HOME BANCSHARES INC - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


☑	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2021


☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition period from to

Commission File Number: 000-51904

HOME BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Arkansas		71-0682831
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

719 Harkrider, Suite 100, Conway, Arkansas		72032
(Address of principal executive offices)		(Zip Code)

(501) 339-2929
(Registrant's telephone number, including area code)

Not Applicable
Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	HOMB	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock Issued and Outstanding: 164,087,998 shares as of August 5, 2021.


HOME BANCSHARES, INC. FORM 10-Q June 30, 2021

INDEX

		Page No.
Part I:	Financial Information

Item 1:	Financial Statements

	Consolidated Balance Sheets –
	June 30, 2021 (Unaudited) and December 31, 2020	4

	Consolidated Statements of Income (Unaudited) –
	Three and six months ended June 30, 2021 and 2020	5

	Consolidated Statements of Comprehensive Income (Unaudited) –
	Three and six months ended June 30, 2021 and 2020	6

	Consolidated Statements of Stockholders’ Equity (Unaudited) –
	Three and six months ended June 30, 2021 and 2020	7-8

	Consolidated Statements of Cash Flows (Unaudited) –
	Six months ended June 30, 2021 and 2020	9

	Condensed Notes to Consolidated Financial Statements (Unaudited)	10-49

	Report of Independent Registered Public Accounting Firm	50

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51-91

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	91-94

Item 4:	Controls and Procedures	94

Part II:	Other Information

Item 1:	Legal Proceedings	95

Item 1A:	Risk Factors	95

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	95

Item 3:	Defaults Upon Senior Securities	95

Item 4:	Mine Safety Disclosures	95

Item 5:	Other Information	95

Item 6:	Exhibits	96-97

Signatures		98

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of our statements contained in this document, including matters discussed under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operation,” are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to future events or our future financial performance and include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, including through potential acquisitions, our other business strategies and other statements that are not historical facts. Forward-looking statements are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, but not limited to, the following:

•

the effects of future local, regional, national and international economic conditions, including inflation, a decrease in commercial real estate and residential housing values and unemployment;

•

changes in the level of nonperforming assets and charge-offs, and credit risk generally;

•

the risks of changes in interest rates or the level and composition of deposits, loan demand and the values of loan collateral, securities and interest-sensitive assets and liabilities;

•

disruptions, uncertainties and related effects on our business and operations as a result of the ongoing COVID-19 pandemic and measures that have been or may be implemented or imposed in response to the pandemic, including the impact on, among other things, credit quality and liquidity;

•

the effect of any mergers, acquisitions or other transactions to which we or our bank subsidiary may from time to time be a party, including our ability to successfully integrate any businesses that we acquire;

•

the risk that expected cost savings and other benefits from acquisitions may not be fully realized or may take longer to realize than expected;

•

the possibility that an acquisition does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;

•

the reaction to a proposed acquisition transaction of the respective companies’ customers, employees and counterparties;

•

diversion of management time on acquisition-related issues;

•

the ability to enter into and/or close additional acquisitions;

•

the availability of and access to capital on terms acceptable to us;

•

increased regulatory requirements and supervision that applies as a result of our exceeding $10 billion in total assets;

•

legislation and regulation affecting the financial services industry as a whole, and the Company and its subsidiaries in particular, including the effects resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), recent reforms to the Dodd-Frank Act, legislation and regulations in response to the COVID-19 pandemic and other future legislative and regulatory changes;

•

changes in governmental monetary and fiscal policies;

•

the effects of terrorism and efforts to combat it;

•

political instability;

•

risks associated with our customer relationship with the Cuban government and our correspondent banking relationship with Banco Internacional de Comercio, S.A. (BICSA), a Cuban commercial bank;

•

adverse weather events, including hurricanes, and other natural disasters;

•

the ability to keep pace with technological changes, including changes regarding cybersecurity;

•

an increase in the incidence or severity of fraud, illegal payments, cybersecurity breaches or other illegal acts impacting our bank subsidiary, our vendors or our customers;

•

the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with competitors offering banking products and services by mail, telephone and the Internet;

•

potential claims, expenses and other adverse effects related to current or future litigation, regulatory examinations or other government actions;

•

the effect of changes in accounting policies and practices and auditing requirements, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;

•

higher defaults on our loan portfolio than we expect; and

•

the failure of assumptions underlying the establishment of our allowance for credit losses or changes in our estimate of the adequacy of the allowance for credit losses.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, see the “Risk Factors” section of our Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2021.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Home BancShares, Inc.

Consolidated Balance Sheets

(In thousands, except share data)	June 30, 2021			December 31, 2020
	(Unaudited)
Assets
Cash and due from banks	$	182,226		$	242,173
Interest-bearing deposits with other banks		2,759,027			1,021,615
Cash and cash equivalents		2,941,253			1,263,788
Investment securities – available-for-sale, net of allowance for credit losses		3,053,712			2,473,781
Loans receivable		10,199,175			11,220,721
Allowance for credit losses		(240,451	)		(245,473	)
Loans receivable, net		9,958,724			10,975,248
Bank premises and equipment, net		278,502			278,614
Foreclosed assets held for sale		1,969			4,420
Cash value of life insurance		104,132			103,519
Accrued interest receivable		48,725			60,528
Deferred tax asset, net		72,273			70,249
Goodwill		973,025			973,025
Core deposit and other intangibles		27,886			30,728
Other assets		166,991			164,904
Total assets	$	17,627,192		$	16,398,804
Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing	$	4,076,570		$	3,266,753
Savings and interest-bearing transaction accounts		8,744,900			8,212,240
Time deposits		1,069,871			1,246,797
Total deposits		13,891,341			12,725,790
Securities sold under agreements to repurchase		150,540			168,931
FHLB and other borrowed funds		400,000			400,000
Accrued interest payable and other liabilities		118,415			127,999
Subordinated debentures		370,707			370,326
Total liabilities		14,931,003			13,793,046
Stockholders’ equity:
Common stock, par value $0.01; shares authorized 300,000,000 in 2021 and 2020; shares issued and outstanding 164,488,498 in 2021 and 165,095,252 in 2020		1,645			1,651
Capital surplus		1,501,615			1,520,617
Retained earnings		1,163,810			1,039,370
Accumulated other comprehensive income		29,119			44,120
Total stockholders’ equity		2,696,189			2,605,758
Total liabilities and stockholders’ equity	$	17,627,192		$	16,398,804

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Income

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands, except per share data)	2021			2020		2021			2020
	(Unaudited)
Interest income:
Loans	$	141,684		$	158,996	$	292,601		$	317,144
Investment securities
Taxable		7,185			8,693		13,438			18,469
Tax-exempt		4,905			3,698		9,976			6,812
Deposits – other banks		707			211		1,117			1,327
Federal funds sold		—			—		—			21
Total interest income		154,481			171,598		317,132			343,773
Interest expense:
Interest on deposits		6,434			15,116		14,139			39,314
Federal funds purchased		—			—		—			13
FHLB and other borrowed funds		1,896			2,656		3,771			5,354
Securities sold under agreements to repurchase		107			260		297			722
Subordinated debentures		4,792			4,899		9,585			9,978
Total interest expense		13,229			22,931		27,792			55,381
Net interest income		141,252			148,667		289,340			288,392
Provision for credit losses		—			11,441		—			98,264
Provision for credit losses - unfunded commitments		(4,752	)		9,214		(4,752	)		16,989
Total credit loss (benefit) expense		(4,752	)		20,655		(4,752	)		115,253
Net interest income after provision for credit losses		146,004			128,012		294,092			173,139
Non-interest income:
Service charges on deposit accounts		5,116			4,296		10,118			10,927
Other service charges and fees		9,659			7,666		17,267			13,722
Trust fees		444			397		966			835
Mortgage lending income		6,202			6,196		14,369			8,817
Insurance commissions		478			533		970			1,211
Increase in cash value of life insurance		537			558		1,039			1,118
Dividends from FHLB, FRB, FNBB & other		2,646			230		11,255			8,072
Gain on sale of SBA loans		1,149			—		1,149			341
(Loss) gain on sale of branches, equipment and other assets, net		(23	)		54		(52	)		136
Gain on OREO, net		619			235		1,020			512
Gain on securities, net		—			—		219			—
Fair value adjustment for marketable securities		1,250			919		7,032			(4,899	)
Other income		3,043			3,939		11,044			7,158
Total non-interest income		31,120			25,023		76,396			47,950
Non-interest expense:
Salaries and employee benefits		42,462			40,088		84,521			79,417
Occupancy and equipment		9,042			10,172		18,279			19,045
Data processing expense		5,893			4,614		11,763			8,940
Other operating expenses		15,585			16,084		31,285			34,030
Total non-interest expense		72,982			70,958		145,848			141,432
Income before income taxes		104,142			82,077		224,640			79,657
Income tax expense		25,072			19,250		53,968			16,323
Net income	$	79,070		$	62,827	$	170,672		$	63,334
Basic earnings per share	$	0.48		$	0.38	$	1.03		$	0.38
Diluted earnings per share	$	0.48		$	0.38	$	1.03		$	0.38

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Comprehensive Income

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2021			2020			2021			2020
	(Unaudited)
Net income	$	79,070		$	62,827		$	170,672		$	63,334
Net unrealized gain (loss) on available-for-sale securities		13,091			24,418			(20,309	)		30,848
Other comprehensive income (loss), before tax effect		13,091			24,418			(20,309	)		30,848
Tax effect on other comprehensive (loss) income		(3,421	)		(6,382	)		5,308			(8,062	)
Other comprehensive income (loss)		9,670			18,036			(15,001	)		22,786
Comprehensive income	$	88,740		$	80,863		$	155,671		$	86,120

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

For the Three and Six Months Ended June 30, 2021
(In thousands, except share data)	Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances at January 1, 2021	$	1,651		$	1,520,617		$	1,039,370		$	44,120		$	2,605,758
Comprehensive income:
Net income		—			—			91,602			—			91,602
Other comprehensive income		—			—			—			(24,671	)		(24,671	)
Net issuance of 161,434 shares of common stock from exercise of stock options		1			2,321			—			—			2,322
Repurchase of 330,000 shares of common stock		(3	)		(8,767	)		—			—			(8,770	)
Share-based compensation net issuance of 214,684 shares of restricted common stock		2			2,115			—			—			2,117
Cash dividends – Common Stock, $0.14 per share		—			—			(23,154	)		—			(23,154	)
Balances at March 31, 2021 (unaudited)	$	1,651		$	1,516,286		$	1,107,818		$	19,449		$	2,645,204
Comprehensive income:
Net Income		—			—			79,070			—			79,070
Other comprehensive income		—			—			—			9,670			9,670
Net issuance of 3,628 shares of common stock from exercise of stock options		—			—			—			—			—
Repurchase of 635,000 shares of common stock		(6	)		(16,947	)		—			—			(16,953	)
Share-based compensation net forfeiture of 21,500 shares of restricted common stock		—			2,276			—			—			2,276
Cash dividends – Common Stock, $0.14 per share		—			—			(23,078	)		—			(23,078	)
Balances at June 30, 2021 (unaudited)	$	1,645		$	1,501,615		$	1,163,810		$	29,119		$	2,696,189

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

For the Three and Six Months Ended June 30, 2020
(In thousands, except share data)	Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balances at January 1, 2020	$	1,664		$	1,537,091		$	956,555		$	16,221	$	2,511,531
Cumulative change in accounting principle (adoption of ASC 326)		—			—			(43,956	)		—		(43,956	)
Balance at January 1, 2020 (as adjusted for change in accounting principle)	$	1,664		$	1,537,091		$	912,599		$	16,221	$	2,467,575
Comprehensive income:
Net income		—			—			507			—		507
Other comprehensive income		—			—			—			4,750		4,750
Net issuance of 22,864 shares of common stock from exercise of stock options		—			422			—			—		422
Repurchase of 1,423,560 shares of common stock		(14	)		(23,843	)		—			—		(23,857	)
Share-based compensation net issuance of 175,249 shares of restricted common stock		1			2,481			—			—		2,482
Cash dividends – Common Stock, $0.13 per share		—			—			(21,608	)		—		(21,608	)
Balances at March 31, 2020 (unaudited)	$	1,651		$	1,516,151		$	891,498		$	20,971	$	2,430,271
Comprehensive income:
Net income		—			—			62,827			—		62,827
Other comprehensive income		—			—			—			18,036		18,036
Share-based compensation net issuance of 58,140 shares of restricted common stock		1			2,480			—			—		2,481
Cash dividends – Common Stock, $0.13 per share		—			—			(21,469	)		—		(21,469	)
Balances at June 30, 2020 (unaudited)	$	1,652		$	1,518,631		$	932,856		$	39,007	$	2,492,146

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
(In thousands)	2021			2020
	(Unaudited)
Operating Activities
Net income	$	170,672		$	63,334
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		9,535			10,512
(Increase) decrease in value of equity securities		(7,032	)		4,899
Amortization of securities, net		13,693			8,516
Accretion of purchased loans		(11,282	)		(14,683	)
Share-based compensation		4,393			4,963
Gain on assets		(2,336	)		(989	)
Provision for credit losses		—			98,264
Provision for credit losses - unfunded commitments		(4,752	)		16,989
Deferred income tax effect		3,311			(30,032	)
Increase in cash value of life insurance		(1,039	)		(1,118	)
Originations of mortgage loans held for sale		(393,886	)		(377,343	)
Proceeds from sales of mortgage loans held for sale		419,052			349,494
Changes in assets and liabilities:
Accrued interest receivable		11,803			(34,958	)
Other assets		5,116			(8,421	)
Accrued interest payable and other liabilities		(4,832	)		41,696
Net cash provided by operating activities		212,416			131,123
Investing Activities
Net decrease (increase) in loans, excluding purchased loans		989,477			(647,771	)
Purchases of investment securities – available-for-sale		(968,660	)		(465,834	)
Proceeds from maturities of investment securities – available-for-sale		336,834			333,157
Proceeds from sales of investment securities – available-for-sale		18,112			—
Purchases of equity securities		(10,460	)		(15,015	)
Proceeds from sales of equity securities		15,354			—
(Purchase) redemption of other investments		(5,084	)		3,425
Proceeds from foreclosed assets held for sale		5,422			4,980
Proceeds from sale of SBA loans		12,361			4,057
Purchases of premises and equipment, net		(6,252	)		(6,279	)
Return of investment on cash value of life insurance		418			47,258
Net cash paid – market acquisitions		—			(421,211	)
Net cash provided by (used in) investing activities		387,522			(1,163,233	)
Financing Activities
Net increase in deposits		1,165,551			1,899,553
Net decrease in securities sold under agreements to repurchase		(18,391	)		19,131
Net decrease in federal funds purchased		—			(5,000	)
Net increase in FHLB and other borrowed funds		—			(90,007	)
Proceeds from exercise of stock options		2,322			422
Repurchase of common stock		(25,723	)		(23,857	)
Dividends paid on common stock		(46,232	)		(43,077	)
Net cash provided by financing activities		1,077,527			1,757,165
Net change in cash and cash equivalents		1,677,465			725,055
Cash and cash equivalents – beginning of year		1,263,788			490,601
Cash and cash equivalents – end of period	$	2,941,253		$	1,215,656

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Home BancShares, Inc. (the “Company” or “HBI”) is a bank holding company headquartered in Conway, Arkansas. The Company is primarily engaged in providing a full range of banking services to individual and corporate customers through its wholly-owned community bank subsidiary – Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). The Bank has branch locations in Arkansas, Florida, South Alabama and New York City. The Company is subject to competition from other financial institutions. The Company also is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

A summary of the significant accounting policies of the Company follows:

Operating Segments

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Bank is the only significant subsidiary upon which management makes decisions regarding how to allocate resources and assess performance. Each of the branches of the Bank provide a group of similar banking services, including such products and services as commercial, real estate and consumer loans, time deposits, checking and savings accounts. The individual bank branches have similar operating and economic characteristics. While the chief decision maker monitors the revenue streams of the various products, services and branch locations, operations are managed, and financial performance is evaluated on a Company-wide basis. Accordingly, all of the banking services and branch locations are considered by management to be aggregated into one reportable operating segment.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, the valuation of investment securities, the valuation of foreclosed assets and the valuations of assets acquired, and liabilities assumed in business combinations. In connection with the determination of the allowance for credit losses and the valuation of foreclosed assets, management obtains independent appraisals for significant properties.

Principles of Consolidation

The consolidated financial statements include the accounts of HBI and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Various items within the accompanying consolidated financial statements for previous years have been reclassified to provide more comparative information. These reclassifications had no effect on net earnings or stockholders’ equity.

Interim financial information

The accompanying unaudited consolidated financial statements as of June 30, 2021 and 2020 have been prepared in condensed format, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2020 Form 10-K, filed with the Securities and Exchange Commission.

New Accounting Pronouncements

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. 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 made changes to the accounting for available-for-sale debt securities. One such change is to require 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.

The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $44.0 million which was recognized through a $32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $146.1 million as of January 1, 2020. In addition, the Company recorded a $15.5 million reserve on unfunded commitments which was recognized through an $11.5 million adjustment to retained earnings, net of tax.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In 2019, the Company reevaluated its loan pools of purchased loans with deteriorated credit quality. These loans pools related specifically to acquired loans from the Heritage, Liberty, Landmark, Bay Cities, Bank of Commerce, Premier Bank, Stonegate and Shore Premier Finance acquisitions. At acquisition, a portion of these loans was recorded as purchased credit impaired loans on a pool by pool basis. Through the reevaluation of these loan pools, management determined that estimated losses for purchase credit impaired loans should be processed against the credit mark of the applicable pools. The remaining non-accretable mark was then moved to accretable mark to be recognized over the remaining weighted average life of the loan pools. The projected losses for these loans were less than the total credit mark. As such, the remaining $107.6 million of loans in these pools along with the $29.3 million in accretable yield was deemed to be immaterial and was reclassified out of the purchased credit impaired loans category. As of December 31, 2019, the Company no longer held any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption on of ASC 326 as of January 1, 2020.

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. 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 noncredit 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 loss.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As of December 31, 2019, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined than an allowance for credit losses on available-for-sale securities was not deemed material. However, the Company evaluated the investment portfolio during the first quarter of 2020 and determined that an $842,000 provision for credit losses was necessary. No additional provision was deemed necessary during the remaining quarters of 2020 or the first or second quarters of 2021. See Note 3 for further discussion.

The following table illustrates the impact of the adoption of ASC 326 on the Company’s 2020 consolidated balance sheet.

	January 1, 2020
	As Reported Under ASC 326		Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
	(In thousands)
Assets:
Allowance for credit losses on loans	$	146,110	$	102,122	$	43,988
Liabilities:
Allowance for credit losses on OBS credit exposures (included in other liabilities)		15,521		—		15,521

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, investment securities and mortgage lending income, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our significant 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 Commercial Finance Group (“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. The Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310.

Earnings per Share

Basic earnings per share is computed based on the weighted-average number of shares outstanding during each year. Diluted earnings per share is computed using the weighted-average shares and all potential dilutive shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the following periods:

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Net income	$	79,070	$	62,827	$	170,672	$	63,334
Average shares outstanding		164,781		165,163		165,018		165,588
Effect of common stock options		445		—		296		—
Average diluted shares outstanding		165,226		165,163		165,314		165,588
Basic earnings per share	$	0.48	$	0.38	$	1.03	$	0.38
Diluted earnings per share	$	0.48	$	0.38	$	1.03	$	0.38

As of June 30, 2020, options to purchase 3.3 million shares of common stock with a weighted average exercise price of $19.57 were excluded from the computation of diluted earnings per share as the majority of the options had an exercise price which was greater than the average market price of the common stock.

2. Business Combinations

Acquisition of LH-Finance

On February 29, 2020, the Company completed the acquisition of LH-Finance, the marine lending division of People’s United Bank, N.A. The Company paid a purchase price of approximately $421.2 million in cash. LH-Finance provides direct consumer financing for United States Coast Guard (“USCG”) registered high-end sail and power boats. Additionally, LH-Finance provides inventory floor plan lines of credit to marine dealers, primarily those selling USCG documented vessels.

Including the purchase accounting adjustments, as of the acquisition date, LH-Finance had approximately $409.1 million in total assets, including $407.4 million in total loans, which resulted in goodwill of $14.6 million being recorded.

The acquired portfolio of loans is now housed in the Shore Premier Finance (“SPF”) division. The SPF division of Centennial is responsible for servicing the acquired loan portfolio and originating new loan production. In connection with this acquisition, Centennial opened a loan production office in Baltimore, Maryland.

3. Investment Securities

The following table summarizes the amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

	June 30, 2021
	Available-for-Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	422,424	$	2,657	$	(2,088	)	$	422,993
Residential mortgage-backed securities		1,128,591		7,335		(7,816	)		1,128,110
Commercial mortgage-backed securities		431,950		12,566		(798	)		443,718
State and political subdivisions		947,877		28,257		(2,111	)		974,023
Other securities		84,290		811		(233	)		84,868
Total	$	3,015,132	$	51,626	$	(13,046	)	$	3,053,712

	December 31, 2020
	Available-for-Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	325,860	$	2,338	$	(1,207	)	$	326,991
Residential mortgage-backed securities		703,138		10,607		(688	)		713,057
Commercial mortgage-backed securities		446,964		18,048		(126	)		464,886
State and political subdivisions		898,174		31,173		(1,454	)		927,893
Other securities		40,755		434		(235	)		40,954
Total	$	2,414,891	$	62,600	$	(3,710	)	$	2,473,781

Assets, principally investment securities, having a carrying value of approximately $1.13 billion and $1.08 billion at June 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, as collateral for repurchase agreements, and for other purposes required or permitted by law. Investment securities pledged as collateral for repurchase agreements totaled approximately $150.5 million and $168.9 million at June 30, 2021 and December 31, 2020, respectively.

The amortized cost and estimated fair value of securities classified as available-for-sale at June 30, 2021, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

	Available-for-Sale
	Amortized Cost		Estimated Fair Value
	(In thousands)
Due in one year or less	$	9,941	$	9,968
Due after one year through five years		63,730		64,563
Due after five years through ten years		331,065		332,398
Due after ten years		1,047,855		1,072,955
Mortgage - backed securities: Residential		1,128,591		1,128,110
Mortgage - backed securities: Commercial		431,950		443,718
Other		2,000		2,000
Total	$	3,015,132	$	3,053,712

During the three months ended June 30, 2021, no available-for-sale securities were sold. There were no realized gains or losses recorded on sales for the three months ended June 30, 2021. During the six months ended June 30, 2021, $17.9 million in available-for-sale securities were sold. The gross realized gains on the sales totaled $219,000 for the six months ended June 30, 2021.

During the three and six months ended June 30, 2020, no available-for-sale securities were sold. There were no realized gains or losses recorded on the sales for the three and six months ended June 30, 2020.

The following table shows gross unrealized losses and estimated fair value of investment securities classified as available-for-sale, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of June 30, 2021 and December 31, 2020.

	June 30, 2021
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
U.S. government-sponsored enterprises	$	128,328	$	(1,662	)	$	50,509	$	(426	)	$	178,837	$	(2,088	)
Residential mortgage-backed securities		602,991		(7,772	)		5,603		(44	)		608,594		(7,816	)
Commercial mortgage-backed securities		72,495		(784	)		3,813		(14	)		76,308		(798	)
State and political subdivisions		152,964		(1,269	)		—		(842	)		152,964		(2,111	)
Other securities		9,326		(179	)		4,285		(54	)		13,611		(233	)
Total	$	966,104	$	(11,666	)	$	64,210	$	(1,380	)	$	1,030,314	$	(13,046	)

	December 31, 2020
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
U.S. government-sponsored enterprises	$	54,611	$	(383	)	$	95,249	$	(824	)	$	149,860	$	(1,207	)
Residential mortgage-backed securities		143,458		(643	)		4,900		(45	)		148,358		(688	)
Commercial mortgage-backed securities		26,886		(126	)		—		—			26,886		(126	)
State and political subdivisions		78,349		(1,454	)		—		—			78,349		(1,454	)
Other securities		5,434		(100	)		8,748		(135	)		14,182		(235	)
Total	$	308,738	$	(2,706	)	$	108,897	$	(1,004	)	$	417,635	$	(3,710	)

The Company evaluates all securities quarterly to determine if any debt 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 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. At June 30, 2021, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainties related to the COVID-19 pandemic, was adequate for the investment portfolio. No additional provision for credit losses was considered necessary for the portfolio.

	June 30, 2021		December 31, 2020
	(In thousands)
Allowance for credit losses:
Beginning balance	$	842	$	—
Provision for credit loss - investment securities		—		842
Balance, June 30	$	842	$	842
Provision for credit loss - investment securities				—
Balance, December 31, 2020			$	842

For the six months ended June 30, 2021, the Company had investment securities with approximately $1.4 million in unrealized losses, which have been in continuous loss positions for more than twelve months. The Company’s assessments indicated that the cause of the market depreciation was primarily due to the change in interest rates and not the issuer’s financial condition or downgrades by rating agencies. In addition, approximately 52.9% of the principal balance from the Company’s investment portfolio will mature and be repaid to the Company within five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.

As of June 30, 2021, the Company's securities portfolio consisted of 1,337 investment securities, 275 of which were in an unrealized loss position. As noted in the table above, the total amount of the unrealized loss was $13.0 million. The U.S government-sponsored enterprises portfolio contained unrealized losses of $2.1 million on 50 securities. The residential mortgage-backed securities portfolio contained $7.8 million of unrealized losses on 136 securities, and the commercial mortgage-backed securities portfolio contained $798,000 of unrealized losses on 29 securities. The state and political subdivisions portfolio contained $2.1 million of unrealized losses on 53 securities. In addition, the other securities portfolio contained $233,000 of unrealized losses on 7 securities. The unrealized losses on the Company's investments were a result of interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. As of June 30, 2021, the Company does not consider an allowance for credit losses on the other portions of the investment portfolio because the decline in market value was attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

Income earned on available-for sale securities for the three and six months ended June 30, 2021 and 2020, is as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Taxable	$	7,185	$	8,693	$	13,438	$	18,469
Non-taxable		4,905		3,698		9,976		6,812
Total	$	12,090	$	12,391	$	23,414	$	25,281

4. Loans Receivable

The various categories of loans receivable are summarized as follows:

	June 30,			December 31,
	2021			2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	4,144,375		$	4,429,060
Construction/land development		1,541,482			1,562,298
Agricultural		126,293			114,431
Residential real estate loans
Residential 1-4 family		1,316,485			1,536,257
Multifamily residential		332,256			536,538
Total real estate		7,460,891			8,178,584
Consumer		824,938			864,690
Commercial and industrial		1,612,826			1,896,442
Agricultural		69,152			66,869
Other		231,368			214,136
Total loans receivable		10,199,175			11,220,721
Allowance for credit losses		(240,451	)		(245,473	)
Loans receivable, net	$	9,958,724		$	10,975,248

During the three and six months ended June 30, 2021, the Company sold $11.1 million of the guaranteed portions of certain SBA loans, which resulted in a gain of approximately $1.1 million. During the three months ended June 30, 2020, the Company did not sell any guaranteed portions of certain SBA loans. During the six months ended June 30, 2020, the Company sold $3.7 million of the guaranteed portions of certain SBA loans, which resulted in a gain of approximately $341,000.

Mortgage loans held for sale of approximately $89.7 million and $114.8 million at June 30, 2021 and December 31, 2020, respectively, are included in residential 1-4 family loans. Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid. The Company obtains forward commitments to sell mortgage loans to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. The forward commitments acquired by the Company for mortgage loans in process of origination are considered mandatory forward commitments. Because these commitments are structured on a mandatory basis, the Company is required to substitute another loan or to buy back the commitment if the original loan does not fund. These commitments are derivative instruments and their fair values at June 30, 2021 and December 31, 2020 were not material.

A description of our accounting policies for loans, impaired loans and non-accrual loans are set forth in our 2020 Form 10-K filed with the SEC on February 26, 2021. The Company adopted ASC 326 effective January 1, 2020. See Notes 1 and 5 for further discussion.

5. Allowance for Credit Losses, Credit Quality and Other

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credits, financial guarantees, and other similar instruments. The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $44.0 million which was recognized through a $32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $146.1 million as of January 1, 2020. In addition, the Company recorded a $15.5 million reserve on unfunded commitments as of January 1, 2020, which was recognized through an $11.5 million adjustment to retained earnings, net of tax.

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.

Each year management evaluates the performance of the selected models used in the CECL calculation through backtesting. Based on the results of the testing, management determines if the various models produced accurate results compared to the actual losses incurred for the current economic environment. Management then determines if changes to the input assumptions and economic factors would produce a stronger overall calculation that is more responsive to changes in economic conditions. The Company continues to use regression analysis to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default for the changes in the economic factors for the loss driver segments. Based on this analysis, management determined that changes to several of the economic factors for the various loss driver segments were necessary. The identified loss drivers by segment are included below as of June 30, 2021 and December 31, 2020, respectively.

June 30, 2021
Loss Driver Segment	Call Report Segment(s)	Modeled Economic Factors
1-4 Family Construction	1a1	National Unemployment (%) & Housing Price Index (%)
All Other Construction	1a2	National Unemployment (%) & Gross Domestic Product (%)
1-4 Family Revolving HELOC & Junior Liens	1c1	National Unemployment (%) & Housing Price Index – CoreLogic (%)
1-4 Family Revolving HELOC & Junior Liens	1c2b	National Unemployment (%) & Gross Domestic Product (%)
1-4 Family Senior Liens	1c2a	National Unemployment (%) & Gross Domestic Product (%)
Multifamily	1d	Rental Vacancy Rate (%) & Housing Price Index – Case-Schiller (%)
Owner Occupied CRE	1e1	National Unemployment (%) & Gross Domestic Product (%)
Non-Owner Occupied CRE	1e2,1b,8	National Unemployment (%) & Gross Domestic Product (%)
Commercial & Industrial, Agricultural, Non-Depository Financial Institutions, Purchase/Carry Securities, Other	4a, 3, 9a, 9b1, 9b2, Other	National Unemployment (%) & National Retail Sales (%)
Consumer Auto	6c	National Unemployment (%) & National Retail Sales (%)
Other Consumer	6b, 6d	National Unemployment (%) & National Retail Sales (%)
Other Consumer - SPF	6d	National Unemployment (%)

	December 31, 2020
Loss Driver Segment	Call Report Segment(s)	Modeled Economic Factors
1-4 Family Construction	1a1	National Unemployment (%) & Housing Price Index (%)
All Other Construction	1a2	National Unemployment (%) & Commercial Real Estate Price Index (%)
1-4 Family Revolving HELOC & Junior Liens	1c1, 1c2b	National Unemployment (%) & Housing Price Index (%)
1-4 Family Senior Liens	1c2a	National Unemployment (%) & Housing Price Index (%)
Multifamily	1d	National Unemployment (%) & Housing Price Index (%)
Owner Occupied CRE	1e1	National Unemployment (%) & Commercial Real Estate Price Index (%)
Non-Owner Occupied CRE	1e2,1b,8	National Unemployment (%) & Commercial Real Estate Price Index (%)
Commercial & Industrial, Agricultural, Non-Depository Financial Institutions, Purchase/Carry Securities, Other	4a, 3, 9a, 9b1, 9b2, Other	National Unemployment (%) & National Retail Sales (%)
Consumer Auto	6c	National Unemployment (%) & National Retail Sales (%)
Other Consumer	6b, 6d	National Unemployment (%) & National Retail Sales (%)
Other Consumer - SPF	6d	National Unemployment (%)

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.

Construction/Land Development and Other 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.

Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to many factors including the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.

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.

Consumer & Other Loans. Our consumer & other loans are primarily composed of loans to finance USCG registered high-end sail and power boats as a result of our acquisitions of SPF on June 30, 2018 and LH-Finance on February 29, 2020. The performance of consumer & other 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.

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 loss 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. The Company uses the DCF method to estimate expected losses for all of Company’s off-balance sheet credit exposures through the use of the existing DCF models for the Company’s loan portfolio pools. The off-balance sheet credit exposures exhibit similar risk characteristics as loans currently in the Company’s loan portfolio.

ASC 326 requires that both a discount and an allowance for credit losses be recorded on loans during an acquisition. During the first quarter of 2020, we completed the acquisition of $406.2 million of loans from LH-Finance. As a result, the Company recorded a $6.6 million loan discount and a $9.3 million increase in the allowance for credit losses for this acquisition. A small portion of the loans acquired during the quarter were purchase credit deteriorated (“PCD”) loans, so the Company recorded a $357,000 allowance for credit losses on these loans.

The following tables present the activity in the allowance for credit losses for the three and six months ended June 30, 2021:

	Three Months Ended June 30, 2021
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	22,937		$	93,869		$	54,597		$	49,824		$	21,705		$	242,932
Loans charged off		—			(618	)		(97	)		(1,931	)		(377	)		(3,023	)
Recoveries of loans previously charged off		17			54			104			226			141			542
Net loans recovered (charged off)		17			(564	)		7			(1,705	)		(236	)		(2,481	)
Provision for credit losses		(809	)		(178	)		(3,422	)		4,163			246			—
Balance, June 30	$	22,145		$	93,127		$	51,182		$	52,282		$	21,715		$	240,451

	Six Months Ended June 30, 2021
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	32,861		$	88,453		$	53,216		$	46,530		$	24,413		$	245,473
Loans charged off		—			(637	)		(323	)		(4,210	)		(900	)		(6,070	)
Recoveries of loans previously charged off		39			68			166			302			473			1,048
Net loans recovered (charged off)		39			(569	)		(157	)		(3,908	)		(427	)		(5,022	)
Provision for credit losses		(10,755	)		5,243			(1,877	)		9,660			(2,271	)		—
Balance, June 30	$	22,145		$	93,127		$	51,182		$	52,282		$	21,715		$	240,451

The following tables present the balances in the allowance for loan losses for the six-month period ended June 30, 2020 and the year ended December 31, 2020.

	Six Months Ended June 30, 2020 and Year Ended December 31, 2020
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	26,433		$	33,529		$	20,135		$	16,615		$	5,410		$	102,122
Impact of adoption ASC 326		(5,296	)		15,912			16,680			11,584			5,108			43,988
Allowance for credit losses on PCD loans		—			—			—			—			357			357
Loans charged off		(443	)		(2,009	)		(357	)		(3,150	)		(888	)		(6,847	)
Recoveries of loans previously charged off		15			485			237			106			455			1,298
Net loans charged off		(428	)		(1,524	)		(120	)		(3,044	)		(433	)		(5,549	)
Provision for credit loss - loans		24,316			35,418			3,223			19,044			6,112			88,113
Provision for credit loss - acquired loans		—			—			—			—			9,309			9,309
Balance, June 30		45,025			83,335			39,918			44,199			25,863			238,340
Loans charged off		(775	)		(1,032	)		(128	)		(4,614	)		(1,090	)		(7,639	)
Recoveries of loans previously charged off		92			162			100			112			306			772
Net loans charged off		(683	)		(870	)		(28	)		(4,502	)		(784	)		(6,867	)
Provision for credit loss - loans		(11,481	)		5,988			13,326			6,833			(666	)		14,000
Balance, December 31	$	32,861		$	88,453		$	53,216		$	46,530		$	24,413		$	245,473

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing as of June 30, 2021 and December 31, 2020:

		June 30, 2021
		Nonaccrual		Nonaccrual with Reserve		Loans Past Due Over 90 Days Still Accruing
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		$	19,030	$	9,011	$	2,165
Construction/land development			1,363		—		13
Agricultural			757		—		—
Residential real estate loans
Residential 1-4 family			18,399		3,000		1,479
Multifamily residential			163		—		—
Total real estate			39,712		12,011		3,657
Consumer			1,726		—		5
Commercial and industrial			12,699		7,275		5
Agricultural & other			1,132		—		—
Total		$	55,269	$	19,286	$	3,667

		December 31, 2020
		Nonaccrual		Nonaccrual with Reserve		Loans Past Due Over 90 Days Still Accruing
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		$	20,947	$	6,794	$	6,088
Construction/land development			1,381		2,089		1,296
Agricultural			879		—		—
Residential real estate loans
Residential 1-4 family			19,334		3,000		1,821
Multifamily residential			173		—		—
Total real estate			42,714		11,883		9,205
Consumer			3,506		—		174
Commercial and industrial			17,251		—		231
Agricultural & other			1,057		—		—
Total		$	64,528	$	11,883	$	9,610

The Company had $55.3 million and $64.5 million in nonaccrual loans for the periods ended June 30, 2021 and December 31, 2020, respectively. In addition, the Company had $3.7 million and $9.6 million in loans past due 90 days or more and still accruing for the periods ended June 30, 2021 and December 31, 2020, respectively.

The Company had $19.3 million and $11.9 million in nonaccrual loans with a specific reserve as of June 30, 2021 and December 31, 2020, respectively. The Company did not recognize any interest income on nonaccrual loans during the period ended June 30, 2021 or June 30, 2020.

The following table presents the amortized cost basis of collateral-dependent impaired loans by class of loans as of June 30, 2021 and December 31, 2020:

	June 30, 2021
	Commercial		Residential
	Real Estate		Real Estate		Other
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	291,453	$	—	$	—
Construction/land development		4,707		—		—
Agricultural		757		—		—
Residential real estate loans
Residential 1-4 family		—		23,088		—
Multifamily residential		—		163		—
Total real estate		296,917		23,251		—
Consumer		—		—		1,745
Commercial and industrial		—		—		16,949
Agricultural & other		—		—		1,132
Total	$	296,917	$	23,251	$	19,826

	December 31, 2020
	Commercial		Residential
	Real Estate		Real Estate		Other
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	47,429	$	—	$	—
Construction/land development		6,012		—		—
Agricultural		879		—		—
Residential real estate loans
Residential 1-4 family		—		32,413		—
Multifamily residential		—		173		—
Total real estate		54,320		32,586		—
Consumer		—		—		3,694
Commercial and industrial		—		—		21,027
Agricultural & other		—		—		1,057
Total	$	54,320	$	32,586	$	25,778

The Company had $340.0 million and $112.7 million in collateral-dependent impaired loans for the periods ended June 30, 2021 and December 31, 2020, respectively. The increase in collateral-dependent impaired loans was due to the Company changing the valuation method for lodging and assisted living loans to a market price valuation methodology. This involved assigning a 15% discount of par for these impaired loans. The 15% figure was derived based on knowledge of current hotel and assisted living offerings in the loan sale market. In the event of default, liquidation would be achieved through a loan sale. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary.

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral-dependent impaired loans, excluding lodging and assisted living loans, where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the fair value of the underlying collateral less estimated costs to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

The following is an aging analysis for loans receivable as of June 30, 2021 and December 31, 2020:

	June 30, 2021
	Loans Past Due 30-59 Days		Loans Past Due 60-89 Days		Loans Past Due 90 Days or More		Total Past Due		Current Loans		Total Loans Receivable		Accruing Loans Past Due 90 Days or More
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	850	$	1,645	$	21,195	$	23,690	$	4,120,685	$	4,144,375	$	2,165
Construction/land development		32		—		1,376		1,408		1,540,074		1,541,482		13
Agricultural		—		—		757		757		125,536		126,293		—
Residential real estate loans														—
Residential 1-4 family		1,080		3,101		19,878		24,059		1,292,426		1,316,485		1,479
Multifamily residential		—		—		163		163		332,093		332,256		—
Total real estate		1,962		4,746		43,369		50,077		7,410,814		7,460,891		3,657
Consumer		572		594		1,731		2,897		822,041		824,938		5
Commercial and industrial		2,373		1,190		12,704		16,267		1,596,559		1,612,826		5
Agricultural & other		524		1		1,132		1,657		298,863		300,520		—
Total	$	5,431	$	6,531	$	58,936	$	70,898	$	10,128,277	$	10,199,175	$	3,667

	December 31, 2020
	Loans Past Due 30-59 Days		Loans Past Due 60-89 Days		Loans Past Due 90 Days or More		Total Past Due		Current Loans		Total Loans Receivable		Accruing Loans Past Due 90 Days or More
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	3,856	$	68	$	27,035	$	30,959	$	4,398,101	$	4,429,060	$	6,088
Construction/land development		178		44		2,677	$	2,899		1,559,399		1,562,298		1,296
Agricultural		522		—		879		1,401		113,030		114,431		—
Residential real estate loans
Residential 1-4 family		4,833		7,787		21,155		33,775		1,502,482		1,536,257		1,821
Multifamily residential		111		—		173		284		536,254		536,538		—
Total real estate		9,500		7,899		51,919		69,318		8,109,266		8,178,584		9,205
Consumer		2,899		802		3,680		7,381		857,309		864,690		174
Commercial and industrial		960		515		17,482		18,957		1,877,485		1,896,442		231
Agricultural and other		1,125		3,713		1,057		5,895		275,110		281,005		—
Total	$	14,484	$	12,929	$	74,138	$	101,551	$	11,119,170	$	11,220,721	$	9,610

Non-accruing loans at June 30, 2021 and December 31, 2020 were $55.3 million and $64.5 million, respectively.

Interest recognized on impaired loans during the three and six months ended June 30, 2021 was approximately $240,000 and $477,000, respectively. Interest recognized on impaired loans during the three and six months ended June 30, 2020 was approximately $341,000 and $678,000, respectively. The amount of interest recognized on impaired loans on the cash basis is not materially different than the accrual basis.

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk rating of loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) non-performing loans and (v) the general economic conditions in Arkansas, Florida, Alabama and New York.

The Company utilizes a risk rating matrix to assign a risk rating to each of its loans. Loans are rated on a scale from 1 to 8. Descriptions of the general characteristics of the 8 risk ratings are as follows:

•

Risk rating 1 – Excellent. Loans in this category are to persons or entities of unquestionable financial strength, a highly liquid financial position, with collateral that is liquid and well margined. These borrowers have performed without question on past obligations, and the Bank expects their performance to continue. Internally generated cash flow covers current maturities of long-term debt by a substantial margin. Loans secured by bank certificates of deposit and savings accounts, with appropriate holds placed on the accounts, are to be rated in this category.

•

Risk rating 2 – Good. These are loans to persons or entities with strong financial condition and above-average liquidity that have previously satisfactorily handled their obligations with the Bank. Collateral securing the Bank’s debt is margined in accordance with policy guidelines. Internally generated cash flow covers current maturities of long-term debt more than adequately. Unsecured loans to individuals supported by strong financial statements and on which repayment is satisfactory may be included in this classification.

•

Risk rating 3 – Satisfactory. Loans to persons or entities with an average financial condition, adequate collateral margins, adequate cash flow to service long-term debt, and net worth comprised mainly of fixed assets are included in this category. These entities are minimally profitable now, with projections indicating continued profitability into the foreseeable future. Closely held corporations or businesses where a majority of the profits are withdrawn by the owners or paid in dividends are included in this rating category. Overall, these loans are basically sound.

•

Risk rating 4 – Watch. Borrowers who have marginal cash flow, marginal profitability or have experienced an unprofitable year and a declining financial condition characterize these loans. The borrower has in the past satisfactorily handled debts with the Bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit exposure.

•

Risk rating 5 – Other Loans Especially Mentioned (“OLEM”). A loan criticized as OLEM has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. OLEM assets are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification.

•

Risk rating 6 – Substandard. A loan classified as substandard is inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual assets.

•

Risk rating 7 – Doubtful. A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the loan.

•

Risk rating 8 – Loss. Assets classified as loss are considered uncollectible and of such little value that the continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may occur in the future. This classification is based upon current facts, not probabilities. Assets classified as loss should be charged-off in the period in which they became uncollectible.

The Company’s classified loans include loans in risk ratings 6, 7 and 8. Loans may be classified, but not considered impaired, due to one of the following reasons: (1) The Company has established minimum dollar amount thresholds for loan impairment testing. All loans over $2.0 million that are rated 5 – 8 are individually assessed for impairment on a quarterly basis. Loans rated 5 – 8 that fall under the threshold amount are not individually tested for impairment and therefore are not included in impaired loans; (2) of the loans that are above the threshold amount and tested for impairment, after testing, some are considered to not be impaired and are not included in impaired loans.

Based on the most recent analysis performed, the risk category of loans by class of loans as of June 30, 2021 and December 31, 2020 is as follows:

	June 30, 2021
	Term Loans Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		25		25
Risk rating 3		83,714		287,185		335,029		436,237		260,682		1,061,887		239,507		2,704,241
Risk rating 4		4,567		26,909		163,508		256,067		189,314		383,864		56,140		1,080,369
Risk rating 5		—		10,589		3,271		25,568		37,568		209,116		—		286,112
Risk rating 6		—		—		15,633		1,939		13,736		42,232		—		73,540
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		88		—		88
Total non-farm/non-residential		88,281		324,683		517,441		719,811		501,300		1,697,187		295,672		4,144,375
Construction/land development
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		239		—		239
Risk rating 3		94,839		237,183		102,983		41,048		24,128		63,829		139,431		703,441
Risk rating 4		14,106		207,503		452,462		46,350		39,894		37,617		26,805		824,737
Risk rating 5		—		—		434		—		—		1,168		1		1,603
Risk rating 6		—		20		889		62		—		10,489		—		11,460
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		1		1		—		2
Total construction/land development		108,945		444,706		556,768		87,460		64,023		113,343		166,237		1,541,482
Agricultural
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		9,364		28,553		8,083		8,973		5,203		21,669		4,370		86,215
Risk rating 4		6,452		2,133		292		1,178		782		27,248		565		38,650
Risk rating 5		—		—		—		—		—		—		—		—
Risk rating 6		—		46		—		—		—		1,382		—		1,428
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural		15,816		30,732		8,375		10,151		5,985		50,299		4,935		126,293
Total commercial real estate loans	$	213,042	$	800,121	$	1,082,584	$	817,422	$	571,308	$	1,860,829	$	466,844	$	5,812,150
Residential real estate loans
Residential 1-4 family
Risk rating 1	$	3	$	—	$	—	$	—	$	—	$	83	$	91	$	177
Risk rating 2		—		—		—		—		—		43		2,180		2,223
Risk rating 3		112,359		159,012		160,707		118,714		104,718		363,412		94,134		1,113,056
Risk rating 4		6,374		4,238		10,868		22,787		19,020		59,743		30,361		153,391
Risk rating 5		—		—		1,178		1,405		4,396		4,621		2,499		14,099
Risk rating 6		286		2,542		2,897		1,844		1,097		17,852		6,995		33,513
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		5		21		—		26
Total residential 1-4 family		119,022		165,792		175,650		144,750		129,236		445,775		136,260		1,316,485
Multifamily residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		6,726		23,555		32,344		78,723		10,302		46,818		7,143		205,611
Risk rating 4		—		478		3,980		21,208		3,026		26,404		37,468		92,564
Risk rating 5		—		—		—		7,652		8,238		15,880		—		31,770
Risk rating 6		—		—		—		—		896		1,415		—		2,311
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total multifamily residential		6,726		24,033		36,324		107,583		22,462		90,517		44,611		332,256
Total real estate	$	338,790	$	989,946	$	1,294,558	$	1,069,755	$	723,006	$	2,397,121	$	647,715	$	7,460,891

	June 30, 2021
	Term Loans Amortized Cost Basis by Origination Year, Continued
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Consumer
Risk rating 1	$	1,972	$	2,371	$	1,736	$	1,205	$	314	$	1,952	$	1,676	$	11,226
Risk rating 2		—		—		46		754		—		10		57		867
Risk rating 3		112,957		202,359		158,116		128,345		77,928		110,039		7,621		797,365
Risk rating 4		939		1,513		3,386		2,332		221		3,243		79		11,713
Risk rating 5		—		118		—		101		195		778		—		1,192
Risk rating 6		—		44		382		475		—		1,548		43		2,492
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		1		82		—		83
Total consumer		115,868		206,405		163,666		133,212		78,659		117,652		9,476		824,938
Commercial and industrial
Risk rating 1	$	326,895	$	135,854	$	497	$	196	$	172	$	21,474	$	11,314	$	496,402
Risk rating 2		25		22		1		—		90		279		266		683
Risk rating 3		49,474		82,519		99,734		51,093		25,315		65,665		109,786		483,586
Risk rating 4		108,241		38,468		105,445		108,977		34,075		43,737		76,436		515,379
Risk rating 5		—		170		17,977		17,895		5,739		3,430		11,027		56,238
Risk rating 6		951		15,462		4,620		27,815		5,598		4,702		1,360		60,508
Risk rating 7		—		—		2		—		—		—		—		2
Risk rating 8		—		2		1		—		—		22		3		28
Total commercial and industrial		485,586		272,497		228,277		205,976		70,989		139,309		210,192		1,612,826
Agricultural and other
Risk rating 1	$	20,380	$	8,734	$	45	$	—	$	—	$	127	$	364	$	29,650
Risk rating 2		—		—		4,571		—		—		907		1,027		6,505
Risk rating 3		47,150		66,429		5,315		3,911		1,268		49,769		54,182		228,024
Risk rating 4		6,098		489		237		1,533		1,440		1,694		22,812		34,303
Risk rating 5		—		—		—		—		—		597		—		597
Risk rating 6		—		—		30		16		33		1,305		57		1,441
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural and other		73,628		75,652		10,198		5,460		2,741		54,399		78,442		300,520
Total	$	1,013,872	$	1,544,500	$	1,696,699	$	1,414,403	$	875,395	$	2,708,481	$	945,825	$	10,199,175

	December 31, 2020
	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		25		25
Risk rating 3		301,237		340,562		546,670		286,173		289,483		942,449		266,867		2,973,441
Risk rating 4		27,239		139,354		161,461		265,684		197,979		300,055		17,305		1,109,077
Risk rating 5		10,591		16,865		67,089		7,764		108,885		84,609		750		296,553
Risk rating 6		—		859		2,289		987		4,577		40,600		86		49,398
Risk rating 7		—		—		—		—		—		552		—		552
Risk rating 8		—		—		—		—		—		14		—		14
Total non-farm/non-residential		339,067		497,640		777,509		560,608		600,924		1,368,279		285,033		4,429,060
Construction/land development
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		283		—		283
Risk rating 3		211,567		181,257		91,323		33,986		25,600		54,245		115,120		713,098
Risk rating 4		129,599		417,737		92,032		46,249		17,161		32,060		76,845		811,683
Risk rating 5		—		—		392		21,892		—		1,227		545		24,056
Risk rating 6		—		763		98		63		157		12,065		—		13,146
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		1		—		31		—		32
Total construction/land development		341,166		599,757		183,845		102,191		42,918		99,911		192,510		1,562,298
Agricultural
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		33,428		8,885		9,119		5,397		3,935		25,159		5,538		91,461
Risk rating 4		2,141		535		1,206		681		5,499		10,735		665		21,462
Risk rating 5		—		—		—		—		—		116		—		116
Risk rating 6		47		—		—		—		—		1,345		—		1,392
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural		35,616		9,420		10,325		6,078		9,434		37,355		6,203		114,431
Total commercial real estate loans	$	715,849	$	1,106,817	$	971,679	$	668,877	$	653,276	$	1,505,545	$	483,746	$	6,105,789
Residential real estate loans
Residential 1-4 family
Risk rating 1	$	—	$	47	$	—	$	—	$	76	$	12	$	120	$	255
Risk rating 2		—		—		—		—		—		423		1,540		1,963
Risk rating 3		237,991		184,578		151,478		139,096		119,642		343,381		119,186		1,295,352
Risk rating 4		4,626		12,716		32,594		20,687		16,148		68,328		30,137		185,236
Risk rating 5		—		—		1,363		4,700		383		5,344		516		12,306
Risk rating 6		554		5,973		829		2,084		3,222		18,074		10,257		40,993
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		8		144		152
Total residential 1-4 family		243,171		203,314		186,264		166,567		139,471		435,570		161,900		1,536,257
Multifamily residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		19,033		60,175		87,104		11,477		8,092		59,592		6,386		251,859
Risk rating 4		477		6,358		101,364		93,475		1,924		17,672		37,286		258,556
Risk rating 5		—		—		—		—		—		24,945		—		24,945
Risk rating 6		—		—		—		894		—		284		—		1,178
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total multifamily residential		19,510		66,533		188,468		105,846		10,016		102,493		43,672		536,538
Total real estate	$	978,530	$	1,376,664	$	1,346,411	$	941,290	$	802,763	$	2,043,608	$	689,318	$	8,178,584

	December 31, 2020
	Term Loans Amortized Cost Basis by Origination Year, Continued
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Consumer
Risk rating 1	$	3,389	$	2,375	$	1,596	$	485	$	828	$	1,428	$	1,957	$	12,058
Risk rating 2		—		47		931		—		—		12		57		1,047
Risk rating 3		229,189		192,054		152,646		97,812		68,585		68,871		20,094		829,251
Risk rating 4		3,699		3,479		2,769		1,411		1,371		1,991		117		14,837
Risk rating 5		144		737		22		198		568		321		—		1,990
Risk rating 6		12		361		566		3		2,052		2,468		45		5,507
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total consumer		236,433		199,053		158,530		99,909		73,404		75,091		22,270		864,690
Commercial and industrial
Risk rating 1	$	632,735	$	506	$	271	$	183	$	20,199	$	1,445	$	10,023	$	665,362
Risk rating 2		29		187		2		96		67		623		268		1,272
Risk rating 3		80,586		131,717		62,814		35,651		39,502		52,743		135,590		538,603
Risk rating 4		68,032		144,867		149,445		42,416		15,138		43,065		115,341		578,304
Risk rating 5		3,195		16,341		11,283		346		251		448		10,637		42,501
Risk rating 6		1,261		4,086		30,834		22,992		2,615		5,198		3,405		70,391
Risk rating 7		—		3		—		—		—		—		—		3
Risk rating 8		1		—		1		—		4		—		—		6
Total commercial and industrial		785,839		297,707		254,650		101,684		77,776		103,522		275,264		1,896,442
Agricultural and other
Risk rating 1	$	59,248	$	51	$	53	$	—	$	110	$	27	$	1,036	$	60,525
Risk rating 2		16		4,571		—		—		—		2,859		1,159		8,605
Risk rating 3		78,305		7,045		5,050		5,045		18,445		36,925		42,401		193,216
Risk rating 4		1,043		5,041		1,592		1,096		895		1,703		4,600		15,970
Risk rating 5		—		—		—		—		—		605		—		605
Risk rating 6		—		219		18		—		223		1,624		—		2,084
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural and other		138,612		16,927		6,713		6,141		19,673		43,743		49,196		281,005
Total	$	2,139,414	$	1,890,351	$	1,766,304	$	1,149,024	$	973,616	$	2,265,964	$	1,036,048	$	11,220,721

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. The Company also evaluates credit quality based on the aging status of the loan, which was previously presented and by payment activity. The following tables present the amortized cost of performing and nonperforming loans as of June 30, 2021 and December 31, 2020.

	June 30, 2021
	Term Loans Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Performing	$	88,281	$	314,539	$	502,660	$	694,702	$	463,225	$	1,493,843	$	295,672	$	3,852,922
Non-performing		—		10,144		14,781		25,109		38,075		203,344		—		291,453
Total non-farm/ non-residential		88,281		324,683		517,441		719,811		501,300		1,697,187		295,672		4,144,375
Construction/land development
Performing	$	108,945	$	444,686	$	555,879	$	87,406	$	64,023	$	109,599	$	166,237	$	1,536,775
Non-performing		—		20		889		54		—		3,744		—		4,707
Total construction/ land development		108,945		444,706		556,768		87,460		64,023		113,343		166,237		1,541,482
Agricultural
Performing	$	15,816	$	30,732	$	8,375	$	10,151	$	5,985	$	49,542	$	4,935	$	125,536
Non-performing		—		—		—		—		—		757		—		757
Total agricultural		15,816		30,732		8,375		10,151		5,985		50,299		4,935		126,293
Total commercial real estate loans	$	213,042	$	800,121	$	1,082,584	$	817,422	$	571,308	$	1,860,829	$	466,844	$	5,812,150
Residential real estate loans
Residential 1-4 family
Performing	$	119,022	$	162,716	$	173,324	$	143,707	$	127,949	$	436,583	$	130,096	$	1,293,397
Non-performing		—		3,076		2,326		1,043		1,287		9,192		6,164		23,088
Total residential 1-4 family		119,022		165,792		175,650		144,750		129,236		445,775		136,260		1,316,485
Multifamily residential
Performing	$	6,726	$	24,033	$	36,324	$	107,583	$	22,462	$	90,354	$	44,611	$	332,093
Non-performing		—		—		—		—		—		163		—		163
Total multifamily residential		6,726		24,033		36,324		107,583		22,462		90,517		44,611		332,256
Total real estate	$	338,790	$	989,946	$	1,294,558	$	1,069,755	$	723,006	$	2,397,121	$	647,715	$	7,460,891
Consumer
Performing	$	115,868	$	206,372	$	163,321	$	133,094	$	78,658	$	116,411	$	9,469	$	823,193
Non-performing		—		33		345		118		1		1,241		7		1,745
Total consumer		115,868		206,405		163,666		133,212		78,659		117,652		9,476		824,938
Commercial and industrial
Performing	$	485,586	$	272,304	$	223,811	$	200,275	$	68,128	$	136,116	$	209,657	$	1,595,877
Non-performing		—		193		4,466		5,701		2,861		3,193		535		16,949
Total commercial and industrial		485,586		272,497		228,277		205,976		70,989		139,309		210,192		1,612,826
Agricultural and other
Performing	$	73,628	$	75,652	$	10,168	$	5,443	$	2,708	$	53,356	$	78,433	$	299,388
Non-performing		—		—		30		17		33		1,043		9		1,132
Total agricultural and other		73,628		75,652		10,198		5,460		2,741		54,399		78,442		300,520
Total	$	1,013,872	$	1,544,500	$	1,696,699	$	1,414,403	$	875,395	$	2,708,481	$	945,825	$	10,199,175

	December 31, 2020
	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Performing	$	339,067	$	497,640	$	775,220	$	560,279	$	598,074	$	1,326,404	$	284,947	$	4,381,631
Non-performing		—		—		2,289		329		2,850		41,875		86		47,429
Total non-farm/ non-residential		339,067		497,640		777,509		560,608		600,924		1,368,279		285,033		4,429,060
Construction/land development
Performing	$	341,166	$	598,995	$	183,821	$	102,127	$	42,779	$	94,888	$	192,510	$	1,556,286
Non-performing		—		762		24		64		139		5,023		—		6,012
Total construction/ land development		341,166		599,757		183,845		102,191		42,918		99,911		192,510		1,562,298
Agricultural
Performing	$	35,616	$	9,420	$	10,325	$	6,078	$	9,434	$	36,476	$	6,203	$	113,552
Non-performing		—		—		—		—		—		879		—		879
Total agricultural		35,616		9,420		10,325		6,078		9,434		37,355		6,203		114,431
Total commercial real estate loans	$	715,849	$	1,106,817	$	971,679	$	668,877	$	653,276	$	1,505,545	$	483,746	$	6,105,789
Residential real estate loans
Residential 1-4 family
Performing	$	242,505	$	196,951	$	185,316	$	161,274	$	137,840	$	425,056	$	154,902	$	1,503,844
Non-performing		666		6,363		948		5,293		1,631		10,514		6,998		32,413
Total residential 1-4 family		243,171		203,314		186,264		166,567		139,471		435,570		161,900		1,536,257
Multifamily residential
Performing	$	19,510	$	66,533	$	188,468	$	105,846	$	10,016	$	102,320	$	43,672	$	536,365
Non-performing		—		—		—		—		—		173		—		173
Total multifamily residential		19,510		66,533		188,468		105,846		10,016		102,493		43,672		536,538
Total real estate	$	978,530	$	1,376,664	$	1,346,411	$	941,290	$	802,763	$	2,043,608	$	689,318	$	8,178,584
Consumer
Performing	$	236,395	$	198,737	$	158,324	$	99,905	$	71,924	$	73,448	$	22,263	$	860,996
Non-performing		38		316		206		4		1,480		1,643		7		3,694
Total consumer		236,433		199,053		158,530		99,909		73,404		75,091		22,270		864,690
Commercial and industrial
Performing	$	785,776	$	293,938	$	246,177	$	98,664	$	76,427	$	100,050	$	274,383	$	1,875,415
Non-performing		63		3,769		8,473		3,020		1,349		3,472		881		21,027
Total commercial and industrial		785,839		297,707		254,650		101,684		77,776		103,522		275,264		1,896,442
Agricultural and other
Performing	$	138,612	$	16,927	$	6,695	$	6,141	$	19,450	$	42,927	$	49,196	$	279,948
Non-performing		—		—		18		—		223		816		—		1,057
Total agricultural and other		138,612		16,927		6,713		6,141		19,673		43,743		49,196		281,005
Total	$	2,139,414	$	1,890,351	$	1,766,304	$	1,149,024	$	973,616	$	2,265,964	$	1,036,048	$	11,220,721

The Company had approximately $21.7 million or 140 total revolving loans convert to term loans for the six months ended June 30, 2021 compared to $73.0 million or 198 total revolving loans convert to term loans for the six months ended June 30, 2020. These loans were considered immaterial for vintage disclosure inclusion.

The following is a presentation of troubled debt restructurings (“TDRs”) by class as of June 30, 2021 and December 31, 2020:

	June 30, 2021
	Number of Loans		Pre- Modification Outstanding Balance		Rate Modification		Term Modification		Rate & Term Modification		Post- Modification Outstanding Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	14	$	11,275	$	3,709	$	624	$	4,343	$	8,676
Construction/land development		2		106		—		60		—		60
Agricultural		1		282		262		—		—		262
Residential real estate loans
Residential 1-4 family		20		2,870		1,361		159		389		1,909
Total real estate		37		14,533		5,332		843		4,732		10,907
Consumer		3		21		14		—		4		18
Commercial and industrial		9		2,354		215		102		81		398
Total	$	49	$	16,908	$	5,561	$	945	$	4,817	$	11,323

	December 31, 2020
	Number of Loans		Pre- Modification Outstanding Balance		Rate Modification		Term Modification		Rate & Term Modification		Post- Modification Outstanding Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		14	$	11,510	$	4,350	$	383	$	4,723	$	9,456
Construction/land development		2		58		—		7		9		16
Agricultural		1		282		267		—		—		267
Residential real estate loans
Residential 1-4 family		21		2,913		1,441		165		431		2,037
Total real estate		38		14,763		6,058		555		5,163		11,776
Consumer		1		17		14		—		—		14
Commercial and industrial		12		2,470		308		127		91		526
Total		51	$	17,250	$	6,380	$	682	$	5,254	$	12,316

The following is a presentation of TDRs on non-accrual status as of June 30, 2021 and December 31, 2020 because they are not in compliance with the modified terms:

	June 30, 2021				December 31, 2020
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		2	$	13		2	$	350
Construction/land development		1		57		1		9
Agricultural		1		262		1		267
Residential real estate loans
Residential 1-4 family		7		646		7		547
Total real estate		11		978		11		1,173
Consumer		2		4		—		—
Commercial and industrial		6		277		8		414
Total		19	$	1,259		19	$	1,587

The following is a presentation of total foreclosed assets as of June 30, 2021 and December 31, 2020:

	June 30, 2021		December 31, 2020
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	558	$	438
Construction/land development		934		3,189
Residential real estate loans
Residential 1-4 family		477		793
Total foreclosed assets held for sale	$	1,969	$	4,420

The Company has purchased loans for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The purchase price of the loans at acquisition was $1.3 million, and a $357,000 allowance for credit losses was recorded on these loans at acquisition along with a $17,000 non-credit premium. The allowance and non-credit premium resulted in a par value of $1.0 million for these loans at acquisition. As of June 30, 2021 and December 31, 2020, the balance of purchase credit deteriorated loans was approximately $466,000 and $760,000, respectively.

6. Goodwill and Core Deposits and Other Intangibles

Changes in the carrying amount and accumulated amortization of the Company’s goodwill and core deposits and other intangibles at June 30, 2021 and December 31, 2020, were as follows:

	June 30, 2021		December 31, 2020
	(In thousands)
Goodwill
Balance, beginning of period	$	973,025	$	958,408
Acquisitions		—		14,617
Balance, end of period	$	973,025	$	973,025

	June 30, 2021			December 31, 2020
	(In thousands)
Core Deposit and Other Intangibles
Balance, beginning of period	$	30,728		$	36,572
Amortization expense		(2,842	)		(3,003	)
Balance, June 30		27,886			33,569
Amortization expense					(2,841	)
Balance, end of year				$	30,728

The carrying basis and accumulated amortization of core deposits and other intangibles at June 30, 2021 and December 31, 2020 were:

	June 30, 2021			December 31, 2020
	(In thousands)
Gross carrying basis	$	86,625		$	86,625
Accumulated amortization		(58,739	)		(55,897	)
Net carrying amount	$	27,886		$	30,728

Core deposit and other intangible amortization expense was approximately $1.4 million and $1.5 million for the three months ended June 30, 2021 and 2020, respectively. Core deposit and other intangible amortization expense was approximately $2.8 million and $3.0 million for the six months ended June 30, 2021 and 2020. The Company’s estimated amortization expense of core deposits and other intangibles for each of the years 2021 through 2025 is approximately: 2021 – $5.7 million; 2022 – $5.7 million; 2023 – $5.5 million; 2024 – $4.3 million; 2025 – $3.9 million.

The carrying amount of the Company’s goodwill was $973.0 million at each of June 30, 2021 and December 31, 2020. Goodwill is tested annually for impairment during the fourth quarter or more often if events and circumstances indicate there may be an impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements.

7. Other Assets

Other assets consist primarily of equity securities without a readily determinable fair value and other miscellaneous assets. As of June 30, 2021 and December 31, 2020, other assets were $167.0 million and $164.9 million, respectively.

The Company has equity securities without readily determinable fair values such as stock holdings in the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“Federal Reserve”) which are outside the scope of ASC Topic 321, Investments – Equity Securities (“ASC Topic 321”). These equity securities without a readily determinable fair value were $87.5 million and $86.7 million at June 30, 2021 and December 31, 2020, and are accounted for at cost.

The Company has equity securities such as stock holdings in First National Bankers’ Bank and other miscellaneous holdings which are accounted for under ASC Topic 321. These equity securities without a readily determinable fair value were $32.4 million and $28.2 million at June 30, 2021 and December 31, 2020. There were no observable transactions during the period that would indicate a material change in fair value. Therefore, these investments were accounted for at cost, less impairment.

8. Deposits

The aggregate amount of time deposits with a minimum denomination of $250,000 was $473.1 and $558.0 million at June 30, 2021 and December 31, 2020. The aggregate amount of time deposits with a minimum denomination of $100,000 was $710.8 million and $864.3 million at June 30, 2021 and December 31, 2020, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $2.0 million and $6.2 million for the three months ended June 30, 2021 and 2020, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $4.4 million and $13.2 million for the six months ended June 30, 2021 and 2020. As of June 30, 2021 and December 31, 2020, brokered deposits were $625.7 million and $635.7 million, respectively.

Deposits totaling approximately $1.99 billion and $1.98 billion at June 30, 2021 and December 31, 2020, respectively, were public funds obtained primarily from state and political subdivisions in the United States.

9. Securities Sold Under Agreements to Repurchase

At June 30, 2021 and December 31, 2020, securities sold under agreements to repurchase totaled $150.5 million and $168.9 million, respectively. For the three-month periods ended June 30, 2021 and 2020, securities sold under agreements to repurchase daily weighted-average totaled $157.6 million and $154.6 million, respectively. For the six months ended June 30, 2021 and 2020, securities sold under agreements to repurchase daily weighted-average totaled $158.6 million and $146.4 million, respectively.

The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of June 30, 2021 and December 31, 2020 is presented in the following tables:

	June 30, 2021
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	10,453	$	—	$	—	$	—	$	10,453
Mortgage-backed securities		11,368		—		—		—		11,368
State and political subdivisions		125,505		—		—		—		125,505
Other securities		3,214		—		—		—		3,214
Total borrowings	$	150,540	$	—	$	—	$	—	$	150,540

	December 31, 2020
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	11,166	$	—	$	—	$	—	$	11,166
Mortgage-backed securities		18,830		—		—		—		18,830
State and political subdivisions		135,308		—		—		—		135,308
Other securities		3,627		—		—		—		3,627
Total borrowings	$	168,931	$	—	$	—	$	—	$	168,931

10. FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $400.0 million at both June 30, 2021 and December 31, 2020. The Company had no other borrowed funds as of June 30, 2021 or December 31, 2020. At June 30, 2021 and December 31, 2020, 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.

Additionally, the Company had $1.15 billion and $1.11 billion at June 30, 2021 and December 31, 2020, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits at June 30, 2021 and December 31, 2020, respectively.

The parent company took out a $20.0 million line of credit for general corporate purposes during 2015. The balance on this line of credit at June 30, 2021 and December 31, 2020 was zero.

11. Subordinated Debentures

Subordinated debentures at June 30, 2021 and December 31, 2020 consisted of subordinated debt securities and guaranteed payments on trust preferred securities with the following components:

	As of June 30,		As of December 31,
	2021		2020
	(In thousands)
Trust preferred securities
Subordinated debentures, issued in 2006, due 2036, fixed rate of 6.75% during the first five years and at a floating rate of 1.85% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty	$	3,093	$	3,093
Subordinated debentures, issued in 2004, due 2034, fixed rate of 6.00% during the first five years and at a floating rate of 2.00% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		15,464		15,464
Subordinated debentures, issued in 2005, due 2035, fixed rate of 5.84% during the first five years and at a floating rate of 1.45% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		25,774		25,774
Subordinated debentures, issued in 2004, due 2034, fixed rate of 4.29% during the first five years and at a floating rate of 2.50% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		16,495		16,495
Subordinated debentures, issued in 2005, due 2035, floating rate of 2.15% above the three-month LIBOR rate, reset quarterly, currently callable without penalty		4,476		4,452
Subordinated debentures, issued in 2006, due 2036, fixed rate of 7.38% during the first five years and at a floating rate of 1.62% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		5,896		5,849
Subordinated debt securities
Subordinated notes, net of issuance costs, issued in 2017, due 2027, fixed rate of 5.625% during the first five years and at a floating rate of 3.575% above the then three-month LIBOR rate, reset quarterly, thereafter, callable in 2022 without penalty		299,509		299,199
Total	$	370,707	$	370,326

Trust Preferred Securities. 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. 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 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.

Subordinated Debt Securities. 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 “Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The 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 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 Notes will 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.

The Company may, beginning with the interest payment date of April 15, 2022, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the Notes at any time, including prior to April 15, 2022, at its option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date. The Notes provide the Company with additional Tier 2 regulatory capital to support expected future growth.

12. Income Taxes

The following is a summary of the components of the provision (benefit) for income taxes for the three and six months ended June 30, 2021 and 2020:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Current:
Federal	$	15,175	$	12,359	$	38,058	$	34,826
State		5,024		4,092		12,599		11,529
Total current		20,199		16,451		50,657		46,355
Deferred:
Federal		3,661		2,103		2,488		(22,563	)
State		1,212		696		823		(7,469	)
Total deferred		4,873		2,799		3,311		(30,032	)
Income tax (benefit) expense	$	25,072	$	19,250	$	53,968	$	16,323

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2021				2020				2021				2020
Statutory federal income tax rate		21.00		%		21.00		%		21.00		%		21.00		%
Effect of non-taxable interest income		(1.03	)			(1.04	)			(0.97	)			(1.98	)
Stock compensation		0.16				0.17				0.25				(0.03	)
State income taxes, net of federal benefit		4.18				3.65				4.22				2.07
Executive officer compensation & other		(0.24	)			(0.33	)			(0.48	)			(0.57	)
Effective income tax rate		24.07		%		23.45		%		24.02		%		20.49		%

The types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities, and their approximate tax effects, are as follows:

	June 30, 2021			December 31, 2020
	(In thousands)
Deferred tax assets:
Allowance for credit losses	$	69,610		$	72,445
Deferred compensation		3,816			4,741
Stock compensation		5,089			4,768
Non-accrual interest income		1,013			775
Real estate owned		131			620
Loan discounts		4,823			6,806
Tax basis premium/discount on acquisitions		4,166			5,101
Investments		281			502
Deposits		(49	)		(33	)
Other		5,252			5,855
Gross deferred tax assets		94,132			101,580
Deferred tax liabilities:
Accelerated depreciation on premises and equipment		313			1,929
Unrealized gain on securities		7,589			15,072
Core deposit intangibles		6,396			7,056
FHLB dividends		2,783			2,711
Other		4,778			4,563
Gross deferred tax liabilities		21,859			31,331
Net deferred tax assets	$	72,273		$	70,249

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and the states of Alabama, Arizona, Arkansas, California, Florida, Georgia, Illinois, Kentucky, Maryland, New York, Oklahoma, Missouri, Pennsylvania, Tennessee, Texas and Wisconsin. The Company is no longer subject to U.S. federal and state tax examinations by tax authorities for years before 2018.

13. Common Stock, Compensation Plans and Other

Common Stock

As of June 30, 2021, the Company’s Restated Articles of Incorporation, as amended, authorize the issuance of up to 300,000,000 shares of common stock, par value $0.01 per share.

The Company also has the authority to issue up to 5,500,000 shares of preferred stock, par value $0.01 per share under the Company’s Restated Articles of Incorporation, as amended.

Stock Repurchases

During the first six months of 2021, the Company repurchased a total of 965,000 shares with a weighted-average stock price of $26.63 per share. Shares repurchased under the program as of June 30, 2021 since its inception total 16,873,335 shares. The remaining balance available for repurchase is 22,878,665 shares at June 30, 2021.

Stock Compensation Plans

The Company has a stock option and performance incentive plan known as the Amended and Restated 2006 Stock Option and Performance Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate those persons to improve the Company’s business results. As of June 30, 2021, the maximum total number of shares of the Company’s common stock available for issuance under the Plan was 13,288,000. At June 30, 2021, the Company had approximately 1,580,000 shares of common stock remaining available for future grants and approximately 4,639,000 shares of common stock reserved for issuance pursuant to outstanding awards under the Plan.

The intrinsic value of the stock options outstanding and stock options vested at June 30, 2021 was $14.4 million and $10.6 million, respectively. The intrinsic value of stock options exercised during the six months ended June 30, 2021 was approximately $1.7 million. Total unrecognized compensation cost, net of income tax benefit, related to non-vested stock option awards, which are expected to be recognized over the vesting periods, was approximately $6.6 million as of June 30, 2021.

The table below summarizes the stock option transactions under the Plan at June 30, 2021 and December 31, 2020 and changes during the six-month period and year then ended:

	For the Six Months Ended June 30, 2021					For the Year Ended December 31, 2020
	Shares (000)			Weighted- Average Exercisable Price		Shares (000)			Weighted- Average Exercisable Price
Outstanding, beginning of year		3,254		$	19.77		3,411		$	19.60
Granted		15			21.68		—			—
Forfeited/Expired		(28	)		23.33		(76	)		21.95
Exercised		(181	)		15.27		(81	)		10.61
Outstanding, end of period		3,060			20.02		3,254			19.77
Exercisable, end of period		1,423		$	17.26		1,537		$	16.82

Stock-based compensation expense for stock-based compensation awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company's employee stock options. The weighted-average fair value of options granted during the six months ended June 30, 2021 was $11.11 per share. There were no options granted during the year ended December 31, 2020. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model based on the weighted-average assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate, and expected life of options granted.

The assumptions used in determining the fair value of the 2021 and 2020 stock option grants were as follows:

	For the Six Months Ended June 30, 2021			For the Year Ended December 31, 2020
Expected dividend yield		2.59	%	Not Applicable
Expected stock price volatility		70.13	%	Not Applicable
Risk-free interest rate		0.75	%	Not Applicable
Expected life of options	6.5 years			Not Applicable

The following is a summary of currently outstanding and exercisable options at June 30, 2021:

Options Outstanding							Options Exercisable
Exercise Prices	Options Outstanding Shares (000)		Weighted- Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price		Options Exercisable Shares (000)		Weighted- Average Exercise Price
$6.56 to $8.62		164		1.41	$	8.32		164	$	8.32
$9.54 to $14.71		140		3.05		13.23		140		13.23
$16.77 to $16.86		130		3.14		16.80		130		16.80
$17.12 to $17.36		102		3.72		17.14		102		17.14
$17.40 to $18.46		871		4.13		18.45		605		18.45
$18.50 to $20.16		55		7.26		19.22		22		19.45
$20.58 to $21.25		158		4.76		21.08		143		21.12
$21.31 to $22.22		112		7.10		22.18		60		22.22
$22.70 to $23.32		1,247		7.06		23.32		1		22.70
$23.51 to $25.96		81		5.98		25.63		56		25.96
		3,060						1,423

The table below summarized the activity for the Company’s restricted stock issued and outstanding at June 30, 2021 and December 31, 2020 and changes during the period and year then ended:

	As of June 30, 2021			As of December 31, 2020
	(In thousands)
Beginning of year		1,371			1,636
Issued		215			264
Vested		(238	)		(453	)
Forfeited		(22	)		(76	)
End of period		1,326			1,371
Amount of expense for six months and twelve months ended, respectively	$	3,491		$	6,824

Total unrecognized compensation cost, net of income tax benefit, related to non-vested restricted stock awards, which are expected to be recognized over the vesting periods, was approximately $18.4 million as of June 30, 2021.

14. Non-Interest Expense

The table below shows the components of non-interest expense for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Salaries and employee benefits	$	42,462	$	40,088	$	84,521	$	79,417
Occupancy and equipment		9,042		10,172		18,279		19,045
Data processing expense		5,893		4,614		11,763		8,940
Other operating expenses:
Advertising		1,194		795		2,240		2,021
Merger and acquisition expenses		—		—		—		711
Amortization of intangibles		1,421		1,486		2,842		3,003
Electronic banking expense		2,616		2,054		4,854		3,769
Directors’ fees		414		412		797		836
Due from bank service charges		273		239		522		462
FDIC and state assessment		1,108		1,846		2,471		3,394
Insurance		787		711		1,568		1,457
Legal and accounting		1,058		1,278		1,904		2,197
Other professional fees		1,796		1,735		3,409		4,961
Operating supplies		465		553		952		1,088
Postage		292		313		630		640
Telephone		365		310		711		634
Other expense		3,796		4,352		8,385		8,857
Total other operating expenses		15,585		16,084		31,285		34,030
Total non-interest expense	$	72,982	$	70,958	$	145,848	$	141,432

15. Leases

The Company leases land and office facilities under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2042 and do not include renewal options based on economic factors that would have implied that continuation of the lease was reasonably certain. Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. The leases generally include real estate taxes and common area maintenance (“CAM”) charges in the rental payments. Short-term leases are leases having a term of twelve months or less. As part of the adoption of Topic 842, the Company elected the package of practical expedients whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In accordance with ASU 2018-11, the Company elected the practical expedient whereby we elected to not separate nonlease components from the associated lease component of our operating leases. As a result, we account for these components as a single component under Topic 842 since (i) the timing and pattern of transfer of the nonlease components and the associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease. The Company recognizes short term leases on a straight-line basis and does not record a related ROU asset and liability for such leases. In addition, equipment leases were determined to be immaterial and a related ROU asset and liability for such leases is not recorded.

As of June 30, 2021, the balances of the right-of-use asset and lease liability was $40.6 million and $43.4 million, respectively. As of December 31, 2020, the balances of the right-of-use asset and lease liability was $40.2 million and $43.0 million, respectively The right-of-use asset is included in bank premises and equipment, net, and the lease liability is included in accrued interest payable and other liabilities.

The minimum rental commitments under these noncancelable operating leases are as follows (in thousands) as of June 30, 2021 and December 31, 2020:

	June 30, 2021			December 31, 2020
2021	$	5,003		$	8,235
2022		7,102			6,486
2023		6,306			5,714
2024		5,782			5,262
2025		5,324			4,818
Thereafter		29,367			27,453
Total future minimum lease payments	$	58,884		$	57,968
Discount effect of cash flows		(15,488	)		(14,922	)
Present value of net future minimum lease payments	$	43,396		$	43,046

Additional information (dollar amounts in thousands):

	For the Three Months Ended						For the Six Months Ended
Lease expense:	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
Operating lease expense	$	1,981		$	2,027		$	3,990		$	4,041
Short-term lease expense		1			15			5			32
Variable lease expense		251			264			508			519
Total lease expense	$	2,233		$	2,306		$	4,503		$	4,592
Other information:
Cash paid for amounts included in the measurement of lease liabilities	$	1,974		$	2,017		$	3,968		$	3,991
Weighted-average remaining lease term (in years)		9.75			10.24			9.84			10.28
Weighted-average discount rate		3.53	%		3.62	%		3.53	%		3.61	%

The Company currently leases three properties from three related parties. Total rent expense from the leases was $36,000 or 1.59% of total lease expense and $70,000 or 1.57% of total lease expense for the three and six months ended June 30, 2021, respectively.

16. Significant Estimates and Concentrations of Credit Risks

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for credit losses and certain concentrations of credit risk are reflected in Note 5, while deposit concentrations are reflected in Note 8.

The Company’s primary market areas are in Arkansas, Florida, South Alabama and New York. The Company primarily grants loans to customers located within these markets unless the borrower has an established relationship with the Company.

The diversity of the Company’s economic base tends to provide a stable lending environment. Although the Company has a loan portfolio that is diversified in both industry and geographic area, a substantial portion of its debtors’ ability to honor their contracts is dependent upon real estate values, tourism demand and the economic conditions prevailing in its market areas.

Although the Company has a diversified loan portfolio, at June 30, 2021 and December 31, 2020, commercial real estate loans represented 57.0% and 54.4% of total loans receivable, respectively, and 215.6% and 234.3% of total stockholders’ equity at June 30, 2021 and December 31, 2020, respectively. Residential real estate loans represented 16.2% and 18.5% of total loans receivable and 61.2% and 79.6% of total stockholders’ equity at June 30, 2021 and December 31, 2020, respectively.

Approximately 72.0% of the Company’s total loans and 76.1% of the Company’s real estate loans as of June 30, 2021, are to borrowers whose collateral is located in Alabama, Arkansas, Florida and New York, the states in which the Company has its branch locations.

Beginning in the first quarter of 2020, the COVID-19 pandemic negatively impacted the U.S. and global economy; disrupted U.S. and global supply chains; lowered equity market valuations; created significant volatility and disruption in financial markets; contributed to a decrease in the rates and yields on U.S. Treasury securities; resulted in ratings downgrades, credit deterioration, and defaults in many industries; increased demands on capital and liquidity; increased unemployment levels and decreased consumer confidence. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in our footprint. The pandemic has caused the Company, and could continue to cause the Company, to recognize credit losses in our loan portfolios and increases in our allowance for credit losses and could cause further volatility in the valuation of real estate and other collateral supporting loans. As of June 30, 2021, the markets in which we operate have begun to experience economic recovery as unemployment rates have declined, COVID-19 vaccination rates have increased, and communities have begun to reopen for business activity. However, there is still a significant amount of uncertainty related to the COVID-19 pandemic which may slow the anticipated economic recovery. 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 June 30, 2021. During the three months ended June 30, 2021, the Company recorded a negative provision for unfunded commitments of $4.8 million. This was primarily due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The financial statements have been prepared using values and information currently available to the Company. The Company is continuing to closely monitor the situation.

Any future volatility in the economy could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for credit losses and capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

17. Commitments and Contingencies

In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of their customers. These commitments and contingent liabilities include lines of credit and commitments to extend credit and issue standby letters of credit. The Company applies the same credit policies and standards as they do in the lending process when making these commitments. The collateral obtained is based on the assessed creditworthiness of the borrower.

At June 30, 2021 and December 31, 2020, commitments to extend credit of $2.87 billion and $2.82 billion, respectively, were outstanding. A percentage of these balances are participated out to other banks; therefore, the Company can call on the participating banks to fund future draws. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Outstanding standby letters of credit are contingent commitments issued by the Company, generally to guarantee the performance of a customer in third-party borrowing arrangements. The term of the guarantee is dependent upon the creditworthiness of the borrower, some of which are long-term. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments. The maximum amount of future payments the Company could be required to make under these guarantees at June 30, 2021 and December 31, 2020, is $56.3 million and $56.1 million, respectively.

The Company and/or its bank subsidiary have various unrelated legal proceedings, most of which involve loan foreclosure activity pending, which, in the aggregate, are not expected to have a material adverse effect on the financial position or results of operations or cash flows of the Company and its subsidiary.

18. Regulatory Matters

The Bank is subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since the Bank is also under supervision of the Federal Reserve, it is further limited if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. During the first six months of 2021, the Company requested approximately $131.3 million in regular dividends from its banking subsidiary.

The Company’s banking subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s regulators could require adjustments to regulatory capital not reflected in the consolidated financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total, common Tier 1 equity and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of June 30, 2021, the Company meets all capital adequacy requirements to which it is subject.

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 elected to adopt the interim final rule, which is reflected in the risk-based capital ratios presented below.

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. Basel III limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5% of common equity Tier 1 capital to risk-weighted assets, which is in addition to the amount necessary to meet its minimum risk-based capital requirements. 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, if the Company acquires another financial institution in the future, then the Tier 1 treatment of the Company’s outstanding trust preferred securities will be phased out, but those securities will still be treated as Tier 2 capital.

Basel III also 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.

The Federal Reserve Board’s risk-based capital guidelines include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. Under Basel III, the criteria for a well-capitalized institution are now: a 6.5% “common equity Tier 1 risk-based capital” ratio, a 5% “Tier 1 leverage capital” ratio, an 8% “Tier 1 risk-based capital” ratio, and a 10% “total risk-based capital” ratio. As of June 30, 2021, the Bank met the capital standards for a well-capitalized institution. The Company’s “common equity Tier 1 risk-based capital” ratio, “Tier 1 leverage capital” ratio, “Tier 1 risk-based capital” ratio, and “total risk-based capital” ratio were 14.98%, 10.86%, 15.60%, and 19.46%, respectively, as of June 30, 2021.

19. Additional Cash Flow Information

In connection with the LH-Finance acquisition, accounted for using the purchase method, the Company acquired approximately $409.1 million in assets, including $407.4 million in loans as of February 29, 2020, and paid $421.2 million in cash.

The following is a summary of the Company’s additional cash flow information during the six-month periods ended:

	June 30,
	2021		2020
	(In thousands)
Interest paid	$	28,428	$	56,024
Income taxes paid		58,685		7,438
Assets acquired by foreclosure		1,951		1,617

20. Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There is a hierarchy of three levels of inputs that may be used to measure fair values:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers of financial instruments between levels within the fair value hierarchy are recognized on the date management determines that the underlying circumstances or assumptions have changed.

Financial Assets and Liabilities Measured on a Recurring Basis

Available-for-sale securities are the only material instruments valued on a recurring basis which are held by the Company at fair value. The Company does not have any Level 1 securities. Primarily all of the Company's securities are considered to be Level 2 securities. These Level 2 securities consist primarily of U.S. government-sponsored enterprises, mortgage-backed securities plus state and political subdivisions. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. As of June 30, 2021 and December 31, 2020, Level 3 securities were immaterial. In addition, there were no material transfers between hierarchy levels during 2021 and 2020. See Note 3 for additional detail related to investment securities.

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities with complicated structures. Pricing for the Company’s investment securities is fairly generic and is easily obtained. The Company uses a third-party comparison pricing vendor in order to reflect consistency in the fair values of the investment securities sampled by the Company each quarter.

Financial Assets and Liabilities Measured on a Nonrecurring Basis

Impaired loans that are collateral dependent are the only material financial assets valued on a non-recurring basis which are held by the Company at fair value. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the net realizable value of the collateral if the loan is collateral dependent. A portion of the allowance for credit losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for credit losses to require an increase, such increase is reported as a component of the provision for credit losses. The fair value of loans with specific allocated losses was $286.7 million and $102.1 million as of June 30, 2021 and December 31, 2020, respectively. The increase in collateral-dependent impaired loans was due to the Company changing the valuation for lodging and assisted living loans to a market price valuation methodology. This involved assigning a 15% discount of par for these impaired loans. The 15% figure was derived based on knowledge of current hotel and assisted living offerings in the loan sale market. In the event of default, liquidation would be achieved through a loan sale. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $126,000 and $181,000 of accrued interest receivable when impaired loans were put on non-accrual status during the three months ended June 30, 2021 and 2020, respectively. The Company reversed approximately $184,000 and $422,000 of accrued interest receivable when impaired loans were put on non-accrual status during the six months ended June 30, 2021 and 2020, respectively.

Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis

Foreclosed assets held for sale are the only material non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for credit losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held for sale is estimated using Level 3 inputs based on appraisals of underlying collateral. As of June 30, 2021 and December 31, 2020, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $2.0 million and $4.4 million, respectively.

No foreclosed assets held for sale were remeasured during the six months ended June 30, 2021. Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets held for sale on at least an annual basis. The Company’s policy is to comply with the regulatory guidelines.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans and foreclosed assets primarily relate to customized discounting criteria applied to the customer’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the underlying collateral. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 25% to 50% for commercial and residential real estate collateral.

Fair Values of Financial Instruments

The following table presents the estimated fair values of the Company’s financial instruments. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

	June 30, 2021
	Carrying
	Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	2,941,253	$	2,941,253	1
Loans receivable, net of impaired loans and allowance		9,672,066		10,027,916	3
Accrued interest receivable		48,725		48,725	1
FHLB, Federal Reserve & First National Bankers Bank stock; other equity investments		119,938		119,938	3
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	4,076,570	$	4,076,570	1
Savings and interest-bearing transaction accounts		8,744,900		8,744,900	1
Time deposits		1,069,871		1,089,374	3
Securities sold under agreements to repurchase		150,540		150,540	1
FHLB and other borrowed funds		400,000		405,584	2
Accrued interest payable		5,289		5,289	1
Subordinated debentures		370,707		380,547	3

	December 31, 2020
	Carrying
	Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	1,263,788	$	1,263,788	1
Loans receivable, net of impaired loans and allowance		10,873,120		11,292,004	3
Accrued interest receivable		60,528		60,528	1
FHLB, Federal Reserve & First National Bankers Bank stock; other equity investments		114,854		114,854	3
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	3,266,753	$	3,266,753	1
Savings and interest-bearing transaction accounts		8,212,240		8,212,240	1
Time deposits		1,246,797		1,266,430	3
Securities sold under agreements to repurchase		168,931		168,931	1
FHLB and other borrowed funds		400,000		414,207	2
Accrued interest payable		5,925		5,925	1
Subordinated debentures		370,326		378,981	3

21. Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption was permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During 2020, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered impaired. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures. The current accounting policies and processes have not changed, except for the elimination of the Step 2 analysis.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, that amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The internal-use software guidance states that only qualifying costs incurred during the application development stage can be capitalized. The effective date is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively in accordance with the applicable guidance. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The effective date and transition requirements for the amendments in this update are the same as the effective dates and transition requirements in ASU 2016-13.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements. The amendments in this Update reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers. Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820. In addition, the amendments in this Update address the concerns of lessors within the scope of Topic 942 about where “principal payments received under leases” should be presented. Specifically, lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities. Finally, the amendments in this Update clarify the FASB’s original intent by explicitly providing an exception to the paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements. The effective date for the amendments in this update is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments clarify certain aspects of the accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs 2016-13, 2017-12 and 2016-01, respectively). The amendments made to the provisions of ASU 2016-13 are related to accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projections of interest rate environments for variable-rate financial instruments, cost to sell financial assets when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, amortized cost basis of line of credit arrangements that are converted to term loans and extension and renewal options that are not unconditionally cancelable by the entity. The effective date and transition requirements for the amendments in this update are the same as the effective dates and transition requirements in ASU 2016-13. The significant amendments made to the provisions of ASU 2017-12 are related to partial-term fair value hedges of interest rate risk, amortization of fair value hedge basis adjustments, disclosure of fair value hedge basis adjustments, consideration of the hedged contractually specified interest rate under the hypothetical derivative method, application of a first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments and transition guidance for reclassifying prepayable debt securities from HTM to available-for-sale. The amendments to ASU 2017-12 are effective as of the beginning of the first annual reporting period beginning after the date of issuance of ASU 2019-04. The amendments made to the provisions of ASU 2016-01 indicate that the measurement alternative for equity securities without readily determinable fair values represent a nonrecurring fair value measurement under ASC 820, and therefore, such securities should be remeasured at fair value when an entity identifies an orderly transaction “for an identical or similar investment of the same issuer.” The amendments related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief. The amendments provide transition relief for entities adopting the Board’s credit losses standard, ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that were previously recorded at amortized cost and are within the scope of the credit losses guidance in ASC 326-20, are eligible for the fair value option under ASC 825-10, and are not held-to-maturity debt securities. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The amendments clarify that the allowance for credit losses for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. The amendments also clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, the expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cash flows after acquisition. Also, the amendments provide transition relief by permitting entities an accounting policy election to adjust the effective interest rate on existing TDRs using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumption in effect immediately before the restructuring. The amendments extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis. In addition, the amendments clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing financial asset to apply the practical expedient. The entity applying the practical expedient should estimate the expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral that is greater than the fair value of the collateral securing the financial asset. An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in the update simplify the accounting for income taxes by removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in the update also simplify the accounting for income taxes by requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; however, an entity may elect to do so on an entity-by-entity basis for a legal entity that is both not subject to tax and disregarded by the taxing authority. The amendments require that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted the guidance effective January 1, 2021, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In March 2020, the FASB issued ASU 2020-04,“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-04 was effective upon issuance and generally can be applied through December 31, 2022.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Section 4013 of the CARES Act provides financial institutions the temporary option to not apply ASC Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, to certain loan modifications related to COVID-19 made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after termination of the President’s national emergency declaration for COVID-19. On December 28, 2020, an extension of section 4013 of the CARES Act, provided institutions with an extension of the temporary option to not apply ASC Subtopic 310-40 until January 1, 2022. Further, financial institutions do not need to determine impairment associated with certain loan concessions that would otherwise have been required for TDRs (e.g., interest rate concessions, payment deferrals, or loan extensions). The Company has relied on Section 4013 of the CARES Act in accounting for loan modifications since the fourth quarter of 2020. The Company has granted loan modification to 47 outstanding loans for a total of $264.5 million as of June 30, 2021. All of the customers currently on deferment chose principal deferment only and now have returned to paying interest monthly.

In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” The amendments in the update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in the update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this Update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. ASU 2020-04 was effective upon issuance and generally can be applied through December 31, 2022.

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Home BancShares, Inc.

Conway, Arkansas

Results of Review of Interim Consolidated Financial Statements

We have reviewed the condensed consolidated balance sheet of Home BancShares, Inc. and subsidiaries (the “Company”) as of June 30, 2021, and the related condensed consolidated statements of income, comprehensive income and stockholders’ equity for the three-month and six-month periods ended June 30, 2021 and 2020 and cash flows for the six-month periods ended
June 30, 2021 and 2020, and the related notes (collectively referred to as the “interim financial information” or “statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company and subsidiaries as of December 31, 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated February 26, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ BKD, LLP

Little Rock, Arkansas

August 5, 2021

Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on February 26, 2021, which includes the audited financial statements for the year ended December 31, 2020. 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 June 30, 2021, we had, on a consolidated basis, total assets of $17.63 billion, loans receivable, net of $9.96 billion, total deposits of $13.89 billion, and stockholders’ equity of $2.70 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 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						As of or for the Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
	(Dollars in thousands, except per share data)
Total assets	$	17,627,192		$	16,895,406		$	17,627,192		$	16,895,406
Loans receivable		10,199,175			11,955,743			10,199,175			11,955,743
Allowance for credit losses		240,451			238,340			240,451			238,340
Total deposits		13,891,341			13,177,936			13,891,341			13,177,936
Total stockholders’ equity		2,696,189			2,492,146			2,696,189			2,492,146
Net income		79,070			62,827			170,672			63,334
Basic earnings per share		0.48			0.38			1.03			0.38
Diluted earnings per share		0.48			0.38			1.03			0.38
Book value per share		16.39			15.09			16.39			15.09
Tangible book value per share (non-GAAP)⁽¹⁾		10.31			8.99			10.31			8.99
Annualized net interest margin – FTE		3.61	%		4.11	%		3.81	%		4.17	%
Efficiency ratio		41.08			39.67			38.71			40.83
Efficiency ratio, as adjusted (non-GAAP)⁽²⁾		42.06			39.38			41.35			40.34
Annualized return on average assets		1.81			1.55			2.01			0.81
Annualized return on average common equity		11.92			10.27			13.02			5.16

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

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

Overview

Recent Developments – COVID-19

The rapid spread of the novel coronavirus (“COVID-19”) hit the United States during the first quarter of 2020 and the effects have continued throughout the second quarter of 2021. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. To address the economic impact of the pandemic, multiple stimulus packages have been enacted to provide economic relief to individuals and businesses. The Company has been, and may continue to be, impacted by the pandemic. Throughout the first quarter of 2021, COVID-19 vaccination rates increased leading to reduced infection rates which resulted in the easing of restrictive measures in the majority of our market areas. However, starting in the second quarter of 2021, the spread of the Delta variant and slowing vaccination rates have resulted in increased infection rates, fueling fears of a virus resurgence. Uncertainty remains about the duration of the pandemic as well as the timing and extent of the economic recovery.

As the pandemic continues to evolve, we will continue to evaluate protocols and processes in place to execute our business continuity plans and help promote the health and safety of our employees and customers. We have reopened our banking lobbies in order to serve customers in person, while still offering service through drive-thru tellers as well as electronic and online means. To support our customers or to comply with law, we have deferred loan payments for certain consumer and commercial customers, and we have suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions, and are offering fee waivers, payment deferrals, and other expanded assistance for automobile, mortgage, small business and personal lending customers. Future governmental actions may require these and other types of customer-related responses.

As of June 30, 2021, the markets in which we operate have begun to experience economic recovery as unemployment rates have declined and communities have begun to reopen for business activity. Our loan deferrals decreased to $264.5 million on 47 loans, as of June 30, 2021, from the December 31, 2020 balance of $330.7 million on 56 loans. All of the customers currently on deferment totaling $264.5 million chose principal deferment only and now have returned to paying interest monthly. The hospitality sector has been most negatively impacted by COVID-19 and represents approximately 70% of the deferment balance as of June 30, 2021. The geographic distribution of these deferrals is similar through all of our markets. Our review of deferment requests required updated interim operating statements, balance sheet and liquidity verifications, and validation of the current risk rating.

In April 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) established a new federal economic relief program administered by the Small Business Administration (“SBA”) called the Paycheck Protection Program (“PPP”), which provides for 100% federally guaranteed loans to be issued by participating private financial institutions to small businesses for payroll and certain other permitted expenses. PPP loans are forgivable, in whole or in part, so long as employee and compensation levels of the borrower are maintained, and the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/HCEA Act”) was passed by Congress on April 23, 2020 and signed into law on April 24, 2020. The PPP/HCEA Act authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA. The Consolidated Appropriations Act (“CAA”) was signed into law on December 27, 2020. The CAA also authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA. As of June 30, 2021, as a participating lender, we have generated 12,971 loans to both existing and new customers totaling $1.23 billion. As of June 30, 2021, the outstanding PPP loan balances were $473.9 million. The average loan size was $91,000.

Although the economic and public health outlooks improved in the United States during the first six months of 2021, the future impact of the pandemic on our business, results of operations and financial condition remains uncertain. Should current economic conditions deteriorate or if the pandemic continues to intensify through the spread of more contagious or severe strains of COVID-19, the pandemic could have an adverse effect on our business and results of operations and financial condition.

Results of Operations for the Three Months Ended June 30, 2021 and 2020

Our net income increased $16.2 million, or 25.9%, to $79.1 million for the three-month period ended June 30, 2021, from $62.8 million for the same period in 2020. On a diluted earnings per share basis, our earnings were $0.48 per share for the three-month period ended June 30, 2021 compared to $0.38 per share for the three-month period ended June 30, 2020. During the three-month period ended June 30, 2021, the Company recorded a negative provision for unfunded commitments of $4.8 million compared to an $11.4 million provision for credit losses and a $9.2 million provision for credit losses on unfunded commitments for a total credit loss expense of $20.7 million for the three-month period ended June 30, 2020. The $4.8 million negative provision for unfunded commitments for the three-month period ended June 30, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $20.7 million of total credit loss expense for the three-month period ended June 30, 2020 was primarily due to the COVID-19 pandemic. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. 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 June 30, 2021. The Company also recorded a $1.3 million adjustment for the increase in fair market value of marketable securities and $2.2 million of special dividend income from our equity investments.

Total interest expense decreased by $9.7 million, or 42.3%, and non-interest income increased by $6.1 million, or 24.4%. Total interest income decreased by $17.1 million or, 10.0%, and non-interest expense increased by $2.0 million or, 2.9%. The decrease in interest expense was primarily due to a $8.7 million decrease in interest on deposits and an $760,000 decrease in interest on FHLB borrowed funds. The increase in non-interest income was primarily due to a $2.4 million increase in dividends from FHLB, FRB, FNBB & other, a $2.0 million increase in other service charges and fees, and a $1.1 million increase in gain on sale of SBA loans. The decrease in interest income was due to a $17.3 million decrease in loan interest income. The increase in non-interest expense was due to a $2.4 million increase in salaries and employee benefits and a $1.3 million increase in data processing expense, partially offset by a $1.1 million decrease in other occupancy and equipment expenses. Income tax expense increased by $5.8 million during the quarter due to an increase in net income.

Our net interest margin decreased from 4.11% for the three-month period ended June 30, 2020 to 3.61% for the three-month period ended June 30, 2021. The yield on interest earning assets was 3.94% and 4.74% for the three months ended June 30, 2021 and 2020, respectively, as average interest earning assets increased from $14.68 billion to $15.89 billion. The increase in average earning assets is primarily the result of a $1.82 billion increase in average interest-bearing balances due from banks and a $638.9 million increase in average investment securities, partially offset by the $1.25 billion decrease in average loans receivable. Average PPP loan balances were $581.4 million for the three months ended June 30, 2021. These loans bear interest at 1.00% plus the accretion of the origination fee. We recognized total interest income of $7.8 million on PPP loans for the three months ended June 30, 2021. The PPP loans were accretive to the net interest margin by 7 basis points for the three months ended June 30, 2021. This was primarily due to approximately $243.2 million of the Company’s PPP loans being forgiven during the second quarter of 2021 as well as the acceleration of deferred fees for the loans that were forgiven. The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market. As a result, we had an increase of $1.82 billion in average interest-bearing cash balances for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. This excess liquidity was dilutive to the net interest margin by 45 basis points. For the three months ended June 30, 2021 and 2020, we recognized $5.8 million and $7.0 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 3 basis points. We recognized $942,000 in event interest income for the three months ended June 30, 2021 compared to $1.5 million for the three months ended June 30, 2020. This reduced the net interest margin by 1 basis point.

Our efficiency ratio was 41.08% for the three months ended June 30, 2021, compared to 39.67% for the same period in 2020. For the second quarter of 2021, our efficiency ratio, as adjusted (non-GAAP), was 42.06%, compared to 39.38% reported for the second quarter of 2020. (See Table 23 for the non-GAAP tabular reconciliation).

Our annualized return on average assets was 1.81% for the three months ended June 30, 2021, compared to 1.55% for the same period in 2020. Our annualized return on average common equity was 11.92% for the three months ended June 30, 2021, compared to 10.27% for the same period in 2020.

Results of Operations for the Six Months Ended June 30, 2021 and 2020

Our net income increased $107.3 million, or 169.5%, to $170.67 million for the six-month period ended June 30, 2021, from $63.3 million for the same period in 2020. On a diluted earnings per share basis, our earnings were $1.03 per share for the six-month period ended June 30, 2021 and $0.38 per share for the six-month period ended June 30, 2020. During the six-month period ended June 30, 2021, the Company recorded a $4.8 million negative provision for unfunded commitments compared to a $98.3 million provision for credit losses and a $17.0 million provision for unfunded commitments for a total credit loss expense of $115.3 million for the six-month period ended June 30, 2020. The $4.8 million negative provision for the six-month period ended June 30, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $115.3 million of total credit loss expense for the six-month period ended June 30, 2020 was primarily due to the COVID-19 pandemic, with $9.3 million for the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. 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 June 30, 2021. The Company also recorded a $7.0 million adjustment for the increase in fair market value of marketable securities, $10.3 million of special dividend income from our equity investments, $5.1 million recovery on historic losses from loans charged-off prior to acquisition and a $219,000 gain on investment securities.

Total interest expense decreased by $27.6 million, or 49.8%, and non-interest income increased by $28.4 million, or 59.3%. This was partially offset by a $26.6 million, or 7.7%, decrease in total interest income and a $4.4 million or, 3.1%, increase in non-interest expense. The decrease in interest expense was primarily due to a $25.2 million decrease in interest on deposits and an $1.6 million decrease in interest on FHLB borrowed funds. The increase in non-interest income was primarily due to an $11.9 million increase in the fair value adjustment on marketable securities, a $5.6 million increase in mortgage lending income, a $3.9 million increase in other income, a $3.5 million increase in other service charges and fees, and a $3.2 million increase in dividends from FHLB, FRB, FNBB & other, which was partially offset by a $809,000 decrease in service charges on deposit accounts. The decrease in interest income was due to a $24.5 million decrease in loan interest income, a $1.9 million decrease in investment security income and a $210,000 decrease in interest income on deposits with other banks. The increase in non-interest expense was due to a $5.1 million increase in salaries and employee benefits and a $2.8 million increase in data processing expense and was partially offset by a $2.7 million decrease in other operating expenses and a $766,000 decrease in occupancy and equipment expense. Income tax expense increased by $37.6 million during the quarter due to an increase in net income.

Our net interest margin decreased from 4.17% for the six-month period ended June 30, 2020 to 3.81% for the six-month period ended June 30, 2021. The yield on interest earning assets was 4.17% and 4.96% for the six months ended June 30, 2021 and 2020, respectively, as average interest earning assets increased from $14.05 billion to $15.51 billion. The increase in average earning assets is primarily the result of a $1.55 billion increase in average interest-bearing balances due from banks and a $522.4 million increase in average investment securities, partially offset by the $618.2 million decrease in average loans receivable. Average PPP loan balances were $607.4 million for the six months ended June 30, 2021. These loans bear interest at 1.00% plus the accretion of the origination fee. We recognized total interest income of $19.7 million on PPP loans for the six months ended June 30, 2021. The PPP loans were accretive to the net interest margin by 11 basis points for the six months ended June 30, 2021. This was primarily due to approximately $549.0 million of the Company’s PPP loans being forgiven during the first six months of 2021 as well as the acceleration of deferred fees for the loans that were forgiven. The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market. As a result, we had an increase of $1.55 billion in average interest-bearing cash balances for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This excess liquidity was dilutive to the net interest margin by 43 basis points. For the six months ended June 30, 2021 and 2020, we recognized $11.3 million and $14.7 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 4 basis points.

Our efficiency ratio was 38.71% for the six months ended June 30, 2021, compared to 40.83% for the same period in 2020. For the six months ended June 30, 2021, our efficiency ratio, as adjusted (non-GAAP), was 41.35%, compared to 40.34% reported for the six months ended June 30, 2020. (See Table 23 for the non-GAAP tabular reconciliation).

Our annualized return on average assets was 2.01% for the six months ended June 30, 2021, compared to 0.81% for the same period in 2020. Our annualized return on average common equity was 13.02% for the six months ended June 30, 2021, compared to 5.16% for the same period in 2020.

Financial Condition as of and for the Period Ended June 30, 2021 and December 31, 2020

Our total assets as of June 30, 2021 increased $1.23 billion to $17.63 billion from the $16.40 billion reported as of December 31, 2020. Cash and cash equivalents increased $1.68 billion, or 132.7%, for the six months ended June 30, 2021. The increase in cash and cash equivalents is due to loan paydowns as well as the significant amount of excess liquidity in the market as a continued result of the COVID-19 pandemic and the accompanying governmental response. Our loan portfolio balance decreased to $10.20 billion as of June 30, 2021 from $11.22 billion at December 31, 2020 due to organic loan decline of $820.2 million and $549.0 million of the Company’s PPP loans being forgiven during the first six months of 2021, which was partially offset by $347.7 million in new PPP loan originations during 2021. Total deposits increased $1.17 billion to $13.89 billion as of June 30, 2021 from $12.73 billion as of December 31, 2020, which was due to customers holding higher deposit balances in response to the COVID-19 pandemic as well as the accompanying governmental response to the pandemic. Stockholders’ equity increased $90.4 million to $2.70 billion as of June 30, 2021, compared to $2.61 billion as of December 31, 2020. The $90.4 million increase in stockholders’ equity is primarily associated with the $170.7 million in net income for the six months ended June 30, 2021, which was partially offset by the $15.0 million in other comprehensive loss for the six months ended June 30, 2021, $46.2 million of shareholder dividends paid and stock repurchases of $25.7 million in 2021.

Our non-performing loans were $58.9 million, or 0.58% of total loans as of June 30, 2021, compared to $74.1 million, or 0.66% of total loans as of December 31, 2020. The allowance for credit losses as a percent of non-performing loans increased to 407.99% as of June 30, 2021, from 331.10% as of December 31, 2020. Non-performing loans from our Arkansas franchise were $22.4 million at June 30, 2021 compared to $24.1 million as of December 31, 2020. Non-performing loans from our Florida franchise were $31.8 million at June 30, 2021 compared to $43.1 million as of December 31, 2020. Non-performing loans from our Alabama franchise were $380,000 at June 30, 2021 compared to $530,000 as of December 31, 2020. Non-performing loans from our SPF franchise were $1.6 million at June 30, 2021 compared to $3.6 million as of December 31, 2020. Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $2.7 million at June 30, 2021 compared to $2.8 million as of December 31, 2020.

As of June 30, 2021, our non-performing assets decreased to $60.9 million, or 0.35% of total assets, from $78.6 million, or 0.48% of total assets, as of December 31, 2020. Non-performing assets from our Arkansas franchise were $23.2 million at June 30, 2021 compared to $25.6 million as of December 31, 2020. Non-performing assets from our Florida franchise were $32.9 million at June 30, 2021 compared to $46.0 million as of December 31, 2020. Non-performing assets from our Alabama franchise were $424,000 at June 30, 2021 compared to $564,000 as of December 31, 2020. Non-performing assets from our SPF franchise were $1.6 million at June 30, 2021 compared to $3.6 million as of December 31, 2020. Non-performing assets from our CFG franchise were $2.8 million at June 30, 2021 and December 31, 2020, respectively.

The $2.7 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

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.

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:

•

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 $4.3 million, $8.1 million, $3.6 million and $7.1 million for the three and six months ended June 30, 2021 and 2020, respectively. Centennial CFG loan fees were $3.3 million, $5.3 million, $2.1 million and $2.9 million for the three and six months ended June 30, 2021 and 2020, respectively.

Credit Losses. The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. 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 made changes to the accounting for available-for-sale debt securities. One such change is to require 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.

The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $44.0 million which was recognized through a $32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $146.1 million as of January 1, 2020. In addition, the Company recorded a $15.5 million reserve on unfunded commitments as of January 1, 2020, which was recognized through an $11.5 million adjustment to retained earnings, net of tax.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In 2019, the Company reevaluated its loan pools of purchased loans with deteriorated credit quality. These loans pools related specifically to acquired loans from the Heritage, Liberty, Landmark, Bay Cities, Bank of Commerce, Premier Bank, Stonegate and Shore Premier Finance acquisitions. At acquisition, a portion of these loans were recorded as purchased credit impaired loans on a pool by pool basis. Through the reevaluation of these loan pools, management determined that estimated losses for purchase credit impaired loans should be processed against the credit mark of the applicable pools. The remaining non-accretable mark was then moved to accretable mark to be recognized over the remaining weighted average life of the loan pools. The projected losses for these loans were less than the total credit mark. As such, the remaining $107.6 million of loans in these pools along with the $29.3 million in accretable yield was deemed to be immaterial and was reclassified out of the purchased credit impaired loans category. As of December 31, 2020, the Company no longer held any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption on of ASC 326 as of January 1, 2020.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As of December 31, 2019, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined than an allowance for credit losses on available-for-sale securities was not deemed material. However, the Company evaluated the investment portfolio during the first quarter of 2020 and determined that an $842,000 provision for credit losses was necessary. No additional provision was deemed necessary during the remaining quarters of 2020 or the first and second quarters of 2021. See Note 3 “Investment Securities” in the Condensed Notes to Consolidated Financial Statements for further discussion.

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. 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.

Loans Receivable and Allowance for Credit Losses. Except for loans acquired during our acquisitions, substantially all of our loans receivable are reported at their outstanding principal balance adjusted for any charge-offs, as it is management’s intent to hold them for the foreseeable future or until maturity or payoff, except for mortgage loans held for sale. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding.

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 loan exhibit similar risk characteristics. The identified loan segments are as follows:

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1-4 family construction

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All other construction

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

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1-4 family senior liens

•

Multifamily

•

Owner occupied commercial real estate

•

Non-owner occupied commercial real estate

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Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other

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Consumer auto

•

Other consumer

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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.

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 either of the following applies:

•

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.

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.

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Purchase credit deteriorated (“PCD”) loans are recorded at the amount paid. 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 noncredit 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 loss.

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.

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 LH-Finance

The acquired portfolio of loans is now housed in our SPF division. The SPF division is responsible for servicing the acquired loan portfolio and originating new loan production. In connection with this acquisition, we opened a loan production office in Baltimore, Maryland.

See Note 2 “Business Combinations” in the Condensed Notes to Consolidated Financial Statements for additional information regarding the acquisition of LH-Finance.

Future Acquisitions

In our continuing evaluation of our growth plans, we believe properly priced bank acquisitions can complement our organic growth and de novo branching growth strategies. We anticipate that our principal acquisition focus will be to continue to expand our presence in Arkansas, Florida and Alabama and into other contiguous markets. However, as financial opportunities in other market areas arise, we may seek to expand into those areas.

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.

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 June 30, 2021, 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.

Results of Operations

For the three and six months ended June 30, 2021 and 2020

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 of 26.135% .

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. The Federal reserve lowered the target rate two times in 2020. First, the target rate was lowered to 1.00% to 1.25% on March 3, 2020; second, the rate was lowered to 0.00% to 0.25% on March 15, 2020. The target rate remains at 0.00% to 0.25% as of June 30, 2021.

Our net interest margin decreased from 4.17% for the six-month period ended June 30, 2020 to 3.81% for the six-month period ended June 30, 2021. The yield on interest earning assets was 4.17% and 4.96% for the six months ended June 30, 2021 and 2020, respectively, as average interest earning assets increased from $14.05 billion to $15.51 billion. The increase in average earning assets is primarily the result of a $1.55 billion increase in average interest-bearing balances due from banks and a $522.4 million increase in average investment securities, partially offset by a $618.2 million decrease in average loans receivable. Average PPP loan balances were $607.4 million for the six months ended June 30, 2021. These loans bear interest at 1.00% plus the accretion of the origination fee. We recognized total interest income of $19.7 million on PPP loans for the six months ended June 30, 2021. The PPP loans were accretive to the net interest margin by 11 basis points for the six months ended June 30, 2021. This was primarily due to approximately $549.0 million of the Company’s PPP loans being forgiven during the first six months of 2021 as well as the acceleration of deferred fees for the loans that were forgiven. The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market. As a result, we had an increase of $1.55 billion in average interest-bearing cash balances for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This excess liquidity was dilutive to the net interest margin by 43 basis points. For the six months ended June 30, 2021 and 2020, we recognized $11.3 million and $14.7 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 4 basis points.

Net interest income on a fully taxable equivalent basis decreased $7.0 million, or 4.7%, to $143.1 million for the three-month period ended June 30, 2021, from $150.1 million for the same period in 2020. This decrease in net interest income for the three-month period ended June 30, 2021 was the result of a $16.7 million decrease in interest income, which was partially offset by a $9.7 million decrease in interest expense, on a fully taxable equivalent basis. The $16.7 million decrease in interest income was primarily the result of higher levels of earning assets at lower yields. Although our interest earning assets increased, our average loan balances decreased by $1.25 billion while average interest-bearing balances due from banks increased by $1.82 billion. The lower yield on earning assets resulted in a decrease in interest income of approximately $4.9 million, and the higher level of earning assets at much lower yields resulted in a decrease in interest income of approximately $11.9 million. The lower yield was primarily the result of the decrease in income on loans of $17.4 million, which was partially offset by an increase in income on investment securities of $129,000 and a $496,000 increase in income on interest-bearing balances due from banks. The decrease in interest income also reflected a $1.2 million decrease in loan accretion income. The $9.7 million decrease in interest expense for the three-month period ended June 30, 2021 is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which lowered interest expense by $7.2 million, as well as a $2.5 million decrease 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 $8.7 million decrease in interest expense on deposits and an $760,000 decrease in interest expense on FHLB borrowed funds.

Net interest income on a fully taxable equivalent basis increased $2.0 million, or 0.7%, to $293.0 million for the six-month period ended June 30, 2021, from $291.1 million for the same period in 2020. This increase in net interest income for the six-month period ended June 30, 2021 was the result of a $27.6 million decrease in interest expense, which was partially offset by a $25.6 million decrease in interest income, on a fully taxable equivalent basis. The $25.6 million decrease in interest income was primarily the result of lower yields on our earning assets. Although our interest earning assets increased, our average loan balances decreased by $618.2 million while average interest-bearing balances due from banks increased by $1.55 billion. The lower yield on earning assets resulted in a decrease in interest income of approximately $18.4 million, and the higher level of earning assets at lower yields resulted in a decrease in interest income of approximately $7.3 million. The lower yield was primarily driven by the decrease in income on loans of $24.7 million, a decrease in income on investment securities of $753,000 and a $210,000 decrease in income on interest-bearing balances due from banks. The decrease in interest income also reflected a $3.4 million decrease in loan accretion income. The $27.6 million decrease in interest expense for the six-month period ended June 30, 2021 is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which lowered interest expense by $23.9 million, as well as a $3.7 million decrease 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 $25.2 million decrease in interest expense on deposits and an $1.6 million decrease in interest expense on FHLB borrowed funds.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and six months ended June 30, 2021 and 2020, as well as changes in fully taxable equivalent net interest margin for the three and six months ended June 30, 2021 compared to the same period in 2020.

Table 2: Analysis of Net Interest Income

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Interest income	$	154,481		$	171,598		$	317,132		$	343,773
Fully taxable equivalent adjustment		1,810			1,434			3,667			2,661
Interest income – fully taxable equivalent		156,291			173,032			320,799			346,434
Interest expense		13,229			22,931			27,792			55,381
Net interest income – fully taxable equivalent	$	143,062		$	150,101			293,007			291,053
Yield on earning assets – fully taxable equivalent		3.94	%		4.74	%		4.17	%		4.96	%
Cost of interest-bearing liabilities		0.49			0.86			0.53			1.07
Net interest spread – fully taxable equivalent		3.45			3.88			3.64			3.89
Net interest margin – fully taxable equivalent		3.61			4.11			3.81			4.17

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin

	Three Months Ended June 30,			Six Months Ended June 30,
	2021 vs. 2020			2021 vs. 2020
	(In thousands)
Increase (decrease) in interest income due to change in earning assets	$	(11,854	)	$	(7,257	)
Increase (decrease) in interest income due to change in earning asset yields		(4,887	)		(18,378	)
(Increase) decrease in interest expense due to change in interest-bearing liabilities		2,471			3,667
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities		7,231			23,922
Increase (decrease) in net interest income	$	(7,039	)	$	1,954

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 and six months ended June 30, 2021 and 2020, 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 June 30,
	2021							2020
	Average Balance		Income / Expense		Yield / Rate			Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	2,577,101	$	707		0.11	%	$	753,093	$	211		0.11	%
Federal funds sold		51		—		0.00			—		—		0.00
Investment securities – taxable		1,909,485		7,185		1.51			1,673,334		8,693		2.09
Investment securities – non-taxable		864,416		6,527		3.03			461,640		4,890		4.26
Loans receivable		10,541,466		141,872		5.40			11,790,398		159,238		5.43
Total interest-earning assets		15,892,519		156,291		3.94	%		14,678,465		173,032		4.74	%
Non-earning assets		1,598,840							1,640,741
Total assets	$	17,491,359						$	16,319,206
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	8,684,726	$	3,960		0.18	%	$	7,651,259	$	7,818		0.41	%
Time deposits		1,123,287		2,474		0.88			1,855,626		7,298		1.58
Total interest-bearing deposits		9,808,013		6,434		0.26			9,506,885		15,116		0.64
Securities sold under agreement to repurchase		157,570		107		0.27			154,628		260		0.68
FHLB and other borrowed funds		400,000		1,896		1.90			652,354		2,656		1.64
Subordinated debentures		370,613		4,792		5.19			369,846		4,899		5.33
Total interest-bearing liabilities		10,736,196		13,229		0.49	%		10,683,713		22,931		0.86	%
Non-interest-bearing liabilities
Non-interest-bearing deposits		3,966,968							3,038,490
Other liabilities		128,048							137,062
Total liabilities		14,831,212							13,859,265
Stockholders’ equity		2,660,147							2,459,941
Total liabilities and stockholders’ equity	$	17,491,359						$	16,319,206
Net interest spread						3.45	%						3.88	%
Net interest income and margin			$	143,062		3.61	%			$	150,101		4.11	%

Table 4: Average Balance Sheets and Net Interest Income Analysis

	Six Months Ended June 30,
	2021							2020
	Average Balance		Income / Expense		Yield / Rate			Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	2,096,452	$	1,117		0.11	%	$	542,066	$	1,327		0.49	%
Federal funds sold		84		—		0.00			2,609		21		1.62
Investment securities – taxable		1,774,026		13,438		1.53			1,690,083		18,469		2.20
Investment securities – non-taxable		856,332		13,259		3.12			417,919		8,981		4.32
Loans receivable		10,780,972		292,985		5.48			11,399,178		317,636		5.60
Total interest-earning assets		15,507,866		320,799		4.17	%		14,051,855		346,434		4.96	%
Non-earning assets		1,599,393							1,674,486
Total assets	$	17,107,259						$	15,726,341
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	8,512,714	$	8,677		0.21	%	$	7,346,281	$	23,621		0.65	%
Time deposits		1,166,121		5,462		0.94			1,899,673		15,693		1.66
Total interest-bearing deposits		9,678,835		14,139		0.29			9,245,954		39,314		0.86
Federal funds purchased		—		—		0.00			3,132		13		0.83
Securities sold under agreement to repurchase		158,628		297		0.38			146,404		722		0.99
FHLB and other borrowed funds		400,000		3,771		1.90			637,940		5,354		1.69
Subordinated debentures		370,518		9,585		5.22			369,749		9,978		5.43
Total interest-bearing liabilities		10,607,981		27,792		0.53	%		10,403,179		55,381		1.07	%
Non-interest-bearing liabilities
Non-interest-bearing deposits		3,724,854							2,724,537
Other liabilities		131,446							128,102
Total liabilities		14,464,281							13,255,818
Stockholders’ equity		2,642,978							2,470,523
Total liabilities and stockholders’ equity	$	17,107,259						$	15,726,341
Net interest spread						3.64	%						3.89	%
Net interest income and margin			$	293,007		3.81	%			$	291,053		4.17	%

Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and six months ended June 30, 2021 compared to the same period in 2020, 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 June 30,									Six Months Ended June 30,
	2021 over 2020									2021 over 2020
	Volume			Yield/Rate			Total			Volume			Yield/Rate			Total
	(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks	$	500		$	(4	)	$	496		$	1,466		$	(1,676	)	$	(210	)
Federal funds sold		—			—			—			(10	)		(11	)		(21	)
Investment securities – taxable		1,113			(2,621	)		(1,508	)		878			(5,909	)		(5,031	)
Investment securities – non-taxable		3,344			(1,707	)		1,637			7,342			(3,064	)		4,278
Loans receivable		(16,811	)		(555	)		(17,366	)		(16,933	)		(7,718	)		(24,651	)
Total interest income		(11,854	)		(4,887	)		(16,741	)		(7,257	)		(18,378	)		(25,635	)
Interest expense:
Interest-bearing transaction and savings deposits		941			(4,799	)		(3,858	)		3,268			(18,212	)		(14,944	)
Time deposits		(2,281	)		(2,543	)		(4,824	)		(4,823	)		(5,408	)		(10,231	)
Federal funds purchased		—			—			—			(7	)		(6	)		(13	)
Securities sold under agreement to repurchase		5			(158	)		(153	)		56			(481	)		(425	)
FHLB borrowed funds		(1,146	)		386			(760	)		(2,182	)		599			(1,583	)
Subordinated debentures		10			(117	)		(107	)		21			(414	)		(393	)
Total interest expense		(2,471	)		(7,231	)		(9,702	)		(3,667	)		(23,922	)		(27,589	)
Increase (decrease) in net interest income	$	(9,383	)	$	2,344		$	(7,039	)	$	(3,590	)	$	5,544		$	1,954

Provision for Credit Losses

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. 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 made changes to the accounting for available-for-sale debt securities. One such change is to require 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.

During the three-month period ended June 30, 2021, the Company recorded a negative provision for unfunded commitments of $4.8 million compared to an $11.4 million provision for credit losses and a $9.2 million provision for credit losses on unfunded commitments for a total credit loss expense of $20.7 million for the three-month period ended June 30, 2020. During the six-month period ended June 30, 2021, the Company recorded a $4.8 million negative provision for unfunded commitments compared to a $98.3 million provision for credit losses and a $17.0 million provision for unfunded commitments for a total credit loss expense of $115.3 million for the six-month period ended June 30, 2020. The $4.8 million negative provision for the six-month period ended June 30, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $115.3 million of total credit loss expense for the six-month period ended June 30, 2020 was primarily due to the COVID-19 pandemic, with $9.3 million for the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. 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 June 30, 2021. Net charge-offs to average total loans was 0.09% for the three months ended June 30, 2021 compared to 0.07% for the three months ended June 30, 2020. Net charge-offs to average total loans was 0.09% for the six months ended June 30, 2021 compared to 0.10% for the six months ended June 30, 2020.

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.”

The allowance for credit losses is measured based on call report segment as these types of loan 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

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.

Non-Interest Income

Total non-interest income was $31.1 million and $76.4 million for the three and six months ended June 30, 2021, compared to $25.0 million and $48.0 million for the same periods in 2020. 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 and dividends.

Table 6 measures the various components of our non-interest income for the three and six months ended June 30, 2021 and 2020, respectively, as well as changes for the three and six months ended June 30, 2021 compared to the same period in 2020.

Table 6: Non-Interest Income

	Three Months Ended										Six Months Ended
	June 30,					2021 Change					June 30,						2021 Change
	2021			2020		from 2020					2021			2020			from 2020
	(Dollars in thousands)
Service charges on deposit accounts	$	5,116		$	4,296	$	820		19.1	%	$	10,118		$	10,927		$	(809	)	(7.4	)%
Other service charges and fees		9,659			7,666		1,993		26.0			17,267			13,722			3,545		25.8
Trust fees		444			397		47		11.8			966			835			131		15.7
Mortgage lending income		6,202			6,196		6		0.1			14,369			8,817			5,552		63.0
Insurance commissions		478			533		(55	)	(10.3	)		970			1,211			(241	)	(19.9	)
Increase in cash value of life insurance		537			558		(21	)	(3.8	)		1,039			1,118			(79	)	(7.1	)
Dividends from FHLB, FRB, FNBB & other		2,646			230		2,416		1,050.4			11,255			8,072			3,183		39.4
Gain on sale of SBA loans		1,149			—		1,149		100.0			1,149			341			808		237.0
(Loss) gain on sale of branches, equipment and other assets, net		(23	)		54		(77	)	(142.6	)		(52	)		136			(188	)	(138.2	)
Gain on OREO, net		619			235		384		163.4			1,020			512			508		99.2
Gain on securities, net		—			—		—		0.0			219			—			219		100.0
Fair value adjustment for marketable securities		1,250			919		331		36.0			7,032			(4,899	)		11,931		243.5
Other income		3,043			3,939		(896	)	(22.7	)		11,044			7,158			3,886		54.3
Total non-interest income	$	31,120		$	25,023	$	6,097		24.4	%	$	76,396		$	47,950		$	28,446		59.3	%

Non-interest income increased $6.1 million, or 24.4%, to $31.1 million for three months ended June 30, 2021 from $25.0 million for the same period in 2020. The primary factors that resulted in this increase were dividends from FHLB, FRB, FNBB & other which increased non-interest income by $2.4 million and the $2.0 million increase in other service charges and fees. Other factors were changes related to service charges on deposit accounts and the gain on the sale of SBA loans.

Additional details for the three months ended June 30, 2021 on some of the more significant changes are as follows:

•

The $820,000 increase in service charges on deposit accounts is primarily related to an increase in overdraft fees resulting from increased volume.

•

The $2.0 million increase in other service charges and fees is primarily due to an increase in Centennial CFG property finance loan fees.

•

The $2.4 million increase for dividends from FHLB, FRB, FNBB & other is primarily due to an increase in special dividends from equity investments.

•

The $1.1 million gain on sale of SBA loans is due to the increase in volume during the second quarter of 2021.

•

The $896,000 decrease in other income is primarily due to a $729,000 decrease in loan recoveries and a $839,000 decrease in gain on life insurance, which was partially offset by a $572,000 increase in investment brokerage fee income.

Non-interest income increased $28.4 million, or 59.3%, to $76.4 million for six months ended June 30, 2021 from $48.0 million for the same period in 2020. The primary factors that resulted in this increase were the impact of fair value adjustment for marketable securities which increased non-interest income by $11.9 million and the $5.6 million increase in mortgage lending income. Other factors were changes related to service charges on deposit accounts, other service charges and fees, gain on sale of SBA loans and other income.

Additional details for the six months ended June 30, 2021 on some of the more significant changes are as follows:

•

The $809,000 decrease in service charges on deposit accounts is primarily related to a decrease in overdraft fees resulting consumers holding higher deposit balances in response to the COVID-19 pandemic through the end of the first quarter of 2021. The Company began to see an increase in overdraft fees during the second quarter of 2021 but not to the extent of pre-pandemic levels.

•

The $3.5 million increase in other service charges and fees is primarily due to an increase in Centennial CFG property finance loan fees.

•

The $5.6 million increase in mortgage lending income is primarily due to the increase in volume of secondary market loan sales driven by the current low interest rate environment.

•

The $3.2 million increase for dividends from FHLB, FRB, FNBB & other is primarily due to an increase in special dividends from equity investments.

•

The $808,000 gain in SBA loans is primarily due to the increase of loan sales during 2021.

•

The $11.9 million gain on the fair value adjustment for marketable securities is related to the increase in the fair market value of marketable securities held by the Company.

•

The $3.9 million increase in other income is primarily due to a $3.1 million increase in loan recoveries and an $889,000 increase in investment brokerage fee income, partially offset by a $317,000 decrease in gains on life insurance.

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 and six months ended June 30, 2021 and 2020, as well as changes for the three and six months ended June 30, 2021 compared to the same period in 2020.

Table 7: Non-Interest Expense

	Three Months Ended									Six Months Ended
	June 30,				2021 Change					June 30,				2020 Change
	2021		2020		from 2020					2021		2020		from 2019
	(Dollars in thousands)
Salaries and employee benefits	$	42,462	$	40,088	$	2,374		5.9	%	$	84,521	$	79,417	$	5,104		6.4	%
Occupancy and equipment		9,042		10,172		(1,130	)	(11.1	)		18,279		19,045		(766	)	(4.0	)
Data processing expense		5,893		4,614		1,279		27.7			11,763		8,940		2,823		31.6
Other operating expenses:
Advertising		1,194		795		399		50.2			2,240		2,021		219		10.8
Merger and acquisition expense		—		—		—		0.0			—		711		(711	)	(100.0	)
Amortization of intangibles		1,421		1,486		(65	)	(4.4	)		2,842		3,003		(161	)	(5.4	)
Electronic banking expense		2,616		2,054		562		27.4			4,854		3,769		1,085		28.8
Directors’ fees		414		412		2		0.5			797		836		(39	)	(4.7	)
Due from bank service charges		273		239		34		14.2			522		462		60		13.0
FDIC and state assessment		1,108		1,846		(738	)	(40.0	)		2,471		3,394		(923	)	(27.2	)
Insurance		787		711		76		10.7			1,568		1,457		111		7.6
Legal and accounting		1,058		1,278		(220	)	(17.2	)		1,904		2,197		(293	)	(13.3	)
Other professional fees		1,796		1,735		61		3.5			3,409		4,961		(1,552	)	(31.3	)
Operating supplies		465		553		(88	)	(15.9	)		952		1,088		(136	)	(12.5	)
Postage		292		313		(21	)	(6.7	)		630		640		(10	)	(1.6	)
Telephone		365		310		55		17.7			711		634		77		12.1
Other expense		3,796		4,352		(556	)	(12.8	)		8,385		8,857		(472	)	(5.3	)
Total non-interest expense	$	72,982	$	70,958	$	2,024		2.9	%	$	145,848	$	141,432	$	4,416		3.1	%

Non-interest expense increased $2.0 million, or 2.9%, to $73.0 million for the three months ended June 30, 2021 from $71.0 million for the same period in 2020. The primary factor that resulted in this increase was the changes related to salaries and employee benefits. Other factors were changes related to occupancy and equipment expenses, data processing expenses, electronic banking expenses, and FDIC and state assessment fees.

Additional details for the three months ended June 30, 2021 on some of the more significant changes are as follows:

•

The $2.4 million increase in salaries and employee benefits expense is primarily due to increased salary expenses related to the normal increased cost of doing business and an increase in salary expense incentives.

•

The $1.1 million decrease in occupancy and equipment expense is primarily related to a decrease in janitorial services and supplies and a decrease in depreciation in building and improvements. During the second quarter of 2020, the Company made the strategic decision to demolish and rebuild the Marathon, Florida branch office at its existing location. This increased depreciation expense during the second quarter of 2020 as the building was written off.

•

The $1.3 million increase in data processing expense is primarily related to an increase in software and licensing expenses.

•

The $562,000 increase in electronic banking expense is due primarily to an increase in fees charged for network expenses and debit card processing fees.

•

The $738,000 decrease in FDIC and state assessment expense is primarily due to the FDIC assessment rate decreasing from due to the Bank’s CAMELS rating improvement after the most recent safety and soundness exam. In addition, the State of Arkansas announced a 25% reduction in assessments for the period January 1, 2021 through June 30, 2021.

Non-interest expense increased $4.4 million, or 3.1%, to $145.8 million for the six months ended June 30, 2021 from $141.4 million for the same period in 2020. The primary factor that resulted in this increase was the changes related to salaries and employee benefits. Other factors were changes related to occupancy and equipment expenses, data processing expenses, merger and acquisition expenses, electronic banking expenses, FDIC and state assessment fees and other professional fees.

Additional details for the six months ended June 30, 2021 on some of the more significant changes are as follows:

•

The $5.1 million increase in salaries and employee benefits expense is primarily due to increased salary expenses related to the normal increased cost of doing business and an increase in salary expense incentives and bonuses.

•

The $766,000 decrease in occupancy and equipment expense is primarily related to a decrease in depreciation in building and improvements. During the second quarter of 2020, the Company made the strategic decision to demolish and rebuild the Marathon, Florida branch office at its existing location. This increased depreciation expense during the second quarter of 2020 as the building was written off.

•

The $2.8 million increase in data processing expense is primarily related to an increase in software, licensing, software maintenance, core processing expenses, telecommunication services and and bill pay expenses.

•

The $711,000 decrease in merger and acquisition expense is due to the acquisition of LH-Finance during the first quarter of 2020.

•

The $1.1 million increase in electronic banking expenses is primarily to an increase in fees charged for network expenses and debit card processing fees.

•

The $923,000 decrease in FDIC and state assessment expense is primarily due to the FDIC assessment rate decreasing from due to the Bank’s CAMELS rating improvement after the most recent safety and soundness exam. In addition, the State of Arkansas announced a 25% reduction in assessments for the period January 1, 2021 through June 30, 2021.

•

The $1.6 million decrease in other professional fees is primarily due to a reduction in outsourced special projects and professional fees for the Bank.

Income Taxes

Income tax expense increased $5.8 million, or 30.2%, to $25.1 million for the three-month period ended June 30, 2021, from $19.3 million for the same period in 2020. Income tax expense increased $37.6 million, or 230.6%, to $54.0 million for the six-month period ended June 30, 2021, from $16.3 million for the same period in 2020. The effective income tax rate was 24.07% and 24.02% for the three and six-month period ended June 30, 2021, compared to 23.45% and 20.49% for the same periods in 2020.

Financial Condition as of and for the Period Ended June 30, 2021 and December 31, 2020

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $10.54 billion and $11.79 billion during the three months ended June 30, 2021 and 2020, respectively. Our loan portfolio averaged $10.78 billion and $11.40 billion during the six months ended June 30, 2021 and 2020, respectively. Loans receivable were $10.20 billion and $11.22 billion as of June 30, 2021 and December 31, 2020, respectively.

The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act includes an allocation for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, so long as employee and compensation levels of the borrower are maintained, and the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1.00% to 5.00%, based on the size of the loan. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/HCEA Act”) was enacted on April 24, 2020. The PPP/HCEA Act authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA. The Consolidated Appropriations Act (“CAA”) was signed into law on December 27, 2020. The CAA also authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA. As of June 30, 2021, the Company had $473.9 million of PPP loans. This balance consists of $445.7 million in commercial and industrial loans and $28.2 million in other loans. From December 31, 2020 to June 30, 2021, the Company experienced a decline of approximately $1.02 billion in loans. The decrease in the loan portfolio is primarily due to $820.2 million in organic loan decline as well as $201.3 million in PPP loan decline. The $820.2 million in organic loan decline included $23.5 million in loan growth for Centennial CFG, while the remaining footprint experienced $843.7 million in loan decline during the first six months of 2021. The $201.3 million in PPP loan decline was the result of $549.0 million of PPP loans being forgiven during the first six months of 2021, partially offset by $347.7 million in new PPP loans during the first six months of 2021.

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 $3.36 billion, $4.22 billion, $228.3 million, $840.2 million and $1.56 billion as of June 30, 2021 in Arkansas, Florida, Alabama, SPF and Centennial CFG, respectively.

As of June 30, 2021, we had approximately $432.6 million of construction land development loans which were collateralized by land. This consisted of approximately $44.5 million for raw land and approximately $388.1 million for land with commercial and or residential lots.

Table 8 presents our loans receivable balances by category as of June 30, 2021 and December 31, 2020.

Table 8: Loans Receivable

	As of		As of
	June 30, 2021		December 31, 2020
	(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	4,144,375	$	4,429,060
Construction/land development		1,541,482		1,562,298
Agricultural		126,293		114,431
Residential real estate loans:
Residential 1-4 family		1,316,485		1,536,257
Multifamily residential		332,256		536,538
Total real estate		7,460,891		8,178,584
Consumer		824,938		864,690
Commercial and industrial		1,612,826		1,896,442
Agricultural		69,152		66,869
Other		231,368		214,136
Total loans receivable	$	10,199,175	$	11,220,721

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 June 30, 2021, commercial real estate loans totaled $5.81 billion, or 57.0% of loans receivable, as compared to $6.11 billion, or 54.4% of loans receivable, as of December 31, 2020. Commercial real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $2.05 billion, $2.51 billion, $112.0 million, zero and $1.14 billion at June 30, 2021, 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 35.4% and 52.8% 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 June 30, 2021, with the remaining 11.8% 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 June 30, 2021, residential real estate loans totaled $1.65 billion, or 16.2% of loans receivable, compared to $2.07 billion, or 18.5% of loans receivable, as of December 31, 2020. Residential real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $595.0 million, $949.7 million, $62.1 million, zero and $41.9 million at June 30, 2021, 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 as a result of our acquisition of SPF on June 30, 2018 as well as our acquisition of LH-Finance on February 29, 2020. 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.

As of June 30, 2021, consumer loans totaled $824.9 million, or 8.1% of loans receivable, compared to $864.7 million, or 7.7% of loans receivable, as of December 31, 2020. Consumer loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $26.9 million, $8.3 million, $892,000, $788.8 million and zero at June 30, 2021, respectively.

As of June 30, 2021, commercial and industrial loans totaled $1.61 billion, or 15.8% of loans receivable, compared to $1.90 billion, or 16.9% of loans receivable, as of December 31, 2020. Commercial and industrial loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $529.8 million, $671.6 million, $39.4 million, $51.4 million and $320.7 million at June 30, 2021, 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.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as PCI and accounted for under ASC 310-30. In 2019, the Company reevaluated its loan pools of purchased loans with deteriorated credit quality. These loans pools related specifically to acquired loans from the Heritage, Liberty, Landmark, Bay Cities, Bank of Commerce, Premier Bank, Stonegate and Shore Premier Finance acquisitions. At acquisition, a portion of these loans were recorded as purchased credit impaired loans on a pool by pool basis. Through the reevaluation of these loan pools, management determined that estimated losses for purchase credit impaired loans should be processed against the credit mark of the applicable pools. The remaining non-accretable mark was then moved to accretable mark to be recognized over the remaining weighted average life of the loan pools. The projected losses for these loans were less than the total credit mark. As such, the remaining $107.6 million of loans in these pools along with the $29.3 million in accretable yield was deemed to be immaterial and was reclassified out of the purchased credit impaired loans category. As of December 31, 2019, the Company no longer held any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption on of ASC 326 as of January 1, 2020.

Table 9 sets forth information with respect to our non-performing assets as of June 30, 2021 and December 31, 2020. As of these dates, all non-performing restructured loans are included in non-accrual loans.

Table 9: Non-performing Assets

	As of			As of
	June 30, 2021			December 31, 2020
	(Dollars in thousands)
Non-accrual loans	$	55,269		$	64,528
Loans past due 90 days or more (principal or interest payments)		3,667			9,610
Total non-performing loans		58,936			74,138
Other non-performing assets
Foreclosed assets held for sale, net		1,969			4,420
Total non-performing assets	$	60,905		$	78,558
Allowance for credit losses to non-performing loans		407.99	%		331.10	%
Non-performing loans to total loans		0.58			0.66
Non-performing assets to total assets		0.35			0.48

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 $58.9 million and $74.1 million as of June 30, 2021 and December 31, 2020, respectively. Non-performing loans at June 30, 2021 were $22.4 million, $31.8 million, $380,000, $1.6 million and $2.7 million in the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively.

As of June 30, 2021, the Company remains optimistic that the markets in which it operates will experience continued economic recovery as long as unemployment rates continue to decline, more COVID-19 vaccinations are administered, and communities continue to reopen for business activity. However, starting in the second quarter of 2021, the spread of the Delta variant and slowing vaccination rates have resulted in increased infection rates, fueling fears of a virus resurgence. Uncertainty remains about the duration of the pandemic as well as the timing and extent of the economic recovery. The Company determined that an additional provision for credit losses on loans was not necessary as the current level of the allowance for credit losses was considered adequate as of June 30, 2021. During the six-month period ended June 30, 2021, the Company recorded a negative provision for unfunded commitments of $4.8 million. This was primarily due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $115.3 million of total credit loss expense for the six-month period ended June 30, 2020 was primarily due to the COVID-19 pandemic, with $9.3 million for the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. 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 June 30, 2021.

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. Only non-performing restructured loans are included in our non-performing loans. As of June 30, 2021, we had $10.1 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 $8.2 million and our Arkansas market contains $1.9 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.

Section 4013 of the CARES Act enacted in March 2020 provides financial institutions optional temporary relief from the TDR classification requirements for certain COVID-19 related loan modifications. Specifically, financial institutions may elect to suspend TDR classification for certain loan modifications related to COVID-19 made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after termination of the President’s national emergency declaration for COVID-19. On December 28, 2020, an extension of section 4013 of the CARES Act, provided institutions with an extension of the temporary option to not apply ASC Subtopic 310-40 until January 1, 2022. Further, financial institutions do not need to determine impairment associated with certain loan concessions that would otherwise have been required for TDRs (e.g., interest rate concessions, payment deferrals, or loan extensions). On April 7, 2020, the Federal Reserve Board and the other federal bank regulatory agencies issued an interagency statement clarifying the relationship between the Section 4013 of the CARES Act and previous guidance issued by the agencies on March 22, 2020. This interagency statement encourages financial institutions to work prudently with borrowers who are or may be unable to meet their payment obligations because of COVID-19 and states that the agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The Company relied on Section 4013 of the CARES Act in accounting for loan modifications as of June 30, 2021. The Company has granted loan modifications to 47 loans for a total of $264.5 million. All of the customers currently on deferment totaling $264.5 million chose principal deferment only and now have returned to paying interest monthly.

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 June 30, 2021 and December 31, 2020, the amount of TDRs was $11.3 million and $12.3 million, respectively. As of June 30, 2021 and December 31, 2020, 88.9% and 87.1%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $2.0 million as of June 30, 2021, compared to $4.4 million as of December 31, 2020 for a decrease of $2.5 million. The foreclosed assets held for sale as of June 30, 2021 are comprised of $890,000 of assets located in Arkansas, $1.0 million located in Florida, $34,000 located in Alabama and zero from SPF and Centennial CFG.

As of June 30, 2021, we had no foreclosed properties with a carrying value greater than $1.0 million.

Table 10 shows the summary of foreclosed assets held for sale as of June 30, 2021 and December 31, 2020.

Table 10: Foreclosed Assets Held For Sale

	As of		As of
	June 30, 2021		December 31, 2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	558	$	438
Construction/land development		934		3,189
Residential real estate loans
Residential 1-4 family		477		793
Total foreclosed assets held for sale	$	1,969	$	4,420

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 June 30, 2021 and December 31, 2020, impaired loans were $340.0 million and $112.7 million, respectively. The amortized cost balance for loans with a specific allocation increased from $39.5 million to $290.3 million, and the specific allocation for impaired loans increased by approximately $42.8 million for the period ended June 30, 2021 compared to the period ended December 31, 2020. The increase in collateral-dependent impaired loans was primarily due to the Company changing the valuation method for lodging and assisted living loans to a market price valuation methodology. This involved assigning a 15% discount of par for these impaired loans. The 15% figure was derived based on knowledge of current hotel and assisted living offerings in the loan sale market. In the event of default, liquidation would be achieved through a loan sale. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary. As of June 30, 2021, our Arkansas, Florida, Alabama, SPF and Centennial CFG markets accounted for approximately $181.0 million, $154.3 million, $390,000, $1.6 million and $2.7 million of the impaired loans, respectively.

Past Due and Non-Accrual Loans

Table 11 shows the summary of non-accrual loans as of June 30, 2021 and December 31, 2020:

Table 11: Total Non-Accrual Loans

	As of		As of
	June 30, 2021		December 31, 2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	19,030	$	20,947
Construction/land development		1,363		1,381
Agricultural		757		879
Residential real estate loans
Residential 1-4 family		18,399		19,334
Multifamily residential		163		173
Total real estate		39,712		42,714
Consumer		1,726		3,506
Commercial and industrial		12,699		17,251
Agricultural		1,132		1,057
Total non-accrual loans	$	55,269	$	64,528

If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $795,000 and $858,000, respectively, would have been recorded for the three-month periods ended June 30, 2021 and 2020. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $1.6 million and $1.7 million, respectively, would have been recorded for the six-month periods ended June 30, 2021 and 2020. The interest income recognized on non-accrual loans for the three and six months ended June 30, 2021 and 2020 was considered immaterial.

Table 12 shows the summary of accruing past due loans 90 days or more as of June 30, 2021 and December 31, 2020:

Table 12: Loans Accruing Past Due 90 Days or More

	As of		As of
	June 30, 2021		December 31, 2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	2,165	$	6,088
Construction/land development		13		1,296
Residential real estate loans
Residential 1-4 family		1,479		1,821
Total real estate		3,657		9,205
Consumer		5		174
Commercial and industrial		5		231
Total loans accruing past due 90 days or more	$	3,667	$	9,610

Our ratio of total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.58% and 0.66% at June 30, 2021 and December 31, 2020, respectively.

Allowance for Credit Losses

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credits, financial guarantees, and other similar instruments. The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $44.0 million, which was recognized through a $32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $146.1 million as of January 1, 2020. In addition, the Company recorded a $15.5 million reserve on unfunded commitments, as of January 1, 2020, which was recognized through an $11.5 million adjustment to retained earnings, net of tax.

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 allowance for credit losses is measured based on call report segment as these types of loan 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

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.

•

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.

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 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.

Loans Collectively Evaluated for Impairment. Loans receivable collectively evaluated for impairment decreased by approximately $843.1 million from $10.76 billion at December 31, 2020 to $9.92 billion at June 30, 2021. 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 2.18% at June 30, 2021 and December 31, 2020, respectively.

Charge-offs and Recoveries. Total charge-offs increased to $3.0 million for the three months ended June 30, 2021, compared to $2.6 million for the same period in 2020. Total charge-offs decreased to $6.1 million for the six months ended June 30, 2021, compared to $6.8 million for the same period in 2020. Total recoveries decreased to $542,000 for the three months ended June 30, 2021, compared to $558,000 for the same period in 2020. Total recoveries decreased to $1.0 million for the six months ended June 30, 2021, compared to $1.3 million for the same period in 2020. For the three months ended June 30, 2021, net charge-offs were $806,000 for Arkansas, $1.6 million for Florida, $2,000 for Alabama, $48,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $2.5 million. For the six months ended June 30, 2021, net charge-offs were $1.4 million for Arkansas, $3.6 million for Florida, $3,000 for Alabama, $94,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $5.0 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.

Table 13 shows the allowance for credit losses, charge-offs and recoveries as of and for the three and six months ended June 30, 2021 and 2020.

Table 13: Analysis of Allowance for Credit Losses

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Balance, beginning of period	$	242,932		$	228,923		$	245,473		$	102,122
Impact of adopting ASC 326		—			—			—			43,988
Allowance for credit losses on acquired loans		—			—			—			357
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		576			1,490			595			2,009
Construction/land development		—			398			—			443
Agricultural		42			—			42			—
Residential real estate loans:
Residential 1-4 family		97			18			323			357
Total real estate		715			1,906			960			2,809
Consumer		55			12			122			28
Commercial and industrial		1,931			346			4,210			3,150
Other		322			318			778			860
Total loans charged off		3,023			2,582			6,070			6,847
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		54			235			68			485
Construction/land development		17			5			39			15
Residential real estate loans:
Residential 1-4 family		104			77			166			237
Total real estate		175			317			273			737
Consumer		(14	)		10			32			53
Commercial and industrial		226			41			302			106
Other		155			190			441			402
Total recoveries		542			558			1,048			1,298
Net loans charged off (recovered)		2,481			2,024			5,022			5,549
Provision for credit losses		—			11,441			—			97,422
Balance, June 30	$	240,451		$	238,340		$	240,451		$	238,340
Net charge-offs (recoveries) to average loans receivable		0.09	%		0.07	%		0.09	%		0.10	%
Allowance for credit losses to total loans		2.36			1.99			2.36			1.99
Allowance for credit losses to net charge-offs (recoveries)		2,416			2,928			2,374			2,136

Table 14 presents the allocation of allowance for credit losses as of June 30, 2021 and December 31, 2020.

Table 14: Allocation of Allowance for Credit Losses

	As of June 30, 2021					As of December 31, 2020
	Allowance Amount		% of loans⁽¹⁾				Allowance Amount			% of loans⁽¹⁾
	(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	92,894		40.6	%	$		87,043	39.5		%
Construction/land development		22,145		15.1				32,861	13.9
Agricultural		233		1.2				1,410	1.0
Residential real estate loans:
Residential 1-4 family		47,401		12.9				47,754	13.7
Multifamily residential		3,781		3.3				5,462	4.8
Total real estate		166,454		73.1				174,530	72.9
Consumer		18,339		8.1				21,905	7.7
Commercial and industrial		52,072		15.8				46,061	16.9
Agricultural		210		0.7				469	0.6
Other		3,376		2.3				2,508	1.9
Total allowance for credit losses	$	240,451		100.0	%	$		245,473	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 June 30, 2021.

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 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. Available-for-sale securities were $3.05 billion and $2.47 billion as June 30, 2021 and December 31, 2020, respectively.

As of June 30, 2021, $1.57 billion, or 51.4%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $1.18 billion, or 47.6%, of our available-for-sale securities as of December 31, 2020. To reduce our income tax burden, $974.0 million, or 31.9%, of our available-for-sale securities portfolio as of June 30, 2021, were primarily invested in tax-exempt obligations of state and political subdivisions, compared to $927.9 million, or 37.5%, of our available-for-sale securities as of December 31, 2020. We had $423.0 million, or 13.9%, invested in obligations of U.S. Government-sponsored enterprises as of June 30, 2021, compared to $327.0 million, or 13.2%, of our available-for-sale securities as of December 31, 2020. Also, we had approximately $84.9 million, or 2.8%, invested in other securities as of June 30, 2021, compared to $41.0 million, or 1.7% of our available-for-sale securities as of December 31, 2020.

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. At June 30, 2021, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainties related to the COVID-19 pandemic, was adequate for the 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 $13.77 billion and $13.40 billion for the three and six months ended June 30, 2021, respectively. Total deposits were $13.89 billion as of June 30, 2021, and $12.73 billion as of December 31, 2020. 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 June 30, 2021 and December 31, 2020.

Table 15: Brokered Deposits

	June 30, 2021		December 31, 2020
	(In thousands)
Time Deposits	$	—	$	10,000
Insured Cash Sweep and Other Transaction Accounts		625,680		625,681
Total Brokered Deposits	$	625,680	$	635,681

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 and six months ended June 30, 2021 and 2020.

Table 16: Average Deposit Balances and Rates

	Three Months Ended June 30,
	2021					2020
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	3,966,968		—	%	$	3,038,490		—	%
Interest-bearing transaction accounts		7,816,822		0.20			6,963,456		0.44
Savings deposits		867,904		0.06			687,803		0.13
Time deposits:
$100,000 or more		761,017		1.06			1,440,660		1.72
Other time deposits		362,270		0.51			414,966		1.10
Total	$	13,774,981		0.19	%	$	12,545,375		0.48	%

	Six Months Ended June 30,
	2021					2020
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	3,724,854		—	%	$	2,724,537		—	%
Interest-bearing transaction accounts		7,682,933		0.22			6,677,921		0.69
Savings deposits		829,781		0.06			668,360		0.17
Time deposits:
$100,000 or more		797,619		1.12			1,476,053		1.80
Other time deposits		368,502		0.56			423,620		1.17
Total	$	13,403,689		0.21	%	$	11,970,491		0.66	%

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 decreased $18.4 million, or 10.9%, from $168.9 million as of December 31, 2020 to $150.5 million as of June 30, 2021.

FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $400.0 million at June 30, 2021 and December 31, 2020. The Company had no other borrowed funds as of June 30, 2021 or December 31, 2020. At June 30, 2021, and December 31, 2020 all of the outstanding balances were classified as long-term advances. Our remaining FHLB borrowing capacity was $3.33 billion and $3.32 billion as of June 30, 2021 and December 31, 2020, respectively. 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 $370.7 million and $370.3 million as of June 30, 2021 and December 31, 2020, respectively.

The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. 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 our subordinated debentures, the sole asset of 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. We wholly own the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related subordinated debentures. Our obligations under the subordinated securities and other relevant trust agreements, in the aggregate, constitute a full and unconditional guarantee by us of each respective trust’s obligations under the trust securities issued by each respective trust.

On April 3, 2017, the Company completed an underwritten public offering of $300 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “Notes”). The Notes were issued at 99.997% of par, resulting in net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The Notes are unsecured, subordinated debt obligations of the Company and will mature on April 15, 2027. The Notes qualify as Tier 2 capital for regulatory purposes.

Stockholders’ Equity

Stockholders’ equity was $2.70 billion at June 30, 2021 compared to $2.61 billion at December 31, 2020. The $90.4 million increase in stockholders’ equity is primarily associated with the $170.7 million in net income for the six months ended June 30, 2021, which was partially offset by the $15.0 million in other comprehensive loss for the six months ended June 30, 2021, the $46.2 million of shareholder dividends paid and stock repurchases of $25.7 million in 2021. The annualized increase in stockholders’ equity for the first six months of 2021 was 7.0%. As of June 30, 2021 and December 31, 2020, our equity to asset ratio was 15.30% and 15.89%, respectively. Book value per share was $16.39 as of June 30, 2021, compared to $15.78 as of December 31, 2020, a 7.8% annualized increase.

Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.14 per share and $0.13 per share for the three months ended June 30, 2021 and 2020, respectively. The common stock dividend payout ratio for the three months ended June 30, 2021 and 2020 was 29.2% and 34.2%, respectively. The common stock dividend payout ratio for the six months ended June 30, 2021 and 2020 was 27.1% and 68.0%, respectively. On July 15, 2021, the Board of Directors declared a regular $0.14 per share quarterly cash dividend payable September 1, 2021, to shareholders of record August 11, 2021.

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, which brought the amount of authorized shares available to repurchase to 23,843,665 shares. We repurchased a total of 965,000 shares with a weighted-average stock price of $26.63 per share during the first six months of 2021. The remaining balance available for repurchase was 22,878,665 shares at June 30, 2021.

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 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 June 30, 2021 and December 31, 2020, we met all regulatory capital adequacy requirements to which we were subject.

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.

Table 17 presents our risk-based capital ratios on a consolidated basis as of June 30, 2021 and December 31, 2020.

Table 17: Risk-Based Capital

	As of June 30, 2021			As of December 31, 2020
	(Dollars in thousands)
Tier 1 capital
Stockholders’ equity	$	2,696,189		$	2,605,758
ASC 326 transitional period adjustment		56,077			57,333
Goodwill and core deposit intangibles, net		(1,000,446	)		(1,003,288	)
Unrealized gain on available-for-sale securities		(29,119	)		(44,120	)
Total common equity Tier 1 capital		1,722,701			1,615,683
Qualifying trust preferred securities		71,198			71,127
Total Tier 1 capital		1,793,899			1,686,810
Tier 2 capital
Allowance for credit losses		240,451			245,473
ASC 326 transitional period adjustment		(56,077	)		(57,333	)
Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets)		(39,914	)		(36,911	)
Qualifying allowance for credit losses		144,460			151,229
Qualifying subordinated notes		299,509			299,199
Total Tier 2 capital		443,969			450,428
Total risk-based capital	$	2,237,868		$	2,137,238
Average total assets for leverage ratio	$	16,520,708		$	15,547,111
Risk weighted assets	$	11,499,339		$	12,039,156
Ratios at end of period
Common equity Tier 1 capital		14.98	%		13.42	%
Leverage ratio		10.86			10.85
Tier 1 risk-based capital		15.60			14.01
Total risk-based capital		19.46			17.75
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.

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 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 (including return on average assets, as adjusted, and return on average assets excluding intangible amortization), return on average equity (including return on average equity, as adjusted, return on average tangible equity, return on average tangible equity excluding intangible amortization and return on average tangible equity, as adjusted), tangible equity to tangible assets and the 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 items such as certain non-interest income and expenses that management believes are not indicative of our primary business operating results. 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.

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 June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(Dollars in thousands)
GAAP net income available to common shareholders (A)	$	79,070		$	62,827		$	170,672		$	63,334
Adjustments:
Outsourced special project		—			—			—			1,092
Merger and acquisition expense		—			—			—			711
Fair value adjustment for marketable securities		(1,250	)		(919	)		(7,032	)		4,899
Special dividend from equity investment		(2,200	)		—			(10,273	)		(7,004	)
Branch write-off expense		—			981			—			981
Gain on securities		—			—			(219	)		—
Recoveries on historic losses		—			—			(5,107	)		—
Total adjustments		(3,450	)		62			(22,631	)		679
Tax-effect of adjustments		(902	)		16			(5,915	)		177
Total adjustments after-tax (B)		(2,548	)		46			(16,716	)		502
Earnings, as adjusted (C)	$	76,522		$	62,873		$	153,956		$	63,836
Average diluted shares outstanding (D)		165,226			165,163			165,314			165,588
GAAP diluted earnings per share: A/D	$	0.48		$	0.38		$	1.03		$	0.38
Adjustments after-tax B/D		(0.02	)		—			(0.10	)		0.01
Diluted earnings per common share, as adjusted: C/D	$	0.46		$	0.38		$	0.93		$	0.39

We had $1.00 billion, $1.00 billion, and $1.01 billion total goodwill, core deposit intangibles and other intangible assets as of June 30, 2021, December 31, 2020 and June 30, 2020, 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 June 30, 2021		As of December 31, 2020
	(In thousands, except per share data)
Book value per share: A/B	$	16.39	$	15.78
Tangible book value per share: (A-C-D)/B		10.31		9.70
(A) Total equity	$	2,696,189	$	2,605,758
(B) Shares outstanding		164,488		165,095
(C) Goodwill		973,025		973,025
(D) Core deposit and other intangibles		27,886		30,728

Table 20: Return on Average Assets

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Return on average assets: A/D		1.81	%		1.55	%		2.01	%		0.81	%
Return on average assets excluding intangible amortization: B/(D-E)		1.95			1.68			2.16			0.90
Return on average assets excluding fair value adjustment for marketable securities, special dividend from equity investments, gain on securities, recoveries on historic losses, outsourced special project expense, merger expenses and branch write-off expense: (ROA, as adjusted): (A+C)/D		1.75			1.55			1.81			0.82
(A) Net income	$	79,070		$	62,827		$	170,672		$	63,334
Intangible amortization after-tax		1,049			1,098			2,098			2,218
(B) Earnings excluding intangible amortization	$	80,119		$	63,925		$	172,770		$	65,552
(C) Adjustments after-tax	$	(2,548	)	$	46		$	(16,716	)	$	502
(D) Average assets		17,491,359			16,319,206			17,107,259			15,726,341
(E) Average goodwill, core deposits and other intangible assets		1,001,598			1,007,307			1,002,301			1,003,156

Table 21: Return on Average Equity

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Return on average equity: A/D		11.92	%		10.27	%		13.02	%		5.16	%
Return on average common equity excluding fair value adjustment for marketable securities, special dividend from equity investments, gain on securities, recoveries on historic losses, outsourced special project expense, merger expenses and branch write-off expense: (ROE, as adjusted) ((A+C)/D)		11.54			10.28			11.75			5.20
Return on average tangible common equity: (A/(D-E))		19.12			17.40			20.98			8.68
Return on average tangible equity excluding intangible amortization: B/(D-E)		19.38			17.70			21.24			8.98
Return on average tangible common equity excluding fair value adjustment for marketable securities, special dividend from equity investments, gain on securities, recoveries on historic losses, outsourced special project expense, merger expenses and branch write-off expense: (ROTCE, as adjusted) ((A+C)/(D-E))		18.51			17.41			18.92			8.75
(A) Net income	$	79,070		$	62,827		$	170,672		$	63,334
(B) Earnings excluding intangible amortization		80,119			63,925			172,770			65,552
(C) Adjustments after-tax		(2,548	)		46			(16,716	)		502
(D) Average equity		2,660,147			2,459,941			2,642,978			2,470,523
(E) Average goodwill, core deposits and other intangible assets		1,001,598			1,007,307			1,002,301			1,003,156

Table 22: Tangible Equity to Tangible Assets

	As of June 30, 2021			As of December 31, 2020
	(Dollars in thousands)
Equity to assets: B/A		15.30	%		15.89	%
Tangible equity to tangible assets: (B-C-D)/(A-C-D)		10.20			10.41
(A) Total assets	$	17,627,192		$	16,398,804
(B) Total equity		2,696,189			2,605,758
(C) Goodwill		973,025			973,025
(D) Core deposit and other intangibles		27,886			30,728

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.

Table 23: Efficiency Ratio, As Adjusted

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Net interest income (A)	$	141,252		$	148,667		$	289,340		$	288,392
Non-interest income (B)		31,120			25,023			76,396			47,950
Non-interest expense (C)		72,982			70,958			145,848			141,432
FTE Adjustment (D)		1,810			1,434			3,667			2,661
Amortization of intangibles (E)		1,421			1,486			2,842			3,003
Adjustments:
Non-interest income:
Special dividend from equity investments	$	2,200		$	—		$	10,273		$	7,004
Fair value adjustment for marketable securities		1,250			919			7,032			(4,899	)
Gain on OREO, net		619			235			1,020			512
(Loss) gain on sale of branches, equipment and other assets, net		(23	)		54			(52	)		136
Gain on securities		—			—			219			—
Recoveries on historic losses		—			—			5,107			—
Total non-interest income adjustments (F)	$	4,046		$	1,208		$	23,599		$	2,753
Non-interest expense:
Branch write-off expense		—			981			—			981
Merger expense		—			—			—			711
Outsourced special project expense		—			—			—			1,092
Total non-interest expense adjustments (G)	$	—		$	981		$	—		$	2,784
Efficiency ratio (reported): ((C-E)/(A+B+D))		41.08	%		39.67	%		38.71	%		40.83	%
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F))		42.06			39.38			41.35			40.34

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.

Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Liquidity and Market Risk Management

Liquidity Management. Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows us to have sufficient funds available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. Our primary source of liquidity at our holding company is dividends paid by our bank subsidiary. Applicable statutes and regulations impose restrictions on the amount of dividends that may be declared by our bank subsidiary. Further, any dividend payments are subject to the continuing ability of the bank subsidiary to maintain compliance with minimum federal regulatory capital requirements and to retain its characterization under federal regulations as a “well-capitalized” institution.

Our bank subsidiary has potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers. Many of these obligations and commitments to fund future borrowings to our loan customers are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.

Due to the continuing effects of the COVID-19 pandemic, the Company continued to increase its liquidity position for the period ended June 30, 2021. Liquidity needs can be met from either assets or liabilities. On the asset side, our primary sources of liquidity include cash and due from banks, federal funds sold, unpledged available-for-sale investment securities and scheduled repayments and maturities of loans. We maintain adequate levels of cash and cash equivalents to meet our day-to-day needs. As of June 30, 2021, our cash and cash equivalents were $2.94 billion, or 16.7% of total assets, compared to $1.26 billion, or 7.7% of total assets, as of December 31, 2020. Our unpledged available-for-sale investment securities and federal funds sold were $1.92 billion and $1.39 billion as of June 30, 2021 and December 31, 2020, respectively.

As of June 30, 2021, our investment portfolio was comprised of approximately $1.59 billion, or 52.9%, of securities which mature or are expected to paydown within five years. As of June 30, 2021 and December 31, 2020, $1.13 billion and $1.08 billion, respectively, were pledged to secure public deposits, as collateral for repurchase agreements, and for other purposes required or permitted by law. The Company defines the liquidity ratio as the sum of cash, unpledged securities and federal funds sold divided by total liabilities. The Company’s liquidity ratio was 32.55% as of June 30, 2021 compared to 19.22% as of December 31, 2020.

On the liability side, our principal sources of liquidity are deposits, borrowed funds, and access to capital markets. Customer deposits are our largest sources of funds. As of June 30, 2021, our total deposits were $13.89 billion, or 78.8% of total assets, compared to $12.73 billion, or 77.6% of total assets, as of December 31, 2020. We attract our deposits primarily from individuals, business, and municipalities located in our market areas.

In the event that additional short-term liquidity is needed to temporarily satisfy our liquidity needs, we have established and currently maintain lines of credit with the Federal Reserve Bank (“Federal Reserve”) and First National Bankers Bank to provide short-term borrowings in the form of federal funds purchases. In addition, we maintain lines of credit with two other financial institutions.

As of June 30, 2021 and December 31, 2020, we could have borrowed under these lines of credit up to $429.2 million and $441.8 million, respectively, on a secured basis from the Federal Reserve, up to $30.0 million from First National Bankers’ Bank on an unsecured basis, up to $20.0 million from First National Bankers Bank on a secured basis and up to $45.0 million in the aggregate from other financial institutions on an unsecured basis. The unsecured lines may be terminated by the respective institutions at any time.

The lines of credit we maintain with the FHLB can provide us with both short-term and long-term forms of liquidity on a secured basis. FHLB borrowed funds were $400.0 million at June 30, 2021 and December 31, 2020, respectively. At June 30, 2021 and December 31, 2020, all of the outstanding balances were classified as long-term advances. Our FHLB borrowing capacity was $3.33 billion and $3.32 billion as of June 30, 2021 and December 31, 2020, respectively.

We believe that we have sufficient liquidity to satisfy our current operations.

Market Risk Management. Our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. We do not hold market risk sensitive instruments for trading purposes.

Asset/Liability Management. Our management actively measures and manages interest rate risk. The asset/liability committees of the boards of directors of our holding company and bank subsidiary are also responsible for approving our asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing our interest rate sensitivity position.

One of the tools that our management uses to measure short-term interest rate risk is a net interest income simulation model. This analysis calculates the difference between net interest income forecasted using base market rates and using a rising and a falling interest rate scenario. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and proportionally to the change in market rates, depending on their contracted index. Some loans and investments include the opportunity of prepayment (embedded options), and accordingly the simulation model uses indexes to estimate these prepayments and reinvest their proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.

This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet remains static and that its structure does not change over the course of the year. It does not account for all factors that impact this analysis, including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.

Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased and decreased over twelve months by 200 and 100 basis points, respectively. At June 30, 2021, our net interest margin exposure related to these hypothetical changes in market interest rates was within our current guidelines.

Table 24 presents our sensitivity to net interest income as of June 30, 2021.

Table 24: Sensitivity of Net Interest Income

	Percentage
	Change
Interest Rate Scenario	from Base
Up 200 basis points		13.76	%
Up 100 basis points		7.23
Down 100 basis points		(3.73	)
Down 200 basis points		(7.35	)

Interest Rate Sensitivity. Our primary business is banking and the resulting earnings, primarily net interest income, are susceptible to changes in market interest rates. Management’s goal is to maximize net interest income within acceptable levels of interest rate and liquidity risks.

A key element in the financial performance of financial institutions is the level and type of interest rate risk assumed. The single most significant measure of interest rate risk is the relationship of the repricing periods of earning assets and interest-bearing liabilities. The more closely the repricing periods are correlated, the less interest rate risk we assume. We use repricing gap and simulation modeling as the primary methods in analyzing and managing interest rate risk.

Gap analysis attempts to capture the amounts and timing of balances exposed to changes in interest rates at a given point in time. As of June 30, 2021, our gap position was asset sensitive with a one-year cumulative repricing gap as a percentage of total earning assets of 18.7%. During the COVID-19 pandemic, the Company has participated in the PPP loan program under the CARES Act. The Company had $473.9 million of PPP loans as of June 30, 2021. In addition, total deposits have increased by $1.17 billion, $809.8 million of which were demand and non-interest-bearing deposits, for the six months ended June 30, 2021. This, along with the rise in demand and non-interest-bearing deposits and the resulting increase in cash on hand, has caused an uneven shift in the sensitivity of the repricing gap between short-term assets and liabilities. Although PPP loans have maturities of two years, a large percentage of these loans are anticipated to receive SBA forgiveness and be repaid in advance of stated maturities. The Company feels that funding these loans was both beneficial and necessary for our customers in light of the current economic environment and believes the one-year repricing gap increase is temporary in nature. The Company believes the repricing gap would have been more in line with historical experiences had it not been for the funding of the PPP loans, and the excess liquidity that we have with the Federal Reserve.

We have a portion of our securities portfolio invested in mortgage-backed securities. Mortgage-backed securities are included based on their final maturity date. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Table 25 presents a summary of the repricing schedule of our interest-earning assets and interest-bearing liabilities (gap) as of June 30, 2021.

Table 25: Interest Rate Sensitivity

	Interest Rate Sensitivity Period
	0-30 Days			31-90 Days			91-180 Days			181-365 Days			1-2 Years			2-5 Years			Over 5 Years			Total
	(Dollars in thousands)
Earning assets
Interest-bearing deposits due from banks	$	2,759,027		$	—		$	—		$	—		$	—		$	—		$	—		$	2,759,027
Federal funds sold		—			—			—			—			—			—			—			—
Investment securities		423,821			82,195			101,833			188,558			342,431			734,925			1,179,949			3,053,712
Loans receivable		3,123,311			682,309			931,454			1,563,549			1,658,338			1,917,756			322,458			10,199,175
Total earning assets		6,306,159			764,504			1,033,287			1,752,107			2,000,769			2,652,681			1,502,407			16,011,914
Interest-bearing liabilities
Interest-bearing transaction and savings deposits	$	1,823,269		$	662,232		$	993,348		$	1,986,696		$	1,020,088		$	846,263		$	1,413,004		$	8,744,900
Time deposits		132,516			143,817			309,928			293,958			152,842			36,525			285			1,069,871
Federal funds purchased		—			—			—			—			—			—			—			—
Securities sold under repurchase agreements		150,540			—			—			—			—			—			—			150,540
FHLB and other borrowed funds		—			—			—			—			—			—			400,000			400,000
Subordinated debentures		71,198			—			—			299,509			—			—			—			370,707
Total interest-bearing liabilities		2,177,523			806,049			1,303,276			2,580,163			1,172,930			882,788			1,813,289			10,736,018
Interest rate sensitivity gap	$	4,128,636		$	(41,545	)	$	(269,989	)	$	(828,056	)	$	827,839		$	1,769,893		$	(310,882	)	$	5,275,896
Cumulative interest rate sensitivity gap	$	4,128,636		$	4,087,091		$	3,817,102		$	2,989,046		$	3,816,885		$	5,586,778		$	5,275,896
Cumulative rate sensitive assets to rate sensitive liabilities		289.6	%		237.0	%		189.0	%		143.5	%		147.5	%		162.6	%		149.1	%
Cumulative gap as a % of total earning assets		25.8	%		25.5	%		23.8	%		18.7	%		23.8	%		34.9	%		32.9	%

Item 4:CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and procedures were also effective in ensuring that information required to be disclosed in our Exchange Act report is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2021, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or its subsidiaries are a party or of which any of their property is the subject.

Item 1A: Risk Factors

There were no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2020. See the discussion of our risk factors in the Form 10-K, as filed with the SEC. The risks described are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

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, which was last amended and approved on January 18, 2019. This authorization brought the total amount of authorized shares available to repurchase to 23,843,665 shares. The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:

Period	Number of Shares Purchased		Average Price Paid Per Share Purchased		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs⁽¹⁾
April 1 through April 30, 2021		290,000		26.92		290,000		23,223,665
May 1 through May 31, 2021		160,000		27.21		160,000		23,063,665
June 1 through June 30, 2021		185,000		25.80		185,000		22,878,665
Total		635,000				635,000

(1)

The above described stock repurchase program has no expiration date.

Item 3: Defaults Upon Senior Securities

Not applicable.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

Not applicable.

Item 6: Exhibits

Exhibit No.		Description of Exhibit

3.1		Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)

3.2		Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.2 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)

3.3		Second Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.3 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)

3.4		Third Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.4 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)

3.5		Fourth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 8, 2007)

3.6		Fifth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 4.6 of Home BancShares’s registration statement on Form S-3 (File No. 333-157165))

3.7		Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, filed with the Secretary of State of the State of Arkansas on January 14, 2009 (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K, filed on January 21, 2009)

3.8		Seventh Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K filed on April 19, 2013)

3.9		Eighth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K filed on April 22, 2016)

3.10		Ninth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K filed on April 23, 2019)

3.11		Amended and Restated Bylaws of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K filed on January 28, 2021)

4.1		Specimen Stock Certificate representing Home BancShares, Inc. Common Stock (incorporated by reference to Exhibit 4.6 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)

4.2		Instruments defining the rights of security holders including indentures. Home BancShares hereby agrees to furnish to the SEC upon request copies of instruments defining the rights of holders of long-term debt of Home BancShares and its consolidated subsidiaries. No issuance of debt exceeds ten percent of the assets of Home BancShares and its subsidiaries on a consolidated basis.

15		Awareness of Independent Registered Public Accounting Firm*

31.1		CEO Certification Pursuant Rule 13a-14(a)/15d-14(a)*

31.2		CFO Certification Pursuant Rule 13a-14(a)/15d-14(a)*

32.1		CEO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002*

32.2		CFO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002*

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*

101.SCH		Inline XBRL Taxonomy Extension Schema Document*

101.CAL		InlineXBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document*
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HOME BANCSHARES, INC.

(Registrant)

Date:	August 5, 2021	/s/ John W. Allison
		John W. Allison, Chairman and Chief Executive Officer

Date:	August 5, 2021	/s/ Brian S. Davis
		Brian S. Davis, Chief Financial Officer

Date:	August 5, 2021	/s/ Jennifer C. Floyd
		Jennifer C. Floyd, Chief Accounting Officer