HOME BANCSHARES INC - Quarter Report: 2022 September (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 September 30, 2022


☐			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: 001-41093

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

New York Stock Exchange

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: 203,971,240 shares as of November 3, 2022.

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HOME BANCSHARES, INC. FORM 10-Q September 30, 2022

INDEX

		Page No.
Part I:	Financial Information

Item 1:	Financial Statements

	Consolidated Balance Sheets – September 30, 2022 (Unaudited) and December 31, 2021	4

	Consolidated Statements of Income (Unaudited) – Three and nine months ended September 30, 2022 and 2021	5

	Consolidated Statements of Comprehensive (Loss) Income (Unaudited) – Three and nine months ended September 30, 2022 and 2021	6

	Consolidated Statements of Stockholders’ Equity (Unaudited) – Three and nine months ended September 30, 2022 and 2021	7-8

	Consolidated Statements of Cash Flows (Unaudited) – Nine months ended September 30, 2022 and 2021	9

	Condensed Notes to Consolidated Financial Statements (Unaudited)	10-55

	Report of Independent Registered Public Accounting Firm	56

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	57-96

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	97-98

Item 4:	Controls and Procedures	98

Part II:	Other Information

Item 1:	Legal Proceedings	98

Item 1A:	Risk Factors	98

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	99

Item 3:	Defaults Upon Senior Securities	99

Item 4:	Mine Safety Disclosures	99

Item 5:	Other Information	99

Item 6:	Exhibits	100-101

Signatures		102

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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 prospective or 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 or a decrease in commercial real estate and residential housing values;

•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 credit quality, liquidity, other aspects of our business and our 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;

•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 our recent acquisition of Happy Bancshares, Inc. and its bank subsidiary, as well as any other businesses that we may 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 apply 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;

•changes in governmental monetary and fiscal policies;

•the effects of terrorism and efforts to combat it;

•political instability, war, military conflicts (including the ongoing military conflict between Russia and Ukraine) and other major domestic or international events;

•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;

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•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 24, 2022.

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Home BancShares, Inc.

Consolidated Balance Sheets


(In thousands, except share data)	September 30, 2022		December 31, 2021
	(Unaudited)
Assets
Cash and due from banks	$	268,929	$	119,908
Interest-bearing deposits with other banks	1,311,492		3,530,407
Cash and cash equivalents	1,580,421		3,650,315
Fed funds sold	2,700		—
Investment securities – available-for-sale, net of allowance for credit losses	4,085,102		3,119,807
Investment securities — held-to-maturity, net of allowance for credit losses	1,251,007		—
Total investment securities	5,336,109		3,119,807
Loans receivable	13,829,311		9,836,089
Allowance for credit losses	(289,203)		(236,714)
Loans receivable, net	13,540,108		9,599,375
Bank premises and equipment, net	411,479		275,760
Foreclosed assets held for sale	365		1,630
Cash value of life insurance	212,619		105,135
Accrued interest receivable	88,671		46,736
Deferred tax asset, net	228,979		78,290
Goodwill	1,394,353		973,025
Core deposit intangibles	60,932		25,045
Other assets	300,634		177,020
Total assets	$	23,157,370	$	18,052,138
Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing	$	5,540,539	$	4,127,878
Savings and interest-bearing transaction accounts	11,968,519		9,251,805
Time deposits	1,033,266		880,887
Total deposits	18,542,324		14,260,570
Securities sold under agreements to repurchase	121,555		140,886
FHLB and other borrowed funds	400,000		400,000
Accrued interest payable and other liabilities	192,908		113,868
Subordinated debentures	440,568		371,093
Total liabilities	19,697,355		15,286,417
Stockholders’ equity:
Common stock, par value $0.01; shares authorized 300,000,000 in 2022 and 2021; shares issued and outstanding 204,219,052 in 2022 and 163,699,282 in 2021	2,042		1,637
Capital surplus	2,404,388		1,487,373
Retained earnings	1,361,040		1,266,249
Accumulated other comprehensive (loss) income	(307,455)		10,462
Total stockholders’ equity	3,460,015		2,765,721
Total liabilities and stockholders’ equity	$	23,157,370	$	18,052,138

See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.

Consolidated Statements of Income


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2022		2021		2022		2021
	(Unaudited)
Interest income:
Loans	$	195,841	$	142,609	$	507,062	$	435,210
Investment securities
Taxable	28,273		8,495		58,294		21,933
Tax-exempt	8,069		4,839		20,501		14,815
Deposits – other banks	10,763		1,117		19,001		2,234
Federal funds sold	9		—		13		—
Total interest income	242,955		157,060		604,871		474,192
Interest expense:
Interest on deposits	23,347		5,642		38,970		19,781
Federal funds purchased	—		—		2		—
FHLB and other borrowed funds	1,917		1,917		5,688		5,688
Securities sold under agreements to repurchase	434		102		729		399
Subordinated debentures	4,153		4,788		16,472		14,373
Total interest expense	29,851		12,449		61,861		40,241
Net interest income	213,104		144,611		543,010		433,951
Provision for credit losses on acquired loans	—		—		45,170		—
Provision for credit losses on acquired unfunded commitments	—		—		11,410		—
Provision for credit losses on unfunded commitments	—		—		—		(4,752)
Provision for credit losses on acquired held-to-maturity investment securities	—		—		2,005		—
Total credit loss expense (benefit)	—		—		58,585		(4,752)
Net interest income after credit loss expense (benefit)	213,104		144,611		484,425		438,703
Non-interest income:
Service charges on deposit accounts	10,756		5,941		26,980		16,059
Other service charges and fees	13,951		8,051		34,225		25,318
Trust fees	3,980		479		8,874		1,445
Mortgage lending income	4,179		5,948		14,091		20,317
Insurance commissions	601		586		1,739		1,556
Increase in cash value of life insurance	1,089		509		2,721		1,548
Dividends from FHLB, FRB, FNBB & other	1,741		2,661		6,384		13,916
Gain on sale of SBA loans	58		439		153		1,588
(Loss) gain on sale of branches, equipment and other assets, net	(13)		(34)		5		(86)
Gain on OREO, net	—		246		487		1,266
Gain on securities, net	—		—		—		219
Fair value adjustment for marketable securities	(2,628)		61		(2,304)		7,093
Other income	9,487		4,322		25,096		15,366
Total non-interest income	43,201		29,209		118,451		105,605
Non-interest expense:
Salaries and employee benefits	65,290		42,469		174,636		126,990
Occupancy and equipment	15,133		9,305		38,533		27,584
Data processing expense	8,747		6,024		25,880		17,787
Merger and acquisition expenses	—		1,006		49,594		1,006
Other operating expenses	25,176		16,815		68,081		48,100
Total non-interest expense	114,346		75,619		356,724		221,467
Income before income taxes	141,959		98,201		246,152		322,841
Income tax expense	33,254		23,209		56,577		77,177
Net income	$	108,705	$	74,992	$	189,575	$	245,664
Basic earnings per share	$	0.53	$	0.46	$	0.99	$	1.49
Diluted earnings per share	$	0.53	$	0.46	$	0.99	$	1.49

See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.

Consolidated Statements of Comprehensive (Loss) Income


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2022		2021		2022		2021
	(Unaudited)
Net income	$	108,705	$	74,992	$	189,575	$	245,664
Net unrealized loss on available-for-sale securities	(122,307)		(4,218)		(424,910)		(24,527)
Other comprehensive loss before tax effect	(122,307)		(4,218)		(424,910)		(24,527)
Tax effect on other comprehensive loss	30,757		1,102		106,993		6,410
Other comprehensive loss	(91,550)		(3,116)		(317,917)		(18,117)
Comprehensive income (loss)	$	17,155	$	71,876	$	(128,342)	$	227,547

See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity


Three and Nine Months Ended September 30, 2022
(In thousands, except share data)	Common Stock		Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balances at January 1, 2022	$	1,637	$	1,487,373	$	1,266,249	$	10,462	$	2,765,721
Comprehensive income:
Net income	—		—		64,892		—		64,892
Other comprehensive loss	—		—		—		(115,019)		(115,019)
Net issuance of 15,909 shares of common stock from exercise of stock options	1		129		—		—		130
Repurchase of 180,000 shares of common stock	(2)		(4,087)		—		—		(4,089)
Share-based compensation net issuance of 222,717 shares of restricted common stock	2		2,109		—		—		2,111
Cash dividends – Common Stock, $0.165 per share	—		—		(27,043)		—		(27,043)
Balances at March 31, 2022 (unaudited)	$	1,638	$	1,485,524	$	1,304,098	$	(104,557)	$	2,686,703
Comprehensive income:
Net Income	—		—		15,978		—		15,978
Other comprehensive loss	—		—		—		(111,348)		(111,348)
Net issuance of 1,500 shares of common stock from exercise of stock options	—		26		—		—		26
Issuance of 42,425,352 shares of common stock including approximately $2.5 million in certain stock award settlements and stock issuance costs - Happy Bancshares acquisition	424		960,866		—		—		961,290
Repurchase of 1,032,732 shares of common stock	(10)		(22,482)		—		—		(22,492)
Share-based compensation net issuance of 138,499 shares of restricted common stock	1		2,337		—		—		2,338
Cash dividends – Common Stock, $0.165 per share	—		—		(33,930)		—		(33,930)
Balances at June 30, 2022 (unaudited)	$	2,053	$	2,426,271	$	1,286,146	$	(215,905)	$	3,498,565
Comprehensive income:
Net Income	—		—		108,705		—		108,705
Other comprehensive loss	—		—		—		(91,550)		(91,550)
Net issuance of 1,574 shares of common stock from exercise of stock options	—		—		—		—		—
Repurchase of 1,045,799 shares of common stock	(10)		(24,278)		—		—		(24,288)
Share-based compensation net forfeiture of 27,250 shares of restricted stock	(1)		2,395		—		—		2,394
Cash dividends – Common Stock, $0.165 per share	—		—		(33,811)		—		(33,811)
Balances at September 30, 2022 (unaudited)	$	2,042	$	2,404,388	$	1,361,040	$	(307,455)	$	3,460,015

See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity


For the Three and Nine Months Ended September 30, 2021
(In thousands, except share data)	Common Stock		Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		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 loss	—		—		—		(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 issuance 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
Comprehensive income:
Net income	—		—		74,992		—		74,992
Other comprehensive loss	—		—		—		(3,116)		(3,116)
Repurchase of 476,500 shares of common stock	(5)		(11,274)		—		—		(11,279)
Share-based compensation net forfeiture of 4,000 shares of restricted stock	—		2,247		—		—		2,247
Cash dividends – Common Stock, $0.14 per share	—		—		(22,971)		—		(22,971)
Balances at September 30, 2021 (unaudited)	$	1,640	$	1,492,588	$	1,215,831	$	26,003	$	2,736,062

See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.

Consolidated Statements of Cash Flows


	Nine Months Ended September 30,
(In thousands)	2022		2021
	(Unaudited)
Operating Activities
Net income	$	189,575	$	245,664
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization	23,546		14,457
Decrease (increase) in value of equity securities	2,304		(7,093)
Amortization of securities, net	17,324		21,018
Accretion of purchased loans	(12,844)		(16,150)
Share-based compensation	6,843		6,640
Gain on assets	(645)		(2,987)
Provision for credit losses - acquired loans & unfunded commitments	56,580		—
Provision for credit losses - unfunded commitments	—		(4,752)
Provision for credit losses - acquired held-to-maturity investment securities	2,005		—
Deferred income tax effect	(9,671)		6,936
Increase in cash value of life insurance	(2,721)		(1,548)
Originations of mortgage loans held for sale	(432,589)		(599,787)
Proceeds from sales of mortgage loans held for sale	418,576		632,721
Changes in assets and liabilities:
Accrued interest receivable	(9,945)		11,951
Other assets	(2,170)		3,891
Accrued interest payable and other liabilities	22,999		(9,526)
Net cash provided by operating activities	269,167		301,435
Investing Activities
Net increase in federal funds sold	(2,700)		—
Net (increase) decrease in loans, excluding purchased loans	(84,995)		1,278,846
Purchases of investment securities – available-for-sale	(1,200,812)		(1,227,507)
Purchases of investment securities - held-to-maturity	(636,474)		—
Proceeds from maturities of investment securities – available-for-sale	458,291		487,242
Proceeds from maturities of investment securities – held-to-maturity	500,479		—
Proceeds from sales of investment securities – available-for-sale	—		18,112
Purchases of equity securities	(49,975)		(10,460)
Proceeds from sales of equity securities	13,778		15,354
Purchase of other investments	(38,224)		(7,970)
Proceeds from foreclosed assets held for sale	2,231		6,572
Proceeds from sale of SBA loans	3,745		16,722
Purchases of premises and equipment, net	(4,158)		(8,065)
Return of investment on cash value of life insurance	277		418
Purchase of marine loan portfolio	(242,617)		—
Net cash received - market acquisition	858,943		—
Net cash (used in) provided by investing activities	(422,211)		569,264
Financing Activities
Net (decrease) increase in deposits	(1,573,517)		1,277,581
Net decrease in securities sold under agreements to repurchase	(19,331)		(27,929)

Net decrease in FHLB and other borrowed funds	(78,330)		—
Retirement of subordinated debentures	(300,000)		—
Proceeds from issuance of subordinated debentures	296,324		—
Redemption of trust preferred securities	(96,499)		—
Proceeds from exercise of stock options	156		2,322
Repurchase of common stock	(50,869)		(37,002)

Dividends paid on common stock	(94,784)		(69,203)
Net cash (used in) provided by financing activities	(1,916,850)		1,145,769
Net change in cash and cash equivalents	(2,069,894)		2,016,468
Cash and cash equivalents – beginning of year	3,650,315		1,263,788
Cash and cash equivalents – end of period	$	1,580,421	$	3,280,256

See Condensed Notes to Consolidated Financial Statements.

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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, Texas 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 September 30, 2022 and 2021 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.

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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 2021 Form 10-K, filed with the Securities and Exchange Commission.

Loans Receivable and Allowance for Credit Losses

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, deferred fees or costs on originated loans. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding. Loan origination fees and direct origination costs are capitalized and recognized as adjustments to yield on the related loans.

The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed and 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, national retail sales index, housing price indices and rental vacancy rate index.

The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows:

•1-4 family construction

•All other construction

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

•1-4 family senior liens

•Multifamily

•Owner occupied commercial real estate

•Non-owner occupied commercial real estate

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

•Consumer auto

•Other consumer

•Other consumer - SPF

The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans evaluated individually that are considered to be collateral dependent are not included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. For loans that are not considered to be collateral dependent, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded.

•Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower.

•The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

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Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factors ("Q-Factors") and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) changes in nature and volume of the portfolio; (iii) staff experience; (iv) changes in volume and trends in classified loans, delinquencies and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral values; (vii) external factors such as competition, legal and regulatory environment; (viii) changes in the quality of the loan review system; and (ix) economic conditions.

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

The Company accounts for its acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the purchase 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 or premium and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. An allowance for credit losses is determined using the same methodology as other loans. The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment. These models utilize a peer group benchmark in order to determine the probability of default and loss given default to be used in the calculation. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.

For further discussion of the Company’s acquisitions, see Note 2 to the Condensed Notes to Consolidated Financial Statements.

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.

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Revenue Recognition

Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit, 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.

•Trust fees - The Company enters into contracts with its customers to manage assets for investment, and/or transact on their accounts. The Company generally satisfies its performance obligations as services are rendered. The management fees are percentage based, flat, percentage of income or a fixed percentage calculated upon the average balance of assets depending upon account type. Fees are collected on a monthly or annual basis.

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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands)
Net income	$	108,705	$	74,992	$	189,575	$	245,664
Average shares outstanding	204,829		164,126		191,584		164,717
Effect of common stock options	306		477		357		333
Average diluted shares outstanding	205,135		164,603		191,941		165,050
Basic earnings per share	$	0.53	$	0.46	$	0.99	$	1.49
Diluted earnings per share	$	0.53	$	0.46	$	0.99	$	1.49

2. Business Combinations

Acquisition of Happy Bancshares, Inc.

On April 1, 2022, the Company completed the acquisition of Happy Bancshares, Inc. (“Happy”), and merged Happy State Bank into Centennial Bank. The Company issued approximately 42.4 million shares of its common stock valued at approximately $958.8 million as of April 1, 2022. In addition, the holders of certain Happy stock-based awards received approximately $3.7 million in cash in cancellation of such awards, for a total transaction value of approximately $962.5 million. The acquisition added new markets for expansion and brought complementary businesses together to drive synergies and growth.

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Including the effects of the known purchase accounting adjustments, as of the acquisition date, Happy had approximately $6.69 billion in total assets, $3.65 billion in loans and $5.86 billion in customer deposits. Happy formerly operated its banking business from 62 locations in Texas.

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. The Company will continue to review the estimated fair values of loans, deposits and intangible assets, and to evaluate the assumed tax positions and contingencies.

The Company has determined that the acquisition of the net assets of Happy constitutes a business combination as defined by the ASC Topic 805. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of ASC Topic 820. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The following schedule is a preliminary breakdown of the assets acquired and liabilities assumed as of the acquisition date as adjusted during the measurement period:

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	Happy Bancshares, Inc.
	Acquired from Happy		Fair Value Adjustments		As Recorded by HBI
	(Dollars in thousands)
Assets
Cash and due from banks	$	112,999	$	(87)	$	112,912
Interest-bearing deposits with other banks	746,031		—		746,031
Cash and cash equivalents	859,030		(87)		858,943
Investment securities - available-for-sale, net of allowance for credit losses	1,773,540		8,485		1,782,025

Total investment securities	1,773,540		8,485		1,782,025
Loans receivable	3,657,009		(4,389)		3,652,620
Allowance for credit losses	(42,224)		25,408		(16,816)
Loans receivable, net	3,614,785		21,019		3,635,804
Bank premises and equipment, net	153,642		(6,977)		146,665
Foreclosed assets held for sale	193		(77)		116
Cash value of life insurance	105,049		3		105,052
Accrued interest receivable	31,575		—		31,575
Deferred tax asset, net	32,908		1,117		34,025
Goodwill	130,428		(130,428)		—
Core deposit and other intangibles	10,672		31,591		42,263
Other assets	43,330		7,233		50,563
Total assets acquired	$	6,755,152	$	(68,121)	$	6,687,031
Liabilities
Deposits
Demand and non-interest-bearing	$	1,932,756	$	60	$	1,932,816
Savings and interest-bearing transaction accounts	3,519,652		—		3,519,652
Time deposits	401,899		903		402,802
Total deposits	5,854,307		963		5,855,270

FHLB and other borrowed funds	74,212		4,118		78,330
Accrued interest payable and other liabilities	50,889		(6,258)		44,631
Subordinated debentures	159,965		7,625		167,590
Total liabilities assumed	$	6,139,373	$	6,448	$	6,145,821
Equity
Total equity assumed	615,779		(615,779)		—
Total liabilities and equity assumed	$	6,755,152	$	(609,331)	$	6,145,821
Net assets acquired					541,210
Purchase price					962,538
Goodwill					$	421,328

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The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above:

Cash and due from banks, interest-bearing deposits with other banks and federal funds sold – The carrying amount of these assets was deemed a reasonable estimate of fair value based on the short-term nature of these assets.

Investment securities – Investment securities were acquired from Happy with an approximately $8.5 million adjustment to fair value based upon quoted market prices. Otherwise the book value was deemed to approximate fair value.

Loans – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, whether or not the loan was amortizing and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. See Note 5 to the Condensed Notes to Consolidated Financial Statements, for additional information related to purchased financial assets with credit deterioration.

Bank premises and equipment – Bank premises and equipment were acquired from Happy with a $7.0 million adjustment to fair value. This represents the difference between current appraisals completed in connection with the acquisition and book value acquired.

Foreclosed assets held for sale – These assets are presented at the estimated fair values that management expects to receive when the properties are sold, net of related costs of disposal.

Cash value of life insurance – Bank owned life insurance is carried at its current cash surrender value, which is the most reasonable estimate of fair value.

Accrued interest receivable – The carrying amount of these assets was deemed a reasonable estimate of the fair value.

Core deposit intangible and other intangibles – This core deposit intangible asset represents the value of the relationships that Happy had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits.

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition, equal the amount payable on demand at the acquisition date. The $963,000 fair value adjustment applied for time deposits was because the weighted-average interest rate of Happy’s certificates of deposits were estimated to be below the current market rates.

FHLB borrowed funds – The fair value of FHLB borrowed funds is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.

Accrued interest payable and other liabilities – The fair value adjustment results from certain liabilities whose value was estimated to be more or less than book value, such as certain accounts payable and other miscellaneous liabilities. The carrying amount of accrued interest and the remainder of other liabilities was deemed to be a reasonable estimate of fair value.

Subordinated debentures – The fair value of subordinated debentures is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.

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During the third quarter of 2022, we continued to analyze the valuations assigned to the acquired assets and assumed liabilities and received updated information resulting in the revised fair values displayed below. We updated our estimated fair values of these items within our Consolidated Balance Sheet with a corresponding adjustment to goodwill. The changes are gross of taxes and reflected in the following table:


Acquired Asset or Liability	Balance Sheet Line Item	Provisional Estimate	Revised Estimate	Increase (Decrease)
		(In thousands)
Cash and due from banks	Cash and due from banks	112,867	112,912	45
Loans receivable	Loans receivable	3,652,706	3,652,620	(86)
Bank premises and equipment, net	Bank premises and equipment, net	142,067	146,665	4,598
Deferred tax asset, net	Deferred tax asset, net	35,414	34,025	(1,389)
Equity method investments & other receivables	Other assets	49,752	50,563	811
Goodwill	Goodwill	425,375	421,328	(4,047)
Demand and non-interest bearing deposits	Demand and non-interest bearing deposits	1,932,756	1,932,816	60
Accrued expense	Accrued interest payable and other liabilities	44,759	44,631	(128)

All measurement period adjustments made during third quarter of 2022 have been deemed insignificant individually and in the aggregate. The Company will finalize its valuation of the Happy acquisition within the measurement period (no later than April 1, 2023).

The impact to the income statement resulting from the changes to the estimated fair values was insignificant. We continue to analyze the assumptions and related valuation results associated with the acquired assets and assumed liabilities, and accordingly, the valuations of these assets and liabilities are not final as of September 30, 2022. However, the valuations will be finalized no later than April 1, 2023. As the valuations remain provision and subject to updates, the purchase accounting accretion/amortization are also subject to adjustments.

The unaudited pro-forma combined consolidated financial information presents how the combined financial information of HBI and Happy might have appeared had the businesses actually been combined. The following schedule represents the unaudited pro forma combined financial information as of the three and nine-month periods ended September 30, 2022 and 2021, assuming the acquisition was completed as of January 1, 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands, except per share data)
Total interest income	$	242,955	$	211,405	$	662,273	$	629,548
Total non-interest income	43,201		43,792		131,352		145,277
Net income available to all shareholders	108,705		90,846		291,262		220,499

Basic earnings per common share	$	0.53	$	0.44	$	1.42	$	1.06
Diluted earnings per common share	$	0.53	$	0.44	$	1.41	$	1.06

The unaudited pro-forma consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented and had the impact of possible significant revenue enhancements and expense efficiencies from in-market cost savings, among other factors, been considered and, accordingly, does not attempt to predict or suggest future results. Pro-forma results include Happy merger expenses of $49.6 million, provision for credit losses on acquired loans of $45.2 million, provision for credit losses on acquired unfunded commitments of $11.4 million and provision for credit losses on acquired investment securities of $2.0 million for the nine months ended September 30, 2022 and 2021, respectively. The pro-forma financial information also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during this period.

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Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. For PCD loans, the initial estimate of expected credit losses is recognized in the allowance for credit losses on the date of acquisition using the same methodology as other loans and leases held-for-investment. The following table provides a summary of loans purchased as part of the Happy acquisition with credit deterioration at acquisition:


	April 1, 2022
	(In thousands)
Purchased Loans with Credit Deterioration:
Par value	$	165,028
Allowance for credit losses at acquisition	(16,816)
Premium on acquired loans	684
Purchase price	$	148,896

3. Investment Securities

The following table summarizes the amortized cost and fair value of securities that are classified as available-for-sale and held-to-maturity are as follows:


	September 30, 2022
	Available-for-Sale
	Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	702,009	$	—	$	702,009	$	3,024	$	(23,029)	$	682,004
Residential mortgage-backed securities	1,805,461		—		1,805,461		299		(207,313)		1,598,447
Commercial mortgage-backed securities	361,251		—		361,251		—		(21,023)		340,228
State and political subdivisions	1,033,621		(842)		1,032,779		709		(133,334)		900,154
Other securities	594,369		—		594,369		—		(30,100)		564,269
Total	$	4,496,711	$	(842)	$	4,495,869	$	4,032	$	(414,799)	$	4,085,102


	September 30, 2022
	Held-to-Maturity
	Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	42,950	$	—	$	42,950	$	—	$	(3,092)	$	39,858
Residential mortgage-backed securities	42,920		—		42,920		—		(612)		42,308
Commercial mortgage-backed securities	55,610		—		55,610		—		(923)		54,687
State and political subdivisions	1,111,532		(2,005)		1,109,527		19		(145,241)		964,305

Total	$	1,253,012	$	(2,005)	$	1,251,007	$	19	$	(149,868)	$	1,101,158

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	December 31, 2021
	Available-for-Sale
	Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	433,829	$	—	$	433,829	$	2,375	$	(3,225)	$	432,979
Residential mortgage-backed securities	1,175,185		—		1,175,185		4,085		(18,551)		1,160,719
Commercial mortgage-backed securities	372,702		—		372,702		6,521		(1,968)		377,255
State and political subdivisions	973,318		(842)		972,476		26,296		(1,794)		996,978
Other securities	151,449		—		151,449		1,781		(1,354)		151,876
Total	$	3,106,483	$	(842)	$	3,105,641	$	41,058	$	(26,892)	$	3,119,807

On April 1, 2022, the Company completed the acquisition of Happy. Including the effects of the known purchase accounting adjustments, as of the acquisition date, Happy had approximately $1.78 billion in investments, net of purchase accounting adjustments. The Company classified approximately $1.12 billion of investments acquired from Happy as held-to-maturity at the acquisition date.

Assets, principally investment securities, having a carrying value of approximately $2.27 billion and $1.15 billion at September 30, 2022 and December 31, 2021, 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 $121.6 million and $140.9 million at September 30, 2022 and December 31, 2021, respectively.

The amortized cost and estimated fair value of securities classified as available-for-sale and held-to-maturity at September 30, 2022, 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				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Due in one year or less	$	267,369	$	266,669	$	—	$	—
Due after one year through five years	178,033		166,906		4,770		4,531
Due after five years through ten years	473,289		434,042		215,931		193,346
Due after ten years	1,405,700		1,273,224		933,781		806,286
Mortgage - backed securities: Residential	1,805,461		1,598,447		42,920		42,308
Mortgage - backed securities: Commercial	361,251		340,228		55,610		54,687
Other	5,608		5,586		—		—
Total	$	4,496,711	$	4,085,102	$	1,253,012	$	1,101,158

During the three and nine months ended September 30, 2022, no available-for-sale securities were sold.

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

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The following table shows gross unrealized losses and estimated fair value of investment securities classified as available-for-sale and held-to-maturity, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of September 30, 2022 and December 31, 2021.


	September 30, 2022
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Available-for-sale:
U.S. government-sponsored enterprises	$	325,781	$	(5,292)	$	117,320	$	(17,737)	$	443,101	$	(23,029)
Residential mortgage-backed securities	881,787		(60,886)		659,272		(146,427)		1,541,059		(207,313)
Commercial mortgage-backed securities	250,331		(11,866)		74,932		(9,157)		325,263		(21,023)
State and political subdivisions	726,799		(104,506)		109,019		(28,828)		835,818		(133,334)
Other securities	388,583		(24,884)		41,184		(5,216)		429,767		(30,100)
Total	$	2,573,281	$	(207,434)	$	1,001,727	$	(207,365)	$	3,575,008	$	(414,799)
Held-to-maturity:
U.S. government-sponsored enterprises	39,858		(3,092)		—		—		39,858		(3,092)
State and political subdivisions	957,918		(145,241)		—		—		957,918		(145,241)
Residential mortgage-backed securities	14,973		(612)		—		—		14,973		(612)
Commercial mortgage-backed securities	16,513		(923)		—		—		16,513		(923)
Total	$	1,029,262	$	(149,868)	$	—	$	—	$	1,029,262	$	(149,868)


	December 31, 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	$	120,730	$	(1,356)	$	78,124	$	(1,869)	$	198,854	$	(3,225)
Residential mortgage-backed securities	854,807		(15,246)		104,897		(3,305)		959,704		(18,551)
Commercial mortgage-backed securities	100,702		(1,251)		28,711		(717)		129,413		(1,968)
State and political subdivisions	136,135		(1,282)		18,647		(512)		154,782		(1,794)
Other securities	75,744		(1,316)		2,703		(38)		78,447		(1,354)
Total	$	1,288,118	$	(20,451)	$	233,082	$	(6,441)	$	1,521,200	$	(26,892)

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 if it 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.

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The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.11 billion, or 88.7% are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S government-sponsored enterprises and mortgage-backed securities all of which are guaranteed by the U.S. government. Due to the inherent low risk in these U.S. government guaranteed securities, no provision for credit loss was established on this portion of the portfolio.

At September 30, 2022, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainty, was adequate for the available-for-sale investment portfolio, and the allowance for credit losses for the held-to-maturity portfolio was considered adequate. No additional provision for credit losses was considered necessary for the portfolio.


Available-for-Sale Investment Securities
	September 30, 2022		December 31, 2021
	(In thousands)
Allowance for credit losses:
Beginning balance	$	842	$	842
Provision for credit loss	—		—
Balance, September 30	$	842	$	842
Provision for credit loss			—
Balance, December 31, 2021			$	842


Held-to-Maturity Investment Securities
	September 30, 2022				December 31, 2021
	State and Political Subdivisions		Other Securities		State and Political Subdivisions		Other Securities
Allowance for credit losses:	(In thousands)
Beginning balance	$	—	$	—	$	—	$	—
Provision for credit loss - acquired securities	(2,005)		—		—		—
Securities charged-off	—		—		—		—
Recoveries	—		—		—		—
Balance, September 30, 2022	$	(2,005)	$	—	$	—	$	—

For the nine months ended September 30, 2022, the Company had available-for-sale investment securities with approximately $207.4 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 31.7% of the principal balance from the Company’s investment portfolio will mature or are expected to pay down within five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.

As of September 30, 2022, the Company's available-for-sale securities portfolio consisted of 1,659 investment securities, 1,439 of which were in an unrealized loss position. As noted in the table above, the total amount of the unrealized loss was $414.8 million. The U.S. government-sponsored enterprises portfolio contained unrealized losses of $23.0 million on 63 securities. The residential mortgage-backed securities portfolio contained $207.3 million of unrealized losses on 592 securities, and the commercial mortgage-backed securities portfolio contained $21.0 million of unrealized losses on 151 securities. The state and political subdivisions portfolio contained $133.3 million of unrealized losses on 533 securities. In addition, the other securities portfolio contained $30.1 million of unrealized losses on 100 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. Because the decline in market value was attributable to changes in interest rates and not credit quality, and because 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, the Company has determined that an additional provision for credit losses is not necessary as of September 30, 2022.

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As of September 30, 2022, the Company's held-to-maturity securities portfolio consisted of 501 investment securities, 487 of which were in an unrealized loss position. As noted in the table above, the total amount of the unrealized loss was $149.9 million. The U.S. government-sponsored enterprises portfolio contained unrealized losses of $3.1 million on 5 securities. The state and political subdivisions portfolio contained $145.2 million of unrealized losses on 477 securities. The residential mortgage-backed securities portfolio contained 612,000 of unrealized losses on 3 securities, and the commercial mortgage-backed securities portfolio contained 923,000 of unrealized losses on 2 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. Because the decline in market value was attributable to changes in interest rates and not credit quality, the Company has determined that an additional provision for credit losses is not necessary as of September 30, 2022.

The following table summarizes bond ratings for the Company’s held-to-maturity portfolio, based upon amortized cost, issued by state and political subdivisions and other securities as of September 30, 2022:


	State and Political Subdivisions		Other Securities		Total
	(In thousands)
Aaa/AAA	$	233,398	$	42,950	$	276,348
Aa/AA	846,155		—		846,155
A	30,381		—		30,381
Baa/BBB	—		—		—
Not rated	1,598		—		1,598
Agency Backed	—		98,530		98,530
Total	$	1,111,532	$	141,480	$	1,253,012

Income earned on securities for the three and nine months ended September 30, 2022 and 2021, is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands)
Taxable
Available-for-sale	$	21,873	$	8,495	$	45,110	$	21,933
Held-to-maturity	6,400		—		13,184		—
Non-taxable
Available-for-sale	5,002		4,839		14,461		14,815
Held-to-maturity	3,067		—		6,040		—
Total	$	36,342	$	13,334	$	78,795	$	36,748

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4. Loans Receivable

The various categories of loans receivable are summarized as follows:


	September 30, 2022		December 31, 2021
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	5,156,438	$	3,889,284
Construction/land development	2,232,906		1,850,050
Agricultural	330,748		130,674
Residential real estate loans
Residential 1-4 family	1,704,850		1,274,953
Multifamily residential	525,110		280,837
Total real estate	9,950,052		7,425,798
Consumer	1,120,250		825,519
Commercial and industrial	2,268,750		1,386,747
Agricultural	313,693		43,920
Other	176,566		154,105
Total loans receivable	13,829,311		9,836,089
Allowance for credit losses	(289,203)		(236,714)
Loans receivable, net	$	13,540,108	$	9,599,375

During the three months ended September 30, 2022, the Company sold $826,524 of the guaranteed portions of certain SBA loans, which resulted in a gain of approximately $58,000. During the nine months ended September 30, 2022, the Company sold $3.6 million of the guaranteed portions of certain SBA loans, which resulted in a gain of approximately $153,000. During the three months ended September 30, 2021, the Company sold $3.9 million guaranteed portions of certain SBA loans, which resulted in a gain of $439,000. During the nine months ended September 30, 2021, the Company sold $15.0 million of the guaranteed portions of certain SBA loans, which resulted in a gain of approximately $1.6 million.

Mortgage loans held for sale of approximately $86.7 million and $72.7 million at September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021 were not material.

Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. An allowance for credit losses is determined using the same methodology as other loans. The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. The Company held approximately $146.0 million and $448,000 in PCD loans, as of September 30, 2022 and December 31, 2021, respectively. This balance, as of September 30, 2022, consisted of $145.5 million resulting from the acquisition of Happy and $422,000 from the acquisition of LH-Finance.

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A description of our accounting policies for loans, impaired loans and non-accrual loans are set forth in our 2021 Form 10-K filed with the SEC on February 24, 2022.

5. Allowance for Credit Losses, Credit Quality and Other

The Company uses the discounted cash flow (“DCF”) method to estimate expected losses for all of the 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.

Management qualitatively adjusts model results for risk factors ("Q-Factors") that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factors and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) changes in nature and volume of the portfolio; (iii) staff experience; (iv) changes in volume and trends in classified loans, delinquencies and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral values; (vii) external factors such as competition, legal and regulatory environment; (viii) changes in the quality of the loan review system; and (ix) economic conditions.

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 during the second quarter of 2022, management determined the previously selected economic factors for the various loss driver segments were appropriate and no changes were necessary. The identified loss drivers by segment are included below as of both September 30, 2022 and December 31, 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, 10, 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.

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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. 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 the 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. The Company completed the acquisition of Happy on April 1, 2022. As a result, the Company recorded $4.4 million in net loan discounts and a $16.8 million increase in the allowance for credit losses related to PCD loans. In addition, the Company recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count" and an $11.4 million provision for credit losses on acquired unfunded commitments.

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The following table presents the activity in the allowance for credit losses for the three and nine months ended September 30, 2022:


	Three Months Ended September 30, 2022
	Construction/ Land Development		Other Commercial Real Estate		Residential Real Estate		Commercial & Industrial		Consumer & Other		Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	36,689	$	115,195	$	51,146	$	68,309	$	22,928	$	294,267

Loans charged off	(11)		—		(48)		(4,536)		(1,718)		(6,313)
Recoveries of loans previously charged off	8		778		45		189		229		1,249
Net loans recovered (charged off)	(3)		778		(3)		(4,347)		(1,489)		(5,064)

Provision for credit losses	(1,999)		(23,560)		(1,322)		25,459		1,422		—
Balance, September 30	$	34,687	$	92,413	$	49,821	$	89,421	$	22,861	$	289,203


	Nine Months Ended September 30, 2022
	Construction/ Land Development		Other Commercial Real Estate		Residential Real Estate		Commercial & Industrial		Consumer & Other		Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	28,415	$	87,218	$	48,458	$	53,062	$	19,561	$	236,714
Allowance for credit losses on PCD loans - Happy acquisition	950		9,283		980		5,596		7		16,816
Loans charged off	(11)		—		(337)		(5,952)		(5,588)		(11,888)
Recoveries of loans previously charged off	325		856		94		519		597		2,391
Net loans recovered (charged off)	314		856		(243)		(5,433)		(4,991)		(9,497)
Provision for credit losses - acquired loans	7,205		18,711		7,380		11,303		571		45,170
Provision for credit losses	(2,197)		(23,655)		(6,754)		24,893		7,713		—
Balance, September 30	$	34,687	$	92,413	$	49,821	$	89,421	$	22,861	$	289,203

The following table presents the activity in the allowance for credit losses for the three and nine-months ended September 30, 2021 and the year ended December 31, 2021:


	Three Months Ended September 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	$	22,145	$	93,127	$	51,182	$	52,282	$	21,715	$	240,451
Loans charged off	—		(9)		(220)		(1,682)		(558)		(2,469)
Recoveries of loans previously charged off	8		44		388		80		171		691
Net loans recovered (charged off)	8		35		168		(1,602)		(387)		(1,778)
Provision for credit losses	3,830		(4,664)		(447)		1,922		(641)		—
Balance, September 30	$	25,983	$	88,498	$	50,903	$	52,602	$	20,687	$	238,673

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	Nine Months Ended September 30, 2021 and Year Ended December 31, 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	—		(646)		(543)		(5,892)		(1,458)		(8,539)
Recoveries of loans previously charged off	47		112		554		382		644		1,739
Net loans recovered (charged off)	47		(534)		11		(5,510)		(814)		(6,800)
Provision for credit loss - loans	(6,925)		579		(2,324)		11,582		(2,912)		—
Balance, September 30	25,983		88,498		50,903		52,602		20,687		238,673
Loans charged off	—		—		(2)		(2,350)		(770)		(3,122)
Recoveries of loans previously charged off	11		673		129		209		141		1,163
Net loans recovered (charged off)	11		673		127		(2,141)		(629)		(1,959)
Provision for credit loss - loans	2,421		(1,953)		(2,572)		2,601		(497)		—
Balance, December 31	$	28,415	$	87,218	$	48,458	$	53,062	$	19,561	$	236,714

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	Nonaccrual		Nonaccrual with Reserve		Loans Past Due Over 90 Days Still Accruing
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	18,621	$	8,341	$	290
Construction/land development	1,895		—		34
Agricultural	772		—		—
Residential real estate loans
Residential 1-4 family	16,549		—		1,445
Multifamily residential	156		—		—
Total real estate	37,993		8,341		1,769
Consumer	1,778		—		15
Commercial and industrial	16,431		—		2,901
Agricultural & other	594		—		213
Total	$	56,796	$	8,341	$	4,898

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	December 31, 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	$	11,923	$	2,212	$	2,225
Construction/land development	1,445		—		—
Agricultural	897		—		—
Residential real estate loans
Residential 1-4 family	16,198		3,000		701
Multifamily residential	156		—		—
Total real estate	30,619		5,212		2,926
Consumer	1,648		—		2
Commercial and industrial	13,875		4,018		107
Agricultural & other	1,016		—		—
Total	$	47,158	$	9,230	$	3,035

The Company had $56.8 million and $47.2 million in nonaccrual loans for the periods ended September 30, 2022 and December 31, 2021, respectively. In addition, the Company had $4.9 million and $3.0 million in loans past due 90 days or more and still accruing for the periods ended September 30, 2022 and December 31, 2021, respectively.

The Company had $8.3 million and $9.2 million in nonaccrual loans with a specific reserve as of September 30, 2022 and December 31, 2021, respectively. The Company did not recognize any interest income on nonaccrual loans during the period ended September 30, 2022 or September 30, 2021.

The following table presents the amortized cost basis of collateral-dependent impaired loans by class of loans as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	Commercial Real Estate		Residential Real Estate		Other
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	168,432	$	—	$	—
Construction/land development	1,928		—		—
Agricultural	772		—		—
Residential real estate loans
Residential 1-4 family	—		19,268		—
Multifamily residential	—		4,275		—
Total real estate	171,132		23,543		—
Consumer	—		—		1,804
Commercial and industrial	—		—		31,631
Agricultural & other	—		—		1,229
Total	$	171,132	$	23,543	$	34,664

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	December 31, 2021
	Commercial Real Estate		Residential Real Estate		Other
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	283,919	$	—	$	—
Construction/land development	4,775		—		—
Agricultural	897		—		—
Residential real estate loans
Residential 1-4 family	—		19,775		—
Multifamily residential	—		1,300		—
Total real estate	289,591		21,075		—
Consumer	—		—		1,663
Commercial and industrial	—		—		18,193
Agricultural & other	—		—		1,016
Total	$	289,591	$	21,075	$	20,872

The Company had $229.3 million and $331.5 million in collateral-dependent impaired loans for the periods ended September 30, 2022 and December 31, 2021, respectively.

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral-dependent impaired loans, excluding assisted living loans which are evaluated using a market price valuation methodology, 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.

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The following is an aging analysis for loans receivable as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	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	$	16,357	$	2,084	$	18,911	$	37,352	$	5,119,086	$	5,156,438	$	290
Construction/land development	745		226		1,929		2,900		2,230,006		2,232,906		34
Agricultural	169		331		772		1,272		329,476		330,748		—
Residential real estate loans
Residential 1-4 family	2,583		6,296		17,994		26,873		1,677,977		1,704,850		1,445
Multifamily residential	738		—		156		894		524,216		525,110		—
Total real estate	20,592		8,937		39,762		69,291		9,880,761		9,950,052		1,769
Consumer	1,528		222		1,793		3,543		1,116,707		1,120,250		15
Commercial and industrial	4,199		5,209		19,332		28,740		2,240,010		2,268,750		2,901
Agricultural & other	1,864		42		807		2,713		487,546		490,259		213
Total	$	28,183	$	14,410	$	61,694	$	104,287	$	13,725,024	$	13,829,311	$	4,898


	December 31, 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	$	1,434	$	576	$	14,148	$	16,158	$	3,873,126	$	3,889,284	$	2,225
Construction/land development	92		22		1,445		1,559		1,848,491		1,850,050		—
Agricultural	—		472		897		1,369		129,305		130,674		—
Residential real estate loans
Residential 1-4 family	1,633		3,560		16,899		22,092		1,252,861		1,274,953		701
Multifamily residential	—		—		156		156		280,681		280,837		—
Total real estate	3,159		4,630		33,545		41,334		7,384,464		7,425,798		2,926
Consumer	60		205		1,650		1,915		823,604		825,519		2
Commercial and industrial	958		316		13,982		15,256		1,371,491		1,386,747		107
Agricultural and other	587		2		1,016		1,605		196,420		198,025		—
Total	$	4,764	$	5,153	$	50,193	$	60,110	$	9,775,979	$	9,836,089	$	3,035

Non-accruing loans at September 30, 2022 and December 31, 2021 were $56.8 million and $47.2 million, respectively.

Interest recognized on impaired loans, including those loans with a specific reserve, during the three and nine months ended September 30, 2022 was approximately $2.8 million and $8.2 million, respectively. Interest recognized on impaired loans, including those loans with a specific reserve, during the three and nine months ended September 30, 2021 was approximately $3.3 million and $9.8 million, respectively. The amount of interest recognized on impaired loans on the cash basis is not materially different than the accrual basis.

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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, Texas, 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.

Table of Contents

Based on the most recent analysis performed, the risk category of loans by class of loans as of September 30, 2022 and December 31, 2021 is as follows:


	September 30, 2022
	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Risk rating 1	$	—	$	—	$	—	$	239	$	—	$	154	$	—	$	393
Risk rating 2	—		—		—		120		—		4,096		—		4,216
Risk rating 3	326,768		520,983		273,891		261,599		338,921		901,012		193,296		2,816,470
Risk rating 4	300,030		335,119		230,462		162,360		334,828		428,104		174,325		1,965,228
Risk rating 5	1,895		—		4,890		14,558		36,406		218,232		95		276,076
Risk rating 6	876		196		10,394		27,350		5,575		49,405		112		93,908
Risk rating 7	147		—		—		—		—		—		—		147
Risk rating 8	—		—		—		—		—		—		—		—
Total non-farm/non-residential	629,716		856,298		519,637		466,226		715,730		1,601,003		367,828		5,156,438
Construction/land development
Risk rating 1	$	—	$	12	$	—	$	—	$	—	$	—	$	—	$	12
Risk rating 2	682		—		—		—		—		216		—		898
Risk rating 3	336,055		303,919		108,525		97,837		22,763		37,966		126,452		1,033,517
Risk rating 4	404,746		498,212		125,985		78,634		14,272		45,042		20,652		1,187,543
Risk rating 5	1,761		—		—		332		—		1,164		—		3,257
Risk rating 6	—		14		125		755		709		6,076		—		7,679
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total construction/land development	743,244		802,157		234,635		177,558		37,744		90,464		147,104		2,232,906
Agricultural
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2	—		2,074		—		—		—		—		—		2,074
Risk rating 3	39,533		42,315		33,486		16,015		10,950		40,385		4,833		187,517
Risk rating 4	21,802		25,791		21,038		14,552		2,822		43,899		4,940		134,844
Risk rating 5	400		—		—		331		—		603		—		1,334
Risk rating 6	—		1,630		2,232		—		—		1,117		—		4,979
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total agricultural	61,735		71,810		56,756		30,898		13,772		86,004		9,773		330,748
Total commercial real estate loans	$	1,434,695	$	1,730,265	$	811,028	$	674,682	$	767,246	$	1,777,471	$	524,705	$	7,720,092
Residential real estate loans
Residential 1-4 family
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	117	$	36	$	153
Risk rating 2	—		—		—		—		—		54		108,286		108,340
Risk rating 3	286,537		252,191		183,157		112,297		101,389		331,731		64,516		1,331,818
Risk rating 4	33,876		39,168		62,626		11,561		18,702		63,964		345		230,242
Risk rating 5	825		—		—		3,064		415		1,536		1,392		7,232
Risk rating 6	245		2,482		2,943		4,344		1,954		14,948		—		26,916
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		148		—		—		1		—		149
Total residential 1-4 family	321,483		293,841		248,874		131,266		122,460		412,351		174,575		1,704,850

Table of Contents


	September 30, 2022
	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Multifamily residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2	—		—		—		—		—		—		—		—
Risk rating 3	37,574		15,929		14,229		14,080		14,051		54,479		39,356		189,698
Risk rating 4	36,695		92,839		145,561		20,945		12,010		13,530		24		321,604
Risk rating 5	—		—		—		—		3,162		7,936		—		11,098
Risk rating 6	—		—		—		738		—		1,816		—		2,554
Risk rating 7	—		—		—		—		—		156		—		156
Risk rating 8	—		—		—		—		—		—		—		—
Total multifamily residential	74,269		108,768		159,790		35,763		29,223		77,917		39,380		525,110
Total real estate	$	1,830,447	$	2,132,874	$	1,219,692	$	841,711	$	918,929	$	2,267,739	$	738,660	$	9,950,052
Consumer
Risk rating 1	$	4,996	$	4,500	$	1,302	$	760	$	612	$	1,250	$	1,453	$	14,873
Risk rating 2	—		—		—		200		622		—		—		822
Risk rating 3	203,762		296,512		167,387		137,420		124,442		143,068		10,484		1,083,075
Risk rating 4	12,740		1,671		455		1,664		490		1,888		72		18,980
Risk rating 5	14		12		109		—		10		374		17		536
Risk rating 6	113		93		111		170		8		1,389		—		1,884
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		2		1		—		77		—		80
Total consumer	221,625		302,788		169,366		140,215		126,184		148,046		12,026		1,120,250
Commercial and industrial
Risk rating 1	$	1,145	$	11,993	$	283	$	284	$	25	$	21,561	$	8,410	$	43,701
Risk rating 2	734		309		29		198		—		227		626		2,123
Risk rating 3	223,596		140,093		81,114		74,943		61,724		94,954		291,151		967,575
Risk rating 4	142,731		223,367		71,312		112,569		83,835		50,257		494,761		1,178,832
Risk rating 5	421		9,600		2,050		356		7,211		9,230		621		29,489
Risk rating 6	871		1,266		11,278		4,299		5,237		10,062		4,965		37,978
Risk rating 7	—		—		1,061		—		7,742		249		—		9,052
Risk rating 8	—		—		—		—		—		—		—		—
Total commercial and industrial	369,498		386,628		167,127		192,649		165,774		186,540		800,534		2,268,750
Agricultural and other
Risk rating 1	$	135	$	267	$	115	$	—	$	—	$	5	$	710	$	1,232
Risk rating 2	16		78		—		2,338		34		152		2,138		4,756
Risk rating 3	99,036		38,861		31,404		5,404		9,205		47,816		136,353		368,079
Risk rating 4	9,780		12,561		3,550		13,123		1,925		11,268		60,585		112,792
Risk rating 5	—		8		204		—		—		740		1,278		2,230
Risk rating 6	—		61		157		32		304		602		14		1,170
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total agricultural and other	108,967		51,836		35,430		20,897		11,468		60,583		201,078		490,259
Total	$	2,530,537	$	2,874,126	$	1,591,615	$	1,195,472	$	1,222,355	$	2,662,908	$	1,752,298	$	13,829,311

Table of Contents


	December 31, 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	—		—		—		—		—		—		—		—
Risk rating 3	284,127		281,982		266,990		341,642		195,301		891,035		194,640		2,455,717
Risk rating 4	111,697		32,788		115,989		301,520		90,747		345,254		90,028		1,088,023
Risk rating 5	—		10,930		2,239		23,117		49,926		189,038		—		275,250
Risk rating 6	—		—		23,723		2,224		11,751		32,372		224		70,294
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total non-farm/non-residential	395,824		325,700		408,941		668,503		347,725		1,457,699		284,892		3,889,284
Construction/land development
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2	—		—		—		—		—		231		—		231
Risk rating 3	301,719		183,715		108,491		23,574		13,760		41,860		149,433		822,552
Risk rating 4	226,230		217,267		448,899		33,617		45,679		38,122		7,297		1,017,111
Risk rating 5	—		—		388		—		—		1,174		176		1,738
Risk rating 6	—		134		825		3		—		7,456		—		8,418
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total construction/land development	527,949		401,116		558,603		57,194		59,439		88,843		156,906		1,850,050
Agricultural
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2	—		—		—		—		—		—		—		—
Risk rating 3	21,480		27,931		7,768		6,564		5,103		21,689		7,026		97,561
Risk rating 4	4,305		964		365		970		655		22,143		2,065		31,467
Risk rating 5	—		166		—		—		—		—		—		166
Risk rating 6	—		44		—		—		—		1,436		—		1,480
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total agricultural	25,785		29,105		8,133		7,534		5,758		45,268		9,091		130,674
Total commercial real estate loans	$	949,558	$	755,921	$	975,677	$	733,231	$	412,922	$	1,591,810	$	450,889	$	5,870,008
Residential real estate loans
Residential 1-4 family
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	76	$	89	$	165
Risk rating 2	—		—		—		—		—		29		—		29
Risk rating 3	210,970		147,523		119,861		94,848		82,474		296,687		85,836		1,038,199
Risk rating 4	8,885		3,397		56,839		16,887		21,874		53,578		36,642		198,102
Risk rating 5	—		—		3,065		1,220		582		1,366		193		6,426
Risk rating 6	1,136		2,252		2,432		2,063		1,263		16,305		6,580		32,031
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		1		—		1
Total residential 1-4 family	220,991		153,172		182,197		115,018		106,193		368,042		129,340		1,274,953

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	December 31, 2021
	Term Loans Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Multifamily residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2	—		—		—		—		—		—		—		—
Risk rating 3	11,898		5,211		34,492		17,375		9,430		43,804		3,583		125,793
Risk rating 4	3,755		44,294		30,060		3,412		2,981		18,805		33,723		137,030
Risk rating 5	—		—		—		7,591		8,105		—		—		15,696
Risk rating 6	—		—		—		—		890		1,428		—		2,318
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total multifamily residential	15,653		49,505		64,552		28,378		21,406		64,037		37,306		280,837
Total real estate	$	1,186,202	$	958,598	$	1,222,426	$	876,627	$	540,521	$	2,023,889	$	617,535	$	7,425,798
Consumer
Risk rating 1	$	4,441	$	1,799	$	1,237	$	920	$	226	$	1,383	$	1,893	$	11,899
Risk rating 2	—		—		45		639		—		8		—		692
Risk rating 3	221,986		173,511		132,148		109,810		67,992		92,076		1,098		798,621
Risk rating 4	3,547		923		2,944		1,776		158		2,641		79		12,068
Risk rating 5	—		116		—		15		—		131		—		262
Risk rating 6	69		34		39		117		—		1,711		7		1,977
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total consumer	230,043		176,383		136,413		113,277		68,376		97,950		3,077		825,519
Commercial and industrial
Risk rating 1	$	99,579	$	12,752	$	350	$	118	$	102	$	21,436	$	9,851	$	144,188
Risk rating 2	175		16		—		—		66		276		168		701
Risk rating 3	125,071		59,056		77,130		67,944		34,733		42,905		145,247		552,086
Risk rating 4	244,927		35,350		89,558		91,840		23,616		34,566		88,750		608,607
Risk rating 5	6,185		609		480		8,258		5,712		2,851		582		24,677
Risk rating 6	492		15,377		5,913		24,941		5,477		2,233		342		54,775
Risk rating 7	—		—		—		1,696		—		—		—		1,696
Risk rating 8	—		—		—		—		—		16		1		17
Total commercial and industrial	476,429		123,160		173,431		194,797		69,706		104,283		244,941		1,386,747
Agricultural and other
Risk rating 1	$	5,042	$	—	$	40	$	—	$	—	$	110	$	552	$	5,744
Risk rating 2	—		—		3,467		—		—		909		983		5,359
Risk rating 3	54,534		44,030		5,158		7,092		2,009		46,570		8,750		168,143
Risk rating 4	1,544		218		154		1,590		1,226		1,224		10,842		16,798
Risk rating 5	—		—		—		—		—		1,297		—		1,297
Risk rating 6	53		—		23		13		33		562		—		684
Risk rating 7	—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—
Total agricultural and other	61,173		44,248		8,842		8,695		3,268		50,672		21,127		198,025
Total	$	1,953,847	$	1,302,389	$	1,541,112	$	1,193,396	$	681,871	$	2,276,794	$	886,680	$	9,836,089

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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 September 30, 2022 and December 31, 2021.


	September 30, 2022
	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Performing	$	629,716	$	856,298	$	514,747	$	440,000	$	711,405	$	1,468,064	$	367,776	$	4,988,006
Non-performing	—		—		4,890		26,226		4,325		132,939		52		168,432
Total non-farm/non-residential	629,716		856,298		519,637		466,226		715,730		1,601,003		367,828		5,156,438
Construction/land development
Performing	$	743,244	$	802,143	$	234,460	$	176,959	$	36,886	$	90,182	$	147,104	$	2,230,978
Non-performing	—		14		175		599		858		282		—		1,928
Total construction/ land development	743,244		802,157		234,635		177,558		37,744		90,464		147,104		2,232,906
Agricultural
Performing	$	61,735	$	71,810	$	56,189	$	30,898	$	13,772	$	85,799	$	9,773	$	329,976
Non-performing	—		—		567		—		—		205		—		772
Total agricultural	61,735		71,810		56,756		30,898		13,772		86,004		9,773		330,748
Total commercial real estate loans	$	1,434,695	$	1,730,265	$	811,028	$	674,682	$	767,246	$	1,777,471	$	524,705	$	7,720,092
Residential real estate loans
Residential 1-4 family
Performing	$	321,236	$	291,693	$	246,007	$	127,719	$	120,756	$	404,001	$	174,170	$	1,685,582
Non-performing	247		2,148		2,867		3,547		1,704		8,350		405		19,268
Total residential 1-4 family	321,483		293,841		248,874		131,266		122,460		412,351		174,575		1,704,850
Multifamily residential
Performing	$	74,269	$	108,768	$	159,790	$	35,763	$	26,061	$	76,804	$	39,380	$	520,835
Non-performing	—		—		—		—		3,162		1,113		—		4,275
Total multifamily residential	74,269		108,768		159,790		35,763		29,223		77,917		39,380		525,110
Total real estate	$	1,830,447	$	2,132,874	$	1,219,692	$	841,711	$	918,929	$	2,267,739	$	738,660	$	9,950,052
Consumer
Performing	$	221,525	$	302,713	$	169,266	$	140,065	$	126,157	$	146,711	$	12,009	$	1,118,446
Non-performing	100		75		100		150		27		1,335		17		1,804
Total consumer	221,625		302,788		169,366		140,215		126,184		148,046		12,026		1,120,250
Commercial and industrial
Performing	$	368,767	$	384,257	$	162,938	$	188,867	$	152,608	$	182,885	$	796,797	$	2,237,119
Non-performing	731		2,371		4,189		3,782		13,166		3,655		3,737		31,631
Total commercial and industrial	369,498		386,628		167,127		192,649		165,774		186,540		800,534		2,268,750
Agricultural and other
Performing	$	108,967	$	51,836	$	35,370	$	20,865	$	11,468	$	59,996	$	200,528	$	489,030
Non-performing	—		—		60		32		—		587		550		1,229
Total agricultural and other	108,967		51,836		35,430		20,897		11,468		60,583		201,078		490,259
Total	$	2,530,537	$	2,874,126	$	1,591,615	$	1,195,472	$	1,222,355	$	2,662,908	$	1,752,298	$	13,829,311

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	December 31, 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	$	395,824	$	315,447	$	394,061	$	648,351	$	298,086	$	1,268,731	$	284,865	$	3,605,365
Non-performing	—		10,253		14,880		20,152		49,639		188,968		27		283,919
Total non-farm/non-residential	395,824		325,700		408,941		668,503		347,725		1,457,699		284,892		3,889,284
Construction/land development
Performing	$	527,949	$	400,982	$	557,778	$	57,024	$	59,439	$	85,197	$	156,906	$	1,845,275
Non-performing	—		134		825		170		—		3,646		—		4,775
Total construction/land development	527,949		401,116		558,603		57,194		59,439		88,843		156,906		1,850,050
Agricultural
Performing	$	25,785	$	28,939	$	8,133	$	7,534	$	5,758	$	44,537	$	9,091	$	129,777
Non-performing	—		166		—		—		—		731		—		897
Total agricultural	25,785		29,105		8,133		7,534		5,758		45,268		9,091		130,674
Total commercial real estate loans	$	949,558	$	755,921	$	975,677	$	733,231	$	412,922	$	1,591,810	$	450,889	$	5,870,008
Residential real estate loans
Residential 1-4 family
Performing	$	220,380	$	151,459	$	180,113	$	113,845	$	105,129	$	360,700	$	123,552	$	1,255,178
Non-performing	611		1,713		2,084		1,173		1,064		7,342		5,788		19,775
Total residential 1-4 family	220,991		153,172		182,197		115,018		106,193		368,042		129,340		1,274,953
Multifamily residential
Performing	$	15,653	$	49,505	$	64,552	$	28,378	$	21,406	$	62,737	$	37,306	$	279,537
Non-performing	—		—		—		—		—		1,300		—		1,300
Total multifamily residential	15,653		49,505		64,552		28,378		21,406		64,037		37,306		280,837
Total real estate	$	1,186,202	$	958,598	$	1,222,426	$	876,627	$	540,521	$	2,023,889	$	617,535	$	7,425,798
Consumer
Performing	$	229,986	$	176,355	$	136,403	$	113,160	$	68,376	$	96,506	$	3,070	$	823,856
Non-performing	57		28		10		117		—		1,444		7		1,663
Total consumer	230,043		176,383		136,413		113,277		68,376		97,950		3,077		825,519
Commercial and industrial
Performing	$	476,424	$	122,999	$	168,984	$	185,569	$	66,928	$	103,391	$	244,259	$	1,368,554
Non-performing	5		161		4,447		9,228		2,778		892		682		18,193
Total commercial and industrial	476,429		123,160		173,431		194,797		69,706		104,283		244,941		1,386,747
Agricultural and other
Performing	$	61,173	$	44,248	$	8,819	$	8,682	$	3,235	$	49,725	$	21,127	$	197,009
Non-performing	—		—		23		13		33		947		—		1,016
Total agricultural and other	61,173		44,248		8,842		8,695		3,268		50,672		21,127		198,025
Total	$	1,953,847	$	1,302,389	$	1,541,112	$	1,193,396	$	681,871	$	2,276,794	$	886,680	$	9,836,089

The Company had approximately $17.6 million or 136 total revolving loans convert to term loans for the nine months ended September 30, 2022 compared to $27.8 million or 201 total revolving loans convert to term loans for the nine months ended September 30, 2021. These loans were considered immaterial for vintage disclosure inclusion.

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The following is a presentation of troubled debt restructurings (“TDRs”) by class as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	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	12	$	6,444	$	3,203	$	601	$	438	$	4,242
Construction/land development	1	216		193		—		—		193

Residential real estate loans
Residential 1-4 family	14	2,307		814		111		282		1,207
Multifamily residential	1	1,130		957		—		—		957
Total real estate	28	10,097		5,167		712		720		6,599
Consumer	2	18		12		—		1		13
Commercial and industrial	13	3,183		841		60		79		980
Total	43	$	13,298	$	6,020	$	772	$	800	$	7,592


	December 31, 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	12	$	6,119	$	3,581	$	623	$	85	$	4,289
Construction/land development	2	240		210		1		—		211
Agricultural	1	282		262		—		—		262
Residential real estate loans
Residential 1-4 family	15	2,328		844		117		332		1,293
Multifamily residential	1	1,130		1,144		—		—		1,144
Total real estate	31	10,099		6,041		741		417		7,199
Consumer	4	22		13		—		3		16
Commercial and industrial	9	2,353		172		65		74		311
Total	44	$	12,474	$	6,226	$	806	$	494	$	7,526

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The following is a presentation of TDRs on non-accrual status as of September 30, 2022 and December 31, 2021 because they are not in compliance with the modified terms:


	September 30, 2022			December 31, 2021
	Number of Loans	Recorded Balance		Number of Loans	Recorded Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	1	$	5	2	$	7
Construction/land development	1	193		1	210
Agricultural	—	—		1	262
Residential real estate loans
Residential 1-4 family	5	338		5	388
Total real estate	7	536		9	867
Consumer	1	1		3	3
Commercial and industrial	11	897		6	206
Total	19	$	1,434	18	$	1,076

The following is a presentation of total foreclosed assets as of September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	49	$	536
Construction/land development	47		834
Residential real estate loans
Residential 1-4 family	269		260
Total foreclosed assets held for sale	$	365	$	1,630

The Company has purchased loans for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. As of September 30, 2022 and December 31, 2021, the balance of purchase credit deteriorated loans was approximately $146.0 million and $448,000, respectively. This balance, as of September 30, 2022, consisted of $145.5 million resulting from the acquisition of Happy and $422,000 from the acquisition of LH-Finance.

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 September 30, 2022 and December 31, 2021, were as follows:


	September 30, 2022		December 31, 2021
	(In thousands)
Goodwill
Balance, beginning of period	$	973,025	$	973,025
Acquisition of Happy Bancshares	421,328		—
Balance, end of period	$	1,394,353	$	973,025

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	September 30, 2022		December 31, 2021
	(In thousands)
Core Deposit Intangibles
Balance, beginning of period	$	25,045	$	30,728
Acquisition of Happy Bancshares	42,263		—
Amortization expense	(6,376)		(4,262)
Balance, September 30	60,932		26,466
Amortization expense			(1,421)
Balance, end of year			$	25,045

The carrying basis and accumulated amortization of core deposit intangibles at September 30, 2022 and December 31, 2021 were:


	September 30, 2022		December 31, 2021
	(In thousands)
Gross carrying basis	$	128,888	$	86,625
Accumulated amortization	(67,956)		(61,580)
Net carrying amount	$	60,932	$	25,045

Core deposit intangible amortization expense was approximately $2.5 million and $1.4 million for the three months ended September 30, 2022 and 2021, respectively. Core deposit intangible amortization expense was approximately $6.4 million and $4.3 million for the nine months ended September 30, 2022 and 2021, respectively. The Company’s estimated amortization expense of core deposits intangibles for each of the years 2022 through 2026 is approximately: 2022 – $8.9 million; 2023 – $9.7 million; 2024 – $8.5 million; 2025 – $8.1 million; 2026 – $7.8 million.

The carrying amount of the Company’s goodwill was $1.39 billion and $973.0 million at September 30, 2022 and December 31, 2021, respectively. 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 September 30, 2022 and December 31, 2021, other assets were $300.6 million and $177.0 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 $120.7 million and $88.2 million at September 30, 2022 and December 31, 2021, 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 $72.6 million and $36.4 million at September 30, 2022 and December 31, 2021. 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.

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8. Deposits

The aggregate amount of time deposits with a minimum denomination of $250,000 was $303.2 million and $321.6 million at September 30, 2022 and December 31, 2021, respectively. The aggregate amount of time deposits with a minimum denomination of $100,000 was $615.1 million and $537.4 million at September 30, 2022 and December 31, 2021, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $615,000 and $1.7 million for the three months ended September 30, 2022 and 2021, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $2.0 million and $6.1 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022 and December 31, 2021, brokered deposits were $546.6 million and $625.7 million, respectively.

Deposits totaling approximately $2.56 billion and $1.91 billion at September 30, 2022 and December 31, 2021, respectively, were public funds obtained primarily from state and political subdivisions in the United States.

9. Securities Sold Under Agreements to Repurchase

At September 30, 2022 and December 31, 2021, securities sold under agreements to repurchase totaled $121.6 million and $140.9 million, respectively. For the three-month periods ended September 30, 2022 and 2021, securities sold under agreements to repurchase daily weighted-average totaled $126.8 million and $143.9 million, respectively. For the nine-month periods ended September 30, 2022 and 2021, securities sold under agreements to repurchase daily weighted-average totaled $129.1 million and $153.7 million, respectively.

The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2022 and December 31, 2021 is presented in the following table:


	September 30, 2022				December 31, 2021
	Overnight and Continuous		Total		Overnight and Continuous		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	6,968	$	6,968	$	8,433	$	8,433
Mortgage-backed securities	6,076		6,076		7,920		7,920
State and political subdivisions	104,968		104,968		122,173		122,173
Other securities	3,543		3,543		2,360		2,360
Total borrowings	$	121,555	$	121,555	$	140,886	$	140,886

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 September 30, 2022 and December 31, 2021. The Company had no other borrowed funds as of September 30, 2022 or December 31, 2021. At September 30, 2022 all of the outstanding balances were classified as short-term advances as the FHLB has provided notice of their intention to call all of the Company's FHLB borrowed funds within a year due to the low interest rates on the advances. At December 31, 2021, all of the outstanding balances were classified as long-term advances. The FHLB advances mature in 2033 with fixed interest rates ranging from 1.76% to 2.26%. As noted above, 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 $1.09 billion and $1.07 billion at September 30, 2022 and December 31, 2021, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits at September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021 was zero.

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11. Subordinated Debentures

Subordinated debentures at September 30, 2022 consisted of subordinated debt securities and subordinated debentures at December 31, 2021 consisted of subordinated debt securities and guaranteed payments on trust preferred securities, with the following components:


	As of September 30, 2022		As of December 31, 2021
	(In thousands)
Trust preferred securities


Subordinated debentures, issued in 2005, due 2035, floating rate of 2.15% above the three-month LIBOR rate, reset quarterly, currently callable without penalty	—		4,501
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
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
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
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
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	—		5,942
Subordinated debt securities
Subordinated notes, net of issuance costs, issued in 2020, due 2030, fixed rate of 5.50% during the first five years and at a floating rate of 534.5 basis points above the then three-month SOFR rate, reset quarterly, thereafter, callable in 2025 without penalty	143,732		—
Subordinated notes, net of issuance costs, issued in 2022, due 2032, fixed rate of 3.125% during the first five years and at a floating rate of 182 basis points above the then three-month SOFR rate, reset quarterly, thereafter, callable in 2027 without penalty	296,836		—
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	—		299,824
Total	$	440,568	$	371,093

Trust Preferred Securities. On April 1, 2022, the Company acquired $23.2 million in trust preferred securities from Happy which were currently callable without penalty based on the terms of the specific agreements. During the second and third quarters of 2022, the Company redeemed, without penalty, the $23.2 million of the trust preferred securities acquired from Happy. In addition, during the second and third quarters, the Company also redeemed, without penalty, the $73.3 million of trust preferred securities held prior to the Happy acquisition. As a result, the Company no longer holds any trust preferred securities.

Subordinated Debt Securities. On April 1, 2022, the Company acquired $140.0 million of subordinated notes from Happy. These notes have a maturity date of July 31, 2030 and carry a fixed rate of 5.500% for the first five years. Thereafter, the notes bear interest at 3-month Secured Overnight Funding Rate (SOFR) plus 5.345%, resetting quarterly. Interest payments are due semi-annually, and the notes include a right of prepayment without penalty on or after July 31, 2025.

On January 18, 2022, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “2032 Notes”) for net proceeds, after underwriting discounts and issuance costs of approximately $296.4 million. The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. From and including the date of issuance to, but excluding January 30, 2027 or the date of earlier redemption, the 2032 Notes will bear interest at an initial rate of 3.125% per annum, payable in arrears on January 30 and July 30 of each year. From and including January 30, 2027 to, but excluding, the maturity date or earlier redemption, the 2032 Notes will bear interest at a floating rate equal to the Benchmark rate (which is expected to be Three-Month Term SOFR), each as defined in and subject to the provisions of the applicable supplemental indenture for the 2032 Notes, plus 182 basis points, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, commencing on April 30, 2027.

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The Company may, beginning with the interest payment date of January 30, 2027, and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior to January 30, 2027, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.

On April 3, 2017, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The 2027 Notes were unsecured, subordinated debt obligations and would have matured on April 15, 2027. From and including the date of issuance to, but excluding April 15, 2022, the 2027 Notes bore interest at an initial rate of 5.625% per annum. From and including April 15, 2022 to, but excluding, the maturity date or earlier redemption, the 2027 Notes were to 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 was less than zero, then three-month LIBOR would have been deemed to be zero.

The Company, beginning with the interest payment date of April 15, 2022, and on any interest payment date thereafter, was permitted to redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. On April 15, 2022, the Company completed the payoff of the 2027 Notes in aggregate principal amount of $300.0 million. Each 2027 Note was redeemed pursuant to the terms of the Subordinated Indenture, as supplemented by the First Supplemental Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank Trust Company, National Association, the Trustee for the 2027 Notes, at the redemption price of 100% of its principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.

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12. Income Taxes

The following is a summary of the components of the provision for income taxes for the three and nine months ended September 30, 2022 and 2021:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands)
Current:
Federal	$	19,211	$	14,693	$	52,418	$	52,771
State	5,068		4,864		13,830		17,470
Total current	24,279		19,557		66,248		70,241
Deferred:
Federal	7,101		2,744		(7,652)		5,211
State	1,874		908		(2,019)		1,725
Total deferred	8,975		3,652		(9,671)		6,936
Income tax expense	$	33,254	$	23,209	$	56,577	$	77,177

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Statutory federal income tax rate	21.00	%	21.00	%	21.00	%	21.00	%
Effect of non-taxable interest income	(1.07)		(1.08)		(1.69)		(1.00)
Stock compensation	0.02		0.16		0.25		0.23
State income taxes, net of federal benefit	3.40		3.50		3.04		4.00
Executive officer compensation & other	0.08		0.05		0.38		(0.32)
Effective income tax rate	23.43	%	23.63	%	22.98	%	23.91	%

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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:


	September 30, 2022		December 31, 2021
	(In thousands)
Deferred tax assets:
Allowance for credit losses	$	83,337	$	68,644
Deferred compensation	6,483		5,342
Stock compensation	6,071		5,044
Non-accrual interest income	1,854		694
Real estate owned	108		109
Unrealized loss on investment securities, available-for-sale	104,452		—
Loan discounts	7,813		4,169
Tax basis premium/discount on acquisitions	1,767		3,220
Investments	29,609		263

Other	12,694		5,283
Gross deferred tax assets	254,188		92,768
Deferred tax liabilities:
Accelerated depreciation on premises and equipment	5,869		761
Unrealized gain on securities	—		4,220
Core deposit intangibles	14,582		5,736
FHLB dividends	2,781		2,820
Other	1,977		941
Gross deferred tax liabilities	25,209		14,478
Net deferred tax assets	$	228,979	$	78,290

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, Kansas, Kentucky, Maryland, Mississippi, Missouri, New Hampshire, New Jersey, New York, New Mexico, North Carolina, Oklahoma, Pennsylvania, South Carolina, 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

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

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. During the first nine months of 2022, the Company repurchased a total of 2,258,531 shares with a weighted-average stock price of $22.50 per share. Shares repurchased under the program as of September 30, 2022 since its inception total 19,919,866 shares. The remaining balance available for repurchase is 19,832,134 shares at September 30, 2022.

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Stock Compensation Plans

On January 21, 2022, the Company’s Board of Directors adopted, and on April 21, 2022, the Company's shareholders approved, the Home BancShares, Inc. 2022 Equity Incentive Plan (the “2022 Plan”). The 2022 Plan replaced the Company’s Amended and Restated 2006 Stock Option and Performance Incentive Plan (the “2006 Plan” and, together with the 2022 Plan, the “Plans”), which expired on February 27, 2022. The purpose of the Plans 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 September 30, 2022, the maximum total number of shares of the Company’s common stock available for issuance under the 2022 Plan was 14,788,000 shares (representing 13,288,000 shares approved for issuance under the 2006 Plan plus 1,500,000 shares added upon adoption of the 2022 Plan). At September 30, 2022, the Company had 2,685,187 shares of common stock available for future grants under 2022 Plan. As of September 30, 2022, a total of 5,787,203 shares of common stock were reserved for issuance pursuant to the Plans.

The intrinsic value of the stock options outstanding and stock options vested at September 30, 2022 was $8.6 million and $8.3 million, respectively. The intrinsic value of stock options exercised during the nine months ended September 30, 2022 was approximately $259,000. 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 $5.3 million as of September 30, 2022.

The table below summarizes the stock option transactions under the 2022 Plan at September 30, 2022 and December 31, 2021 and changes during the three-month period and year then ended:


	For the Nine Months Ended September 30, 2022			For the Year Ended December 31, 2021
	Shares (000)	Weighted- Average Exercisable Price		Shares (000)	Weighted- Average Exercisable Price
Outstanding, beginning of year	3,015	$	20.06	3,254	$	19.77
Granted	181	21.09		15	21.68
Forfeited/Expired	(69)	21.87		(57)	22.44
Exercised	(25)	12.00		(197)	14.78
Outstanding, end of period	3,102	20.14		3,015	20.06
Exercisable, end of period	1,944	$	18.47	1,543	$	17.46

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 nine months ended September 30, 2022 was $5.19 per share. There were 180,500 options granted during the nine months ended September 30, 2022. 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 2022 and 2021 stock option grants were as follows:


	For the Nine Months Ended September 30, 2022		For the Year Ended December 31, 2021
Expected dividend yield	3.14	%	2.59	%
Expected stock price volatility	31.21	%	70.13	%
Risk-free interest rate	2.81	%	0.75	%
Expected life of options	6.5 years		6.5 years

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The following is a summary of currently outstanding and exercisable options at September 30, 2022:


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	140	0.30	$	8.62	140	$	8.62
$9.54 to $14.71	140	1.80	13.23		140	13.23
$16.77 to $16.86	130	1.89	16.80		130	16.80
$17.12 to $17.36	86	2.54	17.12		87	17.12
$17.40 to $18.46	871	2.88	18.45		871	18.45
$18.50 to $20.16	41	6.53	19.05		23	19.05
$20.46 to $21.25	263	5.95	20.83		149	21.10
$21.31 to $22.22	132	6.43	22.18		82	22.21
$22.70 to $23.32	1,198	5.81	23.32		245	23.32
$23.51 to $25.96	101	5.67	25.37		77	25.74
	3,102				1,944

The table below summarized the activity for the Company’s restricted stock issued and outstanding at September 30, 2022 and December 31, 2021 and changes during the period and year then ended:


	As of September 30, 2022		As of December 31, 2021
	(In thousands)
Beginning of year	1,231		1,371
Issued	399		216
Vested	(177)		(320)
Forfeited	(65)		(36)
End of period	1,388		1,231
Amount of expense for nine months and twelve months ended, respectively	$	5,663	$	7,112

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 $16.7 million as of September 30, 2022.

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14. Non-Interest Expense

The table below shows the components of non-interest expense for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands)
Salaries and employee benefits	$	65,290	$	42,469	$	174,636	$	126,990
Occupancy and equipment	15,133		9,305		38,533		27,584
Data processing expense	8,747		6,024		25,880		17,787
Merger and acquisition expenses	—		1,006		49,594		1,006
Other operating expenses:
Advertising	2,024		1,204		5,407		3,444
Amortization of intangibles	2,477		1,421		6,376		4,262
Electronic banking expense	3,828		2,521		9,718		7,375
Directors’ fees	354		395		1,133		1,192
Due from bank service charges	316		265		982		787
FDIC and state assessment	2,146		1,648		6,204		4,119
Insurance	959		749		2,702		2,317
Legal and accounting	1,581		1,050		3,439		2,954
Other professional fees	2,466		1,787		6,329		5,196
Operating supplies	681		474		2,430		1,426
Postage	614		301		1,476		931
Telephone	593		371		1,314		1,082
Other expense	7,137		4,629		20,571		13,015
Total other operating expenses	25,176		16,815		68,081		48,100
Total non-interest expense	$	114,346	$	75,619	$	356,724	$	221,467

15. Leases

The Company leases land and office facilities under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2044 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. In accordance with ASU 2018-11, the Company does not separate nonlease components from the associated lease component of our operating leases. As a result, the Company accounts 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 September 30, 2022, the balances of the right-of-use asset and lease liability were $44.0 million and $47.0 million, respectively. As of December 31, 2021, the balances of the right-of-use asset and lease liability were $39.6 million and $42.4 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.

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The minimum rental commitments under these noncancelable operating leases are as follows (in thousands) as of September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021
2022	$	2,247	$	7,714
2023	8,170		6,574
2024	7,296		6,001
2025	6,568		5,510
2026	6,308		5,389
Thereafter	30,335		24,999
Total future minimum lease payments	$	60,924	$	56,187
Discount effect of cash flows	(13,890)		(13,778)
Present value of net future minimum lease payments	$	47,034	$	42,409

Additional information (dollar amounts in thousands):


	For the Three Months Ended						Nine Months Ended
Lease expense:	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Operating lease expense	$	2,052		$	1,971		$	5,991		$	5,961
Short-term lease expense	2			1			2			5
Variable lease expense	215			250			658			759
Total lease expense	$	2,269		$	2,222		$	6,651		$	6,725
Other information:
Cash paid for amounts included in the measurement of lease liabilities	$	2,096		$	1,988		$	6,078		$	5,956
Weighted-average remaining lease term (in years)	9.21			9.67			9.35			9.78
Weighted-average discount rate	3.48		%	3.42		%	3.42		%	3.49		%

The Company currently leases three properties from three related parties. Total rent expense from the leases was $36,000 or 1.78% of total lease expense and $103,000 or 1.54% of total lease expense for the three and nine months ended September 30, 2022.

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, Texas, 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 September 30, 2022 and December 31, 2021, commercial real estate loans represented 55.8% and 59.7% of total loans receivable, respectively, and 223.1% and 212.2% of total stockholders’ equity at September 30, 2022 and December 31, 2021, respectively. Residential real estate loans represented 16.1% and 15.8% of total loans receivable and 64.4% and 56.3% of total stockholders’ equity at September 30, 2022 and December 31, 2021, respectively.

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Approximately 79.4% of the Company’s total loans and 84.1% of the Company’s real estate loans as of September 30, 2022, are to borrowers whose collateral is located in Alabama, Arkansas, Florida, Texas and New York, the states in which the Company has its branch locations.

As of September 30, 2022, 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 September 30, 2022. In addition, the Company determined no additional provision for unfunded commitments was necessary as of September 30, 2022.

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 its 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 September 30, 2022 and December 31, 2021, commitments to extend credit of $4.67 billion and $3.05 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 September 30, 2022 and December 31, 2021, was $192.0 million and $110.8 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 nine months of 2022, the Company requested approximately $129.8 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.

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Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total, Tier 1 common 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 September 30, 2022, the Company meets all capital adequacy requirements to which it is subject.

On December 31, 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 Company's risk-based capital ratios.

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 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 is 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: 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 September 30, 2022, 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 13.03%, 10.36%, 13.03%, and 16.75%, respectively, as of September 30, 2022.

19. Additional Cash Flow Information

In connection with the Happy acquisition, accounted for under ASC Topic 805, the Company acquired approximately $6.69 billion in assets, including $858.9 million in cash and cash equivalents, assumed $6.15 billion in liabilities, and issued approximately 42.4 million shares of its common stock valued at approximately $958.8 million as of April 1, 2022. In addition, the holders of certain Happy stock-based awards received approximately $3.7 million in cash in cancellation of such awards, for a total transaction value of approximately $962.5 million.

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


	September 30,
	2022		2021
	(In thousands)
Interest paid	$	65,123	$	36,757
Income taxes paid	69,204		82,245
Assets acquired by foreclosure	327		2,058

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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.

Available-for-sale securities - the Company's available-for-sale securities are considered to be Level 2 securities. The 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.

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.

Held-to-maturity securities – the Company's held-to-maturity securities are considered to be Level 2 securities. The 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.

Impaired loans - 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 $169.7 million and $280.0 million as of September 30, 2022 and December 31, 2021, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $693,000 and $92,000 of accrued interest receivable when impaired loans were put on non-accrual status during the three months ended September 30, 2022 and 2021, respectively. The Company reversed approximately $842,000 and $276,000 of accrued interest receivable when impaired loans were put on non-accrual status during the nine months ended September 30, 2022 and 2021, respectively.

Foreclosed assets held for sale - Foreclosed assets held for sale 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 September 30, 2022 and December 31, 2021, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $365,000 and $1.6 million, respectively.

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No foreclosed assets held for sale were remeasured during the nine months ended September 30, 2022. 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.

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.


	September 30, 2022
	Carrying Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	1,580,421	$	1,580,421	1
Federal funds sold	2,700		2,700		1
Investment securities - available for sale	4,085,102		4,085,102		2
Investment securities - held-to-maturity	1,251,007		1,101,158		2
Loans receivable, net of impaired loans and allowance	13,340,436		13,754,133		3
Accrued interest receivable	88,671		88,671		1
FHLB, FRB & FNBB Bank stock; other equity investments	193,287		193,287		3
Marketable equity securities	51,003		51,003		1
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	5,540,539	$	5,540,539	1
Savings and interest-bearing transaction accounts	11,968,519		11,968,519		1
Time deposits	1,033,266		1,004,283		3
Securities sold under agreements to repurchase	121,555		121,555		1
FHLB and other borrowed funds	400,000		399,793		2
Accrued interest payable	3,316		3,376		1
Subordinated debentures	440,568		415,052		3

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	December 31, 2021
	Carrying Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	3,650,315	$	3,650,315	1
Investment securities - available for sale	3,119,807		3,119,807		2
Loans receivable, net of impaired loans and allowance	9,319,421		9,503,261		3
Accrued interest receivable	46,736		46,736		1
FHLB, FRB & FNBB Bank stock; other equity investments	124,638		124,638		3
Marketable equity securities	17,110		17,110		1
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	4,127,878	$	4,127,878	1
Savings and interest-bearing transaction accounts	9,251,805		9,251,805		1
Time deposits	880,887		901,280		3
Securities sold under agreements to repurchase	140,886		140,886		1
FHLB and other borrowed funds	400,000		401,362		2
Accrued interest payable	4,798		4,798		1
Subordinated debentures	371,093		374,894		3

21. Recent Accounting Pronouncements

In December 31, 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.

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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.

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with Subtopic 326-20, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. ASU 2022-02 is effective for entities that have adopted ASU No. 2016-13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively. However, for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted if an entity has adopted ASU 2016-13. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently evaluating the potential impacts related to the adoption of the ASU.

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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 September 30, 2022, and the related condensed consolidated statements of income, comprehensive (loss) income and stockholders’ equity for the three-month and nine-month periods ended September 30, 2022 and 2021 and cash flows for the nine month periods ended September 30, 2022 and 2021, 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, 2021, 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 24, 2022, 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, 2021, 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/ FORVIS, LLP

(Formerly BKD, LLP)

Little Rock, Arkansas

November 4, 2022

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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 24, 2022, which includes the audited financial statements for the year ended December 31, 2021. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refer to Home BancShares, Inc. on a consolidated basis.

General

We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly-owned bank subsidiary, Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of September 30, 2022, we had, on a consolidated basis, total assets of $23.16 billion, loans receivable, net of allowance for credit losses of $13.54 billion, total deposits of $18.54 billion, and stockholders’ equity of $3.46 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 sources of funding. Our largest expenses are interest on our funding sources, salaries and related employee benefits and occupancy and equipment. We measure our performance by calculating our return on average common equity, return on average assets and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a non-GAAP measure and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding adjustments such as merger and acquisition expenses and/or certain gains, losses and other non-interest income and expenses.

Table 1: Key Financial Measures


	As of or for the Three Months Ended September 30,				As of or for the Nine Months Ended September 30,
	2022		2021		2022		2021
	(Dollars in thousands, except per share data)
Total assets	$	23,157,370	$	17,765,056	$	23,157,370	$	17,765,056
Loans receivable	13,829,311		9,901,100		13,829,311		9,901,100
Allowance for credit losses	(289,203)		(238,673)		(289,203)		(238,673)
Total deposits	18,542,324		14,003,371		18,542,324		14,003,371
Total stockholders’ equity	3,460,015		2,736,062		3,460,015		2,736,062
Net income	108,705		74,992		189,575		245,664
Basic earnings per share	0.53		0.46		0.99		1.49
Diluted earnings per share	0.53		0.46		0.99		1.49
Book value per share	16.94		16.68		16.94		16.68
Tangible book value per share (non-GAAP)(1)	9.82		10.59		9.82		10.59
Annualized net interest margin - FTE	4.05%		3.60%		3.67%		3.74%
Efficiency ratio	43.24		42.26		52.44		39.86
Efficiency ratio, as adjusted (non-GAAP)(2)	42.97		42.29		45.13		41.67
Return on average assets	1.81		1.68		1.13		1.90
Return on average common equity	12.25		10.97		7.71		12.32

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

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

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Results of Operations for the Three Months Ended September 30, 2022 and 2021

Our net income increased $33.7 million, or 45.0%, to $108.7 million for the three-month period ended September 30, 2022, from $75.0 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.53 per share for the three-month period ended September 30, 2022 compared to $0.46 per share for the three-month period ended September 30, 2021. The Company determined that a provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2022. In addition, the Company determined that a provision for unfunded commitments was not necessary as of September 30, 2022. During the three months ended September 30, 2022, the Company recorded $1.1 million in recoveries on historic losses and a $2.6 million loss for the decrease in the fair value of marketable securities.

Total interest income increased by $85.9 million, or 54.7%, and non-interest income increased by $14.0 million, or 47.9%. This was partially offset by a $17.4 million, or 139.8%, increase in total interest expense and a $38.7 million, or 51.2%, increase in non-interest expense. These fluctuations are primarily due to the acquisition of Happy Bancshares, Inc. ("Happy"),which we completed on April 1, 2022, and the rising rate environment. The increase in interest income resulted from a $53.2 million, or 37.3%, increase in loan interest income, a $23.0 million, or 172.6%, increase in investment income and a $9.6 million, or 863.6%, increase in interest income on deposits at other banks. The increase in non-interest income was primarily due to a $5.9 million, or 73.3%, increase in other services charges and fees, a $5.2 million, or 119.5%, increase in other income, a $4.8 million, or 81.0%, increase in service charges on deposit accounts, and a $3.5 million, or 730.9%, increase in trust fees. These increases were partially offset by a $2.7 million, or 4,408.2%, decrease in the fair value adjustment for marketable securities resulting from a $2.6 million decrease in the fair value of marketable securities, a $1.8 million, or 29.7%, decrease in mortgage lending income and a $920,000, or 34.6%, decrease in dividends from FHLB, FRB, FNBB and other. Included within other income was $1.1 million in recoveries on historic losses. The increase in interest expense was primarily due to a $17.7 million, or 313.8%, increase in interest on deposits which was partially offset by a $635,000, or 13.3%, decrease in interest on subordinated debentures. The increase in non-interest expense was due to a $22.8 million, or 53.7%, increase in salaries and employee benefits, an $8.4 million, or 49.7%, increase in other operating expenses, a $5.8 million, or 62.6%, increase in occupancy and equipment and a $2.7 million, or 45.2%, increase in data processing expense, partially offset by a decrease of $1.0 million in merger and acquisition expenses. Income tax expense increased by $10.0 million, or 43.3%, during the quarter due to an increase in net income.

Our net interest margin increased from 3.60% for the three-month period ended September 30, 2021 to 4.05% for the three-month period ended September 30, 2022. The yield on interest earning assets was 4.62% and 3.91% for the three months ended September 30, 2022 and 2021, respectively, as average interest earning assets increased from $16.11 billion to $21.09 billion. The increase in average interest earning assets is primarily due to a $3.78 billion increase in average loans receivable and a $2.15 billion increase in average investment securities, largely resulting from the acquisition of Happy, partially offset by a $949.6 million decrease in average interest-bearing balances due from banks. For the three months ended September 30, 2022 and 2021, we recognized $4.6 million and $4.9 million, respectively, in total net accretion for acquired loans and deposits. We recognized $943,000 in event interest income for the three months ended September 30, 2022 compared to $3.5 million for the three months ended September 30, 2021 which reduced the net interest margin by five basis points.

Our efficiency ratio was 43.24% for the three months ended September 30, 2022, compared to 42.26% for the same period in 2021. For the third quarter of 2022, our efficiency ratio, as adjusted (non-GAAP), was 42.97%, compared to 42.29% reported for the third quarter of 2021. (See Table 23 for the non-GAAP tabular reconciliation).

Our annualized return on average assets was 1.81% for the three months ended September 30, 2022, compared to 1.68% for the same period in 2021. Our annualized return on average assets, as adjusted (non-GAAP), was 1.83% for the three months ended September 30, 2022, compared to 1.67% for the same period in 2021. (See Table 20 for the non-GAAP tabular reconciliation). Our annualized return on average common equity was 12.25% and 10.97% for the three months ended September 30, 2022, and 2021, respectively. Our annualized return on average common equity, as adjusted (non-GAAP), was 12.39% for the three months ended September 30, 2022 and 10.87% for the same period in 2021. (See Table 21 for the non-GAAP tabular reconciliation).

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Results of Operations for the Nine Months Ended September 30, 2022 and 2021

Our net income decreased $56.1 million, or 22.8%, to $189.6 million for the nine-month period ended September 30, 2022, from $245.7 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.99 per share for the nine-month period ended September 30, 2022 compared to $1.49 per share for the nine-month period ended September 30, 2021. As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $49.6 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, and a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. The summation of these items reduced earnings by $108.2 million and earnings per share by $0.42 per share for the nine-month period ended September 30, 2022. Excluding the impact of the acquisition of Happy, 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 September 30, 2022. In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of September 30, 2022. During the nine months ended September 30, 2022, the Company recorded $6.7 million in recoveries on historic losses and a $1.4 million special dividend from equity investments which were partially offset by a $2.3 million loss for the decrease in fair value of marketable securities and $2.1 million in TRUPS redemption fees.

Total interest income increased by $130.7 million, or 27.6%, and non-interest income increased by $12.8 million, or 12.2%. This was more than offset by a $135.3 million, or 61.1%, increase in non-interest expense and a $21.6 million, or 53.7%, increase in interest expense. These fluctuations are primarily due to the acquisition of Happy during the second quarter of 2022 and the rising rate environment. The increase in interest income resulted from a $71.9 million, or 16.5%, increase in loan interest income, a $42.0 million, or 114.4%, increase in investment income and a $16.8 million, or 750.5%, increase in interest income on deposits at other banks. The increase in non-interest income was primarily due to a $10.9 million, or 68.0%, increase in service charges on deposit accounts, a $9.7 million, or 63.3%, increase in other income, an $8.9 million, or 35.2%, increase in other service charges and fees, a $7.4 million, or 514.1%, increase in trust fees and a $1.2 million, or 75.8%, increase in the cash value of life insurance. These increases were partially offset by a $9.4 million, or 132.5%, decrease in income for the fair value adjustment for marketable securities resulting from a $2.3 million decrease in the fair value of marketable securities for the nine months ended September 30, 2022 compared to a $7.0 million increase for the nine months ended September 30, 2021, a $7.5 million, or 54.1%, decrease in dividends from FHLB, FRB, FNBB and other, a $6.2 million, or 30.6%, decrease in mortgage lending income and a $1.4 million, or 90.4%, decrease in the gain on sale of SBA loans. Included within other income was $6.7 million recovery on historic losses, and included within dividends from FHLB, FRB, FNBB and other was $1.4 million in special dividends. The increase in non-interest expense was due to $48.6 million in merger and acquisition expenses, a $47.6 million, or 37.5%, increase in salaries and employee benefits, a $20.0 million, or 41.5%, increase in other operating expenses, a $10.9 million, or 39.7% increase in occupancy and equipment and an $8.1 million, or 45.5%, increase in data processing expense. Included within other operating expense was $2.1 million in TRUPS redemption fees. The increase in interest expense was primarily due to a $19.2 million, or 97.0%, increase in interest on deposits and a $2.1 million, or 14.6%, increase in interest on subordinated debentures as a result of the acquisition of $140.0 million of subordinated debt and $23.2 million in trust preferred securities from Happy during the second quarter. Income tax expense decreased by $20.6 million, or 26.7%, during the quarter due to the decrease in net income.

Our net interest margin decreased from 3.74% for the nine-month period ended September 30, 2021 to 3.67% for the nine-month period ended September 30, 2022. The yield on interest earning assets was 4.08% for the nine-month periods ended September 30, 2022 and 2021, as average interest earning assets increased from $15.71 billion to $20.03 billion. The increase in average earning assets is primarily the result of a $2.01 billion increase in average loans receivable, a $1.78 billion increase in average investment securities, and a $527.4 million increase in average interest-bearing balances due from banks. For the nine months ended September 30, 2022 and 2021, we recognized $12.8 million and $16.2 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 2 basis points. The Company experienced a $26.5 million reduction in interest income from PPP loans due to the forgiveness of the PPP loans and the acceleration of the deferred fees for the loans that were forgiven. This was dilutive to the net interest margin by approximately 8 basis points.

Our efficiency ratio was 52.44% for the nine-month period ended September 30, 2022, compared to 39.86% for the same period in 2021. For the first nine months of 2022, our efficiency ratio, as adjusted (non-GAAP), was 45.13%, compared to 41.67% reported for the first nine months of 2021. (See Table 23 for the non-GAAP tabular reconciliation).

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Our annualized return on average assets was 1.13% for the nine-month period ended September 30, 2022, compared to 1.90% for the same period in 2021. Our annualized return on average assets, as adjusted (non-GAAP), was 1.61% for the nine months ended September 30, 2022, compared to 1.76% for the same period in 2021. (See Table 20 for the non-GAAP tabular reconciliation). Our annualized return on average common equity was 7.71% and 12.32% for the nine-month period ended September 30, 2022, and 2021, respectively. Our annualized return on average common equity, as adjusted (non-GAAP), was 10.91% for the nine months ended September 30, 2022 and 11.44% for the same period in 2021. (See Table 21 for the non-GAAP tabular reconciliation).

Financial Condition as of and for the Period Ended September 30, 2022 and December 31, 2021

Our total assets as of September 30, 2022 increased $5.11 billion to $23.16 billion from $18.05 billion reported as of December 31, 2021. The increase in total assets is primarily due to the acquisition of $6.69 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022. Cash and cash equivalents decreased $2.07 billion, for the nine months ended September 30, 2022. Our loan portfolio balance increased to $13.83 billion as of September 30, 2022 from $9.84 billion at December 31, 2021. The increase in loans was primarily due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $98.4 million in organic loan growth. Total deposits increased $4.28 billion to $18.54 billion as of September 30, 2022 from $14.26 billion as of December 31, 2021. The increase in deposits was primarily due to the acquisition of $5.86 billion in deposits, net of purchase accounting adjustments, from Happy in the second quarter of 2022. Stockholders’ equity increased $694.3 million to $3.46 billion as of September 30, 2022, compared to $2.77 billion as of December 31, 2021. The $694.3 million increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and the $189.6 million in net income for the nine months ended September 30, 2022, partially offset by the $317.9 million in other comprehensive loss, the $94.8 million of shareholder dividends paid and stock repurchases of $50.9 million in 2022.

Our non-performing loans were $61.7 million, or 0.45% of total loans as of September 30, 2022, compared to $50.2 million, or 0.51% of total loans as of December 31, 2021. The allowance for credit losses as a percentage of non-performing loans decreased slightly to 468.77% as of September 30, 2022, from 471.61% as of December 31, 2021. Non-performing loans from our Arkansas franchise were $10.2 million at September 30, 2022 compared to $13.9 million as of December 31, 2021. Non-performing loans from our Florida franchise were $24.8 million at September 30, 2022 compared to $26.8 million as of December 31, 2021. Non-performing loans from our Texas franchise were $13.7 million at September 30, 2022 compared to zero as of December 31, 2021. Non-performing loans from our Alabama franchise were $204,000 at September 30, 2022 compared to $470,000 as of December 31, 2021. Non-performing loans from our Shore Premier Finance ("SPF") franchise were $1.4 million at September 30, 2022 compared to $1.5 million as of December 31, 2021. Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $11.4 million at September 30, 2022 compared to $7.5 million as of December 31, 2021.

As of September 30, 2022, our non-performing assets increased to $62.2 million, or 0.27% of total assets, from $51.8 million, or 0.29% of total assets, as of December 31, 2021. Non-performing assets from our Arkansas franchise were $10.2 million at September 30, 2022 compared to $14.4 million as of December 31, 2021. Non-performing assets from our Florida franchise were $25.0 million at September 30, 2022 compared to $27.9 million as of December 31, 2021. Non-performing assets from our Texas franchise were $14.0 million at September 30, 2022 compared to zero as of December 31, 2021. Non-performing assets from our Alabama franchise were $204,000 at September 30, 2022 compared to $470,000 as of December 31, 2021. Non-performing assets from our SPF franchise were $1.4 million at September 30, 2022 compared to $1.5 million as of December 31, 2021. Non-performing assets from our CFG franchise were $11.4 million at September 30, 2022 compared to $7.5 million as of December 31, 2021.

The $11.4 million balance of non-accrual loans for our Centennial CFG market consists of two loans that are assessed for credit risk by the Federal Reserve under the Shared National Credit Program. Due to the condition of the two loans, partial charge-offs for a total of $2.2 million were taken on these loans during the third quarter of 2022. The loans are not current on either principal or interest, and we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve. Any interest payments that are received will be applied to the principal balance.

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Critical Accounting Policies and Estimates

Overview. We prepare our consolidated financial statements based on the selection of certain accounting policies, generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. Our accounting policies are described in detail in the notes to our consolidated financial statements included as part of this document.

We consider a policy critical if (i) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate; and (ii) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that the accounting policies most critical to us are those associated with our lending practices, including revenue recognition and the accounting for the allowance for credit losses, foreclosed assets, investments, intangible assets, income taxes and stock options.

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 $6.1 million, $16.6 million, $4.2 million and $12.2 million for the three and nine months ended September 30, 2022 and 2021, respectively. Centennial CFG loan fees were $4.6 million, $9.7 million, $1.8 million and $7.1 million for the three and nine months ended September 30, 2022 and 2021, respectively.

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Investments – Available-for-sale. Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments ("CECL"). The Company first assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Investments – Held-to-Maturity. Securities held-to-maturity ("HTM"), which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets.

Loans Receivable and Allowance for Credit Losses. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, deferred fees or costs on originated loans. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding. Loan origination fees and direct origination costs are capitalized and recognized as adjustments to yield on the related loans.

The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

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The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows:

•1-4 family construction

•All other construction

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

•1-4 family senior liens

•Multifamily

•Owner occupied commercial real estate

•Non-owner occupied commercial real estate

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

•Consumer auto

•Other consumer

•Other consumer - SPF

The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. For loans that are not considered to be collateral dependent, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded.

•Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower.

•The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

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Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. An allowance for credit losses is determined using the same methodology as other loans. The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Foreclosed Assets Held for Sale. Real estate and personal properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Valuations are periodically performed by management, and the real estate and personal properties are carried at fair value less costs to sell. Gains and losses from the sale of other real estate and personal properties are recorded in non-interest income, and expenses used to maintain the properties are included in non-interest expenses.

Intangible Assets. Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles are being amortized over 48 to 121 months on a straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual impairment test of goodwill and core deposit intangibles as required by FASB ASC 350, Intangibles - Goodwill and Other, in the fourth quarter or more often if events and circumstances indicate there may be an impairment.

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.

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Acquisitions

Acquisition of Marine Portfolio

On February 4, 2022, the Company completed the purchase of the performing marine loan portfolio of Utah-based LendingClub Bank (“LendingClub”). Under the terms of the purchase agreement with LendingClub, the Company acquired approximately $242.2 million of yacht loans. This portfolio of loans is housed within the Company's Shore Premier Finance division, which is responsible for servicing the acquired loan portfolio and originating new loan production.

Acquisition of Happy Bancshares, Inc.

For further discussion of the acquisition, see Note 2 "Business Combinations" to the Condensed Notes to Consolidated Financial Statements.

We will continue evaluating all types of potential bank acquisitions, which may include FDIC-assisted acquisitions as opportunities arise, to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.

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 September 30, 2022, we had 222 branch locations. There were 76 branches in Arkansas, 78 branches in Florida, 62 branches in Texas, five branches in Alabama and one branch in New York City.

Results of Operations

For the three and nine months ended September 30, 2022 and 2021

Our net income increased $33.7 million, or 45.0%, to $108.7 million for the three-month period ended September 30, 2022, from $75.0 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.53 per share for the three-month period ended September 30, 2022 compared to $0.46 per share for the three-month period ended September 30, 2021. 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 September 30, 2022. In addition, the Company determined no additional provision for unfunded commitments was necessary as of September 30, 2022. During the three months ended September 30, 2022, the Company recorded $1.1 million in recoveries on historic losses and a $2.6 million loss for the decrease in the fair value of marketable securities.

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Our net income decreased $56.1 million, or 22.8%, to $189.6 million for the nine-month period ended September 30, 2022, from $245.7 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.99 per share for the nine-month period ended September 30, 2022 compared to $1.49 per share for the nine-month period ended September 30, 2021. As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $49.6 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. The summation of these items reduced earnings by $108.2 million and earnings per share by $0.42 per share for the nine-month period ended September 30, 2022. Excluding the impact of the acquisition of Happy, 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 September 30, 2022. In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of September 30, 2022. During the nine months ended September 30, 2022, the Company recorded $6.7 million in recoveries on historic losses and a $1.4 million special dividend from equity investments, which were partially offset by a $2.3 million loss for the decrease in fair value of marketable securities and $2.1 million in TRUPS redemption fees.

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 (25.1475% for 2022 and 25.74% for 2021).

The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. In 2020, the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in effect throughout all of 2021. On March 16, 2022, the target rate was increased to 0.25% to 0.50%. On May 4, 2022, the target rate was increased to 0.75% to 1.00%. On June 15, 2022, the target rate was increased to 1.50% to 1.75%. On July 27, 2022, the target rate was increased to 2.25% to 2.50%. On September 21, 2022, the target rate was increased to 3.00% to 3.25%. Presently, the Federal Reserve has indicated they are anticipating further rate increases.

Our net interest margin increased from 3.60% for the three-month period ended September 30, 2021 to 4.05% for the three-month period ended September 30, 2022. The yield on interest earning assets was 4.62% and 3.91% for the three months ended September 30, 2022 and 2021, respectively, as average interest earning assets increased from $16.11 billion to $21.09 billion. The increase in average earning assets is primarily due to a $3.78 billion increase in average loans receivable, and a $2.15 billion increase in average investment securities largely resulting from the acquisition of Happy, partially offset by a $949.6 million decrease in average interest-bearing balances due from banks. For the three months ended September 30, 2022 and 2021, we recognized $4.6 million and $4.9 million, respectively, in total net accretion for acquired loans and deposits. We recognized $943,000 in event interest income for the three months ended September 30, 2022 compared to $3.5 million for the three months ended September 30, 2021, which reduced the net interest margin by five basis points.

Our net interest margin decreased from 3.74% for the nine-month period ended September 30, 2021 to 3.67% for the nine-month period ended September 30, 2022. The yield on interest earning assets was 4.08% for both of the nine-month periods ended September 30, 2022 and 2021, as average interest earning assets increased from $15.71 billion to $20.03 billion. The increase in average earning assets is primarily the result of a $2.01 billion increase in average loans receivable, a $1.78 billion increase in average investment securities, and a $527.4 million increase in average interest-bearing balances due from banks. For the nine months ended September 30, 2022 and 2021, we recognized $12.8 million and $16.2 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 2 basis points. The Company experienced a $26.5 million reduction in interest income from PPP loans due to the forgiveness of the PPP loans and the acceleration of the deferred fees for the loans that were forgiven. This was dilutive to the net interest margin by approximately 8 basis points.

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Net interest income on a fully taxable equivalent basis increased $69.2 million, or 47.3%, to $215.5 million for the three-month period ended September 30, 2022, from $146.4 million for the same period in 2021. This increase in net interest income for the three-month period ended September 30, 2022 was the result of an $86.6 million increase in interest income, partially offset by a $17.4 million increase in interest expense, on a fully taxable equivalent basis. The $86.6 million increase in interest income was primarily the result of the higher level of average interest earning assets due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The increase in earning assets resulted in an increase in interest income of approximately $65.5 million, and the higher yield on earning assets resulted in an increase in interest income of approximately $21.1 million. The $17.4 million increase in interest expense is primarily the result of the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately $14.7 million, and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $2.7 million.

Net interest income on a fully taxable equivalent basis increased $110.4 million, or 25.1%, to $549.7 million for the nine-month period ended September 30, 2022, from $439.3 million for the same period in 2021. This increase in net interest income for the nine-month period ended September 30, 2022 was the result of a $132.0 million increase in interest income, partially offset by a $21.6 million increase in interest expense, on a fully taxable equivalent basis. The $132.0 million increase in interest income was primarily the result of the higher level of average interest earning assets due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The increase in earning assets resulted in an increase in interest income of approximately $110.8 million, and the higher yield on earning assets resulted in a increase in interest income of approximately $21.2 million. The $21.6 million increase in interest expense is primarily the result of the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately $11.6 million, and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $10.0 million.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2022 and 2021, as well as changes in fully taxable equivalent net interest margin for the three and nine months ended September 30, 2022 compared to the same period in 2021.

Table 2: Analysis of Net Interest Income


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Interest income	$	242,955		$	157,060		$	604,871		$	474,192
Fully taxable equivalent adjustment	2,437			1,748			6,646			5,343
Interest income – fully taxable equivalent	245,392			158,808			611,517			479,535
Interest expense	29,851			12,449			61,861			40,241
Net interest income – fully taxable equivalent	$	215,541		$	146,359		$	549,656		$	439,294
Yield on earning assets – fully taxable equivalent	4.62		%	3.91		%	4.08		%	4.08		%
Cost of interest-bearing liabilities	0.83			0.46			0.61			0.50
Net interest spread – fully taxable equivalent	3.79			3.45			3.47			3.58
Net interest margin – fully taxable equivalent	4.05			3.60			3.67			3.74

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022 vs. 2021		2022 vs. 2021
	(In thousands)
Increase in interest income due to change in earning assets	$	65,504	$	110,827
Increase in interest income due to change in earning asset yields	21,080		21,155
Increase in interest expense due to change in interest-bearing liabilities	(2,742)		(10,006)
Increase in interest expense due to change in interest rates paid on interest-bearing liabilities	(14,660)		(11,614)
Increase in net interest income	$	69,182	$	110,362

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Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three and nine months ended September 30, 2022 and 2021, respectively. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

Table 4: Average Balance Sheets and Net Interest Income Analysis


	Three Months Ended September 30,
	2022						2021
	Average Balance		Income / Expense		Yield / Rate		Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	1,965,136	$	10,763	2.17	%	$	2,914,785	$	1,117	0.15	%
Federal funds sold	1,176		9		3.04		82		—		—
Investment securities – taxable	4,008,230		28,273		2.80		2,289,680		8,495		1.47
Investment securities – non-taxable	1,292,702		10,370		3.18		862,586		6,416		2.95
Loans receivable	13,822,459		195,977		5.63		10,043,393		142,780		5.64
Total interest-earning assets	21,089,703		245,392		4.62	%	16,110,526		158,808		3.91	%
Non-earning assets	2,689,066						1,584,700
Total assets	$	23,778,769					$	17,695,226
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	12,233,755	$	22,388	0.73	%	$	8,794,657	3,613		0.16	%
Time deposits	1,078,112		959		0.35		1,063,500		2,029		0.76
Total interest-bearing deposits	13,311,867		23,347		0.70		9,858,157		5,642		0.23
Federal funds purchased	14		—		—		—		—		—
Securities sold under agreement to repurchase	126,770		434		1.36		143,937		102		0.28
FHLB and other borrowed funds	400,012		1,917		1.90		400,000		1,917		1.90
Subordinated debentures	442,312		4,153		3.73		370,805		4,788		5.12
Total interest-bearing liabilities	14,280,975		29,851		0.83	%	10,772,899		12,449		0.46	%
Non-interest-bearing liabilities
Non-interest-bearing deposits	5,779,082						4,091,174
Other liabilities	199,416						120,200
Total liabilities	20,259,473						14,984,273
Stockholders’ equity	3,519,296						2,710,953
Total liabilities and stockholders’ equity	$	23,778,769					$	17,695,226
Net interest spread					3.79	%					3.45	%
Net interest income and margin			$	215,541	4.05	%			$	146,359	3.60	%

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	Nine Months Ended September 30,
	2022						2021
	Average Balance		Income / Expense		Yield / Rate		Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	2,899,620	$	19,001	0.88	%	$	2,372,227	$	2,234	0.13	%
Federal funds sold	1,593		13		1.09		83		—		—
Investment securities – taxable	3,442,854		58,294		2.26		1,947,799		21,933		1.51
Investment securities – non-taxable	1,139,628		26,709		3.13		858,440		19,610		3.05
Loans receivable	12,547,275		507,500		5.41		10,532,411		435,758		5.53
Total interest-earning assets	20,030,970		611,517		4.08	%	15,710,960		479,535		4.08	%
Non-earning assets	2,308,827						1,594,442
Total assets	$	22,339,797					$	17,305,402
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest- bearing transaction accounts	$	11,420,566	$	36,031	0.42	%	$	8,607,728	12,289		0.19	%
Time deposits	1,035,340		2,939		0.38		1,131,538		7,492		0.89
Total interest-bearing deposits	12,455,906		38,970		0.42		9,739,266		19,781		0.27
Federal funds purchased	294		2		0.91		—		—		—
Securities sold under agreement to repurchase	129,076		729		0.76		153,677		399		0.35
FHLB borrowed funds	400,004		5,688		1.90		400,000		5,688		1.90
Subordinated debentures	540,175		16,472		4.08		370,615		14,373		5.19
Total interest-bearing liabilities	13,525,455		61,861		0.61	%	10,663,558		40,241		0.50	%
Non-interest-bearing liabilities
Non-interest-bearing deposits	5,363,770						3,848,302
Other liabilities	161,402						127,656
Total liabilities	19,050,627						14,639,516
Stockholders’ equity	3,289,170						2,665,886
Total liabilities and stockholders’ equity	$	22,339,797					$	17,305,402
Net interest spread					3.47	%					3.58	%
Net interest income and margin			$	549,656	3.67	%			$	439,294	3.74	%

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Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine months ended September 30, 2022 compared to the same period in 2021, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

Table 5: Volume/Rate Analysis


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022 over 2021						2022 over 2021
	Volume		Yield / Rate		Total		Volume		Yield / Rate		Total
	(In thousands)
(Decrease) increase in:
Interest income:
Interest-bearing balances due from banks	$	(480)	$	10,126	$	9,646	$	603	$	16,164	$	16,767
Federal funds sold	—		9		9		—		13		13
Investment securities – taxable	8,987		10,791		19,778		21,955		14,406		36,361
Investment securities – non-taxable	3,416		538		3,954		6,578		521		7,099
Loans receivable	53,581		(384)		53,197		81,691		(9,949)		71,742
Total interest income	65,504		21,080		86,584		110,827		21,155		131,982
Interest expense:
Interest-bearing transaction and savings deposits	1,909		16,866		18,775		5,049		18,693		23,742
Time deposits	28		(1,098)		(1,070)		(590)		(3,963)		(4,553)
Federal funds purchased	—		—		—		2		—		2
Securities sold under agreement to repurchase	(14)		346		332		(73)		403		330

Subordinated debentures	819		(1,454)		(635)		5,618		(3,519)		2,099
Total interest expense	2,742		14,660		17,402		10,006		11,614		21,620
Increase (decrease) in net interest income	$	62,762	$	6,420	$	69,182	$	100,821	$	9,541	$	110,362

Provision for Credit Losses

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. In addition, ASC 326 requires credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not, they will be required to sell.

Loans. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, national retail sales index, housing price indices and rental vacancy rate 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" (or "double count").

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The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows:

•1-4 family construction

•All other construction

•1-4 family revolving HELOC & junior liens

•1-4 family senior liens

•Multifamily

•Owner occupied commercial real estate

•Non-owner occupied commercial real estate

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

•Consumer auto

•Other consumer

•Other consumer - SPF

As a result of the Happy acquisition which was completed on April 1, 2022, the Company recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count" and an $11.4 million provision for credit losses on acquired unfunded commitments. 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 September 30, 2022. In addition, the Company determined no additional provision for unfunded commitments was necessary as of September 30, 2022.

Net charge-offs to average total loans was 0.15% for the three months ended September 30, 2022 compared to 0.07% for the three months ended September 30, 2021. Net charge-offs to average total loans was 0.10% for the nine months ended September 30, 2022 compared to 0.09% for the nine months ended September 30, 2021.

Investments – Available-for-sale: The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Investments – Held-to-Maturity. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets.

The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.11 billion, or 88.7% are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S. government-sponsored enterprises and mortgage-backed securities all of which are guaranteed by the U.S. government. Due to the inherent low risk in these U.S. government guaranteed securities, no provision for credit loss was established on this portion of the portfolio.

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At September 30, 2022, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainty, was adequate for the available-for-sale investment portfolio, and the allowance for credit losses for the HTM portfolio resulting from the Happy acquisition was considered adequate. No additional provision for credit losses was considered necessary for the portfolio.

Non-Interest Income

Total non-interest income was $43.2 million and $118.5 million for the three and nine months ended September 30, 2022, compared to $29.2 million and $105.6 million for the same period in 2021. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending income, insurance commissions, increase in cash value of life insurance, fair value adjustment for marketable securities and dividends.

Table 6 measures the various components of our non-interest income for the three and nine months ended September 30, 2022 and 2021, respectively, as well as changes for the three and nine months ended September 30, 2022 compared to the same period in 2021.

Table 6: Non-Interest Income


	Three Months Ended September 30,				2021 Change from 2020				Nine Months Ended September 30,				2021 Change from 2020
	2022		2021						2022		2021
	(Dollars in thousands)
Service charges on deposit accounts	$	10,756	$	5,941	$	4,815	81.0	%	$	26,980	$	16,059	$	10,921	68.0	%
Other service charges and fees	13,951		8,051		5,900		73.3		34,225		25,318		8,907		35.2
Trust fees	3,980		479		3,501		730.9		8,874		1,445		7,429		514.1
Mortgage lending income	4,179		5,948		(1,769)		(29.7)		14,091		20,317		(6,226)		(30.6)
Insurance commissions	601		586		15		2.6		1,739		1,556		183		11.8
Increase in cash value of life insurance	1,089		509		580		113.9		2,721		1,548		1,173		75.8
Dividends from FHLB, FRB, FNBB & other	1,741		2,661		(920)		(34.6)		6,384		13,916		(7,532)		(54.1)
Gain on sale of SBA loans	58		439		(381)		(86.8)		153		1,588		(1,435)		(90.4)
(Loss) gain on sale of branches, equipment and other assets, net	(13)		(34)		21		61.8		5		(86)		91		105.8
Gain on OREO, net	—		246		(246)		(100.0)		487		1,266		(779)		(61.5)
Gain on securities, net	—		—		—		0.0		—		219		(219)		(100.0)
Fair value adjustment for marketable securities	(2,628)		61		(2,689)		(4408.2)		(2,304)		7,093		(9,397)		(132.5)
Other income	9,487		4,322		5,165		119.5		25,096		15,366		9,730		63.3
Total non-interest income	$	43,201	$	29,209	$	13,992	47.9	%	$	118,451	$	105,605	$	12,846	12.2	%

Non-interest income increased $14.0 million, or 47.9%, to $43.2 million for the three months ended September 30, 2022 from $29.2 million for the same period in 2021. The primary factors that resulted in this increase were the increases in other service charges and fees, other income and service charges on deposit accounts. Other factors were changes related to trust fees, mortgage lending income, increase in cash value of life insurance, dividends from FHLB, FRB, FNBB and other and fair value adjustment for marketable securities.

Additional details for the three months ended September 30, 2022 on some of the more significant changes are as follows:

•The $4.8 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees service charge fees related to the acquisition of Happy.

•The $5.9 million increase in other service charges and fees is primarily related to an increase in Centennial CFG property finance loan fees and an increase in interchange fees related to the acquisition of Happy.

•The $3.5 million increase in trust fees is primarily related to an increase in trust fees resulting from the acquisition of Happy.

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•The $1.8 million decrease in mortgage lending income is primarily related to a decrease in volume of secondary market loans from the high volume of loans during 2021. The decrease in volume is due to the increase in interest rates.

•The $580,000 increase in cash value of life insurance is primarily related to the increase in bank owned life insurance resulting from the acquisition of Happy.

•The $920,000 decrease for dividends from FHLB, FRB, FNBB & other is primarily due to a decrease in special dividends from equity investments, partially offset by an increase in dividend income from marketable securities and an increase in FRB stock holdings related to the acquisition of Happy.

•The $2.7 million decrease in the fair value adjustment for marketable securities is due to a reduction in the fair value of marketable securities held by the Company.

•The $5.2 million increase in other income is primarily due to a $3.3 million adjustment for equity method investments. Other factors causing this increase were a $404,000 increase in additional income for items previously charged off, which includes the $1.1 million in recoveries on historic losses; a $618,000 increase in investment brokerage fee income; a $307,000 increase in real estate rental income and a $522,000 increase in building rental income related to the acquisition of Happy.

Non-interest income increased $12.8 million, or 12.2%, to $118.5 million for the nine months ended September 30, 2022 from $105.6 million for the same period in 2021. The primary factors that resulted in this increase were the increase in service charges on deposit accounts and the increase in other income. Other factors were changes related to service charges and fees, trust fees, mortgage lending income, increase in cash value of life insurance, dividends from FHLB, FRB, FNBB and other, gain on sale of SBA loans and fair value adjustment for marketable securities.

Additional details for the nine months ended September 30, 2022 on some of the more significant changes are as follows:

•The $10.9 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees and service charge fees resulting from the acquisition of Happy.

•The $8.9 million increase in other service charges and fees is primarily related to an increase in Centennial CFG property finance loan fees and an increase in interchange acquisition fees resulting from the acquisition of Happy.

•The $7.4 million increase in trust fees is primarily related to an increase in trust fees resulting from the acquisition of Happy.

•The $6.2 million decrease in mortgage lending income is primarily due to a decrease in volume of secondary market loans from the high volume of loans during 2021. The decrease in volume is due to the increase in interest rates.

•The $1.2 million increase in cash value of life insurance is primarily related to BOLI acquired in the acquisition of Happy.

•The $7.5 million decrease for dividends from FHLB, FRB, FNBB & other is primarily due to a decrease in special dividends from equity investments, partially offset by an increase in FRB stock holdings related to the acquisition of Happy.

•The $1.4 million decrease in gains on sales of SBA loans is primarily due to decrease in the volume of SBA loan sales during 2022.

•The $779,000 decrease in gains on OREO resulted from a reduction in the level of sales of OREO during 2022.

•The $9.4 million decrease in the fair value adjustment for marketable securities is due to a reduction in the fair value of marketable securities held by the Company.

•The $9.7 million increase in other income is primarily due to a $3.3 million adjustment for equity method investments and a $3.2 million increase in additional income for items previously charged off, which includes the $6.7 million recoveries on historic losses. Other factors causing this increase were a $2.0 million increase in investment brokerage fee income, a $529,000 increase in real estate rental income and a $1.0 million increase in building rental income related to the acquisition of Happy.

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Non-Interest Expense

Non-interest expense primarily consists of salaries and employee benefits, occupancy and equipment, data processing, and other expenses such as advertising, merger and acquisition expenses, amortization of intangibles, electronic banking expense, FDIC and state assessment, insurance, legal and accounting fees and other professional fees.

Table 7 below sets forth a summary of non-interest expense for the three and nine months ended September 30, 2022 and 2021, as well as changes for the three and nine months ended September 30, 2022 compared to the same period in 2021.

Table 7: Non-Interest Expense


	Three Months Ended September 30,				2022 Change from 2021				Nine Months Ended September 30,				2022 Change from 2021
	2022		2021						2022		2021
	(Dollars in thousands)
Salaries and employee benefits	$	65,290	$	42,469	$	22,821	53.7	%	$	174,636	$	126,990	$	47,646	37.5	%
Occupancy and equipment	15,133		9,305		5,828		62.6		38,533		27,584		10,949		39.7
Data processing expense	8,747		6,024		2,723		45.2		25,880		17,787		8,093		45.5
Merger and acquisition expenses	—		1,006		(1,006)		(100.0)		49,594		1,006		48,588		4829.8
Other operating expenses:
Advertising	2,024		1,204		820		68.1		5,407		3,444		1,963		57.0
Amortization of intangibles	2,477		1,421		1,056		74.3		6,376		4,262		2,114		49.6
Electronic banking expense	3,828		2,521		1,307		51.8		9,718		7,375		2,343		31.8
Directors' fees	354		395		(41)		(10.4)		1,133		1,192		(59)		(4.9)
Due from bank service charges	316		265		51		19.2		982		787		195		24.8
FDIC and state assessment	2,146		1,648		498		30.2		6,204		4,119		2,085		50.6
Insurance	959		749		210		28.0		2,702		2,317		385		16.6
Legal and accounting	1,581		1,050		531		50.6		3,439		2,954		485		16.4
Other professional fees	2,466		1,787		679		38.0		6,329		5,196		1,133		21.8
Operating supplies	681		474		207		43.7		2,430		1,426		1,004		70.4
Postage	614		301		313		104.0		1,476		931		545		58.5
Telephone	593		371		222		59.8		1,314		1,082		232		21.4
Other expense	7,137		4,629		2,508		54.2		20,571		13,015		7,556		58.1
Total non-interest expense	$	114,346	$	75,619	$	38,727	51.2	%	$	356,724	$	221,467	$	135,257	61.1	%

Non-interest expense increased $38.7 million, or 51.2%, to $114.3 million for the three months ended September 30, 2022 from $75.6 million for the same period in 2021. The primary factors that resulted in this increase were the changes related to salaries and employee benefits. Other factors were changes related to occupancy and equipment, data processing expense, merger and acquisition expenses, advertising expenses, amortization of intangibles, electronic banking expense and other expenses.

Additional details for the three months ended September 30, 2022 on some of the more significant changes are as follows:

•The $22.8 million increase in salaries and employee benefits expense is primarily due to increased salary expenses and insurance expenses related to the acquisition of Happy.

•The $5.8 million increase in occupancy and equipment expenses is primarily due to increases in depreciation on buildings, machinery and equipment; utility expenses; lease expense; equipment maintenance and repairs; janitorial expenses; property taxes and other occupancy expenses related to the acquisition of Happy.

•The $2.7 million increase in data processing expense is primarily due to increases in telecommunication fees, depreciation of equipment and software, software maintenance and software licensing subscriptions related to the acquisition of Happy.

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•The $1.0 million decrease in merger and acquisition expense is related to preliminary costs associated with the acquisition of Happy during 2021, and the merger expenses for the current year being recorded during the first and second quarters of 2022.

•The $820,000 increase in advertising expense is related to the acquisition of Happy.

•The $1.1 million increase in amortization of intangibles is due to the acquisition of Happy.

•The $1.3 million increase in electronic banking expense is due to increased debit card processing fees and interchange network expenses resulting from the acquisition of Happy.

•The $2.5 million increase in other expenses is primarily related to the acquisition of Happy.

Non-interest expense increased $135.3 million, or 61.1%, to $356.7 million for the three months ended September 30, 2022 from $221.5 million for the same period in 2021. The primary factors that resulted in this increase were the changes related to salaries and employee benefits and merger and acquisition expense. Other factors were changes related to occupancy and equipment expense, data processing expense, advertising, advertising expenses, amortization of intangibles, electronic banking expense, FDIC and state assessment fees, other professional fees, operating supplies and other expenses.

Additional details for the nine months ended September 30, 2022 on some of the more significant changes are as follows:

•The $47.6 million increase in salaries and employee benefits expense is primarily due to the acquisition of Happy.

•The $10.9 million increase in occupancy and equipment expenses is primarily due to increases in depreciation on buildings, machinery and equipment; utility expenses; lease expense; equipment maintenance and repairs; janitorial expenses; property taxes and other occupancy expenses related to the acquisition of Happy.

•The $8.1 million increase in data processing expense is primarily due to increases in telecommunication fees, computer software fees, licensing fees, mobile banking, internet banking and cash management expenses related to the acquisition of Happy.

•The $48.6 million increase in merger and acquisition expense is related to costs associated with the acquisition of Happy.

•The $2.0 million increase in advertising expense is related to the acquisition of Happy.

•The $2.1 million increase in amortization of intangibles is due to the acquisition of Happy.

•The $2.3 million increase in electronic banking expense is due to increased debit card processing fees and interchange network expenses resulting from the acquisition of Happy.

•The $2.1 million increase in FDIC and state assessment expense is primarily due to FDIC assessment reductions for 2021 and the acquisition of Happy during the second quarter of 2022.

•The $1.1 million increase in other professional fees is primarily due to the acquisition of Happy.

•The $1.0 million increase in operating supplies is primarily due to the acquisition of Happy.

•The $7.6 million increase in other expenses is primarily related to the acquisition of Happy as well as $2.1 million in TRUPS redemption fees.

Income Taxes

Income tax expense increased $10.0 million, or 43.3%, to $33.3 million for the three-month period ended September 30, 2022, from $23.2 million for the same period in 2021. Income tax expense decreased $20.6 million, or 26.7%, to $56.6 million for the nine-month period ended September 30, 2022, from $77.2 million for the same period in 2021. The effective income tax rate was 23.43% and 22.98% for the three and nine months ended September 30, 2022, compared to 23.63% and 23.91% for the same periods in 2021. The marginal tax rate was 25.1475% and 25.74% 2022 and 2021, respectively.

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Financial Condition as of and for the Period Ended September 30, 2022 and December 31, 2021

Our total assets as of September 30, 2022 increased $5.11 billion to $23.16 billion from $18.05 billion reported as of December 31, 2021. The increase in total assets is primarily due to the acquisition of $6.69 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022. Cash and cash equivalents decreased $2.07 billion for the nine months ended September 30, 2022. Our loan portfolio balance increased to $13.83 billion as of September 30, 2022 from $9.84 billion at December 31, 2021. The increase in loans was primarily due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $98.4 million in organic loan growth. Total deposits increased $4.28 billion to $18.54 billion as of September 30, 2022 from $14.26 billion as of December 31, 2021. The increase in deposits was primarily due to the acquisition of $5.86 billion in deposits, net of purchase accounting adjustments, from Happy in the second quarter of 2022. Stockholders’ equity increased $694.3 million to $3.46 billion as of September 30, 2022, compared to $2.77 billion as of December 31, 2021. The $694.3 million increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and the $189.6 million in net income for the nine months ended September 30, 2022, partially offset by the $317.9 million in other comprehensive loss, the $94.8 million of shareholder dividends paid and stock repurchases of $50.9 million in 2022.

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $13.82 billion and $10.04 billion during the three months ended September 30, 2022 and 2021, respectively. Our loan portfolio averaged $12.55 billion and $10.53 billion during the nine months ended September 30, 2022 and 2021, respectively. Loans receivable were $13.83 billion and $9.84 billion as of September 30, 2022 and December 31, 2021, respectively.

From December 31, 2021 to September 30, 2022, the Company experienced an increase of approximately $3.99 billion in loans. The increase in loans was primarily due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $98.4 million in organic loan growth. The $98.4 million in organic loan growth included $156.6 million in loan growth for Centennial CFG and $96.0 million in loan growth within the remaining footprint, which was partially offset by a $154.2 million in decline in PPP loans. As of September 30, 2022, the Company had $10.8 million of PPP loans.

The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property. Although these loans are primarily originated within our franchises in Arkansas, Florida, Texas, Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas of Arkansas, Florida, Texas, Alabama and New York. Loans receivable were approximately $3.06 billion, $3.62 billion, $3.74 billion, $183.5 million, $1.15 billion and $2.08 billion as of September 30, 2022 in Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG, respectively.

As of September 30, 2022, we had approximately $921.3 million of construction land development loans which were collateralized by land. This consisted of approximately $148.9 million for raw land and approximately $772.4 million for land with commercial and/or residential lots.

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Table 8 presents our loans receivable balances by category as of September 30, 2022 and December 31, 2021.

Table 8: Loans Receivable


	September 30, 2022		December 31, 2021
	(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	5,156,438	$	3,889,284
Construction/land development	2,232,906		1,850,050
Agricultural	330,748		130,674
Residential real estate loans:
Residential 1-4 family	1,704,850		1,274,953
Multifamily residential	525,110		280,837
Total real estate	9,950,052		7,425,798
Consumer	1,120,250		825,519
Commercial and industrial	2,268,750		1,386,747
Agricultural	313,693		43,920
Other	176,566		154,105
Total loans receivable	$	13,829,311	$	9,836,089

Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized (where defined) over a 15 to 30-year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.

As of September 30, 2022, commercial real estate loans totaled $7.72 billion, or 55.8%, of loans receivable, as compared to $5.87 billion, or 59.7%, of loans receivable, as of December 31, 2021. Commercial real estate loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $1.95 billion, $2.36 billion, $2.21 billion, $80.7 million, zero and $1.12 billion at September 30, 2022, respectively.

Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 40.0% and 50.1% 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 September 30, 2022, with the remaining 9.9% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.

As of September 30, 2022, residential real estate loans totaled $2.23 billion, or 16.1%, of loans receivable, compared to $1.56 billion, or 15.8%, of loans receivable, as of December 31, 2021. Residential real estate loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $423.2 million, $930.0 million, $552.1 million, $46.7 million, zero and $278.0 million at September 30, 2022, respectively.

Consumer Loans. Our consumer loans are composed of secured and unsecured loans originated by our bank, the primary portion of which consists of loans to finance USCG registered high-end sail and power boats within our SPF division. The performance of consumer loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.

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As of September 30, 2022, consumer loans totaled $1.12 billion, or 8.1%, of loans receivable, compared to $825.5 million, or 8.4%, of loans receivable, as of December 31, 2021. Consumer loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $29.3 million, $8.4 million, $27.9 million, $890,000, $1.05 billion and zero at September 30, 2022, respectively.

Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. The terms for commercial loans are generally one to seven years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally, accounts receivable are financed at between 50% and 80% of accounts receivable less than 60 days past due. Inventory financing will range between 50% and 80% (with no work in process) depending on the borrower and nature of inventory. We require a first lien position for those loans.

As of September 30, 2022, commercial and industrial loans totaled $2.27 billion, or 16.4%, of loans receivable, compared to $1.39 billion, or 14.1%, of loans receivable, as of December 31, 2021. Commercial and industrial loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $482.6 million, $264.0 million, $691.8 million, $52.6 million, $97.5 million and $680.4 million at September 30, 2022, respectively.

Non-Performing Assets

We classify our problem loans into three categories: past due loans, special mention loans and classified loans (accruing and non-accruing).

When management determines that a loan is no longer performing, and that collection of interest appears doubtful, the loan is placed on non-accrual status. Loans that are 90 days past due are placed on non-accrual status unless they are adequately secured and there is reasonable assurance of full collection of both principal and interest. Our management closely monitors all loans that are contractually 90 days past due, treated as “special mention” or otherwise classified or on non-accrual status.

Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. An allowance for credit losses is determined using the same methodology as other loans. The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. The Company held approximately $146.0 million and $448,000 in PCD loans, as of September 30, 2022 and December 31, 2021, respectively.

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Table 9 sets forth information with respect to our non-performing assets as of September 30, 2022 and December 31, 2021. As of these dates, all non-performing restructured loans are included in non-accrual loans.

Table 9: Non-performing Assets


	As of September 30, 2022			As of December 31, 2021
	(Dollars in thousands)
Non-accrual loans	$	56,796		$	47,158
Loans past due 90 days or more (principal or interest payments)	4,898			3,035
Total non-performing loans	61,694			50,193
Other non-performing assets
Foreclosed assets held for sale, net	365			1,630
Other non-performing assets	104			—
Total other non-performing assets	469			1,630
Total non-performing assets	$	62,163		$	51,823
Allowance for credit losses to non-accrual loans	509.20		%	501.96		%
Allowance for credit losses to non-performing loans	468.77			471.61
Non-accrual loans to total loans	0.41			0.48
Non-performing loans to total loans	0.45			0.51
Non-performing assets to total assets	0.27			0.29

Our non-performing loans are comprised of non-accrual loans and accruing loans that are contractually past due 90 days. Our bank subsidiary recognizes income principally on the accrual basis of accounting. When loans are classified as non-accrual, the accrued interest is charged off and no further interest is accrued, unless the credit characteristics of the loan improve. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for credit losses.

Total non-performing loans were $61.7 million and $50.2 million as of September 30, 2022 and December 31, 2021, respectively. Non-performing loans at September 30, 2022 were $10.2 million, $24.8 million, $13.7 million, $204,000, $1.4 million and $11.4 million in the Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets, respectively.

Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan. As of September 30, 2022, we had $6.2 million of restructured loans that are in compliance with the modified terms and are not reported as past due or non-accrual in Table 9. Our Florida market contains $3.5 million and our Arkansas market contains $2.7 million of these restructured loans.

A loan modification that might not otherwise be considered may be granted resulting in classification as a TDR. These loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on an accrual status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of nine months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can pay under the new terms and may result in the loan being returned to an accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan will remain in a non-accrual status.

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The majority of the Bank’s loan modifications relates to commercial lending and involves reducing the interest rate, changing from a principal and interest payment to interest-only, lengthening the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. At September 30, 2022 and December 31, 2021, the amount of TDRs was $7.6 million and $7.5 million, respectively. As of September 30, 2022 and December 31, 2021, 81.1% and 85.7%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $365,000 as of September 30, 2022, compared to $1.6 million as of December 31, 2021 for a decrease of $1.3 million. The foreclosed assets held for sale as of September 30, 2022 are comprised of zero assets located in Arkansas, $260,000 located in Florida, $105,000 located in Texas and zero from Alabama, SPF and Centennial CFG.

Table 10 shows the summary of foreclosed assets held for sale as of September 30, 2022 and December 31, 2021.

Table 10: Foreclosed Assets Held For Sale


	As of September 30, 2022		As of December 31, 2021
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	49	$	536
Construction/land development	47		834
Residential real estate loans
Residential 1-4 family	269		260

Total foreclosed assets held for sale	$	365	$	1,630

A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and non-accrual loans), criticized and/or classified loans with a specific allocation, loans categorized as TDRs and certain other loans identified by management that are still performing (loans included in multiple categories are only included once). As of September 30, 2022 and December 31, 2021, impaired loans were $229.3 million and $331.5 million, respectively. The amortized cost balance for loans with a specific allocation decreased from $284.0 million to $169.7 million, and the specific allocation for impaired loans decreased by approximately $21.9 million for the period ended September 30, 2022 compared to the period ended December 31, 2021. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary. As of September 30, 2022, our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets accounted for approximately $24.2 million, $132.3 million, $59.8 million, $204,000, $1.4 million and $11.4 million of the impaired loans, respectively.

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Past Due and Non-Accrual Loans

Table 11 shows the summary of non-accrual loans as of September 30, 2022 and December 31, 2021:

Table 11: Total Non-Accrual Loans


	As of September 30, 2022		As of December 31, 2021
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	18,621	$	11,923
Construction/land development	1,895		1,445
Agricultural	772		897
Residential real estate loans
Residential 1-4 family	16,549		16,198
Multifamily residential	156		156
Total real estate	37,993		30,619
Consumer	1,778		1,648
Commercial and industrial	16,431		13,875
Agricultural & other	594		1,016
Total non-accrual loans	$	56,796	$	47,158

If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $1.1 million and $662,000, respectively, would have been recorded for the three-month periods ended September 30, 2022 and 2021. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $3.2 million and $2.0 million, respectively, would have been recorded for the nine month periods ended September 30, 2022 and 2021. The interest income recognized on non-accrual loans for the three and nine months ended September 30, 2022 and 2021 was considered immaterial.

Table 12 shows the summary of accruing past due loans 90 days or more as of September 30, 2022 and December 31, 2021:

Table 12: Loans Accruing Past Due 90 Days or More


	As of September 30, 2022		As of December 31, 2021
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	290	$	2,225
Construction/land development	34		—

Residential real estate loans
Residential 1-4 family	1,445		701

Total real estate	1,769		2,926
Consumer	15		2
Commercial and industrial	2,901		107
Other	213		—
Total loans accruing past due 90 days or more	$	4,898	$	3,035

Our ratio of total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.45% and 0.51% at September 30, 2022 and December 31, 2021, respectively.

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Allowance for Credit Losses

Overview. The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The combination of adjustments for credit expectations (default and loss) and time expectations prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis.

The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower or

the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

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Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans. An allowance for credit losses is determined using the same methodology as other loans. The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Specific Allocations. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. Typically, when it becomes evident through the payment history or a financial statement review that a loan or relationship is no longer supported by the cash flows of the asset and/or borrower and has become collateral dependent, we will use appraisals or other collateral analysis to determine if collateral impairment has occurred. The amount or likelihood of loss on this credit may not yet be evident, so a charge-off would not be prudent. However, if the analysis indicates that an impairment has occurred, then a specific allocation will be determined for this loan. If our existing appraisal is outdated or the collateral has been subject to significant market changes, we will obtain a new appraisal for this impairment analysis. The majority of our impaired loans are collateral dependent at the present time, so third-party appraisals were used to determine the necessary impairment for these loans. Cash flow available to service debt was used for the other impaired loans. This analysis is performed each quarter in connection with the preparation of the analysis of the adequacy of the allowance for credit losses, and if necessary, adjustments are made to the specific allocation provided for a particular loan.

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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.

The Company had $229.3 million and $331.5 million in collateral-dependent impaired loans for the periods ended September 30, 2022 and December 31, 2021, respectively.

Loans Collectively Evaluated for Impairment. Loans receivable collectively evaluated for impairment increased by approximately $4.10 billion from $9.54 billion at December 31, 2021 to $13.64 billion at September 30, 2022. The percentage of the allowance for credit losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment was 1.90% and 1.94% at September 30, 2022 and December 31, 2021, respectively.

Charge-offs and Recoveries. Total charge-offs increased to $6.3 million for the three months ended September 30, 2022, compared to $2.5 million for the same period in 2021. Total charge-offs increased to $11.9 million for the nine months ended September 30, 2022, compared to $8.5 million for the same period in 2021. Total recoveries were $1.2 million and $691,000 for the three months ended September 30, 2022 and 2021, respectively. Total recoveries were $2.4 million and $1.7 million for the nine months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022, net charge-offs were $295,000 for Arkansas, $1.6 million for Florida, $1.0 million for Texas, $11,000 for Alabama and $2.2 million for Centennial CFG, partially offset by net recoveries of $3,000 for SPF. These equal a net charge-off position of $5.1 million. For the nine months ended September 30, 2022, net charge-offs were $825,000 for Arkansas, $4.3 million for Florida, $1.7 million for Texas, $47,000 for Alabama, $392,000 for SPF and $2.2 million for Centennial CFG. These equal a net charge-off position of $9.5 million.

We have not charged off an amount less than what was determined to be the fair value of the collateral as presented in the appraisal, less estimated costs to sell (for collateral dependent loans), for any period presented. Loans partially charged-off are placed on non-accrual status until it is proven that the borrower's repayment ability with respect to the remaining principal balance can be reasonably assured. This is usually established over a period of 6-12 months of timely payment performance.

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Table 13 shows the allowance for credit losses, charge-offs and recoveries as of and for the three and nine months ended September 30, 2022 and 2021.

Table 13: Analysis of Allowance for Credit Losses


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Balance, beginning of period	$	294,267		$	240,451		$	236,714		$	245,473

Allowance for credit losses on PCD loans - Happy acquisition	—			—			16,816			—
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential	—			9			—			604
Construction/land development	11			—			11			—
Agricultural	—			—			—			42
Residential real estate loans:
Residential 1-4 family	48			220			337			543

Total real estate	59			229			348			1,189
Consumer	47			21			2,284			143
Commercial and industrial	4,536			1,682			5,952			5,892

Other	1,671			537			3,304			1,315
Total loans charged off	6,313			2,469			11,888			8,539
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential	778			44			856			112
Construction/land development	8			8			325			47

Residential real estate loans:
Residential 1-4 family	45			388			94			554

Total real estate	831			440			1,275			713
Consumer	42			19			90			51
Commercial and industrial	189			80			519			382

Other	187			152			507			593
Total recoveries	1,249			691			2,391			1,739
Net loans charged off	5,064			1,778			9,497			6,800
Provision for credit loss - acquired loans	—			—			45,170			—

Balance, September 30	$	289,203		$	238,673		$	289,203		$	238,673
Net charge-offs to average loans receivable	0.15		%	0.07		%	0.10		%	0.09		%
Allowance for credit losses to total loans	2.09			2.41			2.09			2.41
Allowance for credit losses to net charge-offs	1,439.47			3,383.50			2,277.65			2,625.21

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Table 14 presents the allocation of allowance for credit losses as of September 30, 2022 and December 31, 2021.

Table 14: Allocation of Allowance for Credit Losses


	As of September 30, 2022				As of December 31, 2021
	Allowance Amount		% of loans(1)		Allowance Amount		% of loans(1)
	(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non- residential	$	90,655	37.3	%	$	86,910	39.5	%
Construction/land development	34,687		16.1		28,415		18.8
Agricultural residential real estate loans	1,758		2.4		308		1.3
Residential real estate loans:
Residential 1-4 family	45,074		12.3		45,364		13.0
Multifamily residential	4,747		3.8		3,094		2.9
Total real estate	176,921		71.9		164,091		75.5
Consumer	20,513		8.1		16,612		8.4
Commercial and industrial	88,143		16.4		52,910		14.1
Agricultural	1,278		2.3		152		0.4
Other	2,348		1.3		2,949		1.6
Total	$	289,203	100.0	%	$	236,714	100.0	%

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

Investment Securities

Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. The estimated effective duration of our securities portfolio was 5.2 years as of September 30, 2022.

Securities held-to-maturity, which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. As of September 30, 2022, we had $1.25 billion of held-to-maturity securities. As of September 30, 2022, $1.11 billion, or 88.7%, was invested in obligations of state and political subdivisions, $43.0 million, or 3.4%, were invested in obligations of U.S. Government-sponsored enterprises and $98.5 million, or 7.9%, were invested in mortgage-backed securities. The U.S. government-sponsored enterprises and mortgage-backed securities are guaranteed by the U.S. government.

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 (loss) income. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. Available-for-sale securities were $4.09 billion and $3.12 billion as September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022, $1.94 billion, or 47.5%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $1.54 billion, or 49.3%, of our available-for-sale securities as of December 31, 2021. To reduce our income tax burden, $900.2 million, or 22.0%, of our available-for-sale securities portfolio as of September 30, 2022, were primarily invested in tax-exempt obligations of state and political subdivisions, compared to $997.0 million, or 32.0%, of our available-for-sale securities as of December 31, 2021. We had $682.0 million, or 16.7%, invested in obligations of U.S. Government-sponsored enterprises as of September 30, 2022, compared to $433.0 million, or 13.9%, of our available-for-sale securities as of December 31, 2021. Also, we had approximately $564.3 million, or 13.8%, invested in other securities as of September 30, 2022, compared to $151.9 million, or 4.9% of our available-for-sale securities as of December 31, 2021.

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The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or if it 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.

The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.11 billion, or 88.7% are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S. government-sponsored enterprises and mortgage-backed securities all of which are guaranteed by the U.S. government. Due to the inherent low risk in these U.S. government guaranteed securities, no provision for credit loss was established on this portion of the portfolio.

At September 30, 2022, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainty, was adequate for the available-for-sale investment portfolio, and the allowance for credit losses for the HTM portfolio was considered adequate. No additional provision for credit losses was considered necessary for the portfolio.

See Note 3 to the Condensed Notes to Consolidated Financial Statements for the carrying value and fair value of investment securities.

Deposits

Our deposits averaged $19.09 billion and $17.82 billion for the three and nine months ended September 30, 2022, respectively. Our deposits averaged $13.95 billion and $13.59 billion for the three and nine months ended September 30, 2021, respectively. Total deposits were $18.54 billion as of September 30, 2022, and $14.26 billion as of December 31, 2021. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions.

Our policy also permits the acceptance of brokered deposits. From time to time, when appropriate in order to fund strong loan demand, we accept brokered time deposits, generally in denominations of less than $250,000, from a regional brokerage firm, and other national brokerage networks. We also participate in the One-Way Buy Insured Cash Sweep (“ICS”) service and similar services, which provide for one-way buy transactions among banks for the purpose of purchasing cost-effective floating-rate funding without collateralization or stock purchase requirements. Management believes these sources represent a reliable and cost-efficient alternative funding source for the Company. However, to the extent that our condition or reputation deteriorates, or to the extent that there are significant changes in market interest rates which we do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding.

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Table 15 reflects the classification of the brokered deposits as of September 30, 2022 and December 31, 2021.

Table 15: Brokered Deposits


	September 30, 2022		December 31, 2021
	(In thousands)


Insured Cash Sweep and Other Transaction Accounts	546,643		625,704
Total Brokered Deposits	$	546,643	$	625,704

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 nine months ended September 30, 2022 and 2021.

Table 16: Average Deposit Balances and Rates


	Three Months Ended September 30,
	2022				2021
	Average Amount		Average Rate Paid		Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	5,779,082	—	%	$	4,091,174	—	%
Interest-bearing transaction accounts	10,759,379		0.81		7,895,663		0.18
Savings deposits	1,474,376		0.09		898,994		0.06
Time deposits:
$100,000 or more	654,550		0.37		708,524		0.94
Other time deposits	423,562		0.32		354,976		0.40
Total	$	19,090,949	0.49	%	$	13,949,331	0.16	%


	Nine Months Ended September 30,
	2022				2021
	Average Amount		Average Rate Paid		Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	5,363,770	—	%	$	3,848,302	—	%
Interest-bearing transaction accounts	10,058,021		0.47		7,754,622		0.21
Savings deposits	1,362,545		0.07		853,106		0.06
Time deposits:
$100,000 or more	635,555		0.43		767,594		1.06
Other time deposits	399,785		0.30		363,944		0.51
Total	$	17,819,676	0.29	%	$	13,587,568	0.19	%

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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 $19.3 million, or 13.7%, from $140.9 million as of December 31, 2021 to $121.6 million as of September 30, 2022.

FHLB and Other Borrowed Funds

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $440.6 million and $371.1 million as of September 30, 2022 and December 31, 2021, respectively.

On April 1, 2022, the Company acquired $23.2 million in trust preferred securities from Happy which were currently callable without penalty based on the terms of the specific agreements. During the second and third quarters of 2022, the Company redeemed, without penalty, the $23.2 million of the trust preferred securities acquired from Happy. In addition, during the second and third quarters, the Company also redeemed, without penalty, the $73.3 million of trust preferred securities held prior to the Happy acquisition. As a result, the Company no longer holds any trust preferred securities.

On April 1, 2022, the Company acquired $140.0 million of subordinated notes from Happy. These notes have a maturity date of July 31, 2030 and carry a fixed rate of 5.500% for the first five years. Thereafter, the notes bear interest at 3-month Secured Overnight Funding Rate (SOFR) plus 5.345% resetting quarterly. Interest payments are due semi-annually and the notes include a right of prepayment without penalty on or after July 31, 2025.

On January 18, 2022, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “2032 Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $296.4 million. The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. From and including the date of issuance to, but excluding January 30, 2027 or the date of earlier redemption, the 2032 Notes will bear interest at an initial rate of 3.125% per annum, payable in arrears on January 30 and July 30 of each year. From and including January 30, 2027 to, but excluding the maturity date or earlier redemption, the 2032 Notes will bear interest at a floating rate equal to the Benchmark rate (which is expected to be Three-Month Term SOFR), each as defined in and subject to the provisions of the applicable supplemental indenture for the 2032 Notes, plus 182 basis points, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, commencing on April 30, 2027.

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On April 3, 2017, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The 2027 Notes were unsecured, subordinated debt obligations and would have matured on April 15, 2027. From and including the date of issuance to, but excluding April 15, 2022, the 2027 Notes bore interest at an initial rate of 5.625% per annum. From and including April 15, 2022 to, but excluding the maturity date or earlier redemption, the 2027 Notes were to 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 was less than zero, then three-month LIBOR would have been deemed to be zero.

Stockholders’ Equity

Stockholders’ equity increased $694.3 million to $3.46 billion as of September 30, 2022, compared to $2.77 billion as of December 31, 2021. The $694.3 million increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and the $189.6 million in net income for the nine months ended September 30, 2022, partially offset by the $317.9 million in other comprehensive loss, the $94.8 million of shareholder dividends paid and stock repurchases of $50.9 million in 2022. As of September 30, 2022 and December 31, 2021, our equity to asset ratio was 14.94% and 15.32%, respectively. Book value per share was $16.94 as of September 30, 2022, compared to $16.90 as of December 31, 2021, a 0.3% annualized increase.

Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.165 and $0.14 per share for the three months ended September 30, 2022 and 2021, respectively. The common stock dividend payout ratio for the three months ended September 30, 2022 and 2021 was 31.1% and 30.6%, respectively. The common stock dividend payout ratio for the nine months ended September 30, 2022 and 2021 was 50.0% and 28.2%, respectively. On October 21, 2022, the Board of Directors declared a regular $0.165 per share quarterly cash dividend payable December 7, 2022, to shareholders of record November 16, 2022.

Stock Repurchase Program. On January 22, 2021, the Company’s Board of Directors authorized the repurchase of up to an additional 20,000,000 shares of its common stock under the previously approved stock repurchase program. We repurchased a total of 2,258,531 shares with a weighted-average stock price of $22.50 per share during the first nine months of 2022. The remaining balance available for repurchase was 19,832,134 shares at September 30, 2022.

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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.

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 September 30, 2022 and December 31, 2021, we met all regulatory capital adequacy requirements to which we were subject.

On January 18, 2022, the Company completed an underwritten public offering of the 2032 Notes in aggregate principal amount of $300.0 million. The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. The Company may, beginning with the interest payment date of January 30, 2027, and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior to January 30, 2027, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.

On April 3, 2017, the Company completed an underwritten public offering of the 2027 Notes in aggregate principal amount of $300.0 million. The 2027 Notes were unsecured, subordinated debt obligations and would have matured on April 15, 2027. On April 15, 2022, the Company completed the payoff of the 2027 Notes in aggregate principal amount of $300.0 million. Each 2027 Note was redeemed pursuant to the terms of the Subordinated Indenture, as supplemented by the First Supplemental Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank Trust Company, National Association, the Trustee for the 2027 Notes, at the redemption price of 100% of its principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.

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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 September 30, 2022 and December 31, 2021.

Table 17: Risk-Based Capital


	As of September 30, 2022			As of December 31, 2021
	(Dollars in thousands)
Tier 1 capital
Stockholders’ equity	$	3,460,015		$	2,765,721
ASC 326 transitional period adjustment	24,369			55,143
Goodwill and core deposit intangibles, net	(1,454,837)			(997,605)
Unrealized loss on available-for-sale securities	307,455			(10,462)
Total common equity Tier 1 capital	2,337,002			1,812,797
Qualifying trust preferred securities	—			71,270
Total Tier 1 capital	2,337,002			1,884,067
Tier 2 capital
Allowance for credit losses	289,203			236,714
ASC 326 transitional period adjustment	(24,369)			(55,143)
Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets)	(39,796)			(33,514)
Qualifying allowance for credit losses	225,038			148,057
Qualifying subordinated notes	440,568			299,824
Total Tier 2 capital	665,606			447,881
Total risk-based capital	$	3,002,608		$	2,331,948
Average total assets for leverage ratio	$	22,561,638		$	16,960,683
Risk weighted assets	$	17,929,429		$	11,793,539
Ratios at end of period
Common equity Tier 1 capital	13.03		%	15.37		%
Leverage ratio	10.36			11.11
Tier 1 risk-based capital	13.03			15.98
Total risk-based capital	16.75			19.77
Minimum guidelines – Basel III
Common equity Tier 1 capital	7.00		%	7.00		%
Leverage ratio	4.00			4.00
Tier 1 risk-based capital	8.50			8.50
Total risk-based capital	10.50			10.50
Well-capitalized guidelines
Common equity Tier 1 capital	6.50		%	6.50		%
Leverage ratio	5.00			5.00
Tier 1 risk-based capital	8.00			8.00
Total risk-based capital	10.00			10.00

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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 common equity, as adjusted; return on average tangible equity, excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted.

We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP.

The tables below present non-GAAP reconciliations of earnings, as adjusted, and diluted earnings per share, as adjusted, as well as the non-GAAP computations of tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted. The items used in these calculations are included in financial results presented in accordance with GAAP.

Earnings, as adjusted, and diluted earnings per common share, as adjusted, are meaningful non-GAAP financial measures for management, as they exclude certain items such as merger expenses and/or certain gains and losses. Management believes the exclusion of these items in expressing earnings provides a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business, because management does not consider these items to be relevant to ongoing financial performance.

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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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Dollars in thousands)
GAAP net income available to common shareholders (A)	$	108,705	$	74,992	$	189,575	$	245,664
Pre-tax adjustments:
Merger and acquisition expenses	—		1,006		49,594		1,006
Initial provision for credit losses - acquisition	—		—		58,585		—
Fair value adjustment for marketable securities	2,628		(61)		2,304		(7,093)
Special dividend from equity investment	—		(2,227)		(1,434)		(12,500)
TRUPS redemption fees	—		—		2,081		—
Recoveries on historic losses	(1,065)		—		(6,706)		(5,107)
Gain on securities	—		—		—		(219)
Total pre-tax adjustments	1,563		(1,282)		104,424		(23,913)
Tax-effect of adjustments(1)	393		(587)		25,569		(6,412)
Total adjustments after-tax (B)	1,170		(695)		78,855		(17,501)
Earnings, as adjusted (C)	$	109,875	$	74,297	$	268,430	$	228,163
Average diluted shares outstanding (D)	205,135		164,603		191,941		165,050
GAAP diluted earnings per share: A/D	$	0.53	$	0.46	$	0.99	$	1.49
Adjustments after-tax: B/D	0.01		(0.01)		0.41		(0.11)
Diluted earnings per common share excluding adjustments: C/D	$	0.54	$	0.45	$	1.40	$	1.38

(1) Blended statutory rate of 25.1475% for 2022 and 25.74% for 2021

We had $1.46 billion, $998.1 million, and $999.5 million in total goodwill, core deposit intangibles and other intangible assets as of September 30, 2022, December 31, 2021 and September 30, 2021, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets excluding intangible amortization, return on average tangible equity, return on average tangible equity excluding intangible amortization, and tangible equity to tangible assets are useful in evaluating our company. Management also believes return on average assets, as adjusted, return on average equity, as adjusted, and return on average tangible equity, as adjusted, are meaningful non-GAAP financial measures, as they exclude items such as certain non-interest income and expenses that management believes are not indicative of our primary business operating results. These calculations, which are similar to the GAAP calculations of book value per share, return on average assets, return on average equity, and equity to assets, are presented in Tables 19 through 22, respectively.

Table 19: Tangible Book Value Per Share


	As of September 30, 2022		As of December 31, 2021
	(In thousands, except per share data)
Book value per share: A/B	$	16.94	$	16.90
Tangible book value per share: (A-C-D)/B	9.82		10.80
(A) Total equity	$	3,460,015	$	2,765,721
(B) Shares outstanding	204,219		163,699
(C) Goodwill	1,394,353		973,025
(D) Core deposit intangibles	60,932		25,045

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Table 20: Return on Average Assets


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Return on average assets: A/D	1.81		%	1.68		%	1.13		%	1.90		%
Return on average assets, as adjusted: (A+C)/D	1.83			1.67			1.61			1.76
Return on average assets excluding intangible amortization: B/(D-E)	1.97			1.81			1.23			2.04
(A) Net income	$	108,705		$	74,992		$	189,575		$	245,664
Intangible amortization after-tax	1,854			1,055			4,757			3,164
(B) Earnings excluding intangible amortization	$	110,559		$	76,047		$	194,332		$	248,828
(C) Adjustments after-tax	$	1,170		$	(695)		$	78,855		$	(17,501)
(D) Average assets	23,778,769			17,695,226			22,339,797			17,305,402
(E) Average goodwill, core deposits and other intangible assets	1,459,034			1,000,175			1,294,971			1,001,585

Table 21: Return on Average Equity


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Return on average equity: A/D	12.25		%	10.97		%	7.71		%	12.32		%
Return on average common equity, as adjusted: (A+C)/D	12.39			10.87			10.91			11.44
Return on average tangible common equity: A/(D-E)	20.93			17.39			12.71			19.74
Return on average tangible equity excluding intangible amortization: B/(D-E)	21.29			17.64			13.03			19.99
Return on average tangible common equity, as adjusted: (A+C)/(D-E)	21.16			17.23			18.00			18.33
(A) Net income	$	108,705		$	74,992		$	189,575		$	245,664
(B) Earnings excluding intangible amortization	110,559			76,047			194,332			248,828
(C) Adjustments after-tax	1,170			(695)			78,855			(17,501)
(D) Average equity	3,519,296			2,710,953			3,289,170			2,665,886
(E) Average goodwill, core deposits and other intangible assets	1,459,034			1,000,175			1,294,971			1,001,585

Table 22: Tangible Equity to Tangible Assets


	As of September 30, 2022			As of December 31, 2021
	(Dollars in thousands)
Equity to assets: B/A	14.94		%	15.32		%
Tangible equity to tangible assets: (B-C-D)/(A-C-D)	9.24			10.36
(A) Total assets	$	23,157,370		$	18,052,138
(B) Total equity	3,460,015			2,765,721
(C) Goodwill	1,394,353			973,025
(D) Core deposit intangibles	60,932			25,045

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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 September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Net interest income (A)	$	213,104		$	144,611		$	543,010		$	433,951
Non-interest income (B)	43,201			29,209			118,451			105,605
Non-interest expense (C)	114,346			75,619			356,724			221,467
FTE Adjustment (D)	2,437			1,748			6,646			5,343
Amortization of intangibles (E)	2,477			1,421			6,376			4,262
Adjustments:
Non-interest income:
Fair value adjustment for marketable securities	$	(2,628)		$	61		$	(2,304)		$	7,093
Special dividend from equity investment	—			2,227			1,434			12,500
Gain on OREO, net	—			246			487			1,266
Gain (loss) on branches, equipment and other assets, net	(13)			(34)			5			(86)
Gain on securities, net	—			—			—			219
Recoveries on historic losses	1,065			—			6,706			5,107
Total non-interest income adjustments (F)	$	(1,576)		$	2,500		$	6,328		$	26,099
Non-interest expense:


Merger and acquisition expenses	—			1,006			49,594			1,006

TRUPS redemption fees	—			—			2,081			—
Total non-core non-interest expense (G)	$	—		$	1,006		$	51,675		$	1,006
Efficiency ratio (reported): ((C-E)/(A+B+D))	43.24		%	42.26		%	52.44		%	39.86		%
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F))	42.97			42.29			45.13			41.67

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Recently Issued Accounting Pronouncements

See Note 21 to 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

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.

Our objective is to manage liquidity in a way that ensures cash flow requirements of depositors and borrowers are met in a timely and orderly fashion while ensuring the reliance on various funding sources does not become so heavily weighted to any one source that it causes undue risk to the bank. Our liquidity sources are prioritized based on availability and ease of activation. Our current liquidity condition is a primary driver in determining our funding needs and is a key component of our asset liability management.

Various sources of liquidity are available to meet the cash flow needs of depositors and borrowers. Our principal source of funds is core deposits, including checking, savings, money market accounts and certificates of deposit. We may also from time to time obtain wholesale funding through brokered deposits. Secondary sources of funding include advances from the Federal Home Loan Bank of Dallas, the Federal Reserve Bank Discount Window and other borrowings, such as through correspondent banking relationships. These secondary sources enable us to borrow funds at rates and terms which, at times, are more beneficial to us. Additionally, as needed, we can liquidate or utilize our available for sale investment portfolio as collateral to provide funds for an intermediate source of liquidity.

Interest Rate Sensitivity. Our primary business is banking and the resulting earnings, primarily net interest income, are susceptible to changes in market interest rates. It is management’s goal 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 net interest income simulation modeling and economic value of equity as the primary methods in analyzing and managing interest rate risk.

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 proportional 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 overnight in the model while we project certain other deposits by product type to have stable balances based on our deposit history. This accounts for the portion of our portfolio that moves more slowly than market rates and changes 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 September 30, 2022, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.

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Table 24 presents our sensitivity to net interest income as of September 30, 2022.

Table 24: Sensitivity of Net Interest Income


Interest Rate Scenario	Percentage Change from Base
Up 200 basis points	8.40	%
Up 100 basis points	4.50
Down 100 basis points	(5.50)
Down 200 basis points	(12.70)

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 were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2022, 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, 2021, except for the Company ending its banking relationship with the Cuban Embassy and Banco Internacional de Comercia, S.A. during the second quarter of 2022. 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.

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

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)
July 1 through July 31, 2022	214,438	$	20.82	214,438	20,663,495
August 1 through August 31, 2022	391,100	24.52		391,100	20,272,395
September 1 through September 30, 2022	440,261	23.19		440,261	19,832,134
Total	1,045,799			1,045,799

(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.

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Item 6: Exhibits


Exhibit No.						Description of Exhibit
2.1						Agreement and Plan of Merger, dated as of September 15, 2021, by and among Home BancShares, Inc., Centennial Bank, Happy Bancshares, Inc., and Happy State Bank (incorporated by reference to Exhibit 2.1 of Home BancShares’s Current Report on Form 8-K filed on September 15, 2021)**

2.2						Amendment and Joinder Agreement, dated as of October 18, 2021, by and among Home Bancshares, Inc., Centennial Bank, Happy Bancshares, Inc., Happy State Bank and HOMB Acquisition Sub III, Inc. (incorporated by reference to Appendix A of Home BancShares’s registration statement on Form S-4 (File No. 333-260446)), as amended)

2.3						Second Amendment to Agreement and Plan of Merger, dated as of November 8, 2021, by and among Home BancShares, Inc., Centennial Bank, HOMB Acquisition Sub III, Inc., Happy Bancshares, Inc. and Happy State Bank (incorporated by reference to Appendix A of Home BancShares’s registration statement on Form S-4 (File No. 333-260446), as amended)

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						Tenth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 4.11 of Home BancShares’s registration statement on Form S-8 (File No. 333-264409))

3.12						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)

3.13						Amendment to the 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 April 22, 2022)

4.1						Specimen Stock Certificate representing Home BancShares, Inc. Common Stock (incorporated by reference to Exhibit 4.12 of the Company’s registration statement on Form S-3ASR (File No. 333-261495))

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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

** The disclosure schedules referenced in the Agreement and Plan of Merger have been omitted pursuant to Item 601(a)(5) of SEC Regulation S-K. The Company hereby agrees to furnish supplementally a copy of any omitted disclosure schedule to the SEC upon request.

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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:	November 4, 2022	/s/ John W. Allison
		John W. Allison, Chairman and Chief Executive Officer

Date:	November 4, 2022	/s/ Brian S. Davis
		Brian S. Davis, Chief Financial Officer

Date:	November 4, 2022	/s/ Jennifer C. Floyd
		Jennifer C. Floyd, Chief Accounting Officer

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