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, 2021

or

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

For the Transition period from            to

Commission File Number:  000-51904

HOME BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Arkansas	71-0682831
(State or other jurisdiction of<br><br><br>incorporation or organization)	(I.R.S. Employer<br><br><br>Identification No.)
719 Harkrider, Suite 100, Conway, Arkansas	72032
(Address of principal executive offices)	(Zip Code)
(501) 339-2929
(Registrant's telephone number, including area code)
Not Applicable
Former name, former address and former fiscal year, if changed since last report

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

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

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

Yes  ☑    No  ☐

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

Yes  ☑   No  ☐

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

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

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

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

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

Common Stock Issued and Outstanding: 163,845,498 shares as of November 4, 2021.

HOME BANCSHARES, INC.<br><br><br>FORM 10-Q<br><br><br>September 30, 2021
INDEX
		Page No.
Part I:	Financial Information
Item 1:	Financial Statements
	Consolidated Balance Sheets –
	September 30, 2021 (Unaudited) and December 31, 2020	4
	Consolidated Statements of Income (Unaudited) –
	Three and nine months ended September 30, 2021 and 2020	5
	Consolidated Statements of Comprehensive Income (Unaudited) –
	Three and nine months ended September 30, 2021 and 2020	6
	Consolidated Statements of Stockholders’ Equity (Unaudited) –
	Three and nine months ended September 30, 2021 and 2020	7-8
	Consolidated Statements of Cash Flows (Unaudited) –
	Nine months ended September 30, 2021 and 2020	9
	Condensed Notes to Consolidated Financial Statements (Unaudited)	10-49
	Report of Independent Registered Public Accounting Firm	50
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51-93
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	93-96
Item 4:	Controls and Procedures	96
Part II:	Other Information
Item 1:	Legal Proceedings	97
Item 1A:	Risk Factors	97
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	97
Item 3:	Defaults Upon Senior Securities	97
Item 4:	Mine Safety Disclosures	97
Item 5:	Other Information	97
Item 6:	Exhibits	98-99
Signatures		100

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, a decrease in commercial real estate and residential housing values and unemployment;
•	changes in the level of nonperforming assets and charge-offs, and credit risk generally;
---	---
•	the risks of changes in interest rates or the level and composition of deposits, loan demand and the values of loan collateral, securities and interest-sensitive assets and liabilities;
---	---
•	disruptions, uncertainties and related effects on 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, including the recently proposed federal vaccine and testing mandate for employers of 100 or more employees;
---	---
•	the effect of any mergers, acquisitions or other transactions to which we or our bank subsidiary may from time to time be a party, including our ability to successfully integrate any businesses that we acquire;
---	---
•	the risk that expected cost savings and other benefits from acquisitions may not be fully realized or may take longer to realize than expected;
---	---
•	the possibility that an acquisition does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;
---	---
•	the reaction to a proposed acquisition transaction of the respective companies’ customers, employees and counterparties;
---	---
•	diversion of management time on acquisition-related issues;
---	---
•	the ability to enter into and/or close additional acquisitions;
---	---
•	the availability of and access to capital on terms acceptable to us;
---	---
•	increased regulatory requirements and supervision that applies as a result of our exceeding $10 billion in total assets;
---	---
•	legislation and regulation affecting the financial services industry as a whole, and the Company and its subsidiaries in particular, including the effects resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), recent reforms to the Dodd-Frank Act, legislation and regulations in response to the COVID-19 pandemic and other future legislative and regulatory changes;
---	---
•	changes in governmental monetary and fiscal policies;
---	---
•	the effects of terrorism and efforts to combat it;
---	---
•	political instability;
---	---
•	risks associated with our customer relationship with the Cuban government and our correspondent banking relationship with Banco Internacional de Comercio, S.A. (BICSA), a Cuban commercial bank;
---	---
•	adverse weather events, including hurricanes, and other natural disasters;
---	---
•	the ability to keep pace with technological changes, including changes regarding cybersecurity;
---	---
•	an increase in the incidence or severity of fraud, illegal payments, cybersecurity breaches or other illegal acts impacting our bank subsidiary, our vendors or our customers;
---	---
•	the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with competitors offering banking products and services by mail, telephone and the Internet;
---	---
•	potential claims, expenses and other adverse effects related to current or future litigation, regulatory examinations or other government actions;
---	---
•	the effect of changes in accounting policies and practices and auditing requirements, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters;
---	---
•	higher defaults on our loan portfolio than we expect; and
---	---
•	the failure of assumptions underlying the establishment of our allowance for credit losses or changes in our estimate of the adequacy of the allowance for credit losses.
---	---

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

Item 1: Financial Statements

Home BancShares, Inc.

Consolidated Balance Sheets

(In thousands, except share data)			December 31, 2020
Assets
Cash and due from banks	146,378		$	242,173
Interest-bearing deposits with other banks	3,133,878			1,021,615
Cash and cash equivalents	3,280,256			1,263,788
Investment securities – available-for-sale, net of allowance for credit losses	3,150,608			2,473,781
Loans receivable	9,901,100			11,220,721
Allowance for credit losses	(238,673	)		(245,473	)
Loans receivable, net	9,662,427			10,975,248
Bank premises and equipment, net	276,972			278,614
Foreclosed assets held for sale	1,171			4,420
Cash value of life insurance	104,638			103,519
Accrued interest receivable	48,577			60,528
Deferred tax asset, net	69,724			70,249
Goodwill	973,025			973,025
Core deposit and other intangibles	26,466			30,728
Other assets	171,192			164,904
Total assets	17,765,056		$	16,398,804
Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing	4,139,149		$	3,266,753
Savings and interest-bearing transaction accounts	8,813,326			8,212,240
Time deposits	1,050,896			1,246,797
Total deposits	14,003,371			12,725,790
Securities sold under agreements to repurchase	141,002			168,931
FHLB and other borrowed funds	400,000			400,000
Accrued interest payable and other liabilities	113,721			127,999
Subordinated debentures	370,900			370,326
Total liabilities	15,028,994			13,793,046
Stockholders’ equity:
Common stock, par value 0.01; shares authorized 300,000,000 in 2021 and 2020;<br>   shares issued and outstanding 164,007,998 in 2021 and 165,095,252 in 2020	1,640			1,651
Capital surplus	1,492,588			1,520,617
Retained earnings	1,215,831			1,039,370
Accumulated other comprehensive income	26,003			44,120
Total stockholders’ equity	2,736,062			2,605,758
Total liabilities and stockholders’ equity	17,765,056		$	16,398,804

All values are in US Dollars.

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Income

	Three Months Ended<br><br><br>September 30,						Nine Months Ended<br><br><br>September 30,
(In thousands, except per share data)	2021			2020			2021			2020
	(Unaudited)
Interest income:
Loans	$	142,609		$	154,787		$	435,210		$	471,931
Investment securities
Taxable		8,495			7,227			21,933			25,696
Tax-exempt		4,839			4,367			14,815			11,179
Deposits – other banks		1,117			252			2,234			1,579
Federal funds sold		—			—			—			21
Total interest income		157,060			166,633			474,192			510,406
Interest expense:
Interest on deposits		5,642			13,200			19,781			52,514
Federal funds purchased		—			—			—			13
FHLB and other borrowed funds		1,917			2,235			5,688			7,589
Securities sold under agreements to repurchase		102			237			399			959
Subordinated debentures		4,788			4,823			14,373			14,801
Total interest expense		12,449			20,495			40,241			75,876
Net interest income		144,611			146,138			433,951			434,530
Provision for credit losses		—			14,000			—			112,264
Provision for credit losses - unfunded commitments		—			—			(4,752	)		16,989
Total credit loss (benefit) expense		—			14,000			(4,752	)		129,253
Net interest income after provision for credit losses		144,611			132,138			438,703			305,277
Non-interest income:
Service charges on deposit accounts		5,941			4,910			16,059			15,837
Other service charges and fees		8,051			8,539			25,318			22,261
Trust fees		479			378			1,445			1,213
Mortgage lending income		5,948			10,177			20,317			18,994
Insurance commissions		586			271			1,556			1,482
Increase in cash value of life insurance		509			548			1,548			1,666
Dividends from FHLB, FRB, FNBB & other		2,661			3,433			13,916			11,505
Gain on sale of SBA loans		439			—			1,588			341
(Loss) gain on sale of branches, equipment and other assets, net		(34	)		(27	)		(86	)		109
Gain on OREO, net		246			470			1,266			982
Gain on securities, net		—			—			219			—
Fair value adjustment for marketable securities		61			(1,350	)		7,093			(6,249	)
Other income		4,322			2,602			15,366			9,760
Total non-interest income		29,209			29,951			105,605			77,901
Non-interest expense:
Salaries and employee benefits		42,469			41,511			126,990			120,928
Occupancy and equipment		9,305			9,566			27,584			28,611
Data processing expense		6,024			4,921			17,787			13,861
Merger and acquisition expenses		1,006			—			1,006			711
Other operating expenses		16,815			15,714			48,100			49,033
Total non-interest expense		75,619			71,712			221,467			213,144
Income before income taxes		98,201			90,377			322,841			170,034
Income tax expense		23,209			21,057			77,177			37,380
Net income	$	74,992		$	69,320		$	245,664		$	132,654
Basic earnings per share	$	0.46		$	0.42		$	1.49		$	0.80
Diluted earnings per share	$	0.46		$	0.42		$	1.49		$	0.80

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Comprehensive Income

	Three Months Ended<br><br><br>September 30,						Nine Months Ended<br><br><br>September 30,
(In thousands)	2021			2020			2021			2020
	(Unaudited)
Net income	$	74,992		$	69,320		$	245,664		$	132,654
Net unrealized (loss) gain on available-for-sale securities		(4,218	)		(896	)		(24,527	)		29,952
Other comprehensive (loss) income. before tax effect		(4,218	)		(896	)		(24,527	)		29,952
Tax effect on other comprehensive (loss) income		1,102			234			6,410			(7,828	)
Other comprehensive (loss) income		(3,116	)		(662	)		(18,117	)		22,124
Comprehensive income	$	71,876		$	68,658		$	227,547		$	154,778

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2021
(In thousands, except share data)			Capital<br><br><br>Surplus			Retained<br><br><br>Earnings			Accumulated<br><br><br>Other<br><br><br>Comprehensive<br><br><br>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 income	—			—			—			(24,671	)		(24,671	)
Net issuance of 161,434 shares of common<br>   stock from exercise of stock options	1			2,321			—			—			2,322
Repurchase of 330,000 shares of common<br>   stock	(3	)		(8,767	)		—			—			(8,770	)
Share-based compensation net issuance of<br>   214,684 shares of restricted common stock	2			2,115			—			—			2,117
Cash dividends – Common Stock, 0.14<br>   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<br>   stock from exercise of stock options	—			—			—			—			—
Repurchase of 635,000 shares of common<br>   stock	(6	)		(16,947	)		—			—			(16,953	)
Share-based compensation net forfeiture of<br>   21,500 shares of restricted common stock	—			2,276			—			—			2,276
Cash dividends – Common Stock, 0.14<br>   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<br>   4,000 shares of restricted stock	—			2,247			—			—			2,247
Cash dividends – Common Stock, 0.14<br>   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

All values are in US Dollars.

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2020
(In thousands, except share data)			Capital<br><br><br>Surplus			Retained<br><br><br>Earnings			Accumulated<br><br><br>Other<br><br><br>Comprehensive<br><br><br>Income (Loss)			Total
Balances at January 1, 2020	1,664		$	1,537,091		$	956,555		$	16,221		$	2,511,531
Cumulative change in accounting principle<br>   (adoption of ASC 326)	—			—			(43,956	)		—			(43,956	)
Balance at January 1, 2020 (as adjusted for<br>   change in accounting principle)	1,664		$	1,537,091		$	912,599		$	16,221		$	2,467,575
Comprehensive income:
Net income	—			—			507			—			507
Other comprehensive income	—			—			—			4,750			4,750
Net issuance of 22,864 shares of common<br>   stock from exercise of stock options	—			422			—			—			422
Repurchase of 1,423,560 shares of common<br>   stock	(14	)		(23,843	)		—			—			(23,857	)
Share-based compensation net issuance of<br>   175,249 shares of restricted common stock	1			2,481			—			—			2,482
Cash dividends – Common Stock, 0.13 per<br>   share	—			—			(21,608	)		—			(21,608	)
Balances at March 31, 2020 (unaudited)	1,651		$	1,516,151		$	891,498		$	20,971		$	2,430,271
Comprehensive income:
Net income	—			—			62,827			—			62,827
Other comprehensive income	—			—			—			18,036			18,036
Share-based compensation net issuance of<br>  58,140 shares of restricted common stock	1			2,480			—			—			2,481
Cash dividends – Common Stock, 0.13 per<br>   share	—			—			(21,469	)		—			(21,469	)
Balances at June 30, 2020 (unaudited)	1,652		$	1,518,631		$	932,856		$	39,007		$	2,492,146
Comprehensive income:
Net income	—			—			69,320			—			69,320
Other comprehensive loss	—			—			—			(662	)		(662	)
Share-based compensation net forfeiture of<br>   43,500 shares of restricted stock	—			1,472			—			—			1,472
Cash dividends – Common Stock, 0.13 per<br>   share	—			—			(21,477	)		—			(21,477	)
Balances at September 30, 2020 (unaudited)	1,652		$	1,520,103		$	980,699		$	38,345		$	2,540,799

All values are in US Dollars.

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Cash Flows

	Nine Months Ended<br><br><br>September 30,
(In thousands)	2021			2020
	(Unaudited)
Operating Activities
Net income	$	245,664		$	132,654
Adjustments to reconcile net income to net cash provided by operating<br><br><br>activities:
Depreciation & amortization		14,457			15,236
(Increase) decrease in value of equity securities		(7,093	)		6,249
Amortization of securities, net		21,018			14,292
Accretion of purchased loans		(16,150	)		(21,640	)
Share-based compensation		6,640			6,435
Gain on assets		(2,987	)		(1,432	)
Provision for credit losses		—			112,264
Provision for credit losses - unfunded commitments		(4,752	)		16,989
Deferred income tax effect		6,936			(38,695	)
Increase in cash value of life insurance		(1,548	)		(1,666	)
Originations of mortgage loans held for sale		(599,787	)		(607,494	)
Proceeds from sales of mortgage loans held for sale		632,721			571,623
Changes in assets and liabilities:
Accrued interest receivable		11,951			(27,283	)
Other assets		3,891			2,552
Accrued interest payable and other liabilities		(9,526	)		20,086
Net cash provided by operating activities		301,435			200,170
Investing Activities
Net decrease (increase) in loans, excluding purchased loans		1,278,846			(372,691	)
Purchases of investment securities – available-for-sale		(1,227,507	)		(819,629	)
Proceeds from maturities of investment securities – available-for-sale		487,242			556,386
Proceeds from sales of investment securities – available-for-sale		18,112			—
Purchases of equity securities		(10,460	)		(15,015	)
Proceeds from sales of equity securities		15,354			—
(Purchase) redemption of other investments		(7,970	)		13,414
Proceeds from foreclosed assets held for sale		6,572			7,476
Proceeds from sale of SBA loans		16,722			4,057
Purchases of premises and equipment, net		(8,065	)		(10,282	)
Return of investment on cash value of life insurance		418			47,258
Net cash paid – market acquisitions		—			(421,211	)
Net cash provided by (used in) investing activities		569,264			(1,010,237	)
Financing Activities
Net increase in deposits		1,277,581			1,659,083
Net (decrease) increase in securities sold under agreements to repurchase		(27,929	)		14,720
Net decrease in federal funds purchased		—			(5,000	)
Net decrease in FHLB and other borrowed funds		—			(218,011	)
Proceeds from exercise of stock options		2,322			422
Repurchase of common stock		(37,002	)		(23,857	)
Dividends paid on common stock		(69,203	)		(64,554	)
Net cash provided by financing activities		1,145,769			1,362,803
Net change in cash and cash equivalents		2,016,468			552,736
Cash and cash equivalents – beginning of year		1,263,788			490,601
Cash and cash equivalents – end of period	$	3,280,256		$	1,043,337

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1.  Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

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

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

Operating Segments

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

Use of Estimates

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

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

Principles of Consolidation

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

Reclassifications

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

Interim financial information

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

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

New Accounting Pronouncements

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.  The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio.  In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

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

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

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination.  PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit loss.

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

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

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

Revenue Recognition

Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit, investment securities and mortgage lending income, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our significant revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our income statements as components of non-interest income are as follows:

•	Service charges on deposit accounts – These represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
•	Other service charges and fees – These represent credit card interchange fees and Centennial Commercial Finance Group (“Centennial CFG”) loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. The Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310.
---	---

Earnings per Share

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

	Three Months Ended<br><br><br>September 30,				Nine Months Ended<br><br><br>September 30,
	2021		2020		2021		2020
	(In thousands)
Net income	$	74,992	$	69,320	$	245,664	$	132,654
Average shares outstanding		164,126		165,200		164,717		165,458
Effect of common stock options		477		—		333		—
Average diluted shares outstanding		164,603		165,200		165,050		165,458
Basic earnings per share	$	0.46	$	0.42	$	1.49	$	0.80
Diluted earnings per share	$	0.46	$	0.42	$	1.49	$	0.80

As of September 30, 2020, options to purchase 3.3 million shares of common stock with a weighted average exercise price of $19.56 were excluded from the computation of diluted earnings per share as the majority of the options had an exercise price which was greater than the average market price of the common stock.

2.  Business Combinations

Acquisition of LH-Finance

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

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

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

Future Acquisition of Happy Bancshares, Inc.

On September 15, 2021, the Company and Centennial entered into an Agreement and Plan of Merger (the “Agreement”) with Happy Bancshares, Inc., a Texas corporation (“Happy”), and its wholly-owned bank subsidiary, Happy State Bank, a Texas banking association (“HSB”), under which the Company and Centennial will acquire Happy and HSB. The Agreement, as amended on October 18, 2021, provides that, in a series of transactions, an acquisition subsidiary of the Company will merge into Happy and Happy will merge into the Company, with the Company as the surviving entity (collectively, the “Merger”). As soon as reasonably practicable following the Merger, HSB will merge into Centennial, with Centennial as the surviving entity.

Under the terms of the Agreement, as amended, the Company will issue approximately 42.3 million shares of its common stock to the shareholders of Happy upon the completion of the Merger, for a purchase price of approximately $1.02 billion, valued based on the volume-weighted average closing price per share of the Company’s common stock as reported on the Nasdaq Global Select Market (“Nasdaq”) for the 20 consecutive trading day period ending on November 1, 2021. No cash consideration will be paid in connection with the Merger, except that holders of outstanding shares of Happy common stock at the time of the Merger will receive cash payments in lieu of any fractional shares of Company common stock to which they are otherwise entitled in connection with the Merger. In addition, the Company expects to pay an aggregate of up to approximately $11.0 million in cash in cancellation of certain stock appreciation rights issued by Happy that remain outstanding at the time of the Merger.

Subject to the terms and conditions set forth in the Agreement, as amended, at the effective time of the Merger (the “Effective Time”), each outstanding share of common stock of Happy will be converted into the right to receive, without interest, 2.17 shares of the Company’s common stock (the “Merger Consideration”). Each unvested restricted share of Happy common stock outstanding at the Effective Time will fully vest and be converted into the right to receive the Merger Consideration. In addition, at the Effective Time, each outstanding option to purchase Happy common stock will be cancelled and converted into the right to receive the number of whole shares of the Company’s common stock, together with any cash in lieu of fractional shares, equal to the product of (i) the number of shares of Happy common stock subject to the option, multiplied by (ii) the excess, if any, of the Merger Consideration value over the exercise price of the option, less applicable tax withholdings, divided by (iii) the Company’s Average Closing Price (defined below). Similarly, each stock appreciation right of Happy outstanding at the Effective Time will be cancelled and converted into the right to receive a cash payment, without interest, equal to the product of (i) the number of shares of Happy common stock subject to the stock appreciation right, multiplied by (ii) the excess, if any, of the Merger Consideration value over the grant price of the stock appreciation right, less applicable tax withholdings. For purposes of these calculations, the Merger Consideration value will be determined using a volume-weighted average closing price of the Company’s common stock as reported on Nasdaq over the 20 consecutive trading day period ending on the third business day prior to the closing of the Merger (“the Company’s Average Closing Price”), multiplied by 2.17.

The Merger is expected to close during the first quarter of 2022, and is subject to the approval of the shareholders of the Company and Happy, regulatory approvals, and other conditions set forth in the Agreement.

3.  Investment Securities

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

	September 30, 2021
	Available-for-Sale
	Amortized<br><br><br>Cost		Gross<br><br><br>Unrealized<br><br><br>Gains		Gross<br><br><br>Unrealized<br><br><br>(Losses)			Estimated<br><br><br>Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	439,181	$	2,702	$	(1,720	)	$	440,163
Residential mortgage-backed securities		1,198,016		6,812		(9,064	)		1,195,764
Commercial mortgage-backed securities		403,840		10,656		(922	)		413,574
State and political subdivisions		965,993		27,356		(2,205	)		991,144
Other securities		109,216		1,137		(390	)		109,963
Total	$	3,116,246	$	48,663	$	(14,301	)	$	3,150,608
	December 31, 2020
---	---	---	---	---	---	---	---	---	---
	Available-for-Sale
	Amortized<br><br><br>Cost		Gross<br><br><br>Unrealized<br><br><br>Gains		Gross<br><br><br>Unrealized<br><br><br>(Losses)			Estimated<br><br><br>Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	325,860	$	2,338	$	(1,207	)	$	326,991
Residential mortgage-backed securities		703,138		10,607		(688	)		713,057
Commercial mortgage-backed securities		446,964		18,048		(126	)		464,886
State and political subdivisions		898,174		31,173		(1,454	)		927,893
Other securities		40,755		434		(235	)		40,954
Total	$	2,414,891	$	62,600	$	(3,710	)	$	2,473,781

Assets, principally investment securities, having a carrying value of approximately $1.17 billion and $1.08 billion at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, as collateral for repurchase agreements, and for other purposes required or permitted by law. Investment securities pledged as collateral for repurchase agreements totaled approximately $141.0 million and $168.9 million at September 30, 2021 and December 31, 2020, respectively.

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

	Available-for-Sale
	Amortized<br><br><br>Cost		Estimated<br><br><br>Fair Value
	(In thousands)
Due in one year or less	$	9,391	$	9,399
Due after one year through five years		78,839		79,824
Due after five years through ten years		348,801		350,567
Due after ten years		1,075,359		1,099,480
Mortgage - backed securities: Residential		1,198,016		1,195,764
Mortgage - backed securities: Commercial		403,840		413,574
Other		2,000		2,000
Total	$	3,116,246	$	3,150,608

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.

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

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

	September 30, 2021
	Less Than 12 Months					12 Months or More					Total
	Fair<br><br><br>Value		Unrealized<br><br><br>Losses			Fair<br><br><br>Value		Unrealized<br><br><br>Losses			Fair<br><br><br>Value		Unrealized<br><br><br>Losses
	(In thousands)
U.S. government-sponsored enterprises	$	80,986	$	(1,015	)	$	56,150	$	(705	)	$	137,136	$	(1,720	)
Residential mortgage-backed securities		762,805		(8,216	)		31,319		(848	)		794,124		(9,064	)
Commercial mortgage-backed securities		81,615		(906	)		6,245		(16	)		87,860		(922	)
State and political subdivisions		149,056		(980	)		16,887		(1,225	)		165,943		(2,205	)
Other securities		41,421		(340	)		4,263		(50	)		45,684		(390	)
Total	$	1,115,883	$	(11,457	)	$	114,864	$	(2,844	)	$	1,230,747	$	(14,301	)
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Less Than 12 Months					12 Months or More					Total
	Fair<br><br><br>Value		Unrealized<br><br><br>Losses			Fair<br><br><br>Value		Unrealized<br><br><br>Losses			Fair<br><br><br>Value		Unrealized<br><br><br>Losses
	(In thousands)
U.S. government-sponsored enterprises	$	54,611	$	(383	)	$	95,249	$	(824	)	$	149,860	$	(1,207	)
Residential mortgage-backed securities		143,458		(643	)		4,900		(45	)		148,358		(688	)
Commercial mortgage-backed securities		26,886		(126	)		—		—			26,886		(126	)
State and political subdivisions		78,349		(1,454	)		—		—			78,349		(1,454	)
Other securities		5,434		(100	)		8,748		(135	)		14,182		(235	)
Total	$	308,738	$	(2,706	)	$	108,897	$	(1,004	)	$	417,635	$	(3,710	)

The Company evaluates all securities quarterly to determine if any debt securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2021, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainties related to the COVID-19 pandemic, was adequate for the investment portfolio. No additional provision for credit losses was considered necessary for the portfolio.

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

For the nine months ended September 30, 2021, the Company had investment securities with approximately $2.8 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 58.6% of the principal balance from the Company’s investment portfolio will mature and be repaid to the Company within five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.

As of September 30, 2021, the Company's securities portfolio consisted of 1,335 investment securities, 304 of which were in an unrealized loss position. As noted in the table above, the total amount of the unrealized loss was $14.3 million. The U.S government-sponsored enterprises portfolio contained unrealized losses of $1.7 million on 44 securities. The residential mortgage-backed securities portfolio contained $9.1 million of unrealized losses on 161 securities, and the commercial mortgage-backed securities portfolio contained $922,000 of unrealized losses on 35 securities. The state and political subdivisions portfolio contained $2.2 million of unrealized losses on 51 securities. In addition, the other securities portfolio contained $390,000 of unrealized losses on 13 securities. The unrealized losses on the Company's investments were a result of interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. As of September 30, 2021, the Company does not consider an allowance for credit losses on the other portions of the investment portfolio because the decline in market value was attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

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

	For the Three Months<br><br><br>Ended September 30,				For the Nine Months<br><br><br>Ended September 30,
	2021		2020		2021		2020
	(In thousands)
Taxable	$	8,495	$	7,227	$	21,933	$	25,696
Non-taxable		4,839		4,367		14,815		11,179
Total	$	13,334	$	11,594	$	36,748	$	36,875

4.  Loans Receivable

The various categories of loans receivable are summarized as follows:

	September 30,			December 31,
	2021			2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	4,005,841		$	4,429,060
Construction/land development		1,742,687			1,562,298
Agricultural		138,881			114,431
Residential real estate loans
Residential 1-4 family		1,273,988			1,536,257
Multifamily residential		274,131			536,538
Total real estate		7,435,528			8,178,584
Consumer		814,732			864,690
Commercial and industrial		1,414,079			1,896,442
Agricultural		68,272			66,869
Other		168,489			214,136
Total loans receivable		9,901,100			11,220,721
Allowance for credit losses		(238,673	)		(245,473	)
Loans receivable, net	$	9,662,427		$	10,975,248

During the three and nine months ended September 30, 2021, the Company sold $3.9 million and $15.0 million of the guaranteed portions of certain SBA loans, which resulted in a gain of approximately $440,000 and $1.6 million. During the three months ended September 30, 2020, the Company did not sell any guaranteed portions of certain SBA loans. During the nine months ended September 30, 2020, the Company sold $3.7  million of the guaranteed portions of certain SBA loans, which resulted in a gain of approximately $341,000.

Mortgage loans held for sale of approximately $81.9 million and $114.8 million at September 30, 2021 and December 31, 2020, respectively, are included in residential 1-4 family loans.   Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis.  Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors.  Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid.  The Company obtains forward commitments to sell mortgage loans to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale.  The forward commitments acquired by the Company for mortgage loans in process of origination are considered mandatory forward commitments.  Because these commitments are structured on a mandatory basis, the Company is required to substitute another loan or to buy back the commitment if the original loan does not fund.  These commitments are derivative instruments and their fair values at September 30, 2021 and December 31, 2020 were not material.

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

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination.  PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. As a result of the acquisition of LH-Finance in 2020, the Company held approximately $454,000 and $760,000 in PCD loans, as of September 30, 2021 and  December 31, 2020, respectively.

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

5.  Allowance for Credit Losses, Credit Quality and Other

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

The Company uses the discounted cash flow (“DCF”) method to estimate expected losses for all of Company’s loan pools. These pools are as follows: construction & land development; other commercial real estate; residential real estate; commercial & industrial; and consumer & other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council. For each of these loan pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers.

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

September 30, 2021
Loss Driver Segment	Call Report Segment(s)	Modeled Economic Factors
1-4 Family Construction	1a1	National Unemployment (%) & Housing Price Index (%)
All Other Construction	1a2	National Unemployment (%) & Gross Domestic Product (%)
1-4 Family Revolving HELOC & Junior Liens	1c1	National Unemployment (%) & Housing Price Index – CoreLogic (%)
1-4 Family Revolving HELOC & Junior Liens	1c2b	National Unemployment (%) & Gross Domestic Product (%)
1-4 Family Senior Liens	1c2a	National Unemployment (%) & Gross Domestic Product (%)
Multifamily	1d	Rental Vacancy Rate (%) & Housing Price Index – Case-Schiller (%)
Owner Occupied CRE	1e1	National Unemployment (%) & Gross Domestic Product (%)
Non-Owner Occupied CRE	1e2,1b,8	National Unemployment (%) & Gross Domestic Product (%)
Commercial & Industrial, Agricultural, Non-Depository Financial Institutions, Purchase/Carry Securities, Other	4a, 3, 9a, 9b1, 9b2, Other	National Unemployment (%) & National Retail Sales (%)
Consumer Auto	6c	National Unemployment (%) & National Retail Sales (%)
Other Consumer	6b, 6d	National Unemployment (%) & National Retail Sales (%)
Other Consumer - SPF	6d	National Unemployment (%)
	December 31, 2020	
---	---	---
Loss Driver Segment	Call Report Segment(s)	Modeled Economic Factors
1-4 Family Construction	1a1	National Unemployment (%) & Housing Price Index (%)
All Other Construction	1a2	National Unemployment (%) & Commercial Real Estate Price Index (%)
1-4 Family Revolving HELOC & Junior Liens	1c1, 1c2b	National Unemployment (%) & Housing Price Index (%)
1-4 Family Senior Liens	1c2a	National Unemployment (%) & Housing Price Index (%)
Multifamily	1d	National Unemployment (%) & Housing Price Index (%)
Owner Occupied CRE	1e1	National Unemployment (%) & Commercial Real Estate Price Index (%)
Non-Owner Occupied CRE	1e2,1b,8	National Unemployment (%) & Commercial Real Estate Price Index (%)
Commercial & Industrial, Agricultural, Non-Depository Financial Institutions, Purchase/Carry Securities, Other	4a, 3, 9a, 9b1, 9b2, Other	National Unemployment (%) & National Retail Sales (%)
Consumer Auto	6c	National Unemployment (%) & National Retail Sales (%)
Other Consumer	6b, 6d	National Unemployment (%) & National Retail Sales (%)
Other Consumer - SPF	6d	National Unemployment (%)

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

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

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

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

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

Consumer & Other Loans.  Our consumer & other loans are primarily composed of loans to finance USCG registered high-end sail and power boats as a result of our acquisitions of SPF on June 30, 2018 and LH-Finance on February 29, 2020. The performance of consumer & other loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.

Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit loss on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The Company uses the DCF method to estimate expected losses for all of Company’s off-balance sheet credit exposures through the use of the existing DCF models for the Company’s loan portfolio pools. The off-balance sheet credit exposures exhibit similar risk characteristics as loans currently in the Company’s loan portfolio.

As of September 30, 2021, the Company remains optimistic that the markets in which it operates will experience continued economic recovery as long as unemployment rates continue to decline, more COVID-19 vaccinations are administered, and communities continue to reopen for business activity.  Uncertainty remains about the duration of the pandemic as well as the timing and extent of the economic recovery. The Company determined that an additional provision for credit losses on loans was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2021. During the nine-month period ended September 30, 2021, the Company recorded a negative provision for unfunded commitments of $4.8 million. This was  primarily due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position.

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

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

	Three Months Ended September 30, 2021
	Construction/<br><br><br>Land<br><br><br>Development			Other<br><br><br>Commercial<br><br><br>Real Estate			Residential<br><br><br>Real Estate			Commercial<br><br><br>& Industrial			Consumer<br><br><br>& 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<br><br><br>charged off		8			44			388			80			171			691
Net loans recovered<br><br><br>(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
	Nine Months Ended September 30, 2021
	Construction/<br><br><br>Land<br><br><br>Development			Other<br><br><br>Commercial<br><br><br>Real Estate			Residential<br><br><br>Real Estate			Commercial<br><br><br>& Industrial			Consumer<br><br><br>& 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<br><br><br>charged off		47			112			554			382			644			1,739
Net loans recovered<br><br><br>(charged off)		47			(534	)		11			(5,510	)		(814	)		(6,800	)
Provision for credit losses		(6,925	)		579			(2,324	)		11,582			(2,912	)		—
Balance, September 30	$	25,983		$	88,498		$	50,903		$	52,602		$	20,687		$	238,673

The following tables present the balances in the allowance for credit losses for the nine-month period ended September 30, 2020 and the year ended December 31, 2020.

	Nine Months Ended September 30, 2020 and Year Ended December 31, 2020
	Construction/<br><br><br>Land<br><br><br>Development			Other<br><br><br>Commercial<br><br><br>Real Estate			Residential<br><br><br>Real Estate			Commercial<br><br><br>& Industrial			Consumer<br><br><br>& Other			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	26,433		$	33,529		$	20,135		$	16,615		$	5,410		$	102,122
Impact of adoption ASC 326		(5,296	)		15,912			16,680			11,584			5,108			43,988
Allowance for credit losses on<br><br><br>PCD loans		—			—			—			—			357			357
Loans charged off		(443	)		(3,003	)		(450	)		(6,207	)		(1,343	)		(11,446	)
Recoveries of loans previously<br><br><br>charged off		94			614			305			142			626			1,781
Net loans charged off		(349	)		(2,389	)		(145	)		(6,065	)		(717	)		(9,665	)
Provision for credit loss - loans		18,027			50,912			8,550			18,023			6,601			102,113
Provision for credit loss -<br><br><br>acquired loans		—			—			—			—			9,309			9,309
Balance, September 30		38,815			97,964			45,220			40,157			26,068			248,224
Loans charged off		(775	)		(38	)		(35	)		(1,557	)		(635	)		(3,040	)
Recoveries of loans previously<br><br><br>charged off		13			33			32			76			135			289
Net loans charged off		(762	)		(5	)		(3	)		(1,481	)		(500	)		(2,751	)
Provision for credit loss - loans		(5,192	)		(9,506	)		7,999			7,854			(1,155	)		—
Balance, December 31	$	32,861		$	88,453		$	53,216		$	46,530		$	24,413		$	245,473

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

		September 30, 2021
		Nonaccrual		Nonaccrual<br><br><br>with Reserve		Loans Past Due<br><br><br>Over 90 Days<br><br><br>Still Accruing
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		$	8,819	$	2,244	$	2,413
Construction/land development			1,870		—		—
Agricultural			743		—		—
Residential real estate loans
Residential 1-4 family			17,495		2,984		855
Multifamily residential			161		—		—
Total real estate			29,088		5,228		3,268
Consumer			1,921		—		2
Commercial and industrial			15,989		4,272		41
Agricultural & other			606		—		—
Total		$	47,604	$	9,500	$	3,311
		December 31, 2020
---	---	---	---	---	---	---	---
		Nonaccrual		Nonaccrual<br><br><br>with Reserve		Loans Past Due<br><br><br>Over 90 Days<br><br><br>Still Accruing
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		$	20,947	$	6,794	$	6,088
Construction/land development			1,381		2,089		1,296
Agricultural			879		—		—
Residential real estate loans
Residential 1-4 family			19,334		3,000		1,821
Multifamily residential			173		—		—
Total real estate			42,714		11,883		9,205
Consumer			3,506		—		174
Commercial and industrial			17,251		—		231
Agricultural & other			1,057		—		—
Total		$	64,528	$	11,883	$	9,610

The Company had $47.6 million and $64.5 million in nonaccrual loans for the periods ended September 30, 2021 and December 31, 2020, respectively. In addition, the Company had $3.3 million and $9.6 million in loans past due 90 days or more and still accruing for the periods ended September 30, 2021 and December 31, 2020, respectively.

The Company had $9.5 million and $11.9 million in nonaccrual loans with a specific reserve as of September 30, 2021 and December 31, 2020, respectively. The Company did not recognize any interest income on nonaccrual loans during the period ended September 30, 2021 or September 30, 2020.

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

	September 30, 2021
	Commercial		Residential
	Real Estate		Real Estate		Other
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	249,783	$	—	$	—
Construction/land development		5,201		—		—
Agricultural		743		—		—
Residential real estate loans
Residential 1-4 family		—		21,393		—
Multifamily residential		—		161		—
Total real estate		255,727		21,554		—
Consumer		—		—		1,936
Commercial and industrial		—		—		20,264
Agricultural & other		—		—		607
Total	$	255,727	$	21,554	$	22,807
	December 31, 2020
---	---	---	---	---	---	---
	Commercial		Residential
	Real Estate		Real Estate		Other
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	47,429	$	—	$	—
Construction/land development		6,012		—		—
Agricultural		879		—		—
Residential real estate loans
Residential 1-4 family		—		32,413		—
Multifamily residential		—		173		—
Total real estate		54,320		32,586		—
Consumer		—		—		3,694
Commercial and industrial		—		—		21,027
Agricultural & other		—		—		1,057
Total	$	54,320	$	32,586	$	25,778

The Company had $300.1 million and $112.7 million in collateral-dependent impaired loans for the periods ended September 30, 2021 and December 31, 2020, respectively. The increase in collateral-dependent impaired loans was due to the Company changing the valuation method for lodging and assisted living loans to a market price valuation methodology. This involved assigning a 15% discount of par for these impaired loans. The 15% figure was derived based on knowledge of current hotel and assisted living offerings in the loan sale market. In the event of default, liquidation would be achieved through a loan sale. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary.

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

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

	September 30, 2021
	Loans<br><br><br>Past Due<br><br><br>30-59 Days		Loans<br><br><br>Past Due<br><br><br>60-89 Days		Loans<br><br><br>Past Due<br><br><br>90 Days<br><br><br>or More		Total<br><br><br>Past Due		Current<br><br><br>Loans		Total<br><br><br>Loans<br><br><br>Receivable		Accruing<br><br><br>Loans<br><br><br>Past Due<br><br><br>90 Days<br><br><br>or More
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	2,213	$	—	$	11,232	$	13,445	$	3,992,396	$	4,005,841	$	2,413
Construction/land development		66		171		1,870		2,107		1,740,580		1,742,687		—
Agricultural		434		295		743		1,472		137,409		138,881		—
Residential real estate loans														—
Residential 1-4 family		2,452		3,072		18,350		23,874		1,250,114		1,273,988		855
Multifamily residential		—		—		161		161		273,970		274,131		—
Total real estate		5,165		3,538		32,356		41,059		7,394,469		7,435,528		3,268
Consumer		401		12		1,923		2,336		812,396		814,732		2
Commercial and industrial		752		592		16,030		17,374		1,396,705		1,414,079		41
Agricultural & other		619		1		606		1,226		235,535		236,761		—
Total	$	6,937	$	4,143	$	50,915	$	61,995	$	9,839,105	$	9,901,100	$	3,311
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Loans<br><br><br>Past Due<br><br><br>30-59<br><br><br>Days		Loans<br><br><br>Past Due<br><br><br>60-89<br><br><br>Days		Loans<br><br><br>Past Due<br><br><br>90 Days<br><br><br>or More		Total<br><br><br>Past Due		Current<br><br><br>Loans		Total<br><br><br>Loans<br><br><br>Receivable		Accruing<br><br><br>Loans<br><br><br>Past Due<br><br><br>90 Days<br><br><br>or More
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	3,856	$	68	$	27,035	$	30,959	$	4,398,101	$	4,429,060	$	6,088
Construction/land development		178		44		2,677	$	2,899		1,559,399		1,562,298		1,296
Agricultural		522		—		879		1,401		113,030		114,431		—
Residential real estate loans
Residential 1-4 family		4,833		7,787		21,155		33,775		1,502,482		1,536,257		1,821
Multifamily residential		111		—		173		284		536,254		536,538		—
Total real estate		9,500		7,899		51,919		69,318		8,109,266		8,178,584		9,205
Consumer		2,899		802		3,680		7,381		857,309		864,690		174
Commercial and industrial		960		515		17,482		18,957		1,877,485		1,896,442		231
Agricultural and other		1,125		3,713		1,057		5,895		275,110		281,005		—
Total	$	14,484	$	12,929	$	74,138	$	101,551	$	11,119,170	$	11,220,721	$	9,610

Non-accruing loans at September 30, 2021 and December 31, 2020 were $47.6 million and $64.5 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. Interest recognized on impaired loans, including those loans with a specific reserve, during the three and nine months ended September 30, 2020 was approximately $694,000 and $2.1 million, respectively. The amount of interest recognized on impaired loans on the cash basis is not materially different than the accrual basis.

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

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

•	Risk rating 1 – Excellent.  Loans in this category are to persons or entities of unquestionable financial strength, a highly liquid financial position, with collateral that is liquid and well margined.  These borrowers have performed without question on past obligations, and the Bank expects their performance to continue.  Internally generated cash flow covers current maturities of long-term debt by a substantial margin.  Loans secured by bank certificates of deposit and savings accounts, with appropriate holds placed on the accounts, are to be rated in this category.
•	Risk rating 2 – Good.  These are loans to persons or entities with strong financial condition and above-average liquidity that have previously satisfactorily handled their obligations with the Bank.  Collateral securing the Bank’s debt is margined in accordance with policy guidelines.  Internally generated cash flow covers current maturities of long-term debt more than adequately.  Unsecured loans to individuals supported by strong financial statements and on which repayment is satisfactory may be included in this classification.
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•	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.
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•	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.
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•	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.
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•	Risk rating 6 – Substandard.  A loan classified as substandard is inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged.  Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual assets.
---	---
•	Risk rating 7 – Doubtful.  A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the loan.
---	---
•	Risk rating 8 – Loss. Assets classified as loss are considered uncollectible and of such little value that the continuance as bankable assets is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may occur in the future.  This classification is based upon current facts, not probabilities.  Assets classified as loss should be charged-off in the period in which they became uncollectible.
---	---

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

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

	September 30, 2021
	Term Loans Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		209,027		209,027
Risk rating 3		182,402		280,163		314,000		396,848		247,852		981,970		68,510		2,471,745
Risk rating 4		106,983		35,274		120,584		257,933		112,120		358,937		87		991,918
Risk rating 5		—		10,825		2,308		20,791		37,848		197,539		—		269,311
Risk rating 6		—		—		15,219		1,803		11,939		34,797		—		63,758
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		82		—		82
Total non-farm/non-residential		289,385		326,262		452,111		677,375		409,759		1,573,325		277,624		4,005,841
Construction/land development
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		235		—		235
Risk rating 3		150,620		228,246		100,935		33,933		23,005		42,863		166,151		745,753
Risk rating 4		117,314		215,084		501,761		45,824		40,377		39,461		23,650		983,471
Risk rating 5		—		—		416		—		—		1,177		1		1,594
Risk rating 6		—		115		874		8		—		10,636		—		11,633
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		1		—		—		1
Total construction/land development		267,934		443,445		603,986		79,765		63,383		94,372		189,802		1,742,687
Agricultural
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		18,093		30,708		8,005		6,673		5,412		21,538		6,616		97,045
Risk rating 4		4,389		2,120		367		1,164		771		30,233		1,388		40,432
Risk rating 5		—		—		—		—		—		—		—		—
Risk rating 6		—		45		—		—		—		1,359		—		1,404
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural		22,482		32,873		8,372		7,837		6,183		53,130		8,004		138,881
Total commercial real estate loans	$	579,801	$	802,580	$	1,064,469	$	764,977	$	479,325	$	1,720,827	$	475,430	$	5,887,409
Residential real estate loans
Residential 1-4 family
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	80	$	90	$	170
Risk rating 2		—		—		—		—		—		29		—		29
Risk rating 3		173,712		153,260		140,787		111,458		89,445		324,888		86,267		1,079,817
Risk rating 4		8,346		4,250		6,071		17,677		23,144		60,710		30,830		151,028
Risk rating 5		—		—		3,064		1,506		529		5,114		197		10,410
Risk rating 6		788		2,003		2,406		1,931		1,525		16,914		6,933		32,500
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		6		28		—		34
Total residential 1-4 family		182,846		159,513		152,328		132,572		114,649		407,763		124,317		1,273,988
Multifamily residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		8,496		10,243		35,143		34,974		9,825		46,473		7,782		152,936
Risk rating 4		—		11,271		27,202		3,435		3,009		21,128		37,047		103,092
Risk rating 5		—		—		—		7,621		8,170		—		—		15,791
Risk rating 6		—		—		—		—		897		1,415		—		2,312
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total multifamily residential		8,496		21,514		62,345		46,030		21,901		69,016		44,829		274,131
Total real estate	$	771,143	$	983,607	$	1,279,142	$	943,579	$	615,875	$	2,197,606	$	644,576	$	7,435,528
	September 30, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Term Loans Amortized Cost Basis by Origination Year, Continued
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Consumer
Risk rating 1	$	2,930	$	2,109	$	1,556	$	1,064	$	259	$	1,777	$	1,753	$	11,448
Risk rating 2		—		—		45		647		—		9		—		701
Risk rating 3		153,432		189,046		147,510		116,833		72,351		102,108		6,801		788,081
Risk rating 4		2,993		1,107		3,110		1,908		185		2,407		74		11,784
Risk rating 5		—		116		—		99		172		134		—		521
Risk rating 6		—		46		347		120		—		1,641		41		2,195
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		1		1		—		2
Total consumer		159,355		192,424		152,568		120,671		72,968		108,077		8,669		814,732
Commercial and industrial
Risk rating 1	$	210,222	$	28,846	$	371	$	157	$	169	$	21,457	$	11,885	$	273,107
Risk rating 2		19		19		—		—		87		280		175		580
Risk rating 3		75,240		77,113		95,166		52,322		25,516		55,060		148,891		529,308
Risk rating 4		132,855		35,907		107,294		98,787		35,085		37,893		75,883		523,704
Risk rating 5		6,197		158		2,019		8,387		5,725		3,077		672		26,235
Risk rating 6		1,222		15,430		6,736		25,441		5,570		4,633		330		59,362
Risk rating 7		—		—		—		1,777		—		—		—		1,777
Risk rating 8		—		2		1		—		—		1		2		6
Total commercial and industrial		425,755		157,475		211,587		186,871		72,152		122,401		237,838		1,414,079
Agricultural and other
Risk rating 1	$	11,231	$	203	$	43	$	—	$	—	$	112	$	375	$	11,964
Risk rating 2		—		—		3,467		—		—		908		809		5,184
Risk rating 3		58,313		60,137		5,395		7,572		2,187		50,145		14,162		197,911
Risk rating 4		6,034		376		157		1,542		1,408		1,487		9,441		20,445
Risk rating 5		—		—		—		—		—		597		—		597
Risk rating 6		—		—		27		14		33		586		—		660
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural and other		75,578		60,716		9,089		9,128		3,628		53,835		24,787		236,761
Total	$	1,431,831	$	1,394,222	$	1,652,386	$	1,260,249	$	764,623	$	2,481,919	$	915,870	$	9,901,100
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		25		25
Risk rating 3		301,237		340,562		546,670		286,173		289,483		942,449		266,867		2,973,441
Risk rating 4		27,239		139,354		161,461		265,684		197,979		300,055		17,305		1,109,077
Risk rating 5		10,591		16,865		67,089		7,764		108,885		84,609		750		296,553
Risk rating 6		—		859		2,289		987		4,577		40,600		86		49,398
Risk rating 7		—		—		—		—		—		552		—		552
Risk rating 8		—		—		—		—		—		14		—		14
Total non-farm/non-residential		339,067		497,640		777,509		560,608		600,924		1,368,279		285,033		4,429,060
Construction/land development
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		283		—		283
Risk rating 3		211,567		181,257		91,323		33,986		25,600		54,245		115,120		713,098
Risk rating 4		129,599		417,737		92,032		46,249		17,161		32,060		76,845		811,683
Risk rating 5		—		—		392		21,892		—		1,227		545		24,056
Risk rating 6		—		763		98		63		157		12,065		—		13,146
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		1		—		31		—		32
Total construction/land development		341,166		599,757		183,845		102,191		42,918		99,911		192,510		1,562,298
Agricultural
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		33,428		8,885		9,119		5,397		3,935		25,159		5,538		91,461
Risk rating 4		2,141		535		1,206		681		5,499		10,735		665		21,462
Risk rating 5		—		—		—		—		—		116		—		116
Risk rating 6		47		—		—		—		—		1,345		—		1,392
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural		35,616		9,420		10,325		6,078		9,434		37,355		6,203		114,431
Total commercial real estate loans	$	715,849	$	1,106,817	$	971,679	$	668,877	$	653,276	$	1,505,545	$	483,746	$	6,105,789
Residential real estate loans
Residential 1-4 family
Risk rating 1	$	—	$	47	$	—	$	—	$	76	$	12	$	120	$	255
Risk rating 2		—		—		—		—		—		423		1,540		1,963
Risk rating 3		237,991		184,578		151,478		139,096		119,642		343,381		119,186		1,295,352
Risk rating 4		4,626		12,716		32,594		20,687		16,148		68,328		30,137		185,236
Risk rating 5		—		—		1,363		4,700		383		5,344		516		12,306
Risk rating 6		554		5,973		829		2,084		3,222		18,074		10,257		40,993
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		8		144		152
Total residential 1-4 family		243,171		203,314		186,264		166,567		139,471		435,570		161,900		1,536,257
Multifamily residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		19,033		60,175		87,104		11,477		8,092		59,592		6,386		251,859
Risk rating 4		477		6,358		101,364		93,475		1,924		17,672		37,286		258,556
Risk rating 5		—		—		—		—		—		24,945		—		24,945
Risk rating 6		—		—		—		894		—		284		—		1,178
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total multifamily residential		19,510		66,533		188,468		105,846		10,016		102,493		43,672		536,538
Total real estate	$	978,530	$	1,376,664	$	1,346,411	$	941,290	$	802,763	$	2,043,608	$	689,318	$	8,178,584
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Term Loans Amortized Cost Basis by Origination Year, Continued
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Consumer
Risk rating 1	$	3,389	$	2,375	$	1,596	$	485	$	828	$	1,428	$	1,957	$	12,058
Risk rating 2		—		47		931		—		—		12		57		1,047
Risk rating 3		229,189		192,054		152,646		97,812		68,585		68,871		20,094		829,251
Risk rating 4		3,699		3,479		2,769		1,411		1,371		1,991		117		14,837
Risk rating 5		144		737		22		198		568		321		—		1,990
Risk rating 6		12		361		566		3		2,052		2,468		45		5,507
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total consumer		236,433		199,053		158,530		99,909		73,404		75,091		22,270		864,690
Commercial and industrial
Risk rating 1	$	632,735	$	506	$	271	$	183	$	20,199	$	1,445	$	10,023	$	665,362
Risk rating 2		29		187		2		96		67		623		268		1,272
Risk rating 3		80,586		131,717		62,814		35,651		39,502		52,743		135,590		538,603
Risk rating 4		68,032		144,867		149,445		42,416		15,138		43,065		115,341		578,304
Risk rating 5		3,195		16,341		11,283		346		251		448		10,637		42,501
Risk rating 6		1,261		4,086		30,834		22,992		2,615		5,198		3,405		70,391
Risk rating 7		—		3		—		—		—		—		—		3
Risk rating 8		1		—		1		—		4		—		—		6
Total commercial and industrial		785,839		297,707		254,650		101,684		77,776		103,522		275,264		1,896,442
Agricultural and other
Risk rating 1	$	59,248	$	51	$	53	$	—	$	110	$	27	$	1,036	$	60,525
Risk rating 2		16		4,571		—		—		—		2,859		1,159		8,605
Risk rating 3		78,305		7,045		5,050		5,045		18,445		36,925		42,401		193,216
Risk rating 4		1,043		5,041		1,592		1,096		895		1,703		4,600		15,970
Risk rating 5		—		—		—		—		—		605		—		605
Risk rating 6		—		219		18		—		223		1,624		—		2,084
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural and other		138,612		16,927		6,713		6,141		19,673		43,743		49,196		281,005
Total	$	2,139,414	$	1,890,351	$	1,766,304	$	1,149,024	$	973,616	$	2,265,964	$	1,036,048	$	11,220,721

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

	September 30, 2021
	Term Loans Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Performing	$	289,385	$	316,115	$	437,231	$	657,174	$	371,874	$	1,406,655	$	277,624	$	3,756,058
Non-performing		—		10,147		14,880		20,201		37,885		166,670		—		249,783
Total non-farm/<br><br><br>non-residential		289,385		326,262		452,111		677,375		409,759		1,573,325		277,624		4,005,841
Construction/land<br><br><br>development
Performing	$	267,934	$	443,330	$	602,793	$	79,757	$	63,382	$	90,488	$	189,802	$	1,737,486
Non-performing		—		115		1,193		8		1		3,884		—		5,201
Total construction/<br><br><br>land development		267,934		443,445		603,986		79,765		63,383		94,372		189,802		1,742,687
Agricultural
Performing	$	22,482	$	32,873	$	8,372	$	7,837	$	6,183	$	52,387	$	8,004	$	138,138
Non-performing		—		—		—		—		—		743		—		743
Total agricultural		22,482		32,873		8,372		7,837		6,183		53,130		8,004		138,881
Total commercial real estate<br><br><br>loans	$	579,801	$	802,580	$	1,064,469	$	764,977	$	479,325	$	1,720,827	$	475,430	$	5,887,409
Residential real estate loans
Residential 1-4 family
Performing	$	182,588	$	156,843	$	150,130	$	131,375	$	113,265	$	400,128	$	118,266	$	1,252,595
Non-performing		258		2,670		2,198		1,197		1,384		7,635		6,051		21,393
Total residential 1-4<br><br><br>family		182,846		159,513		152,328		132,572		114,649		407,763		124,317		1,273,988
Multifamily residential
Performing	$	8,496	$	21,514	$	62,345	$	46,030	$	21,901	$	68,855	$	44,829	$	273,970
Non-performing		—		—		—		—		—		161		—		161
Total multifamily<br><br><br>residential		8,496		21,514		62,345		46,030		21,901		69,016		44,829		274,131
Total real estate	$	771,143	$	983,607	$	1,279,142	$	943,579	$	615,875	$	2,197,606	$	644,576	$	7,435,528
Consumer
Performing	$	159,355	$	192,386	$	152,253	$	120,554	$	72,967	$	106,619	$	8,662	$	812,796
Non-performing		—		38		315		117		1		1,458		7		1,936
Total consumer		159,355		192,424		152,568		120,671		72,968		108,077		8,669		814,732
Commercial and industrial
Performing	$	425,755	$	157,273	$	207,163	$	177,113	$	69,338	$	119,460	$	237,713	$	1,393,815
Non-performing		—		202		4,424		9,758		2,814		2,941		125		20,264
Total commercial and industrial		425,755		157,475		211,587		186,871		72,152		122,401		237,838		1,414,079
Agricultural and other
Performing	$	75,578	$	60,716	$	9,062	$	8,859	$	3,595	$	53,566	$	24,778	$	236,154
Non-performing		—		—		27		269		33		269		9		607
Total agricultural and other		75,578		60,716		9,089		9,128		3,628		53,835		24,787		236,761
Total	$	1,431,831	$	1,394,222	$	1,652,386	$	1,260,249	$	764,623	$	2,481,919	$	915,870	$	9,901,100
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Performing	$	339,067	$	497,640	$	775,220	$	560,279	$	598,074	$	1,326,404	$	284,947	$	4,381,631
Non-performing		—		—		2,289		329		2,850		41,875		86		47,429
Total non-farm/<br><br><br>non-residential		339,067		497,640		777,509		560,608		600,924		1,368,279		285,033		4,429,060
Construction/land<br><br><br>development
Performing	$	341,166	$	598,995	$	183,821	$	102,127	$	42,779	$	94,888	$	192,510	$	1,556,286
Non-performing		—		762		24		64		139		5,023		—		6,012
Total construction/<br><br><br>land development		341,166		599,757		183,845		102,191		42,918		99,911		192,510		1,562,298
Agricultural
Performing	$	35,616	$	9,420	$	10,325	$	6,078	$	9,434	$	36,476	$	6,203	$	113,552
Non-performing		—		—		—		—		—		879		—		879
Total agricultural		35,616		9,420		10,325		6,078		9,434		37,355		6,203		114,431
Total commercial real estate<br><br><br>loans	$	715,849	$	1,106,817	$	971,679	$	668,877	$	653,276	$	1,505,545	$	483,746	$	6,105,789
Residential real estate loans
Residential 1-4 family
Performing	$	242,505	$	196,951	$	185,316	$	161,274	$	137,840	$	425,056	$	154,902	$	1,503,844
Non-performing		666		6,363		948		5,293		1,631		10,514		6,998		32,413
Total residential 1-4<br><br><br>family		243,171		203,314		186,264		166,567		139,471		435,570		161,900		1,536,257
Multifamily residential
Performing	$	19,510	$	66,533	$	188,468	$	105,846	$	10,016	$	102,320	$	43,672	$	536,365
Non-performing		—		—		—		—		—		173		—		173
Total multifamily<br><br><br>residential		19,510		66,533		188,468		105,846		10,016		102,493		43,672		536,538
Total real estate	$	978,530	$	1,376,664	$	1,346,411	$	941,290	$	802,763	$	2,043,608	$	689,318	$	8,178,584
Consumer
Performing	$	236,395	$	198,737	$	158,324	$	99,905	$	71,924	$	73,448	$	22,263	$	860,996
Non-performing		38		316		206		4		1,480		1,643		7		3,694
Total consumer		236,433		199,053		158,530		99,909		73,404		75,091		22,270		864,690
Commercial and industrial
Performing	$	785,776	$	293,938	$	246,177	$	98,664	$	76,427	$	100,050	$	274,383	$	1,875,415
Non-performing		63		3,769		8,473		3,020		1,349		3,472		881		21,027
Total commercial and industrial		785,839		297,707		254,650		101,684		77,776		103,522		275,264		1,896,442
Agricultural and other
Performing	$	138,612	$	16,927	$	6,695	$	6,141	$	19,450	$	42,927	$	49,196	$	279,948
Non-performing		—		—		18		—		223		816		—		1,057
Total agricultural and other		138,612		16,927		6,713		6,141		19,673		43,743		49,196		281,005
Total	$	2,139,414	$	1,890,351	$	1,766,304	$	1,149,024	$	973,616	$	2,265,964	$	1,036,048	$	11,220,721

The Company had approximately $27.8 million or 201 total revolving loans convert to term loans for the nine months ended September 30, 2021 compared to $92.4 million or 289 total revolving loans convert to term loans for the nine months ended September 30, 2020.  These loans were considered immaterial for vintage disclosure inclusion.

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

	September 30, 2021
	Number<br><br><br>of Loans		Pre-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Balance		Rate<br><br><br>Modification		Term<br><br><br>Modification		Rate<br><br><br>& Term<br><br><br>Modification		Post-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		12	$	6,119	$	3,666	$	628	$	87	$	4,381
Construction/land development		3		322		216		2		—		218
Agricultural		1		282		262		—		—		262
Residential real estate loans
Residential 1-4 family		18		2,495		953		157		374		1,484
Total real estate		34		9,218		5,097		787		461		6,345
Consumer		4		22		14		—		3		17
Commercial and industrial		9		2,354		201		87		78		366
Total		47	$	11,594	$	5,312	$	874	$	542	$	6,728
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---
	Number<br><br><br>of Loans		Pre-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Balance		Rate<br><br><br>Modification		Term<br><br><br>Modification		Rate<br><br><br>& Term<br><br><br>Modification		Post-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		14	$	11,510	$	4,350	$	383	$	4,723	$	9,456
Construction/land development		2		58		—		7		9		16
Agricultural		1		282		267		—		—		267
Residential real estate loans
Residential 1-4 family		21		2,913		1,441		165		431		2,037
Total real estate		38		14,763		6,058		555		5,163		11,776
Consumer		1		17		14		—		—		14
Commercial and industrial		12		2,470		308		127		91		526
Total		51	$	17,250	$	6,380	$	682	$	5,254	$	12,316

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

	September 30, 2021				December 31, 2020
	Number of<br><br><br>Loans		Recorded<br><br><br>Balance		Number of<br><br><br>Loans		Recorded<br><br><br>Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		2	$	9		2	$	350
Construction/land development		2		216		1		9
Agricultural		1		262		1		267
Residential real estate loans
Residential 1-4 family		6		405		7		547
Total real estate		11		892		11		1,173
Consumer		3		3		—		—
Commercial and industrial		6		254		8		414
Total		20	$	1,149		19	$	1,587

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

	September 30, 2021		December 31, 2020
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	261	$	438
Construction/land development		835		3,189
Residential real estate loans
Residential 1-4 family		75		793
Total foreclosed assets held for sale	$	1,171	$	4,420

The Company has purchased loans for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The purchase price of the loans at acquisition was $1.3 million, and a $357,000 allowance for credit losses was recorded on these loans at acquisition along with a $17,000 non-credit premium. The allowance and non-credit premium resulted in a par value of $1.0 million for these loans at acquisition. As of September 30, 2021 and December 31, 2020, the balance of purchase credit deteriorated loans was approximately $454,000 and $760,000, respectively.

6.  Goodwill and Core Deposits and Other Intangibles

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

	September 30, 2021		December 31, 2020
	(In thousands)
Goodwill
Balance, beginning of period	$	973,025	$	958,408
Acquisitions		—		14,617
Balance, end of period	$	973,025	$	973,025
	September 30, 2021			December 31, 2020
---	---	---	---	---	---	---
	(In thousands)
Core Deposit and Other Intangibles
Balance, beginning of period	$	30,728		$	36,572
Amortization expense		(4,262	)		(4,423	)
Balance, September 30		26,466			32,149
Amortization expense					(1,421	)
Balance, end of year				$	30,728

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

	September 30, 2021			December 31, 2020
	(In thousands)
Gross carrying basis	$	86,625		$	86,625
Accumulated amortization		(60,159	)		(55,897	)
Net carrying amount	$	26,466		$	30,728

Core deposit and other intangible amortization expense was approximately $1.4 million for the three months ended September 30, 2021 and 2020. Core deposit and other intangible amortization expense was approximately $4.3 million and $4.4 million for the nine months ended September 30, 2021 and 2020. The Company’s estimated amortization expense of core deposits and other intangibles for each of the years 2021 through 2025 is approximately: 2021 – $5.7 million; 2022 – $5.7 million; 2023 – $5.5 million; 2024 – $4.3 million; 2025 – $3.9 million.

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

7.  Other Assets

Other assets consist primarily of equity securities without a readily determinable fair value and other miscellaneous assets.  As of September 30, 2021 and December 31, 2020, other assets were $171.2 million and $164.9 million, respectively.

The Company has equity securities without readily determinable fair values such as stock holdings in the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“Federal Reserve”) which are outside the scope of ASC Topic 321, Investments – Equity Securities (“ASC Topic 321”).  These equity securities without a readily determinable fair value were $88.1 million and $86.7 million at September 30, 2021 and December 31, 2020, and are accounted for at cost.

The Company has equity securities such as stock holdings in First National Bankers’ Bank and other miscellaneous holdings which are accounted for under ASC Topic 321.  These equity securities without a readily determinable fair value were $34.8 million and $28.2 million at September 30, 2021 and December 31, 2020.  There were no observable transactions during the period that would indicate a material change in fair value. Therefore, these investments were accounted for at cost, less impairment.

8.  Deposits

The aggregate amount of time deposits with a minimum denomination of $250,000 was $476.6 and $558.0 million at September 30, 2021 and December 31, 2020.  The aggregate amount of time deposits with a minimum denomination of $100,000 was $701.3 million and $864.3 million at September 30, 2021 and December 31, 2020, respectively.  Interest expense applicable to certificates in excess of $100,000 totaled $1.7 million and $5.6 million for the three months ended September 30, 2021 and 2020, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $6.1 million and $18.8 million for the nine months ended September 30, 2021 and 2020. As of September 30, 2021 and December 31, 2020, brokered deposits were $625.7 million and $635.7 million, respectively.

Deposits totaling approximately $1.86 billion and $1.98 billion at September 30, 2021 and December 31, 2020, respectively, were public funds obtained primarily from state and political subdivisions in the United States.

9.  Securities Sold Under Agreements to Repurchase

At September 30, 2021 and December 31, 2020, securities sold under agreements to repurchase totaled $141.0 million and $168.9 million, respectively. For the three-month periods ended September 30, 2021 and 2020, securities sold under agreements to repurchase daily weighted-average totaled $143.9 million and $157.2 million, respectively. For the nine months ended September 30, 2021 and 2020, securities sold under agreements to repurchase daily weighted-average totaled $153.7 million and $150.0 million, respectively.

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

	September 30, 2021
	Overnight and<br><br><br>Continuous		Up to 30 Days		30-90<br><br><br>Days		Greater than<br><br><br>90 Days		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	8,753	$	—	$	—	$	—	$	8,753
Mortgage-backed securities		7,979		—		—		—		7,979
State and political subdivisions		121,412		—		—		—		121,412
Other securities		2,858		—		—		—		2,858
Total borrowings	$	141,002	$	—	$	—	$	—	$	141,002
	December 31, 2020
---	---	---	---	---	---	---	---	---	---	---
	Overnight and<br><br><br>Continuous		Up to 30 Days		30-90<br><br><br>Days		Greater than<br><br><br>90 Days		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	11,166	$	—	$	—	$	—	$	11,166
Mortgage-backed securities		18,830		—		—		—		18,830
State and political subdivisions		135,308		—		—		—		135,308
Other securities		3,627		—		—		—		3,627
Total borrowings	$	168,931	$	—	$	—	$	—	$	168,931

10.  FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $400.0 million at both September 30, 2021 and December 31, 2020. The Company had no other borrowed funds as of September 30, 2021 or December 31, 2020. At September 30, 2021 and December 31, 2020, all of the outstanding balances were classified as long-term advances.  The FHLB advances mature in 2033 with fixed interest rates ranging from 1.76% to 2.26%.  Expected maturities could differ from contractual maturities because FHLB may have the right to call or the Company may have the right to prepay certain obligations.

Additionally, the Company had $1.12 billion and $1.11 billion at September 30, 2021 and December 31, 2020, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits at September 30, 2021 and December 31, 2020, respectively.

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

11.  Subordinated Debentures

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

	As of September 30,		As of<br><br><br>December 31,
	2021		2020
	(In thousands)
Trust preferred securities
Subordinated debentures, issued in 2006, due 2036, fixed rate of 6.75%<br><br><br>during the first five years and at a floating rate of 1.85% above the<br><br><br>three-month LIBOR rate, reset quarterly, thereafter, currently<br><br><br>callable without penalty	$	3,093	$	3,093
Subordinated debentures, issued in 2004, due 2034, fixed rate of 6.00%<br><br><br>during the first five years and at a floating rate of 2.00% above the<br><br><br>three-month LIBOR rate, reset quarterly, thereafter, currently<br><br><br>callable without penalty		15,464		15,464
Subordinated debentures, issued in 2005, due 2035, fixed rate of 5.84%<br><br><br>during the first five years and at a floating rate of 1.45% above the<br><br><br>three-month LIBOR rate, reset quarterly, thereafter, currently<br><br><br>callable without penalty		25,774		25,774
Subordinated debentures, issued in 2004, due 2034, fixed rate of 4.29%<br><br><br>during the first five years and at a floating rate of 2.50% above the<br><br><br>three-month LIBOR rate, reset quarterly, thereafter, currently<br><br><br>callable without penalty		16,495		16,495
Subordinated debentures, issued in 2005, due 2035, floating rate of 2.15%<br><br><br>above the three-month LIBOR rate, reset quarterly, currently callable<br><br><br>without penalty		4,489		4,452
Subordinated debentures, issued in 2006, due 2036, fixed rate of 7.38%<br><br><br>during the first five years and at a floating rate of 1.62% above the<br><br><br>three-month LIBOR rate, reset quarterly, thereafter, currently<br><br><br>callable without penalty		5,919		5,849
Subordinated debt securities
Subordinated notes, net of issuance costs, issued in 2017, due 2027, fixed<br><br><br>rate of 5.625% during the first five years and at a floating rate of<br><br><br>3.575% above the then three-month LIBOR rate, reset quarterly,<br><br><br>thereafter, callable in 2022 without penalty		299,666		299,199
Total	$	370,900	$	370,326

Trust Preferred Securities. The Company holds trust preferred securities with a face amount of $73.3 million which are currently callable without penalty based on the terms of the specific agreements.  The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. However, now that the Company has exceeded $15 billion in assets, the Tier 1 treatment of the Company’s outstanding trust preferred securities will be phased out upon completion of the acquisition of Happy Bancshares, but these securities will still be treated as Tier 2 capital. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s subordinated debentures, the sole asset of each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. The Company wholly owns the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related subordinated debentures. The Company’s obligations under the subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.

Subordinated Debt Securities.  On April 3, 2017, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The Notes are unsecured, subordinated debt obligations and mature on April 15, 2027.  From and including the date of issuance to, but excluding April 15, 2022, the Notes bear interest at an initial rate of 5.625% per annum.  From and including April 15, 2022 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination plus a spread of 3.575%; provided, however, that in the event three-month LIBOR is less than zero, then three-month LIBOR shall be deemed to be zero.

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

12.  Income Taxes

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

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2021		2020			2021		2020
	(In thousands)
Current:
Federal	$	14,693	$	16,271		$	52,771	$	57,154
State		4,864		5,386			17,470		18,921
Total current		19,557		21,657			70,241		76,075
Deferred:
Federal		2,744		(451	)		5,211		(29,071	)
State		908		(149	)		1,725		(9,624	)
Total deferred		3,652		(600	)		6,936		(38,695	)
Income tax expense	$	23,209	$	21,057		$	77,177	$	37,380

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, 2021 and 2020:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2021				2020				2021				2020
Statutory federal income tax rate		21.00		%		21.00		%		21.00		%		21.00		%
Effect of non-taxable interest income		(1.08	)			(1.03	)			(1.00	)			(1.48	)
Stock compensation		0.16				1.17				0.23				0.53
State income taxes, net of federal benefit		3.50				3.82				4.00				3.00
Executive officer compensation & other		0.05				(1.66	)			(0.32	)			(1.07	)
Effective income tax rate		23.63		%		23.30		%		23.91		%		21.98		%

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,<br><br><br>2021			December 31,<br><br><br>2020
	(In thousands)
Deferred tax assets:
Allowance for credit losses	$	69,135		$	72,445
Deferred compensation		4,751			4,741
Stock compensation		5,475			4,768
Non-accrual interest income		853			775
Real estate owned		109			620
Loan discounts		4,151			6,806
Tax basis premium/discount on acquisitions		3,693			5,101
Investments		273			502
Deposits		(57	)		(33	)
Other		5,259			5,855
Gross deferred tax assets		93,642			101,580
Deferred tax liabilities:
Accelerated depreciation on premises and equipment		264			1,929
Unrealized gain on securities		9,735			15,072
Core deposit intangibles		6,066			7,056
FHLB dividends		2,807			2,711
Other		5,046			4,563
Gross deferred tax liabilities		23,918			31,331
Net deferred tax assets	$	69,724		$	70,249

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

13. Common Stock, Compensation Plans and Other

Common Stock

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

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

Stock Repurchases

During the first nine months of 2021, the Company repurchased a total of 1.4 million shares with a weighted-average stock price of $25.64 per share. Shares repurchased under the program as of September 30, 2021 since its inception total 17,349,835 shares. The remaining balance available for repurchase is 22,402,165 shares at September 30, 2021.

Stock Compensation Plans

The Company has a stock option and performance incentive plan known as the Amended and Restated 2006 Stock Option and Performance Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate those persons to improve the Company’s business results. As of September 30, 2021, the maximum total number of shares of the Company’s common stock available for issuance under the Plan was 13,288,000.  At September 30, 2021, the Company had approximately 1,602,000 shares of common stock remaining available for future grants and approximately 3,041,000 stock options outstanding for a total of approximately 4,643,000 shares of common stock reserved for issuance pursuant to outstanding awards under the Plan.

The intrinsic value of the stock options outstanding and stock options vested at September 30, 2021 was $10.9 million and $9.7 million, respectively. The intrinsic value of stock options exercised during the nine months ended September 30, 2021 was approximately $1.7 million. Total unrecognized compensation cost, net of income tax benefit, related to non-vested stock option awards, which are expected to be recognized over the vesting periods, was approximately $6.5 million as of September 30, 2021.

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

	For the Nine Months<br><br><br>Ended September 30, 2021					For the Year Ended<br><br><br>December 31, 2020
	Shares (000)			Weighted-<br><br><br>Average<br><br><br>Exercisable<br><br><br>Price		Shares (000)			Weighted-<br><br><br>Average<br><br><br>Exercisable<br><br><br>Price
Outstanding, beginning of year		3,254		$	19.77		3,411		$	19.60
Granted		15			21.68		—			—
Forfeited/Expired		(47	)		22.25		(76	)		21.95
Exercised		(181	)		15.27		(81	)		10.61
Outstanding, end of period		3,041			20.01		3,254			19.77
Exercisable, end of period		1,552		$	17.37		1,537		$	16.82

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

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

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

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

Options Outstanding						Options Exercisable
Exercise Prices		Weighted-<br><br><br>Average<br><br><br>Remaining<br><br><br>Contractual<br><br><br>Life (in years)		Weighted-<br><br><br>Average<br><br><br>Exercise<br><br><br>Price		Options<br><br><br>Exercisable<br><br><br>Shares (000)		Weighted-<br><br><br>Average<br><br><br>Exercise<br><br><br>Price
6.56 to 8.62	164		1.15	$	8.32		164	$	8.32
9.54 to 14.71	140		2.80		13.23		140		13.23
16.77 to 16.86	130		2.89		16.80		130		16.80
17.12 to 17.36	102		3.47		17.14		102		17.14
17.40 to 18.46	871		3.88		18.45		738		18.45
18.50 to 20.16	41		7.53		19.05		14		19.04
20.58 to 21.25	158		4.51		21.08		143		21.12
21.31 to 22.22	112		6.85		22.18		60		22.22
22.70 to 23.32	1,242		6.81		23.32		1		22.70
23.51 to 25.96	81		5.72		25.63		60		25.81
	3,041						1,552

All values are in US Dollars.

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

	As of<br><br><br>September 30, 2021			As of<br><br><br>December 31, 2020
	(In thousands)
Beginning of year		1,371			1,636
Issued		215			264
Vested		(238	)		(453	)
Forfeited		(26	)		(76	)
End of period		1,322			1,371
Amount of expense for nine months and twelve<br><br><br>months ended, respectively	$	5,307		$	6,824

Total unrecognized compensation cost, net of income tax benefit, related to non-vested restricted stock awards, which are expected to be recognized over the vesting periods, was approximately $16.6 million as of September 30, 2021.

14.  Non-Interest Expense

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(In thousands)
Salaries and employee benefits	$	42,469	$	41,511	$	126,990	$	120,928
Occupancy and equipment		9,305		9,566		27,584		28,611
Data processing expense		6,024		4,921		17,787		13,861
Merger and acquisition expenses		1,006		—		1,006		711
Other operating expenses:
Advertising		1,204		902		3,444		2,923
Amortization of intangibles		1,421		1,420		4,262		4,423
Electronic banking expense		2,521		2,426		7,375		6,195
Directors’ fees		395		429		1,192		1,265
Due from bank service charges		265		259		787		721
FDIC and state assessment		1,648		1,607		4,119		5,001
Insurance		749		766		2,317		2,223
Legal and accounting		1,050		1,235		2,954		3,432
Other professional fees		1,787		1,661		5,196		6,622
Operating supplies		474		460		1,426		1,548
Postage		301		328		931		968
Telephone		371		321		1,082		955
Other expense		4,629		3,900		13,015		12,757
Total other operating expenses		16,815		15,714		48,100		49,033
Total non-interest expense	$	75,619	$	71,712	$	221,467	$	213,144

15. Leases

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

As of September 30, 2021, the balances of the right-of-use asset and lease liability was $40.8 million and $43.7 million, respectively. As of December 31, 2020, the balances of the right-of-use asset and lease liability was $40.2 million and $43.0 million, respectively The right-of-use asset is included in bank premises and equipment, net, and the lease liability is included in accrued interest payable and other liabilities.

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

	September 30, 2021			December 31, 2020
2021	$	2,910		$	8,235
2022		7,366			6,486
2023		6,535			5,714
2024		5,972			5,262
2025		5,510			4,818
Thereafter		30,388			27,453
Total future minimum lease payments	$	58,681		$	57,968
Discount effect of cash flows		(15,017	)		(14,922	)
Present value of net future minimum lease payments	$	43,664		$	43,046

Additional information (dollar amounts in thousands):

	For the Three Months Ended						For the Nine Months Ended
Lease expense:	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Operating lease expense	$	1,971		$	2,044		$	5,961		$	6,085
Short-term lease expense		1			9			5			41
Variable lease expense		250			253			759			772
Total lease expense	$	2,222		$	2,306		$	6,725		$	6,898
Other information:
Cash paid for amounts included in the<br><br><br>measurement of lease liabilities	$	1,988		$	2,021		$	5,956		$	6,013
Weighted-average remaining lease term<br><br><br>(in years)		9.67			10.08			9.78			10.21
Weighted-average discount rate		3.42	%		3.60	%		3.49	%		3.61	%

The Company currently leases three properties from three related parties. Total rent expense from the leases was $36,000 or 1.64% of total lease expense and $107,000 or 1.59% of total lease expense for the three and nine months ended September 30, 2021, respectively.

16. Significant Estimates and Concentrations of Credit Risks

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

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

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

Although the Company has a diversified loan portfolio, at September 30, 2021 and December 31, 2020, commercial real estate loans represented 59.5% and 54.4% of total loans receivable, respectively, and 215.2% and 234.3% of total stockholders’ equity at September 30, 2021 and December 31, 2020, respectively.  Residential real estate loans represented 15.6% and 18.5% of total loans receivable and 56.6% and 79.6% of total stockholders’ equity at September 30, 2021 and December 31, 2020, respectively.

Approximately 74.2% of the Company’s total loans and 76.4% of the Company’s real estate loans as of September 30, 2021, are to borrowers whose collateral is located in Alabama, Arkansas, Florida and New York, the states in which the Company has its branch locations.

As of September 30, 2021, the markets in which we operate have begun to experience economic recovery.  However, there is still a significant amount of uncertainty related to the COVID-19 pandemic which may slow the anticipated economic recovery.  The Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2021. During the nine months ended September 30, 2021, the Company recorded a negative provision for unfunded commitments of $4.8 million. This was  primarily due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The financial statements have been prepared using values and information currently available to the Company. The Company is continuing to closely monitor the situation.

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

17.  Commitments and Contingencies

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

At September 30, 2021 and December 31, 2020, commitments to extend credit of $3.11 billion and $2.82 billion, respectively, were outstanding.  A percentage of these balances are participated out to other banks; therefore, the Company can call on the participating banks to fund future draws.  Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Outstanding standby letters of credit are contingent commitments issued by the Company, generally to guarantee the performance of a customer in third-party borrowing arrangements. The term of the guarantee is dependent upon the creditworthiness of the borrower, some of which are long-term. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.  Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.  The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2021 and December 31, 2020, is $90.6 million and $56.1 million, respectively.

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

18.  Regulatory Matters

The Bank is subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since the Bank is also under supervision of the Federal Reserve, it is further limited if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years.  During the first nine months of 2021, the Company requested approximately $195.6 million in regular dividends from its banking subsidiary.

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

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

On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 27, 2020, the federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. The Company elected to adopt the interim final rule, which is reflected in the risk-based capital ratios presented below.

In July 2013, the Federal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank Act (“Basel III”). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary on January 1, 2015. Basel III limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5% of common equity Tier 1 capital to risk-weighted assets, which is in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement began being phased in beginning January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019 when the phase-in period ended, and the full capital conservation buffer requirement became effective.

Basel III permanently grandfathers trust preferred securities and other non-qualifying capital instruments that were issued and outstanding as of May 19, 2010 in the Tier 1 capital of bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. The rule phases out of Tier 1 capital these non-qualifying capital instruments issued before May 19, 2010 by all other bank holding companies. Because our total consolidated assets were less than $15 billion as of December 31, 2009, our outstanding trust preferred securities continue to be treated as Tier 1 capital.  However, now that the Company has exceeded $15 billion in assets, the Tier 1 treatment of the Company’s outstanding trust preferred securities will be phased out upon completion of the acquisition of Happy Bancshares, but these securities will still be treated as Tier 2 capital.

Basel III also amended the prompt corrective action rules to incorporate a “common equity Tier 1 capital” requirement and to raise the capital requirements for certain capital categories.  In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an 8% “total risk-based capital” ratio.

The Federal Reserve Board’s risk-based capital guidelines include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution.  Under Basel III, the criteria for a well-capitalized institution are now: a 6.5% “common equity Tier 1 risk-based capital” ratio, a 5% “Tier 1 leverage capital” ratio, an 8% “Tier 1 risk-based capital” ratio, and a 10% “total risk-based capital” ratio.  As of September 30, 2021, the Bank met the capital standards for a well-capitalized institution.  The Company’s “common equity Tier 1 risk-based capital” ratio, “Tier 1 leverage capital” ratio, “Tier 1 risk-based capital” ratio, and “total risk-based capital” ratio were 15.12%, 11.00%, 15.73%, and 19.55%, respectively, as of September 30, 2021.

19.  Additional Cash Flow Information

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

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

	September 30,
	2021		2020
	(In thousands)
Interest paid	$	36,757	$	72,909
Income taxes paid		82,245		54,698
Assets acquired by foreclosure		2,058		1,673

20.  Financial Instruments

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

Level 1	Quoted prices in active markets for identical assets or liabilities
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
---	---
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
---	---

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

Financial Assets and Liabilities Measured on a Recurring Basis

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

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

Financial Assets and Liabilities Measured on a Nonrecurring Basis

Impaired loans that are collateral dependent are the only material financial assets valued on a non-recurring basis which are held by the Company at fair value.  Loan impairment is reported when full payment under the loan terms is not expected.  Impaired loans are carried at the net realizable value of the collateral if the loan is collateral dependent.  A portion of the allowance for credit losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.  If these allocations cause the allowance for credit losses to require an increase, such increase is reported as a component of the provision for credit losses.  The fair value of loans with specific allocated losses was $252.8 million and $102.1 million as of September 30, 2021 and December 31, 2020, respectively.  The increase in collateral-dependent impaired loans was due to the Company changing the valuation for lodging and assisted living loans to a market price valuation methodology. This involved assigning a 15% discount of par for these impaired loans. The 15% figure was derived based on knowledge of current hotel and assisted living offerings in the loan sale market. In the event of default, liquidation would be achieved through a loan sale. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $92,000 and $388,000 of accrued interest receivable when impaired loans were put on non-accrual status during the three months ended September 30, 2021 and 2020, respectively. The Company reversed approximately $276,000 and $811,000 of accrued interest receivable when impaired loans were put on non-accrual status during the nine months ended September 30, 2021 and 2020, respectively.

Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis

Foreclosed assets held for sale are the only material non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less estimated costs to sell.  At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for credit losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held for sale is estimated using Level 3 inputs based on appraisals of underlying collateral.  As of September 30, 2021 and December 31, 2020, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $1.2 million and $4.4 million, respectively.

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

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans and foreclosed assets primarily relate to customized discounting criteria applied to the customer’s reported amount of collateral.  The amount of the collateral discount depends upon the condition and marketability of the underlying collateral.  As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 25% to 55% for commercial and residential real estate collateral.

Fair Values of Financial Instruments

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

	September 30, 2021
	Carrying
	Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	3,280,256	$	3,280,256	1
Loans receivable, net of impaired loans and allowance		9,409,596		9,687,138	3
Accrued interest receivable		48,577		48,577	1
FHLB, Federal Reserve & First National Bankers Bank<br><br><br>stock; other equity investments		122,824		122,824	3
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	4,139,149	$	4,139,149	1
Savings and interest-bearing transaction accounts		8,813,326		8,813,326	1
Time deposits		1,050,896		1,089,205	3
Securities sold under agreements to repurchase		141,002		141,002	1
FHLB and other borrowed funds		400,000		403,489	2
Accrued interest payable		9,409		9,409	1
Subordinated debentures		370,900		377,839	3
	December 31, 2020
---	---	---	---	---	---
	Carrying
	Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	1,263,788	$	1,263,788	1
Loans receivable, net of impaired loans and allowance		10,873,120		11,292,004	3
Accrued interest receivable		60,528		60,528	1
FHLB, Federal Reserve & First National Bankers Bank<br><br><br>stock; other equity investments		114,854		114,854	3
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	3,266,753	$	3,266,753	1
Savings and interest-bearing transaction accounts		8,212,240		8,212,240	1
Time deposits		1,246,797		1,266,430	3
Securities sold under agreements to repurchase		168,931		168,931	1
FHLB and other borrowed funds		400,000		414,207	2
Accrued interest payable		5,925		5,925	1
Subordinated debentures		370,326		378,981	3

21.  Recent Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Section 4013 of the CARES Act provides financial institutions the temporary option to not apply ASC Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, to certain loan modifications related to COVID-19 made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after termination of the President’s national emergency declaration for COVID-19. On December 28, 2020, an extension of section 4013 of the CARES Act, provided institutions with an extension of the temporary option to not apply ASC Subtopic 310-40 until January 1, 2022. Further, financial institutions do not need to determine impairment associated with certain loan concessions that would otherwise have been required for TDRs (e.g., interest rate concessions, payment deferrals, or loan extensions). The Company has relied on Section 4013 of the CARES Act in accounting for loan modifications since the fourth quarter of 2020. The Company has granted loan modification to 38 outstanding loans for a total of $228.2 million as of September 30, 2021.  All of the customers currently on deferment chose principal deferment only and now have returned to paying interest monthly.

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

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Home BancShares, Inc.

Conway, Arkansas

Results of Review of Interim Consolidated Financial Statements

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

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

Basis for Review Results

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

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

/s/ BKD, LLP

Little Rock, Arkansas

November 4, 2021

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

The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on February 26, 2021, which includes the audited financial statements for the year ended December 31, 2020. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refer to Home BancShares, Inc. on a consolidated basis.

General

We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly-owned bank subsidiary, Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of September 30, 2021, we had, on a consolidated basis, total assets of $17.77 billion, loans receivable, net of $9.66 billion, total deposits of $14.00 billion, and stockholders’ equity of $2.74 billion.

We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income.  Deposits and Federal Home Loan Bank (“FHLB”) and other borrowed funds are our primary source of funding. Our largest expenses are interest on our funding sources, salaries and related employee benefits and occupancy and equipment. We measure our performance by calculating our return on average common equity, return on average assets and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a non-GAAP measure and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding adjustments such as merger expenses and/or certain gains, losses and other non-interest income and expenses.

Table 1:  Key Financial Measures

	As of or for the Three Months Ended						As of or for the Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
	(Dollars in thousands, except per share data)
Total assets	$	17,765,056		$	16,549,758		$	17,765,056		$	16,549,758
Loans receivable		9,901,100			11,691,470			9,901,100			11,691,470
Allowance for credit losses		238,673			248,224			238,673			248,224
Total deposits		14,003,371			12,937,466			14,003,371			12,937,466
Total stockholders’ equity		2,736,062			2,540,799			2,736,062			2,540,799
Net income		74,992			69,320			245,664			132,654
Basic earnings per share		0.46			0.42			1.49			0.80
Diluted earnings per share		0.46			0.42			1.49			0.80
Book value per share		16.68			15.38			16.68			15.38
Tangible book value per share (non-GAAP)^(1)^		10.59			9.30			10.59			9.30
Annualized net interest margin – FTE		3.60	%		3.92	%		3.74	%		4.08	%
Efficiency ratio		42.26			39.56			39.86			40.40
Efficiency ratio, as adjusted (non-GAAP)^(2)^		42.29			40.08			41.67			40.25
Annualized return on average assets		1.68			1.66			1.90			1.11
Annualized return on average common equity		10.97			10.97			12.32			7.13
(1)	See Table 19 for the non-GAAP tabular reconciliation.
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(2)	See Table 23 for the non-GAAP tabular reconciliation.
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Overview

Recent Developments – COVID-19

The Company has been, and may continue to be, impacted by the novel coronavirus (“COVID-19”) pandemic. Uncertainty remains about the duration of the pandemic as well as the timing and extent of the economic recovery. We continue to evaluate protocols and processes in place to execute our business continuity plans and help promote the health and safety of our employees and customers. To support our customers or to comply with law, we have deferred loan payments for certain consumer and commercial customers, and we have suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions, and have offered fee waivers, payment deferrals, and other expanded assistance for automobile, mortgage, small business and personal lending customers.

As of September 30, 2021, our loan deferrals decreased to $228.2 million on 38 loans from the December 31, 2020 balance of $330.7 million on 56 loans.  All of the customers currently on deferment totaling $228.2 million chose principal deferment only and now have returned to paying interest monthly.  The hospitality sector has been most negatively impacted by COVID-19 and represents approximately 67% of the deferment balance as of September 30, 2021. The geographic distribution of these deferrals is similar through all of our markets.  Our review of deferment requests required updated interim operating statements, balance sheet and liquidity verifications, and validation of the current risk rating.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) established a new federal economic relief program administered by the Small Business Administration (“SBA”) called the Paycheck Protection Program (“PPP”), which provides for 100% federally guaranteed loans to be issued by participating private financial institutions to small businesses for payroll and certain other permitted expenses.  PPP loans are forgivable, in whole or in part, so long as employee and compensation levels of the borrower are maintained, and the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments were deferred for the first six months of the loan. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/HCEA Act”) was signed into law in April 2020. The PPP/HCEA Act authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA. The Consolidated Appropriations Act (“CAA”) was signed into law in December 2020. The CAA also authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA with a term of five years.  As of September 30, 2021, as a participating lender, we have generated 12,971 loans to both existing and new customers totaling $1.23 billion. As of September 30, 2021, the outstanding PPP loan balances were $241.5 million. The average loan size was $108,000.

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

On September 9, 2021, President Biden announced that he has directed the Occupational Safety and Health Administration (OSHA) to develop an Emergency Temporary Standard (ETS) mandating either the full vaccination or weekly testing of employees for employers with 100 or more employees. On November 4, 2021, OSHA issued its ETS which sets out the specific terms of the mandate and its implementation. We are currently reviewing these requirements to assess any potential impacts of their implementation on our operations.

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

Our net income increased $5.7 million, or 8.2%, to $75.0 million for the three-month period ended September 30, 2021, from $69.3 million for the same period in 2020.  On a diluted earnings per share basis, our earnings were $0.46 per share for the three-month period ended September 30, 2021 compared to $0.42 per share for the three-month period ended September 30, 2020.  During the three-month period ended September 30, 2021, the Company did not record any provision for credit losses compared to a $14.0 million provision for credit losses three-month period ended September 30, 2020.  The $14.0 million of total credit loss expense for the three-month period ended September 30, 2020 was primarily due to the COVID-19 pandemic. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. The Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2021.  The Company also recorded a $61,000 adjustment for the increase in fair market value of marketable securities and $2.2 million of special dividend income from our equity investments as well as $1.0 million of merger and acquisition expense.

Total interest income decreased by $9.6 million, or 5.7%, non-interest expense increased by $3.9 million, or 5.4%, and non-interest income decreased by $741,000, or 2.5%. This was partially offset by an by $8.0 million, or 39.3%, decrease in total interest expense. The decrease in interest income was due to a $12.2 million decrease in loan interest income, which was partially offset by a $1.7 million increase in investment income. The increase in non-interest expense was due to a $1.1 million increase in data processing expense, a $1.1 million increase in other operating expenses, a $1.0 million increase in merger and acquisition expense, and a $958,000 increase in salaries and employee benefits. The decrease in non-interest income was primarily due to a $4.2 million decrease in mortgage lending income, which was partially offset by a $1.7 million increase in other income, a $1.4 million increase in fair value adjustment for marketable securities, and a $1.0 million increase in service charges on deposit accounts. The decrease in interest expense was primarily due to a $7.6 million decrease in interest on deposits and an $318,000 decrease in interest on FHLB borrowed funds.  Income tax expense increased by $2.2 million during the quarter due to an increase in net income.

Our net interest margin decreased from 3.92% for the three-month period ended September 30, 2020 to 3.60% for the three-month period ended September 30, 2021. The yield on interest earning assets was 3.91% and 4.47% for the three months ended September 30, 2021 and 2020, respectively, as average interest earning assets increased from $14.98 billion to $16.11 billion. The increase in average earning assets is primarily the result of a $1.99 billion increase in average interest-bearing balances due from banks and a $862.1 million increase in average investment securities, partially offset by the $1.71 billion decrease in average loans receivable. Average PPP loan balances were $371.5 million for the three months ended September 30, 2021. These loans bear interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $10.2 million on PPP loans for the three months ended September 30, 2021. The PPP loans were accretive to the net interest margin by 17 basis points for the three months ended September 30, 2021. This was primarily due to approximately $232.4 million of the Company’s PPP loans being forgiven during the third quarter of 2021 which included the acceleration of $8.2 million in deferred fees for the loans that were forgiven. As of September 30, 2021, the Company had $9.0 million in remaining unamortized PPP fees. The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market.  As a result, we had an increase of $1.99 billion in average interest-bearing cash balances for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.  This excess liquidity was dilutive to the net interest margin by 49 basis points. For the three months ended September 30, 2021 and 2020, we recognized $4.9 million and $7.0 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 5 basis points. We recognized $3.5 million in event interest income for the three months ended September 30, 2021 compared to no event income for the three months ended September 30, 2020. This increased the net interest margin by 8 basis points.

Our efficiency ratio was 42.26% for the three months ended September 30, 2021, compared to 39.56% for the same period in 2020.  For the third quarter of 2021, our efficiency ratio, as adjusted (non-GAAP), was 42.29%, compared to 40.08% reported for the third quarter of 2020. (See Table 23 for the non-GAAP tabular reconciliation).

Our annualized return on average assets was 1.68% for the three months ended September 30, 2021, compared to 1.66% for the same period in 2020.  Our annualized return on average common equity was 10.97% for both the three months ended September 30, 2021, and 2020.

Results of Operations for the Nine Months Ended September 30, 2021 and 2020

Our net income increased $113.0 million, or 85.2%, to $245.7 million for the nine-month period ended September 30, 2021, from $132.7 million for the same period in 2020.  On a diluted earnings per share basis, our earnings were $1.49 per share for the nine-month period ended September 30, 2021 and $0.80 per share for the nine-month period ended September 30, 2020.  During the nine-month period ended September 30, 2021, the Company recorded a $4.8 million negative provision for unfunded commitments compared to a $112.3 million provision for credit losses and a $17.0 million provision for unfunded commitments for a total credit loss expense of $129.3 million for the nine-month period ended September 30, 2020.  The $4.8 million negative provision for the nine-month period ended September 30, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $129.3 million of total credit loss expense for the nine-month period ended September 30, 2020 was primarily due to the COVID-19 pandemic, with $9.3 million for the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. The Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2021. The Company also recorded a $7.1 million adjustment for the increase in fair market value of marketable securities, $12.5 million of special dividend income from our equity investments, $5.1 million recovery on historic losses from loans charged-off prior to acquisition, $1.0 million of merger and acquisition expense and a $219,000 gain on investment securities.

Total interest expense decreased by $35.6 million, or 47.0%, and non-interest income increased by $27.7 million, or 35.6%. This was partially offset by a $36.2 million, or 7.1%, decrease in total interest income and an $8.3 million, or 3.9%, increase in non-interest expense. The decrease in interest expense was primarily due to a $32.7 million decrease in interest on deposits and a $1.9 million decrease in interest on FHLB borrowed funds.  The increase in non-interest income was primarily due to a $13.3 million increase in the fair value adjustment on marketable securities, a $5.6 million increase in other income, a $3.1 million increase in other service charges and fees, a $2.4 million increase in dividends from FHLB, FRB, FNBB & other, a $1.3 million increase in mortgage lending income, and a $1.2 million increase in gain on sale of SBA loans.  The decrease in interest income was due to a $36.7 million decrease in loan interest income.  The increase in non-interest expense was due to a $6.1 million increase in salaries and employee benefits and a $3.9 million increase in data processing expense and was partially offset by a $1.0 million decrease in occupancy and equipment and a $933,000 decrease in other operating expenses.  Income tax expense increased by $39.8 million during the quarter due to an increase in net income.

Our net interest margin decreased from 4.08% for the nine-month period ended September 30, 2020 to 3.74% for the nine-month period ended September 30, 2021.  The yield on interest earning assets was 4.08% and 4.79% for the nine months ended September 30, 2021 and 2020, respectively, as average interest earning assets increased from $14.36 billion to $15.71 billion. The increase in average earning assets is primarily the result of a $1.70 billion increase in average interest-bearing balances due from banks and a $637.1 million increase in average investment securities, partially offset by the $987.3 million decrease in average loans receivable. Average PPP loan balances were $525.9 million for the nine months ended September 30, 2021. These loans bear interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $29.8 million on PPP loans for the nine months ended September 30, 2021. The PPP loans were accretive to the net interest margin by 13 basis points for the nine months ended September 30, 2021. This was primarily due to approximately $781.4 million of the Company’s PPP loans being forgiven during the first nine months of 2021 which included the acceleration of $19.9 million in deferred fees for the loans that were forgiven. As of September 30, 2021, the Company had $9.0 million in remaining unamortized PPP fees. The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market.  As a result, we had an increase of $1.70 billion in average interest-bearing cash balances for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This excess liquidity was dilutive to the net interest margin by 45 basis points. For the nine months ended September 30, 2021 and 2020, we recognized $16.2 million and $21.6 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 5 basis points. We recognized $5.5 million in event interest income for the nine months ended September 30, 2021 compared to $2.1 million in event income for the three months ended September 30, 2020. This increased the net interest margin by 3 basis points.

Our efficiency ratio was 39.86% for the nine months ended September 30, 2021, compared to 40.40% for the same period in 2020.  For the nine months ended September 30, 2021, our efficiency ratio, as adjusted (non-GAAP), was 41.67%, compared to 40.25% reported for the nine months ended September 30, 2020. (See Table 23 for the non-GAAP tabular reconciliation).

Our annualized return on average assets was 1.90% for the nine months ended September 30, 2021, compared to 1.11% for the same period in 2020.  Our annualized return on average common equity was 12.32% for the nine months ended September 30, 2021, compared to 7.13% for the same period in 2020.

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

Our total assets as of September 30, 2021 increased $1.37 billion to $17.77 billion from the $16.40 billion reported as of December 31, 2020.  Cash and cash equivalents increased $2.02 billion, or 159.6%, for the nine months ended September 30, 2021. The increase in cash and cash equivalents is due to loan paydowns as well as the significant amount of excess liquidity in the market as a continued result of the COVID-19 pandemic and the accompanying governmental response. Our loan portfolio balance decreased to $9.90 billion as of September 30, 2021 from $11.22 billion at December 31, 2020 due to organic loan decline of $885.9 million and $781.4 million of the Company’s PPP loans being forgiven during the first nine months of 2021, which was partially offset by $347.7 million in new PPP loan originations during 2021. Total deposits increased $1.28 billion to $14.00 billion as of September 30, 2021 from $12.73 billion as of December 31, 2020, which was due to customers holding higher deposit balances in response to the COVID-19 pandemic as well as the accompanying governmental response to the pandemic. Stockholders’ equity increased $130.3 million to $2.74 billion as of September 30, 2021, compared to $2.61 billion as of December 31, 2020.  The $130.3 million increase in stockholders’ equity is primarily associated with the $245.7 million in net income for the nine months ended September 30, 2021, which was partially offset by the $18.1 million in other comprehensive loss for the nine months ended September 30, 2021, $69.2 million of shareholder dividends paid and stock repurchases of $37.0 million in 2021.

Our non-performing loans were $50.9 million, or 0.51% of total loans as of September 30, 2021, compared to $74.1 million, or 0.66% of total loans as of December 31, 2020.  The allowance for credit losses as a percentage of non-performing loans increased to 468.77% as of September 30, 2021, from 331.10% as of December 31, 2020.  Non-performing loans from our Arkansas franchise were $15.5 million at September 30, 2021 compared to $24.1 million as of December 31, 2020.  Non-performing loans from our Florida franchise were $25.2 million at September 30, 2021 compared to $43.1 million as of December 31, 2020.  Non-performing loans from our Alabama franchise were $523,000 at September 30, 2021 compared to $530,000 as of December 31, 2020.  Non-performing loans from our SPF franchise were $1.9 million at September 30, 2021 compared to $3.6 million as of December 31, 2020. Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $7.8 million at September 30, 2021 compared to $2.8 million as of December 31, 2020.

As of September 30, 2021, our non-performing assets decreased to $52.1 million, or 0.29% of total assets, from $78.6 million, or 0.48% of total assets, as of December 31, 2020. Non-performing assets from our Arkansas franchise were $16.1 million at September 30, 2021 compared to $25.6 million as of December 31, 2020. Non-performing assets from our Florida franchise were $25.8 million at September 30, 2021 compared to $46.0 million as of December 31, 2020. Non-performing assets from our Alabama franchise were $523,000 at September 30, 2021 compared to $564,000 as of December 31, 2020. Non-performing assets from our SPF franchise were $1.9 million at September 30, 2021 compared to $3.6 million as of December 31, 2020. Non-performing assets from our CFG franchise were $7.8 million at September 30, 2021 compared to $2.8 million as of December 31, 2020.

The $7.8 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. The decision to place these loans on non-accrual status was made by the Federal Reserve and not the Company. The loans that make up the total balance are still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because the Federal Reserve required us to place these loans on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve.

Critical Accounting Policies

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

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

Revenue Recognition.  Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our income statements as components of non-interest income are as follows:

•	Service charges on deposit accounts – These represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
•	Other service charges and fees – These represent credit card interchange fees and Centennial CFG loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310.  Interchange fees were $4.2 million, $12.2 million, $3.8 million and $11.0 million for the three and nine months ended September 30, 2021 and 2020, respectively. Centennial CFG loan fees were $1.8 million, $7.1 million, $2.7 million and $5.6 million for the three and nine months ended September 30, 2021 and 2020, respectively.
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Credit Losses.  The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.  The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant  estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not, they will be required to sell.

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

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

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

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

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

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

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

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

•	1-4 family construction
•	All other construction
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•	1-4 family revolving home equity lines of credit (“HELOC”) & junior liens
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•	1-4 family senior liens
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•	Multifamily
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•	Owner occupied commercial real estate
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•	Non-owner occupied commercial real estate
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•	Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other
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•	Consumer auto
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•	Other consumer
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•	Other consumer - SPF
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The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

•	Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower.
•	The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
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Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for credit losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.

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

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Purchase credit deteriorated (“PCD”) loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit loss.

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

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

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

Income Taxes.  We account for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes).  The income tax accounting guidance results in two components of income tax expense:  current and deferred.  Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.  We determine deferred income taxes using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.  Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term “more likely than not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Both we and our subsidiary file consolidated tax returns.  Our subsidiary provides for income taxes on a separate return basis, and remits to us amounts determined to be currently payable.

Stock Compensation.  In accordance with FASB ASC 718, Compensation - Stock Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees, the fair value of each option award is estimated on the date of grant.  We recognize compensation expense for the grant-date fair value of the option award over the vesting period of the award.

Acquisitions

Acquisition of LH-Finance

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

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

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

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

Future Acquisition of Happy Bancshares, Inc.

On September 15, 2021, the Company and Centennial entered into an Agreement and Plan of Merger (the “Agreement”) with Happy Bancshares, Inc., a Texas corporation (“Happy”), and its wholly-owned bank subsidiary, Happy State Bank, a Texas banking association (“HSB”), under which the Company and Centennial will acquire Happy and HSB. The Agreement, as amended on October 18, 2021, provides that, in a series of transactions, an acquisition subsidiary of the Company will merge into Happy and Happy will merge into the Company, with the Company as the surviving entity (collectively, the “Merger”). As soon as reasonably practicable following the Merger, HSB will merge into Centennial, with Centennial as the surviving entity.

Under the terms of the Agreement, as amended, the Company will issue approximately 42.3 million shares of its common stock to the shareholders of Happy upon the completion of the Merger, for a purchase price of approximately $1.02 billion, valued based on the volume-weighted average closing price per share of the Company’s common stock as reported on the Nasdaq Global Select Market (“Nasdaq”) for the 20 consecutive trading day period ending on November 1, 2021. No cash consideration will be paid in connection with the Merger, except that holders of outstanding shares of Happy common stock at the time of the Merger will receive cash payments in lieu of any fractional shares of Company common stock to which they are otherwise entitled in connection with the Merger. In addition, the Company expects to pay an aggregate of up to approximately $11.0 million in cash in cancellation of certain stock appreciation rights issued by Happy that remain outstanding at the time of the Merger.

Subject to the terms and conditions set forth in the Agreement, as amended, at the effective time of the Merger (the “Effective Time”), each outstanding share of common stock of Happy will be converted into the right to receive, without interest, 2.17 shares of the Company’s common stock (the “Merger Consideration”). Each unvested restricted share of Happy common stock outstanding at the Effective Time will fully vest and be converted into the right to receive the Merger Consideration. In addition, at the Effective Time, each outstanding option to purchase Happy common stock will be cancelled and converted into the right to receive the number of whole shares of the Company’s common stock, together with any cash in lieu of fractional shares, equal to the product of (i) the number of shares of Happy common stock subject to the option, multiplied by (ii) the excess, if any, of the Merger Consideration value over the exercise price of the option, less applicable tax withholdings, divided by (iii) the Company’s Average Closing Price (defined below). Similarly, each stock appreciation right of Happy outstanding at the Effective Time will be cancelled and converted into the right to receive a cash payment, without interest, equal to the product of (i) the number of shares of Happy common stock subject to the stock appreciation right, multiplied by (ii) the excess, if any, of the Merger Consideration value over the grant price of the stock appreciation right, less applicable tax withholdings. For purposes of these calculations, the Merger Consideration value will be determined using a volume-weighted average closing price of the Company’s common stock as reported on Nasdaq over the 20 consecutive trading day period ending on the third business day prior to the closing of the Merger (“the Company’s Average Closing Price”), multiplied by 2.17.

The Merger is expected to close during the first quarter of 2022, and is subject to the approval of the shareholders of the Company and Happy, regulatory approvals, and other conditions set forth in the Agreement.

As of September 30, 2021, Happy had approximately $6.44 billion in total assets, $3.55 billion in loans and $5.47 billion in customer deposits. Happy is conducting banking business from 63 locations across the Texas Panhandle, South Plains, Austin, Central Texas and the Dallas/Fort Worth Metroplex.

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, 2021, we had 160 branch locations.  There were 76 branches in Arkansas, 78 branches in Florida, five branches in Alabama and one branch in New York City.

Results of Operations

For the three and nine months ended September 30, 2021 and 2020

Our net income increased $5.7 million, or 8.2%, to $75.0 million for the three-month period ended September 30, 2021, from $69.3 million for the same period in 2020.  On a diluted earnings per share basis, our earnings were $0.46 per share for the three-month period ended September 30, 2021 compared to $0.42 per share for the three-month period ended September 30, 2020.  During the three-month period ended September 30, 2021, the Company did not record any provision for credit losses compared to a $14.0 million provision for credit losses three-month period ended September 30, 2020.  The $14.0 million of total credit loss expense for the three-month period ended September 30, 2020 was primarily due to the COVID-19 pandemic. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. The Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2021.  The Company also recorded a $61,000 adjustment for the increase in fair market value of marketable securities and $2.2 million of special dividend income from our equity investments as well as $1.0 million of merger and acquisition expense.

Our net income increased $113.0 million, or 85.2%, to $245.7 million for the nine-month period ended September 30, 2021, from $132.7 million for the same period in 2020.  On a diluted earnings per share basis, our earnings were $1.49 per share for the nine-month period ended September 30, 2021 and $0.80 per share for the nine-month period ended September 30, 2020.  During the nine-month period ended September 30, 2021, the Company recorded a $4.8 million negative provision for unfunded commitments compared to a $112.3 million provision for credit losses and a $17.0 million provision for unfunded commitments for a total credit loss expense of  $129.3 million for the nine-month period ended September 30, 2020.  The $4.8 million negative provision for the nine-month period ended September 30, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $129.3 million of total credit loss expense for the nine-month period ended September 30, 2020 was primarily due to the COVID-19 pandemic, with $9.3 million for the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. The Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2021. The Company also recorded a $7.1 million adjustment for the increase in fair market value of marketable securities, $12.5 million of special dividend income from our equity investments, $5.1 million recovery on historic losses from loans charged-off prior to acquisition, $1.0 million of merger and acquisition expense and a $219,000 gain on investment securities.

Net Interest Income

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments, rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 25.74% .

The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal reserve lowered the target rate two times in 2020. First, the target rate was lowered to 1.00% to 1.25% on March 3, 2020; second, the rate was lowered to 0.00% to 0.25% on March 15, 2020. The target rate remains at 0.00% to 0.25% as of September 30, 2021.

Our net interest margin decreased from 3.92% for the three-month period ended September 30, 2020 to 3.60% for the three-month period ended September 30, 2021. The yield on interest earning assets was 3.91% and 4.47% for the three months ended September 30, 2021 and 2020, respectively, as average interest earning assets increased from $14.98 billion to $16.11 billion. The increase in average earning assets is primarily the result of a $1.99 billion increase in average interest-bearing balances due from banks and a $862.1 million increase in average investment securities, partially offset by the $1.71 billion decrease in average loans receivable. Average PPP loan balances were $371.5 million for the three months ended September 30, 2021. These loans bear interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $10.2 million on PPP loans for the three months ended September 30, 2021. The PPP loans were accretive to the net interest margin by 17 basis points for the three months ended September 30, 2021. This was primarily due to approximately $232.4 million of the Company’s PPP loans being forgiven during the third quarter of 2021 which included the acceleration of $8.2 million in deferred fees for the loans that were forgiven. The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market.  As a result, we had an increase of $1.99 billion in average interest-bearing cash balances for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.  This excess liquidity was dilutive to the net interest margin by 49 basis points. For the three months ended September 30, 2021 and 2020, we recognized $4.9 million and $7.0 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 5 basis points. We recognized $3.5 million in event interest income for the three months ended September 30, 2021 compared to no event income for the three months ended September 30, 2020. This increased the net interest margin by 8 basis points.

Our net interest margin decreased from 4.08% for the nine-month period ended September 30, 2020 to 3.74% for the nine-month period ended September 30, 2021.  The yield on interest earning assets was 4.08% and 4.79% for the nine months ended September 30, 2021 and 2020, respectively, as average interest earning assets increased from $14.36 billion to $15.71 billion. The increase in average earning assets is primarily the result of a $1.70 billion increase in average interest-bearing balances due from banks and a $637.1 million increase in average investment securities, partially offset by the $987.3 million decrease in average loans receivable. Average PPP loan balances were $525.9 million for the nine months ended September 30, 2021. These loans bear interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $29.8 million on PPP loans for the nine months ended September 30, 2021. The PPP loans were accretive to the net interest margin by 13 basis points for the nine months ended September 30, 2021. This was primarily due to approximately $781.4 million of the Company’s PPP loans being forgiven during the first nine months of 2021 which included the acceleration of $19.9 million in deferred fees for the loans that were forgiven. The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market.  As a result, we had an increase of $1.70 billion in average interest-bearing cash balances for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.  This excess liquidity was dilutive to the net interest margin by 45 basis points. For the nine months ended September 30, 2021 and 2020, we recognized $16.2 million and $21.6 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 5 basis points. We recognized $5.5 million in event interest income for the nine months ended September 30, 2021 compared to $2.1 million in event income for the three months ended September 30, 2020. This increased the net interest margin by 3 basis points.

Net interest income on a fully taxable equivalent basis decreased $1.4 million, or 0.9%, to $146.4 million for the three-month period ended September 30, 2021, from $147.7 million for the same period in 2020.  This decrease in net interest income for the three-month period ended September 30, 2021 was the result of a $9.4 million decrease in interest income, which was partially offset by an $8.0 million decrease in interest expense, on a fully taxable equivalent basis. The $9.4 million decrease in interest income was primarily the result of a $23.8 million decrease in loan interest income due to a reduction in average loan balances of $1.71 billion which was partially offset by an $11.5 million increase in loan interest income due to higher yields for a net decrease in interest income of  $12.2 million. This reduction in income was partially offset by an increase in income on investment securities of $2.0 million and a $865,000 increase in income on interest-bearing balances due from banks. Overall, the change in composition of earning assets reduced interest income by $18.9 million while the change in asset yield (primarily from loan interest income) increase interest income by $9.5 million. The decrease in interest income also reflected a $2.1 million decrease in loan accretion income. The $8.0 million decrease in interest expense for the three-month period ended September 30, 2021 is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which lowered interest expense by $6.4 million, as well as a $1.7 million decrease in interest expense resulting from a change in the composition of  average interest bearing liabilities. The decrease in interest expense was primarily driven by a $7.6 million decrease in interest expense on deposits and an $318,000 decrease in interest expense on FHLB borrowed funds.

Net interest income on a fully taxable equivalent basis increased $527,000, or 0.1%, to $439.3 million for the nine-month period ended September 30, 2021, from $438.8 million for the same period in 2020.  This increase in net interest income for the nine-month period ended September 30, 2021 was the result of a $35.6 million decrease in interest expense, which was partially offset by a $35.1 million decrease in interest income, on a fully taxable equivalent basis. The $35.1 million decrease in interest income was primarily the result of  higher levels of earning assets at lower yields. Although our interest earning assets increased, our average loan balances decreased by $987.3 million while average interest-bearing balances due from banks increased by $1.70 billion. The lower yield on earning assets resulted in a decrease in interest income of approximately $8.9 million, and the change in composition of earning assets at lower yields resulted in a decrease in interest income of approximately $26.2 million.  The lower yield was primarily driven by the decrease in income on loans of $36.9 million, which was partially offset by an increase in income on investment securities of $1.1 million and a $655,000 increase in income on interest-bearing balances due from banks. The decrease in interest income also reflected a $5.5 million decrease in loan accretion income.  The $35.6 million decrease in interest expense for the nine-month period ended September 30, 2021 is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which lowered interest expense by $30.1 million, as well as a $5.5 million decrease in interest expense resulting from a change in the composition of  average interest bearing liabilities. The decrease in interest expense was primarily driven by a $32.7 million decrease in interest expense on deposits and an $1.9 million decrease in interest expense on FHLB borrowed funds.

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

Table 2: Analysis of Net Interest Income

	Three Months Ended<br><br><br>September 30,						Nine Months Ended<br><br><br>September 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Interest income	$	157,060		$	166,633		$	474,192		$	510,406
Fully taxable equivalent adjustment		1,748			1,576			5,343			4,237
Interest income – fully taxable equivalent		158,808			168,209			479,535			514,643
Interest expense		12,449			20,495			40,241			75,876
Net interest income – fully taxable equivalent	$	146,359		$	147,714			439,294			438,767
Yield on earning assets – fully taxable equivalent		3.91	%		4.47	%		4.08	%		4.79	%
Cost of interest-bearing liabilities		0.46			0.76			0.50			0.97
Net interest spread – fully taxable equivalent		3.45			3.71			3.58			3.82
Net interest margin – fully taxable equivalent		3.60			3.92			3.74			4.08

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin

	Three Months Ended<br><br><br>September 30,			Nine Months Ended<br><br><br>September 30,
	2021 vs. 2020			2021 vs. 2020
	(In thousands)
Increase (decrease) in interest income due to change<br><br><br>in earning assets	$	(18,909	)	$	(26,219	)
Increase (decrease) in interest income due to change<br><br><br>in earning asset yields		9,508			(8,889	)
(Increase) decrease in interest expense due to change in<br><br><br>interest-bearing liabilities		1,666			5,522
(Increase) decrease in interest expense due to change in<br><br><br>interest rates paid on interest-bearing liabilities		6,380			30,113
Increase (decrease) in net interest income	$	(1,355	)	$	527

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, 2021 and 2020, respectively. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

Table 4: Average Balance Sheets and Net Interest Income Analysis

	Three Months Ended September 30,
	2021							2020
	Average<br><br><br>Balance		Income /<br><br><br>Expense		Yield /<br><br><br>Rate			Average<br><br><br>Balance		Income /<br><br><br>Expense		Yield /<br><br><br>Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	2,914,785	$	1,117		0.15	%	$	926,754	$	252		0.11	%
Federal funds sold		82		—		0.00			124		—		0.00
Investment securities – taxable		2,289,680		8,495		1.47			1,618,058		7,227		1.78
Investment securities – non-taxable		862,586		6,416		2.95			672,067		5,731		3.39
Loans receivable		10,043,393		142,780		5.64			11,758,143		154,999		5.24
Total interest-earning assets		16,110,526		158,808		3.91	%		14,975,146		168,209		4.47	%
Non-earning assets		1,584,700							1,619,349
Total assets	$	17,695,226						$	16,594,495
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	8,794,657	$	3,613		0.16	%	$	7,937,412	$	6,651		0.33	%
Time deposits		1,063,500		2,029		0.76			1,745,279		6,549		1.49
Total interest-bearing deposits		9,858,157		5,642		0.23			9,682,691		13,200		0.54
Securities sold under agreement to repurchase		143,937		102		0.28			157,172		237		0.60
FHLB and other borrowed funds		400,000		1,917		1.90			464,799		2,235		1.91
Subordinated debentures		370,805		4,788		5.12			370,038		4,823		5.19
Total interest-bearing liabilities		10,772,899		12,449		0.46	%		10,674,700		20,495		0.76	%
Non-interest-bearing liabilities
Non-interest-bearing deposits		4,091,174							3,259,501
Other liabilities		120,200							146,502
Total liabilities		14,984,273							14,080,703
Stockholders’ equity		2,710,953							2,513,792
Total liabilities and stockholders’ equity	$	17,695,226						$	16,594,495
Net interest spread						3.45	%						3.71	%
Net interest income and margin			$	146,359		3.60	%			$	147,714		3.92	%

Table 4: Average Balance Sheets and Net Interest Income Analysis

	Nine Months Ended September 30,
	2021							2020
	Average<br><br><br>Balance		Income /<br><br><br>Expense		Yield /<br><br><br>Rate			Average<br><br><br>Balance		Income /<br><br><br>Expense		Yield /<br><br><br>Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	2,372,227	$	2,234		0.13	%	$	671,231	$	1,579		0.31	%
Federal funds sold		83		—		0.00			1,775		21		1.58
Investment securities – taxable		1,947,799		21,933		1.51			1,665,900		25,696		2.06
Investment securities – non-taxable		858,440		19,610		3.05			503,253		14,712		3.90
Loans receivable		10,532,411		435,758		5.53			11,519,706		472,635		5.48
Total interest-earning assets		15,710,960		479,535		4.08	%		14,361,865		514,643		4.79	%
Non-earning assets		1,594,442							1,655,973
Total assets	$	17,305,402						$	16,017,838
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	8,607,728	$	12,289		0.19	%	$	7,544,763	$	30,272		0.54	%
Time deposits		1,131,538		7,492		0.89			1,847,833		22,242		1.61
Total interest-bearing deposits		9,739,266		19,781		0.27			9,392,596		52,514		0.75
Federal funds purchased		—		—		0.00			2,080		13		0.83
Securities sold under agreement to repurchase		153,677		399		0.35			150,020		959		0.85
FHLB and other borrowed funds		400,000		5,688		1.90			579,805		7,589		1.75
Subordinated debentures		370,615		14,373		5.19			369,846		14,801		5.35
Total interest-bearing liabilities		10,663,558		40,241		0.50	%		10,494,347		75,876		0.97	%
Non-interest-bearing liabilities
Non-interest-bearing deposits		3,848,302							2,904,159
Other liabilities		127,656							134,281
Total liabilities		14,639,516							13,532,787
Stockholders’ equity		2,665,886							2,485,051
Total liabilities and stockholders’ equity	$	17,305,402						$	16,017,838
Net interest spread						3.58	%						3.82	%
Net interest income and margin			$	439,294		3.74	%			$	438,767		4.08	%

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, 2021 compared to the same period in 2020, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

Table 5: Volume/Rate Analysis

	Three Months Ended September 30,									Nine Months Ended September 30,
	2021 over 2020									2021 over 2020
	Volume			Yield/Rate			Total			Volume			Yield/Rate			Total
	(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks	$	727		$	138		$	865		$	2,061		$	(1,406	)	$	655
Federal funds sold		—			—			—			(10	)		(11	)		(21	)
Investment securities – taxable		2,639			(1,371	)		1,268			3,896			(7,659	)		(3,763	)
Investment securities – non-taxable		1,482			(797	)		685			8,651			(3,753	)		4,898
Loans receivable		(23,757	)		11,538			(12,219	)		(40,817	)		3,940			(36,877	)
Total interest income		(18,909	)		9,508			(9,401	)		(26,219	)		(8,889	)		(35,108	)
Interest expense:
Interest-bearing transaction and savings deposits		654			(3,692	)		(3,038	)		3,772			(21,755	)		(17,983	)
Time deposits		(2,001	)		(2,519	)		(4,520	)		(6,827	)		(7,923	)		(14,750	)
Federal funds purchased		—			—			—			(7	)		(6	)		(13	)
Securities sold under agreement to repurchase		(18	)		(117	)		(135	)		22			(582	)		(560	)
FHLB borrowed funds		(311	)		(7	)		(318	)		(2,513	)		612			(1,901	)
Subordinated debentures		10			(45	)		(35	)		31			(459	)		(428	)
Total interest expense		(1,666	)		(6,380	)		(8,046	)		(5,522	)		(30,113	)		(35,635	)
Increase (decrease) in net interest income	$	(17,243	)	$	15,888		$	(1,355	)	$	(20,697	)	$	21,224		$	527

Provision for Credit Losses

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.  The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not, they will be required to sell.

During the three-month period ended September 30, 2021, the Company did not record any credit loss expense compared to a $14.0 million provision for credit losses and no provision for credit losses on unfunded commitments for a total credit loss expense of $14.0 million for the three-month period ended September 30, 2020.  During the nine-month period ended September 30, 2021, the Company did not record a provision for credit losses but did record a $4.8 million negative provision for unfunded commitments for a total credit loss benefit of $4.8 million compared to a $112.3 million provision for credit losses and a $17.0 million provision for unfunded commitments for a total credit loss expense of $129.3 million for the nine-month period ended September 30, 2020.  The $4.8 negative provision for the nine-month period ended September 30, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position.  The $129.3 million of total credit loss expense for the nine-month period ended September 30, 2020 was primarily due to the COVID-19 pandemic, with $9.3 million for the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020. The Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2021. Net charge-offs to average total loans was 0.07% for the three months ended September 30, 2021 compared to 0.14% for the three months ended September 30, 2020. Net charge-offs to average total loans was 0.09% for the nine months ended September 30, 2021 compared to 0.11% for the nine months ended September 30, 2020.

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

Acquired loans. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. This is commonly referred to as “double accounting.”

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

•	1-4 family construction
•	All other construction
---	---
•	1-4 family revolving HELOC & junior liens
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•	1-4 family senior liens
---	---
•	Multifamily
---	---
•	Owner occupied commercial real estate
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•	Non-owner occupied commercial real estate
---	---
•	Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other
---	---
•	Consumer auto
---	---
•	Other consumer
---	---
•	Other consumer - SPF
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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.

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

Non-Interest Income

Total non-interest income was $29.2 million and $105.6 million for the three and nine months ended September 30, 2021, compared to $30.0 million and $77.9 million for the same periods in 2020.  Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending income, insurance commissions, increase in cash value of life insurance, 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, 2021 and 2020, respectively, as well as changes for the three and nine months ended September 30, 2021 compared to the same period in 2020.

Table 6: Non-Interest Income

	Three Months Ended											Nine Months Ended
	September 30,						2021 Change					September 30,						2021 Change
	2021			2020			from 2020					2021			2020			from 2020
	(Dollars in thousands)
Service charges on deposit accounts	$	5,941		$	4,910		$	1,031		21.0	%	$	16,059		$	15,837		$	222		1.4	%
Other service charges and fees		8,051			8,539			(488	)	(5.7	)		25,318			22,261			3,057		13.7
Trust fees		479			378			101		26.7			1,445			1,213			232		19.1
Mortgage lending income		5,948			10,177			(4,229	)	(41.6	)		20,317			18,994			1,323		7.0
Insurance commissions		586			271			315		116.2			1,556			1,482			74		5.0
Increase in cash value of life insurance		509			548			(39	)	(7.1	)		1,548			1,666			(118	)	(7.1	)
Dividends from FHLB, FRB, FNBB &<br><br><br>other		2,661			3,433			(772	)	(22.5	)		13,916			11,505			2,411		21.0
Gain on sale of SBA loans		439			—			439		100.0			1,588			341			1,247		365.7
(Loss) gain on sale of branches,<br><br><br>equipment and other assets, net		(34	)		(27	)		(7	)	25.9			(86	)		109			(195	)	(178.9	)
Gain on OREO, net		246			470			(224	)	(47.7	)		1,266			982			284		28.9
Gain on securities, net		—			—			—		0.0			219			—			219		100.0
Fair value adjustment for marketable<br><br><br>securities		61			(1,350	)		1,411		(104.5	)		7,093			(6,249	)		13,342		213.5
Other income		4,322			2,602			1,720		66.1			15,366			9,760			5,606		57.4
Total non-interest income	$	29,209		$	29,951		$	(742	)	(2.5	)%	$	105,605		$	77,901		$	27,704		35.6	%

Non-interest income decreased $742,000, or 2.5%, to $29.2 million for three months ended September 30, 2021 from $30.0 million for the same period in 2020.  The primary factors that resulted in this decrease were mortgage lending income which decreased non-interest income by $4.2 million. Other factors were changes related to service charges on deposit accounts, dividends from FHLB, FRB, FNBB & other, fair value adjustment for marketable securities and other income.

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

•	The $1.0 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees resulting from increased economic activity.
•	The $4.2 million decrease in mortgage lending income is primarily due to the decrease in volume of secondary market loans from the peak in 2020.
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•	The $772,000 million decrease for dividends from FHLB, FRB, FNBB & other is primarily due to a decrease in special dividends from equity investments.
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•	The $1.4 million increase in the fair value adjustment for marketable securities is due to an increase in the fair market values of marketable securities held by the Company.
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•	The $1.7 million increase in other income is primarily due to a $1.3 million increase in loan recoveries and a $629,000 increase in investment brokerage fee income, partially offset by a $173,000 decrease in miscellaneous income and a $128,000 decrease in rent income from other real estate owned.
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Non-interest income increased $27.7 million, or 35.6%, to $105.6 million for nine months ended September 30, 2021 from $77.9 million for the same period in 2020.  The primary factors that resulted in this increase were the impact of fair value adjustment for marketable securities which increased non-interest income by $13.3 million, the $5.6 million increase in other income and the $3.1 million increase in other service charges and fees. Other factors were changes related mortgage lending income, dividends from FHLB, FRB, FNBB & other and gain on sale of SBA loans.

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

•	The $3.1 million increase in other service charges and fees is primarily due to an increase in Centennial CFG property finance loan fees and Mastercard income.
•	The $1.3 million increase in mortgage lending income is primarily due to the increase in volume of secondary market loan sales driven by the current low interest rate environment.
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•	The $2.4 million increase for dividends from FHLB, FRB, FNBB & other is primarily due to an increase in special dividends from equity investments.
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•	The $1.2 million gain in SBA loans is primarily due to the increase of loan sales during 2021.
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•	The $13.3 million increase in the fair value adjustment for marketable securities is due to an increase in the fair market values of marketable securities held by the Company.
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•	The $5.6 million increase in other income is primarily due to a $4.4 million increase in loan recoveries and a $1.5 million increase in investment brokerage fee income, partially offset by a $317,000 decrease in gains on life insurance.
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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, 2021 and 2020, as well as changes for the three and nine months ended September 30, 2021 compared to the same period in 2020.

Table 7: Non-Interest Expense

	Three Months Ended									Nine Months Ended
	September 30,				2021 Change					September 30,				2020 Change
	2021		2020		from 2020					2021		2020		from 2019
	(Dollars in thousands)
Salaries and employee benefits	$	42,469	$	41,511	$	958		2.3	%	$	126,990	$	120,928	$	6,062		5.0	%
Occupancy and equipment		9,305		9,566		(261	)	(2.7	)		27,584		28,611		(1,027	)	(3.6	)
Data processing expense		6,024		4,921		1,103		22.4			17,787		13,861		3,926		28.3
Merger and acquisition expense		1,006		—		1,006		100.0			1,006		711		295		41.5
Other operating expenses:
Advertising		1,204		902		302		33.5			3,444		2,923		521		17.8
Amortization of intangibles		1,421		1,420		1		0.1			4,262		4,423		(161	)	(3.6	)
Electronic banking expense		2,521		2,426		95		3.9			7,375		6,195		1,180		19.0
Directors’ fees		395		429		(34	)	(7.9	)		1,192		1,265		(73	)	(5.8	)
Due from bank service charges		265		259		6		2.3			787		721		66		9.2
FDIC and state assessment		1,648		1,607		41		2.6			4,119		5,001		(882	)	(17.6	)
Insurance		749		766		(17	)	(2.2	)		2,317		2,223		94		4.2
Legal and accounting		1,050		1,235		(185	)	(15.0	)		2,954		3,432		(478	)	(13.9	)
Other professional fees		1,787		1,661		126		7.6			5,196		6,622		(1,426	)	(21.5	)
Operating supplies		474		460		14		3.0			1,426		1,548		(122	)	(7.9	)
Postage		301		328		(27	)	(8.2	)		931		968		(37	)	(3.8	)
Telephone		371		321		50		15.6			1,082		955		127		13.3
Other expense		4,629		3,900		729		18.7			13,015		12,757		258		2.0
Total non-interest expense	$	75,619	$	71,712	$	3,907		5.4	%	$	221,467	$	213,144	$	8,323		3.9	%

Non-interest expense increased $3.9 million, or 5.4%, to $75.6 million for the three months ended September 30, 2021 from $71.7 million for the same period in 2020.  The primary factors that resulted in this increase were the changes related to data processing expense and merger and acquisition expense. Other factors were changes related to salary and employee benefits.

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

•	The $958,000 increase in salaries and employee benefits expense is primarily due to increased salary expenses related to the normal increased cost of doing business.
•	The $1.1 million increase in data processing expense is primarily related to an increase in software, licensing, core processing expenses, telecommunication services, internet banking and cash management expenses and bill pay expenses.
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•	The $1.0 million increase in merger and acquisition expense is related to costs associated with the anticipated acquisition of Happy Bancshares, Inc.
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Non-interest expense increased $8.3 million, or 3.9%, to $221.5 million for the nine months ended September 30, 2021 from $213.1 million for the same period in 2020.  The primary factors that resulted in this increase were the changes related to salaries and employee benefits and data processing expense. Other factors were changes related to occupancy and equipment expenses, advertising expenses, electronic banking expense, FDIC and state assessment fees and other professional fees

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

•	The $6.1 million increase in salaries and employee benefits expense is primarily due to increased salary expenses related to the normal increased cost of doing business and an increase in salary expense incentives and bonuses.
•	The $1.0 million decrease in occupancy and equipment expense is primarily related to a decrease in depreciation - building and improvements. During the second quarter of 2020, the  Company made the strategic decision to demolish and rebuild the Marathon, Florida branch office at its existing location. This increased depreciation expense during the second quarter of 2020 as the building was written off. This decrease was offset by an increase in equipment maintenance contracts.
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•	The $3.9 million increase in data processing expense is primarily related to an increase in software, licensing, core processing expenses, telecommunication services, internet banking and cash management expenses and bill pay expenses.
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•	The $521,000 increase in advertising expense is due primarily to an increase in advertising campaigns during the current year.
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•	The $1.2 million increase in electronic banking expenses is primarily to an increase in fees charged for network expenses and debit card processing fees.
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•	The $882,000 decrease in FDIC and state assessment expense is primarily due to an improvement in the FDIC assessment rate resulting from the most recent safety and soundness exam. In addition, the State of Arkansas announced a 25% reduction in assessments for January 1, 2021 through June 30, 2021.
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•	The $1.4 million decrease in other professional fees is primarily due to a reduction in outsourced special projects and professional fees for the Bank.
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Income Taxes

Income tax expense increased $2.2 million, or 10.2%, to $23.2 million for the three-month period ended September 30, 2021, from $21.1 million for the same period in 2020. Income tax expense increased $39.8 million, or 106.5%, to $77.2 million for the nine-month period ended September 30, 2021, from $37.4 million for the same period in 2020. The effective income tax rate was 23.63% and 23.91% for the three and nine-month period ended September 30, 2021, compared to 23.30% and 21.98% for the same periods in 2020.

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

Our total assets as of September 30, 2021 increased $1.37 billion to $17.77 billion from the $16.40 billion reported as of December 31, 2020.  Cash and cash equivalents increased $2.02 billion, or 159.6%, for the nine months ended September 30, 2021. The increase in cash and cash equivalents is due to loan paydowns as well as the significant amount of excess liquidity in the market as a continued result of the COVID-19 pandemic and the accompanying governmental response. Our loan portfolio balance decreased to $9.90 billion as of September 30, 2021 from $11.22 billion at December 31, 2020 due to organic loan decline of $885.9 million and $781.4 million of the Company’s PPP loans being forgiven during the first nine months of 2021, which was partially offset by $347.7 million in new PPP loan originations during 2021. Total deposits increased $1.28 billion to $14.00 billion as of September 30, 2021 from $12.73 billion as of December 31, 2020, which was due to customers holding higher deposit balances in response to the COVID-19 pandemic as well as the accompanying governmental response to the pandemic.  Stockholders’ equity increased $130.3 million to $2.74 billion as of September 30, 2021, compared to $2.61 billion as of December 31, 2020.  The $130.3 million increase in stockholders’ equity is primarily associated with the $245.7 million in net income for the nine months ended September 30, 2021, which was partially offset by the $18.1 million in other comprehensive loss for the nine months ended September 30, 2021, $69.2 million of shareholder dividends paid and stock repurchases of $37.0 million in 2021.

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $10.04 billion and $11.76 billion during the three months ended September 30, 2021 and 2020, respectively. Our loan portfolio averaged $10.53 billion and $11.52 billion during the nine months ended September 30, 2021 and 2020, respectively. Loans receivable were $9.90 billion and $11.22 billion as of September 30, 2021 and December 31, 2020, respectively.

The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act includes an allocation for loans to be issued by financial institutions through the SBA. This program is known as the PPP. PPP loans are forgivable, in whole or in part, so long as employee and compensation levels of the borrower are maintained, and the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1.00% to 5.00%, based on the size of the loan. The PPP/HCEA Act was enacted on April 24, 2020. The PPP/HCEA Act authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA. The CAA was signed into law on December 27, 2020. The CAA also authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA with a term of 5 years.  As of September 30, 2021, the Company had $241.5 million of PPP loans. This balance consists of $230.5 million in commercial and industrial loans and $11.0 million in other loans. From December 31, 2020 to September 30, 2021, the Company experienced a decline of approximately $1.32 billion in loans.  The decrease in the loan portfolio is primarily due to $885.9 million in organic loan decline as well as $433.7 million in PPP loan decline. The $885.9 million in organic loan decline included $99.6 million in loan growth for Centennial CFG, while the remaining footprint experienced $985.5 million in loan decline during the first nine months of 2021. The $433.7 million in PPP loan decline was the result of $781.4 million of PPP loans being forgiven during the first nine months of 2021, partially offset by $347.7 million in new PPP loans during the first nine months of 2021.

The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property.  Although these loans are primarily originated within our franchises in Arkansas, Florida, South Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas of Arkansas, Florida, Alabama and New York.  Loans receivable were approximately $3.21 billion, $3.99 billion, $228.3 million, $837.0 million and $1.64 billion as of September 30, 2021 in Arkansas, Florida, Alabama, SPF and Centennial CFG, respectively.

As of September 30, 2021, we had approximately $402.7 million of construction land development loans which were collateralized by land.  This consisted of approximately $34.7 million for raw land and approximately $368.0 million for land with commercial and or residential lots.

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

Table 8: Loans Receivable

	As of		As of
	September 30, 2021		December 31, 2020
	(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	4,005,841	$	4,429,060
Construction/land development		1,742,687		1,562,298
Agricultural		138,881		114,431
Residential real estate loans:
Residential 1-4 family		1,273,988		1,536,257
Multifamily residential		274,131		536,538
Total real estate		7,435,528		8,178,584
Consumer		814,732		864,690
Commercial and industrial		1,414,079		1,896,442
Agricultural		68,272		66,869
Other		168,489		214,136
Total loans receivable	$	9,901,100	$	11,220,721

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

As of September 30, 2021, commercial real estate loans totaled $5.89 billion, or 59.5% of loans receivable, as compared to $6.11 billion, or 54.4% of loans receivable, as of December 31, 2020.  Commercial real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $2.01 billion, $2.50 billion, $111.6 million, zero and $1.26 billion at September 30, 2021, respectively.

Residential Real Estate Loans.  We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas.  Approximately 36.2% and 51.7% 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, 2021, with the remaining 12.1% 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, 2021, residential real estate loans totaled $1.55 billion, or 15.6% of loans receivable, compared to $2.07 billion, or 18.5% of loans receivable, as of December 31, 2020.  Residential real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $516.3 million, $910.8 million, $62.4 million, zero and $58.6 million at September 30, 2021, respectively.

Consumer Loans.  Our consumer loans are composed of secured and unsecured loans originated by our bank, the primary portion of which consists of loans to finance USCG registered high-end sail and power boats as a result of our acquisition of SPF on June 30, 2018 as well as our acquisition of LH-Finance on February 29, 2020. The performance of consumer loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.

As of September 30, 2021, consumer loans totaled $814.7 million, or 8.2% of loans receivable, compared to $864.7 million, or 7.7% of loans receivable, as of December 31, 2020.  Consumer loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $25.2 million, $8.3 million, $835,000, $780.4 million and zero at September 30, 2021, 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, 2021, commercial and industrial loans totaled $1.41 billion, or 14.2% of loans receivable, compared to $1.90 billion, or 16.9% of loans receivable, as of December 31, 2020.  Commercial and industrial loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $506.7 million, $497.2 million, $39.7 million, $56.6 million and $313.9 million at September 30, 2021, respectively.

Non-Performing Assets

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

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

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

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.

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

Table 9: Non-performing Assets

	As of			As of
	September 30,<br><br><br>2021			December 31,<br><br><br>2020
	(Dollars in thousands)
Non-accrual loans	$	47,604		$	64,528
Loans past due 90 days or more (principal or interest<br><br><br>payments)		3,311			9,610
Total non-performing loans		50,915			74,138
Other non-performing assets
Foreclosed assets held for sale, net		1,171			4,420
Total non-performing assets	$	52,086		$	78,558
Allowance for credit losses to non-performing loans		468.77	%		331.10	%
Non-performing loans to total loans		0.51			0.66
Non-performing assets to total assets		0.29			0.48

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

Total non-performing loans were $50.9 million and $74.1 million as of September 30, 2021 and December 31, 2020, respectively.  Non-performing loans at September 30, 2021 were $15.5 million, $25.2 million, $523,000, $1.9 million and $7.8 million in the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively.

The $7.8 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.  The decision to place these loans on non-accrual status was made by the Federal Reserve and not the Company. The loans that make up the total balance is still current on both principal and interest.  However, all interest payments are currently being applied to the principal balance.  Because the Federal Reserve required us to place these loans on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve.

As of September 30, 2021, the Company remains optimistic that the markets in which it operates will experience continued economic recovery as long as unemployment rates continue to decline, more COVID-19 vaccinations are administered, and communities continue to reopen for business activity.  Uncertainty remains about the duration of the pandemic as well as the timing and extent of the economic recovery. The Company determined that an additional provision for credit losses on loans was not necessary as the current level of the allowance for credit losses was considered adequate as of September 30, 2021. During the nine-month period ended September 30, 2021, the Company recorded a negative provision for unfunded commitments of $4.8 million. This was  primarily due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $129.3 million of total credit loss expense for the nine-month period ended September 30, 2020 was primarily due to the COVID-19 pandemic, with $9.3 million for the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which have continued to improve since the fourth quarter of 2020.

Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan.  In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months.  For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan.  Only non-performing restructured loans are included in our non-performing loans.  As of September 30, 2021, we had $5.6 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 $3.9 million and our Arkansas market contains $1.7 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.

Section 4013 of the CARES Act enacted in March 2020 provides financial institutions optional temporary relief from the TDR classification requirements for certain COVID-19 related loan modifications. Specifically, financial institutions may elect to suspend TDR classification for certain loan modifications related to COVID-19 made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after termination of the President’s national emergency declaration for COVID-19. On December 28, 2020, an extension of section 4013 of the CARES Act, provided institutions with an extension of the temporary option to not apply ASC Subtopic 310-40 until January 1, 2022. Further, financial institutions do not need to determine impairment associated with certain loan concessions that would otherwise have been required for TDRs (e.g., interest rate concessions, payment deferrals, or loan extensions). On April 7, 2020, the Federal Reserve Board and the other federal bank regulatory agencies issued an interagency statement clarifying the relationship between the Section 4013 of the CARES Act and previous guidance issued by the agencies on March 22, 2020. This interagency statement encourages financial institutions to work prudently with borrowers who are or may be unable to meet their payment obligations because of COVID-19 and states that the agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The Company relied on Section 4013 of the CARES Act in accounting for loan modifications as of September 30, 2021.  As of September 30, 2021, our loan deferrals decreased to $228.2 million on 38 loans, as of September 30, 2021, from the December 31, 2020 balance of $330.7 million on 56 loans.  All of the customers currently on deferment totaling $228.2 million chose principal deferment only and now have returned to paying interest monthly.

The majority of the Bank’s loan modifications relates to commercial lending and involves reducing the interest rate, changing from a principal and interest payment to interest-only, lengthening the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. At September 30, 2021 and December 31, 2020, the amount of TDRs was $6.7 million and $12.3 million, respectively. As of September 30, 2021 and December 31, 2020, 82.9% and 87.1%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $1.2 million as of September 30, 2021, compared to $4.4 million as of December 31, 2020 for a decrease of $3.2 million. The foreclosed assets held for sale as of September 30, 2021 are comprised of $563,000 of assets located in Arkansas, $608,000 located in Florida, and zero from Alabama, SPF and Centennial CFG.

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

Table 10: Foreclosed Assets Held For Sale

	As of		As of
	September 30, 2021		December 31, 2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	261	$	438
Construction/land development		835		3,189
Residential real estate loans
Residential 1-4 family		75		793
Total foreclosed assets held for sale	$	1,171	$	4,420

A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and non-accrual loans), criticized and/or classified loans with a specific allocation, loans categorized as TDRs and certain other loans identified by management that are still performing (loans included in multiple categories are only included once). As of September 30, 2021 and December 31, 2020, impaired loans were $300.1 million and $112.7 million, respectively.  The amortized cost balance for loans with a specific allocation increased from $39.5 million to $290.3 million, and the specific allocation for impaired loans increased by approximately $42.8 million for the period ended September 30, 2021 compared to the period ended December 31, 2020. The increase in collateral-dependent impaired loans was primarily due to the Company changing the valuation method for lodging and assisted living loans to a market price valuation methodology. This involved assigning a 15% discount of par for these impaired loans. The 15% figure was derived based on knowledge of current hotel and assisted living offerings in the loan sale market. In the event of default, liquidation would be achieved through a loan sale. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary. As of September 30, 2021, our Arkansas, Florida, Alabama, SPF and Centennial CFG markets accounted for approximately $180.3 million, $109.7 million, $523,000, $1.9 million and $7.8 million of the impaired loans, respectively.

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination.  PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. As a result of the acquisition of LH-Finance in 2020, the Company held approximately $454,000 and $760,000 in PCD loans, as of September 30, 2021 and  December 31, 2020, respectively.

Past Due and Non-Accrual Loans

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

Table 11: Total Non-Accrual Loans

	As of		As of
	September 30, 2021		December 31, 2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	8,819	$	20,947
Construction/land development		1,870		1,381
Agricultural		743		879
Residential real estate loans
Residential 1-4 family		17,495		19,334
Multifamily residential		161		173
Total real estate		29,088		42,714
Consumer		1,921		3,506
Commercial and industrial		15,989		17,251
Agricultural		352		1,057
Other		254		—
Total non-accrual loans	$	47,604	$	64,528

If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $662,000 and $944,000, respectively, would have been recorded for the three-month periods ended September 30, 2021 and 2020. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $2.0 million and $2.8 million, respectively, would have been recorded for the nine-month periods ended September 30, 2021 and 2020. The interest income recognized on non-accrual loans for the three and nine months ended September 30, 2021 and 2020 was considered immaterial.

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

Table 12: Loans Accruing Past Due 90 Days or More

	As of		As of
	September 30, 2021		December 31, 2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	2,413	$	6,088
Construction/land development		—		1,296
Residential real estate loans
Residential 1-4 family		855		1,821
Total real estate		3,268		9,205
Consumer		2		174
Commercial and industrial		41		231
Total loans accruing past due 90 days or more	$	3,311	$	9,610

Our ratio of total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.51% and 0.66% at September 30, 2021 and December 31, 2020, respectively.

Allowance for Credit Losses

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

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

The Company uses the discounted cash flow (“DCF”) method to estimate expected losses for all of Company’s loan pools. These pools are as follows: construction & land development; other commercial real estate; residential real estate; commercial & industrial; and consumer & other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council. For each of these loan pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers.

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

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

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

•	1-4 family construction
•	All other construction
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•	1-4 family revolving HELOC & junior liens
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•	1-4 family senior liens
---	---
•	Multifamily
---	---
•	Owner occupied commercial real estate
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•	Non-owner occupied commercial real estate
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•	Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other
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•	Consumer auto
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•	Other consumer
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•	Other consumer - SPF
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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.

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

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

•	Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower.
•	The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
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Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for credit losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.

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

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision for credit loss.

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

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

For collateral dependent loans, we do not consider an appraisal outdated simply due to the passage of time. However, if an appraisal is older than 13 months and if market or other conditions have deteriorated and we believe that the current market value of the property is not within approximately 20% of the appraised value, we will consider the appraisal outdated and order either a new appraisal or an internal validation report for the impairment analysis. The recognition of any provision or related charge-off on a collateral dependent loan is either through annual credit analysis or, many times, when the relationship becomes delinquent. If the borrower is not current, we will update our credit and cash flow analysis to determine the borrower's repayment ability. If we determine this ability does not exist and it appears that the collection of the entire principal and interest is not likely, then the loan could be placed on non-accrual status. In any case, loans are classified as non-accrual no later than 105 days past due. If the loan requires a quarterly impairment analysis, this analysis is completed in conjunction with the completion of the analysis of the adequacy of the allowance for credit losses. Any exposure identified through the impairment analysis is shown as a specific reserve on the individual impairment. If it is determined that a new appraisal or internal validation report is required, it is ordered and will be taken into consideration during completion of the next impairment analysis.

In estimating the net realizable value of the collateral, management may deem it appropriate to discount the appraisal based on the applicable circumstances. In such case, the amount charged off may result in loan principal outstanding being below fair value as presented in the appraisal.

Between the receipt of the original appraisal and the updated appraisal, we monitor the loan's repayment history. If the loan is $3.0 million or greater or the total loan relationship is $5.0 million or greater, our policy requires an annual credit review.  For these loans, our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually on these loans.

As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or by law at 105 days past due, we will reflect that loan as non-performing. It will remain non-performing until it performs in a manner that it is reasonable to expect that we will collect the full principal and accrued interest.

When the amount or likelihood of a loss on a loan has been determined, a charge-off should be taken in the period it is determined. If a partial charge-off occurs, the quarterly impairment analysis will determine if the loan is still impaired, and thus continues to require a specific allocation.

The Company had $300.1 million and $112.7 million in collateral-dependent impaired loans for the periods ended September 30, 2021 and December 31, 2020, respectively. The increase in collateral-dependent impaired loans was due to the Company changing the valuation method for lodging and assisted living loans to a market price valuation methodology. This involved assigning a 15% discount of par for these impaired loans. The 15% figure was derived based on knowledge of current hotel and assisted living offerings in the loan sale market. In the event of default, liquidation would be achieved through a loan sale. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary.

Loans Collectively Evaluated for Impairment.  Loans receivable collectively evaluated for impairment decreased by approximately $1.12 billion from $10.76 billion at December 31, 2020 to $9.64 billion at September 30, 2021. The percentage of the allowance for credit losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment was 1.99% and 2.18% at September 30, 2021 and December 31, 2020, respectively.

Charge-offs and Recoveries.  Total charge-offs increased to $2.5 million for the three months ended September 30, 2021, compared to $4.6 million for the same period in 2020. Total charge-offs decreased to $8.5 million for the nine months ended September 30, 2021, compared to $11.4 million for the same period in 2020. Total recoveries increased to $691,000 for the three months ended September 30, 2021, compared to $483,000 for the same period in 2020. Total recoveries were $1.7 million and $1.8 million for the nine months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021, net charge-offs were $334,000 for Arkansas, $1.5 million for Florida, $5,000 for Alabama, $5,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $1.8 million. For the nine months ended September 30, 2021, net charge-offs were $1.7 million for Arkansas, $5.0 million for Florida, $8,000 for Alabama, $99,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $6.8 million.

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

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

Table 13: Analysis of Allowance for Credit Losses

	Three Months Ended<br><br><br>September 30,						Nine Months Ended<br><br><br>September 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Balance, beginning of period	$	240,451		$	238,340		$	245,473		$	102,122
Impact of adopting ASC 326		—			—			—			43,988
Allowance for credit losses on acquired loans		—			—			—			357
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		9			994			604			3,003
Construction/land development		—			—			—			443
Agricultural		—			—			42			—
Residential real estate loans:
Residential 1-4 family		220			93			543			450
Total real estate		229			1,087			1,189			3,896
Consumer		21			133			143			161
Commercial and industrial		1,682			3,057			5,892			6,207
Other		537			322			1,315			1,182
Total loans charged off		2,469			4,599			8,539			11,446
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		44			129			112			614
Construction/land development		8			79			47			94
Residential real estate loans:
Residential 1-4 family		388			59			554			296
Multifamily residential		—			9			—			9
Total real estate		440			276			713			1,013
Consumer		19			24			51			77
Commercial and industrial		80			36			382			142
Other		152			147			593			549
Total recoveries		691			483			1,739			1,781
Net loans charged off (recovered)		1,778			4,116			6,800			9,665
Provision for credit losses		—			14,000			—			111,422
Balance, September 30	$	238,673		$	248,224		$	238,673		$	248,224
Net charge-offs (recoveries) to average loans receivable		0.07	%		0.14	%		0.09	%		0.11	%
Allowance for credit losses to total loans		2.41			2.12			2.41			2.12
Allowance for credit losses to net charge-offs (recoveries)		3,384			1,516			2,625			1,923

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

Table 14: Allocation of Allowance for Credit Losses

	As of September 30, 2021					As of December 31, 2020
	Allowance Amount		% of loans^(1)^			Allowance Amount		% of loans^(1)^
	(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	88,199		40.5	%	$	87,043		39.5	%
Construction/land development		25,983		17.6			32,861		13.9
Agricultural		299		1.4			1,410		1.0
Residential real estate loans:
Residential 1-4 family		47,635		12.9			47,754		13.7
Multifamily residential		3,268		2.8			5,462		4.8
Total real estate		165,384		75.2			174,530		72.9
Consumer		17,389		8.2			21,905		7.7
Commercial and industrial		52,401		14.2			46,061		16.9
Agricultural		201		0.7			469		0.6
Other		3,298		1.7			2,508		1.9
Total allowance for credit losses	$	238,673		100.0	%	$	245,473		100.0	%
(1)	Percentage of loans in each category to total loans receivable.
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Investment Securities

Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue.  Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity.  Fair values of securities are based on quoted market prices where available.  If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities.  The estimated effective duration of our securities portfolio was 3.5 years as of September 30, 2021.

Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity as other comprehensive income. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale.  Available-for-sale securities were $3.15 billion and $2.47 billion as September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021, $1.61 billion, or 51.0%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $1.18 billion, or 47.6%, of our available-for-sale securities as of December 31, 2020.  To reduce our income tax burden, $991.1 million, or 31.5%, of our available-for-sale securities portfolio as of September 30, 2021, were primarily invested in tax-exempt obligations of state and political subdivisions, compared to $927.9 million, or 37.5%, of our available-for-sale securities as of December 31, 2020. We had $440.2 million, or 14.0%, invested in obligations of U.S. Government-sponsored enterprises as of September 30, 2021, compared to $327.0 million, or 13.2%, of our available-for-sale securities as of December 31, 2020. Also, we had approximately $110.0 million, or 3.5%, invested in other securities as of September 30, 2021, compared to $41.0 million, or 1.7% of our available-for-sale securities as of December 31, 2020.

The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2021, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainties related to the COVID-19 pandemic, was adequate for the investment portfolio. No additional provision for credit losses was considered necessary for the portfolio.

See Note 3 “Investment Securities” in the Condensed Notes to Consolidated Financial Statements for the carrying value and fair value of investment securities.

Deposits

Our deposits averaged $13.95 billion and $13.59 billion for the three and nine months ended September 30, 2021, respectively.  Total deposits were $14.00 billion as of September 30, 2021, and $12.73 billion as of December 31, 2020.  Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers.  Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit.  Deposits are gathered from individuals, partnerships and corporations in our market areas.  In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions.

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

Table 15 reflects the classification of the brokered deposits as of September 30, 2021 and December 31, 2020.

Table 15: Brokered Deposits

	September 30, 2021		December 31, 2020
	(In thousands)
Time Deposits	$	—	$	10,000
Insured Cash Sweep and Other Transaction Accounts		625,690		625,681
Total Brokered Deposits	$	625,690	$	635,681

The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing. We may allow higher rate deposits to run off during periods of limited loan demand. We believe that additional funds can be attracted, and deposit growth can be realized through deposit pricing if we experience increased loan demand or other liquidity needs.

The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal reserve lowered the target rate two times in 2020. First, the target rate was lowered to 1.00% to 1.25% on March 3, 2020; second, the rate was lowered to 0.00% to 0.25% on March 15, 2020. The target rate is currently at 0.00% to 0.25% as of September 30, 2021, which remains unchanged from the target rate as of September 30, 2020.

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, 2021 and 2020.

Table 16: Average Deposit Balances and Rates

					2020
		Average<br><br><br>Rate Paid			Average<br><br><br>Amount		Average<br><br><br>Rate Paid
Non-interest-bearing transaction accounts	4,091,174		—	%	$	3,259,501		—	%
Interest-bearing transaction accounts	7,895,663		0.18			7,197,123		0.36
Savings deposits	898,994		0.06			740,289		0.09
Time deposits:
100,000 or more	708,524		0.94			1,340,508		1.66
Other time deposits	354,976		0.40			404,771		0.94
Total	13,949,331		0.16	%	$	12,942,192		0.41	%
					2020
		Average<br><br><br>Rate Paid			Average<br><br><br>Amount		Average<br><br><br>Rate Paid
Non-interest-bearing transaction accounts	3,848,302		—	%	$	2,904,159		—	%
Interest-bearing transaction accounts	7,754,622		0.21			6,852,251		0.58
Savings deposits	853,106		0.06			692,512		0.14
Time deposits:
100,000 or more	767,594		1.06			1,430,542		1.76
Other time deposits	363,944		0.51			417,291		1.10
Total	13,587,568		0.19	%	$	12,296,755		0.57	%

All values are in US Dollars.

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 $27.9 million, or 16.5%, from $168.9 million as of December 31, 2020 to $141.0 million as of September 30, 2021.

FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $400.0 million at September 30, 2021 and December 31, 2020. The Company had no other borrowed funds as of September 30, 2021 or December 31, 2020. At September 30, 2021, and December 31, 2020 all of the outstanding balances were classified as long-term advances.  Our remaining FHLB borrowing capacity was $2.69 billion and $3.32 billion as of September 30, 2021 and December 31, 2020, respectively. The FHLB advances mature in 2033 with fixed interest rates ranging from 1.76% to 2.26%.  Expected maturities could differ from contractual maturities because FHLB may have the right to call or the Company may have the right to prepay certain obligations.

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $370.9 million and $370.3 million as of September 30, 2021 and December 31, 2020, respectively.

The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations.  Distributions on these securities are included in interest expense.  Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in our subordinated debentures, the sole asset of each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. We wholly own the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related subordinated debentures. Our obligations under the subordinated securities and other relevant trust agreements, in the aggregate, constitute a full and unconditional guarantee by us of each respective trust’s obligations under the trust securities issued by each respective trust.

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

Stockholders’ Equity

Stockholders’ equity was $2.74 billion at September 30, 2021 compared to $2.61 billion at December 31, 2020. The $130.3 million increase in stockholders’ equity is primarily associated with the $245.7 million in net income for the nine months ended September 30, 2021, which was partially offset by the $18.1 million in other comprehensive loss for the nine months ended September 30, 2021, the $69.2 million of shareholder dividends paid and stock repurchases of $37.0 million in 2021. The annualized increase in stockholders’ equity for the first nine months of 2021 was 6.7%. As of September 30, 2021 and December 31, 2020, our equity to asset ratio was 15.40% and 15.89%, respectively. Book value per share was $16.68 as of September 30, 2021, compared to $15.78 as of December 31, 2020, a 7.6% annualized increase.

Common Stock Cash Dividends.  We declared cash dividends on our common stock of $0.14 per share and $0.13 per share for the three months ended September 30, 2021 and 2020, respectively.  The common stock dividend payout ratio for the three months ended September 30, 2021 and 2020 was 30.6% and 31.0%, respectively. The common stock dividend payout ratio for the nine months ended September 30, 2021 and 2020 was 28.2% and 48.7%, respectively. On October 22, 2021, the Board of Directors declared a regular $0.14 per share quarterly cash dividend payable December 8, 2021, to shareholders of record November 17, 2021.

Stock Repurchase Program.  On January 22, 2021, the Company’s Board of Directors authorized the repurchase of up to an additional 20,000,000 shares of its common stock under the previously approved stock repurchase program, which brought the amount of authorized shares available to repurchase to 23,843,665 shares. We repurchased a total of 1,441,500 shares with a weighted-average stock price of $25.64 per share during the first nine months of 2021.  The remaining balance available for repurchase was 22,402,165 shares at September 30, 2021.

Liquidity and Capital Adequacy Requirements

Risk-Based Capital.  We, as well as our bank subsidiary, are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and other discretionary actions by regulators that, if enforced, could have a direct material effect on our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  Our capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings and other factors.

In July 2013, the Federal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank Act (“Basel III”). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary on January 1, 2015.  The capital conservation buffer requirement began being phased in beginning January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019 when the phase-in period ended, and the full capital conservation buffer requirement became effective.

Basel III permanently grandfathers trust preferred securities and other non-qualifying capital instruments that were issued and outstanding as of May 19, 2010 in the Tier 1 capital of bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. The rule phases out of Tier 1 capital these non-qualifying capital instruments issued before May 19, 2010 by all other bank holding companies. Because our total consolidated assets were less than $15 billion as of December 31, 2009, our outstanding trust preferred securities continue to be treated as Tier 1 capital.  However, now that the Company has exceeded $15 billion in assets, the Tier 1 treatment of the Company’s outstanding trust preferred securities will be phased out upon completion of the acquisition of Happy Bancshares, but these securities will still be treated as Tier 2 capital.

Basel III amended the prompt corrective action rules to incorporate a “common equity Tier 1 capital” requirement and to raise the capital requirements for certain capital categories.  In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an 8% “total risk-based capital” ratio.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of September 30, 2021 and December 31, 2020, we met all regulatory capital adequacy requirements to which we were subject.

On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 27, 2020, the federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. The Company has elected to adopt the interim final rule, which is reflected in the risk-based capital ratios presented below.

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

Table 17: Risk-Based Capital

	As of<br><br><br>September 30,<br><br><br>2021			As of<br><br><br>December 31,<br><br><br>2020
	(Dollars in thousands)
Tier 1 capital
Stockholders’ equity	$	2,736,062		$	2,605,758
ASC 326 transitional period adjustment		55,633			57,333
Goodwill and core deposit intangibles, net		(999,026	)		(1,003,288	)
Unrealized gain on available-for-sale securities		(26,003	)		(44,120	)
Total common equity Tier 1 capital		1,766,666			1,615,683
Qualifying trust preferred securities		71,234			71,127
Total Tier 1 capital		1,837,900			1,686,810
Tier 2 capital
Allowance for credit losses		238,673			245,473
ASC 326 transitional period adjustment		(55,633	)		(57,333	)
Disallowed allowance for credit losses (limited to 1.25%<br><br><br>of risk weighted assets)		(36,687	)		(36,911	)
Qualifying allowance for credit losses		146,353			151,229
Qualifying subordinated notes		299,666			299,199
Total Tier 2 capital		446,019			450,428
Total risk-based capital	$	2,283,919		$	2,137,238
Average total assets for leverage ratio	$	16,715,705		$	15,547,111
Risk weighted assets	$	11,682,394		$	12,039,156
Ratios at end of period
Common equity Tier 1 capital		15.12	%		13.42	%
Leverage ratio		11.00			10.85
Tier 1 risk-based capital		15.73			14.01
Total risk-based capital		19.55			17.75
Minimum guidelines – Basel III
Common equity Tier 1 capital		7.00	%		7.00	%
Leverage ratio		4.00			4.00
Tier 1 risk-based capital		8.50			8.50
Total risk-based capital		10.50			10.50
Well-capitalized guidelines
Common equity Tier 1 capital		6.50	%		6.50	%
Leverage ratio		5.00			5.00
Tier 1 risk-based capital		8.00			8.00
Total risk-based capital		10.00			10.00

As of the most recent notification from regulatory agencies, our bank subsidiary was “well-capitalized” under the regulatory framework for prompt corrective action.  To be categorized as “well-capitalized,” we, as well as our banking subsidiary, must maintain minimum common equity Tier 1 capital, leverage, Tier 1 risk-based capital, and total risk-based capital ratios as set forth in the table.  There are no conditions or events since that notification that we believe have changed the bank subsidiary’s category.

Non-GAAP Financial Measurements

Our accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, this report contains financial information determined by methods other than in accordance with GAAP, including earnings, as adjusted; diluted earnings per common share, as adjusted; tangible book value per share; return on average assets excluding intangible amortization; return on average assets, as adjusted; return on average tangible equity, excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted.

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

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

Earnings, as adjusted, and diluted earnings per common share, as adjusted, are meaningful non-GAAP financial measures for management, as they exclude items such as certain non-interest income and expenses that management believes are not indicative of our primary business operating results. Management believes the exclusion of these items in expressing earnings provides a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business.

In Table 18 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Table 18: Earnings, As Adjusted

	Three Months Ended<br><br><br>September 30,						Nine Months Ended<br><br><br>September 30,
	2021			2020			2021			2020
	(Dollars in thousands)
GAAP net income available to common shareholders (A)	$	74,992		$	69,320		$	245,664		$	132,654
Adjustments:
Outsourced special project		—			—			—			1,092
Merger and acquisition expense		1,006			—			1,006			711
Fair value adjustment for marketable securities		(61	)		1,350			(7,093	)		6,249
Special dividend from equity investments		(2,227	)		(3,181	)		(12,500	)		(10,185	)
Branch write-off expense		—			—			—			981
Gain on securities		—			—			(219	)		—
Recoveries on historic losses		—			—			(5,107	)		—
Total adjustments		(1,282	)		(1,831	)		(23,913	)		(1,152	)
Tax-effect of adjustments		(587	)		(479	)		(6,412	)		(301	)
Total adjustments after-tax (B)		(695	)		(1,352	)		(17,501	)		(851	)
Earnings, as adjusted (C)	$	74,297		$	67,968		$	228,163		$	131,803
Average diluted shares outstanding (D)		164,603			165,200			165,050			165,458
GAAP diluted earnings per share: A/D	$	0.46		$	0.42		$	1.49		$	0.80
Adjustments after-tax B/D		(0.01	)		(0.01	)		(0.11	)		—
Diluted earnings per common share, as adjusted: C/D	$	0.45		$	0.41		$	1.38		$	0.80

We had $999.5 million, $1.00 billion, and $1.01 billion total goodwill, core deposit intangibles and other intangible assets as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets excluding intangible amortization, return on average tangible equity, return on average tangible equity excluding intangible amortization, and tangible equity to tangible assets are useful in evaluating our company. Management also believes return on average assets, as adjusted, return on average equity, as adjusted, and return on average tangible equity, as adjusted, are meaningful non-GAAP financial measures, as they exclude items such as certain non-interest income and expenses that management believes are not indicative of our primary business operating results. These calculations, which are similar to the GAAP calculations of book value per share, return on average assets, return on average equity, and equity to assets, are presented in Tables 19 through 22, respectively.

Table 19: Tangible Book Value Per Share

	As of<br><br><br>September 30,<br><br><br>2021		As of<br><br><br>December 31,<br><br><br>2020
	(In thousands, except per share data)
Book value per share: A/B	$	16.68	$	15.78
Tangible book value per share: (A-C-D)/B		10.59		9.70
(A) Total equity	$	2,736,062	$	2,605,758
(B) Shares outstanding		164,008		165,095
(C) Goodwill		973,025		973,025
(D) Core deposit and other intangibles		26,466		30,728

Table 20: Return on Average Assets

	Three Months Ended<br><br><br>September 30,						Nine Months Ended<br><br><br>September 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Return on average assets:  A/D		1.68	%		1.66	%		1.90	%		1.11	%
Return on average assets excluding intangible<br><br><br>amortization: B/(D-E)		1.81			1.80			2.04			1.21
Return on average assets excluding fair value adjustment<br><br><br>for marketable securities, special dividend from equity<br><br><br>investments, gain on securities, recoveries on historic<br><br><br>losses, outsourced special project expense, merger<br><br><br>expenses and branch write-off expense:<br><br><br>(ROA, as adjusted): (A+C)/D		1.67			1.63			1.76			1.10
(A) Net income	$	74,992		$	69,320		$	245,664		$	132,654
Intangible amortization after-tax		1,055			1,049			3,164			3,268
(B) Earnings excluding intangible amortization	$	76,047		$	70,369		$	248,828		$	135,922
(C) Adjustments after-tax	$	(695	)	$	(1,352	)	$	(17,501	)	$	(851	)
(D) Average assets		17,695,226			16,594,495			17,305,402			16,017,838
(E) Average goodwill, core deposits and other intangible<br><br><br>assets		1,000,175			1,005,864			1,001,585			1,004,065

Table 21: Return on Average Equity

	Three Months Ended<br><br><br>September 30,						Nine Months Ended<br><br><br>September 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Return on average equity: A/D		10.97	%		10.97	%		12.32	%		7.13	%
Return on average common equity excluding fair value<br><br><br>adjustment for marketable securities, special dividend<br><br><br>from equity investments, gain on securities, recoveries<br><br><br>on historic losses, outsourced special project expense,<br><br><br>merger expenses and branch write-off expense:<br><br><br>(ROE, as adjusted) ((A+C)/D)		10.87			10.76			11.44			7.08
Return on average tangible common equity: (A/(D-E))		17.39			18.29			19.74			11.96
Return on average tangible equity excluding intangible<br><br><br>amortization: B/(D-E)		17.64			18.56			19.99			12.26
Return on average tangible common equity excluding fair<br><br><br>value adjustment for marketable securities, special<br><br><br>dividend from equity investments, gain on securities,<br><br><br>recoveries on historic losses, outsourced special project<br><br><br>expense, merger expenses and branch write-off expense:<br><br><br>(ROTCE, as adjusted) ((A+C)/(D-E))		17.23			17.93			18.33			11.89
(A) Net income	$	74,992		$	69,320		$	245,664		$	132,654
(B) Earnings excluding intangible amortization		76,047			70,369			248,828			135,922
(C) Adjustments after-tax		(695	)		(1,352	)		(17,501	)		(851	)
(D) Average equity		2,710,953			2,513,792			2,665,886			2,485,051
(E) Average goodwill, core deposits and other intangible<br><br><br>assets		1,000,175			1,005,864			1,001,585			1,004,065

Table 22: Tangible Equity to Tangible Assets

	As of<br><br><br>June 30,<br><br><br>2021			As of<br><br><br>December 31,<br><br><br>2020
	(Dollars in thousands)
Equity to assets: B/A		15.40	%		15.89	%
Tangible equity to tangible assets: (B-C-D)/(A-C-D)		10.36			10.41
(A) Total assets	$	17,765,056		$	16,398,804
(B) Total equity		2,736,062			2,605,758
(C) Goodwill		973,025			973,025
(D) Core deposit and other intangibles		26,466			30,728

The efficiency ratio is a standard measure used in the banking industry and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income.  The  efficiency ratio, as adjusted, is a meaningful non-GAAP measure for management, as it excludes certain items and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding items such as merger expenses and/or certain gains, losses and other non-interest income and expenses.  In Table 23 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Table 23: Efficiency Ratio, As Adjusted

	Three Months Ended<br><br><br>September 30,						Nine Months Ended<br><br><br>September 30,
	2021			2020			2021			2020
	(Dollars in thousands)
Net interest income (A)	$	144,611		$	146,138		$	433,951		$	434,530
Non-interest income (B)		29,209			29,951			105,605			77,901
Non-interest expense (C)		75,619			71,712			221,467			213,144
FTE Adjustment (D)		1,748			1,576			5,343			4,237
Amortization of intangibles (E)		1,421			1,420			4,262			4,423
Adjustments:
Non-interest income:
Special dividend from equity investments	$	2,227		$	3,181		$	12,500		$	10,185
Fair value adjustment for marketable securities		61			(1,350	)		7,093			(6,249	)
Gain on OREO, net		246			470			1,266			982
(Loss) gain on sale of branches, equipment and<br><br><br>other assets, net		(34	)		(27	)		(86	)		109
Gain on securities		—			—			219			—
Recoveries on historic losses		—			—			5,107			—
Total non-interest income adjustments (F)	$	2,500		$	2,274		$	26,099		$	5,027
Non-interest expense:
Branch write-off expense		—			—			—			981
Merger expense		1,006			—			1,006			711
Outsourced special project expense		—			—			—			1,092
Total non-interest expense adjustments (G)	$	1,006		$	—		$	1,006		$	2,784
Efficiency ratio (reported):  ((C-E)/(A+B+D))		42.26	%		39.56	%		39.86	%		40.40	%
Efficiency ratio, as adjusted (non-GAAP):<br><br><br>((C-E-G)/(A+B+D-F))		42.29			40.08			41.67			40.25

Recently Issued Accounting Pronouncements

See Note 21 in the Condensed Notes to Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.

Item 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Liquidity and Market Risk Management

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

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

Due to the continuing effects of the COVID-19 pandemic, the Company continued to increase its liquidity position for the period ended September 30, 2021. Liquidity needs can be met from either assets or liabilities. On the asset side, our primary sources of liquidity include cash and due from banks, federal funds sold, unpledged available-for-sale investment securities and scheduled repayments and maturities of loans. We maintain adequate levels of cash and cash equivalents to meet our day-to-day needs.  As of September 30, 2021, our cash and cash equivalents were $3.28 billion, or 18.5% of total assets, compared to $1.26 billion, or 7.7% of total assets, as of December 31, 2020.  Our unpledged available-for-sale investment securities and federal funds sold were $1.98 billion and $1.39 billion as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021, our investment portfolio was comprised of approximately $1.82 billion, or 58.6%, of securities which mature or are expected to paydown within five years.  As of September 30, 2021 and December 31, 2020, $1.17 billion and $1.08 billion, respectively, were pledged to secure public deposits, as collateral for repurchase agreements, and for other purposes required or permitted by law. The Company defines the liquidity ratio as the sum of cash, unpledged securities and federal funds sold divided by total liabilities. The Company’s liquidity ratio was 35.00% as of September 30, 2021 compared to 19.22% as of December 31, 2020.

On the liability side, our principal sources of liquidity are deposits, borrowed funds, and access to capital markets. Customer deposits are our largest sources of funds. As of September 30, 2021, our total deposits were $14.00 billion, or 78.8% of total assets, compared to $12.73 billion, or 77.6% of total assets, as of December 31, 2020. We attract our deposits primarily from individuals, business, and municipalities located in our market areas.

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

As of September 30, 2021 and December 31, 2020, we could have borrowed under these lines of credit up to $421.3 million and $441.8 million, respectively, on a secured basis from the Federal Reserve, up to $35.0 million and $30.0 million, respectively, from First National Bankers’ Bank on an unsecured basis, up to $20.0 million from First National Bankers Bank on a secured basis and up to $45.0 million in the aggregate from other financial institutions on an unsecured basis. The unsecured lines may be terminated by the respective institutions at any time.

The lines of credit we maintain with the FHLB can provide us with both short-term and long-term forms of liquidity on a secured basis. FHLB borrowed funds were $400.0 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, all of the outstanding balances were classified as long-term advances. Our FHLB borrowing capacity was $2.69 billion and $3.32 billion as of September 30, 2021 and December 31, 2020, respectively.

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

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

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

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

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

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

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

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

Table 24: Sensitivity of Net Interest Income

	Percentage
	Change
Interest Rate Scenario	from Base
Up 200 basis points		18.90	%
Up 100 basis points		9.42
Down 100 basis points		(5.09	)
Down 200 basis points		(8.21	)

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

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

Gap analysis attempts to capture the amounts and timing of balances exposed to changes in interest rates at a given point in time. As of September 30, 2021, our gap position was asset sensitive with a one-year cumulative repricing gap as a percentage of total earning assets of 20.5%.  During the COVID-19 pandemic, the Company has participated in the PPP loan program under the CARES Act. The Company had $241.5 million of PPP loans as of September 30, 2021. In addition, total deposits have increased by $1.28 billion, $872.4 million of which were demand and non-interest-bearing deposits, for the nine months ended September 30, 2021. This, along with the rise in demand and non-interest-bearing deposits and the resulting increase in cash on hand, has caused an uneven shift in the sensitivity of the repricing gap between short-term assets and liabilities. Although PPP loans have maturities of two years, a large percentage of these loans are anticipated to receive SBA forgiveness and be repaid in advance of stated maturities. The Company feels that funding these loans was both beneficial and necessary for our customers in light of the current economic environment and believes the one-year repricing gap increase is temporary in nature. The Company believes the repricing gap would have been more in line with historical experiences had it not been for the decrease in loans, and the excess liquidity that we have with the Federal Reserve.

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

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

Table 25: Interest Rate Sensitivity

	Interest Rate Sensitivity Period
	0-30<br><br><br>Days			31-90<br><br><br>Days			91-180<br><br><br>Days			181-365<br><br><br>Days			1-2<br><br><br>Years			2-5<br><br><br>Years			Over 5<br><br><br>Years			Total
	(Dollars in thousands)
Earning assets
Interest-bearing deposits due from banks	$	3,133,878		$	—		$	—		$	—		$	—		$	—		$	—		$	3,133,878
Investment securities		483,800			94,710			100,621			223,513			365,084			822,230			1,060,650			3,150,608
Loans receivable		3,157,959			659,158			865,387			1,478,175			1,563,309			1,878,649			298,463			9,901,100
Total earning assets		6,775,637			753,868			966,008			1,701,688			1,928,393			2,700,879			1,359,113			16,185,586
Interest-bearing liabilities
Interest-bearing transaction and savings<br><br><br>deposits	$	1,837,536		$	667,414		$	1,001,121		$	2,002,240		$	1,028,070		$	852,885		$	1,424,060		$	8,813,326
Time deposits		130,166			141,265			304,437			288,750			150,120			35,878			280			1,050,896
Securities sold under repurchase agreements		141,002		—			—			—			—			—			—				141,002
FHLB and other borrowed funds	—			—			—			—			—			—				400,000			400,000
Subordinated debentures		71,234		—			—				299,666		—			—			—				370,900
Total interest-bearing liabilities		2,179,938			808,679			1,305,558			2,590,656			1,178,190			888,763			1,824,340			10,776,124
Interest rate sensitivity gap	$	4,595,699		$	(54,811	)	$	(339,550	)	$	(888,968	)	$	750,203		$	1,812,116		$	(465,227	)	$	5,409,462
Cumulative interest rate sensitivity gap	$	4,595,699		$	4,540,888		$	4,201,338		$	3,312,370		$	4,062,573		$	5,874,689		$	5,409,462
Cumulative rate sensitive assets to rate<br><br><br>sensitive liabilities		310.8	%		251.9	%		197.8	%		148.1	%		150.4	%		165.6	%		150.2	%
Cumulative gap as a % of total earning<br><br><br>assets		28.4	%		28.1	%		26.0	%		20.5	%		25.1	%		36.3	%		33.4	%

Item 4:CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls

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

Changes in Internal Control Over Financial Reporting

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

Item 1:  Legal Proceedings

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

Item 1A: Risk Factors

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

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

On January 22, 2021, the Company’s Board of Directors authorized the repurchase of up to an additional 20,000,000 shares of its common stock under the previously approved stock repurchase program, which was last amended and approved on January 18, 2019. This authorization brought the total amount of authorized shares available to repurchase to 23,843,665 shares. The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:

Period	Number of<br><br><br>Shares<br><br><br>Purchased		Average Price<br><br><br>Paid Per Share<br><br><br>Purchased		Total Number of<br><br><br>Shares Purchased<br><br><br>as Part of Publicly<br><br><br>Announced Plans<br><br><br>or Programs		Maximum Number<br><br><br>of Shares That May<br><br><br>Yet Be Purchased<br><br><br>Under the Plans or<br><br><br>Programs^(1)^
July 1 through July 31, 2021		400,000		23.86		400,000		22,478,665
August 1 through August 31, 2021		—		—		—		22,478,665
September 1 through September 30, 2021		76,500		22.49		76,500		22,402,165
Total		476,500				476,500
(1)	The above described stock repurchase program has no expiration date.
---	---

Item 3:  Defaults Upon Senior Securities

Not applicable.

Item 4:  Mine Safety Disclosures

Not applicable.

Item 5:  Other Information

Not applicable.

Item 6:   Exhibits

Exhibit No.	Description of Exhibit
2.1<br><br><br><br><br><br><br><br><br><br><br><br>2.2	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).**<br><br><br><br><br><br>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)).
3.1	Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
3.2	Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.2 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
3.3	Second Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.3 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
3.4	Third Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.4 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
3.5	Fourth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, filed on August 8, 2007)
3.6	Fifth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 4.6 of Home BancShares’s registration statement on Form S-3 (File No. 333-157165))
3.7	Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, filed with the Secretary of State of the State of Arkansas on January 14, 2009 (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K, filed on January 21, 2009)
3.8	Seventh Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K filed on April 19, 2013)
3.9	Eighth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K filed on April 22, 2016)
3.10	Ninth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K filed on April 23, 2019)
3.11	Amended and Restated Bylaws of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form 8-K filed on January 28, 2021)
4.1	Specimen Stock Certificate representing Home BancShares, Inc. Common Stock (incorporated by reference to Exhibit 4.6 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)
4.2	Instruments defining the rights of security holders including indentures. Home BancShares hereby agrees to furnish to the SEC upon request copies of instruments defining the rights of holders of long-term debt of Home BancShares and its consolidated subsidiaries. No issuance of debt exceeds ten percent of the assets of Home BancShares and its subsidiaries on a consolidated basis.
15	Awareness of Independent Registered Public Accounting Firm*
31.1	CEO Certification Pursuant Rule 13a-14(a)/15d-14(a)*
31.2	CFO Certification Pursuant Rule 13a-14(a)/15d-14(a)*
---	---
32.1	CEO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002*
32.2	CFO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002*
101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*
101.SCH	Inline XBRL Taxonomy Extension Schema Document*
101.CAL	InlineXBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document*
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)
*	Filed herewith
---	---
**	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.
---	---

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, 2021	/s/ John W. Allison
		John W. Allison, Chairman and Chief Executive Officer
Date:	November 4, 2021	/s/ Brian S. Davis
		Brian S. Davis, Chief Financial Officer
Date:	November 4, 2021	/s/ Jennifer C. Floyd
		Jennifer C. Floyd, Chief Accounting Officer

100

homb-ex15_10.htm

Exhibit 15

Awareness of Independent Registered

Public Accounting Firm

We are aware that our report dated November 4, 2021, included with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, is incorporated by reference in Forms S-8 (Nos. 333-136645, 333-148763, 333-188591, 333-211116, 333-226608 and 333-229805) and Form S-3 (No. 333-228611).  Pursuant to Rule 436(c) under the Securities Act of 1933 (the Act), this report should not be considered a part of these registration statements prepared or certified by us within the meaning of Sections 7 and 11 of the Act.

/s/ BKD, LLP

Little Rock, Arkansas

November 4, 2021

homb-ex311_8.htm

Exhibit 31.1

I, John W. Allison, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Home BancShares, Inc. for the period ended September 30, 2021;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
---	---
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
---	---
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
---	---
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
---	---
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
---	---
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
---	---
d)	disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
---	---
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
---	---
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
---	---
Date: November 4, 2021	/s/ John W. Allison
---	---
	John W. Allison
	Chief Executive Officer

homb-ex312_9.htm

Exhibit 31.2

I, Brian S. Davis, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Home BancShares, Inc. for the period ended September 30, 2021;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
---	---
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
---	---
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
---	---
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
---	---
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
---	---
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
---	---
d)	disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
---	---
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
---	---
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
---	---
Date: November 4, 2021	/s/ Brian S. Davis
---	---
	Brian S. Davis
	Chief Financial Officer

homb-ex321_6.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Home BancShares, Inc. (the Company) on Form 10-Q for the period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John W. Allison, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 4, 2021	/s/ John W. Allison
	John W. Allison
	Chief Executive Officer

homb-ex322_7.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Home BancShares, Inc. (the Company) on Form 10-Q for the period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Brian S. Davis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 4, 2021	/s/ Brian S. Davis
	Brian S. Davis
	Chief Financial Officer