $ 934 $ 2,280 $ 3,214 Available-for-sale Beginning balance, April 1, 2023 $ — $ 5,800 $ 5,800 Provision for credit loss expense — — — Reduction due to sales — ( 2,078 ) ( 2,078 ) Net increase (decrease) in allowance on previously impaired securities — ( 1,326 ) ( 1,326 ) Securities charged-off — — — Ending balance, June 30, 2023 $ — $ 2,396 $ 2,396 Six Months Ended June 30, 2023 Held-to-maturity Beginning balance, January 1, 2023 $ 110 $ 1,278 $ 1,388 Provision for credit loss expense 824 1,002 1,826 Ending balance, June 30, 2023 $ 934 $ 2,280 $ 3,214 Available-for-sale Beginning balance, January 1, 2023 $ — $ — $ — Provision for credit loss expense — 12,800 12,800 Reduction due to sales — ( 2,078 ) ( 2,078 ) Net increase (decrease) in allowance on previously impaired securities — ( 1,326 ) ( 1,326 ) Securities charged-off — ( 7,000 ) ( 7,000 ) Ending balance, June 30, 2023 $ — $ 2,396 $ 2,396 16 Activity in the allowance for credit losses by investment security type for the three and six months ended June 30, 2022 on the Company’s HTM securities portfolio was as follows: (In thousands) State and Political Subdivisions Other Securities Total Three Months Ended June 30, 2022 Held-to-maturity Beginning balance, April 1, 2022 $ 1,285 $ 92 $ 1,377 Provision for credit loss expense — — — Net increase (decrease) in allowance on previously impaired securities ( 1,183 ) 1,183 — Recoveries 1 3 4 Ending balance, June 30, 2022 $ 103 $ 1,278 $ 1,381 Six Months Ended June 30, 2022 Held-to-maturity Beginning balance, January 1, 2022 $ 1,197 $ 82 $ 1,279 Provision for credit loss expense — — — Net increase (decrease) in allowance on previously impaired securities ( 1,183 ) 1,183 — Recoveries 89 13 102 Ending balance, June 30, 2022 $ 103 $ 1,278 $ 1,381 Based upon the Company’s analysis of the underlying risk characteristics of its AFS portfolio, including credit ratings and other qualitative factors, as previously discussed, the provision for credit losses related to AFS securities recorded for the six months ended June 30, 2023 was $ 11.5 million, while the provision for credit losses related to AFS securities was reduced by $ 1.3 million during the three months ended June 30, 2023. During the six months ended June 30, 2023, the Company charged-off $ 7.0 million directly related to one corporate bond which was deemed uncollectible in the period. The remaining allowance for credit loss on the AFS portfolio of $ 2.4 million at June 30, 2023 is related to outstanding exposure for two nonperforming corporate bonds. The following table summarizes bond ratings for the Company’s HTM portfolio, based upon amortized cost, issued by state and political subdivisions and other securities as of June 30, 2023: State and Political Subdivisions (In thousands) Not Guaranteed or Pre-Refunded Other Credit Enhancement or Insurance Pre-Refunded Total Other Securities Aaa/AAA $ 178,809 $ 299,834 $ — $ 478,643 $ — Aa/AA 638,308 522,367 — 1,160,675 — A 47,154 161,399 — 208,553 101,965 Baa/BBB — 4,371 — 4,371 153,192 Not Rated 7,714 — — 7,714 — Total $ 871,985 $ 987,971 $ — $ 1,859,956 $ 255,157 Historical loss rates associated with securities having similar grades as those in the Company’s portfolio have generally not been significant. Pre-refunded securities, if any, have been defeased by the issuer and are fully secured by cash and/or U.S. Treasury securities held in escrow for payment to holders when the underlying call dates of the securities are reached. 17 Income earned on securities for the three and six months ended June 30, 2023 and 2022, is as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 Taxable: Held-to-maturity $ 11,058 $ 10,578 $ 22,071 $ 12,490 Available-for-sale 21,687 11,217 43,478 27,453 Non-taxable: Held-to-maturity 10,225 10,088 20,351 16,190 Available-for-sale 5,781 5,965 11,625 15,427 Total $ 48,751 $ 37,848 $ 97,525 $ 71,560 The amortized cost and estimated fair value by maturity of securities as of June 30, 2023 are shown in the following table. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. Accordingly, actual maturities may differ from contractual maturities. Held-to-Maturity Available-for-Sale (In thousands) Amortized Cost Fair Value Amortized Cost Fair Value One year or less $ 1,915 $ 1,909 $ 64,701 $ 63,160 After one through five years 10,313 9,857 166,086 160,826 After five through ten years 363,981 315,452 218,164 187,975 After ten years 2,190,641 1,693,250 1,030,810 885,199 Securities not due on a single maturity date 1,193,118 1,074,390 2,532,234 2,282,328 Other securities (no maturity) — — 270 270 Total $ 3,759,968 $ 3,094,858 $ 4,012,265 $ 3,579,758 The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $ 3.75 billion at June 30, 2023 and $ 3.96 billion at December 31, 2022. There were no gross realized gains and $ 391,000 gross realized losses recorded from the sale of securities during both the three and six months ended June 30, 2023. There were no gross realized gains and approximately $ 150,000 of gross realized losses from the sale and calls of securities during the three months ended June 30, 2022, and approximately $ 37,000 of gross realized gains and $ 240,000 of gross realized losses from the sale and call of securities during the six months ended June 30, 2022. The income tax expense/benefit related to security gains/losses was 26.135 % of the gross amounts in 2023 and 2022. The Company has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the fair value of AFS securities. See Note 23, Derivative Instruments, for disclosure of the gains and losses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities. NOTE 4: OTHER ASSETS AND OTHER LIABILITIES HELD FOR SALE Spirit Acquisition In connection with the acquisition of Spirit, the Company acquired a portfolio of loans which were identified as held for sale by the acquired bank prior to the completion of the acquisition. These loans were valued at $ 35.2 million, net of fair value discounts, at the date of acquisition with no remaining balance as of June 30, 2023. As of June 30, 2023, there were no outstanding other liabilities held for sale. 18 NOTE 5: LOANS AND ALLOWANCE FOR CREDIT LOSSES At June 30, 2023, the Company’s loan portfolio was $ 16.83 billion, compared to $ 16.14 billion at December 31, 2022. The various categories of loans are summarized as follows: June 30, December 31, (In thousands) 2023 2022 Consumer: Credit cards $ 209,452 $ 196,928 Other consumer 148,333 152,882 Total consumer 357,785 349,810 Real Estate: Construction and development 2,930,586 2,566,649 Single family residential 2,633,365 2,546,115 Other commercial 7,546,130 7,468,498 Total real estate 13,110,081 12,581,262 Commercial: Commercial 2,569,330 2,632,290 Agricultural 280,541 205,623 Total commercial 2,849,871 2,837,913 Other 515,916 373,139 Total loans $ 16,833,653 $ 16,142,124 The above table presents total loans at amortized cost. The difference between amortized cost and unpaid principal balance is primarily premiums and discounts associated with acquisition date fair value adjustments on acquired loans as well as deferred origination costs and fees totaling $ 13.6 million and $ 26.4 million at June 30, 2023 and December 31, 2022, respectively. Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 66.2 million and $ 65.4 million at June 30, 2023 and December 31, 2022, respectively, and is included in interest receivable on the consolidated balance sheets. Loan Origination/Risk Management – The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral; obtaining and monitoring collateral; and providing an adequate allowance for credit losses by regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry. The Company seeks to use diversification within the loan portfolio to reduce its credit risk, thereby minimizing the adverse impact on the portfolio if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. Consumer – The consumer loan portfolio consists of credit card loans and other consumer loans. Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to economic downturns that result in increased unemployment. Other consumer loans include direct and indirect installment loans and account overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures. Real estate – The real estate loan portfolio consists of construction and development loans (“C&D”), single family residential loans and commercial loans. C&D and commercial real estate (“CRE”) loans can be particularly sensitive to valuation of real estate. CRE cycles are inevitable. The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties. While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market. CRE cycles tend to be local in nature and longer than other credit cycles. Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult. Additionally, submarkets within CRE – such as office, industrial, 19 apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the overall risk through diversification across types of CRE loans. Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and duration. The Company monitors these loans closely. Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchases or other expansion projects. Paycheck Protection Program (“PPP”) loans are also included in the commercial loan portfolio. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations. The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates. Term loans are generally set up with one or three year balloons, and the Company has instituted a pricing mechanism for commercial loans. It is standard practice to require personal guaranties on commercial loans for closely-held or limited liability entities. Paycheck Protection Program Loans – The Company originated loans pursuant to multiple PPP appropriations of the Coronavirus Aid, Relief and Economic Security Act which provided 100% federally guaranteed loans for small businesses to cover up to 24 weeks of payroll costs and assistance with mortgage interest, rent and utilities. Notably, these small business loans may be forgiven by the SBA if borrowers maintain their payrolls and satisfy certain other conditions. PPP loans have a zero percent risk-weight for regulatory capital ratios. As of June 30, 2023 and December 31, 2022, the total outstanding balance of PPP loans was $ 6.8 million and $ 8.9 million, respectively. Other – The other loan portfolio includes mortgage warehouse loans, representing warehouse lines of credit to mortgage originators for the disbursement of newly originated 1-4 family residential loans. Also included in the other loan portfolio are loans to public sector customers, including state and local governments. Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The amortized cost basis of nonaccrual loans segregated by category of loans are as follows: June 30, December 31, (In thousands) 2023 2022 Consumer: Credit cards $ 268 $ 349 Other consumer 629 433 Total consumer 897 782 Real estate: Construction and development 3,400 2,799 Single family residential 21,427 22,319 Other commercial 14,142 14,998 Total real estate 38,969 40,116 Commercial: Commercial 29,162 17,356 Agricultural 2,248 177 Total commercial 31,410 17,533 Other 3 3 Total $ 71,279 $ 58,434 As of June 30, 2023 and December 31, 2022, nonaccrual loans for which there was no related allowance for credit losses had an amortized cost of $ 13.0 million and $ 16.9 million, respectively. These loans are individually assessed and do not hold an allowance due to being adequately collateralized under the collateral-dependent valuation method. 20 An age analysis of the amortized cost basis of past due loans, including nonaccrual loans, segregated by class of loans is as follows: (In thousands) Gross 30-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans 90 Days Past Due & Accruing June 30, 2023 Consumer: Credit cards $ 1,666 $ 495 $ 2,161 $ 207,291 $ 209,452 $ 426 Other consumer 1,217 245 1,462 146,871 148,333 — Total consumer 2,883 740 3,623 354,162 357,785 426 Real estate: Construction and development 1,273 3,233 4,506 2,926,080 2,930,586 — Single family residential 11,035 8,022 19,057 2,614,308 2,633,365 28 Other commercial 4,762 7,433 12,195 7,533,935 7,546,130 — Total real estate 17,070 18,688 35,758 13,074,323 13,110,081 28 Commercial: Commercial 4,990 18,776 23,766 2,545,564 2,569,330 284 Agricultural 247 1,978 2,225 278,316 280,541 — Total commercial 5,237 20,754 25,991 2,823,880 2,849,871 284 Other — 3 3 515,913 515,916 — Total $ 25,190 $ 40,185 $ 65,375 $ 16,768,278 $ 16,833,653 $ 738 December 31, 2022 Consumer: Credit cards $ 1,297 $ 409 $ 1,706 $ 195,222 $ 196,928 $ 225 Other consumer 852 214 1,066 151,816 152,882 — Total consumer 2,149 623 2,772 347,038 349,810 225 Real estate: Construction and development 4,677 443 5,120 2,561,529 2,566,649 — Single family residential 23,625 11,075 34,700 2,511,415 2,546,115 106 Other commercial 2,759 7,100 9,859 7,458,639 7,468,498 — Total real estate 31,061 18,618 49,679 12,531,583 12,581,262 106 Commercial: Commercial 5,034 7,575 12,609 2,619,681 2,632,290 176 Agricultural 111 67 178 205,445 205,623 — Total commercial 5,145 7,642 12,787 2,825,126 2,837,913 176 Other 61 3 64 373,075 373,139 — Total $ 38,416 $ 26,886 $ 65,302 $ 16,076,822 $ 16,142,124 $ 507 Loan Modifications to Borrowers Experiencing Financial Difficulty The Company has 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. The Company primarily uses interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal. 21 The following table presents the period-end balance of loan modifications, segregated by type of modification, to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023. Combination: Interest Rate Percent of Modification and Total Class (Dollars in thousands) Term Extension of Loans Commercial: Commercial $ 655 0.03 % Total commercial $ 655 0.03 % The financial effects of the loan modification made to a borrower experiencing financial difficulty was not significant during the three and six month periods ended June 30, 2023. The loan modification reported in the table above did not significantly impact the Company’s determination of the allowance for credit losses on loans during the three and six months ended June 30, 2023. During the three and six months ended June 30, 2023, the Company modified one loan, whereby the borrower was experiencing financial difficulty at the time of modification, that was current as of June 30, 2023 with a recorded investment of $ 655,000 . Additionally, there were no modified loans for which a payment default occurred during the three and six month periods ended June 30, 2023 and were modified in the 12 months prior to default. At June 30, 2023 and December 31, 2022, the Company had $ 1.3 million and $ 3.0 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At June 30, 2023 and December 31, 2022, the Company had $ 423,000 and $ 853,000 , respectively, of Other Real Estate Owned (“OREO”) secured by residential real estate properties. Troubled Debt Restructurings (Prior to the adoption of ASU 2022-02) When the Company restructured a loan to a borrower that was experiencing financial difficulty and granted a concession that it would not otherwise consider, a “troubled debt restructuring” (“TDR”) resulted, and the Company classified the loan as a TDR. The Company granted various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal. Once an obligation was restructured because of such credit problems, it continued to be considered a TDR until paid in full; or, if an obligation yielded a market interest rate and no longer has any concession regarding payment amount or amortization, then it was not considered a TDR at the beginning of the calendar year after the year in which the improvement had taken place. The Company returned TDRs to accrual status only if (1) all contractual amounts due were reasonably expected to be repaid within a prudent period and (2) repayment was in accordance with the contract for a sustained period, typically at least six months. TDRs were individually evaluated for expected credit losses. The Company assessed the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and determined if a specific allowance for credit losses was needed. The following table presents a summary of TDRs segregated by class of loans as of December 31, 2022. Accruing TDR Loans Nonaccrual TDR Loans Total TDR Loans (Dollars in thousands) Number Balance Number Balance Number Balance Real estate: Single-family residential 24 $ 1,849 12 $ 1,589 36 $ 3,438 Other commercial — — — — — — Total real estate 24 1,849 12 1,589 36 3,438 Commercial: Commercial — — 1 33 1 33 Total commercial — — 1 33 1 33 Total 24 $ 1,849 13 $ 1,622 37 $ 3,471 22 The following table presents loans that were restructured as TDRs during the three and six month periods ended June 30, 2022. (Dollars in thousands) Number of loans Balance Prior to TDR Balance at June 30, Change in Maturity Date Change in Rate Financial Impact on Date of Restructure Three and Six Months Ended June 30, 2022 Real estate: Other commercial 1 $ 13 $ 13 $ — $ 13 $ — Total real estate 1 $ 13 $ 13 $ — $ 13 $ — During the three and six months ended June 30, 2022, the Company modified one loan with a recorded investment of $ 13,000 prior to modification, which was deemed a TDR. The restructured loan was modified by reducing the interest rate on the loan. No specific reserve was recorded with respect to this TDR. Also, there was no immediate financial impact from the restructuring of this loan, as it was not considered necessary to charge-off interest or principal on the date of restructure. Additionally, there were no loans considered TDRs for which a payment default occurred during the six months ended June 30, 2022. There were no TDRs with pre-modification loan balances for which OREO was received in full or partial satisfaction of the loans during the three and six month period ended June 30, 2022. Credit Quality Indicators – As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions of the Company’s local markets. The Company utilizes a risk rating matrix to assign a risk rate to each of its commercial and real estate loans. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. A description of the general characteristics of the risk ratings is as follows: • Pass (Excellent) – This category includes loans which are virtually free of credit risk. Borrowers in this category represent the highest credit quality and greatest financial strength. • Pass (Good) - Loans under this category possess a nominal risk of default. This category includes borrowers with strong financial strength and superior financial ratios and trends. These loans are generally fully secured by cash or equivalents (other than those rated “excellent”). • Pass (Acceptable – Average) - Loans in this category are considered to possess a normal level of risk. Borrowers in this category have satisfactory financial strength and adequate cash flow coverage to service debt requirements. If secured, the perfected collateral should be of acceptable quality and within established borrowing parameters. • Pass (Monitor) - Loans in the Watch (Monitor) category exhibit an overall acceptable level of risk, but that risk may be increased by certain conditions, which represent “red flags”. These “red flags” require a higher level of supervision or monitoring than the normal “Pass” rated credit. The borrower may be experiencing these conditions for the first time, or it may be recovering from weakness, which at one time justified a higher rating. These conditions may include: weaknesses in financial trends; marginal cash flow; one-time negative operating results; non-compliance with policy or borrowing agreements; poor diversity in operations; lack of adequate monitoring information or lender supervision; questionable management ability/stability. • Special Mention - A loan in this category has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention loans are not adversely classified (although they are “criticized”) and do not expose an institution to sufficient risk to warrant adverse classification. Borrowers may be experiencing adverse operating trends or an ill-proportioned balance sheet. Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices. 23 • Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the loan. • Doubtful - A loan classified Doubtful has all the weaknesses inherent in a substandard loan except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. The possibility of loss is extremely high, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Pending factors include: proposed merger or acquisition; liquidation procedures; capital injection; perfection of liens on additional collateral; and refinancing plans. Loans classified as Doubtful are placed on nonaccrual status. • Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loans has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan, even though partial recovery may be affected in the future. Borrowers in the Loss category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Loans should be classified as Loss and charged-off in the period in which they become uncollectible. The Company monitors credit quality in the consumer portfolio by delinquency status. The delinquency status of loans is updated daily. A description of the delinquency credit quality indicators is as follows: • Current - Loans in this category are either current in payments or are under 30 days past due. These loans are considered to have a normal level of risk. • 30-89 Days Past Due - Loans in this category are between 30 and 89 days past due and are subject to the Company’s loss mitigation process. These loans are considered to have a moderate level of risk. • 90+ Days Past Due - Loans in this category are 90 days or more past due and are placed on nonaccrual status. These loans have been subject to the Company’s loss mitigation process and foreclosure and/or charge-off proceedings have commenced. The Company uses a dual risk rating scale that utilizes quantitative models and qualitative factors (“score cards”) to assist in determining the appropriate risk rating for its commercial loans. This dual risk rating methodology incorporates a “probability of default” analysis which utilizes quantified metrics such as loan terms and financial performance, as well as a “loss given default” analysis which utilizes collateral values and economics of the market, among other attributes. Model outputs are reviewed and analyzed to ensure the projected risk levels are commensurate with underwriting and credit leader expectations. The risk rating scale includes Probability of Default levels of 1 – 16 and Loss Given Default levels of A – I. The scale allows for more granular recognition of risk and diversification of grading among traditional Pass grades. The following is a reconciliation between the expanded risk rating scale and the Company’s traditional risk rating segments utilized within the commercial loan classes presented in the credit quality indicator tables. • Pass - Includes loans with an expanded risk rating of 1 through 11. Loans with a risk rating of 10 and 11 equate to loans included on management’s “watch list” and is intended to be utilized on a temporary basis for pass grade borrowers where a significant risk-modifying action is anticipated in the near term. • Special Mention - Includes loans with an expanded risk rating of 12. • Substandard - Includes loans with an expanded risk rating of 13 and 14. • Doubtful and loss - Includes loans with an expanded risk rating of 15 and 16. 24 The following table presents a summary of loans by credit quality indicator, as of June 30, 2023, segregated by class of loans. Term Loans Amortized Cost Basis by Origination Year (In thousands) 2023 (YTD) 2022 2021 2020 2019 2018 and Prior Lines of Credit (“LOC”) Amortized Cost Basis LOC Converted to Term Loans Amortized Cost Basis Total Consumer - credit cards Delinquency: Current $ — $ — $ — $ — $ — $ — $ 207,291 $ — $ 207,291 30-89 days past due — — — — — — 1,666 — 1,666 90+ days past due — — — — — — 495 — 495 Total consumer - credit cards — — — — — — 209,452 — 209,452 Current-period consumer - credit cards gross charge-offs — — — — — — 2,486 — 2,486 Consumer - other Delinquency: Current 51,542 49,740 18,189 6,047 2,469 2,595 16,289 — 146,871 30-89 days past due 145 476 185 195 6 37 173 — 1,217 90+ days past due — 65 153 — 9 17 1 — 245 Total consumer - other 51,687 50,281 18,527 6,242 2,484 2,649 16,463 — 148,333 Current-period consumer - other gross charge-offs 18 513 214 55 28 97 143 — 1,068 Real estate - C&D Risk rating: Pass 63,331 185,255 65,189 41,966 12,798 26,591 2,522,794 — 2,917,924 Special mention — — — — — 406 3,342 — 3,748 Substandard — 565 103 2 11 196 8,037 — 8,914 Doubtful and loss — — — — — — — — — Total real estate - C&D 63,331 185,820 65,292 41,968 12,809 27,193 2,534,173 — 2,930,586 Current-period real estate - C&D gross charge-offs — 1,148 — — — 8 — — 1,156 Real estate - SF residential Delinquency: Current 230,962 656,365 373,639 237,589 122,329 637,891 354,957 576 2,614,308 30-89 days past due 13 1,838 1,609 478 54 5,639 1,404 — 11,035 90+ days past due — 451 985 497 597 5,140 352 — 8,022 Total real estate - SF residential 230,975 658,654 376,233 238,564 122,980 648,670 356,713 576 2,633,365 Current-period real estate - SF residential gross charge-offs — 1 — — — 109 200 — 310 Real estate - other commercial Risk rating: Pass 256,143 1,747,880 1,280,524 585,377 219,471 866,189 2,282,403 — 7,237,987 Special mention 16,810 1,279 27,790 10,642 2,686 46,041 97,843 — 203,091 Substandard 438 9,361 17,719 9,226 3,456 28,954 35,898 — 105,052 Doubtful and loss — — — — — — — — — Total real estate - other commercial 273,391 1,758,520 1,326,033 605,245 225,613 941,184 2,416,144 — 7,546,130 Current-period real estate - other commercial gross charge-offs — — — 7 — 35 131 — 173 25 Term Loans Amortized Cost Basis by Origination Year (In thousands) 2023 (YTD) 2022 2021 2020 2019 2018 and Prior Lines of Credit (“LOC”) Amortized Cost Basis LOC Converted to Term Loans Amortized Cost Basis Total Commercial Risk rating: Pass 222,995 466,055 248,760 114,917 55,019 75,495 1,325,382 348 2,508,971 Special mention 18 12,032 1,061 24 14 947 11,578 — 25,674 Substandard 28 7,723 3,561 1,066 1,325 5,649 15,270 — 34,622 Doubtful and loss — 61 — — — 2 — — 63 Total commercial 223,041 485,871 253,382 116,007 56,358 82,093 1,352,230 348 2,569,330 Current-period commercial - gross charge-offs — 332 205 140 158 180 619 — 1,634 Commercial - agriculture Risk rating: Pass 26,529 37,597 18,044 7,414 2,218 2,056 183,682 17 277,557 Special mention — — — — — — — — — Substandard — 635 488 256 40 28 1,537 — 2,984 Doubtful and loss — — — — — — — — — Total commercial - agriculture 26,529 38,232 18,532 7,670 2,258 2,084 185,219 17 280,541 Current-period commercial - agriculture gross charge-offs — — — — — 3 — — 3 Other Delinquency: Current 25,701 147,955 29,128 7,408 3,724 43,391 258,606 — 515,913 30-89 days past due — — — — — — — — — 90+ days past due — — — — — 3 — — 3 Total other 25,701 147,955 29,128 7,408 3,724 43,394 258,606 — 515,916 Current-period other - gross charge-offs — — — — — — 54 — 54 Total $ 894,655 $ 3,325,333 $ 2,087,127 $ 1,023,104 $ 426,226 $ 1,747,267 $ 7,329,000 $ 941 $ 16,833,653 26 The following table presents a summary of loans by credit quality indicator, as of December 31, 2022, segregated by class of loans. Term Loans Amortized Cost Basis by Origination Year (In thousands) 2022 2021 2020 2019 2018 2017 and Prior Lines of Credit (“LOC”) Amortized Cost Basis LOC Converted to Term Loans Amortized Cost Basis Total Consumer - credit cards Delinquency: Current $ — $ — $ — $ — $ — $ — $ 195,222 $ — $ 195,222 30-89 days past due — — — — — — 1,297 — 1,297 90+ days past due — — — — — — 409 — 409 Total consumer - credit cards — — — — — — 196,928 — 196,928 Consumer - other Delinquency: Current 86,303 26,339 10,071 3,804 2,671 2,275 20,350 3 151,816 30-89 days past due 298 241 135 13 34 119 12 — 852 90+ days past due 121 47 2 1 2 41 — — 214 Total consumer - other 86,722 26,627 10,208 3,818 2,707 2,435 20,362 3 152,882 Real estate - C&D Risk rating: Pass 237,304 68,916 50,912 16,920 13,625 9,611 2,163,776 334 2,561,398 Special mention — — — — — 41 1,342 — 1,383 Substandard 1,091 116 36 13 31 103 2,478 — 3,868 Doubtful and loss — — — — — — — — — Total real estate - C&D 238,395 69,032 50,948 16,933 13,656 9,755 2,167,596 334 2,566,649 Real estate - SF residential Delinquency: Current 700,976 411,885 295,365 141,608 192,176 440,931 324,282 4,192 2,511,415 30-89 days past due 3,105 3,415 1,290 2,018 3,129 8,626 2,042 — 23,625 90+ days past due 586 871 885 968 1,017 6,312 436 — 11,075 Total real estate - SF residential 704,667 416,171 297,540 144,594 196,322 455,869 326,760 4,192 2,546,115 Real estate - other commercial Risk rating: Pass 1,917,352 1,482,049 768,630 254,986 179,729 428,027 2,093,379 19,469 7,143,621 Special mention 19,538 32,831 38,821 206 2,261 20,741 104,431 — 218,829 Substandard 24,639 3,399 27,399 2,544 2,026 15,217 30,824 — 106,048 Doubtful and loss — — — — — — — — — Total real estate - other commercial 1,961,529 1,518,279 834,850 257,736 184,016 463,985 2,228,634 19,469 7,468,498 Commercial Risk rating: Pass 595,256 300,650 168,539 41,924 31,329 35,447 1,401,402 24,940 2,599,487 Special mention 199 1,700 11 32 — 927 2,708 80 5,657 Substandard 5,257 2,435 3,328 802 891 1,290 11,337 1,805 27,145 Doubtful and loss — — — — — — — 1 1 Total commercial 600,712 304,785 171,878 42,758 32,220 37,664 1,415,447 26,826 2,632,290 Commercial - agriculture Risk rating: Pass 44,377 22,901 12,044 4,483 1,029 369 119,342 310 204,855 Special mention 8 — — — — — — — 8 Substandard 55 8 78 49 10 — 560 — 760 Doubtful and loss — — — — — — — — — Total commercial - agriculture 44,440 22,909 12,122 4,532 1,039 369 119,902 310 205,623 Other Delinquency: Current 152,086 29,362 8,181 4,742 20,018 25,349 132,384 953 373,075 30-89 days past due — — — — — 61 — — 61 90+ days past due — — — — — 3 — — 3 Total other 152,086 29,362 8,181 4,742 20,018 25,413 132,384 953 373,139 Total $ 3,788,551 $ 2,387,165 $ 1,385,727 $ 475,113 $ 449,978 $ 995,490 $ 6,608,013 $ 52,087 $ 16,142,124 27 Allowance for Credit Losses 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, quantitative factors, and other qualitative considerations. The allowance, in the judgment of management, is necessary to reserve for expected loan losses and risks inherent in the loan portfolio. The Company’s 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 comprised of two components: individual assessments on loans with unique risk characteristics and collective assessments for loans that share similar risk characteristics. Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated for collective assessment. The Company uses 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. To determine the best estimate of credit losses as of June 30, 2023, the Company utilized a probability-weighted, multiple-scenario approach consisting of Baseline, Upside (S1), and Downside (S3) scenarios published by Moody’s Analytics in June 2023 that was updated to reflect the U.S. economic outlook. The Company also includes qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. These factors may include but are not limited to portfolio trends and considerations, other economic considerations, policy actions, concentration risk, or imprecision risk. 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 relationship 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. 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, the Company’s 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. 28 Loans for which the repayment is expected to be provided substantially through the operation or sale of collateral and where the borrower is experiencing financial difficulty had an amortized cost of $ 99.7 million and $ 70.9 million as of June 30, 2023 and December 31, 2022, respectively, as further detailed in the table below. The collateral securing these loans consist of commercial real estate properties, residential properties, and other business assets. (In thousands) Real Estate Collateral Other Collateral Total June 30, 2023 Construction and development $ 7,517 $ — $ 7,517 Single family residential 1,446 — 1,446 Other commercial real estate 75,017 — 75,017 Commercial — 15,741 15,741 Total $ 83,980 $ 15,741 $ 99,721 December 31, 2022 Construction and development $ 2,156 $ — $ 2,156 Single family residential — — — Other commercial real estate 65,450 — 65,450 Commercial — 3,320 3,320 Total $ 67,606 $ 3,320 $ 70,926 The following table details activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2023. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. (In thousands) Commercial Real Estate Credit Card Other Consumer and Other Total Allowance for credit losses: Three Months Ended June 30, 2023 Beginning balance, April 1, 2023 $ 30,256 $ 163,906 $ 6,446 $ 5,949 $ 206,557 Provision for credit loss expense 1,483 1,464 995 1,119 5,061 Charge-offs ( 1,225 ) ( 435 ) ( 1,409 ) ( 666 ) ( 3,735 ) Recoveries 471 878 298 436 2,083 Net (charge-offs) recoveries ( 754 ) 443 ( 1,111 ) ( 230 ) ( 1,652 ) Ending balance, June 30, 2023 $ 30,985 $ 165,813 $ 6,330 $ 6,838 $ 209,966 Six Months Ended June 30, 2023 Beginning balance, January 1, 2023 $ 34,406 $ 150,795 $ 5,140 $ 6,614 $ 196,955 Provision for credit loss expense ( 3,322 ) 15,485 3,144 670 15,977 Charge-offs ( 1,637 ) ( 1,639 ) ( 2,486 ) ( 1,122 ) ( 6,884 ) Recoveries 1,538 1,172 532 676 3,918 Net charge-offs ( 99 ) ( 467 ) ( 1,954 ) ( 446 ) ( 2,966 ) Ending balance, June 30, 2023 $ 30,985 $ 165,813 $ 6,330 $ 6,838 $ 209,966 29 Activity in the allowance for credit losses for the three and six months ended June 30, 2022 was as follows: (In thousands) Commercial Real Estate Credit Card Other Consumer and Other Total Allowance for credit losses: Three Months Ended June 30, 2022 Beginning balance, April 1, 2022 $ 9,177 $ 161,389 $ 2,894 $ 5,464 $ 178,924 Acquisition adjustment for PCD loans 854 3,187 — 2 4,043 Provision for credit loss expense 22,853 1,629 4,470 1,454 30,406 Charge-offs ( 688 ) ( 124 ) ( 1,004 ) ( 518 ) ( 2,334 ) Recoveries 621 400 249 302 1,572 Net (charge-offs) recoveries ( 67 ) 276 ( 755 ) ( 216 ) ( 762 ) Ending balance, June 30, 2022 $ 32,817 $ 166,481 $ 6,609 $ 6,704 $ 212,611 Six Months Ended June 30, 2022 Beginning balance, January 1, 2022 $ 17,458 $ 179,270 $ 3,987 $ 4,617 $ 205,332 Acquisition adjustment for PCD loans 854 3,187 — 2 4,043 Provision for credit loss expense 20,334 ( 16,193 ) 4,023 2,328 10,492 Charge-offs ( 7,007 ) ( 600 ) ( 1,924 ) ( 932 ) ( 10,463 ) Recoveries 1,178 817 523 689 3,207 Net (charge-offs) recoveries ( 5,829 ) 217 ( 1,401 ) ( 243 ) ( 7,256 ) Ending balance, June 30, 2022 $ 32,817 $ 166,481 $ 6,609 $ 6,704 $ 212,611 As of June 30, 2023, the Company’s allowance for credit losses was considered sufficient based upon expected losses that were supported by scenario-weighted economic forecasts. The provision expense for the three and six months ended June 30, 2023 was primarily due to the loan growth experienced during the periods, as well as the impact of updated economic assumptions. Reserve for Unfunded Commitments In addition to the allowance for credit losses, the Company has established a reserve for unfunded commitments, classified in other liabilities. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The reserve for unfunded commitments was $ 36.9 million and $ 41.9 million as of June 30, 2023 and December 31, 2022, respectively. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the allowance for credit losses. During the three and six month periods ended June 30, 2023, $ 5.0 million was released from the reserve for unfunded commitments primarily due to a decline in unfunded commitments resulting from customers utilizing lines of credit during the period. For the three and six month periods ended June 30, 2022, an adjustment to the reserve for unfunded commitments resulted in an expense of $ 3.5 million associated with the Day 2 CECL provision related to the Spirit acquisition and was included in the provision for credit losses in the statement of income. 30 Provision for Credit Losses Provision for credit losses is determined by the Company as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposure after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The components of the provision for credit losses for the three and six month periods ended June 30, 2023 and 2022 were as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 Provision for credit losses related to: Loans $ 5,061 $ 30,406 $ 15,977 $ 10,492 Unfunded commitments ( 5,000 ) 3,453 ( 5,000 ) 3,453 Securities - HTM 1,326 — 1,826 — Securities - AFS ( 1,326 ) — 11,474 — Total $ 61 $ 33,859 $ 24,277 $ 13,945 Purchased Credit Deteriorated (“PCD”) Loans Purchased loans that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. For PCD loans, the initial estimate of expected credit losses is recognized in the allowance for credit loss on the date of acquisition using the same methodology as discussed in the Allowance for Credit Losses section included above. The following table provides a summary of loans purchased as part of the Spirit acquisition with credit deterioration at acquisition: (In thousands) Commercial Real Estate Credit Card Other Consumer and Other Total Unpaid principal balance $ 8,258 $ 66,534 $ — $ 59 $ 74,851 PCD allowance for credit loss at acquisition ( 6,433 ) ( 3,187 ) — ( 2 ) ( 9,622 ) Non-credit related discount ( 378 ) ( 998 ) — ( 1 ) ( 1,377 ) Fair value of PCD loans $ 1,447 $ 62,349 $ — $ 56 $ 63,852 31 NOTE 6: RIGHT-OF-USE LEASE ASSETS AND LEASE LIABILITIES The Company accounts for its leases in accordance with ASC Topic 842, Leases , which requires recognition of most leases, including operating leases, with a term greater than 12 months on the balance sheet. At lease commencement, the lease contract is reviewed to determine whether the contract is a finance lease or an operating lease; a lease liability is recognized on a discounted basis, related to the Company’s obligation to make lease payments; and a right-of-use asset is also recognized related to the Company’s right to use, or control the use of, a specified asset for the lease term. The Company accounts for lease and non-lease components (such as taxes, insurance and common area maintenance costs) separately as such amounts are generally readily determinable under the lease contracts. Lease payments over the expected term are discounted using the Company’s Federal Home Loan Bank (“FHLB”) advance rates for borrowings of similar term. If it is reasonably certain that a renewal or termination option will be exercised, the effects of such options are included in the determination of the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company’s leases are classified as operating leases with a term, including expected renewal or termination options, greater than one year, and are related to certain office facilities and office equipment. The following table presents information as of June 30, 2023 and December 31, 2022 related to the Company’s right-of-use lease assets, included in premises and equipment, and lease liabilities, included in accrued interest and other liabilities. June 30, December 31, (Dollars in thousands) 2023 2022 Right-of-use lease assets $ 57,171 $ 46,845 Lease liabilities 58,379 47,850 Weighted average remaining lease term 8.26 years 6.69 years Weighted average discount rate 3.33 % 2.41 % Operating lease cost for the three and six month periods ended June 30, 2023 was $ 3.7 million and $ 7.6 million, respectively, as compared to $ 3.7 million and $ 6.9 million for the same periods in 2022. NOTE 7: PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Total premises and equipment, net at June 30, 2023 and December 31, 2022 were as follows: June 30, December 31, (In thousands) 2023 2022 Right-of-use lease assets $ 57,171 $ 46,845 Premises and equipment: Land 124,491 122,841 Buildings and improvements 377,108 370,530 Furniture, fixtures and equipment 108,106 122,029 Software 59,841 70,984 Construction in progress 16,023 15,488 Accumulated depreciation and amortization ( 180,715 ) ( 199,976 ) Total premises and equipment, net $ 562,025 $ 548,741 32 NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is tested annually, or more often than annually, if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill totaled $ 1.32 billion at June 30, 2023 and December 31, 2022. Goodwill impairment was neither indicated nor recorded during the six months ended June 30, 2023 or the year ended December 31, 2022. During March of 2023, the Company’s share price began to decline as markets in the United States (“US”) responded to the sudden collapse of two US banks. As a result of the decrease in the Company’s market capitalization, the Company performed an interim goodwill impairment qualitative assessment during the first quarter of 2023 and concluded that it was more likely-than-not that the fair value of goodwill continued to exceed its carrying value and therefore, goodwill was not impaired. During the second quarter of 2023, the Company performed the annual goodwill impairment analysis and concluded that it is more likely-than-not that the fair value of goodwill continues to exceed its carrying value and therefore, goodwill is not impaired. Core deposit premiums represent the value of the relationships that acquired banks had with their deposit customers and are amortized over periods ranging from 10 years to 15 years and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Other intangible assets represent the value of other acquired relationships, including relationships with trust and wealth management customers, and are being amortized over various periods ranging from 8 years to 15 years. Changes in the carrying amount and accumulated amortization of the Company’s core deposit premiums and other intangible assets at June 30, 2023 and December 31, 2022 were as follows: June 30, December 31, (In thousands) 2023 2022 Core deposit premiums: Balance, beginning of year $ 116,016 $ 93,862 Acquisitions (1) — 36,500 Amortization ( 7,377 ) ( 14,346 ) Balance, end of period 108,639 116,016 Books of business and other intangibles: Balance, beginning of year 12,935 12,373 Acquisitions (2) — 2,131 Amortization ( 816 ) ( 1,569 ) Balance, end of period 12,119 12,935 Total other intangible assets, net $ 120,758 $ 128,951 _________________________ (1) A core deposit premium of $ 36.5 million was recorded during 2022 as part of the Spirit acquisition. See Note 2, Acquisitions, for additional information on acquisitions. (2) The Company recorded $ 2.1 million during 2022 related to servicing assets acquired as part of the Spirit acquisition. See Note 2, Acquisitions, for additional information on acquisitions. 33 The carrying basis and accumulated amortization of the Company’s other intangible assets at June 30, 2023 and December 31, 2022 were as follows: June 30, December 31, (In thousands) 2023 2022 Core deposit premiums: Gross carrying amount $ 187,467 $ 189,996 Accumulated amortization ( 78,828 ) ( 73,980 ) Core deposit premiums, net 108,639 116,016 Books of business and other intangibles: Gross carrying amount 22,068 22,068 Accumulated amortization ( 9,949 ) ( 9,133 ) Books of business and other intangibles, net 12,119 12,935 Total other intangible assets, net $ 120,758 $ 128,951 The Company’s estimated remaining amortization expense on other intangible assets as of June 30, 2023 is as follows: (In thousands) Year Amortization Expense Remainder of 2023 $ 8,113 2024 15,403 2025 12,819 2026 12,346 2027 12,218 Thereafter 59,859 Total $ 120,758 NOTE 9: TIME DEPOSITS Time deposits included approximately $ 1.60 billion and $ 1.08 billion of certificates of deposit over $250,000 at June 30, 2023 and December 31, 2022, respectively. Brokered time deposits were $ 3.24 billion and $ 2.75 billion at June 30, 2023 and December 31, 2022, respectively. NOTE 10: INCOME TAXES The provision for income taxes is comprised of the following components for the periods indicated below: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 Income taxes currently payable $ 10,295 $ 15,341 $ 21,111 $ 20,460 Deferred income taxes ( 156 ) ( 8,190 ) ( 335 ) 917 Provision for income taxes $ 10,139 $ 7,151 $ 20,776 $ 21,377 34 The tax effects of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities, and their approximate tax effects, are as follows: June 30, December 31, (In thousands) 2023 2022 Deferred tax assets: Loans acquired $ 4,681 $ 5,846 Allowance for credit losses 50,236 47,145 Valuation of foreclosed assets 523 523 Tax NOLs from acquisition 9,964 10,962 Deferred compensation payable 3,796 3,867 Accrued equity and other compensation 6,131 8,153 Acquired securities 7,641 7,651 Right-of-use lease liability 14,202 11,641 Unrealized loss on AFS securities 167,244 177,839 Allowance for unfunded commitments 8,984 10,200 Other 5,922 4,173 Gross deferred tax assets 279,324 288,000 Deferred tax liabilities: Goodwill and other intangible amortization ( 43,138 ) ( 44,539 ) Accumulated depreciation ( 23,429 ) ( 24,288 ) Right-of-use lease asset ( 13,908 ) ( 11,396 ) Unrealized gain on swaps ( 29,383 ) ( 25,836 ) Other ( 10,207 ) ( 8,875 ) Gross deferred tax liabilities ( 120,065 ) ( 114,934 ) Net deferred tax asset $ 159,259 $ 173,066 A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown for the periods indicated below: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 Computed at the statutory rate (21%) $ 14,375 $ 7,267 $ 26,183 $ 23,924 Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit 454 ( 560 ) 697 565 Stock-based compensation 129 97 441 ( 105 ) Tax exempt interest income ( 3,871 ) ( 3,619 ) ( 7,675 ) ( 7,022 ) Tax exempt earnings on BOLI ( 776 ) ( 465 ) ( 1,337 ) ( 890 ) Federal tax credits ( 495 ) ( 949 ) ( 934 ) ( 1,537 ) Other differences, net 323 5,380 3,401 6,442 Actual tax provision $ 10,139 $ 7,151 $ 20,776 $ 21,377 35 The Company follows ASC Topic 740, Income Taxes , which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company has no history of expiring net operating loss carryforwards and is projecting significant pre-tax and financial taxable income in future years. The Company expects to fully realize its deferred tax assets in the future. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. Section 382 of the Internal Revenue Code imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its U.S. net operating losses to reduce its tax liability. The Company has engaged in four tax-free reorganization transactions in which acquired net operating losses are limited pursuant to Section 382. In total, approximately $ 44.4 million of federal net operating losses subject to the IRC Section 382 annual limitation are expected to be utilized by the Company. All of the acquired net operating loss carryforwards are expected to be fully utilized by 2036. The Company files income tax returns in the U.S. federal jurisdiction. The Company’s U.S. federal income tax returns are open and subject to examinations from the 2019 tax year and forward. The Company’s various state income tax returns are generally open from the 2019 and later tax return years based on individual state statute of limitations. NOTE 11: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company utilizes securities sold under agreements to repurchase to facilitate the needs of its customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis. The Company may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with the Company’s safekeeping agents. The gross amount of recognized liabilities for repurchase agreements was $ 102.2 million and $ 152.4 million at June 30, 2023 and December 31, 2022, respectively. The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of June 30, 2023 and December 31, 2022 is presented in the following tables. Remaining Contractual Maturity of the Agreements (In thousands) Overnight and Continuous Up to 30 Days 30-90 Days Greater than 90 Days Total June 30, 2023 Repurchase agreements: U.S. Government agencies $ 102,186 $ — $ — $ — $ 102,186 December 31, 2022 Repurchase agreements: U.S. Government agencies $ 152,403 $ — $ — $ — $ 152,403 36 NOTE 12: OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES Debt at June 30, 2023 and December 31, 2022 consisted of the following components: June 30, December 31, (In thousands) 2023 2022 Other Borrowings FHLB advances, net of discount, due 2023 to 2033, 4.56 % to 5.53 % secured by real estate loans $ 1,353,356 $ 838,487 Other long-term debt 19,983 20,809 Total other borrowings 1,373,339 859,296 Subordinated Notes and Debentures Subordinated notes payable, due 4/1/2028, fixed-to-floating rate (fixed rate of 5.00 % through 3/31/2023, floating rate of 2.15 % above the three month LIBOR rate, reset quarterly) (1) 330,000 330,000 Subordinated notes payable, net of premium adjustments, due 7/31/2030, fixed-to-floating rate (fixed rate of 6.00 % through 7/30/2025, floating rate of 5.92 % above the three month SOFR rate, reset quarterly) 37,227 37,285 Unamortized debt issuance costs ( 1,162 ) ( 1,296 ) Total subordinated notes and debentures 366,065 365,989 Total other borrowings and subordinated debt $ 1,739,404 $ 1,225,285 _________________________ (1) The Company will transition from the three month LIBOR rate to the three month Secured Overnight Financing Rate (“SOFR”), plus a comparable spread adjustment of 26.161 basis points, beginning with interest accrued on the notes from and after October 1, 2023. In March 2018, the Company 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 during March 2018. The Notes will mature on April 1, 2028 and will bear interest at an initial fixed rate of 5.00 % per annum, payable semi-annually in arrears. From and including April 1, 2023 to, but excluding, the maturity date or the date of earlier redemption, the interest rate will reset quarterly to an annual interest rate equal to the “then-current three month LIBOR rate” plus 215 basis points, payable quarterly in arrears (provided that the Company will transition from the “then-current three month LIBOR rate” to the “three month SOFR, plus a comparable spread adjustment of 26.161 basis points,” beginning with interest accrued on the Notes from and after October 1, 2023). The Notes will be subordinated in right of payment to the payment of the Company’s other existing and future senior indebtedness, including all of its 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 used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness. The Notes qualify for Tier 2 capital treatment. The Company assumed subordinated debt 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 SOFR 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. The Company had total FHLB advances of $ 1.35 billion and $ 838.5 million at June 30, 2023 and December 31, 2022, respectively, which are primarily fixed rate, fixed term advances, which are due less than one year from origination and therefore are classified as short-term advances by the Company. At June 30, 2023, the FHLB advances outstanding were secured by mortgage loans and investment securities totaling approximately $ 6.95 billion and the Company had approximately $ 5.35 billion of additional advances available from the FHLB. 37 The Company’s long-term debt primarily includes subordinated debt and other notes payable. Aggregate annual maturities of long-term debt at June 30, 2023, are as follows: Year (In thousands) Remainder of 2023 $ 889 2024 1,822 2025 1,822 2026 1,824 2027 1,920 Thereafter 381,128 Total $ 389,405 NOTE 13: CONTINGENT LIABILITIES In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings incidental to the conduct of its business, including proceedings based on breach of contract claims, lender liability claims, and other ordinary-course claims, some of which seek substantial relief or damages. On June 29, 2020, Shunda Wilkins, Diann Graham, and David Watson filed a putative class action complaint against Simmons Bank in the United States District Court for the Eastern District of Arkansas. The complaint alleged that Simmons Bank improperly charges multiple insufficient funds or overdraft fees when a merchant resubmits a rejected payment request. The complaint asserted claims for breach of contract and unjust enrichment. Plaintiffs sought to represent a proposed class of all Simmons Bank checking account customers who were charged multiple insufficient funds or overdraft fees on resubmitted payment requests. Plaintiffs sought unspecified damages, costs, attorney’s fees, pre-judgment interest, an injunction, and other relief as the Court deems proper for themselves and the purported class. Simmons Bank denied the allegations and has vigorously defended the matter. On February 9, 2023, the district court denied plaintiffs’ motion for class certification, granted Simmons Bank’s motion for summary judgment in part, and granted Simmons Bank’s motion to exclude testimony of plaintiffs’ expert. On July 14, 2023, the district court denied plaintiffs’ motion to reconsider the court’s February 9, 2023 ruling, and ruled in favor of Simmons Bank on the outstanding issues. The Company establishes reserves for legal proceedings when potential losses become probable and can be reasonably estimated. While the ultimate resolution (including amounts thereof) of any legal proceedings, including the matter described above, cannot be determined at this time, based on information presently available and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, either individually or in the aggregate, will not have a material adverse effect on the Company’s business, consolidated results of operations, financial condition, or cash flows. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any of these proceedings, which may be material to the Company’s results of operations for a given fiscal period. NOTE 14: CAPITAL STOCK On February 27, 2009, at a special meeting, the Company’s shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock, $ 0.01 par value. On April 27, 2022, the Company’s shareholders approved amendments to the Company’s 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 the Company’s Class A common stock from 175,000,000 to 350,000,000 . On October 29, 2019, the Company 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 (“Series D Preferred Stock”), out of the Company’s authorized preferred stock. On April 27, 2022, the Company’s shareholders approved an amendment to the Company’s Articles of Incorporation to remove the classification and designation for the Series D Preferred Stock. As of June 30, 2023, there were no shares of preferred stock issued or outstanding. Effective July 23, 2021, the Company’s Board of Directors approved an amendment to the Company’s stock repurchase program originally established in October 2019 (“2019 Program”) that increased the amount of the Company’s Class A common stock that may 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. 38 During January 2022, the Company substantially exhausted the repurchase capacity under the 2019 Program. As a result, the Company’s Board of Directors authorized a new stock repurchase program in January 2022 (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 and six month periods ended June 30, 2023, the Company repurchased 1,128,087 shares at an average price of $ 17.75 per share under the 2022 Program. Market conditions and the Company’s capital needs will drive decisions regarding additional, future stock repurchases. During the six month period ended June 30, 2022, the Company repurchased 513,725 shares at an average price of $ 31.25 per share under the 2019 Program and 2,035,324 shares at an average price of $ 24.59 per share under the 2022 Program. The 2022 Program repurchases during the six months ended June 30, 2022 were all completed during the second quarter of 2022. 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. NOTE 15: UNDIVIDED PROFITS Simmons Bank, the Company’s subsidiary bank, is subject to legal limitations on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. The approval of the Commissioner of the Arkansas State Bank Department is required if the total of all dividends declared by an Arkansas state bank in any calendar year exceeds seventy-five percent ( 75 %) of the total of its net profits, as defined, for that year combined with seventy-five percent ( 75 %) of its retained net profits of the preceding year. At June 30, 2023, Simmons Bank had approximately $ 285.9 million available for payment of dividends to the Company, without prior regulatory approval. The risk-based capital guidelines of the Federal Reserve Board and the Arkansas State Bank Department include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. The criteria for a well-capitalized institution are: a 5 % “Tier l leverage capital” ratio, an 8 % “Tier 1 risk-based capital” ratio, 10 % “total risk-based capital” ratio; and a 6.5 % “common equity Tier 1 (CET1)” ratio. The Company and Simmons Bank must hold a capital conservation buffer of 2.5 % composed of CET1 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. As of June 30, 2023, the Company and Simmons Bank met all capital adequacy requirements, including the capital conservation buffer, under the Basel III Capital Rules. The Company’s CET1 ratio was 11.92 % at June 30, 2023. 39 NOTE 16: STOCK-BASED COMPENSATION The Company’s Board of Directors has adopted various stock-based compensation plans, including the 2023 Stock and Incentive Plan that was approved by shareholders and became effective April 18, 2023. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance stock units and stock awards. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awards of restricted stock, restricted stock units, performance stock units or stock awards granted to directors, officers and other key employees. The table below summarizes the transactions under the Company’s active stock-based compensation plans for the six months ended June 30, 2023: Stock Options Outstanding Non-vested Stock Awards Outstanding Non-vested Stock Units Outstanding (Shares in thousands) Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Grant-Date Fair Value Number of Shares Weighted Average Grant-Date Fair Value Beginning balance, January 1, 2023 470 $ 22.56 — $ — 1,197 $ 26.63 Granted — — — — 730 21.52 Stock options exercised ( 1 ) 10.65 — — — — Stock awards/units vested (earned) — — — — ( 381 ) 25.64 Forfeited/expired — — — — ( 138 ) 24.78 Balance, June 30, 2023 469 $ 22.58 — $ — 1,408 $ 24.41 Exercisable, June 30, 2023 469 $ 22.58 The following table summarizes information about stock options under the plans outstanding at June 30, 2023: Options Outstanding Options Exercisable Range of Exercise Prices Number of Shares (In thousands) Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number of Shares (In thousands) Weighted Average Exercise Price $ 20.29 — $ 20.29 47 1.39 $ 20.29 47 $ 20.29 22.20 — 22.20 51 1.73 22.20 51 22.20 22.75 — 22.75 293 1.97 22.75 293 22.75 23.51 — 23.51 71 2.40 23.51 71 23.51 24.07 — 24.07 7 2.21 24.07 7 24.07 $ 20.29 — $ 24.07 469 1.95 $ 22.58 469 $ 22.58 The table below summarizes the Company’s performance stock unit activity for the six months ended June 30, 2023: (In thousands) Performance Stock Units Non-vested, January 1, 2023 352 Granted 302 Vested (earned) ( 72 ) Forfeited ( 53 ) Non-vested, June 30, 2023 529 40 Stock-based compensation expense was $ 8.0 million and $ 8.2 million during the six month periods ended June 30, 2023 and 2022, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards. There was no unrecognized stock-based compensation expense related to stock options at June 30, 2023. Unrecognized stock-based compensation expense related to non-vested stock awards and stock units was $ 21.3 million at June 30, 2023. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.7 years. There was no intrinsic value of stock options outstanding and stock options exercisable at June 30, 2023. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $ 17.25 as of June 30, 2023, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of stock options exercised during the six months ended June 30, 2023 was $ 6,000 , while there was no intrinsic value of stock options exercised during the six months ended June 30, 2022. The fair value of the Company’s employee stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. There were no stock options granted during the six months ended June 30, 2023 and 2022. NOTE 17: EARNINGS PER SHARE (“EPS”) Basic EPS is computed by dividing reported net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing reported net income available to common stockholders by the weighted average common shares and all potential dilutive common shares outstanding during the period. The computation of earnings per share is as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands, except per share data) 2023 2022 2023 2022 Net income available to common stockholders $ 58,314 $ 27,454 $ 103,903 $ 92,549 Average common shares outstanding 127,104 128,313 127,145 120,420 Average potential dilutive common shares 276 407 276 407 Average diluted common shares 127,380 128,720 127,421 120,827 Basic earnings per share $ 0.46 $ 0.21 $ 0.82 $ 0.77 Diluted earnings per share $ 0.46 $ 0.21 $ 0.82 $ 0.77 There were 469,280 stock options excluded from the three and six months ended June 30, 2023 earnings per share calculation due to the related stock option exercise price exceeding the average market price of the Company’s stock during the periods. There were 6,610 stock options excluded from the earnings per share calculation for the three months ended June 30, 2022 due to the related stock option exercise price exceeding the average market price of the Company’s stock during the period. There were no stock options excluded from the earnings per share calculation for the six months ended June 30, 2022 due to the average market price of the Company’s stock exceeding the related stock option exercise price during the period. NOTE 18: ADDITIONAL CASH FLOW INFORMATION The following is a summary of the Company’s additional cash flow information: Six Months Ended June 30, (In thousands) 2023 2022 Interest paid $ 224,345 $ 36,049 Income taxes paid 1,425 4,881 Transfers of loans to foreclosed assets held for sale 2,274 581 Transfers of assets held for sale to other assets — 100 41 NOTE 19: OTHER INCOME AND OTHER OPERATING EXPENSES Other income for the three and six months ended June 30, 2023 was $ 9.8 million and $ 21.1 million, respectively. Other income for the same periods in 2022 was $ 6.8 million and $ 14.1 million, respectively. Included in other income during the six month period ended June 30, 2023 was a $ 4.0 million legal reserve recapture associated with previously disclosed legal matters. Additionally, other income increased on a year-over-year basis, primarily as a result of fair value adjustments associated with certain equity investments and death benefits from bank owned life insurance. Other operating expenses consisted of the following: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 Professional services $ 5,233 $ 4,202 $ 9,642 $ 9,648 Postage 2,366 2,217 4,690 4,343 Telephone 1,701 1,695 3,432 3,253 Credit card expense 3,444 3,037 6,633 5,743 Marketing 6,044 8,754 12,254 14,894 Software and technology 10,236 10,078 20,592 20,225 Operating supplies 683 713 1,288 1,411 Amortization of intangibles 4,098 4,096 8,194 7,582 Branch right sizing expense 95 292 1,074 1,201 Other expense 9,026 9,399 18,213 17,829 Total other operating expenses $ 42,926 $ 44,483 $ 86,012 $ 86,129 NOTE 20: CERTAIN TRANSACTIONS From time to time, the Company and its subsidiaries have made loans, other extensions of credit, and vendor contracts to directors, officers, their associates and members of their immediate families. Additionally, some directors, officers and their associates and members of their immediate families have placed deposits with the Company’s subsidiary bank, Simmons Bank. Such loans and other extensions of credit, deposits and vendor contracts (which were not material) were made in the ordinary course of business, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated persons or through a competitive bid process. Further, in management’s opinion, these extensions of credit did not involve more than normal risk of collectability or present other unfavorable features. NOTE 21: COMMITMENTS AND CREDIT RISK The Company grants agribusiness, commercial and residential loans to customers primarily throughout Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas, along with credit card loans to customers throughout the United States. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At June 30, 2023, the Company had outstanding commitments to extend credit aggregating approximately $ 717.1 million and $ 4.71 billion for credit card commitments and other loan commitments, respectively. At December 31, 2022, the Company had outstanding commitments to extend credit aggregating approximately $ 696.7 million and $ 5.64 billion for credit card commitments and other loan commitments, respectively. As of June 30, 2023, the Company had outstanding commitments to originate fixed-rate mortgage loans of approximately $ 30.4 million. At December 31, 2022, the Company had outstanding commitments to originate fixed-rate mortgage loans of approximately $ 21.1 million. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period. 42 Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $ 52.0 million and $ 44.4 million at June 30, 2023, and December 31, 2022, respectively, with terms ranging from 9 months to 15 years. At June 30, 2023 and December 31, 2022, the Company had no deferred revenue under standby letter of credit agreements. The Company has purchased letters of credit from the FHLB as security for certain public deposits. The amount of the letters of credit was $ 245.2 million and $ 265.7 million at June 30, 2023 and December 31, 2022, respectively, and they expire in less than one year from issuance. NOTE 22: FAIR VALUE MEASUREMENTS ASC Topic 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Topic 820 describes three levels of inputs that may be used to measure fair value: • Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities. • Level 2 Inputs – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 Inputs – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Available-for-sale securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and certain other financial products. Other securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. In order to ensure the fair values are consistent with ASC Topic 820, the Company periodically checks the fair values by comparing them to another pricing source, such as Bloomberg. The availability of pricing confirms Level 2 classification in the fair value hierarchy. The third-party pricing service is subject to an annual review of internal controls. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company’s investment in U.S. Treasury securities, if any, is reported at fair value utilizing Level 1 inputs. The remainder of the Company’s available-for-sale securities are reported at fair value utilizing Level 2 inputs. 43 Mortgage loans held for sale – Mortgage loans held for sale are reported at fair value on an aggregate basis. Adjustments to fair value are recognized monthly and reflected in earnings. In determining the fair value of loans held for sale, the Company may consider outstanding investor commitments, discounted cash flow analyses with market assumptions or the fair value of the collateral if the loan is collateral dependent. Such loans are classified within either Level 2 or Level 3 of the fair value hierarchy. Where assumptions are made using significant unobservable inputs, such loans held for sale are classified as Level 3. At June 30, 2023 and December 31, 2022, the aggregate fair value of mortgage loans held for sale exceeded their cost. Derivative instruments – The Company’s derivative instruments are reported at fair value utilizing Level 2 inputs. The Company obtains fair value measurements from dealer quotes. The following table sets forth the Company’s financial assets by level within the fair value hierarchy that were measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022. Fair Value Measurements Using (In thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2023 Available-for-sale securities U.S. Treasury $ 2,209 $ 2,209 $ — $ — U.S. Government agencies 176,564 — 176,564 — Mortgage-backed securities 2,282,328 — 2,282,328 — State and political subdivisions 885,505 — 885,505 — Other securities 233,152 — 233,152 — Mortgage loans held for sale 10,342 — — 10,342 Derivative asset 152,697 — 152,697 — Derivative liability ( 33,543 ) — ( 33,543 ) — December 31, 2022 Available-for-sale securities U.S. Treasury $ 2,197 $ 2,197 $ — $ — U.S. Government agencies 184,279 — 184,279 — Mortgage-backed securities 2,542,902 — 2,542,902 — States and political subdivisions 871,074 — 871,074 — Other securities 252,402 — 252,402 — Mortgage loans held for sale 3,486 — — 3,486 Derivative asset 139,323 — 139,323 — Derivative liability ( 34,440 ) — ( 34,440 ) — Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Assets and liabilities measured at fair value on a nonrecurring basis include the following: Individually assessed loans (collateral-dependent) – When the Company has a specific expectation to initiate, or has initiated, foreclosure proceedings, and when the repayment of a loan is expected to be substantially dependent on the liquidation of underlying collateral, the relationship is deemed collateral-dependent. Fair value of the loan is determined by establishing an allowance for credit loss for any exposure based on the valuation of the underlying collateral. The valuation of the collateral is determined by either an independent third-party appraisal or other collateral analysis. Discounts can be made by the Company based upon the overall evaluation of the independent appraisal. Collateral-dependent loans are classified within Level 3 of the fair value hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower’s underlying financial condition. Collateral values supporting the individually assessed loans are evaluated quarterly for updates to appraised values or adjustments due to non-current valuations. 44 Foreclosed assets and other real estate owned – Foreclosed assets and other real estate owned are reported at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for credit losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets and other real estate owned is estimated using Level 3 inputs based on unobservable market data. The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent loans and foreclosed assets primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount. The following table sets forth the Company’s assets by level within the fair value hierarchy that were measured at fair value on a nonrecurring basis as of June 30, 2023 and December 31, 2022. Fair Value Measurements Using (In thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2023 Individually assessed loans (1) (2) (collateral-dependent) $ 99,721 $ — $ — $ 99,721 Foreclosed assets and other real estate owned (1) 3,052 — — 3,052 December 31, 2022 Individually assessed loans (1) (2) (collateral-dependent) $ 70,926 $ — $ — $ 70,926 Foreclosed assets and other real estate owned (1) 2,418 — — 2,418 ________________________ (1) These amounts represent the resulting carrying amounts on the consolidated balance sheets for collateral-dependent loans and foreclosed assets and other real estate owned for which fair value re-measurements took place during the period. (2) Identified reserves of $ 12.8 million and $ 5.2 million were related to collateral-dependent loans for which fair value re-measurements took place during the periods ended June 30, 2023 and December 31, 2022, respectively. ASC Topic 825, Financial Instruments , requires disclosure in annual and interim financial statements of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The following methods and assumptions were used to estimate the fair value of each class of financial instruments not previously disclosed. Cash and cash equivalents – The carrying amount for cash and cash equivalents approximates fair value (Level 1). Interest bearing balances due from banks – The fair value of interest bearing balances due from banks – time is estimated using a discounted cash flow calculation that applies the rates currently offered on deposits of similar remaining maturities (Level 2). Held-to-maturity securities – Fair values for held-to-maturity securities equal quoted market prices, if available, such as for highly liquid government bonds (Level 1). If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things (Level 2). In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. 45 Loans – The fair value of loans is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Additional factors considered include the type of loan and related collateral, variable or fixed rate, classification status, remaining term, interest rate, historical delinquencies, loan to value ratios, current market rates and remaining loan balance. The loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans were based on current market rates for new originations of similar loans. Estimated credit losses were also factored into the projected cash flows of the loans. The fair value of loans is estimated on an exit price basis incorporating the above factors (Level 3). Deposits – The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 2). The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities (Level 3). Federal Funds purchased, securities sold under agreement to repurchase and short-term debt – The carrying amount for Federal funds purchased, securities sold under agreement to repurchase and short-term debt are a reasonable estimate of fair value (Level 2). Other borrowings – For short-term instruments, the carrying amount is a reasonable estimate of fair value. For long-term debt, rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value (Level 2). Subordinated debentures – The fair value of subordinated debentures is estimated using the rates that would be charged for subordinated debentures of similar remaining maturities (Level 2). Accrued interest receivable/payable – The carrying amounts of accrued interest approximated fair value (Level 2). Commitments to extend credit, letters of credit and lines of credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. 46 The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows: Carrying Fair Value Measurements (In thousands) Amount Level 1 Level 2 Level 3 Total June 30, 2023 Financial assets: Cash and cash equivalents $ 745,912 $ 745,912 $ — $ — $ 745,912 Interest bearing balances due from banks - time 545 — 545 — 545 Held-to-maturity securities, net 3,756,754 — 3,094,858 — 3,094,858 Interest receivable 103,431 — 103,431 — 103,431 Loans, net 16,623,687 — — 15,928,195 15,928,195 Financial liabilities: Noninterest bearing transaction accounts 5,264,962 — 5,264,962 — 5,264,962 Interest bearing transaction accounts and savings deposits 10,866,078 — 10,866,078 — 10,866,078 Time deposits 6,357,682 — — 6,293,911 6,293,911 Federal funds purchased and securities sold under agreements to repurchase 102,586 — 102,586 — 102,586 Other borrowings 1,373,339 — 1,370,261 — 1,370,261 Subordinated notes and debentures 366,065 — 359,801 — 359,801 Interest payable 27,346 — 27,346 — 27,346 December 31, 2022 Financial assets: Cash and cash equivalents $ 682,122 $ 682,122 $ — $ — $ 682,122 Interest bearing balances due from banks - time 795 — 795 — 795 Held-to-maturity securities, net 3,759,706 — 3,063,233 — 3,063,233 Interest receivable 102,892 — 102,892 — 102,892 Loans, net 15,945,169 — — 15,573,555 15,573,555 Financial liabilities: Noninterest bearing transaction accounts 6,016,651 — 6,016,651 — 6,016,651 Interest bearing transaction accounts and savings deposits 11,762,885 — 11,762,885 — 11,762,885 Time deposits 4,768,558 — — 4,696,473 4,696,473 Federal funds purchased and securities sold under agreements to repurchase 160,403 — 160,403 — 160,403 Other borrowings 859,296 — 857,257 — 857,257 Subordinated notes and debentures 365,989 — 363,578 — 363,578 Interest payable 16,399 — 16,399 — 16,399 The fair value of commitments to extend credit, letters of credit and lines of credit is not presented since management believes the fair value to be insignificant. 47 NOTE 23: DERIVATIVE INSTRUMENTS The Company utilizes derivative instruments to manage exposure to various types of interest rate risk for itself and its customers within policy guidelines. Transactions should only be entered into with an associated underlying exposure. All derivative instruments are carried at fair value. Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s asset/liability management committee. In arranging these products for its customers, the Company assumes additional credit risk from the customer and from the dealer counterparty with whom the transaction is undertaken. Credit risk exists due to the default credit risk created in the exchange of the payments over a period of time. Credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps with each counterparty. Access to collateral in the event of default is reasonably assured. Therefore, credit exposure may be reduced by the amount of collateral pledged by the counterparty. Hedge Structures The Company will seek to enter derivative structures that most effectively address the risk exposure and structural terms of the underlying position being hedged. The term and notional principal amount of a hedge transaction will not exceed the term or principal amount of the underlying exposure. In addition, the Company will use hedge indices which are the same as, or highly correlated to, the index or rate on the underlying exposure. Derivative credit exposure is monitored on an ongoing basis for each customer transaction and aggregate exposure to each counterparty is tracked. Fair Value Hedges For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. 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 fixed rate callable AFS securities. The hedging strategy converts the fixed interest rates to variable interest rates based on federal funds rates. The two year forward start date for these swaps occurs during the third quarter of 2023 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. The following table summarizes the fair value hedges recorded in the accompanying consolidated balance sheets. June 30, 2023 December 31, 2022 (In thousands) Balance Sheet Location Weighted Average Pay Rate Receive Rate Notional Fair Value Notional Fair Value Derivative assets Other assets 1.21 % Federal Funds $ 1,001,715 $ 119,105 $ 1,001,715 $ 104,833 The following amounts were recorded on the balance sheet related to carrying amounts and cumulative basis adjustments for fair value hedges. Carrying Amount of Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Assets Line Item on the Balance Sheet (In thousands) June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Investment securities - Available-for-sale $ 926,745 $ 944,115 $ 120,919 $ 106,321 48 Customer Risk Management Interest Rate Swaps The Company’s qualified loan customers have the opportunity to participate in its interest rate swap program for the purpose of managing interest rate risk on their variable rate loans with the Company. The Company enters into such agreements with customers, then offsetting agreements are executed between the Company and an approved dealer counterparty to minimize market risk from changes in interest rates. The counterparty contracts are identical to customer contracts in terms of notional amounts, interest rates, and maturity dates, except for a fixed pricing spread or fee paid to the Company by the dealer counterparty. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. The fair value of these derivative instruments is recognized as either derivative assets or liabilities in the accompanying consolidated balance sheets. The Company has a limited number of swaps that are standalone without a similar agreement with the loan customer. The following table summarizes the fair values of loan derivative contracts recorded in the accompanying consolidated balance sheets. June 30, 2023 December 31, 2022 (In thousands) Notional Fair Value Notional Fair Value Derivative assets $ 486,439 $ 33,592 $ 413,968 $ 34,490 Derivative liabilities 547,212 33,543 414,955 34,440 Risk Participation Agreements The Company has a limited number of Risk Participation Agreement swaps, that are associated with loan participations, where the Company is not the counterparty to the interest rate swaps that are associated with the risk participation sold. The interest rate swap mark to market only impacts the Company if the swap is in a liability position to the counterparty and the customer defaults on payments to the counterparty. The notional amount of these contingent agreements is $ 20.1 million as of June 30, 2023. Energy Hedging The Company, from time-to-time, provides energy derivative services to qualifying, high quality oil and gas borrowers for hedging purposes. The Company serves as an intermediary on energy derivative products between the Company’s borrowers and dealers. The Company will only enter into back-to-back trades, thus maintaining a balanced book between the dealer and the borrower. Energy hedging risk exposure to the Company’s customer increases as energy prices for crude oil and natural gas rise. As prices decrease, exposure to the exchange increases. These risks are mitigated by customer credit underwriting policies and establishing a predetermined hedge line for each borrower and by monitoring the exchange margin. During the second quarter of 2023, the Company’s remaining energy hedge swap contracts expired and there were no outstanding notional values related to these contracts as of June 30, 2023. Currently, the Company generally does not intend to offer hedging services to any remaining energy related customers. 49 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders, Board of Directors and Audit Committee Simmons First National Corporation Pine Bluff, Arkansas Results of Review of Interim Financial Statements We have reviewed the consolidated balance sheet of Simmons First National Corporation and subsidiaries (“the Company”) as of June 30, 2023, and the related consolidated statements of income, comprehensive income (loss) and stockholders’ equity for the three and six month periods ended June 30, 2023 and 2022, and cash flows for the six month periods ended June 30, 2023 and 2022, and the related notes (collectively referred to as the “interim financial information or statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company and subsidiaries as of December 31, 2022, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated February 27, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Basis for Review Results These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information (statements) consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. /s/ FORVIS, LLP Little Rock, Arkansas August 4, 2023 50