HOME BANCSHARES INC : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (type 10-Q)

The following discussion should be read in conjunction with our Form 10-K, filed

with the Securities and Exchange Commission on February 24, 2022, which includes

the audited financial statements for the year ended December 31, 2021. Unless

the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refer

to Home BancShares, Inc. on a consolidated basis.

General

We are a bank holding company headquartered in Conway, Arkansas, offering a

broad array of financial services through our wholly-owned bank subsidiary,

Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of

March 31, 2022, we had, on a consolidated basis, total assets of $18.62 billion,

loans receivable, net of $10.05 billion, total deposits of $14.58 billion, and

stockholders’ equity of $2.69 billion.

We generate most of our revenue from interest on loans and investments, service

charges, and mortgage banking income. Deposits and Federal Home Loan Bank

(“FHLB”) and other borrowed funds are our primary source of funding. Our largest

expenses are interest on our funding sources, salaries and related employee

benefits and occupancy and equipment. We measure our performance by calculating

our return on average common equity, return on average assets and net interest

margin. We also measure our performance by our efficiency ratio, which is

calculated by dividing non-interest expense less amortization of core deposit

intangibles by the sum of net interest income on a tax equivalent basis and

non-interest income. The efficiency ratio, as adjusted, is a non-GAAP measure

and is calculated by dividing non-interest expense less amortization of core

deposit intangibles by the sum of net interest income on a tax equivalent basis

and non-interest income excluding adjustments such as merger and acquisition

expenses and/or certain gains, losses and other non-interest income and

expenses.

Table 1: Key Financial Measures

As of or for the Three Months Ended

March 31,

2022 2021

(Dollars

in thousands, except per share

data)

Total assets $ 18,617,995 $ 17,240,241

Loans receivable 10,052,714 10,778,493

Allowance for credit losses 234,768 242,932

Total deposits 14,580,934 13,512,594

Total stockholders’ equity 2,686,703 2,645,204

Net income 64,892 91,602

Basic earnings per share 0.40 0.55

Diluted earnings per share 0.40 0.55

Book value per share 16.41 16.02

Tangible book value per share (non-GAAP)(1) 10.32 9.95

Annualized net interest margin – FTE 3.21% 4.02%

Efficiency ratio 46.15 36.60

Efficiency ratio, as adjusted (non-GAAP)(2) 47.33 40.68

Annualized return on average assets 1.43 2.22

Annualized return on average common equity 9.58 14.15

(1)See Table 19 for the non-GAAP tabular reconciliation.

(2)See Table 23 for the non-GAAP tabular reconciliation.

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Results of Operations for the Three Months Ended March 31, 2022 and 2021

Our net income decreased $26.7 million, or 29.2%, to $64.9 million for the

three-month period ended March 31, 2022, from $91.6 million for the same period

in 2021. On a diluted earnings per share basis, our earnings were $0.40 per

share for the three-month period ended March 31, 2022 compared to $0.55 per

share for the three-month period ended March 31, 2021. During the three-month

periods ended March 31, 2022 and March 31, 2021, the Company did not record any

provision for credit losses. The markets in which we operate have begun to

experience significant economic uncertainty primarily related to inflationary

concerns, continuing supply chain issues and the potential impacts of

international unrest. However, the Company determined that an additional

provision for credit losses was not necessary as the current level of the

allowance for credit losses was considered adequate as of March 31, 2022. The

Company recorded a $2.1 million adjustment for the increase in fair value of

marketable securities, $3.3 million recovery on historic losses for a single

borrower and $863,000 in merger and acquisition expenses.

Total interest income decreased by $17.7 million, or 10.9%, non-interest expense

increased by $4.0 million, or 5.5%, and non-interest income decreased by $14.6

million, or 32.3%. This was partially offset by an $808,000, or 5.5%, decrease

in total interest expense. The decrease in interest income was due to a $21.5

million decrease in loan interest income, which was partially offset by a $2.5

million increase in investment income and a $1.3 million increase in interest

income on deposits at other banks. The increase in non-interest expense was due

to a $1.5 million, or 3.5%, increase in salaries and employee benefits, a $1.2

million, or 19.9%, increase in data processing expense, a $863,000 increase in

merger and acquisition expense, and a $599,000, or 3.8%, increase in other

operating expenses. The decrease in non-interest income was primarily due to a

$7.9 million, or 91.9%, decrease in dividends from FHLB, FRB, FNBB and other, a

$4.3 million, or 52.1%, decrease in mortgage lending income, a $3.7 million, or

63.2%, decrease in fair value adjustment for marketable securities which was

partially offset by a $1.1 million, or 22.8%, increase in service charges on

deposit accounts. The decrease in interest expense was primarily due to a $2.8

million, or 36.5%, decrease in interest on deposits, which was partially offset

by a $2.1 million, or 43.5%, increase in interest on subordinated debentures

resulting from the completion of the new subordinated debt issue in January

2022. Income tax expense decreased by $8.9 million, or 30.7%, during the quarter

due to a decrease in net income.

Our net interest margin decreased from 4.02% for the three-month period ended

March 31, 2021 to 3.21% for the three-month period ended March 31, 2022. The

yield on interest earning assets was 3.55% and 4.41% for the three months ended

March 31, 2022 and 2021, respectively, as average interest earning assets

increased from $15.12 billion to $16.77 billion. The increase in average earning

assets is primarily the result of a $1.89 billion increase in average

interest-bearing balances due from banks and an $851.9 million increase in

average investment securities. This was partially offset by the $1.09 billion

decrease in average loans receivable. Average PPP loan balances were $78.0

million for the three months ended March 31, 2022, compared to $633.8 million

for the three months ended March 31, 2021. These loans bear interest at 1.00%

plus the accretion of the deferred origination fee. Including deferred fees, we

recognized total interest income of $2.2 million on PPP loans for the three

months ended March 31, 2022 compared to $11.9 million for the three months ended

March 31, 2021. The PPP loans were accretive to the net interest margin by 4

basis points for the three months ended March 31, 2022 compared to 16 basis

points for the three months ended March 31, 2021. As of March 31, 2022, the

Company had $1.6 million in remaining unamortized PPP fees. The market has

continued to experience significant amounts of excess liquidity, and the Company

completed an underwritten public offering of $300.0 million in aggregate

principal of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032

during January 2022. As a result, we had an increase of $1.89 billion in average

interest-bearing cash balances for the three months ended March 31, 2022

compared to the three months ended March 31, 2021. The excess liquidity was

dilutive to the net interest margin by 34 basis points, and the additional

liquidity resulting from the subordinated debt issuance was dilutive to the net

interest margin by 5 basis points. In addition, the increase in interest expense

for the subordinated debentures was dilutive to the net interest margin by 5

basis points. For the three months ended March 31, 2022 and 2021, we recognized

$3.1 million and $5.5 million, respectively, in total net accretion for acquired

loans and deposits. The reduction in accretion was dilutive to the net interest

margin by 6 basis points. We recognized $1.4 million in event interest income

for the three months ended March 31, 2022 compared to $1.1 million for the three

months ended March 31, 2021. This increased the net interest margin by 1 basis

point.

Our efficiency ratio was 46.15% for the three months ended March 31, 2022,

compared to 36.60% for the same period in 2021. For the first quarter of 2022,

our efficiency ratio, as adjusted (non-GAAP), was 47.33%, compared to 40.68%

reported for the first quarter of 2021. (See Table 23 for the non-GAAP tabular

reconciliation).

Our annualized return on average assets was 1.43% for the three months ended

March 31, 2022, compared to 2.22% for the same period in 2021. Our annualized

return on average common equity was 9.58% and 14.15% for both the three months

ended March 31, 2022, and 2021.

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Financial Condition as of and for the Period Ended March 31, 2022 and

December 31, 2021

Our total assets as of March 31, 2022 increased $565.9 million to $18.62 billion

from the $18.05 billion reported as of December 31, 2021. Cash and cash

equivalents decreased $30.9 million, for the three months ended March 31, 2022.

Our loan portfolio balance increased to $10.05 billion as of March 31, 2022 from

$9.84 billion at December 31, 2021. The increase in loans was primarily due to

the acquisition of $242.2 million in marine loans from LendingClub Bank during

the first quarter of 2022, as well as $27.6 million in organic loan growth,

partially offset by $53.2 million of PPP loan decline. Total deposits increased

$320.4 million to $14.58 billion as of March 31, 2022 from $14.26 billion as of

December 31, 2021. Stockholders’ equity decreased $79.0 million to $2.69 billion

as of March 31, 2022, compared to $2.77 billion as of December 31, 2021. The

$79.0 million decrease in stockholders’ equity is primarily associated with the

$115.0 million in other comprehensive loss for the three months ended March 31,

2022, $27.0 million of shareholder dividends paid and stock repurchases of $4.1

million in 2022, partially offset by $64.9 million in net income for the three

months ended March 31, 2022.

Our non-performing loans were $44.7 million, or 0.44% of total loans as of

March 31, 2022, compared to $50.2 million, or 0.51% of total loans as of

December 31, 2021. The allowance for credit losses as a percentage of

non-performing loans increased to 525.50% as of March 31, 2022, from 471.61% as

of December 31, 2021. Non-performing loans from our Arkansas franchise were

$13.2 million at March 31, 2022 compared to $13.9 million as of December 31,

2021. Non-performing loans from our Florida franchise were $24.8 million at

March 31, 2022 compared to $26.8 million as of December 31, 2021. Non-performing

loans from our Alabama franchise were $480,000 at March 31, 2022 compared to

$470,000 as of December 31, 2021. Non-performing loans from our Shore Premier

Finance (“SPF”) franchise were $1.4 million at March 31, 2022 compared to $1.5

million as of December 31, 2021. Non-performing loans from our Centennial

Commercial Finance Group (“CFG”) franchise were $4.8 million at March 31, 2022

compared to $7.5 million as of December 31, 2021.

As of March 31, 2022, our non-performing assets decreased to $45.8 million, or

0.25% of total assets, from $51.8 million, or 0.29% of total assets, as of

December 31, 2021. Non-performing assets from our Arkansas franchise were $13.2

million at March 31, 2022 compared to $14.4 million as of December 31, 2021.

Non-performing assets from our Florida franchise were $25.9 million at March 31,

2022 compared to $27.9 million as of December 31, 2021. Non-performing assets

from our Alabama franchise were $480,000 at March 31, 2022 compared to $470,000

as of December 31, 2021. Non-performing assets from our SPF franchise were $1.4

million at March 31, 2022 compared to $1.5 million as of December 31, 2021.

Non-performing assets from our CFG franchise were $4.8 million at March 31, 2022

compared to $7.5 million as of December 31, 2021.

The $4.8 million balance of non-accrual loans for our Centennial CFG market

consists of one loan that is assessed for credit risk by the Federal Reserve

under the Shared National Credit Program. The decision to place this loan on

non-accrual status was made by the Federal Reserve and not the Company. The loan

that makes up the total balance is still current on both principal and interest.

However, all interest payments are currently being applied to the principal

balance. Because the Federal Reserve required us to place this loan on

non-accrual status, we have reversed any interest that had accrued subsequent to

the non-accrual date designated by the Federal Reserve.

Critical Accounting Policies and Estimates

Overview. We prepare our consolidated financial statements based on the

selection of certain accounting policies, generally accepted accounting

principles and customary practices in the banking industry. These policies, in

certain areas, require us to make significant estimates and assumptions. Our

accounting policies are described in detail in the notes to our consolidated

financial statements included as part of this document.

We consider a policy critical if (i) the accounting estimate requires

assumptions about matters that are highly uncertain at the time of the

accounting estimate; and (ii) different estimates that could reasonably have

been used in the current period, or changes in the accounting estimate that are

reasonably likely to occur from period to period, would have a material impact

on our financial statements. Using these criteria, we believe that the

accounting policies most critical to us are those associated with our lending

practices, including revenue recognition and the accounting for the allowance

for credit losses, foreclosed assets, investments, intangible assets, income

taxes and stock options.

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Revenue Recognition. Accounting Standards Codification (“ASC”) Topic 606,

Revenue from Contracts with Customers (“ASC Topic 606”), establishes principles

for reporting information about the nature, amount, timing and uncertainty of

revenue and cash flows arising from the entity’s contracts to provide goods or

services to customers. The core principle requires an entity to recognize

revenue to depict the transfer of goods or services to customers in an amount

that reflects the consideration that it expects to be entitled to receive in

exchange for those goods or services recognized as performance obligations are

satisfied. The majority of our revenue-generating transactions are not subject

to ASC Topic 606, including revenue generated from financial instruments, such

as our loans, letters of credit and investment securities, as these activities

are subject to other GAAP discussed elsewhere within our disclosures.

Descriptions of our revenue-generating activities that are within the scope of

ASC Topic 606, which are presented in our income statements as components of

non-interest income are as follows:

•Service charges on deposit accounts – These represent general service fees for

monthly account maintenance and activity or transaction-based fees and consist

of transaction-based revenue, time-based revenue (service period), item-based

revenue or some other individual attribute-based revenue. Revenue is recognized

when our performance obligation is completed which is generally monthly for

account maintenance services or when a transaction has been completed (such as a

wire transfer). Payment for such performance obligations are generally received

at the time the performance obligations are satisfied.

•Other service charges and fees – These represent credit card interchange fees

and Centennial CFG loan fees. The interchange fees are recorded in the period

the performance obligation is satisfied which is generally the cash basis based

on agreed upon contracts. Centennial CFG loan fees are based on loan or other

negotiated agreements with customers and are accounted for under ASC Topic 310.

Interchange fees were $3.9 million and $3.8 million for the three months ended

March 31, 2022 and 2021, respectively. Centennial CFG loan fees were $1.8

million and $2.0 million for the three months ended March 31, 2022 and 2021,

respectively.

Investments – Available-for-sale. Securities available-for-sale are reported at

fair value with unrealized holding gains and losses reported as a separate

component of stockholders’ equity and other comprehensive income (loss), net of

taxes. Securities that are held as available-for-sale are used as a part of our

asset/liability management strategy. Securities that may be sold in response to

interest rate changes, changes in prepayment risk, the need to increase

regulatory capital, and other similar factors are classified as

available-for-sale. The Company evaluates all securities quarterly to determine

if any securities in a loss position require a provision for credit losses in

accordance with ASC 326, Measurement of Credit Losses on Financial Instruments

(“CECL”). The Company first assesses whether it intends to sell or is more

likely than not that the Company will be required to sell the security before

recovery of its amortized cost basis. If either of the criteria regarding intent

or requirement to sell is met, the security’s amortized cost basis is written

down to fair value through income. For securities that do not meet this

criteria, the Company evaluates whether the decline in fair value has resulted

from credit losses or other factors. In making this assessment, the Company

considers the extent to which fair value is less than amortized cost, and

changes to the rating of the security by a rating agency, and adverse conditions

specifically related to the security, among other factors. If this assessment

indicates that a credit loss exists, the present value of cash flows expected to

be collected from the security are compared to the amortized cost basis of the

security. If the present value of cash flows expected to be collected is less

than the amortized cost basis, a credit loss exists and an allowance for credit

losses is recorded for the credit loss, limited by the amount that the fair

value is less than the amortized cost basis. Any impairment that has not been

recorded through an allowance for credit losses is recognized in other

comprehensive income. Changes in the allowance for credit losses are recorded as

provision for (or reversal of) credit loss expense. Losses are charged against

the allowance when management believes the uncollectability of a security is

confirmed or when either of the criteria regarding intent or requirement to sell

is met.

Investments – Held-to-Maturity. Securities held-to-maturity, which include any

security for which we have the positive intent and ability to hold until

maturity, are reported at historical cost adjusted for amortization of premiums

and accretion of discounts. Premiums and discounts are amortized/accreted to the

call date to interest income using the constant effective yield method over the

estimated life of the security. The Company measures expected credit losses on

HTM securities on a collective basis by major security type, with each type

sharing similar risk characteristics. The estimate of expected credit losses

considers historical credit loss information that is adjusted for current

conditions and reasonable and supportable forecasts. The Company has made the

election to exclude accrued interest receivable on HTM securities from the

estimate of credit losses and report accrued interest separately on the

consolidated balance sheets.

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Loans Receivable and Allowance for Credit Losses. Loans receivable that

management has the intent and ability to hold for the foreseeable future or

until maturity or payoff are reported at their outstanding principal balance

adjusted for any charge-offs, deferred fees or costs on originated loans.

Interest income on loans is accrued over the term of the loans based on the

principal balance outstanding. Loan origination fees and direct origination

costs are capitalized and recognized as adjustments to yield on the related

loans.

The allowance for credit losses on loans receivable is a valuation account that

is deducted from the loans’ amortized cost basis to present the net amount

expected to be collected on the loans. Loans are charged off against the

allowance when management believes the uncollectability of a loan balance is

confirmed. Expected recoveries do not exceed the aggregate of amounts previously

charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information,

from internal and external sources, relating to past events, current conditions,

and reasonable and supportable forecasts. Historical credit loss experience

provides the basis for the estimation of expected credit losses. Adjustments to

historical loss information are made for differences in current loan-specific

risk characteristics such as differences in underwriting standards, portfolio

mix, delinquency level, or term as well as for changes in environmental

conditions, such as changes in the national unemployment rate, gross domestic

product, rental vacancy rate, housing price index and national retail sales

index.

The allowance for credit losses is measured based on call report segment as

these types of loans exhibit similar risk characteristics. The identified loan

segments are as follows:

•1-4 family construction

•All other construction

•1-4 family revolving home equity lines of credit (“HELOC”) & junior liens

•1-4 family senior liens

•Multifamily

•Owner occupied commercial real estate

•Non-owner occupied commercial real estate

•Commercial & industrial, agricultural, non-depository financial institutions,

purchase/carry securities, other

•Consumer auto

•Other consumer

•Other consumer – SPF

The allowance for credit losses for each segment is measured through the use of

the discounted cash flow method. Loans that do not share risk characteristics

are evaluated on an individual basis. Loans evaluated individually are not also

included in the collective evaluation. For those loans that are classified as

impaired, an allowance is established when the discounted cash flows, collateral

value or observable market price of the impaired loan is lower than the carrying

value of that loan. For loans that are not considered to be collateral

dependent, an allowance is recorded based on the loss rate for the respective

pool within the collective evaluation if a specific reserve is not recorded.

•Management has a reasonable expectation at the reporting date that troubled

debt restructuring will be executed with an individual borrower.

•The extension or renewal options are included in the original or modified

contract at the reporting date and are not unconditionally cancellable by the

Company.

Management qualitatively adjusts model results for risk factors that are not

considered within our modeling processes but are nonetheless relevant in

assessing the expected credit losses within our loan pools. These qualitative

factors (“Q-Factor”) and other qualitative adjustments may increase or decrease

management’s estimate of expected credit losses by a calculated percentage or

amount based upon the estimated level of risk. The various risks that may be

considered in making Q-Factor and other qualitative adjustments include, among

other things, the impact of (i) changes in lending policies, procedures and

strategies; (ii) changes in nature and volume of the portfolio; (iii) staff

experience; (iv) changes in volume and trends in classified loans, delinquencies

and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral

values; (vii) external factors such as competition, legal and regulatory

environment; (viii) changes in the quality of the loan review system and (ix)

economic conditions.

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Loans considered impaired, according to ASC 326, are loans for which, based on

current information and events, it is probable that we will be unable to collect

all amounts due according to the contractual terms of the loan agreement. The

aggregate amount of impairment of loans is utilized in evaluating the adequacy

of the allowance for credit losses and amount of provisions thereto. Losses on

impaired loans are charged against the allowance for credit losses when in the

process of collection, it appears likely that such losses will be realized. The

accrual of interest on impaired loans is discontinued when, in management’s

opinion the collection of interest is doubtful or generally when loans are 90

days or more past due. When accrual of interest 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.

Loans are placed on non-accrual status when management believes that the

borrower’s financial condition, after giving consideration to economic and

business conditions and collection efforts, is such that collection of interest

is doubtful, or generally when loans are 90 days or more past due. Loans are

charged against the allowance for credit losses when management believes that

the collectability of the principal is unlikely. Accrued interest related to

non-accrual loans is generally charged against the allowance for credit losses

when accrued in prior years and reversed from interest income if accrued in the

current year. Interest income on non-accrual loans may be recognized to the

extent cash payments are received, although the majority of payments received

are usually applied to principal. Non-accrual loans are generally returned to

accrual status when principal and interest payments are less than 90 days past

due, the customer has made required payments for at least six months, and we

reasonably expect to collect all principal and interest.

Acquisition Accounting and Acquired Loans. We account for our acquisitions under

FASB ASC Topic 805, Business Combinations, which requires the use of the

acquisition method of accounting. All identifiable assets acquired, including

loans, are recorded at fair value. In accordance with ASC 326, the Company

records both a discount and an allowance for credit losses on acquired loans.

All purchased loans are recorded at fair value in accordance with the fair value

methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair

value estimates associated with the loans include estimates related to expected

prepayments and the amount and timing of undiscounted expected principal,

interest and other cash flows.

Purchased loans that have experienced more than insignificant credit

deterioration since origination are purchase credit deteriorated (“PCD”) loans.

An allowance for credit losses is determined using the same methodology as other

loans. The initial allowance for credit losses determined on a collective basis

is allocated to individual loans. The sum of the loan’s purchase price and

allowance for credit losses becomes its initial amortized cost basis. The

difference between the initial amortized cost basis and the par value of the

loan is a non-credit discount or premium, which is amortized into interest

income over the life of the loan. Subsequent changes to the allowance for credit

losses are recorded through the provision for credit losses.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company

estimates expected credit losses over the contractual period in which the

Company is exposed to credit risk via a contractual obligation to extend credit

unless that obligation is unconditionally cancellable by the Company. The

allowance for credit losses on off-balance sheet credit exposures is adjusted as

a provision for credit loss. The estimate includes consideration of the

likelihood that funding will occur and an estimate of expected credit losses on

commitments expected to be funded over its estimated life.

Foreclosed Assets Held for Sale. Real estate and personal properties acquired

through or in lieu of loan foreclosure are to be sold and are initially recorded

at fair value at the date of foreclosure, establishing a new cost basis.

Valuations are periodically performed by management, and the real estate and

personal properties are carried at fair value less costs to sell. Gains and

losses from the sale of other real estate and personal properties are recorded

in non-interest income, and expenses used to maintain the properties are

included in non-interest expenses.

Intangible Assets. Intangible assets consist of goodwill and core deposit

intangibles. Goodwill represents the excess purchase price over the fair value

of net assets acquired in business acquisitions. The core deposit intangible

represents the excess intangible value of acquired deposit customer

relationships as determined by valuation specialists. The core deposit

intangibles are being amortized over 48 to 121 months on a straight-line basis.

Goodwill is not amortized but rather is evaluated for impairment on at least an

annual basis. We perform an annual impairment test of goodwill and core deposit

intangibles as required by FASB ASC 350, Intangibles – Goodwill and Other, in

the fourth quarter or more often if events and circumstances indicate there may

be an impairment.

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Income Taxes. We account for income taxes in accordance with income tax

accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance

results in two components of income tax expense: current and deferred. Current

income tax expense reflects taxes to be paid or refunded for the current period

by applying the provisions of the enacted tax law to the taxable income or

excess of deductions over revenues. We determine deferred income taxes using the

liability (or balance sheet) method. Under this method, the net deferred tax

asset or liability is based on the tax effects of the differences between the

book and tax basis of assets and liabilities, and enacted changes in tax rates

and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and

liabilities between periods. Deferred tax assets are recognized if it is more

likely than not, based on the technical merits, that the tax position will be

realized or sustained upon examination. The term “more likely than not” means a

likelihood of more than 50 percent; the terms “examined” and “upon examination”

also include resolution of the related appeals or litigation processes, if any.

A tax position that meets the more-likely-than-not recognition threshold is

initially and subsequently measured as the largest amount of tax benefit that

has a greater than 50 percent likelihood of being realized upon settlement with

a taxing authority that has full knowledge of all relevant information. The

determination of whether or not a tax position has met the more-likely-than-not

recognition threshold considers the facts, circumstances and information

available at the reporting date and is subject to the management’s judgment.

Deferred tax assets are reduced by a valuation allowance if, based on the weight

of evidence available, it is more likely than not that some portion or all of a

deferred tax asset will not be realized.

Both we and our subsidiary file consolidated tax returns. Our subsidiary

provides for income taxes on a separate return basis, and remits to us amounts

determined to be currently payable.

Stock Compensation. In accordance with FASB ASC 718, Compensation – Stock

Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees, the

fair value of each option award is estimated on the date of grant. We recognize

compensation expense for the grant-date fair value of the option award over the

vesting period of the award.

Acquisitions

Acquisition of Marine Portfolio

On February 4, 2022, the Company completed the purchase of the performing marine

loan portfolio of Utah-based LendingClub Bank (“LendingClub”). Under the terms

of the purchase agreement with LendingClub, the Company acquired yacht loans

totaling approximately $242.2 million. This portfolio of loans is housed within

the Company’s Shore Premier Finance division, which is responsible for servicing

the acquired loan portfolio and originating new loan production.

Acquisition of Happy Bancshares, Inc.

Effective April 1, 2022, pursuant to an Agreement and Plan of Merger, dated as

of September 15, 2021, as amended on October 18, 2021 and further amended on

November 8, 2021 (the “Merger Agreement”) among the Company, Centennial, the

Company’s acquisition subsidiary, HOMB Acquisition Sub III, Inc. (“Acquisition

Sub”), Happy Bancshares, Inc. (“Happy”), and its wholly-owned bank subsidiary,

Happy State Bank (“HSB”), Acquisition Sub merged with and into Happy and Happy

merged with and into the Company, with the Company as the surviving entity

(collectively, the “Merger”). HSB also merged with and into Centennial, with

Centennial as the surviving entity.

Under the terms of the Merger Agreement, the Company issued approximately

42.4 million shares of its common stock valued at approximately $958.8 million

as of April 1, 2022. In addition, the holders of stock appreciation rights of

Happy received approximately $3.1 million in cash in cancellation of their stock

appreciation rights immediately before the Merger, for a total transaction value

of approximately $961.9 million.

For further discussion of the acquisition, see Note 22 to the Condensed Notes to

Consolidated Financial Statements.

We will continue evaluating all types of potential bank acquisitions, which may

include FDIC-assisted acquisitions as opportunities arise, to determine what is

in the best interest of our Company. Our goal in making these decisions is to

maximize the return to our investors.

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Branches

As opportunities arise, we will continue to open new (commonly referred to as de

novo) branches in our current markets and in other attractive market areas.

As of March 31, 2022, we had 160 branch locations. There were 76 branches in

Arkansas, 78 branches in Florida, five branches in Alabama and one branch in New

York City.

With the completion of the acquisition of Happy as of April 1, 2022, the Company

now operates 62 branches in Texas.

Results of Operations

For the three months ended March 31, 2022 and 2021

Net Interest Income

Net interest income, our principal source of earnings, is the difference between

the interest income generated by earning assets and the total interest cost of

the deposits and borrowings obtained to fund those assets. Factors affecting the

level of net interest income include the volume of earning assets and

interest-bearing liabilities, yields earned on loans and investments, rates paid

on deposits and other borrowings, the level of non-performing loans and the

amount of non-interest-bearing liabilities supporting earning assets. Net

interest income is analyzed in the discussion and tables below on a fully

taxable equivalent basis. The adjustment to convert certain income to a fully

taxable equivalent basis consists of dividing tax-exempt income by one minus the

combined federal and state income tax rate (26.135% for 2022 and 25.74% for

2021).

The Federal Reserve Board sets various benchmark rates, including the Federal

Funds rate, and thereby influences the general market rates of interest,

including the deposit and loan rates offered by financial institutions. In 2020,

the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in

effect throughout all of 2021. On March 16, 2022, the target rate was increased

to 0.25% to 0.50%. Presently, the Federal Reserve has indicated they are

anticipating multiple rate increases for 2022.

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respectively, in total net accretion for acquired loans and deposits. The

reduction in accretion was dilutive to the net interest margin by 6 basis

points. We recognized $1.4 million in event interest income for the three months

ended March 31, 2022 compared to $1.1 million for the three months ended

March 31, 2021. This increased the net interest margin by 1 basis point.

Net interest income on a fully taxable equivalent basis decreased $17.0 million,

or 11.4%, to $132.9 million for the three-month period ended March 31, 2022,

from $149.9 million for the same period in 2021. This decrease in net interest

income for the three-month period ended March 31, 2022 was the result of a $17.8

million decrease in interest income, partially offset by an $808,000 decrease in

interest expense, on a fully taxable equivalent basis. The $17.8 million

decrease in interest income was primarily the result of higher levels of

interest earning assets at lower yields. Although our interest earning assets

increased, our average loan balances decreased by $1.09 billion while average

interest-bearing balances due from banks increased by $1.89 billion. The lower

yield on earning assets resulted in a decrease in interest income of

approximately $7.3 million, and the change in composition of earning assets at

lower yields resulted in a decrease in interest income of approximately $10.5

million. The lower yield was primarily driven by the decrease in income on loans

of $21.5 million, which was partially offset by an increase in income on

investment securities of $2.4 million and a $1.3 million increase in income on

interest-bearing balances due from banks. The $808,000 decrease in interest

expense is primarily the result of interest-bearing liabilities repricing in a

decreasing interest rate environment, which reduced interest expense by $3.4

million, partially offset by a $2.6 million increase in interest expense

resulting from a change in the composition of average interest bearing

liabilities. The decrease in interest expense was primarily driven by a $2.8

million decrease in interest expense on deposits, which was partially offset by

a $2.1 million increase in interest expense on subordinated debentures resulting

from the Company’s issuance of $300.0 million in aggregate principal of its

3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 during January 2022.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable

equivalent basis for the three months ended March 31, 2022 and 2021, as well as

changes in fully taxable equivalent net interest margin for the three months

ended March 31, 2022 compared to the same period in 2021.

Table 2: Analysis of Net Interest Income

Three Months Ended March 31,

2022 2021

(Dollars in thousands)

Interest income $ 144,903 $ 162,651

Fully taxable equivalent adjustment 1,738 1,821

Interest income – fully taxable equivalent 146,641 164,472

Interest expense 13,755 14,563

Net interest income – fully taxable equivalent $ 132,886 $ 149,909

Yield on earning assets – fully taxable equivalent 3.55 % 4.41 %

Cost of interest-bearing liabilities 0.49 0.56

Net interest spread – fully taxable equivalent 3.06 3.85

Net interest margin – fully taxable equivalent 3.21 4.02

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin

Three Months Ended

March 31,

2022 vs. 2021

(In thousands)

Decrease in interest income due to change in earning assets $ (10,536)

Decrease in interest income due to change in earning asset yields (7,295)

Increase in interest expense due to change in interest-bearing liabilities

(2,577)

Decrease in interest expense due to change in interest rates paid on

interest-bearing liabilities

3,385

Decrease in net interest income

$ (17,023)

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Table 4 shows, for each major category of earning assets and interest-bearing

liabilities, the average amount outstanding, the interest income or expense on

that amount and the average rate earned or expensed for the three months ended

March 31, 2022 and 2021, respectively. The table also shows the average rate

earned on all earning assets, the average rate expensed on all interest-bearing

liabilities, the net interest spread and the net interest margin for the same

periods. The analysis is presented on a fully taxable equivalent basis.

Non-accrual loans were included in average loans for the purpose of calculating

the rate earned on total loans.

Table 4: Average Balance Sheets and Net Interest Income Analysis

Three Months Ended March 31,

2022 2021

Average Income / Yield / Average Income / Yield /

Balance Expense Rate Balance Expense Rate

(Dollars in thousands)

ASSETS

Earnings assets

Interest-bearing balances due from

banks $ 3,497,894 $ 1,673 0.19 % $ 1,610,463 $ 410 0.10 %

Federal funds sold 1,751 1 0.23 119 – –

Investment securities – taxable 2,486,401 9,080 1.48 1,637,061 6,253 1.55

Investment securities –

non-taxable 850,722 6,284 3.00 848,158 6,700 3.20

Loans receivable 9,937,993 129,603 5.29 11,023,139 151,109 5.56

Total interest-earning assets 16,774,761 146,641 3.55 % 15,118,940 164,472 4.41 %

Non-earning assets 1,618,314 1,599,950

Total assets $ 18,393,075 $ 16,718,890

LIABILITIES AND

STOCKHOLDERS’ EQUITY

Liabilities

Interest-bearing liabilities

Savings and interest-bearing

transaction

accounts $ 9,363,793 $ 3,873 0.17 % $ 8,338,791 4,716 0.23 %

Time deposits 854,593 1,021 0.48 1,209,431 2,989 1.00

Total interest-bearing deposits 10,218,386 4,894 0.19 9,548,222 7,705 0.33

Securities sold under agreement to

repurchase 137,565 108 0.32 159,697 190 0.48

FHLB and other borrowed funds 400,000 1,875 1.90 400,000 1,875 1.90

Subordinated debentures 611,888 6,878 4.56 370,421 4,793 5.25

Total interest-bearing liabilities 11,367,839 13,755 0.49 % 10,478,340 14,563 0.56

Non-interest-bearing liabilities

Non-interest-bearing deposits 4,155,894 3,480,050

Other liabilities 121,362 134,882

Total liabilities 15,645,095 14,093,272

Stockholders’ equity 2,747,980 2,625,618

Total liabilities and

stockholders’

equity $ 18,393,075 $ 16,718,890

Net interest spread 3.06 % 3.85

Net interest income and margin $ 132,886 3.21 % $ 149,909 4.02 %

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Table 5 shows changes in interest income and interest expense resulting from

changes in volume and changes in interest rates for the three months ended

March 31, 2022 compared to the same period in 2021, on a fully taxable basis.

The changes in interest rate and volume have been allocated to changes in

average volume and changes in average rates, in proportion to the relationship

of absolute dollar amounts of the changes in rates and volume.

Table 5: Volume/Rate Analysis

Three

Months Ended March 31, 2022 over 2021

Volume Yield/Rate Total

(In thousands)

Increase (decrease) in:

Interest income:

Interest-bearing balances due from banks $ 722 $ 541 $ 1,263

Federal funds sold – 1 1

Investment securities – taxable 3,113 (286) 2,827

Investment securities – non-taxable 20 (436) (416)

Loans receivable (14,391) (7,115) (21,506)

Total interest income (10,536) (7,295) (17,831)

Interest expense:

Interest-bearing transaction and savings deposits 531 (1,374) (843)

Time deposits (713) (1,255) (1,968)

Federal funds purchased – – –

Securities sold under agreement to repurchase (24) (58) (82)

FHLB borrowed funds – – –

Subordinated debentures 2,783 (698) 2,085

Total interest expense 2,577 (3,385) (808)

Increase (decrease) in net interest income $ (13,113)

$ (3,910) $ (17,023)

Provision for Credit Losses

The measurement of expected credit losses under the CECL methodology is

applicable to financial assets measured at amortized cost, including loan

receivables and held-to-maturity debt securities. It also applies to off-balance

sheet credit exposures not accounted for as insurance (loan commitments, standby

letters of credits, financial guarantees, and other similar instruments) and net

investments in leases recognized by a lessor in accordance with Topic 842 on

leases. ASC 326 requires enhanced disclosures related to the significant

estimates and judgments used in estimating credit losses as well as the credit

quality and underwriting standards of a company’s portfolio. In addition, ASC

326 requires credit losses to be presented as an allowance rather than as a

write-down on available for sale debt securities management does not intend to

sell or believes that it is more likely than not, they will be required to sell.

Loans. Management estimates the allowance balance using relevant available

information, from internal and external sources, relating to past events,

current conditions, and reasonable and supportable forecasts. Historical credit

loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current

loan-specific risk characteristics such as differences in underwriting

standards, portfolio mix, delinquency level, or term as well as for changes in

environmental conditions, such as changes in the national unemployment rate,

gross domestic product, rental vacancy rate, housing price index and national

retail sales index.

Acquired loans. In accordance with ASC 326, the Company records both a discount

and an allowance for credit losses on acquired loans. This is commonly referred

to as “double accounting.”

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The allowance for credit losses is measured based on call report segment as

these types of loans exhibit similar risk characteristics. The identified loan

segments are as follows:

•1-4 family construction

•All other construction

•1-4 family revolving HELOC & junior liens

•1-4 family senior liens

•Multifamily

•Owner occupied commercial real estate

•Non-owner occupied commercial real estate

•Commercial & industrial, agricultural, non-depository financial institutions,

purchase/carry securities, other

•Consumer auto

•Other consumer

•Other consumer – SPF

During the three-month periods ended March 31, 2022 and March 31, 2021, the

Company did not record any provision for credit losses. The markets in which we

operate have begun to experience significant economic uncertainty primarily

related to inflationary concerns, continuing supply chain issues and the

potential impacts of international unrest. However, the Company determined that

an additional provision for credit losses was not necessary as the current level

of the allowance for credit losses was considered adequate as of March 31, 2022.

Net charge-offs to average total loans was 0.08% for the three months ended

March 31, 2022 compared to 0.09% for the three months ended March 31, 2021.

Investments – Available-for-sale: The Company evaluates all securities quarterly

to determine if any securities in a loss position require a provision for credit

losses in accordance with ASC 326, Measurement of Credit Losses on Financial

Instruments. The Company first assesses whether it intends to sell or is more

likely than not that the Company will be required to sell the security before

recovery of its amortized cost basis. If either of the criteria regarding intent

or requirement to sell is met, the security’s amortized cost basis is written

down to fair value through income. For securities that do not meet this

criteria, the Company evaluates whether the decline in fair value has resulted

from credit losses or other factors. In making this assessment, the Company

considers the extent to which fair value is less than amortized cost, and

changes to the rating of the security by a rating agency, and adverse conditions

specifically related to the security, among other factors. If this assessment

indicates that a credit loss exists, the present value of cash flows expected to

be collected from the security are compared to the amortized cost basis of the

security. If the present value of cash flows expected to be collected is less

than the amortized cost basis, a credit loss exists and an allowance for credit

losses is recorded for the credit loss, limited by the amount that the fair

value is less than the amortized cost basis. Any impairment that has not been

recorded through an allowance for credit losses is recognized in other

comprehensive income. Changes in the allowance for credit losses are recorded as

provision for (or reversal of) credit loss expense. Losses are charged against

the allowance when management believes the uncollectability of a security is

confirmed or when either of the criteria regarding intent or requirement to sell

is met.

During the three-month periods ended March 31, 2022 and March 31, 2021, the

Company did not record any provision for credit losses on available-for-sale

securities. At March 31, 2022, the Company determine the allowance for credit

losses of $842,000, resulting from economic uncertainties was adequate for the

investment portfolio. No additional provision for credit losses was considered

necessary for the portfolio.

Investments – Held-to-Maturity. The Company measures expected credit losses on

HTM securities on a collective basis by major security type, with each type

sharing similar risk characteristics. The estimate of expected credit losses

considers historical credit loss information that is adjusted for current

conditions and reasonable and supportable forecasts. The Company has made the

election to exclude accrued interest receivable on HTM securities from the

estimate of credit losses and report accrued interest separately on the

consolidated balance sheets.

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During the three months ended March 31, 2022, the Company purchased

$500.0 million of U.S. Treasury Securities with an initial book value of

$498.9 million. These investments are classified as held-to-maturity, and mature

within one year. As of March 31, 2022, the amortized cost of these securities

was $499.3 million. Management has determined that recording a provision for

credit losses on these investments was not necessary due to the inherent low

risk of U.S. Treasury Securities and the short-term maturities of these

investments. As of March 31, 2021, the Company did not hold any held-to-maturity

securities.

Non-Interest Income

Total non-interest income was $30.7 million for the three months ended March 31,

2022, compared to $45.3 million for the same period in 2021. Our recurring

non-interest income includes service charges on deposit accounts, other service

charges and fees, trust fees, mortgage lending income, insurance commissions,

increase in cash value of life insurance, fair value adjustment for marketable

securities and dividends.

Table 6 measures the various components of our non-interest income for the three

months ended March 31, 2022 and 2021, respectively, as well as changes for the

three months ended March 31, 2022 compared to the same period in 2021.

Table 6: Non-Interest Income

Three Months Ended March 31, 2021 Change

2022 2021 from 2020

(Dollars in thousands)

Service charges on deposit accounts $ 6,140 $ 5,002 $ 1,138 22.8 %

Other service charges and fees 7,733 7,608 125 1.6

Trust fees 574 522 52 10.0

Mortgage lending income 3,916 8,167 (4,251) (52.1)

Insurance commissions 480 492 (12) (2.4)

Increase in cash value of life insurance 492 502 (10) (2.0)

Dividends from FHLB, FRB, FNBB & other 698 8,609 (7,911) (91.9)

Gain on sale of SBA loans 95 – 95 100.0

Gain (loss) on sale of branches, equipment and other

assets, net 16 (29) 45 155.2

Gain on OREO, net 478 401 77 19.2

Gain on securities, net – 219 (219) (100.0)

Fair value adjustment for marketable securities 2,125 5,782 (3,657) (63.2)

Other income 7,922 8,001 (79) (1.0)

Total non-interest income $ 30,669 $ 45,276 $ (14,607) (32.3) %

Non-interest income decreased $14.6 million, or 32.3%, to $30.7 million for the

three months ended March 31, 2022 from $45.3 million for the same period in

2021. The primary factors that resulted in this decrease were the reduction in

dividends from FHLB, FRB, FNBB & other as well as the lower level of mortgage

lending income. Other factors were changes related to service charges on deposit

accounts and fair value adjustment for marketable securities.

Additional details for the three months ended March 31, 2022 on some of the more

significant changes are as follows:

•The $1.1 million increase in service charges on deposit accounts is primarily

related to an increase in overdraft fees resulting from increased economic

activity.

•The $4.3 million decrease in mortgage lending income is primarily due to a

decrease in volume of secondary market loans from the high volume of loans

during 2021.

•The $7.9 million decrease for dividends from FHLB, FRB, FNBB & other is

primarily due to a decrease in special dividends from equity investments.

•The $3.7 million decrease in the fair value adjustment for marketable

securities is due to a reduction in the increase of the fair market values of

marketable securities held by the Company.

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Non-Interest Expense

Non-interest expense primarily consists of salaries and employee benefits,

occupancy and equipment, data processing, and other expenses such as

advertising, merger and acquisition expenses, amortization of intangibles,

electronic banking expense, FDIC and state assessment, insurance, legal and

accounting fees and other professional fees.

Table 7 below sets forth a summary of non-interest expense for the three months

ended March 31, 2022 and 2021, as well as changes for the three months ended

March 31, 2022 compared to the same period in 2021.

Table 7: Non-Interest Expense

Three Months Ended March 31, 2022 Change

2022 2021 from 2021

(Dollars in thousands)

Salaries and employee benefits $ 43,551 $ 42,059 $ 1,492 3.5 %

Occupancy and equipment 9,144 9,237 (93) (1.0)

Data processing expense 7,039 5,870 1,169 19.9

Merger and acquisition expenses 863 – 863 100.0

Other operating expenses:

Advertising 1,266 1,046 220 21.0

Amortization of intangibles 1,421 1,421 – –

Electronic banking expense 2,538 2,238 300 13.4

Directors’ fees 404 383 21 5.5

Due from bank service charges 270 249 21 8.4

FDIC and state assessment 1,668 1,363 305 22.4

Insurance 770 781 (11) (1.4)

Legal and accounting 797 846 (49) (5.8)

Other professional fees 1,609 1,613 (4) (0.2)

Operating supplies 754 487 267 54.8

Postage 306 338 (32) (9.5)

Telephone 337 346 (9) (2.6)

Other expense 4,159 4,589 (430) (9.4)

Total non-interest expense $ 76,896 $ 72,866 $ 4,030 5.5 %

Non-interest expense increased $4.0 million, or 5.5%, to $76.9 million for the

three months ended March 31, 2022 from $72.9 million for the same period in

2021. The primary factors that resulted in this increase were the changes

related to salaries and employee benefits, data processing expense and merger

and acquisition expense.

Additional details for the three months ended March 31, 2022 on some of the more

significant changes are as follows:

•The $1.5 million increase in salaries and employee benefits expense is

primarily due to increased salary expenses related to the normal increased cost

of doing business.

•The $1.2 million increase in data processing expense is primarily related to

the normal increased cost of doing business such as the increase in software,

licensing, core processing expense, telecommunication services, internet banking

and cash management expense and mobile banking expenses.

•The $863,000 increase in merger and acquisition expense is related to costs

associated with the acquisition of Happy Bancshares, Inc.

Income Taxes

Income tax expense decreased $8.9 million, or 30.7%, to $20.0 million for the

three-month period ended March 31, 2022, from $28.9 million for the same period

in 2021. The effective income tax rate was 23.59% for the three month period

ended March 31, 2022, compared to 23.98% for the same period in 2021.

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Financial Condition as of and for the Period Ended March 31, 2022 and

December 31, 2021

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $9.94 billion and $11.02 billion during the three

months ended March 31, 2022 and 2021, respectively. Loans receivable were $10.05

billion and $9.84 billion as of March 31, 2022 and December 31, 2021,

respectively.

From December 31, 2021 to March 31, 2022, the Company experienced an increase of

approximately $216.6 million in loans. The increase in loans was primarily due

to the acquisition of $242.2 million in marine loans from LendingClub Bank

during the first quarter of 2022, as well as $27.6 million in organic loan

growth, partially offset by $53.2 million of PPP loan decline. The $27.6 million

in organic loan growth included $225.6 million in loan growth for Centennial

CFG, while the remaining footprint experienced $198.0 million in loan decline

during the first three months of 2022. As of March 31, 2022, the Company had

$59.6 million of PPP loans.

The most significant components of the loan portfolio were commercial real

estate, residential real estate, consumer and commercial and industrial loans.

These loans are generally secured by residential or commercial real estate or

business or personal property. Although these loans are primarily originated

within our franchises in Arkansas, Florida, South Alabama and Centennial CFG,

the property securing these loans may not physically be located within our

market areas of Arkansas, Florida, Alabama and New York. Loans receivable were

approximately $3.02 billion, $3.56 billion, $217.6 million, $1.11 billion and

$2.15 billion as of March 31, 2022 in Arkansas, Florida, Alabama, SPF and

Centennial CFG, respectively.

As of March 31, 2022, we had approximately $308.3 million of construction land

development loans which were collateralized by land. This consisted of

approximately $46.4 million for raw land and approximately $261.9 million for

land with commercial and or residential lots.

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Table 8 presents our loans receivable balances by category as of March 31, 2022

and December 31, 2021.

Table 8: Loans Receivable

March 31, 2022 December 31, 2021

(In thousands)

Real estate:

Commercial real estate loans:

Non-farm/non-residential $ 3,810,383 $ 3,889,284

Construction/land development 1,856,096

1,850,050

Agricultural 142,920

130,674

Residential real estate loans:

Residential 1-4 family 1,223,890

1,274,953

Multifamily residential 248,650

280,837

Total real estate 7,281,939 7,425,798

Consumer 1,059,342 825,519

Commercial and industrial 1,510,205 1,386,747

Agricultural 48,095 43,920

Other 153,133 154,105

Total loans receivable $ 10,052,714 $

9,836,089

Commercial Real Estate Loans. We originate non-farm and non-residential loans

(primarily secured by commercial real estate), construction/land development

loans, and agricultural loans, which are generally secured by real estate

located in our market areas. Our commercial mortgage loans are generally

collateralized by first liens on real estate and amortized (where defined) over

a 15 to 30-year period with balloon payments due at the end of one to five

years. These loans are generally underwritten by assessing cash flow (debt

service coverage), primary and secondary source of repayment, the financial

strength of any guarantor, the strength of the tenant (if any), the borrower’s

liquidity and leverage, management experience, ownership structure, economic

conditions and industry specific trends and collateral. Generally, we will loan

up to 85% of the value of improved property, 65% of the value of raw land and

75% of the value of land to be acquired and developed. A first lien on the

property and assignment of lease is required if the collateral is rental

property, with second lien positions considered on a case-by-case basis.

As of March 31, 2022, commercial real estate loans totaled $5.81 billion, or

57.8%, of loans receivable, as compared to $5.87 billion, or 59.7%, of loans

receivable, as of December 31, 2021. Commercial real estate loans originated in

our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $2.00

billion, $2.27 billion, $97.5 million, zero and $1.44 billion at March 31, 2022,

respectively.

Residential Real Estate Loans. We originate one to four family, residential

mortgage loans generally secured by property located in our primary market

areas. Approximately 35.9% and 52.2% of our residential mortgage loans consist

of owner occupied 1-4 family properties and non-owner occupied 1-4 family

properties (rental), respectively, as of March 31, 2022, with the remaining

11.9% relating to condos and mobile homes. Residential real estate loans

generally have a loan-to-value ratio of up to 90%. These loans are underwritten

by giving consideration to the borrower’s ability to pay, stability of

employment or source of income, debt-to-income ratio, credit history and

loan-to-value ratio.

As of March 31, 2022, residential real estate loans totaled $1.47 billion, or

14.6%, of loans receivable, compared to $1.56 billion, or 15.8%, of loans

receivable, as of December 31, 2021. Residential real estate loans originated in

our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $404.2

million, $884.3 million, $57.4 million, zero and $126.6 million at March 31,

2022, respectively.

Consumer Loans. Our consumer loans are composed of secured and unsecured loans

originated by our bank, the primary portion of which consists of loans to

finance USCG registered high-end sail and power boats within our SPF division.

The performance of consumer loans will be affected by the local and regional

economies as well as the rates of personal bankruptcies, job loss, divorce and

other individual-specific characteristics.

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As of March 31, 2022, consumer loans totaled $1.06 billion, or 10.5%, of loans

receivable, compared to $825.5 million, or 8.4%, of loans receivable, as of

December 31, 2021. Consumer loans originated in our Arkansas, Florida, Alabama,

SPF and Centennial CFG markets were $19.6 million, $7.8 million, $710,000, $1.03

billion and zero at March 31, 2022, respectively.

Commercial and Industrial Loans. Commercial and industrial loans are made for a

variety of business purposes, including working capital, inventory, equipment

and capital expansion. The terms for commercial loans are generally one to seven

years. Commercial loan applications must be supported by current financial

information on the borrower and, where appropriate, by adequate collateral.

Commercial loans are generally underwritten by addressing cash flow (debt

service coverage), primary and secondary sources of repayment, the financial

strength of any guarantor, the borrower’s liquidity and leverage, management

experience, ownership structure, economic conditions and industry specific

trends and collateral. The loan to value ratio depends on the type of

collateral. Generally, accounts receivable are financed at between 50% and 80%

of accounts receivable less than 60 days past due. Inventory financing will

range between 50% and 80% (with no work in process) depending on the borrower

and nature of inventory. We require a first lien position for those loans.

As of March 31, 2022, commercial and industrial loans totaled $1.51 billion, or

15.0%, of loans receivable, compared to $1.39 billion, or 14.1%, of loans

receivable, as of December 31, 2021. Commercial and industrial loans originated

in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $470.1

million, $328.5 million, $52.1 million, $78.2 million and $581.3 million at

March 31, 2022, respectively.

Non-Performing Assets

We classify our problem loans into three categories: past due loans, special

mention loans and classified loans (accruing and non-accruing).

When management determines that a loan is no longer performing, and that

collection of interest appears doubtful, the loan is placed on non-accrual

status. Loans that are 90 days past due are placed on non-accrual status unless

they are adequately secured and there is reasonable assurance of full collection

of both principal and interest. Our management closely monitors all loans that

are contractually 90 days past due, treated as “special mention” or otherwise

classified or on non-accrual status.

Table 9 sets forth information with respect to our non-performing assets as of

March 31, 2022 and December 31, 2021. As of these dates, all non-performing

restructured loans are included in non-accrual loans.

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Table 9: Non-performing Assets

As of March 31, As of December 31,

2022 2021

(Dollars in thousands)

Non-accrual loans $ 44,629 $ 47,158

Loans past due 90 days or more (principal or interest payments) 46 3,035

Total non-performing loans 44,675 50,193

Other non-performing assets

Foreclosed assets held for sale, net 1,144 1,630

Other non-performing assets – –

Total other non-performing assets 1,144 1,630

Total non-performing assets $ 45,819 $ 51,823

Allowance for credit losses to non-accrual loans 526.04 % 501.96 %

Allowance for credit losses to non-performing loans 525.50 471.61

Non-accrual loans to total loans 0.44 0.48

Non-performing loans to total loans 0.44 0.51

Non-performing assets to total assets 0.25 0.29

Our non-performing loans are comprised of non-accrual loans and accruing loans

that are contractually past due 90 days. Our bank subsidiary recognizes income

principally on the accrual basis of accounting. When loans are classified as

non-accrual, the accrued interest is charged off and no further interest is

accrued, unless the credit characteristics of the loan improve. If a loan is

determined by management to be uncollectible, the portion of the loan determined

to be uncollectible is then charged to the allowance for credit losses.

Total non-performing loans were $44.7 million and $50.2 million as of March 31,

2022 and December 31, 2021, respectively. Non-performing loans at March 31, 2022

were $13.2 million, $24.8 million, $480,000, $1.4 million and $4.8 million in

the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively.

Troubled debt restructurings (“TDRs”) generally occur when a borrower is

experiencing, or is expected to experience, financial difficulties in the near

term. As a result, we will work with the borrower to prevent further

difficulties, and ultimately to improve the likelihood of recovery on the loan.

In those circumstances it may be beneficial to restructure the terms of a loan

and work with the borrower for the benefit of both parties, versus forcing the

property into foreclosure and having to dispose of it in an unfavorable and

depressed real estate market. When we have modified the terms of a loan, we

usually either reduce the monthly payment and/or interest rate for generally

about three to twelve months. For our TDRs that accrue interest at the time the

loan is restructured, it would be a rare exception to have charged-off any

portion of the loan. As of March 31, 2022, we had $6.1 million of restructured

loans that are in compliance with the modified terms and are not reported as

past due or non-accrual in Table 9. Our Florida market contains $3.6 million and

our Arkansas market contains $2.5 million of these restructured loans.

A loan modification that might not otherwise be considered may be granted

resulting in classification as a TDR. These loans can involve loans remaining on

non-accrual, moving to non-accrual, or continuing on an accrual status,

depending on the individual facts and circumstances of the borrower. Generally,

a non-accrual loan that is restructured remains on non-accrual for a period of

nine months to demonstrate that the borrower can meet the restructured terms.

However, performance prior to the restructuring, or significant events that

coincide with the restructuring, are considered in assessing whether the

borrower can pay under the new terms and may result in the loan being returned

to an accrual status after a shorter performance period. If the borrower’s

ability to meet the revised payment schedule is not reasonably assured, the loan

will remain in a non-accrual status.

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The majority of the Bank’s loan modifications relates to commercial lending and

involves reducing the interest rate, changing from a principal and interest

payment to interest-only, lengthening the amortization period, or a combination

of some or all of the three. In addition, it is common for the Bank to seek

additional collateral or guarantor support when modifying a loan. At March 31,

2022 and December 31, 2021, the amount of TDRs was $6.9 million and $7.5

million, respectively. As of March 31, 2022 and December 31, 2021, 88.6% and

85.7%, respectively, of all restructured loans were performing to the terms of

the restructure.

Total foreclosed assets held for sale were $1.1 million as of March 31, 2022,

compared to $1.6 million as of December 31, 2021 for a decrease of $486,000. The

foreclosed assets held for sale as of March 31, 2022 are comprised of $8,000 of

assets located in Arkansas, $1.14 million located in Florida, and zero from

Alabama, SPF and Centennial CFG.

Table 10 shows the summary of foreclosed assets held for sale as of March 31,

2022 and December 31, 2021.

Table 10: Foreclosed Assets Held For Sale

As of March 31, As of December

2022 31, 2021

(In thousands)

Commercial real estate loans

Non-farm/non-residential $ 275 $ 536

Construction/land development 609 834

Agricultural – –

Residential real estate loans

Residential 1-4 family 260 260

Multifamily residential – –

Total foreclosed assets held for sale

$ 1,144 $ 1,630

A loan is considered impaired when it is probable that we will not receive all

amounts due according to the contracted terms of the loans. Impaired loans

include non-performing loans (loans past due 90 days or more and non-accrual

loans), criticized and/or classified loans with a specific allocation, loans

categorized as TDRs and certain other loans identified by management that are

still performing (loans included in multiple categories are only included once).

As of March 31, 2022 and December 31, 2021, impaired loans were $321.5 million

and $331.5 million, respectively. The amortized cost balance for loans with a

specific allocation decreased from $284.0 million to $276.8 million, and the

specific allocation for impaired loans decreased by approximately $1.4 million

for the period ended March 31, 2022 compared to the period ended December 31,

2021. The Company is continuing to monitor these impaired loans and will adjust

the discount as necessary. As of March 31, 2022, our Arkansas, Florida, Alabama,

SPF and Centennial CFG markets accounted for approximately $174.6 million,

$140.2 million, $480,000, $1.4 million and $4.8 million of the impaired loans,

respectively.

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Past Due and Non-Accrual Loans

Table 11 shows the summary of non-accrual loans as of March 31, 2022 and

December 31, 2021:

Table 11: Total Non-Accrual Loans

As of March 31, 2022 As of December 31, 2021

(In thousands)

Real estate:

Commercial real estate loans

Non-farm/non-residential $ 11,477 $ 11,923

Construction/land development 1,042 1,445

Agricultural 367 897

Residential real estate loans

Residential 1-4 family 18,167 16,198

Multifamily residential 156 156

Total real estate 31,209 30,619

Consumer 1,400 1,648

Commercial and industrial 11,104 13,875

Agricultural & other 916 1,016

Total non-accrual loans $ 44,629 $ 47,158

If non-accrual loans had been accruing interest in accordance with the original

terms of their respective agreements, interest income of approximately $407,000

and $904,000, respectively, would have been recorded for the three-month periods

ended March 31, 2022 and 2021.

Table 12 shows the summary of accruing past due loans 90 days or more as of

March 31, 2022 and December 31, 2021:

Table 12: Loans Accruing Past Due 90 Days or More

As of December

As of March 31, 2022 31, 2021

(In thousands)

Real estate:

Commercial real estate loans

Non-farm/non-residential $ – $ 2,225

Construction/land development – –

Agricultural – –

Residential real estate loans

Residential 1-4 family 46 701

Multifamily residential – –

Total real estate 46 2,926

Consumer – 2

Commercial and industrial – 107

Other – –

Total loans accruing past due 90 days or more $ 46 $ 3,035

Our ratio of total loans accruing past due 90 days or more and non-accrual loans

to total loans was 0.44% and 0.51% at March 31, 2022 and December 31, 2021,

respectively.

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Allowance for Credit Losses

Overview. The allowance for credit losses on loans receivable is a valuation

account that is deducted from the loans’ amortized cost basis to present the net

amount expected to be collected on the loans. Loans are charged off against the

allowance when management believes the uncollectability of a loan balance is

confirmed. Expected recoveries do not exceed the aggregate of amounts previously

charged-off and expected to be charged-off.

The Company uses the discounted cash flow (“DCF”) method to estimate expected

losses for all of Company’s loan pools. These pools are as follows: construction

& land development; other commercial real estate; residential real estate;

commercial & industrial; and consumer & other. The loan portfolio pools were

selected in order to generally align with the loan categories specified in the

quarterly call reports required to be filed with the Federal Financial

Institutions Examination Council. For each of these loan pools, the Company

generates cash flow projections at the instrument level wherein payment

expectations are adjusted for estimated prepayment speed, curtailments, time to

recovery, probability of default, and loss given default. The modeling of

expected prepayment speeds, curtailment rates, and time to recovery are based on

historical internal data. The Company uses regression analysis of historical

internal and peer data to determine suitable loss drivers to utilize when

modeling lifetime probability of default and loss given default. This analysis

also determines how expected probability of default and loss given default will

react to forecasted levels of the loss drivers.

For all DCF models, management has determined that four quarters represents a

reasonable and supportable forecast period and reverts to a historical loss rate

over four quarters on a straight-line basis. Management leverages economic

projections from a reputable and independent third party to inform its loss

driver forecasts over the four-quarter forecast period. Other internal and

external indicators of economic forecasts are also considered by management when

developing the forecast metrics.

The combination of adjustments for credit expectations (default and loss) and

time expectations prepayment, curtailment, and time to recovery) produces an

expected cash flow stream at the instrument level. Instrument effective yield is

calculated, net of the impacts of prepayment assumptions, and the instrument

expected cash flows are then discounted at that effective yield to produce an

instrument-level net present value of expected cash flows (“NPV”). An allowance

for credit loss is established for the difference between the instrument’s NPV

and amortized cost basis.

The allowance for credit losses is measured based on call report segment as

these types of loans exhibit similar risk characteristics. The allowance for

credit losses for each segment is measured through the use of the discounted

cash flow method. Loans that do not share risk characteristics are evaluated on

an individual basis. Loans evaluated individually are not also included in the

collective evaluation. For those loans that are classified as impaired, an

allowance is established when the discounted cash flows, collateral value or

observable market price of the impaired loan is lower than the carrying value of

that loan.

Expected credit losses are estimated over the contractual term of the loans,

adjusted for expected prepayments when appropriate. The contractual term

excludes expected extensions, renewals and modifications unless Management has a

reasonable expectation at the reporting date that troubled debt restructuring

will be executed with an individual borrower or

the extension or renewal options are included in the original or modified

contract at the reporting date and are not unconditionally cancellable by the

Company.

Management qualitatively adjusts model results for risk factors that are not

considered within our modeling processes but are nonetheless relevant in

assessing the expected credit losses within our loan pools. These Q-Factors and

other qualitative adjustments may increase or decrease management’s estimate of

expected credit losses by a calculated percentage or amount based upon the

estimated level of risk. The various risks that may be considered in making

Q-Factor and other qualitative adjustments include, among other things, the

impact of (i) changes in lending policies, procedures and strategies; (ii)

changes in nature and volume of the portfolio; (iii) staff experience; (iv)

changes in volume and trends in classified loans, delinquencies and nonaccruals;

(v) concentration risk; (vi) trends in underlying collateral values; (vii)

external factors such as competition, legal and regulatory environment; (viii)

changes in the quality of the loan review system and (ix) economic conditions.

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Purchased loans that have experienced more than insignificant credit

deterioration since origination are PCD loans. An allowance for credit losses is

determined using the same methodology as other loans. The initial allowance for

credit losses determined on a collective basis is allocated to individual loans.

The sum of the loan’s purchase price and allowance for credit losses becomes its

initial amortized cost basis. The difference between the initial amortized cost

basis and the par value of the loan is a non-credit discount or premium, which

is amortized into interest income over the life of the loan. Subsequent changes

to the allowance for credit losses are recorded through the provision for credit

losses.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company

estimates expected credit losses over the contractual period in which the

Company is exposed to credit risk via a contractual obligation to extend credit

unless that obligation is unconditionally cancellable by the Company. The

allowance for credit losses on off-balance sheet credit exposures is adjusted as

a provision for credit loss expense. The estimate includes consideration of the

likelihood that funding will occur and an estimate of expected credit losses on

commitments expected to be funded over its estimated life.

Specific Allocations. As a general rule, if a specific allocation is warranted,

it is the result of an analysis of a previously classified credit or

relationship. Typically, when it becomes evident through the payment history or

a financial statement review that a loan or relationship is no longer supported

by the cash flows of the asset and/or borrower and has become collateral

dependent, we will use appraisals or other collateral analysis to determine if

collateral impairment has occurred. The amount or likelihood of loss on this

credit may not yet be evident, so a charge-off would not be prudent. However, if

the analysis indicates that an impairment has occurred, then a specific

allocation will be determined for this loan. If our existing appraisal is

outdated or the collateral has been subject to significant market changes, we

will obtain a new appraisal for this impairment analysis. The majority of our

impaired loans are collateral dependent at the present time, so third-party

appraisals were used to determine the necessary impairment for these loans. Cash

flow available to service debt was used for the other impaired loans. This

analysis is performed each quarter in connection with the preparation of the

analysis of the adequacy of the allowance for credit losses, and if necessary,

adjustments are made to the specific allocation provided for a particular loan.

For collateral dependent loans, we do not consider an appraisal outdated simply

due to the passage of time. However, if an appraisal is older than 13 months and

if market or other conditions have deteriorated and we believe that the current

market value of the property is not within approximately 20% of the appraised

value, we will consider the appraisal outdated and order either a new appraisal

or an internal validation report for the impairment analysis. The recognition of

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any provision or related charge-off on a collateral dependent loan is either

through annual credit analysis or, many times, when the relationship becomes

delinquent. If the borrower is not current, we will update our credit and cash

flow analysis to determine the borrower’s repayment ability. If we determine

this ability does not exist and it appears that the collection of the entire

principal and interest is not likely, then the loan could be placed on

non-accrual status. In any case, loans are classified as non-accrual no later

than 105 days past due. If the loan requires a quarterly impairment analysis,

this analysis is completed in conjunction with the completion of the analysis of

the adequacy of the allowance for credit losses. Any exposure identified through

the impairment analysis is shown as a specific reserve on the individual

impairment. If it is determined that a new appraisal or internal validation

report is required, it is ordered and will be taken into consideration during

completion of the next impairment analysis.

In estimating the net realizable value of the collateral, management may deem it

appropriate to discount the appraisal based on the applicable circumstances. In

such case, the amount charged off may result in loan principal outstanding being

below fair value as presented in the appraisal.

Between the receipt of the original appraisal and the updated appraisal, we

monitor the loan’s repayment history. If the loan is $3.0 million or greater or

the total loan relationship is $5.0 million or greater, our policy requires an

annual credit review. For these loans, our policy requires financial statements

from the borrowers and guarantors at least annually. In addition, we calculate

the global repayment ability of the borrower/guarantors at least annually on

these loans.

As a general rule, when it becomes evident that the full principal and accrued

interest of a loan may not be collected, or by law at 105 days past due, we will

reflect that loan as non-performing. It will remain non-performing until it

performs in a manner that it is reasonable to expect that we will collect the

full principal and accrued interest.

When the amount or likelihood of a loss on a loan has been determined, a

charge-off should be taken in the period it is determined. If a partial

charge-off occurs, the quarterly impairment analysis will determine if the loan

is still impaired, and thus continues to require a specific allocation.

The Company had $321.5 million and $331.5 million in collateral-dependent

impaired loans for the periods ended March 31, 2022 and December 31, 2021,

respectively.

Loans Collectively Evaluated for Impairment. Loans receivable collectively

evaluated for impairment increased by approximately $213.1 million from $9.54

billion at December 31, 2021 to $9.75 billion at March 31, 2022. The percentage

of the allowance for credit losses allocated to loans receivable collectively

evaluated for impairment to the total loans collectively evaluated for

impairment was 1.89% and 1.94% at March 31, 2022 and December 31, 2021,

respectively.

Charge-offs and Recoveries. Total charge-offs decreased to $2.3 million for the

three months ended March 31, 2022, compared to $3.0 million for the same period

in 2021. Total recoveries were $364,000 and $506,000 for the three months ended

March 31, 2022 and 2021, respectively. For the three months ended March 31,

2022, net charge-offs were $268,000 for Arkansas, $1.2 million for Florida,

$1,000 for Alabama, $458,000 for SPF and zero for Centennial CFG. These equal a

net charge-off position of $1.9 million.

We have not charged off an amount less than what was determined to be the fair

value of the collateral as presented in the appraisal, less estimated costs to

sell (for collateral dependent loans), for any period presented. Loans partially

charged-off are placed on non-accrual status until it is proven that the

borrower’s repayment ability with respect to the remaining principal balance can

be reasonably assured. This is usually established over a period of 6-12 months

of timely payment performance.

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Table 13 shows the allowance for credit losses, charge-offs and recoveries as of

and for the three months ended March 31, 2022 and 2021.

Table 13: Analysis of Allowance for Credit Losses

Three Months Ended March 31,

2022 2021

(Dollars in thousands)

Balance, beginning of year $ 236,714 $ 245,473

Loans charged off

Real estate:

Commercial real estate loans:

Non-farm/non-residential – 19

Construction/land development – –

Agricultural – –

Residential real estate loans:

Residential 1-4 family 250 226

Multifamily residential – –

Total real estate 250 245

Consumer 63 67

Commercial and industrial 1,416 2,279

Agricultural – –

Other 581 456

Total loans charged off 2,310 3,047

Recoveries of loans previously charged off

Real estate:

Commercial real estate loans:

Non-farm/non-residential 26 14

Construction/land development 15 22

Agricultural – –

Residential real estate loans:

Residential 1-4 family 26 62

Multifamily residential – –

Total real estate 67 98

Consumer 11 46

Commercial and industrial 109 76

Agricultural – –

Other 177 286

Total recoveries 364 506

Net loans charged off 1,946 2,541

Provision for credit loss – loans – –

Balance, March 31 $ 234,768 $ 242,932

Net charge-offs to average loans receivable 0.08 % 0.09 %

Allowance for credit losses to total loans 2.34 2.25

Allowance for credit losses to net charge-offs 2,974.72 2,357.38

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Table 14 presents the allocation of allowance for credit losses as of March 31,

2022 and December 31, 2021.

Table 14: Allocation of Allowance for Credit Losses

As of March 31, 2022 As of December 31, 2021

Allowance % of Allowance % of

Amount loans(1) Amount loans(1)

(Dollars in thousands)

Real estate:

Commercial real estate loans:

Non-farm/non- residential $ 95,322 37.9 % $ 86,910 39.5 %

Construction/land development 26,349 18.5 28,415 18.8

Agricultural residential real estate loans 554 1.4 308 1.3

Residential real estate loans:

Residential 1-4 family 34,732 12.2 45,364 13.0

Multifamily residential 2,379 2.5 3,094 2.9

Total real estate 159,336 72.5 164,091 75.5

Consumer 20,690 10.5 16,612 8.4

Commercial and industrial 52,326 15.0 52,910 14.1

Agricultural 166 0.5 152 0.4

Other 2,250 1.5 2,949 1.6

Total $ 234,768 100.0 % $ 236,714 100.0 %

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

Investment Securities

Our securities portfolio is the second largest component of earning assets and

provides a significant source of revenue. Securities within the portfolio are

classified as held-to-maturity, available-for-sale, or trading based on the

intent and objective of the investment and the ability to hold to maturity. Fair

values of securities are based on quoted market prices where available. If

quoted market prices are not available, estimated fair values are based on

quoted market prices of comparable securities. The estimated effective duration

of our securities portfolio was 3.7 years as of March 31, 2022.

Securities held-to-maturity, which include any security for which we have the

positive intent and ability to hold until maturity, are reported at historical

cost adjusted for amortization of premiums and accretion of discounts. Premiums

and discounts are amortized/accreted to the call date to interest income using

the constant effective yield method over the estimated life of the security. As

of March 31, 2022, we had $499.3 million of held-to-maturity securities. Of the

$499.3 million of held-to-maturity securities as of March 31, 2022, all were

invested in U.S. Government-sponsored enterprises.

Securities available-for-sale are reported at fair value with unrealized holding

gains and losses reported as a separate component of stockholders’ equity as

other comprehensive income. Securities that may be sold in response to interest

rate changes, changes in prepayment risk, the need to increase regulatory

capital, and other similar factors are classified as available-for-sale.

Available-for-sale securities were $2.96 billion and $3.12 billion as March 31,

2022 and December 31, 2021, respectively.

As of March 31, 2022, $1.41 billion, or 47.7%, of our available-for-sale

securities were invested in mortgage-backed securities, compared to $1.54

billion, or 49.3%, of our available-for-sale securities as of December 31, 2021.

To reduce our income tax burden, $928.9 million, or 31.4%, of our

available-for-sale securities portfolio as of March 31, 2022, were primarily

invested in tax-exempt obligations of state and political subdivisions, compared

to $997.0 million, or 32.0%, of our available-for-sale securities as of

December 31, 2021. We had $410.8 million, or 13.9%, invested in obligations of

U.S. Government-sponsored enterprises as of March 31, 2022, compared to $433.0

million, or 13.9%, of our available-for-sale securities as of December 31, 2021.

Also, we had approximately $207.1 million, or 7.0%, invested in other securities

as of March 31, 2022, compared to $151.9 million, or 4.9% of our

available-for-sale securities as of December 31, 2021.

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The Company evaluates all securities quarterly to determine if any securities in

a loss position require a provision for credit losses in accordance with ASC

326, Measurement of Credit Losses on Financial Instruments. The Company first

assesses whether it intends to sell or is more likely than not that the Company

will be required to sell the security before recovery of its amortized cost

basis. If either of the criteria regarding intent or requirement to sell is met,

the security’s amortized cost basis is written down to fair value through

income. For securities that do not meet this criteria, the Company evaluates

whether the decline in fair value has resulted from credit losses or other

factors. In making this assessment, the Company considers the extent to which

fair value is less than amortized cost, changes to the rating of the security by

a rating agency, and adverse conditions specifically related to the security,

among other factors. If this assessment indicates that a credit loss exists, the

present value of cash flows expected to be collected from the security are

compared to the amortized cost basis of the security. If the present value of

cash flows expected to be collected is less than the amortized cost basis, a

credit loss exists and an allowance for credit losses is recorded for the credit

loss, limited by the amount that the fair value is less than the amortized cost

basis. Any impairment that has been recorded through an allowance for credit

losses is recognized in other comprehensive income. Changes in the allowance for

credit losses are recorded as provision for (or reversal of) credit loss

expense. Losses are charged against the allowance when management believes the

uncollectability of a security is confirmed or when either of the criteria

regarding intent or requirement to sell is met.

Management has determined that recording a provision for credit losses on the

Company’s held-to-maturity investments was not necessary due to the inherent low

risk of the U.S. Treasury Securities, which comprise the entire balance of the

held-to-maturity U.S. Government-sponsored enterprises investments, as well as

the short-term maturities of these investments.

At March 31, 2022, the Company determined that the allowance for credit losses

of $842,000, resulting from economic uncertainty, was adequate for the

available-for-sale investment portfolio. No additional provision for credit

losses was considered necessary for the portfolio.

See Note 3 “Investment Securities” in the Condensed Notes to Consolidated

Financial Statements for the carrying value and fair value of investment

securities.

Deposits

Our deposits averaged $14.37 billion and $13.03 billion for the three months

ended March 31, 2022 and March 31, 2021, respectively. Total deposits were

$14.58 billion as of March 31, 2022, and $14.26 billion as of December 31, 2021.

Deposits are our primary source of funds. We offer a variety of products

designed to attract and retain deposit customers. Those products consist of

checking accounts, regular savings deposits, NOW accounts, money market accounts

and certificates of deposit. Deposits are gathered from individuals,

partnerships and corporations in our market areas. In addition, we obtain

deposits from state and local entities and, to a lesser extent, U.S. Government

and other depository institutions.

Our policy also permits the acceptance of brokered deposits. From time to time,

when appropriate in order to fund strong loan demand, we accept brokered time

deposits, generally in denominations of less than $250,000, from a regional

brokerage firm, and other national brokerage networks. We also participate in

the One-Way Buy Insured Cash Sweep (“ICS”) service and similar services, which

provide for one-way buy transactions among banks for the purpose of purchasing

cost-effective floating-rate funding without collateralization or stock purchase

requirements. Management believes these sources represent a reliable and

cost-efficient alternative funding source for the Company. However, to the

extent that our condition or reputation deteriorates, or to the extent that

there are significant changes in market interest rates which we do not elect to

match, we may experience an outflow of brokered deposits. In that event we would

be required to obtain alternate sources for funding.

Table 15 reflects the classification of the brokered deposits as of March 31,

2022 and December 31, 2021.

Table 15: Brokered Deposits

December 31,

March 31, 2022 2021

(In thousands)

Time Deposits $ – $ –

CDARS – –

Insured Cash Sweep and Other Transaction Accounts 625,721 625,704

Total Brokered Deposits $ 625,721 $ 625,704

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The interest rates paid are competitively priced for each particular deposit

product and structured to meet our funding requirements. We will continue to

manage interest expense through deposit pricing. We may allow higher rate

deposits to run off during periods of limited loan demand. We believe that

additional funds can be attracted, and deposit growth can be realized through

deposit pricing if we experience increased loan demand or other liquidity needs.

Table 16 reflects the classification of the average deposits and the average

rate paid on each deposit category, which are in excess of 10 percent of average

total deposits, for the three months ended March 31, 2022 and 2021.

Table 16: Average Deposit Balances and Rates

Three Months Ended March 31,

2022 2021

Average Average Average Average

Amount Rate Paid Amount Rate Paid

(Dollars in thousands)

Non-interest-bearing transaction accounts $ 4,155,894 – % $ 3,480,050 – %

Interest-bearing transaction accounts 8,389,038 0.18 7,547,556 0.25

Savings deposits 974,755 0.06 791,235 0.07

Time deposits:

$100,000 or more 518,864 0.60 834,628 1.17

Other time deposits 335,729 0.31 374,803 0.62

Total $ 14,374,280 0.14 % $ 13,028,272 0.24 %

Securities Sold Under Agreements to Repurchase

We enter into short-term purchases of securities under agreements to resell

(resale agreements) and sales of securities under agreements to repurchase

(repurchase agreements) of substantially identical securities. The amounts

advanced under resale agreements and the amounts borrowed under repurchase

agreements are carried on the balance sheet at the amount advanced. Interest

incurred on repurchase agreements is reported as interest expense. Securities

sold under agreements to repurchase increased $10.3 million, or 7.3%, from

$140.9 million as of December 31, 2021 to $151.2 million as of March 31, 2022.

FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were

$400.0 million at both March 31, 2022 and December 31, 2021. The Company had no

other borrowed funds as of March 31, 2022 or December 31, 2021. At March 31,

2022 and December 31, 2021, all of the outstanding balances were classified as

long-term advances. The FHLB advances mature in 2033 with fixed interest rates

ranging from 1.76% to 2.26%. Expected maturities could differ from contractual

maturities because FHLB may have the right to call or the Company may have the

right to prepay certain obligations.

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and

guaranteed payments on trust preferred securities, were $667.9 million and

$371.1 million as of March 31, 2022 and December 31, 2021, respectively.

The Company holds trust preferred securities with a face amount of $73.3 million

which are currently callable without penalty based on the terms of the specific

agreements. The trust preferred securities are tax-advantaged issues that

qualify for Tier 1 capital treatment subject to certain limitations. However,

now that the Company has exceeded $15 billion in assets, the Tier 1 treatment of

the Company’s outstanding trust preferred securities will be eliminated because

of the completion of the acquisition of Happy Bancshares, but these securities

will still be treated as Tier 2 capital. Distributions on these securities are

included in interest expense. Each of the trusts is a statutory business trust

organized for the sole purpose of issuing trust securities and investing the

proceeds in the Company’s subordinated debentures, the sole asset of

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each trust. The trust preferred securities of each trust represent preferred

beneficial interests in the assets of the respective trusts and are subject to

mandatory redemption upon payment of the subordinated debentures held by the

trust. The Company wholly owns the common securities of each trust. Each trust’s

ability to pay amounts due on the trust preferred securities is solely dependent

upon the Company making payment on the related subordinated debentures. The

Company’s obligations under the subordinated securities and other relevant trust

agreements, in aggregate, constitute a full and unconditional guarantee by the

Company of each respective trust’s obligations under the trust securities issued

by each respective trust. The Company has received approval from the Federal

Reserve to redeem all of the trust preferred securities.

On January 18, 2022, the Company completed an underwritten public offering of

$300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating

Rate Subordinated Notes due 2032 (the “2032 Notes”) for net proceeds, after

underwriting discounts and issuance costs of approximately $296.4 million. The

2032 Notes are unsecured, subordinated debt obligations of the Company and will

mature on January 30, 2032. From and including the date of issuance to, but

excluding January 30, 2027 or the date of earlier redemption, the 2032 Notes

will bear interest at an initial rate of 3.125% per annum, payable in arrears on

January 30 and July 30 of each year. From and including January 30, 2027 to, but

excluding the maturity date or earlier redemption, the 2032 Notes will bear

interest at a floating rate equal to the Benchmark rate (which is expected to be

Three-Month Term SOFR), each as defined in and subject to the provisions of the

applicable supplemental indenture for the 2032 Notes, plus 182 basis points,

payable quarterly in arrears on January 30, April 30, July 30, and October 30 of

each year, commencing on April 30, 2027.

The Company may, beginning with the interest payment date of January 30, 2027,

and on any interest payment date thereafter, redeem the 2032 Notes, in whole or

in part, subject to prior approval of the Federal Reserve if then required, at a

redemption price equal to 100% of the principal amount of the 2032 Notes to be

redeemed plus accrued and unpaid interest to but excluding the date of

redemption. The Company may also redeem the 2032 Notes at any time, including

prior to January 30, 2027, at the Company’s option, in whole but not in part,

subject to prior approval of the Federal Reserve if then required, if certain

events occur that could impact the Company’s ability to deduct interest payable

on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032

Notes from being recognized as Tier 2 capital for regulatory capital purposes,

or if the Company is required to register as an investment company under the

Investment Company Act of 1940, as amended. In each case, the redemption would

be at a redemption price equal to 100% of the principal amount of the 2032 Notes

plus any accrued and unpaid interest to, but excluding, the redemption date.

On April 3, 2017, the Company completed an underwritten public offering of

$300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating

Rate Subordinated Notes due 2027 (the “2027 Notes”) for net proceeds, after

underwriting discounts and issuance costs, of approximately $297.0 million. The

2027 Notes are unsecured, subordinated debt obligations and mature on April 15,

2027. From and including the date of issuance to, but excluding April 15, 2022,

the 2027 Notes bear interest at an initial rate of 5.625% per annum. From and

including April 15, 2022 to, but excluding the maturity date or earlier

redemption, the 2027 Notes bear interest at a floating rate equal to three-month

LIBOR as calculated on each applicable date of determination plus a spread of

3.575%; provided, however, that in the event three-month LIBOR is less than

zero, then three-month LIBOR shall be deemed to be zero.

On April 15, 2022, the Company completed the payoff of its $300.0 million in

aggregate principal amount of the 2027 Notes. Each 2027 Note was redeemed

pursuant to the terms of the Subordinated Indenture, as supplemented by the

First Supplemental Indenture, each dated as of April 3, 2017, between the

Company and U.S. Bank Trust Company, National Association, the Trustee for the

2027 Notes, at the redemption price of 100% of its principal amount, plus

accrued and unpaid interest to, but excluding, the Redemption Date.

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Stockholders’ Equity

Stockholders’ equity decreased $79.0 million to $2.69 billion as of March 31,

2022, compared to $2.77 billion as of December 31, 2021. The $79.0 million

decrease in stockholders’ equity is primarily associated with the $115.0 million

in other comprehensive loss for the three months ended March 31, 2022, $27.0

million of shareholder dividends paid and stock repurchases of $4.1 million in

2022, partially offset by $64.9 million in net income for the three months ended

March 31, 2022. The annualized decrease in stockholders’ equity for the first

three months of 2022 was 11.6%. As of March 31, 2022 and December 31, 2021, our

equity to asset ratio was 14.43% and 15.32%, respectively. Book value per share

was $16.41 as of March 31, 2022, compared to $16.90 as of December 31, 2021, an

11.8% annualized decrease.

Common Stock Cash Dividends. We declared cash dividends on our common stock of

$0.165 and $0.14 per share for the three months ended March 31, 2022 and 2021,

respectively. The common stock dividend payout ratio for the three months ended

March 31, 2022 and 2021 was 41.7% and 25.3%, respectively. On April 21, 2022,

the Board of Directors declared a regular $0.165 per share quarterly cash

dividend payable June 8, 2022, to shareholders of record May 18, 2022.

Stock Repurchase Program. On January 22, 2021, the Company’s Board of Directors

authorized the repurchase of up to an additional 20,000,000 shares of its common

stock under the previously approved stock repurchase program. We repurchased a

total of 180,000 shares with a weighted-average stock price of $22.69 per share

during the first three months of 2022. The remaining balance available for

repurchase was 21,910,665 shares at March 31, 2022.

Liquidity and Capital Adequacy Requirements

Risk-Based Capital. We, as well as our bank subsidiary, are subject to various

regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and

other discretionary actions by regulators that, if enforced, could have a direct

material effect on our financial statements. Under capital adequacy guidelines

and the regulatory framework for prompt corrective action, we must meet specific

capital guidelines that involve quantitative measures of our assets, liabilities

and certain off-balance-sheet items as calculated under regulatory accounting

practices. Our capital amounts and classifications are also subject to

qualitative judgments by the regulators as to components, risk weightings and

other factors.

In July 2013, the Federal Reserve Board and the other federal bank regulatory

agencies issued a final rule to revise their risk-based and leverage capital

requirements and their method for calculating risk-weighted assets to make them

consistent with the agreements that were reached by the Basel Committee on

Banking Supervision in “Basel III: A Global Regulatory Framework for More

Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank

Act (“Basel III”). Basel III applies to all depository institutions, bank

holding companies with total consolidated assets of $500 million or more, and

savings and loan holding companies. Basel III became effective for the Company

and its bank subsidiary on January 1, 2015. The capital conservation buffer

requirement began being phased in beginning January 1, 2016 at the 0.625% level

and increased by 0.625% on each subsequent January 1, until it reached 2.5% on

January 1, 2019 when the phase-in period ended, and the full capital

conservation buffer requirement became effective.

Basel III permanently grandfathers trust preferred securities and other

non-qualifying capital instruments that were issued and outstanding as of May

19, 2010 in the Tier 1 capital of bank holding companies with total consolidated

assets of less than $15 billion as of December 31, 2009. The rule phases out of

Tier 1 capital these non-qualifying capital instruments issued before May 19,

2010 by all other bank holding companies. Because our total consolidated assets

were less than $15 billion as of December 31, 2009, our outstanding trust

preferred securities continue to be treated as Tier 1 capital. However, now that

the Company has exceeded $15 billion in assets, the Tier 1 treatment of the

Company’s outstanding trust preferred securities will be eliminated because of

the completion of the acquisition of Happy Bancshares, but these securities will

still be treated as Tier 2 capital.

Basel III amended the prompt corrective action rules to incorporate a “common

equity Tier 1 capital” requirement and to raise the capital requirements for

certain capital categories. In order to be adequately capitalized for purposes

of the prompt corrective action rules, a banking organization will be required

to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4%

“Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an

8% “total risk-based capital” ratio.

Quantitative measures established by regulation to ensure capital adequacy

require us to maintain minimum amounts and ratios (set forth in the table below)

of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to

average assets. Management believes that, as of March 31, 2022 and December 31,

2021, we met all regulatory capital adequacy requirements to which we were

subject.

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On January 18, 2022, the Company completed an underwritten public offering of

$300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating

Rate Subordinated Notes due 2032 (the “2032 Notes”). The 2032 Notes are

unsecured, subordinated debt obligations of the Company and will mature on

January 30, 2032. The Company may, beginning with the interest payment date of

January 30, 2027, and on any interest payment date thereafter, redeem the 2032

Notes, in whole or in part, subject to prior approval of the Federal Reserve if

then required, at a redemption price equal to 100% of the principal amount of

the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding

the date of redemption. The Company may also redeem the 2032 Notes at any time,

including prior to January 30, 2027, at the Company’s option, in whole but not

in part, subject to prior approval of the Federal Reserve if then required, if

certain events occur that could impact the Company’s ability to deduct interest

payable on the 2032 Notes for U.S. federal income tax purposes or preclude the

2032 Notes from being recognized as Tier 2 capital for regulatory capital

purposes, or if the Company is required to register as an investment company

under the Investment Company Act of 1940, as amended. In each case, the

redemption would be at a redemption price equal to 100% of the principal amount

of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the

redemption date.

On April 3, 2017, the Company completed an underwritten public offering of

$300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating

Rate Subordinated Notes due 2027 (the “2027 Notes”). The 2027 Notes are

unsecured, subordinated debt obligations and mature on April 15, 2027. On April

15, 2022, the Company completed the payoff of its $300.0 million in aggregate

principal amount of the 2027 Notes. Each 2027 Note was redeemed pursuant to the

terms of the Subordinated Indenture, as supplemented by the First Supplemental

Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank

Trust Company, National Association, the Trustee for the 2027 Notes, at the

redemption price of 100% of its principal amount, plus accrued and unpaid

interest to, but excluding, the Redemption Date.

On December 21, 2018, the federal banking agencies issued a joint final rule to

revise their regulatory capital rules to permit bank holding companies and banks

to phase-in, for regulatory capital purposes, the day-one impact of the new CECL

accounting rule on retained earnings over a period of three years. As part of

its response to the impact of COVID-19, on March 27, 2020, the federal banking

regulatory agencies issued an interim final rule that provided the option to

temporarily delay certain effects of CECL on regulatory capital for two years,

followed by a three-year transition period. The interim final rule allows bank

holding companies and banks to delay for two years 100% of the day-one impact of

adopting CECL and 25% of the cumulative change in the reported allowance for

credit losses since adopting CECL. The Company has elected to adopt the interim

final rule, which is reflected in the risk-based capital ratios presented below.

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Table 17 presents our risk-based capital ratios on a consolidated basis as of

March 31, 2022 and December 31, 2021.

Table 17: Risk-Based Capital

As of March 31, As of December

2022 31, 2021

(Dollars in thousands)

Tier 1 capital

Stockholders’ equity $ 2,686,703 $ 2,765,721

ASC 326 transitional period adjustment 24,369 55,143

Goodwill and core deposit intangibles, net (996,184) (997,605)

Unrealized (gain) loss on available-for-sale securities 104,557 (10,462)

Total common equity Tier 1 capital 1,819,445 1,812,797

Qualifying trust preferred securities 71,305 71,270

Total Tier 1 capital 1,890,750 1,884,067

Tier 2 capital

Allowance for credit losses 234,768 236,714

ASC 326 transitional period adjustment (24,369) (55,143)

Disallowed allowance for credit losses (limited to 1.25% of risk

weighted assets)

(56,444) (33,514)

Qualifying allowance for credit losses 153,955 148,057

Qualifying subordinated notes 596,563 299,824

Total Tier 2 capital 750,518 447,881

Total risk-based capital $ 2,641,268 $ 2,331,948

Average total assets for leverage ratio $ 17,443,200 $ 16,960,683

Risk weighted assets $ 12,239,536 $ 11,793,539

Ratios at end of period

Common equity Tier 1 capital 14.87 % 15.37 %

Leverage ratio 10.84 11.11

Tier 1 risk-based capital 15.45 15.98

Total risk-based capital 21.58 19.77

Minimum guidelines – Basel III

Common equity Tier 1 capital 7.00 % 7.00 %

Leverage ratio 4.00 4.00

Tier 1 risk-based capital 8.50 8.50

Total risk-based capital 10.50 10.50

Well-capitalized guidelines

Common equity Tier 1 capital 6.50 % 6.50 %

Leverage ratio 5.00 5.00

Tier 1 risk-based capital 8.00 8.00

Total risk-based capital 10.00 10.00

As of the most recent notification from regulatory agencies, our bank subsidiary

was “well-capitalized” under the regulatory framework for prompt corrective

action. To be categorized as “well-capitalized,” we, as well as our banking

subsidiary, must maintain minimum common equity Tier 1 capital, leverage, Tier 1

risk-based capital, and total risk-based capital ratios as set forth in the

table. There are no conditions or events since that notification that we believe

have changed the bank subsidiary’s category.

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Non-GAAP Financial Measurements

Our accounting and reporting policies conform to generally accepted accounting

principles in the United States (“GAAP”) and the prevailing practices in the

banking industry. However, this report contains financial information determined

by methods other than in accordance with GAAP, including earnings, as adjusted;

diluted earnings per common share, as adjusted; tangible book value per share;

return on average assets, excluding intangible amortization; return on average

assets, as adjusted; return on average common equity, as adjusted; return on

average tangible equity, excluding intangible amortization; return on average

tangible equity, as adjusted; tangible equity to tangible assets; and efficiency

ratio, as adjusted.

We believe these non-GAAP measures and ratios, when taken together with the

corresponding GAAP measures and ratios, provide meaningful supplemental

information regarding our performance. We believe investors benefit from

referring to these non-GAAP measures and ratios in assessing our operating

results and related trends, and when planning and forecasting future periods.

However, these non-GAAP measures and ratios should be considered in addition to,

and not as a substitute for or preferable to, ratios prepared in accordance with

GAAP.

The tables below present non-GAAP reconciliations of earnings, as adjusted, and

diluted earnings per share, as adjusted as well as the non-GAAP computations of

tangible book value per share; return on average assets, excluding intangible

amortization; return on average assets, as adjusted; return on average common

equity, as adjusted; return on average tangible equity excluding intangible

amortization; return on average tangible equity, as adjusted; tangible equity to

tangible assets; and efficiency ratio, as adjusted. The items used in these

calculations are included in financial results presented in accordance with

GAAP.

Earnings, as adjusted, and diluted earnings per common share, as adjusted, are

meaningful non-GAAP financial measures for management, as they exclude certain

items such as merger expenses and/or certain gains and losses. Management

believes the exclusion of these items in expressing earnings provides a

meaningful foundation for period-to-period and company-to-company comparisons,

which management believes will aid both investors and analysts in analyzing our

financial measures and predicting future performance. These non-GAAP financial

measures are also used by management to assess the performance of our business,

because management does not consider these items to be relevant to ongoing

financial performance.

In Table 18 below, we have provided a reconciliation of the non-GAAP calculation

of the financial measure for the periods indicated.

Table 18: Earnings, As Adjusted

Three Months Ended March 31,

2022 2021

(Dollars in thousands)

GAAP net income available to common shareholders (A) $ 64,892 $ 91,602

Adjustments:

Fair value adjustment for marketable securities (2,125) (5,782)

Gain on securities – (219)

Recoveries on historic losses (3,288) (5,107)

Special dividend from equity investment – (8,073)

Merger and acquisition expenses 863 –

Total adjustments (4,550) (19,181)

Tax-effect of adjustments(1) (1,220) (4,937)

Total adjustments after-tax (3,330) (14,244)

Earnings, as adjusted (C) $ 61,562 $ 77,358

Average diluted shares outstanding (D) 164,196 165,446

GAAP diluted earnings per share: A/D $ 0.40 $ 0.55

Adjustments after-tax: B/D (0.03) (0.08)

Diluted earnings per common share excluding adjustments: C/D $

0.37 $ 0.47

(1) Blended statutory rate of 26.135% for 2022 and 25.74% for 2021

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We had $996.6 million, $998.1 million, and $1.00 billion total goodwill, core

deposit intangibles and other intangible assets as of March 31, 2022,

December 31, 2021 and March 31, 2021, respectively. Because of our level of

intangible assets and related amortization expenses, management believes

tangible book value per share, return on average assets excluding intangible

amortization, return on average tangible equity, return on average tangible

equity excluding intangible amortization, and tangible equity to tangible assets

are useful in evaluating our company. Management also believes return on average

assets, as adjusted, return on average equity, as adjusted, and return on

average tangible equity, as adjusted, are meaningful non-GAAP financial

measures, as they exclude items such as certain non-interest income and expenses

that management believes are not indicative of our primary business operating

results. These calculations, which are similar to the GAAP calculations of book

value per share, return on average assets, return on average equity, and equity

to assets, are presented in Tables 19 through 22, respectively.

Table 19: Tangible Book Value Per Share

As of March 31, As of December

2022 31, 2021

(In thousands, except per share data)

Book value per share: A/B $ 16.41 $ 16.90

Tangible book value per share: (A-C-D)/B 10.32 10.80

(A) Total equity $ 2,686,703 $ 2,765,721

(B) Shares outstanding 163,758 163,699

(C) Goodwill 973,025 973,025

(D) Core deposit and other intangibles 23,624 25,045

Table 20: Return on Average Assets

Three Months Ended March 31,

2022 2021

(Dollars in thousands)

Return on average assets: A/D 1.43 % 2.22 %

Return on average assets excluding intangible amortization:

(A+B)/(D-E)

1.54 2.39

Return on average assets excluding fair value adjustment for

marketable securities, gain on securities, recoveries on

historic losses, special dividend from equity investment and

merger and acquisition expenses: (ROA, as adjusted) (A+C)/D

1.36 1.88

(A) Net income $ 64,892 $ 91,602

Intangible amortization after-tax 1,049 1,055

(B) Earnings excluding intangible amortization $ 65,941 $ 92,657

(C) Adjustments after-tax $ (3,330) $ (14,244)

(D) Average assets 18,393,075 16,718,890

(E) Average goodwill, core deposits and other intangible assets 997,338

1,003,011

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Table 21: Return on Average Equity

Three Months Ended March 31,

2022 2021

(Dollars in thousands)

Return on average equity: A/D 9.58 % 14.15 %

Return on average common equity excluding fair value adjustment

for marketable securities, gain on securities, recoveries on

historic losses, special dividend from equity investment and

merger and acquisition expenses: (ROE, as adjusted) (A+C)/D

9.09 11.95

Return on average tangible equity excluding intangible

amortization: B/(D-E)

15.28 23.16

Return on average tangible common equity excluding fair value

adjustment for

marketable securities, gain on securities, recoveries on

historic losses, special

dividend from equity investment and merger and acquisition

expenses:

(ROTCE, as adjusted) (A+C)/(D-E) 14.26 19.33

(A) Net income $ 64,892 $ 91,602

(B) Earnings excluding intangible amortization 65,941 92,657

(C) Adjustments after-tax (3,330) (14,244)

(D) Average equity 2,747,980 2,625,618

(E) Average goodwill, core deposits and other intangible assets 997,338 1,003,011

Table 22: Tangible Equity to Tangible Assets

As of March 31, As of December

2022 31, 2021

(Dollars in thousands)

Equity to assets: B/A 14.43 % 15.32 %

Tangible equity to tangible assets: (B-C-D)/(A-C-D) 9.59 10.36

(A) Total assets $ 18,617,995 $ 18,052,138

(B) Total equity 2,686,703 2,765,721

(C) Goodwill 973,025 973,025

(D) Core deposit and other intangibles 23,624 25,045

The efficiency ratio is a standard measure used in the banking industry and is

calculated by dividing non-interest expense less amortization of core deposit

intangibles by the sum of net interest income on a tax equivalent basis and

non-interest income. The efficiency ratio, as adjusted, is a meaningful non-GAAP

measure for management, as it excludes certain items and is calculated by

dividing non-interest expense less amortization of core deposit intangibles by

the sum of net interest income on a tax equivalent basis and non-interest income

excluding items such as merger expenses and/or certain gains, losses and other

non-interest income and expenses. In Table 23 below, we have provided a

reconciliation of the non-GAAP calculation of the financial measure for the

periods indicated.

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Table 23: Efficiency Ratio, As Adjusted

Three Months Ended

March 31,

2022 2021

(Dollars in thousands)

Net interest income (A) $ 131,148 $ 148,088

Non-interest income (B) 30,669 45,276

Non-interest expense (C) 76,896 72,866

FTE Adjustment (D) 1,738 1,821

Amortization of intangibles (E) 1,421 1,421

Adjustments:

Non-interest income:

Fair value adjustment for marketable securities $ 2,125 $ 5,782

Special dividend from equity investment – 8,073

Gain on OREO, net 478 401

Gain (loss) on branches, equipment and other assets, net 16 (29)

Gain on securities, net – 219

Recoveries on historic losses 3,288 5,107

Total non-interest income adjustments (F) $ 5,907 $ 19,553

Non-interest expense:

Merger and acquisition expenses $

863 $ –

Total non-core non-interest expense (G) $ 863 $ –

Efficiency ratio (reported): ((C-E)/(A+B+D)) 46.15 % 36.60 %

Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F)) 47.33 40.68

Recently Issued Accounting Pronouncements

See Note 21 in the Condensed Notes to Consolidated Financial Statements for a

discussion of certain recently issued and recently adopted accounting

pronouncements.