HOME BANCSHARES INC (HOMB) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HOME BANCSHARES INC's 10-K for fiscal year 2021. Filing date: 2022-02-24. Report date: 2021-12-31. Accession: 0001331520-22-000015.

This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.

Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high.

Company profile: HOMB · All MD&A years: index · Next year: FY 2022

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents our consolidated financial condition and results of operations for the years ended December 31, 2021, 2020 and 2019. This discussion should be read together with the “Summary Consolidated Financial Data,” our consolidated financial statements and the notes thereto, and other financial data included in this document. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and in the forward-looking statements as a result of certain factors, including those discussed in the section of this document captioned “Risk Factors,” and elsewhere in this document. Unless the context requires otherwise, the terms “Company,” “HBI,” “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 (“Centennial”). As of December 31, 2021, we had, on a consolidated basis, total assets of $18.05 billion, loans receivable, net of $9.60 billion, total deposits of $14.26 billion, and stockholders’ equity of $2.77 billion.

We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income. Deposits and FHLB 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 net interest margin, return on average assets and return on average common equity. We also measure our performance by our efficiency ratio and efficiency ratio, as adjusted (non-GAAP). The efficiency ratio 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 certain items such as merger expenses, hurricane expenses and/or gains and losses.

Table 1: Key Financial Measures

	As of or for the Years Ended December 31,
	2021		2020		2019
	(Dollars in thousands, except per share data)
Total assets	$	18,052,138			$	16,398,804			$	15,032,047
Loans receivable	9,836,089			11,220,721			10,869,710
Allowance for credit losses	(236,714)			(245,473)			(102,122)
Total deposits	14,260,570			12,725,790			11,278,383
Total stockholders’ equity	2,765,721			2,605,758			2,511,531
Net income	319,021			214,448			289,539
Basic earnings per share	$	1.94			$	1.30			$	1.73
Diluted earnings per share	1.94			1.30			1.73
Book value per share	16.90			15.78			15.10
Tangible book value per share (non-GAAP)(1)	10.80			9.70			9.12
Net interest margin	3.66	%		4.06	%		4.29	%
Efficiency ratio	40.81			40.20			40.34
Efficiency ratio, as adjusted (non-GAAP)(2)	42.12			40.36			40.55
Return on average assets	1.83			1.33			1.93
Return on average common equity	11.89			8.57			12.01

(1)See Table 25 for the non-GAAP tabular reconciliation.

(2)See Table 29 for the non-GAAP tabular reconciliation.

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2021 Overview

Recent Developments – COVID-19

The Company has been, and may continue to be, impacted by the novel coronavirus (“COVID-19”) pandemic. Throughout 2021, the spread of the Delta and Omicron variants resulted in increased infection rates, fueling fears of a virus resurgence. As a result, significant 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 December 31, 2021, our loan deferrals decreased to $190.7 million on 26 loans from the December 31, 2020 balance of $330.7 million on 56 loans. All of the customers currently on deferment 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 76% of the deferment balance as of December 31, 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 December 31, 2021, as a participating lender, we have generated 12,971 loans to both existing and new customers totaling $1.23 billion. As of December 31, 2021, the outstanding PPP loan balances were $112.8 million. The average loan size was $131,000.

Despite the improvements in the economic and public health outlooks in the United States during 2021, the emergence of the Delta variant during the second quarter and the Omicron variant during the fourth quarter have resulted in significant uncertainty about the future impact of the pandemic on our business, results of operations and financial condition. 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.

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Results of Operations for the Years Ended December 31, 2021 and 2020

Our net income increased $104.6 million, or 48.8%, to $319.0 million for the year ended December 31, 2021, from $214.4 million for the same period in 2020. On a diluted earnings per share basis, our earnings were $1.94 per share for the year ended December 31, 2021 and $1.30 per share for the year ended December 31, 2020. During the year ended December 31, 2021, the Company did not record a provision for credit losses but did record 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 year ended December 31, 2020. The $4.8 million negative provision for the year ended December 31, 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 year ended December 31, 2020 was primarily due to the uncertainty created by the COVID-19 pandemic, with $9.3 million as a result of 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. Despite the improvements in the economic and public health outlooks in the United States during 2021, the emergence of the Delta variant during the second quarter and the Omicron variant during the fourth quarter have resulted in significant uncertainty about the future impact of the pandemic on our business, results of operations and financial condition. As a result, the Company determined that a negative provision for credit losses was not appropriate at this time, and the current level of the allowance for credit losses was considered adequate as of December 31, 2021. The Company also recorded a $7.2 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, $1.9 million of merger and acquisition expense and a $219,000 gain on sale of investment securities.

Total interest expense decreased by $41.2 million, or 44.1%, and non-interest income increased by $25.8 million, or 23.1%. This was partially offset by a $50.8 million, or 7.5%, decrease in total interest income and a $11.1 million, or 3.9%, increase in non-interest expense. The decrease in interest expense was primarily due to a $38.2 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 $9.2 million increase in the fair value adjustment on marketable securities, an $8.3 million increase in other income, a $5.8 million increase in other service charges and fees, a $2.4 million increase in dividends from FHLB, FRB, FNBB & other and a $1.7 million increase in gain on sale of SBA loans and was partially offset by a $3.4 million decrease in mortgage lending income. The decrease in interest income was primarily due to a $53.4 million decrease in loan interest income. The increase in non-interest expense was due to a $6.8 million increase in salaries and employee benefits, a $5.2 million increase in data processing expense and a $1.2 million increase in merger and acquisition expense and was partially offset by a $1.8 million decrease in occupancy and equipment expense. Income tax expense increased by $34.5 million during 2021 due to an increase in net income.

Our net interest margin decreased from 4.06% for the year ended December 31, 2020 to 3.66% for the year ended December 31, 2021. The yield on interest earning assets was 3.99% and 4.70% for the year ended December 31, 2021 and 2020, respectively, as average interest earning assets increased from $14.50 billion to $15.86 billion. The increase in average earning assets is primarily the result of a $1.84 billion increase in average interest-bearing balances due from banks and a $659.0 million increase in average investment securities, partially offset by the $1.13 billion decrease in average loans receivable. Average PPP loan balances were $434.7 million for the year ended December 31, 2021. These loans bear interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $35.6 million on PPP loans for the year ended December 31, 2021. The PPP loans were accretive to the net interest margin by 13 basis points for the year ended December 31, 2021. This was primarily due to approximately $910.1 million of the Company’s PPP loans being forgiven during 2021 which included the acceleration of $24.8 million in deferred fees for the loans that were forgiven. As of December 31, 2021, the Company had $3.6 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 $1.84 billion in average interest-bearing cash balances for the year ended December 31, 2021 compared to the year ended December 31, 2020. This excess liquidity was dilutive to the net interest margin by 46 basis points. For the years ended December 31, 2021 and 2020, we recognized $20.2 million and $27.4 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 4 basis points. We recognized $6.7 million in event interest income for the year ended December 31, 2021 compared to $2.1 million in event income for the year ended December 31, 2020. This increased the net interest margin by 3 basis points.

Our efficiency ratio was 40.81% for the year ended December 31, 2021, compared to 40.20% for the same period in 2020. For the year ended December 31, 2021, our efficiency ratio, as adjusted (non-GAAP), was 42.12%, compared to 40.36% reported for the year ended December 31, 2020. (See Table 29 for the non-GAAP tabular reconciliation).

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Our return on average assets was 1.83% for the year ended December 31, 2021, compared to 1.33% for the same period in 2020. Our return on average common equity was 11.89% for the year ended December 31, 2021, compared to 8.57% for the same period in 2020.

Financial Condition as of and for the Years Ended December 31, 2021 and 2020

Our total assets as of December 31, 2021 increased $1.65 billion to $18.05 billion from the $16.40 billion reported as of December 31, 2020. Cash and cash equivalents increased $2.39 billion, or 188.84%. 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 $1.38 billion to $9.84 billion as of December 31, 2021, from $11.22 billion as of December 31, 2020. The decrease in the loan portfolio is due to organic loan decline of $822.2 million and $910.1 million of the Company’s PPP loans being forgiven during 2021, which was partially offset by $347.7 million in new PPP loan originations during 2021. Total deposits increased $1.53 billion to $14.26 billion as of December 31, 2021 compared to $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 resulting governmental response to the pandemic. Stockholders’ equity increased $160.0 million to $2.77 billion as of December 31, 2021, compared to $2.61 billion as of December 31, 2020. The increase in stockholders’ equity is primarily associated with the $319.0 million in net income, which was partially offset by the $33.7 million decrease in accumulated other comprehensive income, $92.1 million of shareholder dividends paid and the repurchase of $44.5 million of our common stock during 2021. The improvement in stockholders’ equity was 6.1% for the year ended December 31, 2021 compared to December 31, 2020.

As of December 31, 2021, our non-performing loans decreased to $50.2 million, or 0.51%, of total loans from $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 471.61% as of December 31, 2021, compared to 331.10% as of December 31, 2020. Non-performing loans from our Arkansas franchise were $13.9 million at December 31, 2021 compared to $24.1 million as of December 31, 2020. Non-performing loans from our Florida franchise were $26.8 million at December 31, 2021 compared to $43.1 million as of December 31, 2020. Non-performing loans from our Alabama franchise were $470,000 at December 31, 2021 compared to $530,000 as of December 31, 2020. Non-performing loans from our SPF franchise were $1.5 million at December 31, 2021 compared to $3.6 million as of December 31, 2020. Non-performing loans from our Centennial CFG franchise were $7.5 million at December 31, 2021 compared to $2.8 million as of December 31, 2020.

As of December 31, 2021, our non-performing assets decreased to $51.8 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 $14.4 million at December 31, 2021 compared to $25.6 million as of December 31, 2020. Non-performing assets from our Florida franchise were $27.9 million at December 31, 2021 compared to $46.0 million as of December 31, 2020. Non-performing assets from our Alabama franchise were $470,000 at December 31, 2021 compared to $564,000 as of December 31, 2020. Non-performing assets from our SPF franchise were $1.5 million at December 31, 2021 compared to $3.6 million as of December 31, 2020. Non-performing assets from our CFG franchise were $7.5 million at December 31, 2021 compared to $2.8 million as of December 31, 2020.

The $7.5 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.

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2020 Overview

Results of Operations for the Years Ended December 31, 2020 and 2019

Our net income decreased $75.1 million, or 25.9%, to $214.4 million for the year ended December 31, 2020, from $289.5 million for the same period in 2019. On a diluted earnings per share basis, our earnings were $1.30 per share for the year ended December 31, 2020 and $1.73 per share for the year ended December 31, 2019. As a result of COVID-19, the unemployment rate projections significantly increased from January 1, 2020 through December 31, 2020. Additionally, the ongoing uncertainties related to the COVID-19 pandemic resulted in the Company increasing reserves on deferred loans and loans 30 days or more past maturity. These impacts of COVID-19 resulted in the Company recording a $102.1 million provision for credit losses on loans, an $842,000 provision for credit losses on investment securities, and a $2.0 million write-down for the fair value adjustment on marketable securities. The Company also recorded a $17.0 million provision for unfunded commitments which was due to an increase in the expected funding percentages for the Company’s unfunded commitments as well as an increase in the unemployment rate projections from January 1, 2020 to December 31, 2020, due to COVID-19. We incurred $10.0 million of expense as a result of our LH-Finance acquisition, which we completed on February 29, 2020, including $9.3 million for the provision for credit losses and $711,000 of acquisition expenses. The acquired loan portfolio is now housed in our SPF division. The Company also had $1.1 million of expense for outsourced special projects, $10.2 million of special dividend income from one of our equity investments and $981,000 of increased depreciation expense related to the second quarter write-off of the Company’s Marathon, Florida branch office, which the Company made the strategic decision to demolish and rebuild at its existing location. The summation of all these items resulted in net expense of $123.8 million, or $91.5 million after tax.

Total interest income decreased $42.0 million, or 5.9%, and non-interest expense increased $11.6 million, or 4.2%. This was offset by a $61.4 million, or 39.6%, decrease in total interest expense and a $12.3 million, or 12.3%, increase in non-interest income. The primary drivers of the decrease in interest income were a $33.0 million decrease in loan interest income, a $5.7 million increase in investment security income and a $3.3 million decrease in interest income on deposits with other banks. The increase in non-interest expense was primarily due to a $9.8 million increase in salaries and employee benefits, a $3.0 million increase in occupancy and equipment expense, a $2.9 million increase in data processing expense, partially offset by a $4.7 million decrease in other operating expenses. The decrease in interest expense was due to a $51.0 million decrease in interest on deposits and a $7.7 million decrease in interest on FHLB borrowed funds. The increase in non-interest income was primarily due to a $14.8 million increase in mortgage lending income, a $4.8 million increase in dividend income from FHLB, FRB, FNBB and other equity investments, and a $3.8 million increase in other income, partially offset by a $4.5 million decrease in service charges on deposit accounts, a $3.4 million decrease in other service charges and fees and a $2.0 million write-down for the fair value adjustment on marketable securities. Income tax expense decreased by $32.8 million during the year due a reduction in net income as well as $3.7 million in tax expense incurred in the third quarter of 2019 due to the Company surrendering $47.5 million of underperforming separate account bank owned life insurance.

Our net interest margin decreased from 4.29% for the year ended December 31, 2019 to 4.06% for the year ended December 31, 2020. The yield on interest earning assets was 4.70% and 5.45% for the year ended December 31, 2020 and 2019, respectively, as average interest earning assets increased from $13.26 billion to $14.50 billion. The increase in average earning assets is primarily the result of a $542.5 million increase in average loans receivable, a $506.6 million increase in average interest-bearing balances due from banks and a $187.9 million increase in average investment securities. Average PPP loan balances were $547.3 million for the year ended December 31, 2020. These loans bear interest at 1.00% plus the accretion of the origination fee. We recognized total interest income of $19.2 million on PPP loans for the year ended December 31, 2020. The PPP loans were dilutive to the net interest margin by 2 basis points for the year ended December 31, 2020. As a result of the significant excess liquidity in the market created by the COVID-19 pandemic and the resulting government responses, we had an increase of $506.6 million in average interest-bearing cash balances for the year ended December 31, 2020 compared to the year ended December 31, 2019. This excess liquidity was dilutive to the net interest margin by 17 basis points. For the year ended December 31, 2020 and 2019, we recognized $27.4 million and $35.9 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 $2.1 million event interest income for the year ended December 31, 2020 compared to $3.3 million for the year ended December 31, 2019. This was dilutive to the net interest margin by 1 basis point. The rate on interest bearing liabilities was 0.89% and 1.55% for the year ended December 31, 2020 and 2019, respectively, as average interest-bearing liabilities increased from $10.02 billion to $10.50 billion. The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the reduction in loan payoff events, reduced the net interest margin by 25 basis points for the year ended December 31, 2020.

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Our efficiency ratio was 40.20% for the year ended December 31, 2020, compared to 40.34% for the same period in 2019. For the year ended December 31, 2020, our efficiency ratio, as adjusted (non-GAAP), was 40.36%, compared to 40.55% reported for the year ended December 31, 2019. (See Table 29 for the non-GAAP tabular reconciliation).

Our return on average assets was 1.33% for the year ended December 31, 2020, compared to 1.93% for the same period in 2019. Our return on average common equity was 8.57% for the year ended December 31, 2020, compared to 12.01% for the same period in 2019.

Financial Condition as of and for the Years Ended December 31, 2020 and 2019

Our total assets as of December 31, 2020 increased $1.37 billion to $16.40 billion from the $15.03 billion reported as of December 31, 2019. Cash and cash equivalents increased $773.2 million, or 157.6%, due to the significant excess liquidity in the market created by the COVID-19 pandemic and the accompanying governmental response. Our loan portfolio balance increased $351.0 million to $11.22 billion as of December 31, 2020, from $10.87 billion as of December 31, 2019. The increase in the loan portfolio is due to the $675.2 million of PPP loans as well as the acquisition of $406.2 million of loans from LH-Finance during the first quarter of 2020, which was offset by $730.4 million in organic loan decline for the year ended December 31, 2020. Total deposits increased $1.45 billion to $12.73 billion as of December 31, 2020 compared to $11.28 billion as of December 31, 2019, which was due to customers holding higher deposit balances in response to the COVID-19 pandemic as well as the resulting governmental response to the pandemic. Stockholders’ equity increased $94.2 million to $2.61 billion as of December 31, 2020, compared to $2.51 billion as of December 31, 2019. The increase in stockholders’ equity is primarily associated with the $214.4 million in net income and the $27.9 million increase in accumulated other comprehensive income, which were partially offset by the $44.0 million impact of the adoption of ASC 326, $87.7 million of shareholder dividends paid and the repurchase of $25.7 million of our common stock during 2020. The improvement in stockholders’ equity was 3.8% for the year ended December 31, 2020 compared to December 31, 2019.

As of December 31, 2020, our non-performing loans increased to $74.1 million, or 0.66%, of total loans from $54.8 million, or 0.50%, of total loans as of December 31, 2019. The allowance for credit losses as a percentage of non-performing loans increased to 331.10% as of December 31, 2020, compared to 186.20% as of December 31, 2019. Non-performing loans from our Arkansas franchise were $24.1 million at December 31, 2020 compared to $17.9 million as of December 31, 2019. Non-performing loans from our Florida franchise were $43.1 million at December 31, 2020 compared to $34.7 million as of December 31, 2019. Non-performing loans from our Alabama franchise were $530,000 at December 31, 2020 compared to $429,000 as of December 31, 2019. Non-performing loans from our SPF franchise were $3.6 million at December 31, 2020 compared to $1.8 million as of December 31, 2019. Non-performing loans from our Centennial CFG franchise were $2.8 million at December 31, 2020 compared to zero as of December 31, 2019.

As of December 31, 2020, our non-performing assets increased to $78.6 million, or 0.48%, of total assets from $64.4 million, or 0.43%, of total assets as of December 31, 2019. Non-performing assets from our Arkansas franchise were $25.6 million at December 31, 2020 compared to $22.9 million as of December 31, 2019. Non-performing assets from our Florida franchise were $46.0 million at December 31, 2020 compared to $39.2 million as of December 31, 2019. Non-performing assets from our Alabama franchise were $564,000 at December 31, 2020 compared to $463,000 as of December 31, 2019. Non-performing assets from our SPF franchise were $3.6 million at December 31, 2020 compared to $1.8 million as of December 31, 2019. Non-performing assets from our CFG franchise were $2.8 million at December 31, 2020 compared to zero as of December 31, 2019.

The $2.8 million balance of non-accrual loans for our Centennial CFG market consists of one loan that is assessed for Credit risk by the Federal Reserve under the Shared National Credit Program. The decision to place this loan on non-accrual status was made by the Federal Reserve and not the Company. The loan that makes up the total balance is still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because the Federal Reserve required us to place this loan on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve.

Critical Accounting Policies and Estimates

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

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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 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, investment securities and mortgage lending income, 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 $16.4 million and $14.8 million for the years ended December 31, 2021 and December 31, 2020, respectively. Centennial CFG loan fees were $11.9 million and $8.3 million for the years ended December 31, 2021 and December 31, 2020, respectively.

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

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

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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, 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 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 that an allowance for credit losses on available-for-sale securities was not material. However, the Company evaluated the investment portfolio during 2020 and determined that an $842,000 provision for credit losses was necessary. No additional provision was deemed necessary during the remainder of 2020 or for the 2021. See Note 3 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 and expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

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

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

•1-4 family construction

•All other construction

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

•1-4 family senior liens

•Multifamily

•Owner occupies commercial real estate

•Non-owner occupied commercial real estate

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

•Consumer auto

•Other consumer

•Other consumer - SPF

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

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.

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

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.

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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 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.

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.

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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

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 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 new loan production office in Baltimore, Maryland.

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

Acquisition of Marine Portfolio

On February 4, 2022, the Company completed the purchase of the performing marine loan portfolio of Utah-based LendingClub Bank (“LendingClub”). Under the terms of the purchase agreement with LendingClub, the Company acquired yacht loans totaling approximately $238 million. This portfolio of loans will be housed within the Company's Shore Premier Finance division, which will be responsible for servicing the acquired loan portfolio and originating new loan production. Upon completion of the acquisition, SPF has total loans receivable of approximately $1.13 billion.

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 and further amended on November 8, 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.

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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. 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 the New York Stock Exchange 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 regulatory approvals and other conditions set forth in the Agreement. The Company received approval for the merger from the Arkansas State Banking Board and the Arkansas State Bank Commissioner as well as the approval of the shareholders of each company in December of 2021.

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 December 31, 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.

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Results of Operations for the Years Ended December 31, 2021, 2020 and 2019

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 and rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (25.740% for the year ended December 31, 2021, 26.135% for the year ended December 31, 2020 and 25.819% for year ended December 31, 2019).

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 three times during 2019. First, the target rate was lowered to 2.00% to 2.25% on July 31, 2019; second, the rate was lowered on September 18, 2019 to 1.75% to 2.00%; and third, the rate was lowered on October 30, 2019 to 1.50% to 1.75%. 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 December 31, 2021.

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Net interest income on a fully taxable equivalent basis decreased $8.5 million, or 1.45%, to $580.1 million for the year ended December 31, 2021, from $588.6 million for the same period in 2020. This decrease in net interest income was the result of a $49.7 million decrease in interest income, partially offset by a $41.2 million decrease in interest expense on a fully taxable equivalent basis. The $49.7 million decrease in interest income was primarily the result of higher levels of earning assets at lower yields. Although our interest earning assets increased, our average loan balances decreased by $1.13 billion while average interest-bearing balances due from banks increased by $1.84 billion. The lower yield on earning assets resulted in a decrease in interest income of approximately $5.9 million, and the change in composition of earning assets at lower yields resulted in a decrease in interest income of approximately $43.8 million. The lower yield was primarily driven by the decrease in income on loans of $53.6 million, which was partially offset by an increase in income on investment securities of $2.2 million and a $1.7 million increase in income on interest-bearing balances due from banks. The decrease in interest income also reflected a $7.2 million decrease in loan accretion income. The $41.2 million decrease in interest expense was primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which lowered interest expense by $34.9 million, as well as a $6.3 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 $38.2 million decrease in interest expense on deposits and a $1.9 million decrease in interest expense on FHLB borrowed funds.

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Net interest income on a fully taxable equivalent basis increased $20.1 million, or 3.5%, to $588.6 million for the year ended December 31, 2020, from $568.5 million for the same period in 2019. This increase in net interest income was the result of a $61.4 million decrease in interest expense partially offset by a $41.3 million decrease in interest income. The $41.3 million decrease in interest income was primarily the result lower yields on our loans. The higher level of earning assets resulted in an increase in interest income of approximately $43.1 million. The $61.4 million decrease in interest expense was primarily the result of our interest-bearing liabilities repricing in a lower interest rate environment. The lower yield on our interest earning assets resulted in an approximately $84.3 million decrease in interest income. The repricing of our interest-bearing liabilities in a lower interest rate environment resulted in an approximately $62.2 million decrease in interest expense. The higher level of our interest-bearing liabilities resulted in an increase in interest expense of approximately $797,000.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2021, 2020 and 2019, as well as changes in fully taxable equivalent net interest margin for the years 2021 compared to 2020 and 2020 compared to 2019.

Table 2: Analysis of Net Interest Income

	Years Ended December 31,
	2021		2020		2019
	(Dollars in thousands)
Interest income	$	625,171			$	675,962			$	717,988
Fully taxable equivalent adjustment	7,079			6,015			5,255
Interest income – fully taxable equivalent	632,250			681,977			723,243
Interest expense	52,200			93,407			154,771
Net interest income – fully taxable equivalent	$	580,050			$	588,570			$	568,472
Yield on earning assets – fully taxable equivalent	3.99	%		4.70	%		5.45	%
Cost of interest-bearing liabilities	0.49			0.89			1.55
Net interest spread – fully taxable equivalent	3.50			3.81			3.90
Net interest margin – fully taxable equivalent	3.66			4.06			4.29

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin

	December 31,
	2021 vs. 2020		2020 vs. 2019
	(In thousands)
(Decrease) increase in interest income due to change in earning assets	$	(43,840)			$	43,052
(Decrease) increase in interest income due to change in earning asset yields	(5,887)			(84,318)
Decrease (increase) in interest expense due to change in interest-bearing liabilities	6,325			(797)
Decrease in interest expense due to change in interest rates paid on interest-bearing liabilities	34,882			62,161
(Decrease) increase in net interest income	$	(8,520)			$	20,098

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 years ended December 31, 2021, 2020 and 2019. 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.

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Table 4: Average Balance Sheets and Net Interest Income Analysis

	Years Ended December 31,
	2021		2020		2019
	Average Balance		Income / Expense		Yield / Rate		Average Balance		Income / Expense		Yield / Rate		Average Balance	Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	2,596,460			$	3,515			0.14	%		$	761,174		$	1,849			0.24	%		$	254,548		$	5,188	2.04	%
Federal funds sold	71			—			—			1,330			21		1.58			1,421			34			2.39
Investment securities – taxable	2,031,139			30,054			1.48			1,653,159			32,596		1.97			1,663,512			41,406			2.49
Investment securities – non-taxable	858,503			26,017			3.03			577,444			21,262		3.68			379,232			17,026			4.49
Loans receivable	10,375,457			572,664			5.52			11,504,123			626,249		5.44			10,961,599			659,589			6.02
Total interest-earning assets	15,861,630			632,250			3.99			14,497,230			681,977		4.70			13,260,312			723,243			5.45
Non-earning assets	1,597,355							1,640,064						1,768,188
Total assets	$	17,458,985							$	16,137,294						$	15,028,500
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest- bearing transaction accounts	$	8,716,004			$	15,956			0.18	%		$	7,686,621		$	36,084			0.47	%		$	6,674,493		$	77,194	1.16	%
Time deposits	1,087,875			8,980			0.83			1,756,138			27,026		1.54			1,972,040			36,910			1.87
Total interest-bearing deposits	9,803,879			24,936			0.25			9,442,759			63,110		0.67			8,646,533			114,104			1.32
Federal funds purchased	—			—			—			1,557			13		0.83			2,895			54			1.87
Securities sold under agreement to repurchase	151,190			497			0.33			151,573			1,167		0.77			149,665			2,544			1.70
FHLB borrowed funds	400,000			7,604			1.90			534,608			9,506		1.78			848,969			17,209			2.03
Subordinated debentures	370,712			19,163			5.17			369,943			19,611		5.30			369,175			20,860			5.65
Total interest-bearing liabilities	10,725,781			52,200			0.49			10,500,440			93,407		0.89			10,017,237			154,771			1.55
Non-interest-bearing liabilities
Non-interest-bearing deposits	3,924,341							2,998,560						2,489,254
Other liabilities	124,724							135,094						111,156
Total liabilities	14,774,846							13,634,094						12,617,647
Stockholders’ equity	2,684,139							2,503,200						2,410,853
Total liabilities and stockholders’ equity	$	17,458,985							$	16,137,294						$	15,028,500
Net interest spread					3.50	%						3.81	%					3.90	%
Net interest income and margin			$	580,050			3.66					$	588,570		4.06					$	568,472			4.29

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Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the year ended December 31, 2021 compared to 2020 and 2020 compared to 2019 on a fully taxable equivalent 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

	Years Ended December 31,
	2021 over 2020		2020 over 2019
	Volume		Yield / Rate		Total		Volume	Yield / Rate		Total
	(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks	$	2,791			$	(1,125)		$	1,666		$	4,021		$	(7,360)	$	(3,339)
Federal funds sold	(10)			(11)			(21)		(2)		(11)		(13)
Investment securities – taxable	6,563			(9,105)			(2,542)		(256)		(8,554)		(8,810)
Investment securities – non-taxable	9,006			(4,251)			4,755		7,708		(3,472)		4,236
Loans receivable	(62,190)			8,605			(53,585)		31,581		(64,921)		(33,340)
Total interest income	(43,840)			(5,887)			(49,727)		43,052		(84,318)		(41,266)
Interest expense:
Interest-bearing transaction and savings deposits	4,302			(24,430)			(20,128)		10,292		(51,402)		(41,110)
Time deposits	(8,135)			(9,911)			(18,046)		(3,767)		(6,117)		(9,884)
Federal funds purchased	(7)			(7)			(13)		(19)		(22)		(41)
Securities sold under agreement to repurchase	(3)			(667)			(670)		32		(1,409)		(1,377)
FHLB borrowed funds	(2,523)			621			(1,902)		(5,784)		(1,919)		(7,703)
Subordinated debentures	41			(489)			(448)		43		(1,292)		(1,249)
Total interest expense	(6,325)			(34,882)			(41,207)		797		(62,161)		(61,364)
Increase (decrease) in net interest income	$	(37,515)			$	28,995		$	(8,520)		$	42,255		$	(22,157)	$	20,098

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 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.

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Credit Loss Expense: During the year ended December 31, 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 year ended December 31, 2020. The $4.8 million negative provision for the year ended December 31, 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 year ended December 31, 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. Despite the improvements in the economic and public health outlooks in the United States during 2021, the emergence of the Delta variant during the second quarter and the Omicron variant during the fourth quarter have resulted in significant uncertainty about the future impact of the pandemic on our business, results of operations and financial condition. As a result, the Company determined that a negative provision for credit losses was not appropriate at this time, and the current level of the allowance for credit losses was considered adequate as of December 31, 2021. Net charge-offs to average total loans decreased to 0.08% for the year ended December 31, 2021 from 0.11% for the year ended December 31, 2020. In addition, non-performing loans to total loans decreased from 0.66% as of December 31, 2020 to 0.51% as of December 31, 2021.

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 home equity lines of credit (“HELOC”) & junior liens

•1-4 family senior liens

•Multifamily

•Owner occupies commercial real estate

•Non-owner occupied commercial real estate

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

•Consumer auto

•Other consumer

•Other consumer - SPF

Investments – Available-for-sale: The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet these 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,

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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 $137.6 million in 2021, compared to $111.8 million in 2020 and $99.5 million in 2019. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending, 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 years ended December 31, 2021, 2020, and 2019, respectively, as well as changes for the years 2021 compared to 2020 and 2020 compared to 2019.

Table 6: Non-Interest Income

	Years Ended December 31,		2021 Change from 2020		2020 Change from 2019
	2021		2020		2019
	(Dollars in thousands)
Service charges on deposit accounts	$	22,276			$	21,381		$	25,930		$	895			4.2	%		$	(4,549)	(17.5)	%
Other service charges and fees	36,451			30,686			34,086		5,765		18.8			(3,400)			(10.0)
Trust fees	1,960			1,633			1,566		327		20.0			67			4.3
Mortgage lending income	25,676			29,065			14,303		(3,389)		(11.7)			14,762			103.2
Insurance commissions	1,943			1,848			2,278		95		5.1			(430)			(18.9)
Increase in cash value of life insurance	2,049			2,200			2,752		(151)		(6.9)			(552)			(20.1)
Dividends from FHLB, FRB, FNBB & other	14,835			12,472			7,707		2,363		18.9			4,765			61.8
Gain on sale of SBA loans	2,380			645			1,573		1,735		269.0			(928)			(59.0)
(Loss) gain on sale of branches, equipment and other assets, net	(105)			326			(3)		(431)		(132.2)			329			10,966.7
Gain on OREO, net	2,003			1,132			757		871		76.9			375			49.5
Gain (loss) on securities, net	219			—			(2)		219		100.0			2			100.0
Fair value adjustment for marketable securities	7,178			(1,978)			—		9,156		462.9			(1,978)			(100.0)
Other income	20,704			12,376			8,569		8,328	67.3			3,807			44.4
Total non-interest income	$	137,569			$	111,786		$	99,516		$	25,783			23.1	%		$	12,270	12.3

Non-interest income increased $25.8 million, or 23.1%, to $137.6 million for the year ended December 31, 2021 from $111.8 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 $9.2 million, the $8.3 million increase in other income and the $5.8 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 year ended December 31, 2021 on some of the more significant changes are as follows:

•The $5.8 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 $3.4 million decrease in mortgage lending income is primarily due to a decrease in volume of secondary market loans from the peak in 2020.

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

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•The $1.7 million increase in gain on sale of SBA loans is primarily due to the increase in loan sales during 2021.

•The $9.2 million gain in the fair value adjustment for marketable securities is related to an increase in the fair market value of marketable securities held by the Company.

•The $8.3 million increase in other income is primarily due to a $6.3 million increase in additional income for items previously charged off and a $2.2 million increase in investment brokerage fee income.

Non-interest income increased $12.3 million, or 12.3%, to $111.8 million for the year ended December 31, 2020 from $99.5 million for the same period in 2019. The primary factor that resulted in this increase was the $14.8 million increase in mortgage lending income for the year ended December 31, 2020. Other factors were changes related to service charges on deposit accounts, other service charges and fees, decrease in cash value of life insurance, dividends from FHLB, FRB, FNBB & other, gain on sale of SBA loans, equipment and other assets, fair value adjustment for marketable securities and other income.

Additional details for the year ended December 31, 2020 on some of the more significant changes are as follows:

•The $4.5 million decrease in service charges on deposit accounts is primarily related to a decrease in overdraft fees resulting from changes in consumer spending habits leading consumers to hold higher deposit balances in response to the COVID-19 pandemic.

•The $3.4 million decrease in other service charges and fees is primarily due to the reduction in Centennial CFG property finance loan fees and wire service charges.

•The $14.8 million increase in mortgage lending income is primarily due to the increase in volume of secondary market loan sales driven by the current low interest rate environment.

•The $552,000 decrease in the cash value of life insurance is due to the Company surrendering $47.5 million of underperforming separate account bank owned life insurance (“BOLI”) during 2019.

•The $4.8 million increase in dividends from FHLB, FRB, FNBB & other is primarily the result of $10.2 million in special dividends from an equity investment received during 2020, compared to $3.0 million received during 2019. This was partially offset by a decrease in dividend income from the FRB and FHLB.

•The $928,000 million decrease in gain on sale of SBA loans is primarily due a reduction in volume of sales of SBA loans in 2020.

•The $2.0 million loss in the fair value adjustment for marketable securities is related to the decline in the fair market value of a marketable security acquired by the Company in 2020.

•The $3.8 million increase in other income is primarily due to a $2.7 million increase in additional income for items previously charged off, a $452,000 increase in gain on life insurance and an $873,000 increase in investment brokerage fee income.

Non-Interest Expense

Non-interest expense 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 years ended December 31, 2021, 2020, and 2019, as well as changes for the years ended 2021 compared to 2020 and 2020 compared to 2019.

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Table 7: Non-Interest Expense

	Years Ended December 31,		2021 Change from 2020		2020 Change from 2019
	2021		2020		2019
	(Dollars in thousands)
Salaries and employee benefits	$	170,755			$	163,950		$	154,177	$	6,805		4.2	%		$	9,773	6.3	%
Occupancy and equipment	36,631			38,412			35,452		(1,781)	(4.6)		2,960			8.3
Data processing expense	24,280			19,032			16,161		5,248	27.6		2,871			17.8
Merger expense	1,886			711			—		1,175	165.3		711			100.0
Other operating expenses:
Advertising	4,855			3,999			4,687		856	21.4		(688)			(14.7)
Amortization of intangibles	5,683			5,844			6,324		(161)	(2.8)		(480)			(7.6)
Electronic banking expense	9,817			8,477			7,525		1,340	15.8		952			12.7
Directors' fees	1,614			1,624			1,602		(10)	(0.6)		22			1.4
Due from bank service charges	1,044			975			1,081		69	7.1		(106)			(9.8)
FDIC and state assessment	5,472			6,494			4,468		(1,022)	(15.7)		2,026			45.3
Hurricane expense	—			—			897		—	—		(897)			(100.0)
Insurance	3,118			3,018			2,846		100	3.3		172			6.0
Legal and accounting	3,703			4,222			5,017		(519)	(12.3)		(795)			(15.8)
Other professional fees	6,950			8,150			10,213		(1,200)	(14.7)		(2,063)			(20.2)
Operating supplies	1,915			1,988			2,021		(73)	(3.7)		(33)			(1.6)
Postage	1,283			1,283			1,266		—	—		17			1.3
Telephone	1,425			1,302			1,210		123	9.4		92			7.6
Other expense	18,086			17,904			20,840		182	1.0		(2,936)			(14.1)
Total non-interest expense	$	298,517			$	287,385		$	275,787	$	11,132		3.9	%		$	11,598	4.2	%

Non-interest expense increased $11.1 million, or 3.9%, to $298.5 million for the year ended December 31, 2021, from $287.4 million for the same period in 2020. The primary factor that resulted in this increase was the increase in salaries and employee benefits expense. Other factors were changes related to occupancy and equipment expenses, data processing expenses, merger and acquisition expenses, electronic banking expense, FDIC and state assessment, hurricane expense, legal and accounting, other professional fees and other expense.

Additional details for the year ended December 31, 2021 on some of the more significant changes are as follows:

•The $6.8 million increase in salaries and employee benefits expense is primarily due to increased salary expenses related to the normal increased cost of doing business.

•The $1.8 million decrease in occupancy and equipment is related to a decrease in depreciation - building and improvements, lease expenses and janitorial services and supplies. During the second quarter of 2020, the Company made the strategic decision to demolish and rebuild the Marathon, Florida branch office at its existing location. This increased depreciation expense during the second quarter of 2020 as the building was written off.

•The $5.2 million increase in data processing expense is primarily related to the normal increased cost of doing business such as the increase in software, licensing, core processing expense, telecommunication services, internet banking and cash management expenses, mobile banking and bill pay expenses.

•The $1.2 million increase in merger and acquisition expense costs associated with the anticipated acquisition of Happy Bancshares, Inc.

•The $856,000 increase in advertising expense is primarily due to increase in advertising campaigns during the current year.

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•The $1.3 million increase in electronic banking expenses is primarily due to the normal increased cost of doing business such as the increase in fees charged for network expenses and debit card processing fees.

•The $1.0 million decrease in FDIC and state assessment is primarily related to an improvement in the FDIC assessment rate. In addition, the State of Arkansas announced a 25% reduction in assessments for January 1, 2021 through June 30, 2021 and a 30% reduction in assessments for July 1, 2021 through December 31,2021.

•The $1.2 million decrease in other professional fees is primarily related to a reduction outsourced special projects and professional fees for the Bank. This was partially offset by an increase in consulting fees.

Non-interest expense increased $11.6 million, or 4.2%, to $287.4 million for the year ended December 31, 2020, from $275.8 million for the same period in 2019. The primary factor that resulted in this increase was the increase in salaries and employee benefits expense. Other factors were changes related to occupancy and equipment expenses, data processing expenses, merger and acquisition expenses, electronic banking expense, FDIC and state assessment, hurricane expense, legal and accounting, other professional fees and other expense.

Additional details for the year ended December 31, 2020 on some of the more significant changes are as follows:

•The $9.8 million increase in salaries and employee benefits expense is primarily due to increased salary expense related to the normal increased cost of doing business, additional employees hired as a result of the increased regulatory environment and the acquisition of LH-Finance on February 29, 2020.

•The $3.0 million increase in occupancy and equipment is primarily related to an increase in janitorial services and supplies expense resulting from the ongoing COVID-19 pandemic and the increased depreciation expense due to the write-off of the Company’s Marathon, Florida branch office during the second quarter of 2020. The Company made the strategic decision to demolish and rebuild the branch at its existing location.

•The $2.9 million increase in data processing expense is primarily related to an increase in software, licensing, software maintenance and internet banking/cash management expenses.

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

•The $2.0 million increase in FDIC and state assessment is primarily related to a $2.3 million FDIC small bank assessment credit recorded in the third quarter of 2019.

•The $897,000 in hurricane expense incurred during the first quarter of 2019 was related to damages from Hurricane Michael which made landfall in Mexico Beach, Florida on October 10, 2018.

•The $795,000 decrease in legal and accounting fees is primarily due to a reduction in legal and audit fees for the Bank.

•The $2.1 million decrease in other professional fees is primarily related to a reduction in consulting fees, outsourced special projects and professional fees for the Bank.

•The $2.9 million decrease in other expenses is primarily due to the decreases in general travel expenses, OREO expenses and other miscellaneous expenses.

Income Taxes

During 2021, the Company lowered its marginal tax rate from 26.135% to 25.740%. In an effort to more accurately reflect current state income apportionment and state tax rates, the state tax rate was lowered to 6.0%, lowering the blended rate to 25.74%. Florida and Arkansas were the main drivers in the tax rate reduction.

During 2020, the Company began filing income tax returns in several new states. To account for the slight increase in state income tax expense due to respective state income tax rates, the Company raised its marginal tax rate from 25.819% to 26.135% for 2020.

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During 2019, the State of Florida reduced its corporate income tax rate from 5.50% to 4.458% for the tax years January 1, 2019 through December 31, 2021. As a result of this reduction, our income taxes were reduced by $1.0 million. This rate decline lowered the Company’s marginal tax rate from 26.135% to 25.819% for 2019.

Income tax expense increased $34.5 million, or 54.5%, to $97.8 million for the year ended December 31, 2021, from $63.3 million for 2020. Income tax expense decreased $32.8 million, or 34.2%, to $63.3 million for the year ended December 31, 2020, from $96.1 million for 2019. The effective tax rates for the years ended December 31, 2021, 2020 and 2019 were 23.45%, 22.78% and 24.92%, respectively. The Company’s marginal tax rate was 25.740%, 26.135% and 25.819% for years ended December 31, 2021, 2020 and 2019, respectively.

Financial Condition as of and for the Years Ended December 31, 2021 and 2020

Loan Portfolio

Our loan portfolio averaged $10.38 billion and $11.50 billion during the years ended December 31, 2021 and 2020, respectively. Loans receivable were $9.84 billion as of December 31, 2021 compared to $11.22 billion as of December 31, 2020, a decrease of $1.38 billion, or 12.34%.

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

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CARES Act for PPP loans to be issued by financial institutions through the SBA with a term of 5 years. As of December 31, 2021, the Company had $112.8 million of PPP loans. This balance consists of $107.9 million in commercial and industrial loans and $4.9 million in other loans.

During 2021, the Company experienced a decline of approximately $1.38 billion in loans. The decrease in the loan portfolio is primarily due to $822.2 million in organic loan decline as well as $562.4 million in PPP loan decline. The $822.2 million in organic loan decline included $385.3 million in loan growth for Centennial CFG, while the remaining footprint experienced $1.20 billion in loan decline during 2021. The $562.4 million in PPP loan decline was the result of $910.1 million of PPP loans being forgiven, partially offset by $347.7 million in new PPP loans during 2021.

During 2020, the Company experienced an increase of approximately $351.0 million in loans compared to 2019. The increase in the loan portfolio is primarily due to the $675.2 million of PPP loans held as of December 31, 2020 as well as the acquisition of $406.2 million of loans from LH-Finance during the first quarter of 2020, which was offset by $730.4 million in organic loan decline for the year ended December 31, 2020. Excluding the effects of PPP loan originations, Centennial CFG experienced $59.9 million of organic loan decline during the year, while the remaining footprint, excluding the acquisition of LH-Finance, experienced $670.5 million of organic loan decline during 2020.

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 $3.14 billion, $3.67 billion, $218.8 million, $888.2 million and $1.92 billion as of December 31, 2021 in Arkansas, Florida, Alabama, SPF and Centennial CFG, respectively.

As of December 31, 2021, we had $376.4 million of construction/land development loans which were collateralized by land. This consisted of $38.1 million for raw land and $338.3 million for land with commercial and/or residential lots.

Table 8 presents our loans receivable balances by category as of December 31, 2021, 2020 and 2019.

Table 8: Loans Receivable

	As of December 31,
	2021		2020
	(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	3,889,284			$	4,429,060
Construction/land development	1,850,050			1,562,298
Agricultural	130,674			114,431
Residential real estate loans:
Residential 1-4 family	1,274,953			1,536,257
Multifamily residential	280,837			536,538
Total real estate	7,425,798			8,178,584
Consumer	825,519			864,690
Commercial and industrial	1,386,747			1,896,442
Agricultural	43,920			66,869
Other	154,105			214,136
Total loans receivable	$	9,836,089			$	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

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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 December 31, 2021, commercial real estate loans totaled $5.87 billion, or 59.7% 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 $2.06 billion, $2.38 billion, $105.6 million, zero and $1.33 billion at December 31, 2021, respectively.

Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 35.6% and 52.1% of our residential mortgage loans consist of owner occupied 1-4 family properties and non-owner occupied 1-4 family properties (rental), respectively, as of December 31, 2021, with the remaining 12.3% 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 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.

As of December 31, 2021, residential real estate loans totaled $1.56 billion, or 15.8%, 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 franchises in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $483.2 million, $858.9 million, $60.6 million, zero and $153.1 million at December 31, 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 December 31, 2021, consumer loans totaled $825.5 million, or 8.4% 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 $20.0 million, $8.5 million, $763,000, $796.3 million and zero at December 31, 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 speaking, 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 December 31, 2021, commercial and industrial loans totaled $1.39 billion, or 14.1% of loans receivable, which 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 $453.4 million, $362.3 million, $42.2 million, $91.9 million and $437.0 million at December 31, 2021, respectively.

Agricultural Loans. Agricultural loans include loans for financing agricultural production, including loans to businesses or individuals engaged in the production of timber, poultry, livestock or crops and are not categorized as part of real estate loans. Our agricultural loans are generally secured by farm machinery, livestock, crops, vehicles or other agricultural-related collateral. A portion of our portfolio of agricultural loans is comprised of loans to individuals which would normally be characterized as consumer loans except for the fact that the individual borrowers are primarily engaged in the production of timber, poultry, livestock or crops.

As of December 31, 2021, agricultural loans totaled $43.9 million, or 0.4% of loans receivable, compared to the $66.9 million, or 0.6% of loans receivable as of December 31, 2020. Agricultural loans originated in our Arkansas, Florida,

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Alabama, SPF and Centennial CFG markets were $43.6 million, $330,000, zero, zero and zero at December 31, 2021, respectively.

Table 9 presents the distribution of the maturity of our total loans as of December 31, 2021. The table also presents the portion of our loans that have fixed interest rates and interest rates that fluctuate over the life of the loans based on changes in the interest rate environment.

The loans acquired during our acquisitions accrete interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the weighted-average life of the loans).

Table 9: Maturity Distribution of Loan Portfolio and Interest Rate Detail of Loans Due After One Year

	Maturity Distribution of Loan Portfolio
	One Year or Less		Over One Year Through Five Years		Over Five Years Through Fifteen Years		Over Fifteen Years	Total Loans Receivable
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	802,472			$	2,177,997		$	856,396	$	52,419	$	3,889,284
Construction/land development	921,822			764,380			98,883		64,965	1,850,050
Agricultural	28,679			86,781			14,831		383	130,674
Residential real estate loans
Residential 1-4 family	211,202			325,617			181,293		556,841	1,274,953
Multifamily residential	70,191			140,500			59,722		10,424	280,837
Total real estate	2,034,366			3,495,275			1,211,125		685,032	7,425,798
Consumer	7,131			19,718			206,334		592,336	825,519
Commercial and industrial	309,603			938,645			117,923		20,576	1,386,747
Agricultural	28,452			15,024			444		—	43,920
Other	8,975			81,389			49,680		14,061	154,105
Total loans receivable	$	2,388,527			$	4,550,051		$	1,585,506	$	1,312,005	$	9,836,089

	Loans Due After One Year
	Predetermined Interest Rates		Floating or Adjustable Interest Rates		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	1,849,587			$	1,237,225		$	3,086,812
Construction/land development	271,172			657,056			928,228
Agricultural	88,651			13,344			101,995
Residential real estate loans
Residential 1-4 family	416,515			647,236			1,063,751
Multifamily residential	98,102			112,544			210,646
Total real estate	2,724,027			2,667,405			5,391,432
Consumer	793,697			24,691			818,388
Commercial and industrial	489,406			587,738			1,077,144
Agricultural	9,017			6,451			15,468
Other	119,602			25,528			145,130
Total loans receivable	$	4,135,749			$	3,311,813		$	7,447,562

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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 were deemed to be immaterial and were 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 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 10 sets forth information with respect to our non-performing assets as of December 31, 2021 and 2020. As of these dates, all non-performing restructured loans are included in non-accrual loans.

Table 10: Non-performing Assets

	As of December 31,
	2021		2020
	(Dollars in thousands)
Non-accrual loans	$	47,158			$	64,528
Loans past due 90 days or more (principal or interest payments)	3,035			9,610
Total non-performing loans	50,193			74,138
Other non-performing assets
Foreclosed assets held for sale, net	1,630			4,420
Other non-performing assets	—			—
Total other non-performing assets	1,630			4,420
Total non-performing assets	$	51,823			$	78,558
Allowance for credit losses to non-accrual loans	501.96	%		380.41	%
Allowance for credit losses to non-performing loans	471.61			331.10
Non-accrual loans to total loans	0.48			0.58
Non-performing loans to total loans	0.51			0.66
Non-performing assets to total assets	0.29			0.48

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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 $50.2 million as of December 31, 2021, compared to $74.1 million as of December 31, 2020, for a decrease of $23.9 million. The $23.9 million decrease in non-performing loans is the result of a $10.2 million decrease in non-performing loans in our Arkansas market, a $16.3 million decrease in non-performing loans in our Florida market, a $60,000 decrease in non-performing loans in our Alabama market, a $2.1 million decrease in non-performing loans attributable to our SPF market, partially offset by a $4.7 million increase in non-performing loans in our Centennial CFG market. Non-performing loans, at December 31, 2021, were $13.9 million, $26.8 million, $470,000, $1.5 million and $7.5 million in the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively.

During the year ended December 31, 2021, the Company did not record a provision for credit losses but did record 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 year ended December 31, 2020. The $4.8 million negative provision for the year ended December 31, 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 year ended December 31, 2020 was primarily due to the uncertainty created by the COVID-19 pandemic, with $9.3 million as a result of 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. Despite the improvements in the economic and public health outlooks in the United States during 2021, the emergence of the Delta variant during the second quarter and the Omicron variant during the fourth quarter have resulted in significant uncertainty about the future impact of the pandemic on our business, results of operations and financial condition. As a result, the Company determined that a negative provision for credit losses was not appropriate at this time, and the current level of the allowance for credit losses was considered adequate as of December 31, 2021.

Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan. As of December 31, 2021, we had $6.5 million of restructured loans that are in compliance with the modified terms and are not reported as past due or non-accrual in Table 10. Our Florida market contains $3.8 million and our Arkansas market contains $2.7 million of these restructured loans.

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

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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. 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 during the year ended December 31, 2021. As of December 31, 2021, our loan deferrals decreased to $190.7 million on 26 loans from the December 31, 2020 balance of $330.7 million on 56 loans. All of the customers currently on deferment 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 76% of the deferment balance as of December 31, 2021.

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, a lengthening of 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 December 31, 2021, the amount of TDRs was $7.5 million, a decrease of 38.9% from $12.3 million at December 31, 2020. As of December 31, 2021 and 2020, 85.7% and 87.1%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $1.6 million as of December 31, 2021, compared to $4.4 million as of December 31, 2020 for a decrease of $2.8 million. The foreclosed assets held for sale as of December 31, 2021 are comprised of approximately $500,000 of assets located in Arkansas and $1.1 million of assets located in Florida and zero from Alabama, SPF and Centennial CFG.

Table 11 shows the summary of foreclosed assets held for sale as of December 31, 2021 and 2020.

Table 11: Total Foreclosed Assets Held for Sale

	December 31
	2021		2020
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	536			$	438
Construction/land development	834			3,189
Agricultural	—			—
Residential real estate loans
Residential 1-4 family	260			793
Multifamily residential	—			—
Total foreclosed assets held for sale	$	1,630			$	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 December 31, 2021, average impaired loans were $289.5 million compared to $96.6 million as of December 31, 2020. As of December 31, 2021 impaired loans were $331.5 million compared to $112.7 million as of December 31, 2020. The amortized cost balance for loans with a specific allocation increased from $39.5 million to $284.0 million, and the specific allocation for impaired loans increased by approximately $41.0 million for the period ended December 31, 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

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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 December 31, 2021, our Arkansas, Florida, Alabama, SPF and Centennial CFG markets accounted for approximately $179.6 million, $142.4 million, $470,000, $1.5 million and $7.5 million of the impaired loans, respectively.

Past Due and Non-Accrual Loans

Table 12 shows the summary non-accrual loans as of December 31, 2021 and 2020:

Table 12: Total Non-Accrual Loans

	December 31
	2021		2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	11,923			$	20,947
Construction/land development	1,445			1,381
Agricultural	897			879
Residential real estate loans
Residential 1-4 family	16,198			19,334
Multifamily residential	156			173
Total real estate	30,619			42,714
Consumer	1,648			3,506
Commercial and industrial	13,875			17,251
Agricultural & other	1,016			1,057
Total non-accrual loans	$	47,158			$	64,528

If the non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $2.4 million for the year ended December 31, 2021, $3.7 million in 2020, and $2.4 million in 2019 would have been recorded. Interest income recognized on the non-accrual loans for the years ended December 31, 2021, 2020 and 2019 was considered immaterial.

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Table 13 shows the summary of accruing past due loans 90 days or more as of December 31, 2021 and 2020:

Table 13: Total Loans Accruing Past Due 90 Days or More

	As of December 31,
	2021		2020
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	2,225			$	6,088
Construction/land development	—			1,296
Agricultural	—			—
Residential real estate loans
Residential 1-4 family	701			1,821
Multifamily residential	—			—
Total real estate	2,926			9,205
Consumer	2			174
Commercial and industrial	107			231
Total loans accruing past due 90 days or more	$	3,035			$	9,610

Our total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.51% and 0.66% as of December 31, 2021 and 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 and 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.

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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 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 home equity lines of credit (“HELOC”) & junior liens

•1-4 family senior liens

•Multifamily

•Owner occupies commercial real estate

•Non-owner occupied commercial real estate

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

•Consumer auto

•Other consumer

•Other consumer - SPF

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

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

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

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

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

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

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

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

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

Between the receipt of the original appraisal and the updated appraisal, we monitor the loan's repayment history. If the loan is $3.0 million or greater or the total loan relationship is $5.0 million or greater, our policy requires an annual credit review. 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.

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 $331.5 million and $112.7 million in collateral-dependent impaired loans for the periods ended December 31, 2021 and 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 $1.22 billion from $10.76 billion at December 31, 2020 to $9.54 billion at December 31, 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 decreased from 2.18% at December 31, 2020 to 1.94% at December 31, 2021.

Charge-offs and Recoveries. Total charge-offs decreased to $11.7 million for the year ended December 31, 2021, compared to $14.5 million for the year ended December 31, 2020. Total recoveries increased to $2.9 million for the year ended December 31, 2021, compared to $2.1 million for the same period in 2020.

Net loans charged off for the years ended December 31, 2021 and 2020 were $8.8 million and $12.4 million, respectively. For the years ended December 31, 2021 and 2020, approximately $3.1 million and $4.4 million, respectively, of the net charge-offs were from our Arkansas market. For the years ended December 31, 2021 and 2020, approximately $5.3 million and $7.9 million, respectively, of the net charge-offs were from our Florida market. Approximately $17,000 and $11,000 related to net charge-offs for the years ended December 31, 2021 and 2020, respectively, on loans in our Alabama market. For the years ended December 31, 2021 and 2020, approximately $401,000 and $80,000 of the net charge-offs were from our SPF market. There have been zero charge-offs for Centennial CFG since the franchise was formed in 2015.

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While the 2021 charge-offs and recoveries consisted of many relationships, there were two individual relationships consisting of charge-offs greater than $1.0 million. The first was a $3.8 million charge-off for a commercial and industrial loan in our Florida market. The second was a $1.9 million charge-off for a commercial and industrial loan in our Arkansas market. For the year ended December 31, 2020, there were two individual relationships consisting of charge-offs greater than $1.0 million. The first was a $1.9 million charge-off for a commercial and industrial loan that had been acquired in the Stonegate acquisition. The second was a $2.5 million charge-off for a commercial and industrial loan in our Florida market.

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

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Table 14 shows the allowance for credit losses, charge-offs and recoveries for loans as of and for the years ended December 31, 2021 and 2020.

Table 14: Analysis of Allowance for Credit Losses

	As of December 31,
	2021		2020
	(Dollars in thousands)
Balance, beginning of year	$	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	604			2,990
Construction/land development	—			1,218
Agricultural	42			51
Residential real estate loans:
Residential 1-4 family	545			485
Multifamily residential	—			—
Total real estate	1,191			4,744
Consumer	458			296
Commercial and industrial	8,242			7,764
Agricultural	—			—
Other	1,770			1,682
Total loans charged off	11,661			14,486
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential	785			638
Construction/land development	58			107
Agricultural	—			9
Residential real estate loans:
Residential 1-4 family	680			337
Multifamily residential	3			—
Total real estate	1,526			1,091
Consumer	70			108
Commercial and industrial	591			218
Agricultural	—			—
Other	715			653
Total recoveries	2,902			2,070
Net loans charged off (recovered)	8,759			12,416
Provision for credit loss - loans	—			102,113
Provision for credit loss - acquired loans	—			9,309
Balance, end of year	$	236,714			$	245,473
Net charge-offs (recoveries) to average loans receivable	0.08	%		0.11	%
Allowance for credit losses to total loans	2.41			2.19
Allowance for credit losses to net charge-offs (recoveries)	2,702.52			1,977.07

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Net charge-offs to average loans receivable were 0.08% and 0.11% as of December 31, 2021 and 2020, respectively. Net charge-offs decreased by $3.7 million, or 29.5%, from 2020 to 2021. These improvements further enhanced the Company's strong asset quality, and additional disclosure of net charge-offs to average loans outstanding by loan category is not considered necessary.

Table 15 presents the allocation of allowance for credit losses as of December 31, 2021 and 2020.

Table 15: Allocation of Allowance for Credit Losses

	December 31, 2021
	2021		2020
	Allowance Amount		% ofloans(1)		Allowance Amount		% ofloans(1)
	(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non- residential	$	86,910			39.5	%		$	87,043		39.5	%
Construction/land development	28,415			18.8			32,861			13.9
Agricultural residential real estate loans:	308			1.3			1,410			1.0
Residential real estate loans:
Residential 1-4 family	45,364			13.0			47,754			13.7
Multifamily residential	3,094			2.9			5,462			4.8
Total real estate	164,091			75.5			174,530			72.9
Consumer	16,612			8.4			21,905			7.7
Commercial and industrial	52,910			14.1			46,061			16.9
Agricultural	152			0.4			469			0.6
Other	2,949			1.6			2,508			1.9
Total	$	236,714			100.0	%		$	245,473		100.0	%

___________________________

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

Investment Securities

Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. The estimated effective duration of our securities portfolio was 3.7 years as of December 31, 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 $3.12 billion and $2.47 billion as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, $1.54 billion, or 49.3%, 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, $997.0 million, or 32.0%, of our available-for-sale securities portfolio as of December 31, 2021, was 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 $433.0 million, or 13.9%, invested in obligations of U.S. Government-sponsored enterprises as of December 31, 2021, compared to $327.0 million, or 13.2%, of our available-for-sale securities as of December 31, 2020. Also, we had approximately $151.9 million, or 4.9%, invested in other securities as of December 31, 2021, compared to $41.0 million, or 1.7%, of our available-for-sale securities as of December 31, 2020.

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The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At December 31, 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.

Table 16 presents the carrying value and fair value of investment securities as of December 31, 2021 and 2020.

Table 16: Investment Securities

	December 31, 2021		December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)
Available-for-sale
U.S. government-sponsored enterprises	$	433,829			$	2,375		$	(3,225)		$	432,979			$	325,860		$	2,338	$	(1,207)	$	326,991
Residential mortgage-backed securities	1,175,185			4,085			(18,551)		1,160,719		703,138			10,607			(688)		713,057
Commercial mortgage-backed securities	372,702			6,521			(1,968)		377,255		446,964			18,048			(126)		464,886
State and political subdivisions	973,318			26,296			(2,636)		996,978		898,174			31,173			(1,454)		927,893
Other securities	151,449			1,781			(1,354)		151,876		40,755			434			(235)		40,954
Total	$	3,106,483			$	41,058		$	(27,734)		$	3,119,807			$	2,414,891		$	62,600	$	(3,710)	$	2,473,781

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Table 17 reflects the amortized cost and estimated fair value of debt securities as of December 31, 2021, by contractual maturity as well as the weighted-average yields (for tax-exempt obligations on a fully taxable equivalent basis) of those securities by contractual maturity. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

Table 17: Maturity and Yield Distribution of Investment Securities

	December 31, 2021
	1 Year or Less		1 Year Through 5 Years		5 Years Through 10 Years		Over 10 Years		Monthly Amortizing Securities		Total Amortized Cost	Total Fair Value
	(Dollars in thousands)
Available-for-sale
U.S. Government-sponsored enterprises	$	6,285			$	53,108			$	219,569		$	154,867		$	—		$	433,829	$	432,979
State and political subdivisions	1,710			27,732			87,127			856,749		—		973,318			996,978
Residential mortgage-backed securities	—			—			—			—		1,175,185		1,175,185			1,160,719
Commercial mortgage-backed securities	—			—			—			—		372,702		372,702			377,255
Other securities	47			15,121			74,837			59,444		2,000		151,449			151,876
Total	$	8,042			$	95,961			$	381,533		$	1,071,060		$	1,549,887		$	3,106,483	$	3,119,807
Percentage of total amortized cost	0.3	%		3.1	%		12.3	%		34.5	%	49.8	%	100.0	%

	December 31, 2021
	1 Year or Less		1 Year Through 5 Years		5 Years Through 10 Years	Over 10 Years		Monthly Amortizing Securities		Tax Equivalent Yield
	(Dollars in thousands)
Available-for-sale
U.S. Government-sponsored enterprises	1.99	%		1.13	%	1.07	%		0.81	%	—	%	0.99	%
State and political subdivisions	4.32			3.75		2.83			2.73		—		2.77
Residential mortgage-backed securities	—			—		—			—		1.39		1.39
Commercial mortgage-backed securities	—			—		—			—		1.97		1.97
Other securities	1.54			4.42		3.40			1.92		1.03		2.91

The weighted average tax-equivalent yield is calculated by multiplying the carried book value by the tax-equivalent yield for each security, and is then grouped by investment type and maturity. Tax-exempt obligations have been computed on a tax-equivalent basis. Taxable-equivalent adjustments are the result of increasing income from tax-free investments by an amount equal to the taxes that would be paid if the income were fully taxable, thus making tax-exempt yields comparable to taxable asset yields. Taxable equivalent adjustments were based upon a 25.74% income tax rate. In 2021, $19.6 million of interest income on debt securities was excluded from Federal taxation, and $6.1 million was excluded from state taxation.

Deposits

Our deposits averaged $13.73 billion for the year ended December 31, 2021 and $12.44 billion for 2020. Total deposits increased $1.53 billion, or 12.1%, to $14.26 billion as of December 31, 2021, from $12.73 billion as of December 31, 2020. Uninsured deposits including related interest accrued and unpaid were $5.66 billion as of December 31, 2021 compared to $6.07 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.

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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 18 reflects the classification of the brokered deposits as of December 31, 2021 and 2020.

Table 18: Brokered Deposits

	December 31, 2021
	(In thousands)
Time Deposits	$	—		$	10,000
Insured Cash Sweep and Other Transaction Accounts	625,704		625,681
Total Brokered Deposits	$	625,704		$	635,681

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

Table 19 reflects the classification of the average deposits and the average rate paid on each deposit category which is in excess of 10 percent of average total deposits, for the years ended December 31, 2021, 2020, and 2019.

Table 19: Average Deposit Balances and Rates

	Years Ended December 31,
	2021		2020		2019
	Average Amount		Average Rate Paid		Average Amount		Average Rate Paid		Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	3,924,341			—	%		$	2,998,560			—	%	$	2,489,254	—	%
Interest-bearing transaction accounts	7,846,618			0.20			6,978,839			0.50			6,042,974		1.25
Savings deposits	869,386			0.06			707,782			0.13			631,519		0.26
Time deposits:
$100,000 or more	728,845			1.00			1,346,063			1.70			1,513,510		2.07
Other time deposits	359,030			0.47			410,075			1.02			458,530		1.22
Total	$	13,728,220			0.18	%		$	12,441,319			0.51	%	$	11,135,787	1.02	%

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Table 20 presents our maturities of time deposits as of December 31, 2021.

Table 20: Maturities of Time Deposits

	As of December 31, 2021
	2021
	Insured		Uninsured		Total
	(Dollars in thousands)
Maturing
Three months or less	$	175,573			$	90,140		$	265,713
Over three months to six months	111,178			55,090			166,268
Over six months to 12 months	174,136			95,801			269,937
Over 12 months	108,691			70,278			178,969
Total	$	569,578			$	311,309		$	880,887

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 $28.0 million, or 16.6%, from $168.9 million as of December 31, 2020 to $140.9 million as of December 31, 2021.

FHLB and Other Borrowed Funds

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

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $371.1 million and $370.3 million as of December 31, 2021 and 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 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 net proceeds of the offering, after underwriting discounts and issuance costs, were approximately $297.0 million. The Notes are unsecured, subordinated debt obligations of the Company and will mature on April 15, 2027. 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. 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

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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 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 qualify as Tier 2 capital for regulatory purposes. The Company is currently considering paying off the Notes.

On January 18, 2022, the Company completed an underwritten public offering of $300 million in aggregate principal amount of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “2022 Notes”). The net proceeds of the offering, after underwriting discounts and issuance costs, were approximately $296.6 million. The 2022 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. From and including the date of issuance to, but excluding January 30, 2027 or the date of earlier redemption, the 2022 Notes will bear interest at an initial rate of 3.125% per annum, payable in arrears on January 30 and July 30 of each year. From and including January 30, 2027 to, but excluding the maturity date or earlier redemption, the 2022 Notes will bear interest at a floating rate equal to a benchmark rate (which is expected to be three-month term SOFR ), plus 182 basis points, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, commencing on April 30, 2027.

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

Stockholders’ Equity

Stockholders’ equity was $2.77 billion at December 31, 2021 compared to $2.61 billion at December 31, 2020. The increase in stockholders’ equity is primarily associated with the $319.0 million in net income, which was partially offset by the $33.7 million decrease in accumulated other comprehensive income, $92.1 million of shareholder dividends paid and the repurchase of $44.5 million of our common stock during 2021. The improvement in stockholders’ equity was 6.1% for the year ended December 31, 2021 compared to December 31, 2020. As of December 31, 2021 and 2020, our equity to asset ratio was 15.32% and 15.89%, respectively. Book value per common share was $16.90 at December 31, 2021 compared to $15.78 at December 31, 2020.

Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.56, $0.53 and $0.51 per share for the years ended December 31, 2021, 2020 and 2019, respectively. The common stock dividend payout ratio for the year ended December 31, 2021, 2020 and 2019 was 28.88%, 40.88% and 29.57% respectively.

Stock Repurchase Program. On January 22, 2021, the Board of Directors of the Company authorized the repurchase of up to an additional 20,000,000 shares of the Company’s common stock under the previously approved stock repurchase program, which brought the remaining balance of authorized shares to repurchase to 39,752,000 shares.

During 2021, the Company utilized a portion of this stock repurchase program in order to repurchase a total of 1,753,000 shares with a weighted-average stock price of $25.34 per share. The 2021 earnings were used to fund the repurchases during the year. Shares repurchased under the program as of December 31, 2021 total 17,661,335 shares. The remaining balance available for repurchase was 22,090,665 shares at December 31, 2021.

Liquidity and Capital Adequacy Requirements

Parent Company Liquidity. The primary sources for payment of our operating expenses, and dividends are current cash on hand ($291.6 million as of December 31, 2021), dividends received from our bank subsidiary and a $20.0 million unfunded line of credit with another financial institution.

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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 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 is required to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an 8% “total risk-based capital” ratio.

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

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”). The Notes are unsecured, subordinated debt obligations and mature on April 15, 2027. 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. The Company is currently considering paying off the Notes.

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

Table 21 presents our risk-based capital ratios as of December 31, 2021 and 2020.

Table 21: Risk-Based Capital

	December 31, 2021
	(Dollars in thousands)
Tier 1 capital
Stockholders’ equity	$	2,765,721		$	2,605,758
ASC 326 transitional period adjustment	55,143		57,333
Goodwill and core deposit intangibles, net	(997,605)		(1,003,288)
Unrealized (gain) loss on available-for-sale securities	(10,462)		(44,120)
Total common equity Tier 1 capital	1,812,797		1,615,683
Qualifying trust preferred securities	71,270		71,127
Total Tier 1 capital	1,884,067		1,686,810
Tier 2 capital
Allowance for credit losses	236,714		245,473
ASC 326 transitional period adjustment	(55,143)		(57,333)
Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets)	(33,514)		(36,911)
Qualifying allowance for credit losses	148,057		151,229
Qualifying subordinated notes	299,824		299,199
Total Tier 2 capital	447,881		450,428
Total risk-based capital	$	2,331,948		$	2,137,238
Average total assets for leverage ratio	$	16,960,683		$	15,547,111
Risk weighted assets	$	11,793,539		$	12,039,156
Ratios at end of period
Common equity Tier 1 capital	15.37	%	13.42	%
Leverage ratio	11.11		10.85
Tier 1 risk-based capital	15.98		14.01
Total risk-based capital	19.77		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

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

Table 22 presents actual capital amounts and ratios as of December 31, 2021 and 2020, for our bank subsidiary and us.

Table 22: Capital and Ratios

	Actual		Minimum Capital Requirement – Basel III		Minimum To Be Well-Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of December 31, 2021
Common equity Tier 1 capital ratios:
Home BancShares	$	1,812,797			15.37	%		$	825,548			7.00	%	N/A		N/A
Centennial Bank	1,859,093			15.82			822,608			7.00			763,850		6.50
Leverage ratios:
Home BancShares	$	1,884,067			11.11	%		$	678,427			4.00	%	N/A		N/A
Centennial Bank	1,859,093			10.97			677,883			4.00			847,353		5.00
Tier 1 capital ratios:
Home BancShares	$	1,884,067			15.98	%		$	1,002,451			8.50	%	N/A		N/A
Centennial Bank	1,859,093			15.82			998,881			8.50			940,123		8.00
Total risk-based capital ratios:
Home BancShares	$	2,331,948			19.77	%		$	1,238,322			10.50	%	N/A		N/A
Centennial Bank	2,006,814			17.08			1,233,697			10.50			1,174,950		10.00
As of December 31, 2020
Common equity Tier 1 capital ratios:
Home BancShares	$	1,615,683			13.42	%		$	842,741			7.00	%	N/A		N/A
Centennial Bank	1,804,392			15.04			839,810			7.00			779,824		6.50
Leverage ratios:
Home BancShares	$	1,686,810			10.85	%		$	621,884			4.00	%	N/A		N/A
Centennial Bank	1,804,392			11.61			621,668			4.00			777,085		5.00
Tier 1 capital ratios:
Home BancShares	$	1,686,810			14.01	%		$	1,023,328			8.50	%	N/A		N/A
Centennial Bank	1,804,392			15.04			1,019,769			8.50			959,783		8.00
Total risk-based capital ratios:
Home BancShares	$	2,137,238			17.75	%		$	1,264,111			10.50	%	N/A		N/A
Centennial Bank	1,955,299			16.30			1,259,548			10.50			1,199,570		10.00

Cash Commitments and Resources

In the normal course of business, we enter into a number of financial commitments. Examples of these commitments include but are not limited to operating lease obligations, FHLB advances & other borrowings, lines of credit, subordinated debentures, unfunded loan commitments and letters of credit.

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Commitments to extend credit and letters of credit are legally binding, conditional agreements generally having certain expiration or termination dates. These commitments generally require customers to maintain certain credit standards and are established based on management’s credit assessment of the customer. The commitments may expire without being drawn upon. Therefore, the total commitment does not necessarily represent future requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $110.8 million and $56.1 million at December 31, 2021 and 2020, respectively, with the majority of maturities ranging from currently due to four years.

Table 23 presents the anticipated funding requirements of our most significant financial commitments, excluding interest, as of December 31, 2021.

Table 23: Funding Requirements of Financial Commitments

	Payments Due by Period
	Less than One Year		One-Three Years		Three-Five Years		Greater than Five Years	Total
	(In thousands)
Operating lease obligations	$	7,714			$	12,575		$	10,899	$	24,999	$	56,187
FHLB advances & other borrowings by contractual maturity	—			—			—		400,000	400,000
Subordinated debentures	—			—			—		371,093	371,093
Loan commitments	1,309,701			1,094,256			226,984		419,382	3,050,323
Letters of credit	110,419			308			—		38	110,765

Non-GAAP Financial Measurements

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

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

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

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

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In Table 24 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Table 24: Earnings, As Adjusted

	2021			2019
	(In thousands, except per share data)
GAAP net income available to common shareholders (A)	$	319,021		$	214,448		$	289,539
Adjustments:
Fair value adjustment for marketable securities	(7,178)		1,978			—
FDIC Small Bank Assessment Credit	—		—			(2,291)
Gain on securities	(219)		—			—
Recoveries on historic losses	(5,107)		—			—
Branch write-off expense	—		981			—
Special dividend from equity investment	(12,500)		(10,185)			(2,995)
Merger expenses	1,886		711			—
Hurricane expenses	—		—			897
Outsourced special project expense	—		1,092			1,531
Total adjustments	(23,118)		(5,423)			(2,858)
Tax-effect of adjustments(1)	(6,225)		(1,417)			(738)
Adjustments after-tax	(16,893)		(4,006)			(2,120)
BOLI redemption tax	—		—			3,667
Total adjustments after tax (B)	(16,893)		(4,006)			1,547
Earnings, as adjusted (C)	$	302,128		$	210,442		$	291,086
Average diluted shares outstanding (D)	164,858		165,373			167,804
GAAP diluted earnings per share: A/D	$	1.94		$	1.30		$	1.73
Adjustments after-tax: B/D	(0.11)		(0.03)			—
Diluted earnings per common share excluding adjustments: C/D	$	1.83		$	1.27		$	1.73

_____________________

(1) Blended statutory tax rate of 25.740% for 2021, 26.135% for 2020 and 25.819% for 2019.

We had $998.1 million, $1.00 billion and $995.0 million total goodwill, core deposit intangibles and other intangible assets as of December 31, 2021, 2020 and 2019, 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 assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted are useful in evaluating our Company. These calculations, which are similar to the GAAP calculation of diluted earnings per common share, book value, return on average assets, return on average equity, and equity to assets, are presented in Tables 25 through 28, respectively.

Table 25: Tangible Book Value Per Share

	Years Ended December 31,
	2021		2020
	(In thousands, except per share data)
Book value per share: A/B	$	16.90			$	15.78
Tangible book value per share: (A-C-D)/B	10.80			9.70
(A) Total equity	$	2,765,721			$	2,605,758
(B) Shares outstanding	163,699			165,095
(C) Goodwill	973,025			973,025
(D) Core deposit and other intangibles	25,045			30,728

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Table 26: Return on Average Assets Excluding Intangible Amortization

	Years Ended December 31,
	2021		2020		2019
	(Dollars in thousands)
Return on average assets: A/D	1.83	%		1.33	%		1.93	%
Return on average assets excluding intangible amortization: (A+B)/(D-E)	1.96			1.45			2.10
Return on average assets excluding fair value adjustment for marketable securities, FDIC Small Bank Assessment Credit, gain on securities, recoveries on historic losses, branch write-off expense, special dividend from equity investment, merger expenses, hurricane expense, outsourced special project expense and BOLI redemption tax: (ROA, as adjusted) (A+C)/D	1.73			1.30			1.94
(A) Net income	$	319,021			$	214,448			$	289,539
(B) Intangible amortization after-tax	4,220			4,317			4,691
(C) Adjustments after-tax	(16,893)			(4,006)			1,547
(D) Average assets	17,458,985			16,137,294			15,028,500
(E) Average goodwill, core deposits and other intangible assets	1,000,872			1,004,157			998,090

Table 27: Return on Average Tangible Equity Excluding Intangible Amortization

	Years Ended December 31,
	2021		2020		2019
	(Dollars in thousands)
Return on average equity: A/D	11.89	%		8.57	%		12.01	%
Return on average common equity excluding fair value adjustment for marketable securities, FDIC Small Bank Assessment Credit, gain on securities, recoveries on historic losses, branch write-off expense, special dividend from equity investment, merger expenses, hurricane expense, outsourced special project expense and BOLI redemption tax: (ROE, as adjusted) (A+C)/D	11.26			8.41			12.07
Return on average tangible equity excluding intangible amortization: B/(D-E)	19.20			14.59			20.83
Return on average tangible common equity excluding fair value adjustment for marketable securities, FDIC Small Bank Assessment Credit, gain on securities, recoveries on historic losses, branch write-off expense, special dividend from equity investment, merger expenses, hurricane expense, outsourced special project expense and BOLI redemption tax: (ROTCE, as adjusted) (A+C)/(D-E)	17.95			14.04			20.60
(A) Net income	$	319,021			$	214,448			$	289,539
(B) Earnings excluding intangible amortization	323,241			218,765			294,230
(C) Adjustments after-tax	(16,893)			(4,006)			1,547
(D) Average equity	2,684,139			2,503,200			2,410,853
(E) Average goodwill, core deposits and other intangible assets	1,000,872			1,004,157			998,090

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Table 28: Tangible Equity to Tangible Assets

	Years Ended December 31,
	2021		2020
	(Dollars in thousands)
Equity to assets: B/A	15.32	%		15.89	%
Tangible equity to tangible assets: (B-C-D)/(A-C-D)	10.36			10.41
(A) Total assets	$	18,052,138			$	16,398,804
(B) Total equity	2,765,721			2,605,758
(C) Goodwill	973,025			973,025
(D) Core deposit and other intangibles	25,045			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 other gains and losses. In Table 29 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Table 29: Efficiency Ratio, As Adjusted

	Years Ended December 31,
	2021		2020		2019
	(Dollars in thousands)
Net interest income (A)	$	572,971			$	582,555			$	563,217
Non-interest income (B)	137,569			111,786			99,516
Non-interest expense (C)	298,517			287,385			275,787
FTE Adjustment (D)	7,079			6,015			5,255
Amortization of intangibles (E)	5,683			5,844			6,324
Adjustments:
Non-interest income:
Fair value adjustment for marketable securities	$	7,178			$	(1,978)			$	—
Special dividend from equity investment	12,500			10,185			2,995
Gain on OREO, net	2,003			1,132			757
(Loss) gain on branches, equipment and other assets, net	(105)			326			(3)
Gain (loss) on securities, net	219			—			(2)
Recoveries on historic losses	5,107			—			—
Total non-interest income adjustments (F)	$	26,902			$	9,665			$	3,747
Non-interest expense:
Branch write-off expense	$	—			$	981			$	—
FDIC Small Bank Assessment Credit	—			—			(2,291)
Merger expenses	1,886			711			—
Hurricane damage expense	—			—			897
Outsourced special project expense	—			1,092			1,531
Total non-core non-interest expense (G)	$	1,886			$	2,784			$	137
Efficiency ratio (reported): ((C-E)/(A+B+D))	40.81	%		40.20	%		40.34	%
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F))	42.12			40.36			40.55

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Table 30 presents selected unaudited quarterly financial information for 2021 and 2020.

Table 30: Quarterly Results

	2021 Quarters
	First		Second		Third		Fourth	Total
	(In thousands, except per share data)
Income statement data:
Total interest income	$	162,651			$	154,481		$	157,060	$	150,979	$	625,171
Total interest expense	14,563			13,229			12,449		11,959	$	52,200
Net interest income	148,088			141,252			144,611		139,020	572,971
Provision for credit losses	—			(4,752)			—		—	(4,752)
Net interest income after provision for credit losses	148,088			146,004			144,611		139,020	577,723
Total non-interest income	45,276			31,120			29,209		31,964	137,569
Total non-interest expense	72,866			72,982			75,619		77,050	298,517
Income before income taxes	120,498			104,142			98,201		93,934	416,775
Income tax expense	28,896			25,072			23,209		20,577	97,754
Net income	$	91,602			$	79,070		$	74,992	$	73,357	$	319,021
Per share data:
Basic earnings per common share	$	0.55			$	0.48		$	0.46	$	0.45	$	1.94
Diluted earnings per common share	0.55			0.48			0.46		0.45	1.94

	2020 Quarters
	First		Second		Third		Fourth	Total
	(In thousands, except per share data)
Income statement data:
Total interest income	$	172,175			$	171,598		$	166,633	$	165,556	$	675,962
Total interest expense	32,450			22,931			20,495		17,531	93,407
Net interest income	139,725			148,667			146,138		148,025	582,555
Provision for credit losses	94,598			20,655			14,000		—	129,253
Net interest income after provision for credit losses	45,127			128,012			132,138		148,025	453,302
Total non-interest income	22,927			25,023			29,951		33,885	111,786
Total non-interest expense	70,474			70,958			71,712		74,241	287,385
Income before income taxes	(2,420)			82,077			90,377		107,669	277,703
Income tax expense	(2,927)			19,250			21,057		25,875	63,255
Net income	$	507			$	62,827		$	69,320	$	81,794	$	214,448
Per share data:
Basic earnings per common share	$	—			$	0.38		$	0.42	$	0.50	$	1.30
Diluted earnings per common share	—			0.38			0.42		0.50	1.30

In 2021, the Company reclassified unfunded commitment expense from other operating expenses within non-interest expense to the provision for credit losses - unfunded commitments within total credit loss expense. This reclassification was made in response to financial institutions eliminating the diversity in practice as to where unfunded commitments expense was to be classified in the statement of income.

Recent Accounting Pronouncements

See Note 24 to the Notes to Consolidated Financial Statements for a discussion of certain recent accounting pronouncements.

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