Table of Contents
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM
10-Q

(Mark One)

☑☒

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

For the Quarterly Period Ended September
June 30, 2018

2019

or

☐

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

For the Transition period from
to

Commission File Number:
000-51904

HOME BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Arkansas

 71-0682831

Arkansas
71-0682831
(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

719 Harkrider, Suite 100
,
Conway, Arkansas

 
72032
(Address of principal executive offices)
 
(Zip Code)

(501)
339-2929

(Registrant’s telephone number, including area code)

Not Applicable

Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to
Section 12(b)
of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange
on which registered
Common Stock
, par value $0.01 per share
HOMB
NASDAQ
Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☑
☒
    No  
☐

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

Yes  ☑
☒
    No  
☐

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

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

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

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

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

Common Stock Issued and Outstanding: 172,932,360 
167,467,975
shares as of NovemberAugust 2, 2018.

2019.

Table of Contents
HOME BANCSHARES, INC.

FORM10-Q

September

June 30, 2018

2019

INDEX

Page No.
    Page No.
Part I:
Financial Information
Item 1:
Financial Statements
 
Part I:

Financial Information

Item 1:

Financial Statements

Consolidated Balance Sheets – SeptemberJune 30, 20182019 (Unaudited) and December 31, 20172018

  4 
 

Consolidated Statements of Income (Unaudited) – Three and ninesix months ended SeptemberJune 30, 20182019 and 20172018

  5 
 

Consolidated Statements of Comprehensive Income (Unaudited) – Three and ninesix months ended SeptemberJune 30, 20182019 and 20172018

  6 
 

Consolidated Statements of Stockholders’ Equity (Unaudited) – NineThree and six months ended SeptemberJune 30, 20182019 and 20172018

  66-7
 

Consolidated Statements of Cash Flows (Unaudited) – NineSix months ended SeptemberJune 30, 20182019 and 20172018

  78
 

Condensed Notes to Consolidated Financial Statements (Unaudited)

  8-529-46
 

Report of Independent Registered Public Accounting Firm

  5347 
Item 2: 

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

  54-9148-84 
Item 3: 

Item 3:
Quantitative and Qualitative Disclosures About Market Risk

  91-9484-87 
Item 4:

Controls and Procedures

  94
Part II:

Other Information

Item 1:

Legal Proceedings

  94 
Item 1A:4: 

Risk FactorsControls and Procedures

  9587 
Item 2: 

Part II:
Other Information
Item 1:
Legal Proceedings
88
Item 1A:
Risk Factors
88
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds

  9588 
Item 3: 

Item 3:
Defaults Upon Senior Securities

  9588 
Item 4:

Mine Safety Disclosures

  95
Item 5:

Other Information

  95 
Item 6:4: 

ExhibitsMine Safety Disclosures

  95-9788 
Item 5:
Other Information
88
Item 6:
Exhibits
89-90
Signatures
   9891 

Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

diversion of management time on acquisition-related issues;

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

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

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

legislation and regulation affecting the financial services industry as a whole, and the Company and its subsidiaries in particular, including the effects resulting from the reforms enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the adoption of regulations by regulatory bodies under, recent reforms to the Dodd-Frank Act;

Act and other future legislative and regulatory changes;

governmental monetary and fiscal policies, as well as legislative and regulatory changes, including as a result of initiatives of the administration of President Donald J. Trump;

policies;

the effects of terrorism and efforts to combat it;

political instability;

risks associated with our customer relationship with the Cuban government and our correspondent banking relationship with Banco Internacional de Comercio, S.A. (BICSA), a Cuban commercial bank, through our recently completed acquisitionbank;
adverse weather events, including hurricanes, and other natural disasters;
Table of Stonegate Bank;

Contents

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

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

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

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

higher defaults on our loan portfolio than we expect; and

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

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, see the “Risk Factors” sections of our Form
10-K
filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2018.

26, 2019.

Table of Contents
PART I: FINANCIAL INFORMATION

Item 1:    Financial Statements

Item 1:Financial Statements
Home BancShares, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

  September 30,
2018		  December 31,
2017		 
   (Unaudited)    
Assets ��     

Cash and due from banks

  $208,681  $166,915 

Interest-bearing deposits with other banks

   323,376   469,018 
  

 

 

  

 

 

 

Cash and cash equivalents

   532,057   635,933 

Federal funds sold

   500   24,109 

Investment securities –available-for-sale

   1,744,430   1,663,517 

Investment securities –held-to-maturity

   199,266   224,756 

Loans receivable

   10,832,815   10,331,188 

Allowance for loan losses

   (110,191)   (110,266) 
  

 

 

  

 

 

 

Loans receivable, net

   10,722,624   10,220,922 

Bank premises and equipment, net

   233,652   237,439 

Foreclosed assets held for sale

   13,507   18,867 

Cash value of life insurance

   148,014   146,866 

Accrued interest receivable

   48,909   45,708 

Deferred tax asset, net

   79,548   76,564 

Goodwill

   958,408   927,949 

Core deposit and other intangibles

   44,484   49,351 

Other assets

   187,339   177,779 
  

 

 

  

 

 

 

Total assets

  $14,912,738  $14,449,760 
  

 

 

  

 

 

 
Liabilities and Stockholders’ Equity       

Deposits:

   

Demand andnon-interest-bearing

  $2,482,857  $2,385,252 

Savings and interest-bearing transaction accounts

   6,420,951   6,476,819 

Time deposits

   1,720,930   1,526,431 
  

 

 

  

 

 

 

Total deposits

   10,624,738   10,388,502 

Securities sold under agreements to repurchase

   142,146   147,789 

FHLB and other borrowed funds

   1,363,851   1,299,188 

Accrued interest payable and other liabilities

   72,381   41,959 

Subordinated debentures

   368,596   368,031 
  

 

 

  

 

 

 

Total liabilities

   12,571,712   12,245,469 
  

 

 

  

 

 

 

Stockholders’ equity:

   

Common stock, par value $0.01; shares authorized 200,000,000 in 2018 and 2017; shares issued and outstanding 174,134,811 in 2018 and 173,632,983 in 2017

   1,741   1,736 

Capital surplus

   1,668,106   1,675,318 

Retained earnings

   701,900   530,658 

Accumulated other comprehensive loss

   (30,721)   (3,421) 
  

 

 

  

 

 

 

Total stockholders’ equity

   2,341,026   2,204,291 
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $14,912,738  $14,449,760 
  

 

 

  

 

 

 

         
(In thousands, except share data)
 
June 30, 2019
  
December 31, 2018
 
 
(Unaudited)
   
Assets
    
Cash and due from banks
 $
183,745
  $
175,024
 
Interest-bearing deposits with other banks
  
373,557
   
482,915
 
         
Cash and cash equivalents
  
557,302
   
657,939
 
Federal funds sold
  
1,075
   
325
 
Investment securities –
available-for-sale
  
2,053,939
   
1,785,862
 
Investment securities –
held-to-maturity
  
—  
   
192,776
 
Loans receivable
  
11,053,129
   
11,071,879
 
Allowance for loan losses
  
(106,066
)  
(108,791
)
         
Loans receivable, net
  
10,947,063
   
10,963,088
 
Bank premises and equipment, net
  
278,821
   
233,261
 
Foreclosed assets held for sale
  
13,734
   
13,236
 
Cash value of life insurance
  
149,708
   
148,621
 
Accrued interest receivable
  
48,992
   
48,945
 
Deferred tax asset, net
  
58,517
   
73,275
 
Goodwill
  
958,408
   
958,408
 
Core deposit and other intangibles
  
39,723
   
42,896
 
Other assets
  
180,293
   
183,806
 
         
Total assets
 $
15,287,575
  $
15,302,438
 
         
Liabilities and Stockholders’ Equity
    
Deposits:
      
Demand and
non-interest-bearing
 $
2,575,696
  $
2,401,232
 
Savings and interest-bearing transaction accounts
  
6,774,162
   
6,624,407
 
Time deposits
  
1,997,458
   
1,874,139
 
         
Total deposits
  
11,347,316
   
10,899,778
 
Securities sold under agreements to repurchase
  
142,541
   
143,679
 
FHLB and other borrowed funds
  
899,447
   
1,472,393
 
Accrued interest payable and other liabilities
  
107,695
   
67,912
 
Subordinated debentures
  
369,170
   
368,790
 
         
Total liabilities
  
12,866,169
   
12,952,552
 
         
Stockholders’ equity:
      
Common stock, par value $0.01; shares authorized 300,000,000 in 2019 and 200,000,000 in 2018; shares issued and outstanding 167,465,975 in 2019 and 170,720,072 in 2018
  
1,675
   
1,707
 
Capital surplus
  
1,550,999
   
1,609,810
 
Retained earnings
  
853,964
   
752,184
 
Accumulated other comprehensive income (loss)
  
14,768
   
(13,815
)
         
Total stockholders’ equity
  
2,421,406
   
2,349,886
 
         
Total liabilities and stockholders’ equity
 $
15,287,575
  $
15,302,438
 
         
See Condensed Notes to Consolidated Financial Statements.

4
Table of Contents
Home BancShares, Inc.

Consolidated Statements of Income

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 

(In thousands, except per share data)

  2018  2017  2018  2017 
   (Unaudited) 

Interest income:

     

Loans

  $166,334  $113,269  $467,395  $331,763 

Investment securities

     

Taxable

   9,011   7,071   26,960   18,983 

Tax-exempt

   3,427   3,032   9,801   8,942 

Deposits – other banks

   1,273   538   3,408   1,573 

Federal funds sold

   6   3   24   9 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest income

   180,051   123,913   507,588   361,270 
  

 

 

  

 

 

  

 

 

  

 

 

 

Interest expense:

     

Interest on deposits

   21,412   8,535   54,382   20,831 

Federal funds purchased

   —     —     1   —   

FHLB and other borrowed funds

   7,055   3,408   15,880   10,707 

Securities sold under agreements to repurchase

   472   232   1,220   593 

Subordinated debentures

   5,202   4,969   15,374   10,203 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest expense

   34,141   17,144   86,857   42,334 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

   145,910   106,769   420,731   318,936 

Provision for loan losses

   —   35,023   4,322   39,324 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income after provision for loan losses

   145,910   71,746   416,409   279,612 
  

 

 

  

 

 

  

 

 

  

 

 

 

Non-interest income:

     

Service charges on deposit accounts

   6,992   6,408   19,847   18,356 

Other service charges and fees

   9,041   8,490   28,993   25,983 

Trust fees

   437   365   1,262   1,130 

Mortgage lending income

   3,691   3,172   9,825   9,713 

Insurance commissions

   463   472   1,668   1,482 

Increase in cash value of life insurance

   735   478   2,119   1,251 

Dividends from FHLB, FRB, FNBB & other

   1,288   834   3,765   2,455 

Gain on acquisitions

   —     —     —     3,807 

Gain on sale of SBA loans

   47   163   491   738 

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

   (102)   (1,337)   (95)   (962) 

Gain (loss) on OREO, net

   836   335   2,287   849 

Gain (loss) on securities, net

   —     136   —     939 

Other income

   2,419   1,941   9,163   6,603 
  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-interest income

   25,847   21,457   79,325   72,344 
  

 

 

  

 

 

  

 

 

  

 

 

 

Non-interest expense:

     

Salaries and employee benefits

   37,825   28,510   107,315   83,965 

Occupancy and equipment

   8,148   7,887   25,650   21,602 

Data processing expense

   3,461   2,853   10,786   8,439 

Other operating expenses

   16,689   31,596   48,980   62,984 
  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-interest expense

   66,123   70,846   192,731   176,990 
  

 

 

  

 

 

  

 

 

  

 

 

 

Income before income taxes

   105,634   22,357   303,003   174,966 

Income tax expense

   25,350   7,536   73,630   63,192 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $80,284  $14,821  $229,373  $111,774 
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic earnings per share

  $0.46  $0.10  $1.32  $0.78 
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted earnings per share

  $0.46  $0.10  $1.32  $0.78 
  

 

 

  

 

 

  

 

 

  

 

 

 

                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(In thousands, except per share data)
 
2019
  
2018
  
2019
  
2018
 
 
(Unaudited)
 
Interest income:
            
Loans
 $
165,816
  $
152,996
  $
329,664
  $
301,061
 
Investment securities
            
Taxable
  
10,650
   
8,979
   
21,356
   
17,949
 
Tax-exempt
  
3,183
   
3,368
   
6,562
   
6,374
 
Deposits – other banks
  
1,628
   
1,206
   
3,171
   
2,135
 
Federal funds sold
  
10
   
12
   
21
   
18
 
                 
Total interest income
  
181,287
   
166,561
   
360,774
   
327,537
 
                 
Interest expense:
            
Interest on deposits
  
29,709
   
18,164
   
57,715
   
32,970
 
Federal funds purchased
  
—  
   
—  
   
—  
   
1
 
FHLB and other borrowed funds
  
4,722
   
4,245
   
10,840
   
8,825
 
Securities sold under agreements to repurchase
  
630
   
372
   
1,264
   
748
 
Subordinated debentures
  
5,239
   
5,168
   
10,498
   
10,172
 
                 
Total interest expense
  
40,300
   
27,949
   
80,317
   
52,716
 
                 
Net interest income
  
140,987
   
138,612
   
280,457
   
274,821
 
Provision for loan losses
  
1,325
   
2,722
   
1,325
   
4,322
 
                 
Net interest income after provision for loan losses
  
139,662
   
135,890
   
279,132
   
270,499
 
                 
Non-interest
income:
            
Service charges on deposit accounts
  
6,259
   
6,780
   
12,660
   
12,855
 
Other service charges and fees
  
8,177
   
9,797
   
14,740
   
19,952
 
Trust fees
  
391
   
379
   
794
   
825
 
Mortgage lending income
  
3,457
   
3,477
   
5,892
   
6,134
 
Insurance commissions
  
515
   
526
   
1,124
   
1,205
 
Increase in cash value of life insurance
  
740
   
730
   
1,476
   
1,384
 
Dividends from FHLB, FRB, FNBB & other
  
1,149
   
1,600
   
4,654
   
2,477
 
Gain on sale of SBA loans
  
355
   
262
   
596
   
444
 
(Loss) gain on sale of branches, equipment and other assets, net
  
(129
)  
—  
   
(50
)  
7
 
Gain on OREO, net
  
58
   
1,046
   
264
   
1,451
 
Other income
  
2,094
   
3,076
   
4,588
   
6,744
 
                 
Total
non-interest
income
  
23,066
   
27,673
   
46,738
   
53,478
 
                 
Non-interest
expense:
            
Salaries and employee benefits
  
37,976
   
34,476
   
75,812
   
69,490
 
Occupancy and equipment
  
8,853
   
8,519
   
17,676
   
17,502
 
Data processing expense
  
3,838
   
3,339
   
7,808
   
7,325
 
Other operating expenses
  
16,957
   
16,894
   
35,385
   
32,291
 
                 
Total
non-interest
expense
  
67,624
   
63,228
   
136,681
   
126,608
 
                 
Income before income taxes
  
95,104
   
100,335
   
189,189
   
197,369
 
Income tax expense
  
22,940
   
24,310
   
45,675
   
48,280
 
                 
Net income
 $
72,164
  $
76,025
  $
143,514
  $
149,089
 
                 
Basic earnings per share
 $
0.43
  $
0.44
  $
0.85
  $
0.86
 
                 
Diluted earnings per share
 $
0.43
  $
0.44
  $
0.85
  $
0.86
 
                 
See Condensed Notes to Consolidated Financial Statements.

5
Table of Contents
Home BancShares, Inc.

Consolidated Statements of Comprehensive Income

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 

(In thousands)

  2018  2017  2018  2017 
   (Unaudited) 

Net income

  $80,284  $14,821  $229,373  $111,774 

Net unrealized gain (loss) onavailable-for-sale securities

   (6,979)   (4,065)   (35,957)   6,681 

Less: reclassification adjustment for realized (gains) losses included in income

   —     (136)   —     (939) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive (loss) income, before tax effect

   (6,979)   (4,201)   (35,957)   5,742 

Tax effect on other comprehensive income

   2,867   1,648   9,647   (2,253) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss)

   (4,112)   (2,553)   (26,310)   3,489 
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income

  $76,172  $12,268  $203,063  $115,263 
  

 

 

  

 

 

  

 

 

  

 

 

 
              

                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(In thousands)
 
2019
  
2018
  
2019
  
2018
 
 
(Unaudited)
 
Net income
 $
72,164
  $
76,025
  $
143,514
  $
149,089
 
Net unrealized gain (loss) on
available-for-sale
securities
  
26,520
   
(4,345
)  
39,317
   
(25,978
)
                 
Other comprehensive income 
(loss)
, before tax effect
  
26,520
   
(4,345
)  
39,317
   
(25,978
)
Tax effect on other comprehensive 
(loss)
income
  
(6,931
)  
1,018
   
(10,275
)  
6,780
 
                 
Other comprehensive income (loss)
  
19,589
   
(3,327
)  
29,042
   
(19,198
)
                 
Comprehensive income
 $
91,753
  $
72,698
  $
172,556
  $
129,891
 
                 
Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Nine

Three and Six Months Ended SeptemberJune 30, 20182019 and 2017

(In thousands, except share data)

  Common
Stock		  Capital
Surplus		  Retained
Earnings		  Accumulated
Other
Comprehensive
Income (Loss)		  Total 

Balances at January 1, 2017

   1,405   869,737   455,948   400   1,327,490 

Comprehensive income:

      

Net income

   —     —     111,774   —     111,774 

Other comprehensive income (loss)

   —     —     —     3,489   3,489 

Net issuance of 160,237 shares of common stock from exercise of stock options

   2   847   —     —     849 

Issuance of 2,738,038 shares of common stock from acquisition of GHI, net of issuance costs of approximately $195

   27   77,290   —     —     77,317 

Issuance of 30,863,658 shares of common stock from acquisition of Stonegate, net of issuance costs of approximately $630

   309   741,324     741,633 

Repurchase of 800,000 shares of common stock

   (8)   (19,530)     (19,538) 

Share-based compensation net issuance of 231,766 shares of restricted common stock

   2   4,974   —     —     4,976 

Cash dividends – Common Stock, $0.29 per share

   —     —     (41,274)   —     (41,274) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances at September 30, 2017 (unaudited)

  $1,737  $1,674,642  $526,448  $3,889  $2,206,716 

Comprehensive income:

      

Net income

   —     —     23,309   —     23,309 

Other comprehensive income (loss)

   —     —     —     (7,310)   (7,310) 

Net issuance of 24,879 shares of common stock from exercise of stock options

   —     233   —     —     233 

Repurchase of 57,800 shares of common stock

   (1)   (1,286)   —     —     (1,287) 

Share-based compensation

   —     1,729   —     —     1,729 

Cash dividends – Common Stock, $0.11 per share

   —     —     (19,099)   —     (19,099) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances at December 31, 2017

  $1,736  $1,675,318  $530,658  $(3,421)  $2,204,291 

Comprehensive income:

      

Net Income

   —     —     229,373   —     229,373 

Other comprehensive income (loss)

   —     —     —     (26,310)   (26,310) 

Net issuance of 176,821 shares of common stock from exercise of stock options

   2   1,255   —     —     1,257 

Issuance of 1,250,000 shares of common stock from acquisition of Shore Premier Finance

   13   28,188   —     —     28,201 

Impact of adoption of new accounting standards(1)

   —     —     990   (990)   —   

Repurchase of 1,863,400 shares of common stock

   (19)   (43,151)   —     —     (43,170) 

Share-based compensation net issuance of 956,125 shares of restricted common stock

   9   6,496   —     —     6,505 

Cash dividends – Common Stock, $0.34 per share

   —     —     (59,121)   —     (59,121) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances at September 30, 2018 (unaudited)

  $1,741  $1,668,106  $701,900  $(30,721)  $2,341,026 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

2018
For the three and six months ended June 30, 2019
(In thousands, except share data)
 
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
 
Balances at January 1, 2019
 $
1,707
  $
1,609,810
  $
752,184
  $
(13,815
) $
2,349,886
 
Comprehensive income:
               
Net income
  
—
   
—
   
71,350
   
—
   
71,350
 
Other comprehensive income
  
—
   
—
   
—
   
9,453
   
9,453
 
Impact of adoption of new accounting standards
(1)
  
—
   
—
   
459
   
(459
)  
—
 
Repurchase of 2,716,359 shares of common stock
  
(27
)  
(51,658
)  
—
   
—
   
(51,685
)
Share-based compensation net issuance of 169,125 shares of restricted common stock
  
2
   
2,842
   
—
   
—
   
2,844
 
Cash dividends – Common Stock, $0.12 per share
  
—
   
—
   
(20,364
)  
—
   
(20,364
)
 ��                   
Balances at March 31, 2019 (unaudited)
 $
1,682
  $
1,560,994
  $
803,629
  $
(4,821
) $
2,361,484
 
Comprehensive income:
               
Net Income
  
—
   
—
   
72,164
   
—
   
72,164
 
Other comprehensive income
  
—
   
—
   
—
   
19,589
   
19,589
 
Repurchase of 700,363 shares of common stock  
(7
)  
(12,680
)  
—
   
—
   
(12,687
)
Share-based compensation net forfeiture of 6,500 shares of restricted stock  
—
   
2,685
   
—
   
—
   
2,685
 
Cash dividends – Common Stock, $0.13 per share
  
—
   
—
   
(21,829
)  
—
   
(21,829
)
                     
Balances at June 30, 2019 (unaudited)
 $
1,675
  $
1,550,999
  $
853,964
  $
14,768
  $
2,421,406
 
                     
(1)

Represents the impact of adopting Accounting Standard Update (“ASU”)2016-01.

2018-02.
See Note 1 to the consolidated financial statements for more information.

See Condensed Notes to Consolidated Financial Statements.

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Table of Contents
Home BancShares, Inc.

Consolidated Statements of Cash Flows

   Nine Months Ended
September 30,		 

(In thousands)

  2018  2017 
   (Unaudited) 

Operating Activities

   

Net income

  $229,373  $111,774 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

   

Depreciation

   9,156   8,634 

Investment amortization

   16,033   12,087 

Accretion of purchased loans

   (32,021)   (23,319) 

Share-based compensation

   6,505   4,976 

Gain on assets

   (3,436)   (1,720) 

Gain on acquisitions

   —     (3,807) 

Provision for loan losses

   4,322   39,324 

Deferred income tax effect

   14,593   (15,867) 

Increase in cash value of life insurance

   (2,119)   (1,251) 

Originations of mortgage loans held for sale

   (258,520)   (243,948) 

Proceeds from sales of mortgage loans held for sale

   262,900   250,784 

Changes in assets and liabilities:

   

Accrued interest receivable

   (2,377)   (1,814) 

Other assets

   (17,485)   (22,642) 

Accrued interest payable and other liabilities

   28,547   (35,436) 
  

 

 

  

 

 

 

Net cash provided by operating activities

   255,471   77,775 
  

 

 

  

 

 

 

Investing Activities

   

Net decrease (increase) in federal funds sold

   23,609   (1,480) 

Net increase in loans, excluding purchased loans

   (119,723)   (92,015) 

Purchases of investment securities –available-for-sale

   (380,847)   (522,329) 

Proceeds from maturities of investment securities –available-for-sale

   252,795   120,785 

Proceeds from sale of investment securities –available-for-sale

   1,064   28,368 

Purchases of investment securities –held-to-maturity

   —     (219) 

Proceeds from maturities of investment securities –held-to-maturity

   25,007   48,144 

Proceeds from sale of investment securities –held-to-maturity

   —     491 

Proceeds from foreclosed assets held for sale

   17,744   13,315 

Proceeds from sale of SBA Loans

   7,938   13,630 

Purchases of premises and equipment, net

   (5,070)   (4,383) 

Return of investment on cash value of life insurance

   1,325   592 

Net cash (paid) proceeds received – market acquisitions

   (377,411)   227,845 
  

 

 

  

 

 

 

Net cash used in investing activities

   (553,569)   (167,256) 
  

 

 

  

 

 

 

Financing Activities

   

Net increase in deposits, excluding deposits acquired

   236,236   536,891 

Net (decrease) increase in securities sold under agreements to repurchase

   (5,643)   2,078 

Net increase (decrease) in FHLB and other borrowed funds

   64,663   (350,230) 

Proceeds from exercise of stock options

   1,257   849 

Proceeds from issuance of subordinated notes

   —     297,201 

Repurchase of common stock

   (43,170)   (19,538) 

Common stock issuance costs – market acquisitions

   —     (825) 

Dividends paid on common stock

   (59,121)   (41,274) 
  

 

 

  

 

 

 

Net cash provided by used in financing activities

   194,222   425,152 
  

 

 

  

 

 

 

Net change in cash and cash equivalents

   (103,876)   335,671 

Cash and cash equivalents – beginning of year

   635,933   216,649 
  

 

 

  

 

 

 

Cash and cash equivalents – end of period

  $532,057  $552,320 
  

 

 

  

 

 

 

Stockholders’ Equity

Three and Six Months Ended June 30, 2019 and 2018
For the three and six months ended June 30, 2018
                     
(In thousands, except share data)
 
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
 
Balances at January 1, 2018
 $
1,736
  $
1,675,318
  $
530,658
  $
(3,421
) $
2,204,291
 
Comprehensive income:
               
Net income
  
—  
   
—  
   
73,064
   
—  
   
73,064
 
Other comprehensive loss
  
—  
   
—  
   
—  
   
(15,871
)  
(15,871
)
Net issuance of 142,116 shares of common stock from exercise of stock options
  
1
   
899
   
—  
   
—  
   
900
 
Impact of adoption of new accounting standards
(2)
  
—  
   
—  
   
990
   
(990
)  
—  
 
Repurchase of 303,637 shares of common stock
  
(3
)  
(7,111
)  
—  
   
—  
   
(7,114
)
Share-based compensation net issuance of 147,000 shares of restricted common stock
  
2
   
2,035
   
—  
   
—  
   
2,037
 
Cash dividends – Common Stock, $0.11 per share
  
—  
   
—  
   
(19,126
)  
—  
   
(19,126
)
                     
Balances at March 31, 2018 (unaudited)
 $
1,736
  $
1,671,141
  $
585,586
  $
(20,282
) $
2,238,181
 
Comprehensive income:
               
Net income
  
—  
   
—  
   
76,025
   
—  
   
76,025
 
Other comprehensive loss
  
—  
   
—  
   
—  
   
(3,327
)  
(3,327
)
Issuance of common stock -
3,424
stock options
  
—  
   
38
   
—  
   
—  
   
38
 
Issuance 1,250,000 shares of common stock from acquisition of Shore Premier Finance
  
13
   
28,188
   
—  
   
—  
   
28,201
 
Repurchase of 345,683 shares of common stock
  
(3
)  
(7,878
)  
—  
   
—  
   
(7,881
)
Share-based compensation
  
(1
)  
1,848
         
1,847
 
Cash dividends – Common Stock, $0.11 per share
  
—  
   
—  
   
(19,071
)  
—  
   
(19,071
)
                     
Balances at June 30, 2018 (unaudited)
 $
1,745
  $
1,693,337
  $
642,540
  $
(23,609
) $
2,314,013
 
                     
(2)Represents the impact of adopting Accounting Standard Update (“ASU”)
2016-01.
See Condensed Notes to Consolidated Financial Statements.

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Table of Contents
Home BancShares, Inc.

Consolidated Statements of Cash Flows
         
 
Six Months Ended
June 30,
 
(In thousands)
 
2019
  
2018
 
 
(Unaudited)
 
Operating Activities
      
Net income
 $
143,514
  $
149,089
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
      
Depreciation & amortization
  
9,847
   
9,863
 
Amortization of securities, net
  
7,165
   
6,781
 
Accretion of purchased loans
  
(18,295
)  
(21,276
)
Share-based compensation
  
5,529
   
3,884
 
Gain on assets
  
(423
)  
(2,268
)
Provision for loan losses
  
1,325
   
4,322
 
Deferred income tax effect
  
14,760
   
13,200
 
Increase in cash value of life insurance
  
(1,476
)  
(1,384
)
Originations of mortgage loans held for sale
  
(194,982
)  
(171,616
)
Proceeds from sales of mortgage loans held for sale
  
175,418
   
176,029
 
Changes in assets and liabilities:
      
Accrued interest receivable
  
(47
)  
850
 
Other assets
  
(15,931
)  
(21,692
)
Accrued interest payable and other liabilities
  
(6,839
)  
14,012
 
         
Net cash provided by operating activities
  
119,565
   
159,794
 
         
Investing Activities
      
Net (increase) decrease in federal funds sold
  
(750
)  
23,609
 
Net decrease (increase) in loans, excluding purchased loans
  
38,130
   
(183,630
)
Purchases of investment securities –
available-for-sale
  
(258,735
)  
(254,851
)
Proceeds from maturities of investment securities –
available-for-sale
  
215,586
   
166,403
 
Proceeds from sale of investment securities –
available-for-sale
  
—
   
809
 
Proceeds from maturities of investment securities –
held-to-maturity
  
—
   
20,048
 
Redemptions (purchases) of other investments  9,174   (731)
Proceeds from foreclosed assets held for sale
  
5,530
   
10,384
 
Proceeds from sale of SBA loans
  
9,261
   
7,055
 
Purchases of premises and equipment, net
  
(5,287
)  
(3,422
)
Return of investment on cash value of life insurance
  
—
   
1,325
 
Net cash paid – market acquisitions
  
—
   
(384,983
)
         
Net cash provided by (used in) investing activities
  
12,909
   
(597,984
)
         
Financing Activities
      
Net increase in deposits
  
447,538
   
347,531
 
Net decrease in securities sold under agreements to repurchase
  
(1,138
)  
(8,039
)
Net (decrease) increase in FHLB and other borrowed funds
  
(572,946
)  
10,762
 
Proceeds from exercise of stock options
  
—
   
938
 
Repurchase of common stock
  
(64,372
)  
(14,995
)
Dividends paid on common stock
  
(42,193
)  
(38,197
)
         
Net cash (used in) provided by financing activities
  
(233,111
)  
298,000
 
         
Net change in cash and cash equivalents
  
(100,637
)  
(140,190
)
Cash and cash equivalents – beginning of year
  
657,939
   
635,933
 
         
Cash and cash equivalents – end of period
 $
557,302
  $
495,743
 
         
See Condensed Notes to Consolidated Financial Statements.
8
Table of Contents
Home BancShares, Inc.
Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

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

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

Operating Segments

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

Use of Estimates

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

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

Principles of Consolidation

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

Reclassifications

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

Interim financial information

The accompanying unaudited consolidated financial statements as of SeptemberJune 30, 20182019 and 20172018 have been prepared in condensed format, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

9
Table of Contents
The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 20172018 Form
10-K,
filed with the Securities and Exchange Commission.

Revenue Recognition.

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

Pronouncements

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. The Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310.

•

Mortgage lending income – This represents fee income on secondary market lending which is accounted for under ASC Topic 310 and transfer of loans based on a “bid” agreement with the investor which is accounted for under ASC Topic 860,Transfers and Servicing.

Earnings per Share

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

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2018   2017   2018   2017 
   (In thousands) 

Net income

  $80,284   $14,821   $229,373   $111,774 

Average shares outstanding

   174,440    144,238    173,870    143,111 

Effect of common stock options

   427    749    524    728 
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

   174,867    144,987    174,394    143,839 
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

  $0.46   $0.10   $1.32   $0.78 

Diluted earnings per share

  $0.46   $0.10   $1.32   $0.78 

2. Business Combinations

Acquisition of Shore Premier Finance

On June 30, 2018, the Company, completed the acquisition of Shore Premier Finance (“SPF”), a division of Union Bank & Trust of Richmond, Virginia, the bank subsidiary of Union Bankshares Corporation. The Company paid a purchase price of approximately $377.4 million in cash, subject to certain post-closing adjustments, adopted ASU

2016-02,
Leases (Topic 842)
, ASU
2018-11,
Leases (Topic 842) Targeted Improvements
and 1,250,000 shares of HBI common stock valued at approximately $28.2 million. SPF provides direct consumer financingASU
2018-20
Narrow Scope Improvements for United States Coast Guard (“USCG”) registeredhigh-end sail and power boats. Additionally, SPF provides inventory floor plan lines of credit to marine dealers, primarily those selling USCG documented vessels.

Including the effects of known purchase accounting adjustments, as of acquisition date, SPF had approximately $377.0 million in total assets, including $376.2 million in total loans and $1.9 million in assumed liabilities, which resulted in tentative goodwill of $30.5 million being recorded. The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. The Company will continue to review the estimated fair values of loans and intangible assets and to evaluate the assumed tax positions and contingencies.

This portfolio of loans is now housed in a division of Centennial known as Shore Premier Finance. The SPF division of Centennial is responsible for servicing the acquired loan portfolio and originating new loan production.Lessors

effective January 1, 2019. In connection with this acquisition and the creation of the SPF division of Centennial, Centennial has opened a new loan production office in Chesapeake, Virginia. Through this loan production office, the SPF division of Centennial will continue its vision to build out a lending platform focusing on commercial and consumer marine loans.

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

Acquisition of Stonegate Bank

On September 26, 2017, the Company, completed the acquisition of all of the issued and outstanding shares of common stock of Stonegate Bank (“Stonegate”), and merged Stonegate into Centennial. The Company paid a purchase price to the Stonegate shareholders of approximately $792.4 million for the Stonegate acquisition. Under the terms of the merger agreement, shareholders of Stonegate received 30,863,658 shares of HBI common stock valued at approximately $742.3 million plus approximately $50.1 million in cash in exchange for all outstanding shares of Stonegate common stock. In addition, the holders of outstanding stock options of Stonegate received approximately $27.6 million in cash in connection with the cancellation of their options immediately before the acquisition closed, for a total transaction value of approximately $820.0 million.

Including the effects of the purchase accounting adjustments, as of acquisition date, Stonegate had approximately $2.89 billion in total assets, $2.37 billion in loans and $2.53 billion in customer deposits. Stonegate formerly operated its banking business from 24 locations in key Florida markets with significant presence in Broward and Sarasota counties.

The Company has determined that the acquisition of the net assets of Stonegate constitutes a business combination as defined by the ASC Topic 805. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of ASC Topic 820. In many cases, the determination of these fair values required

management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The following schedule is a breakdown of the assets acquired and liabilities assumed as of the acquisition date:

   Stonegate Bank 
   Acquired
from
Stonegate		  Fair Value
Adjustments		  As Recorded
by HBI		 
   (Dollars in thousands) 
Assets          

Cash and due from banks

  $100,958  $—    $100,958 

Interest-bearing deposits with other banks

   135,631   —     135,631 

Federal funds sold

   1,515   —     1,515 

Investment securities

   103,041   474   103,515 

Loans receivable

   2,446,149   (74,067)   2,372,082 

Allowance for loan losses

   (21,507)   21,507   —   
  

 

 

  

 

 

  

 

 

 

Loans receivable, net

   2,424,642   (52,560)   2,372,082 

Bank premises and equipment, net

   38,868   (3,572)   35,296 

Foreclosed assets held for sale

   4,187   (801)   3,386 

Cash value of life insurance

   48,000   —     48,000 

Accrued interest receivable

   7,088   —     7,088 

Deferred tax asset, net

   27,340   11,990   39,330 

Goodwill

   81,452   (81,452)   —   

Core deposit and other intangibles

   10,505   20,364   30,869 

Other assets

   9,598   255   9,853 
  

 

 

  

 

 

  

 

 

 

Total assets acquired

  $2,992,825  $(105,302)  $2,887,523 
  

 

 

  

 

 

  

 

 

 
Liabilities          

Deposits

    

Demand andnon-interest-bearing

  $585,959  $—    $585,959 

Savings and interest-bearing transaction accounts

   1,776,256   —     1,776,256 

Time deposits

   163,567   (85)   163,482 
  

 

 

  

 

 

  

 

 

 

Total deposits

   2,525,782   (85)   2,525,697 

FHLB borrowed funds

   32,667   184   32,851 

Securities sold under agreements to repurchase

   26,163   —     26,163 

Accrued interest payable and other liabilities

   8,100   (484)   7,616 

Subordinated debentures

   8,345   1,489   9,834 
  

 

 

  

 

 

  

 

 

 

Total liabilities assumed

   2,601,057   1,104   2,602,161 
  

 

 

  

 

 

  

 

 

 
Equity          

Total equity assumed

   391,768   (391,768)   —   
  

 

 

  

 

 

  

 

 

 

Total liabilities and equity assumed

  $2,992,825  $(390,664)   2,602,161 
  

 

 

  

 

 

  

 

 

 

Net assets acquired

     285,362 

Purchase price

     792,370 
    

 

 

 

Goodwill

    $507,008 
    

 

 

 

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

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

Investment securities – Investment securities were acquired from Stonegate with an approximately $474,000 adjustment to market value based upon quoted market prices.

Loans – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.

The Company evaluated $2.37 billion of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic310-20,Nonrefundable Feeslease standards, the Company determines if an arrangement is a lease at inception. Operating leases are included in the

right-of-use
(“ROU”) lease asset and Other Costs,which were recorded with a $73.3 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $74.3 million of loans evaluated were considered purchased credit impaired loanslease liability within the provisions of FASB ASC Topic310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $23.3 million discount. These purchase credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows. The acquired Stonegate loan balance and the fair value adjustment on loans receivable includes $22.6 million of discount on purchased loans, respectively.

Bankbank premises and equipment, – Bank premises and equipment were acquired from Stonegate with a $3.6 million adjustment to market value. This represents the difference between current appraisals completed in connection with the acquisition and book value acquired.

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

Cash value of life insurance– Cash value of life insurance was acquired from Stonegate at market value.

Accrued interest receivable – Accrued interest receivable was acquired from Stonegate at market value.

Deferred tax asset – The current and deferred income tax assets and liabilities are recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal income tax purposes, at the Company’s statutory federal and state income tax rate which was 39.225% at the time of acquisition.

Core deposit intangible – This intangible asset represents the value of the relationships that Stonegate had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The Company recorded $30.9 million of core deposit intangible.

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. The $85,000 fair value adjustment applied for time deposits was because the weighted average interest rate of Stonegate’s certificates of deposits were estimated to be below the current market rates.

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

Securities sold under agreements to repurchase – Securities sold under agreements to repurchase were acquired from Stonegate at market value.

Accrued interest payable and other liabilities – Accrued interest payable and other liabilities, were acquired from Stonegate at market value.

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

The unauditedpro-forma combined consolidated financial information presents how the combined financial information of HBI and Stonegate might have appeared had the businesses actually been combined. The following schedule represents the unaudited pro forma combined financial information as of the years ended December 31, 2017 and 2016, assuming the acquisition was completed as of January 1, 2017 and 2016, respectively:

   Years Ended
December 31,		 
   2017   2016 
   (In thousands, except per
share data)		 

Total interest income

  $610,697   $538,258 

Totalnon-interest income

   107,179    95,555 

Net income available to all shareholders

   143,979    206,081 

Basic earnings per common share

  $0.79   $1.20 

Diluted earnings per common share

   0.79    1.20 

The unauditedpro-forma consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented and had the impact of possible significant revenue enhancements and expense efficiencies fromin-market cost savings, among other factors, been considered and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during this period.

Acquisition of The Bank of Commerce

On February 28, 2017, the Company completed its acquisition of all of the issued and outstanding shares of common stock of The Bank of Commerce (“BOC”), a Florida state-chartered bank that operated in the Sarasota, Florida area, pursuant to an acquisition agreement, dated December 1, 2016, by and between HBI and Bank of Commerce Holdings, Inc. (“BCHI”), parent company of BOC. The Company merged BOC with and into Centennial effective as of the close of business on February 28, 2017.

The acquisition of BOC was conducted in accordance with the provisions of Section 363 of the United States Bankruptcy Code (the “Bankruptcy Code”) pursuant to a voluntary petition for relief under Chapter 11 of the Bankruptcy Code filed by BCHI with the United States Bankruptcy Court for the Middle District of Florida (the “Bankruptcy Court”). The sale of BOC by BCHI was subject to certain bidding procedures approved by the Bankruptcy Court, under which the Company submitted an initial bid to purchase the outstanding shares of BOC and was deemed to be the successful bidder after a subsequent auction was held. The Bankruptcy Court entered a final order on December 9, 2016 approving the sale of BOC to the Company pursuant to and in accordance with the acquisition agreement.

Under the terms of the acquisition agreement, the Company paid an aggregate of approximately $4.2 million in cash for the acquisition, which included the purchase of all outstanding shares of BOC common stock, the discounted purchase of certain subordinated debentures issued by BOC from the existing holders of the subordinated debentures, and an expense reimbursement to BCHI for approved administrative claims in connection with the bankruptcy proceeding.

BOC formerly operated three branch locations in the Sarasota, Florida area. Including the effects of the purchase accounting adjustments, as of acquisition date, BOC had approximately $178.1 million in total assets, $118.5 million in loans after $5.8 million of loan discounts, and $139.8 million in deposits.

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

   The Bank of Commerce 
   Acquired
from BOC		  Fair Value
Adjustments		  As
Recorded
by HBI		 
   (Dollars in thousands) 
Assets          

Cash and due from banks

  $4,610  $—    $4,610 

Interest-bearing deposits with other banks

   14,360   —     14,360 

Investment securities

   25,926   (113)   25,813 

Loans receivable

   124,289   (5,751)   118,538 

Allowance for loan losses

   (2,037)   2,037   —   
  

 

 

  

 

 

  

 

 

 

Loans receivable, net

   122,252   (3,714)   118,538 

Bank premises and equipment, net

   1,887   —     1,887 

Foreclosed assets held for sale

   8,523   (3,165)   5,358 

Accrued interest receivable

   481   —     481 

Deferred tax asset, net

   —     4,198   4,198 

Core deposit intangible

   ��     968   968 

Other assets

   1,880   —     1,880 
  

 

 

  

 

 

  

 

 

 

Total assets acquired

  $179,919  $(1,826)  $178,093 
  

 

 

  

 

 

  

 

 

 
Liabilities          

Deposits

    

Demand andnon-interest-bearing

  $27,245  $—    $27,245 

Savings and interest-bearing transaction accounts

   32,300   —     32,300 

Time deposits

   79,945   270   80,215 
  

 

 

  

 

 

  

 

 

 

Total deposits

   139,490   270   139,760 

FHLB borrowed funds

   30,000   42   30,042 

Accrued interest payable and other liabilities

   564   (255)   309 
  

 

 

  

 

 

  

 

 

 

Total liabilities assumed

  $170,054  $57   170,111 
  

 

 

  

 

 

  

 

 

 

Net assets acquired

     7,982 

Purchase price

     4,175 
    

 

 

 

Pre-tax gain on acquisition

    $3,807 
    

 

 

 

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

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

Investment securities – Investment securities were acquired from BOC with an $113,000 adjustment to market value based upon quoted market prices.

Loans – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.

The Company evaluated $106.8 million of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic310-20,Nonrefundable Fees and Other Costs,which were recorded with a $3.0 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted-average life of the loans using a constant yield method. The remaining $17.5 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $2.8 million discount. These purchase credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows.

Bank premises and equipment – Bank premises and equipment were acquired from BOC at market value.

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

Accrued interest receivable – Accrued interest receivable was acquired from BOC at market value.

Deferred tax asset – The current and deferred income tax assets and liabilities are recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal income tax purposes, at the Company’s statutory federal and state income tax rate which was 39.225% at the time of acquisition.

Core deposit intangible – This intangible asset represents the value of the relationships that BOC had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The Company recorded $968,000 of core deposit intangible.

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. The $270,000 fair value adjustment applied for time deposits was because the weighted-average interest rate of BOC’s certificates of deposits was estimated to be above the current market rates.

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

Accrued interest payable and other liabilities – The fair value used represents the adjustment of certain estimated liabilities from BOC.

The Company’s operating results for the period ended December 31, 2017, include the operating results of the acquired assets and assumed liabilities subsequent to the acquisition date. Due to the fair value adjustments recorded and the fact BOC total assets acquired are less than 5% of total assets as of December 31, 2017 excluding BOC as recorded by HBI as of acquisition date, historical results are not believed to be material to the Company’s results, and thus nopro-forma information is presented.

Acquisition of Giant Holdings, Inc.

On February 23, 2017, the Company completed its acquisition of Giant Holdings, Inc. (“GHI”), parent company of Landmark Bank, N.A. (“Landmark”), pursuant to a definitive agreement and plan of merger whereby GHI merged with and into HBI and, immediately thereafter, Landmark merged with and into Centennial. The Company paid a purchase price to the GHI shareholders of approximately $96.0 million for the GHI acquisition. Under the terms of the agreement, shareholders of GHI received 2,738,038 shares of the Company’s common stock valued at approximately $77.5 million as of February 23, 2017, plus approximately $18.5 million in cash in exchange for all outstanding shares of GHI common stock.

GHI formerly operated six branch locations in the Ft. Lauderdale, Florida area. Including the effects of the purchase accounting adjustments, as of acquisition date, GHI had approximately $398.1 million in total assets, $327.8 million in loans after $8.1 million of loan discounts, and $304.0 million in deposits.

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

   Giant Holdings, Inc. 
   Acquired
from GHI		  Fair Value
Adjustments		  As
Recorded
by HBI		 
   (Dollars in thousands) 
Assets          

Cash and due from banks

  $41,019  $—    $41,019 

Interest-bearing deposits with other banks

   4,057   1   4,058 

Investment securities

   1,961   (5)   1,956 

Loans receivable

   335,886   (6,517)   329,369 

Allowance for loan losses

   (4,568)   4,568   — 
  

 

 

  

 

 

  

 

 

 

Loans receivable, net

   331,318   (1,949)   329,369 

Bank premises and equipment, net

   2,111   608   2,719 

Cash value of life insurance

   10,861   —   10,861 

Accrued interest receivable

   850   —   850 

Deferred tax asset, net

   2,286   1,807   4,093 

Core deposit and other intangibles

   172   3,238   3,410 

Other assets

   254   (489)   (235) 
  

 

 

  

 

 

  

 

 

 

Total assets acquired

  $394,889  $3,211  $398,100 
  

 

 

  

 

 

  

 

 

 
Liabilities          

Deposits

    

Demand andnon-interest-bearing

  $75,993  $—    $75,993 

Savings and interest-bearing transaction accounts

   139,459   —     139,459 

Time deposits

   88,219   324   88,543 
  

 

 

  

 

 

  

 

 

 

Total deposits

   303,671   324   303,995 

FHLB borrowed funds

   26,047   431   26,478 

Accrued interest payable and other liabilities

   14,552   18   14,570 
  

 

 

  

 

 

  

 

 

 

Total liabilities assumed

   344,270   773   345,043 
  

 

 

  

 

 

  

 

 

 
Equity          

Total equity assumed

   50,619   (50,619)   —   
  

 

 

  

 

 

  

 

 

 

Total liabilities and equity assumed

  $394,889  $(49,846)   345,043 
  

 

 

  

 

 

  

 

 

 

Net assets acquired

     53,057 

Purchase price

     96,015 
    

 

 

 

Goodwill

    $42,958 
    

 

 

 

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

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

Investment securities – Investment securities were acquired from GHI with an approximately $5,000 adjustment to market value based upon quoted market prices.

Loans – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.

The Company evaluated $315.6 million of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic310-20,Nonrefundable Fees and Other Costs,which were recorded with a $3.6 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted-average life of the loans using a constant yield method. The remaining $20.3 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $4.5 million discount. These purchase credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows. The acquired GHI loan balance includes $1.6 million of discount on purchased loans.

Bank premises and equipment – Bank premises and equipment were acquired from GHI with a $608,000 adjustment to market value. This represents the difference between current appraisals completed in connection with the acquisition and book value acquired.

Cash value of life insurance– Cash value of life insurance was acquired from GHI at market value.

Accrued interest receivable – Accrued interest receivable was acquired from GHI at market value.

Deferred tax asset – The current and deferred income tax assets and liabilities are recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal income tax purposes, at the Company’s statutory federal and state income tax rate which was 39.225% at the time of acquisition.

Core deposit intangible – This intangible asset represents the value of the relationships that GHI had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The Company recorded $3.4 million of core deposit intangible.

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. The $324,000 fair value adjustment applied for time deposits was because the weighted-average interest rate of GHI’s certificates of deposits was estimated to be above the current market rates.

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

Accrued interest payable and other liabilities – The fair value used represents the adjustments of certain estimated liabilities from GHI.

3. Investment Securities

The amortized cost and estimated fair value of investment securities that are classified asavailable-for-sale andheld-to-maturity are as follows:

   September 30, 2018 
   Available-for-Sale 
   Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
(Losses)		   Estimated
Fair Value		 
   (In thousands) 

U.S. government-sponsored enterprises

  $427,722   $138   $(7,985)   $419,875 

Residential mortgage-backed securities

   533,106    294    (15,386)    518,014 

Commercial mortgage-backed securities

   478,409    87    (14,636)    463,860 

State and political subdivisions

   311,117    1,235    (6,202)    306,150 

Other securities

   35,554    1,160    (183)    36,531 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,785,908   $2,914   $(44,392)   $1,744,430 
  

 

 

   

 

 

   

 

 

   

 

 

 

   Held-to-Maturity 
   Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
(Losses)		   Estimated
Fair Value		 
   (In thousands) 

U.S. government-sponsored enterprises

  $3,587   $—     $(87)   $3,500 

Residential mortgage-backed securities

   47,670    23    (1,395)    46,298 

Commercial mortgage-backed securities

   12,705    —      (370)    12,335 

State and political subdivisions

   135,304    1,368    (253)    136,419 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $199,266   $1,391   $(2,105)   $198,552 
  

 

 

   

 

 

   

 

 

   

 

 

 

   December 31, 2017 
   Available-for-Sale 
   Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
(Losses)		   Estimated
Fair Value		 
   (In thousands) 

U.S. government-sponsored enterprises

  $407,387   $899   $(1,982)   $406,304 

Residential mortgage-backed securities

   481,981    538    (4,919)    477,600 

Commercial mortgage-backed securities

   497,870    332    (4,430)    493,772 

State and political subdivisions

   247,292    3,783    (774)    250,301 

Other securities

   34,617    1,225    (302)    35,540 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,669,147   $6,777   $(12,407)   $1,663,517 
  

 

 

   

 

 

   

 

 

   

 

 

 

   Held-to-Maturity 
   Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
(Losses)		   Estimated
Fair Value		 
   (In thousands) 

U.S. government-sponsored enterprises

  $5,791   $15   $(15)   $5,791 

Residential mortgage-backed securities

   56,982    107    (402)    56,687 

Commercial mortgage-backed securities

   16,625    114    (40)    16,699 

State and political subdivisions

   145,358    3,031    (27)    148,362 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $224,756   $3,267   $(484)   $227,539 
  

 

 

   

 

 

   

 

 

   

 

 

 

Assets, principally investment securities, having a carrying value of approximately $1.17 billion and $1.18 billion at September 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Also, investment securities pledged as collateral for repurchase agreements totaled approximately $142.1 million and $147.8 million at September 30, 2018 and December 31, 2017, respectively.

The amortized cost and estimated fair value of securities classified asavailable-for-sale andheld-to-maturity at September 30, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   Available-for-Sale   Held-to-Maturity 
   Amortized
Cost		   Estimated
Fair Value		   Amortized
Cost		   Estimated
Fair Value		 
   (In thousands) 

Due in one year or less

  $188,664   $185,303   $64,821   $65,527 

Due after one year through five years

   997,039    975,767    89,950    89,016 

Due after five years through ten years

   468,969    455,579    11,773    11,472 

Due after ten years

   131,236    127,781    32,722    32,537 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,785,908   $1,744,430   $199,266   $198,552 
  

 

 

   

 

 

   

 

 

   

 

 

 

For purposes of the maturity tables, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on anticipated maturities. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

During the three-month period ended September 30, 2018, approximately $1.4 million inavailable-for-sale securities were sold. During nine-month period ended September 30, 2018, approximately $2.1 million inavailable-for-sale securities were sold. There were no realized gains or losses recorded on the sales for the three and nine-month periods ended September 30, 2018. The income tax expense/benefit to net security gains and losses was 26.135% of the gross amounts.

During the three and nine-month periods ended September 30, 2017, approximately $234,000 and $27.4 million, respectively, inavailable-for-sale securities were sold. The gross realized gains on the sale for the three-month period ended September 30, 2017 totaled approximately $136,000. The gross realized gains and losses on the sales for the nine-month period ended September 30, 2017 totaled approximately $1.1 million and $127,000, respectively. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.

During the three-month and nine-month periods ended September 30, 2018, noheld-to-maturity securities were sold. During the nine-month period ended September 30, 2017, oneheld-to-maturity security experienced its second downgrade in its credit rating. The Company made a strategic decision to sell thisheld-to-maturity security for approximately $483,000, which resulted in a gross realized loss on the sale for the nine-month period ended September 30, 2017 of approximately $7,000.

The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. In completing these evaluations, the Company follows the requirements of FASB ASC 320,Investments—Debt and Equity Securities. Certain investment securities are valued less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. The Company does not intend to sell or believe it will be required to sell these investments before recovery of their amortized cost basis, which may be maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

During the three and nine-month periods ended September 30, 2018, no securities were deemed to have other-than-temporary impairment.

At September 30, 2018, the Company had investment securities with approximately $26.9 million in unrealized losses, which have been in continuous loss positions for more than twelve months. Excluding impairment write downs taken in prior periods, the Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates and not the issuer’s financial condition, or downgrades by rating agencies. In addition, approximately 67.7% of the Company’s investment portfolio matures in five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.

The following shows gross unrealized losses and estimated fair value of investment securities classified asavailable-for-sale andheld-to-maturity with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of September 30, 2018 and December 31, 2017:

   September 30, 2018 
   Less Than 12 Months  12 Months or More  Total 
   Fair
Value		   Unrealized
Losses		  Fair
Value		   Unrealized
Losses		  Fair
Value		   Unrealized
Losses		 
   (In thousands) 

U.S. government-sponsored enterprises

  $253,980   $(3,686)  $135,156   $(4,386)  $389,136   $(8,072) 

Residential mortgage-backed securities

   212,531    (4,745)   315,803    (12,036)   528,334    (16,781) 

Commercial mortgage-backed securities

   233,726    (6,738)   226,854    (8,268)   460,580    (15,006) 

State and political subdivisions

   174,397    (4,385)   42,238    (2,070)   216,635    (6,455) 

Other securities

   —    —   9,792    (183)   9,792    (183) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $874,634   $(19,554)  $729,843   $(26,943)  $1,604,477   $(46,497) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

   December 31, 2017 
   Less Than 12 Months  12 Months or More  Total 
   Fair Value   Unrealized
Losses		  Fair Value   Unrealized
Losses		  Fair Value   Unrealized
Losses		 
   (In thousands) 

U.S. government-sponsored enterprises

  $234,213   $(1,288)  $40,122   $(709)  $274,335   $(1,997) 

Residential mortgage-backed securities

   389,541    (3,656)   99,989    (1,665)   489,530    (5,321) 

Commercial mortgage-backed securities

   314,301    (2,343)   120,365    (2,127)   434,666    (4,470) 

State and political subdivisions

   41,299    (331)   20,980    (470)   62,279    (801) 

Other securities

   —    —   9,852    (302)   9,852    (302) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $979,354   $(7,618)  $291,308   $(5,273)  $1,270,662   $(12,891) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Income earned on securities for the three and nine months ended September 30, 2018 and 2017, is as follows:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2018   2017   2018   2017 
Taxable:  (In thousands) 

Available-for-sale

  $8,578   $6,527   $25,571   $17,001 

Held-to-maturity

   433    544    1,389    1,982 

Non-taxable:

        

Available-for-sale

   2,205    1,627    6,006    4,757 

Held-to-maturity

   1,222    1,405    3,795    4,185 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $12,438   $10,103   $36,761   $27,925 
  

 

 

   

 

 

   

 

 

   

 

 

 

4. Loans Receivable

The various categories of loans receivable are summarized as follows:

   September 30,
2018		   December 31,
2017		 
   (In thousands) 

Real estate:

    

Commercial real estate loans

    

Non-farm/non-residential

  $4,685,827   $4,600,117 

Construction/land development

   1,550,910    1,700,491 

Agricultural

   72,930    82,229 

Residential real estate loans

    

Residential1-4 family

   1,982,666    1,970,311 

Multifamily residential

   608,608    441,303 
  

 

 

   

 

 

 

Total real estate

   8,900,941    8,794,451 

Consumer

   428,192    46,148 

Commercial and industrial

   1,303,841    1,297,397 

Agricultural

   58,644    49,815 

Other

   141,197    143,377 
  

 

 

   

 

 

 

Total loans receivable

  $10,832,815   $10,331,188 
  

 

 

   

 

 

 

During the three and nine-month periods ended September 30, 2018, the Company sold $836,000 and $7.4 million, respectively, of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $47,000 and $491,000, respectively. During the three and nine-month periods ended September 30, 2017, the Company sold $3.1 million and $12.9 million, respectively, of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $163,000 and $738,000, respectively.

Mortgage loans held for sale of approximately $39.9 million and $44.3 million at September 30, 2018 and December 31, 2017, respectively, are included in residential1-4 family loans. Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid. The Company obtains forward commitments to sell mortgage loans to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. The forward commitments acquired by the Company for mortgage loans in process of origination are considered mandatory forward commitments. Because these commitments are structured on a mandatory basis, the Company is required to substitute another loan or to buy back the commitment if the original loan does not fund. These commitments are derivative instruments and their fair values at September 30, 2018 and December 31, 2017 were not material.

The Company had $3.08 billion of purchased loans, which includes $120.8 million of discount for credit losses on purchased loans, at September 30, 2018. The Company had $40.5 million and $80.3 million remaining ofnon-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of September 30, 2018. The Company had $3.46 billion of purchased loans, which includes $146.6 million of discount for credit losses on purchased loans, at December 31, 2017. The Company had $51.9 million and $94.7 million remaining ofnon-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of December 31, 2017.

A description of our accounting policies for loans, impaired loans,non-accrual loans and allowance for loan losses are set forth in our 2017 Form10-K filed with the SEC on February 27, 2018. There have been no significant changes to these policies since December 31, 2017.

5. Allowance for Loan Losses, Credit Quality and Other

The Company’s allowance for loan loss as of September 30, 2018 and December 31, 2017 was significantly impacted by Hurricane Irma which made initial landfall in the Florida Keys and a second landfall just south of Naples, Florida, as a Category 4 hurricane on September 10, 2017. Based on initial assessments of the potential credit impact and damage to the approximately $2.41 billion in legacy loans receivable we have in the disaster area, the Company established a $32.9 million storm-related provision for loan losses as of December 31, 2017. As of September 30, 2018, charge-offs of $2.5 million have been taken against the storm-related provision for loan losses.

The following table presents a summary of changes in the allowance for loan losses:

   Nine Months Ended
September 30, 2018		 
Allowance for loan losses:  (In thousands) 

Beginning balance

  $110,266 

Loans charged off

   (7,173) 

Recoveries of loans previously charged off

   2,776 
  

 

 

 

Net loans recovered (charged off)

   (4,397) 
  

 

 

 

Provision for loan losses

   4,322 
  

 

 

 

Balance, September 30, 2018

  $110,191 
  

 

 

 

The following tables present the balance in the allowance for loan losses for the three and nine-month period ended September 30, 2018, and the allowance for loan losses and recorded investment in loans based on portfolio segment by impairment method as of September 30, 2018. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.

   Three Months Ended September 30, 2018 
   Construction/
Land
Development		  Other
Commercial
Real Estate		  Residential
Real Estate		  Commercial
& Industrial		  Consumer
& Other		  Unallocated   Total 
Allowance for loan losses:  (In thousands) 

Beginning balance

  $20,243  $45,985  $24,205  $16,193  $3,518  $1,372   $111,516 

Loans charged off

   (337)   (144)   (608)   (744)   (668)   —      (2,501) 

Recoveries of loans previously charged off

   90   195   309   251   331   —      1,176 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Net loans recovered (charged off)

   (247)   51   (299)   (493)   (337)   —      (1,325) 

Provision for loan losses

   (982)   (683)   193   (1,923)   479   2,916    —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance, September 30

  $19,014  $45,353  $24,099  $13,777  $3,660  $4,288   $110,191 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

   Nine Months Ended September 30, 2018 
   Construction/
Land
Development		  Other
Commercial
Real Estate		  Residential
Real Estate		  Commercial
& Industrial		  Consumer
& Other		  Unallocated   Total 
Allowance for loan losses:  (In thousands) 

Beginning balance

  $20,343  $43,939  $24,506  $15,292  $3,334  $2,852   $110,266 

Loans charged off

   (399)   (981)   (2,339)   (1,816)   (1,638)   —      (7,173) 

Recoveries of loans previously charged off

   209   383   844   568   772   —      2,776 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Net loans recovered (charged off)

   (190)   (598)   (1,495)   (1,248)   (866)   —      (4,397) 

Provision for loan losses

   (1,139)   2,012   1,088   (267)   1,192   1,436    4,322 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance, September 30

  $19,014  $45,353  $24,099  $13,777  $3,660  $4,288   $110,191 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

   As of September 30, 2018 
   Construction/
Land
Development		   Other
Commercial
Real Estate		   Residential
Real Estate		   Commercial
& Industrial		   Consumer
& Other		   Unallocated   Total 
Allowance for loan losses:  (In thousands) 

Period end amount allocated to:

              

Loans individually evaluated for impairment

  $854   $533   $115   $9   $—     $—     $1,511 

Loans collectively evaluated for impairment

   18,150    44,590    23,355    13,672    3,660    4,288    107,715 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans evaluated for impairment balance, September 30

   19,004    45,123    23,470    13,681    3,660    4,288    109,226 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit impaired loans

   10    230    629    96    —      —      965 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30

  $19,014   $45,353   $24,099   $13,777   $3,660   $4,288   $110,191 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

              

Period end amount allocated to:

              

Loans individually evaluated for impairment

  $14,876   $60,572   $19,933   $30,716   $2,064   $—     $128,161 

Loans collectively evaluated for impairment

   1,526,689    4,613,352    2,534,630    1,256,796    623,747    —      10,555,214 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans evaluated for impairment balance, September 30

   1,541,565    4,673,924    2,554,563    1,287,512    625,811    —      10,683,375 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit impaired loans

   9,345    84,833    36,711    16,329    2,222    —      149,440 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30

  $1,550,910   $4,758,757   $2,591,274   $1,303,841   $628,033   $—     $10,832,815 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present the balances in the allowance for loan losses for the nine-month period ended September 30, 2017 and the year ended December 31, 2017, and the allowance for loan losses and recorded investment in loans receivable based on portfolio segment by impairment method as of December 31, 2017. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.

   Year Ended December 31, 2017 
   Construction/
Land
Development		  Other
Commercial
Real Estate		  Residential
Real Estate		  Commercial
& Industrial		  Consumer
& Other		  Unallocated  Total 
Allowance for loan losses:  (In thousands) 

Beginning balance

  $11,522  $28,188  $16,517  $12,756  $4,188  $6,831  $80,002 

Loans charged off

   (326)   (1,655)   (2,288)   (779)   (1,063)   —     (6,111) 

Recoveries of loans previously charged off

   227   710   254   252   503   —     1,946 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loans recovered (charged off)

   (99)   (945)   (2,034)   (527)   (560)   —     (4,165) 

Provision for loan losses

   1,419   600   3,232   599   (565)   (984)   4,301 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 30

   12,842   27,843   17,715   12,828   3,063   5,847   80,138 

Loans charged off

   (1,306)   (2,094)   (1,692)   (4,799)   (1,469)   —     (11,360) 

Recoveries of loans previously charged off

   235   332   422   212   338   —     1,539 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loans recovered (charged off)

   (1,071)   (1,762)   (1,270)   (4,587)   (1,131)   —     (9,821) 

Provision for loan losses

   8,572   17,858   8,061   7,051   1,402   (2,995)   39,949 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31

  $20,343  $43,939  $24,506  $15,292  $3,334  $2,852  $110,266 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   As of December 31, 2017 
   Construction/
Land
Development		   Other
Commercial
Real Estate		   Residential
Real Estate		   Commercial
& Industrial		   Consumer
& Other		   Unallocated   Total 
Allowance for loan losses:  (In thousands) 

Period end amount allocated to:

              

Loans individually evaluated for impairment

  $1,378   $768   $188   $843   $7   $—     $3,184 

Loans collectively evaluated for impairment

   18,954    42,824    23,341    14,290    3,310    2,852    105,571 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans evaluated for impairment balance, December 31

   20,332    43,592    23,529    15,133    3,317    2,852    108,755 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit impaired loans

   11    347    977    159    17    —      1,511 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31

  $20,343   $43,939   $24,506   $15,292   $3,334   $2,852   $110,266 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

              

Period end amount allocated to:

              

Loans individually evaluated for impairment

  $26,860   $124,124   $20,431   $21,867   $500   $—     $193,782 

Loans collectively evaluated for impairment

   1,658,519    4,442,201    2,341,081    1,261,161    236,392    —      9,939,354 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans evaluated for impairment balance, December 31

   1,685,379    4,566,325    2,361,512    1,283,028    236,892    —      10,133,136 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit impaired loans

   15,112    116,021    50,102    14,369    2,448    —      198,052 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31

  $1,700,491   $4,682,346   $2,411,614   $1,297,397   $239,340   $—     $10,331,188 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is an aging analysis for loans receivable as of September 30, 2018 and December 31, 2017:

   September 30, 2018 
   Loans
Past Due
30-59 Days		   Loans
Past Due
60-89 Days		   Loans
Past Due
90 Days
or More		   Total
Past Due		   Current
Loans		   Total Loans
Receivable		   Accruing
Loans
Past Due
90 Days
or More		 
Real estate:  (In thousands) 

Commercial real estate loans

              

Non-farm/non-residential

  $6,496   $4,411   $22,628   $33,535   $4,652,292   $4,685,827   $11,405 

Construction/land development

   803    584    8,517    9,904    1,541,006    1,550,910    3,551 

Agricultural

   —      —      30    30    72,900    72,930    —   

Residential real estate loans

              

Residential1-4 family

   9,141    2,441    15,821    27,403    1,955,263    1,982,666    1,509 

Multifamily residential

   482    —      983    1,465    607,143    608,608    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   16,922    7,436    47,979    72,337    8,828,604    8,900,941    16,465 

Consumer

   784    73    2,004    2,861    425,331    428,192    1,796 

Commercial and industrial

   4,868    384    6,449    11,701    1,292,140    1,303,841    2,006 

Agricultural and other

   1,260    23    33    1,316    198,525    199,841    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $23,834   $7,916   $56,465   $88,215   $10,744,600   $10,832,815   $20,267 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   December 31, 2017 
   Loans
Past Due
30-59 Days		   Loans
Past Due
60-89 Days		   Loans
Past Due
90 Days
or More		   Total
Past Due		   Current
Loans		   Total Loans
Receivable		   Accruing
Loans
Past Due
90 Days
or More		 
Real estate:  (In thousands) 

Commercial real estate loans

              

Non-farm/non-residential

  $6,331   $1,480   $12,719   $20,530   $4,579,587   $4,600,117   $3,119 

Construction/land development

   834    13    8,258    9,105    1,691,386    1,700,491    3,247 

Agricultural

   —      221    19    240    81,989    82,229    —   

Residential real estate loans

              

Residential1-4 family

   9,066    2,013    16,612    27,691    1,942,620    1,970,311    2,175 

Multifamily residential

   —      —      253    253    441,050    441,303    100 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   16,231    3,727    37,861    57,819    8,736,632    8,794,451    8,641 

Consumer

   252    51    171    474    45,674    46,148    26 

Commercial and industrial

   2,073    1,030    6,528    9,631    1,287,766    1,297,397    1,944 

Agricultural and other

   288    113    137    538    192,654    193,192    54 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $18,844   $4,921   $44,697   $68,462   $10,262,726   $10,331,188   $10,665 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-accruing loans at September 30, 2018 and December 31, 2017 were $36.2 million and $34.0 million, respectively.

The following is a summary of the impaired loans as of September 30, 2018 and December 31, 2017:

   September 30, 2018 
               Three Months Ended   Nine Months Ended 
   Unpaid
Contractual
Principal
Balance		   Total
Recorded
Investment		   Allocation
of Allowance
for Loan
Losses		   Average
Recorded
Investment		   Interest
Recognized		   Average
Recorded
Investment		   Interest
Recognized		 
Loans without a specific valuation allowance  (In thousands) 

Real estate:

  

Commercial real estate loans

              

Non-farm/non-residential

  $44   $44   $—     $36   $1   $33   $2 

Construction/land development

   18    18    —      18    —      30    1 

Agricultural

   13    13    —      14    —      16    1 

Residential real estate loans

              

Residential1-4 family

   286    286    —      237    5    186    14 

Multifamily residential

   —      —      —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   361    361    —      305    6    265    18 

Consumer

   27    28    —      29    1    23    2 

Commercial and industrial

   202    202    —      225    3    189    8 

Agricultural and other

   —      —      —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans without a specific valuation allowance

   590    591    —      559    10    477    28 

Loans with a specific valuation allowance

              

Real estate:

              

Commercial real estate loans

              

Non-farm/non-residential

   41,299    37,365    524    37,770    375    33,965    1,107 

Construction/land development

   13,509    12,446    854    12,614    75    12,398    234 

Agricultural

   299    303    9    410    4    412    14 

Residential real estate loans

              

Residential1-4 family

   19,248    17,241    67    17,678    51    18,639    429 

Multifamily residential

   2,405    2,405    48    2,561    16    2,116    66 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   76,760    69,760    1,502    71,033    521    67,530    1,850 

Consumer

   2,245    2,003    —      1,092    24    638    42 

Commercial and industrial

   10,269    6,619    9    8,276    35    11,361    223 

Agricultural and other

   33    33    —      103    —      174    3 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans with a specific valuation allowance

   89,307    78,415    1,511    80,504    580    79,703    2,118 

Total impaired loans

              

Real estate:

              

Commercial real estate loans

              

Non-farm/non-residential

   41,343    37,409    524    37,806    376    33,998    1,109 

Construction/land development

   13,527    12,464    854    12,632    75    12,428    235 

Agricultural

   312    316    9    424    4    428    15 

Residential real estate loans

              

Residential1-4 family

   19,534    17,527    67    17,915    56    18,825    443 

Multifamily residential

   2,405    2,405    48    2,561    16    2,116    66 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   77,121    70,121    1,502    71,338    527    67,795    1,868 

Consumer

   2,272    2,031    —      1,121    25    661    44 

Commercial and industrial

   10,471    6,821    9    8,501    38    11,550    231 

Agricultural and other

   33    33    —      103    —      174    3 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $89,897   $79,006   $1,511   $81,063   $590   $80,180   $2,146 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note: Purchased credit impaired loans are accounted for on a pooled basis under ASC310-30. All of these pools are currently considered to be performing, resulting in none of the purchased credit impaired loans being classified as impaired loans as of September 30, 2018.

   December 31, 2017 
               Year Ended 
   Unpaid
Contractual
Principal
Balance		   Total
Recorded
Investment		   Allocation
of Allowance
for Loan
Losses		   Average
Recorded
Investment		   Interest
Recognized		 
Loans without a specific valuation allowance  (In thousands) 

Real estate:

  

Commercial real estate loans

          

Non-farm/non-residential

  $29   $29   $—     $23   $2 

Construction/land development

   64    64    —      31    3 

Agricultural

   19    —      —      —      1 

Residential real estate loans

          

Residential1-4 family

   115    115    —      135    7 

Multifamily residential

   —      —      —      —      —   
  

 

 

   

 

��

   

 

 

   

 

 

   

 

 

 

Total real estate

   227    208    —      189    13 

Consumer

   18    —      —      —      1 

Commercial and industrial

   105    105    —      85    7 

Agricultural and other

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans without a specific valuation allowance

   350    313    —      274    21 

Loans with a specific valuation allowance

          

Real estate:

          

Commercial real estate loans

          

Non-farm/non-residential

   29,666    29,040    757    41,772    1,498 

Construction/land development

   12,976    12,157    1,378    10,556    262 

Agricultural

   281    303    11    268    11 

Residential real estate loans

          

Residential1-4 family

   19,770    18,689    124    22,347    363 

Multifamily residential

   1,627    1,627    64    1,412    81 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   64,320    61,816    2,334    76,355    2,215 

Consumer

   179    191    —      163    —   

Commercial and industrial

   16,777    13,007    843    9,726    121 

Agricultural and other

   297    309    7    644    8 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans with a specific valuation allowance

   81,573    75,323    3,184    86,888    2,344 

Total impaired loans

          

Real estate:

          

Commercial real estate loans

          

Non-farm/non-residential

   29,695    29,069    757    41,795    1,500 

Construction/land development

   13,040    12,221    1,378    10,587    265 

Agricultural

   300    303    11    268    12 

Residential real estate loans

          

Residential1-4 family

   19,885    18,804    124    22,482    370 

Multifamily residential

   1,627    1,627    64    1,412    81 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   64,547    62,024    2,334    76,544    2,228 

Consumer

   197    191    —      163    1 

Commercial and industrial

   16,882    13,112    843    9,811    128 

Agricultural and other

   297    309    7    644    8 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $81,923   $75,636   $3,184   $87,162   $2,365 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note: Purchased credit impaired loans are accounted for on a pooled basis under ASC310-30. All of these pools are currently considered to be performing resulting in none of the purchased credit impaired loans being classified as impaired loans as of December 31, 2017.

Interest recognized on impaired loans during the three months ended September 30, 2018 and 2017 was approximately $590,000 and $957,000, respectively. Interest recognized on impaired loans during the nine months ended September 30, 2018 and 2017 was approximately $2.1 million and $2.0 million, respectively. The amount of interest recognized on impaired loans on the cash basis is not materially different than the accrual basis.

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

The Company’s classified loans include loans in risk ratings 6, 7 and 8. The following is a presentation of classified loans (excluding loans accounted for under ASC Topic310-30) by class as of September 30, 2018 and December 31, 2017:

   September 30, 2018 
   Risk Rated 6   Risk Rated 7   Risk Rated 8   Classified Total 
Real estate:  (In thousands) 

Commercial real estate loans

        

Non-farm/non-residential

  $41,424   $484   $—     $41,908 

Construction/land development

   14,502    860    —      15,362 

Agricultural

   315    3    —      318 

Residential real estate loans

        

Residential1-4 family

   23,782    253    —      24,035 

Multifamily residential

   983    —      —      983 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   81,006    1,600    —      82,606 

Consumer

   1,117    1    —      1,118 

Commercial and industrial

   11,237    881    —      12,118 

Agricultural and other

   50    —      —      50 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total risk rated loans

  $93,410   $2,482   $—     $95,892 
  

 

 

   

 

 

   

 

 

   

 

 

 

   December 31, 2017 
   Risk Rated 6   Risk Rated 7   Risk Rated 8   Classified Total 
Real estate:  (In thousands) 

Commercial real estate loans

        

Non-farm/non-residential

  $20,933   $518   $—     $21,451 

Construction/land development

   24,013    204    —      24,217 

Agricultural

   321    —      —      321 

Residential real estate loans

        

Residential1-4 family

   23,420    564    —      23,984 

Multifamily residential

   939    —      —      939 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   69,626    1,286    —      70,912 

Consumer

   159    9    —      168 

Commercial and industrial

   12,818    80    —      12,898 

Agricultural and other

   136    —      —      136 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total risk rated loans

  $82,739   $1,375   $—     $84,114 
  

 

 

   

 

 

   

 

 

   

 

 

 

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

The following is a presentation of loans receivable by class and risk rating as of September 30, 2018 and December 31, 2017:

   September 30, 2018 
   Risk
Rated 1		   Risk
Rated 2		   Risk
Rated 3		   Risk
Rated 4		   Risk
Rated 5		   Classified
Total		   Total 
Real estate:  (In thousands) 

Commercial real estate loans

              

Non-farm/non-residential

  $993   $299   $2,660,482   $1,863,651   $33,857   $41,908   $4,601,190 

Construction/land development

   20    736    261,009    1,263,515    923    15,362    1,541,565 

Agricultural

   —      —      35,336    36,099    981    318    72,734 

Residential real estate loans

              

Residential1-4 family

   770    750    1,454,690    461,225    7,536    24,035    1,949,006 

Multifamily residential

   —      —      398,294    206,280    —      983    605,557 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   1,783    1,785    4,809,811    3,830,770    43,297    82,606    8,770,052 

Consumer

   13,051    995    397,060    13,617    129    1,118    425,970 

Commercial and industrial

   21,669    8,805    589,856    624,100    30,964    12,118    1,287,512 

Agricultural and other

   1,045    3,388    134,301    60,520    537    50    199,841 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total risk rated loans

  $37,548   $14,973   $5,931,028   $4,529,007   $74,927   $95,892    10,683,375 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit impaired loans

               149,440 
            

 

 

 

Total loans receivable

              $10,832,815 
              

 

 

 

   December 31, 2017 
   Risk
Rated 1		   Risk
Rated 2		   Risk
Rated 3		   Risk
Rated 4		   Risk
Rated 5		   Classified
Total		   Total 
Real estate:  (In thousands) 

Commercial real estate loans

              

Non-farm/non-residential

  $1,015   $558   $2,595,844   $1,745,778   $119,656   $21,451   $4,484,302 

Construction/land development

   28    583    280,980    1,373,133    6,438    24,217    1,685,379 

Agricultural

   —      19    53,018    27,515    1,150    321    82,023 

Residential real estate loans

              

Residential1-4 family

   1,140    969    1,414,849    475,619    11,658    23,984    1,928,219 

Multifamily residential

   —      —      329,070    103,071    213    939    433,293 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   2,183    2,129    4,673,761    3,725,116    139,115    70,912    8,613,216 

Consumer

   13,106    808    22,479    8,532    70    168    45,163 

Commercial and industrial

   20,870    7,543    627,316    592,088    22,313    12,898    1,283,028 

Agricultural and other

   1,986    3,914    147,323    38,370    —      136    191,729 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total risk rated loans

  $38,145   $14,394   $5,470,879   $4,364,106   $161,498   $84,114    10,133,136 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit impaired loans

               198,052 
              

 

 

 

Total loans receivable

              $10,331,188 
              

 

 

 

The following is a presentation of troubled debt restructurings (“TDRs”) by class as of September 30, 2018 and December 31, 2017:

   September 30, 2018 
   Number
of Loans		   Pre-
Modification
Outstanding
Balance		   Rate
Modification		   Term
Modification		   Rate
& Term
Modification		   Post-
Modification
Outstanding
Balance		 
Real estate:  (Dollars in thousands) 

Commercial real estate loans

            

Non-farm/non-residential

   16   $16,018   $8,177   $742   $4,494   $13,413 

Construction/land development

   3    641    546    69    —      615 

Agricultural

   2    345    283    16    —      299 

Residential real estate loans

            

Residential1-4 family

   24    4,494    1,105    353    1,035    2,493 

Multifamily residential

   3    1,701    1,281    —      287    1,568 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   48    23,199    11,392    1,180    5,816    18,388 

Consumer

   4    36    17    11    —      28 

Commercial and industrial

   13    1,062    396    105    —      501 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   65   $24,297   $11,805   $1,296   $5,816   $18,917 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   December 31, 2017 
   Number
of Loans		   Pre-
Modification
Outstanding
Balance		   Rate
Modification		   Term
Modification		   Rate
& Term
Modification		   Post-
Modification
Outstanding
Balance		 
Real estate:  (Dollars in thousands) 

Commercial real estate loans

            

Non-farm/non-residential

   16   $16,853   $8,815   $250   $5,513   $14,578 

Construction/land development

   5    782    689    75    —      764 

Agricultural

   2    345    282    22    —      304 

Residential real estate loans

            

Residential1-4 family

   21    5,607    1,926    81    1,238    3,245 

Multifamily residential

   3    1,701    1,340    —      287    1,627 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   47    25,288    13,052    428    7,038    20,518 

Consumer

   3    19    —      18    —      18 

Commercial and industrial

   11    951    445    50    1    496 

Agricultural and other

   1    166    166    —      —      166 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   62   $26,424   $13,663   $496   $7,039   $21,198 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a presentation of TDRs onnon-accrual status as of September 30, 2018 and December 31, 2017 because they are not in compliance with the modified terms:

   September 30, 2018   December 31, 2017 
   Number
of Loans		   Recorded
Balance		   Number
of Loans		   Recorded
Balance		 
Real estate:  (Dollars in thousands) 

Commercial real estate loans

        

Non-farm/non-residential

   3   $758    2   $1,161 

Agricultural

   1    16    1    22 

Residential real estate loans

        

Residential1-4 family

   9    787    8    850 

Multifamily residential

   1    146    1    153 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   14    1,707    12    2,186 
  

 

 

   

 

 

   

 

 

   

 

 

 

Commercial and industrial

   6    128    1    —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   20   $1,835    13   $2,186 
  

 

 

   

 

 

   

 

 

   

 

 

 

The following is a presentation of total foreclosed assets as of September 30, 2018 and December 31, 2017:

   September 30,
2018		   December 31,
2017		 
   (In thousands) 

Commercial real estate loans

    

Non-farm/non-residential

  $5,858   $9,766 

Construction/land development

   3,539    5,920 

Agriculture

   155   

Residential real estate loans

    

Residential1-4 family

   3,885    2,654 

Multifamily residential

   70    527 
  

 

 

   

 

 

 

Total foreclosed assets held for sale

  $13,507   $18,867 
  

 

 

   

 

 

 

The following is a summary of the purchased credit impaired loans acquired in the SPF, GHI, BOC and Stonegate acquisitions as of the dates of acquisition:

   SPF   GHI   BOC   Stonegate 
   (In thousands) 

Contractually required principal and interest at acquisition

  $3,496   $22,379   $18,586   $98,444 

Non-accretable difference (expected losses and foregone interest)

   285    4,462    2,811    23,297 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected at acquisition

   3,211    17,917    15,775    75,147 

Accretable yield

   808    2,071    1,043    11,761 
  

 

 

   

 

 

   

 

 

   

 

 

 

Basis in purchased credit impaired loans at acquisition

  $2,403   $15,846   $14,732   $63,386 
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the carrying amount of the accretable yield for purchased credit impaired loans were as follows for the nine-month period ended September 30, 2018 for the Company’s acquisitions:

   Accretable
Yield		   Carrying
Amount of
Loans		 
   (In thousands) 

Balance at beginning of period

  $41,803   $198,052 

Reforecasted future interest payments for loan pools

   (459)    —   

Contractual accretion recorded to interest income

   (13,206)    13,206 

Acquisitions

   808    2,403 

Adjustment to yield

   8,519    —   

Transfers to foreclosed assets held for sale

   —      (2,156) 

Payments received, net

   —      (62,065) 
  

 

 

   

 

 

 

Balance at end of period

  $37,465   $149,440 
  

 

 

   

 

 

 

The loan pools were evaluated by the Company and are currently forecasted to have a slowerrun-off than originally expected. As a result, the Company has reforecast the total accretable yield expectations for those loan pools by $459,000. This updated forecast does not change the expected weighted average yields on the loan pools.

During the 2018 impairment tests on the estimated cash flows of loans, the Company established that several loan pools were determined to have a materially projected credit improvement. As a result of this improvement, the Company will recognize approximately $8.5 million as an additional adjustment to yield over the weighted average life of the loans.

6. Goodwill and Core Deposits and Other Intangibles

Changes in the carrying amount and accumulated amortization of the Company’s goodwill and core deposits and other intangibles at September 30, 2018 and December 31, 2017, were as follows:

   September 30,
2018		   December 31,
2017		 
Goodwill  (In thousands) 

Balance, beginning of period

  $927,949   $377,983 

Acquisitions

   30,459    549,966 
  

 

 

   

 

 

 

Balance, end of period

  $958,408   $927,949 
  

 

 

   

 

 

 

   September 30,
2018		   December 31,
2017		 
Core Deposit and Other Intangibles  (In thousands) 

Balance, beginning of period

  $49,351   $18,311 

Acquisition

   —      35,247 

Amortization expense

   (4,867)    (2,576) 
  

 

 

   

 

 

 

Balance, September 30

  $44,484    50,982 
  

 

 

   

Acquisitions

     —   

Amortization expense

     (1,631) 
    

 

 

 

Balance, end of year

    $49,351 
    

 

 

 

The carrying basis and accumulated amortization of core deposits and other intangibles at September 30, 2018 and December 31, 2017 were:

   September 30,
2018		   December 31,
2017		 
   (In thousands) 

Gross carrying basis

  $86,625   $86,625 

Accumulated amortization

   (42,141)    (37,274) 
  

 

 

   

 

 

 

Net carrying amount

  $44,484   $49,351 
  

 

 

   

 

 

 

Core deposit and other intangible amortization expense was approximately $1.6 million and $906,000 for the three months ended September 30, 2018 and 2017, respectively. Core deposit and other intangible amortization expense was approximately $4.9 million and $2.6 million for the nine months ended September 30, 2018 and 2017, respectively. Including all of the mergers completed as of December 31, 2017, HBI’s estimated amortization expense of core deposits and other intangibles for each of the years 2018 through 2023 is approximately: 2018 – $6.6 million; 2019 – $6.5 million; 2020 – $5.9 million; 2021 – $5.7 million; 2022 – $5.7 million; 2023 – $5.5 million.

The carrying amount of the Company’s goodwill was $958.4 million and $927.9 million at September 30, 2018 and December 31, 2017, respectively. Goodwill is tested annually for impairment during the fourth quarter. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements.

7. Other Assets

Other assets consist primarily of equity securities without a readily determinable fair value and other miscellaneous assets. As of September 30, 2018 and December 31, 2017, other assets were $187.3 million and $177.8 million, respectively.

The Company has equity securities without readily determinable fair values such as stock holdings in the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“Federal Reserve”) which are outside the scope of ASC Topic 321,Investments – Equity Securities(“ASC Topic 321”). These equity securities without a readily determinable fair value were $134.1 million and $132.1 million at September 30, 2018 and December 31, 2017, respectively, and are accounted for at cost.

The Company has equity securities such as stock holdings in First National Bankers’ Bank and other miscellaneous holdings which are accounted for under ASC Topic 321. These equity securities without a readily determinable fair value were $24.5 million and $23.9 million at September 30, 2018 and December 31, 2017, respectively. There were no transactions during the period that would indicate a material change in fair value. Therefore, these investments were accounted for at cost.

8. Deposits

The aggregate amount of time deposits with a minimum denomination of $250,000 was $784.8 million and $636.9 million at September 30, 2018 and December 31, 2017, respectively. The aggregate amount of time deposits with a minimum denomination of $100,000 was $1.25 billion and $998.3 million at September 30, 2018 and December 31, 2017, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $4.9 million and $2.2 million for the three months ended September 30, 2018 and 2017, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $11.5 million and $5.8 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018 and December 31, 2017, brokered deposits were $591.6 million and $1.03 billion, respectively.

Deposits totaling approximately $1.84 billion and $1.51 billion at September 30, 2018 and December 31, 2017, respectively, were public funds obtained primarily from state and political subdivisions in the United States.

9. Securities Sold Under Agreements to Repurchase

At September 30, 2018 and December 31, 2017, securities sold under agreements to repurchase totaled $142.1 million and $147.8 million, respectively. For the three-month periods ended September 30, 2018 and 2017, securities sold under agreements to repurchase daily weighted-average totaled $148.8 million and $135.9 million, respectively. For the nine-month periods ended September 30, 2018 and 2017, securities sold under agreements to repurchase daily weighted-average totaled $148.5 million and $129.6 million, respectively.

The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2018 and December 31, 2017 is presented in the following tables:

   September 30, 2018 
   Overnight and
Continuous		   Up to 30
Days		   30-90
Days		   Greater than
90 Days		   Total 
   (In thousands) 

Securities sold under agreements to repurchase:

          

U.S. government-sponsored enterprises

  $26,134   $—     $—     $—     $26,134 

Mortgage-backed securities

   9,694    —      —      —      9,694 

State and political subdivisions

   90,715    —      —      —      90,715 

Other securities

   15,603    —      —      —      15,603 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowings

  $142,146   $—     $—     $—     $142,146 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   December 31, 2017 
   Overnight and
Continuous		   Up to 30
Days		   30-90
Days		   Greater than
90 Days		   Total 
   (In thousands) 

Securities sold under agreements to repurchase:

          

U.S. government-sponsored enterprises

  $11,525   $—     $—     $10,000   $21,525 

Mortgage-backed securities

   21,255    —      —      —      21,255 

State and political subdivisions

   85,428    —      —      —      85,428 

Other securities

   19,581    —      —      —      19,581 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowings

  $137,789   $—     $—     $10,000   $147,789 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

10. FHLB Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $    1.36 billion and $1.30 billion at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018, $750.0 million and $609.9 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2017, $525.0 million and $774.2 million of the outstanding balance were issued as short-term and long-term advances, respectively. The FHLB advances mature from the current year to 2033 with fixed interest rates ranging from 1.00% to 4.80% and are secured by loans and investments securities. Maturities of borrowings as of September 30, 2018 include: 2018 – $770.0 million; 2019 – $143.0 million; 2020 – $146.4 million; 2021 – zero; 2022 – zero; 2023 – zero; after 2023 – $300.4 million. Expected maturities will differ from contractual maturities because FHLB may have the right to call or HBI the right to prepay certain obligations. $300 million of the borrowings maturing after 2023 are callable by the FHLB within one year.

Additionally, the Company had $941.3 million and $695.3 million at September 30, 2018 and December 31, 2017, respectively, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits at September 30, 2018 and December 31, 2017, respectively.

11. Other Borrowings

The Company had zero other borrowings at September 30, 2018. The Parent Company took out a $20.0 million unsecured line of credit for general corporate purposes during 2015. The balance on this line of credit at September 30, 2018 and December 31, 2017 was zero.

12. Subordinated Debentures

Subordinated debentures at September 30, 2018 and December 31, 2017 consisted of guaranteed payments on trust preferred securities with the following components:

   As of
September 30,
2018		   As of
December 31,
2017		 
   (In thousands) 

Trust preferred securities

    

Subordinated debentures, issued in 2006, due 2036, fixed rate of 6.75% during the first five years and at a floating rate of 1.85% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty

  $3,093   $3,093 

Subordinated debentures, issued in 2004, due 2034, fixed rate of 6.00% during the first five years and at a floating rate of 2.00% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty

   15,464    15,464 

Subordinated debentures, issued in 2005, due 2035, fixed rate of 5.84% during the first five years and at a floating rate of 1.45% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty

   25,774    25,774 

Subordinated debentures, issued in 2004, due 2034, fixed rate of 4.29% during the first five years and at a floating rate of 2.50% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty

   16,495    16,495 

Subordinated debentures, issued in 2005, due 2035, floating rate of 2.15% above the three-month LIBOR rate, reset quarterly, currently callable without penalty

   4,341    4,304 

Subordinated debentures, issued in 2006, due 2036, fixed rate of 7.38% during the first five years and at a floating rate of 1.62% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty

   5,638    5,569 

Subordinated debt securities

    

Subordinated notes, net of issuance costs, issued in 2017, due 2027, fixed rate of 5.625% during the first five years and at a floating rate of 3.575% above the then three-month LIBOR rate, reset quarterly, thereafter, callable in 2022 without penalty

   297,791    297,332 
  

 

 

   

 

 

 

Total

  $368,596   $368,031 
  

 

 

   

 

 

 

The Company holds trust preferred securities with a face amount of $73.3 million which are currently callable without penalty based on the terms of the specific agreements. The trust preferred securities aretax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s subordinated debentures, the sole asset of each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. The Company wholly owns the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related subordinated debentures. The Company’s obligations under the subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.

The Bank acquired $12.5 million in trust preferred securities with a carrying value of $9.9 million and $9.8 million at September 30, 2018 and December 31, 2017, respectively, from the Stonegate acquisition. The difference between the fair value purchased of $9.9 million and the $12.5 million face amount, will be amortized into interest expense over the remaining life of the debentures. The associated subordinated debentures are redeemable, in whole or in part, prior to maturity at our option on a quarterly basis when interest is due and payable and in whole at any time within 90 days following the occurrence and continuation of certain changes in the tax treatment or capital treatment of the debentures.

13. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA makes broad and complex changes to the U.S. tax code that affected our income tax rate in 2017. The TCJA reduced the U.S. federal corporate income tax rate from 35% to 21%. The TCJA also established new tax laws that will affect 2018.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the 2017 Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. As such, the company’s 2017 financial results reflect the income tax effects for the 2017 Act for which the accounting under ASC 740 is complete and provisional amounts for those specific income tax effects of the 2017 Act for which the accounting under ASC 740 is incomplete, but a reasonable estimate could be determined. The company did not identify items for which the income tax effects of the 2017 Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017. The tax expense recorded in 2017 is a reasonable estimate based on published guidance available at this time and is considered provisional. The ultimate impact of the 2017 Act may differ from these estimates due to changes in interpretations and assumptions made by the Company, as well as additional regulatory guidance. Any adjustments will be reflected in the Company’s financial statements in future periods.

The following is a summary of the components of the provision (benefit) for income taxes for the three and nine-month periods ended September 30, 2018 and 2017:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2018   2017   2018   2017 
   (In thousands) 

Current:

        

Federal

  $17,999   $17,289   $44,354   $65,958 

State

   5,958    3,434    14,683    13,101 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current

   23,957    20,723    59,037    79,059 
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred:

        

Federal

   1,047    (11,002)    10,964    (13,238) 

State

   346    (2,185)    3,629    (2,629) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred

   1,393    (13,187)    14,593    (15,867) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

  $25,350   $7,536   $73,630   $63,192 
  

 

 

   

 

 

   

 

 

   

 

 

 

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three and nine-month periods ended September 30, 2018 and 2017:

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
   2018  2017  2018  2017 

Statutory federal income tax rate

   21.00%   35.00%   21.00%   35.00% 

Effect ofnon-taxable interest income

   (0.84)   (4.48)   (0.80)   (1.82) 

Effect of gain on acquisitions

   —     —     —     (0.76) 

Stock compensation

   (0.12)   (0.09)   (0.18)   (0.49) 

State income taxes, net of federal benefit

   3.30   3.91   3.60   4.01 

Other

   0.66   (0.63)   0.68   0.18 
  

 

 

  

 

 

  

 

 

  

 

 

 

Effective income tax rate

   24.00%   33.71%   24.30%   36.12% 
  

 

 

  

 

 

  

 

 

  

 

 

 

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

   September 30,
2018		   December 31,
2017		 
   (In thousands) 

Deferred tax assets:

    

Allowance for loan losses

  $30,023   $29,515 

Deferred compensation

   2,868    1,142 

Stock compensation

   3,674    2,731 

Real estate owned

   1,419    1,731 

Unrealized loss on securitiesavailable-for-sale

   11,118    1,471 

Loan discounts

   25,144    32,784 

Tax basis premium/discount on acquisitions

   8,387    8,802 

Investments

   1,008    1,155 

Other

   10,552    11,663 
  

 

 

   

 

 

 

Gross deferred tax assets

   94,193    90,994 
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Accelerated depreciation on premises and equipment

   1,157    291 

Core deposit intangibles

   10,163    11,258 

FHLB dividends

   1,712    1,625 

Other

   1,613    1,256 
  

 

 

   

 

 

 

Gross deferred tax liabilities

   14,645    14,430 
  

 

 

   

 

 

 

Net deferred tax assets

  $79,548   $76,564 
  

 

 

   

 

 

 

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and the states of Arkansas, Alabama, Florida and New York. The Company is no longer subject to U.S. federal and state tax examinations by tax authorities for years before 2013.

14. Common Stock, Compensation Plans and Other

Common Stock

The Company’s Restated Articles of Incorporation, as amended, authorize the issuance of up to 200,000,000 shares of common stock, par value $0.01 per share.

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

Stock Repurchases

On February 21, 2018, the Company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of its common stock under the previously approved stock repurchase program, which brought the total amount of authorized shares to repurchase to 14,752,000 shares. During 2018, the Company utilized a portion of this stock repurchase program.

During the first nine months of 2018, the Company repurchased a total of 1,863,400 shares with a weighted-average stock price of $23.14 per share. The 2018 earnings were used to fund the repurchases during the year. Shares repurchased under the program as of September 30, 2018 total 6,388,264 shares. The remaining balance available for repurchase is8,363,736 shares at September 30, 2018.

Stock Compensation Plans

The Company has a stock option and performance incentive plan known as the Amended and Restated 2006 Stock Option and Performance Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate those persons to improve the Company’s business results. On April 19, 2018 at the Annual Meeting of Shareholders of the Company, the shareholders approved, as proposed in the Proxy Statement, an amendment to the Plan to increase the number of shares of the Company’s common stock available for issuance under the Plan by 2,000,000 shares to 13,288,000 shares. The Plan provides for the granting of incentive andnon-qualified stock options and other equity awards, including the issuance of restricted shares. As of September 30, 2018, the maximum total number of shares of the Company’s common stock available for issuance under the Plan was 13,288,000. At September 30, 2018, the Company had approximately 1,841,443 shares of common stock remaining available for future grants and approximately 5,477,700 shares of common stock reserved for issuance pursuant to outstanding awards under the Plan.

During the third quarter of 2018, the Company granted 1,452,000 stock options and 843,500 shares of restricted stock to certain employees under the HOMB $2.00 program (“HOMB $2.00”). The purpose of the performance-based incentive plan is to motivate employees to help the Company achieve $2.00 of diluted earnings per share over a consecutive four-quarter period.

The intrinsic value of the stock options outstanding and stock options vested at September 30, 2018 was $11.0 million and $8.0 million, respectively. Total unrecognized compensation cost, net of income tax benefit, related tonon-vested stock option awards, which are expected to be recognized over the vesting periods, was approximately $13.3 million as of September 30, 2018. For the first nine months of 2018, the Company has expensed approximately $1.4 million for thenon-vested awards.

The table below summarizes the stock option transactions under the Plan at September 30, 2018 and December 31, 2017 and changes during the nine-month period and year then ended:

   For the Nine Months
Ended September 30, 2018		   For the Year Ended
December 31, 2017		 
   Shares
(000)		   Weighted-
Average
Exercisable
Price		   Shares
(000)		   Weighted-
Average
Exercisable
Price		 

Outstanding, beginning of year

   2,274   $16.23    2,397   $15.19 

Granted

   1,576    23.24    80    25.96 

Forfeited/Expired

   (37)    22.30    —      —   

Exercised

   (177)    9.42    (203)    7.82 
  

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding, end of period

   3,636    19.54    2,274    16.23 
  

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable, end of period

   1,171    15.10    1,016   $13.55 
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense for stock-based compensation awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options. The weighted-average fair value of options granted during the nine months ended September 30, 2018 was $5.58 per share. The weighted-average fair value of options granted during the year ended December 31, 2017 was $7.10 per share. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model based on the weighted-average assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate, and expected life of options granted.

   For the Nine
Months Ended
September 30, 2018		  For the
Year Ended
December 31, 2017		 

Expected dividend yield

   2.05%   1.39% 

Expected stock price volatility

   25.59%   28.47% 

Risk-free interest rate

   2.82%   2.06% 

Expected life of options

   6.5 years   6.5 years 

The following is a summary of currently outstanding and exercisable options at September 30, 2018:

Options Outstanding

 

Options Exercisable

Exercise Prices

 

Options

Outstanding

Shares

(000)

 

Weighted-

Average

Remaining

Contractual

Life (in years)

 

Weighted-

Average

Exercise

Price

 

Options

Exercisable

Shares (000)

 

Weighted-

Average

Exercise

Price

$2.10 to $2.66

 12 0.73 2.60 12 2.60

$5.68 to $6.56

 89 3.22 6.54 89 6.54

$8.62 to $9.54

 259 4.41 9.04 259 9.04

$14.71 to $16.86

 252 6.02 15.97 168 16.05

$17.12 to $17.40

 195 6.15 17.20 118 17.22

$18.46

 1,010 6.90 18.46 433 18.46

$20.16 to $20.58

 68 7.02 20.41 28 20.34

$21.25 to $22.22

 230 8.51 21.71 48 21.25

$22.70 to $23.51

 1,441 9.81 23.32 —   —  

$25.96

 80 8.56 25.96 16 25.96
 

 

   

 

 
 3,636   1,171 
 

 

   

 

 

The table below summarized the activity for the Company’s restricted stock issued and outstanding at September 30, 2018 and December 31, 2017 and changes during the period and year then ended:

  As of
September 30,
2018		  As of
December 31,
2017		 
  (In thousands) 

Beginning of year

  1,145   958 

Issued

  1,005   232 

Vested

  (229)   (45) 

Forfeited

  (49)   —   
 

 

 

  

 

 

 

End of period

  1,872   1,145 
 

 

 

  

 

 

 

Amount of expense for nine months and twelve months ended, respectively

 $5,153  $5,237 
 

 

 

  

 

 

 

Total unrecognized compensation cost, net of income tax benefit, related tonon-vested restricted stock awards, which are expected to be recognized over the 7.8 weighted average remaining contractual life, was approximately $30.2 million as of September 30, 2018.

15.Non-Interest Expense

The table below shows the components ofnon-interest expense for the three and nine months ended September 30, 2018 and 2017:

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2018   2017   2018   2017 
   (In thousands) 

Salaries and employee benefits

  $37,825   $28,510   $107,315   $83,965 

Occupancy and equipment

   8,148    7,887    25,650    21,602 

Data processing expense

   3,461    2,853    10,786    8,439 

Other operating expenses:

        

Advertising

   1,154    795    3,258    2,305 

Merger and acquisition expenses

   —      18,227    —      25,743 

Amortization of intangibles

   1,617    906    4,867    2,576 

Electronic banking expense

   1,947    1,712    5,653    4,885 

Directors’ fees

   314    309    962    946 

Due from bank service charges

   253    472    714    1,348 

FDIC and state assessment

   2,293    1,293    6,689    3,763 

Insurance

   762    577    2,363    1,698 

Legal and accounting

   761    698    2,397    1,799 

Other professional fees

   1,748    1,436    4,988    3,822 

Operating supplies

   510    432    1,712    1,376 

Postage

   311    280    978    861 

Telephone

   337    305    1,081    1,027 

Other expense

   4,682    4,154    13,318    10,835 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating expenses

   16,689    31,596    48,980    62,984 
  

 

 

   

 

 

   

 

 

   

 

 

 

Totalnon-interest expense

  $66,123   $70,846   $192,731   $176,990 
  

 

 

   

 

 

   

 

 

   

 

 

 

16. Significant Estimates and Concentrations of Credit Risks

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

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

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

Although the Company has a diversified loan portfolio, commercial real estate loans represented 58.3% and 61.8% of total loans receivable at September 30, 2018 and December 31, 2017, respectively, and 269.5% and 289.6% of total stockholders’ equity at September 30, 2018 and December 31, 2017, respectively. Residential real estate loans represented23.9% and 23.3% of total loans receivable and 110.7% and 109.4% of total stockholders’ equity at September 30, 2018 and December 31, 2017, respectively.

Approximately 89.1% of the Company’s total loans and 91.1% of the Company’s real estate loans as of September 30, 2018, are to borrowers whose collateral is located in Alabama, Arkansas, Florida and New York, the states in which the Company has its branch locations.

Although general economic conditions in our market areas have improved, both nationally and locally, in recent years and have shown signs of continued improvement, financial institutions still face circumstances and challenges which, in some cases, have resulted and could potentially result, in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.

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

17. Commitments and Contingencies

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

At September 30, 2018 and December 31, 2017, commitments to extend credit of $2.25 billion and $2.38 billion, respectively, were outstanding. A percentage of these balances are participated out to other banks; therefore, the Company can call on the participating banks to fund future draws. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Outstanding standby letters of credit are contingent commitments issued by the Company, generally to guarantee the performance of a customer in third-party borrowing arrangements. The term of the guarantee is dependent upon the creditworthiness of the borrower, some of which are long-term. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does foron-balance-sheet instruments. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2018 and December 31, 2017, is $55.0 million and $70.5 million, respectively.

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

18. Regulatory Matters

The Bank is subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since the Bank is also under supervision of the Federal Reserve, it is further limited if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. During the first nine months of 2018, the Company requested approximately $155.5 million in regular dividends from its banking subsidiary. This dividend is equal to approximately63.0% of the Company’s banking subsidiary’syear-to-date 2018 earnings.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total, common Tier 1 equity and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of September 30, 2018, the Company meets all capital adequacy requirements to which it is subject.

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 will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019 when thephase-in period ends and the full capital conservation buffer requirement becomes effective.

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

The Federal Reserve Board’s risk-based capital guidelines include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. Under Basel III, the criteria for a well-capitalized institution are now: a 6.5% “common equity Tier 1 risk-based capital” ratio, a 5% “Tier 1 leverage capital” ratio, an 8% “Tier 1 risk-based capital” ratio, and a 10% “total risk-based capital” ratio. As of September 30, 2018, the Bank met the capital standards for a well-capitalized institution. The Company’s “common equity Tier 1 risk-based capital” ratio, “Tier 1 leverage capital” ratio, “Tier 1 risk-based capital” ratio, and “total risk-based capital” ratio were 11.65%, 10.38%, 12.25%, and 15.73%, respectively, as of September 30, 2018.

19. Additional Cash Flow Information

In connection with the GHI acquisition, accounted for using the purchase method, the Company acquired approximately $398.1 million in assets, including $41.0 million in cash and cash equivalents, assumed $345.0 million in liabilities, issued 2,738,038 shares of its common stock valued at approximately $77.5 million as of February 23, 2017, and paid approximately $18.5 million in cash in exchange for all outstanding shares of GHI common stock.

In connection with the BOC acquisition, accounted for using the purchase method, the Company acquired approximately $178.1 million in assets, including $4.6 million in cash and cash equivalents, assumed $170.1 million in liabilities, issued no equity and paid approximately $4.2 million in cash. As a result, the Company recorded a bargain purchase gain of $3.8 million.

In connection with the Stonegate acquisition, accounted for using the purchase method, the Company acquired approximately $2.89 billion in assets, including $101.0 million in cash and cash equivalents, assumed $2.60 billion in liabilities, issued 30,863,658 shares of its common stock valued at approximately $742.3 million as of September 26, 2017, and paid $50.1 million in cash in exchange for all outstanding shares of Stonegate common stock.

In connection with the SPF acquisition, accounted for using the purchase method, the Company acquired approximately $377.0 million in assets, including $376.2 million in loans, issued 1,250,000 shares of its common stock valued at approximately $28.2 million as of June 30, 2018, and paid $377.4 million in cash.

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

   September 30, 
   2018   2017 
   (In thousands) 

Interest paid

  $80,057   $34,573 

Income taxes paid

   47,682    117,025 

Assets acquired by foreclosure

   10,098    9,255 

20. Financial Instruments

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

Level 1Quoted prices in active markets for identical assets or liabilities
Level 2

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

Level 3

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

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

Financial Assets and Liabilities Measured on a Recurring Basis

Available-for-sale securities are the only material financial instruments valued on a recurring basis which are held by the Company at fair value. The Company does not have any Level 1 securities. Primarily all of the Company’s securities are considered to be Level 2 securities. These Level 2 securities consist primarily of U.S. government-sponsored enterprises, mortgage-backed securities plus state and political subdivisions. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. As of September 30, 2018 and December 31, 2017, Level 3 securities were immaterial. In addition, there were no material transfers between hierarchy levels during 2018 and 2017. See Note 3 for additional detail related to investment securities.

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities with complicated structures. Pricing for the Company’s investment securities is fairly generic and is easily obtained.

Financial Assets and Liabilities Measured on a Nonrecurring Basis

Impaired loans that are collateral dependent are the only material financial assets valued on anon-recurring basis which are held by the Company at fair value. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the net realizable value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses. The fair value of loans with specific allocated losses was $77.5 million and $72.5 million as of September 30, 2018 and December 31, 2017, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $164,000 and $314,000 of accrued interest receivable whennon-covered impaired loans were put onnon-accrual status during the three months ended September 30, 2018 and 2017, respectively. The Company reversed approximately $728,000 and $523,000 of accrued interest receivable whennon-covered impaired loans were put onnon-accrual status during the nine months ended September 30, 2018 and 2017, respectively.

Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis

Foreclosed assets held for sale are the only materialnon-financial assets valued on anon-recurring basis which are held by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held for sale is estimated using Level 3 inputs based on appraisals of underlying collateral. As of September 30, 2018 and December 31, 2017, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $13.5 million and $18.9 million, respectively.

No foreclosed assets held for sale were remeasured during the nine months ended September 30, 2018. Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets held for sale on at least an annual basis. The Company’s policy is to comply with the regulatory guidelines.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans and foreclosed assets primarily relate to customized discounting criteria applied to the customer’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the underlying collateral. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 20% to 30% for commercial and residential real estate collateral.

Fair Values of Financial Instruments

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

   September 30, 2018 
   Carrying
Amount		   Fair Value   Level 
   (In thousands)     

Financial assets:

      

Cash and cash equivalents

  $532,057   $532,057    1 

Federal funds sold

   500    500    1 

Investment securities –held-to-maturity

   199,266    198,552    2 

Loans receivable, net of impaired loans and allowance

   10,645,129    10,429,379    3 

Accrued interest receivable

   48,909    48,909    1 

Financial liabilities:

      

Deposits:

      

Demand andnon-interest-bearing

  $2,482,857   $2,482,857    1 

Savings and interest-bearing transaction accounts

   6,420,951    6,420,951    1 

Time deposits

   1,720,930    1,696,005    3 

Securities sold under agreements to repurchase

   142,146    142,146    1 

FHLB and other borrowed funds

   1,363,851    1,291,287    2 

Accrued interest payable

   12,383    12,383    1 

Subordinated debentures

   368,596    374,338    3 
  

 

 

   

 

 

   

 

 

 

   December 31, 2017 
   Carrying
Amount		   Fair Value   Level 
   (In thousands) 

Financial assets:

      

Cash and cash equivalents

  $635,933   $635,933    1 

Federal funds sold

   24,109    24,109    1 

Investment securities –held-to-maturity

   224,756    227,539    2 

Loans receivable, net of impaired loans and allowance

   10,148,470    10,055,901    3 

Accrued interest receivable

   45,708    45,708    1 

Financial liabilities:

      

Deposits:

      

Demand andnon-interest-bearing

  $2,385,252   $2,385,252    1 

Savings and interest-bearing transaction accounts

   6,476,819    6,476,819    1 

Time deposits

   1,526,431    1,514,670    3 

Securities sold under agreements to repurchase

   147,789    147,789    1 

FHLB and other borrowed funds

   1,299,188    1,299,961    2 

Accrued interest payable

   5,583    5,583    1 

Subordinated debentures

   368,031    379,146    3 

21. Recent Accounting Pronouncements

In May 2014, the FASB issued ASU2014-09,Revenue from Contracts with Customers (Topic 606). ASU2014-09 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASUNo. 2015-14,Revenue from Contracts with Customers (Topic 606), which defers the effective date of this standard to annual and interim periods beginning after December 15, 2017; however, early adoption was permitted for annual and interim reporting periods beginning after December 15, 2016. In April 2016, the FASB issued ASU2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends certain aspects of the guidance in ASU2014-09 (FASB’s new revenue standard) on (1) identifying performance obligations and (2) licensing. ASU2014-10’s effective date and transition provisions are aligned with the requirements in ASU2014-09. In May 2016, the FASB issued ASU2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of the FASB’s new revenue standard, ASU2014-09. ASU2016-12’s effective date and transition provisions are aligned with the requirements in ASU2014-09.

The guidance issued in ASU2014-09, ASU2015-14, ASU2016-10 and ASU2016-12 permit two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company adopted the guidance effective January 1, 2018, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In January 2016, the FASB issued ASU2016-01,Financial Instruments – Overall(Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. The ASU requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities previously recognized in accumulated other comprehensive income (“AOCI”). In addition, ASU2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses onavailable-for-sale securities. The new guidance is effective for annual reporting period and interim reporting periods within those annual periods, beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018 and recorded a cumulative-effect adjustment to retained earnings of $990,000 to reclassify the cumulative change in fair value of equity securities previously recognized in AOCI. For additional information on fair value of assets and liabilities, see Note 20.

In February 2016, the FASB issued ASU2016-02,Leases (Topic 842). The amendments in ASU2016-02 address several aspects of lease accounting with the significant change being the recognition ofROU lease assets and lease liabilities for leases previously classified as operating leases. ASU2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application ofrepresent the amendments in ASU2016-02 is permitted for all entities. The Company has several lease agreements for which the amendments will require the Company to recognize a lease liability to make lease payments and aright-of-use asset which will represent itsCompany’s right to use thean underlying asset for the lease term.term, and the lease liability represents the Company’s obligation to make lease payments arising from the lease. The Company is currently reviewingoperating ROU lease asset and lease liability are recognized at the amendments to ensure it is fully compliant by the adoptioncommencement date and does not expect to early adopt. The impact is not expected to have a material effectare based on the Company’s financial position or results of operations as the Company does not have a material amountpresent value of lease agreements. In addition,payments over the Company will change its current accounting policies to comply with the amendments with such changes as mentioned above. For additional information onlease term. As most of the Company’s leases see Note 18 “Leases” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form10-K for the year ended December 31, 2017.

In May 2016, the FASB issued ASU2016-11,Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates2014-09 and2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update), which rescinds certain SEC guidance from the FASB Accounting Standards Codification in response to announcements made by the SEC staff at the Emerging Issues Task Force’s (“EITF”) March 3, 2016, meeting. ASU2016-11 is effective at the same time as ASU2014-09 and ASU2014-16. The Company adopted the guidance effective January 1, 2018, and its adoption diddo not have a significant impact on the Company’s financial position or financial statement disclosures.

In June 2016, the FASB issued ASU2016-13,Measurement of Credit Losses on Financial Instruments, which amends the FASB’s guidance on the impairment of financial instruments. The amendments in ASU2016-13 replace the incurred loss model with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates, known as the current expected credit loss (“CECL”) model. Under the new guidance,provide an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU2016-13 is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. ASU2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The allowance for loan losses is a material estimate ofimplicit rate, the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the allowance for loan losses at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The Company will also develop new procedures for determining an allowance for credit losses relating toheld-to-maturity investment securities. In addition, the current accounting policy and procedures for other-than-temporary impairment onavailable-for-sale investment securities will be replaced with an allowance approach. The Company is currently evaluating the impact, if any, ASU2016-13 will have onuses its financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from the amendments. It is too early to assess the impact that the implementation of this guidance will have on the Company’s consolidated financial statements; however, the Company has begun developing processes and procedures to ensure it is fully compliant with the amendments at the required adoption date. Among other things, the Company has initiated data gathering and assessment to support forecasting of asset quality, loan balances, and portfolio net charge-offs and has developed anin-house data warehouse, developed asset quality forecast models and evaluated potential software vendors in preparation for the implementation of this standard. For additional information on the allowance for loan losses, see Note 5.

In August 2016, the FASB issued ASU2016-15,Classification of Certain Cash Receipts and Cash Payments,which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. ASU2016-15’s amendments add or clarify guidance on eight cash flow issues including debt prepayment or debt extinguishment costs; settlement ofzero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interestincremental borrowing rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. ASU2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and the guidance must be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. The Company adopted the guidance effective January 1, 2018, and its adoption did not have a significant impact on the Company’s statement of cash flows or financial statement disclosures.

In October 2016, the FASB issued ASU2016-16,Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning period of adoption. Early adoption is permitted in the first interim period of an annual reporting period for which financial statements have not been issued. The Company adopted the guidance effective January 1, 2018, and its adoption did not have a significant impact on the Company’s financial position or financial statement disclosures.

In November 2016, the FASB issued ASU2016-18,Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows, and, as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, and the new guidance must be applied retrospectively to all periods presented. The Company adopted the guidance effective January 1, 2018 and its adoption did not have a significant impact on the Company’s financial position or financial statement disclosures.

In January 2017, the FASB issued ASU2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance to entities to assist with evaluating when a set of transferred assets and activities (collectively, the “set”) is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption. Early adoption is permitted for interim or annual periods in which the financial statements have not been issued. The Company adopted the guidance effective January 1, 2018, and its adoption did not have a significant impact on the Company’s financial position or financial statement disclosures.

In January 2017, the FASB issued ASU2017-03,Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323). The amendments in the update relate to SEC paragraphs pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF meetings related to disclosure of the impact of recently issued accounting standards. The SEC staff’s view that a registrant should evaluate ASC updates that have not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an update, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent ASC amendments to ASU2016-02,Leases, and ASU2014-09,Revenue from Contracts with Customers, although, the amendments apply to any subsequent amendments to guidance in the ASC. The Company adopted the amendments in this update during the fourth quarter of 2016, and appropriate disclosures have been included in this Note for each recently issued accounting standard.

In January 2017, the FASB issued ASU2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that wouldmore-likely-than-not reduce the fair value of the reporting unit below its carrying value. During 2017, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment it is unlikely that an impairment amount would need to be calculated, and, therefore,information available at the Company does not anticipate a material impact from these amendments tocommencement date in determining the Company’s financial position and resultspresent value of operations. The current accounting policies and processes are not anticipated to change, exceptlease payments. See Note 15 for the elimination of the Step 2 analysis.

additional disclosures.

In February 2017, the FASB issued ASU2017-05,Other Income: Gains and Losses from the Derecognition of Nonfinancial Assets, which clarifies the scope of the FASB’s guidance on nonfinancial asset derecognition (ASC610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The ASU requires an entity to derecognize the nonfinancial asset orin-substance nonfinancial asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary under ASC 810 and (2) control of the asset is transferred in accordance with ASC 606. The entity therefore has to consider repurchase agreements (e.g., a call option to repurchase the ownership interest in a subsidiary) in its assessment and may not be able to derecognize the nonfinancial assets, even though it no longer has a controlling financial interest in a subsidiary in accordance with ASC 810. The ASU illustrates the application of this guidance in ASC610-20-55-15 and55-16. The effective date of the new guidance is aligned with the requirements in the new revenue standard, which is effective for public entities for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017, and for nonpublic entities for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company adopted the guidance effective January 1, 2018, and its adoption did not have a significant impact on the Company’s financial position or financial statement disclosures.

In March 2017, the FASB issued ASU2017-08,Receivables – Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. This ASU will shorten the amortization period for the premium to be amortized to the earliest call date. This ASU does not apply to securities held at a discount, which will continue to be amortized to maturity. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted, including adoption in an interim period. The Company early adopted the guidance effective January 1, 2018, and its adoption did not have a significant impact on the Company’s financial position or financial statement disclosures.

In May 2017, the FASB issued ASU2017-09,Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in ASU2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company adopted the guidance effective January 1, 2018. The Company does not anticipate any modifications to its existing awards, and therefore, the adoption of ASU2017-09 is not expected to have a significant impact on the Company’s financial position, results of operations, or its financial statement disclosures.

In July 2017, the FASB issued ASU2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily RedeemableNon-Controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigatingTopic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemablenon-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact, if any, ASU2017-11 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope of the guidance, reviewing its accounting and disclosures for these transactions and accounts, and identifying and implementing any necessary changes to its accounting and disclosures as a result of the guidance. The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2019.

In August 2017, the FASB issued ASU

2017-12,
Derivatives and Hedging (Topic 815) –- Targeted Improvements to Accounting for Hedging Activities
, which amends the hedge accounting model to provide better insight to risk management activities in the financial statements, reduces the complexity in cash flow hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, requires the entire change in the fair value of a hedging instrument included in the assessment of the hedge effectiveness to be recorded in other comprehensive income, with amounts reclassified to earnings to be presented in the same line item used to present the earnings effect of the hedged item when the hedged item affects earnings and allows the initial prospective quantitative assessment of hedge effectiveness to be performed at any time after hedge designation, but no later than the first quarterly effectiveness testing date. This ASU is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The amendments in this standard must be applied using the modified retrospective approach for cash flow and net investment hedge relationships existing on the date of adoption. The Company is currently evaluating the impact, if any, ASU2017-12 will have on its financial position, results of operations, and its financial statement disclosures. The Company’s evaluation process includes, but is not limited to, identifying transactions and accounts within the scope ofadopted the guidance reviewing its accountingeffective January 1, 2019, and disclosures for these transactionsas permitted by the ASU, the Company reclassified the prepayable
held-to-maturity
investment securities, with a fair value of $193.6 million and accounts, and identifying and implementing any necessary changes$834,000 in net unrealized gains as of December 31, 2018, to its accounting and disclosures as a result of the guidance.
available-for-sale
investment securities.
The Company is also identifying and implementing changes to its business processes, systems and controls to support adoption of the new standard in 2019.

In February 2018, the FASB issuedadopted ASU

2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
effective January 1, 2019. In accordance with the standard, the Company made an election to reclassify the income tax effects of the Tax Cuts and Jobs Act (“TCJA”) from accumulated other comprehensive income (“AOCI”) to retained earnings. The stranded tax effects were a result of the decrease in the corporate tax rate from 35% to 21% on deferred tax liabilities and assets for
available-for-sale
and equity securities which had been recognized as an adjustment to income tax expense and included in income from continuing operations, with the tax effects initially recognized directly in other comprehensive income which caused the stranded tax effects to remain in AOCI. The Company adopted the guidance effective January 1, 2019, and its adoption resulted in a $459,000 reclassification between retained earnings and accumulated other comprehensive income. The Company’s policy for future tax rate changes is to release the future disproportionate income tax effects from AOCI using the aggregate portfolio approach.
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Table of Contents
Revenue Recognition
Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC Topic 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit, investment securities and mortgage lending income, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our significant revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our income statements as components of
non-interest
income are as follows:
Service charges on deposit accounts – These represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
Other service charges and fees – These represent credit card interchange fees and Centennial Commercial Finance Group (“Centennial CFG”) loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. The Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310.
Earnings per Share
Basic earnings per share is computed based on the weighted-average number of shares outstanding during each year. Diluted earnings per share is computed using the weighted-average shares and all potential dilutive shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the following periods:
                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(In thousands)
 
Net income
 $
72,164
  $
76,025
  $
143,514
  $
149,089
 
Average shares outstanding
  
167,791
   
173,403
   
168,686
   
173,581
 
Effect of common stock options
  
—  
   
533
   
—  
   
587
 
                 
Average diluted shares outstanding
  
167,791
   
173,936
   
168,686
   
174,168
 
                 
Basic earnings per share
 $
0.43
  $
0.44
  $
0.85
  $
0.86
 
Diluted earnings per share
 $
0.43
  $
0.44
  $
0.85
  $
0.86
 
As of June 30, 2019, options to purchase
3.6
million shares of common stock, with a weighted average exercise price of $
19.57
, were excluded from the computation of diluted net income per share as the majority of the options had an exercise price which was greater than the average market price of the common stock.
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Table of Contents
2. Business Combinations
Acquisition of Shore Premier Finance
On
June 30, 2018
, the Company completed the acquisition of Shore Premier Finance (“SPF”), a division of Union Bank & Trust of Richmond, Virginia, the bank subsidiary of Union Bankshares Corporation. The Company paid a purchase price of approximately $377.4 million in cash, subject to certain post-closing adjustments, and 1,250,000 shares of HBI common stock valued at approximately $28.2 million at the time of closing. SPF provides direct consumer financing for United States Coast Guard (“USCG”) registered
high-end
sail and power boats. Additionally, SPF 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, SPF had approximately $377.0 million in total assets, including $376.2 million in total loans, which resulted in goodwill of $30.5 million being recorded.
This portfolio of loans is now housed in a division of Centennial known as Shore Premier Finance. The SPF division of Centennial is responsible for servicing the acquired loan portfolio and originating new loan production. In connection with this acquisition, Centennial opened a new loan production office in Chesapeake, Virginia to house the SPF division. Through the SPF division, Centennial is working to build out a lending platform focusing on commercial and consumer marine loans.
The Company has determined that the acquisition of the net assets of SPF constitutes a business combination as defined by the ASC Topic 805. Accordingly, the assets acquired are presented at their fair values as required. Fair values were determined based on the requirements of ASC Topic 820. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change.
3. Investment Securities
Effective January 1, 2019, as permitted by ASU
2017-12,
Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities
, the Company reclassified the prepayable
held-to-maturity
(“HTM”) investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to
available-for-sale
investment securities. The amortized cost and estimated fair value of investment securities that are classified as
available-for-sale
and
held-to-maturity
are as follows:
                 
 
June 30, 2019
 
 
Available-for-Sale
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
(Losses)
  
Estimated
Fair Value
 
 
(In thousands)
 
U.S. government-sponsored enterprises
 $
415,153
  $
1,218
  $
(1,899
) $
414,472
 
Residential mortgage-backed securities
  
665,630
   
3,848
   
(2,249
)  
667,229
 
Commercial mortgage-backed securities
  
494,115
   
7,388
   
(682
)  
500,821
 
State and political subdivisions
  
425,505
   
12,345
   
(103
)  
437,747
 
Other securities
  
33,544
   
450
   
(324
)  
33,670
 
       
 
 
   
 
 
   
 
 
 
Total
 $
2,033,947
  $
25,249
  $
(5,257
) $
2,053,939
 
                 
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December 31, 2018
 
 
Available-for-Sale
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
(Losses)
  
Estimated
Fair Value
 
 
(In thousands)
 
U.S. government-sponsored enterprises
 $
418,605
  $
504
  $
(4,976
) $
414,133
 
Residential mortgage-backed securities
  
580,183
   
1,230
   
(8,512
)  
572,901
 
Commercial mortgage-backed securities
  
463,084
   
539
   
(7,745
)  
455,878
 
State and political subdivisions
  
308,835
   
2,311
   
(2,589
)  
308,557
 
Other securities
  
34,336
   
304
   
(247
)  
34,393
 
                 
Total
 $
1,805,043
  $
4,888
  $
(24,069
) $
1,785,862
 
                 
                 
 
Held-to-Maturity
 
 
    Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
  Unrealized
(Losses)
  
Estimated
   Fair Value
 
 
(In thousands)
 
U.S. government-sponsored enterprises
 $
3,261
  $
14
  $
(71
) $
3,204
 
Residential mortgage-backed securities
  
39,707
   
20
   
(689
)  
39,038
 
Commercial mortgage-backed securities
  
17,587
   
58
   
(267
)  
17,378
 
State and political subdivisions
  
132,221
   
1,815
   
(46
)  
133,990
 
                 
Total
 $
192,776
  $
1,907
  $
(1,073
) $
193,610
 
                 
Assets, principally investment securities, having a carrying value of approximately $970.1 million and $1.32 billion at June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. 
The decrease in investments pledged to secure public deposits is due to the Company increasing the usage of FHLB letters of credit in order to secure public deposits. 
Also, investment securities pledged as collateral for repurchase agreements totaled approximately $142.5 million and $143.7 million at June 30, 2019 and December 31, 2018, respectively.
The amortized cost and estimated fair value of securities classified as
available-for-sale
at June 30, 2019, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
         
 
Available-for-Sale
 
 
Amortized
Cost
  
Estimated
Fair Value
 
 
(In thousands)
 
Due in one year or less
 $
363,329
  $
364,679
 
Due after one year through five years
  
1,134,765
   
1,141,408
 
Due after five years through ten years
  
374,841
   
384,786
 
Due after ten years
  
161,012
   
163,066
 
   
 
 
   
 
 
 
 
Total
 $
2,033,947
  $
2,053,939
 
         
For purposes of the maturity tables, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on anticipated maturities. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.
During the three-month and
six-month
periods ended June 30, 2019, no
available-for-sale
securities were sold.
During the three-month period ended June 30, 2018, there were no
available-for-sale
securities sold. During the 
six-month
period ended June 30, 2018, approximately $809,000 in
available-for-sale
securities were sold. No realized gains or losses were recorded on the sales for the three and
six-month
periods ended June 30, 2018. The income tax expense/benefit to net security gains and losses was 26.135% of the gross amounts. During 2018, no
held-to-maturity
securities were sold.
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Table of Contents
The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. In completing these evaluations, the Company follows the requirements of FASB ASC 320,
Investments - Debt and Equity Securities.
Certain investment securities are valued less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. The Company does not intend to sell or believe it will be required to sell these investments before recovery of their amortized cost basis, which may be maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
During the three and
six-month
period ended June 30, 2019, no securities were deemed to have other-than-temporary impairment.
For the six months ended June 30, 2019, the Company had investment securities with approximately $4.4 million in unrealized losses, which have been in continuous loss positions for more than twelve months. Excluding impairment write-downs taken in prior periods, the Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates (not the issuer’s financial condition or downgrades by rating agencies). In addition, approximately 73.3% of the Company’s investment portfolio matures in five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.
The following shows gross unrealized losses and estimated fair value of investment securities classified as
available-for-sale
and
held-to-maturity
with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of June 30, 2019 and December 31, 2018:
                         
 
June 30, 2019
 
 
Less Than 12 Months
  
12 Months or More
  
Total
 
 
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
 
 
(In thousands)
 
U.S. government-sponsored enterprises
 $
18,720
  $
(72
) $
190,667
  $
(1,827
) $
209,387
  $
(1,899
)
Residential mortgage-backed securities
  
58,361
   
(437
)  
268,583
   
(1,812
)  
326,944
   
(2,249
)
Commercial mortgage-backed securities
  
5,883
   
(42
)  
91,770
   
(640
)  
97,653
   
(682
)
State and political subdivisions
  
4,977
   
(23
)  
18,835
   
(80
)  
23,812
   
(103
)
Other securities
  
7,283
   
(239
)  
8,209
   
(85
)  
15,492
   
(324
)
   
 
 
   
 
 
 
   
 
 
 
 
   
 
 
 
 
 
   
 
 
 
   
 
 
 
 
Total
 $
95,224
  $
(813
) $
578,064
  $
(4,444
) $
673,288
  $
(5,257
)
                         
                         
 
December 31, 2018
 
 
Less Than 12 Months
  
12 Months or More
  
Total
 
 
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
 
 
(In thousands)
 
U.S. government-sponsored enterprises
 $
148,392
  $
(1,398
) $
192,456
  $
(3,649
) $
340,848
  $
(5,047
)
Residential mortgage-backed securities
  
95,001
   
(713
)  
386,279
   
(8,488
)  
481,280
   
(9,201
)
Commercial mortgage-backed securities
  
33,917
   
(337
)  
368,705
   
(7,675
)  
402,622
   
(8,012
)
State and political subdivisions
  
64,376
   
(763
)  
77,602
   
(1,872
)  
141,978
   
(2,635
)
Other securities
  
3,364
   
(154
)  
8,307
   
(93
)  
11,671
   
(247
)
                         
Total
 $
345,050
  $
(3,365
) $
1,033,349
  $
(21,777
) $
1,378,399
  $
(25,142
)
                         
14
Table of Contents
As of June 30, 2019, the Company’s securities portfolio consisted of 1,331 investment securities, 325 of which were in an unrealized loss position. As noted in the table above, the total amount of the unrealized loss was $5.3 million. The U.S government-sponsored enterprises portfolio contained unrealized losses of $1.9 million on 70 securities. The residential mortgage-backed securities portfolio contained $2.3 million of unrealized losses on 182 securities, and the commercial mortgage-backed securities portfolio contained $682,000 of unrealized losses on 39 securities. The state and political subdivisions portfolio contained $103,000 of unrealized losses on 28 securities. In addition, the other securities portfolio contained $324,000 of unrealized losses on 6 securities. The unrealized losses on the Company’s investments were a result of interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value was attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2019.
Income earned on securities for the three and six months ended June 30, 2019 and 2018, is as follows:
                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(In thousands)
 
Taxable:
            
Available-for-sale
 $
10,650
  $
8,528
   $
21,356
  $
16,993
 
Held-to-maturity
  
— 
   
451
   
— 
   
956
 
Non-taxable:
            
Available-for-sale
  
3,183
   
2,452
   
6,562
   
3,801
 
Held-to-maturity
  
— 
   
916
   
— 
   
2,573
 
           
 
 
     
Total
  $
13,833
  $
12,347
   $
27,918
  $
24,323
 
                 
4.
Loans Receivable
The various categories of loans receivable are summarized as follows:
         
 
June 30,
2019
  
December 31,
2018
 
 
(In thousands)
 
Real estate:
      
Commercial real estate loans
      
Non-farm/non-residential
 $
4,495,558
  $
4,806,684
 
Construction/land development
  
1,930,838
   
1,546,035
 
Agricultural
  
85,045
   
76,433
 
Residential real estate loans
      
Residential
1-4
family
  
1,852,784
   
1,975,586
 
Multifamily residential
  
523,789
   
560,475
 
         
Total real estate
  
8,888,014
   
8,965,213
 
Consumer
  
455,554
   
443,105
 
Commercial and industrial
  
1,515,357
   
1,476,331
 
Agricultural
  
80,621
   
48,562
 
Other
  
113,583
   
138,668
 
         
Total loans receivable
 $
11,053,129
  $
11,071,879
 
         
During the three and
six-month
period ended June 30, 2019, the Company sold $
4.2
million and $8.6 million of the guaranteed portion of certain Small Business Administration (“SBA”) loans, which resulted in a gain of approximately $355,000 and $596,000, respectively. During the three and
six-month
periods ended June 30, 2018, the Company sold $
4.0
 million and $6.6 million, respectively, of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $262,000 and $444,000, respectively.
15
Table of Contents
Mortgage loans held for sale of approximately $
57.7
million and $
64.2
 million at June 
30
,
2019
and December 
31
,
2018
, respectively, are included in residential
1-4
family loans. Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid. The Company obtains forward commitments to sell mortgage loans to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. The forward commitments acquired by the Company for mortgage loans in process of origination are considered mandatory forward commitments. Because these commitments are structured on a mandatory basis, the Company is required to substitute another loan or to buy back the commitment if the original loan does not fund. These commitments are derivative instruments and their fair values at June 
30
,
2019
and December 
31
,
2018
were not material.
The Company had $2.47 billion of purchased loans, which includes $98.7 million of discount for credit losses on purchased loans, at June 30, 2019. The Company had $33.6 million and $65.1 million remaining of
non-accretable
discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of June 30, 2019. The Company had $2.90 billion of purchased loans, which includes $113.6 million of discount for credit losses on purchased loans, at December 31, 2018. The Company had $39.3 million and $74.3 million remaining of
non-accretable
discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of December 31, 2018.
A description of our accounting policies for loans, impaired loans, non-accrual loans and allowance for loan losses are set forth in our 2018 Form 10-K filed with the SEC on February 26, 2019. There have been no significant changes to these policies since December 31, 2018.
5. Allowance for Loan Losses, Credit Quality and Other
The Company’s allowance for loan loss as of June 30, 2019 and December 31, 2018 was significantly impacted by Hurricane Michael, which made landfall in the Florida Panhandle as a Category 4 hurricane during the fourth quarter of 2018, and somewhat impacted by Hurricane Irma, which made initial landfall in the Florida Keys and a second landfall just south of Naples, Florida, as a Category 4 hurricane during the third quarter of 2017. As of December 31, 2018, management reevaluated the storm-related allowance for Hurricane Irma. Based on this analysis, management determined a $2.9 million storm-related allowance was still necessary. The Company’s management also performed an analysis on the loans with collateral in counties in the Florida Panhandle which were impacted by Hurricane Michael. Based on this analysis, management determined a $20.4 million storm-related provision was necessary. After establishing the storm-related provision for Hurricane Michael and adjusting the allowance for Hurricane Irma, the storm-related allowance was $23.2 million and $23.3 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, charge-offs of $2.6 million have been taken against the storm-related allowance for loan losses.
The following table presents a summary of changes in the allowance for loan losses:
     
 
Six Months Ended
June 30, 2019
 
 
(In thousands)
 
Allowance for loan losses:
   
Beginning balance
 $
108,791
 
Loans charged off
  
(5,670
)
Recoveries of loans previously charged off
  
1,620
 
     
Net loans recovered (charged off)
  
(4,050
)
     
Provision for loan losses
  
1,325
 
     
Balance, June 30, 2019
 $
106,066
 
     
16
Table of Contents
The following tables present the balances in the allowance for loan losses for the three and
six-month
period ended June 30, 2019, and the allowance for loan losses and recorded investment in loans based on portfolio segment by impairment method as of June 30, 2019. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.
                             
 
Three Months Ended June 30, 2019
 
 
Construction/
Land
Development
  
Other
Commercial
Real Estate
  
Residential
Real Estate
  
Commercial
& Industrial
  
Consumer
& Other
  
Unallocated
  
Total
 
 
(In thousands)
 
Allowance for loan losses:
                     
Beginning balance
 $
21,887
  $
40,665
  $
25,445
  $
14,690
  $
3,670
  $
—
  $
106,357
 
Loans charged off
  
(26
)  
(1,163
)  
(125
)  
(305
)  
(660
)  
—
   
(2,279
)
Recoveries of loans previously charged off
  
95
   
13
   
152
   
222
   
181
   
—
   
663
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loans recovered (charged off)
  
69
   
(1,150
)  
27
   
(83
)  
(479
)  
—
   
(1,616
)
Provision for loan losses
  
2,302
   
(848
)  
(1,201
)  
246
   
826
   
—
   
1,325
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30
 $
24,258
  $
38,667
  $
24,271
  $
14,853
  $
4,017
  $
—
  $
106,066
 
                             
                             
 
Six Months Ended June 30, 2019
 
 
Construction/
Land
Development
  
Other
Commercial
Real Estate
  
Residential
Real Estate
  
Commercial
& Industrial
  
Consumer
& Other
  
Unallocated
  
Total
 
 
(In thousands)
 
Allowance for loan losses:
                     
Beginning balance
 $
21,302
  $
42,336
  $
26,734
  $
14,981
  $
3,438
  $
—
  $
108,791
 
Loans charged off
  
(1,312
)  
(1,502
)  
(661
)  
(1,009
)  
(1,186
)  
—
   
(5,670
)
Recoveries of loans previously charged off
  
118
   
204
   
504
   
404
   
390
   
—
   
1,620
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loans recovered (charged off)
  
(1,194
)  
(1,298
)  
(157
)  
(605
)  
(796
)  
—
   
(4,050
)
Provision for loan losses
  
4,150
   
(2,371
)  
(2,306
)  
477
   
1,375
   
—
   
1,325
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30
 $
24,258
  $
38,667
  $
24,271
  $
14,853
  $
4,017
  $
—
  $
106,066
 
                             
                             
 
As of June 30, 2019
 
 
Construction/
Land
Development
  
Other
Commercial
Real Estate
  
Residential
Real Estate
  
Commercial
& Industrial
  
Consumer
& Other
  
Unallocated
  
Total
 
 
(In thousands)
 
Allowance for loan losses:
                     
Period end amount allocated to:
                     
Loans individually evaluated for
   impairment
 $
101
  $
287
  $
74
  $
16
  $
—
  $
— 
  $
478
 
Loans collectively evaluated for
   impairment
  
23,934
   
38,287
   
23,557
   
14,766
   
4,017
   
— 
   
104,561
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loans evaluated for impairment balance,
    June 30
  
24,035
   
38,574
   
23,631
   
14,782
   
4,017
   
— 
   
105,039
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Purchased credit impaired loans
  
223
   
93
   
640
   
71
   
—
   
— 
   
1,027
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30
 $
24,258
  $
38,667
  $
24,271
  $
14,853
  $
4,017
  $
— 
  $
106,066
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loans receivable:
                     
Period end amount allocated to:
                     
Loans individually evaluated for impairment
 $
11,635
  $
56,146
  $
102,416
  $
33,205
  $
3,667
  $
— 
  $
207,069
 
Loans collectively evaluated for impairment
  
1,913,123
   
4,455,278
   
2,246,999
   
1,469,477
   
644,123
   
— 
   
10,729,000
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loans evaluated for impairment balance,
   June 30
  
1,924,758
   
4,511,424
   
2,349,415
   
1,502,682
   
647,790
   
— 
   
10,936,069
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Purchased credit impaired loans
  
6,080
   
69,179
   
27,158
   
12,675
   
1,968
   
— 
   
117,060
 
       
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance, June 30
 $
1,930,838
  $
4,580,603
  $
2,376,573
  $
1,515,357
  $
649,758
  $
— 
  $
11,053,129
 
                             
17
Table of Contents
The following tables present the balances in the allowance for loan losses for the six-month period ended June 30, 2018 and the year ended December 31, 2018, and the allowance for loan losses and recorded investment in loans receivable based on portfolio segment by impairment method as of December 31, 2018. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.
                             
 
Year Ended December 31, 2018
 
 
Construction/
Land
Development
  
Other
Commercial
Real Estate
  
Residential
Real Estate
  
Commercial
& Industrial
  
Consumer
& Other
  
Unallocated
  
Total
 
 
(In thousands)
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
20,343
 
 
$
43,939
 
 
$
24,506
 
 
$
15,292
 
 
$
3,334
 
 
$
2,852
 
 
$
110,266
 
Loans charged off
 
 
(62
)
 
 
(837
)
 
 
(1,731
)
 
 
(1,072
)
 
 
(970
)
 
 
—  
 
 
 
(4,672
)
Recoveries of loans previously charged off
 
 
119
 
 
 
188
 
 
 
535
 
 
 
317
 
 
 
441
 
 
 
—  
 
 
 
1,600
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loans recovered (charged off)
 
 
57
 
 
 
(649
)
 
 
(1,196
)
 
 
(755
)
 
 
(529
)
 
 
—�� 
 
 
 
(3,072
)
Provision for loan losses
 
 
(157
)
 
 
2,695
 
 
 
895
 
 
 
1,656
 
 
 
713
 
 
 
(1,480
)
 
 
4,322
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30
 
 
20,243
 
 
 
45,985
 
 
 
24,205
 
 
 
16,193
 
 
 
3,518
 
 
 
1,372
 
 
 
111,516
 
Loans charged off
 
 
(337
)
 
 
(374
)
 
 
(1,013
)
 
 
(1,149
)
 
 
(1,443
)
 
 
—  
 
 
 
(4,316
)
Recoveries of loans previously charged off
 
 
61
 
 
 
339
 
 
 
389
 
 
 
307
 
 
 
495
 
 
 
—  
 
 
 
1,591
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loans recovered (charged off)
 
 
(276
)
 
 
(35
)
 
 
(624
)
 
 
(842
)
 
 
(948
)
 
 
—  
 
 
 
(2,725
)
Provision for loan losses
 
 
1,335
 
 
 
(3,614
)
 
 
3,153
 
 
 
(370
)
 
 
868
 
 
 
(1,372
)
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31
 
$
21,302
 
 
$
42,336
 
 
$
26,734
 
 
$
14,981
 
 
$
3,438
 
 
$
—  
 
 
$
108,791
 
                             
                             
 
As of December 31, 2018
 
 
Construction/
Land
Development
  
Other
Commercial
Real Estate
  
Residential
Real Estate
  
Commercial
& Industrial
  
Consumer
& Other
  
Unallocated
  
Total
 
 
(In thousands)
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
732
 
 
$
468
 
 
$
100
 
 
$
21
 
 
$
—  
 
 
$
  —   
 
 
$
1,321
 
Loans collectively evaluated for impairment
 
 
20,336
 
 
 
41,512
 
 
 
25,970
 
 
 
14,789
 
 
 
3,438
 
 
 
—   
 
 
 
106,045
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans evaluated for impairment balance, December 31
 
 
21,068
 
 
 
41,980
 
 
 
26,070
 
 
 
14,810
 
 
 
3,438
 
 
 
—  
 
 
 
107,366
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased credit impaired loans
 
 
234
 
 
 
356
 
 
 
664
 
 
 
171
 
 
 
—
 
 
 
—  
 
 
 
1,425
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31
 
$
21,302
 
 
$
42,336
 
 
$
26,734
 
 
$
14,981
 
 
$
3,438
 
 
$
—  
 
 
$
108,791
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
14,519
 
 
$
58,706
 
 
$
29,535
 
 
$
30,251
 
 
$
3,688
 
 
$
—  
 
 
$
136,699
 
Loans collectively evaluated for impairment
 
 
1,522,520
 
 
 
4,741,484
 
 
 
2,473,467
 
 
 
1,431,608
 
 
 
624,561
 
 
 
—  
 
 
 
10,793,640
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans evaluated for impairment balance, December 31
 
 
1,537,039
 
 
 
4,800,190
 
 
 
2,503,002
 
 
 
1,461,859
 
 
 
628,249
 
 
 
—  
 
 
 
10,930,339
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchased credit impaired loans
 
 
8,996
 
 
 
82,927
 
 
 
33,059
 
 
 
14,472
 
 
 
2,086
 
 
 
—  
 
 
 
141,540
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31
 
$
1,546,035
 
 
$
4,883,117
 
 
$
2,536,061
 
 
$
1,476,331
 
 
$
630,335
 
 
$
—  
 
 
$
11,071,879
 
                             
18
Table of Contents
The following is an aging analysis for loans receivable as of June 30, 2019 and December 31, 2018:
                             
 
June 30, 2019
 
 
Loans
Past Due
30-59
 Days
  
Loans
Past Due
60-89
 Days
  
Loans
Past Due
90 Days
or More
  
Total
Past Due
  
Current
Loans
  
Total Loans
Receivable
  
Accruing
Loans
Past Due
90 Days
or More
 
 
(In thousands)
 
Real estate:
                     
Commercial real estate loans
                     
Non-farm/non-residential
 $
3,918
  $
2,147
  $
25,580
  $
31,645
  $
4,463,913
  $
4,495,558
  $
6,633
 
Construction/land development
  
539
   
—
   
3,812
   
4,351
   
1,926,487
   
1,930,838
   
1,546
 
Agricultural
  
1,027
   
—
   
381
   
1,408
   
83,637
   
85,045
   
—
 
Residential real estate loans
                     
Residential
1-4
family
  
6,318
   
1,377
   
23,048
   
30,743
   
1,822,041
   
1,852,784
   
821
 
Multifamily residential
  
133
   
18
   
1,155
   
1,306
   
522,483
   
523,789
   
—
 
                             
Total real estate
  
11,935
   
3,542
   
53,976
   
69,453
   
8,818,561
   
8,888,014
   
9,000
 
Consumer
  
850
   
363
   
2,481
   
3,694
   
451,860
   
455,554
   
574
 
Commercial and industrial
  
2,628
   
831
   
6,313
   
9,772
   
1,505,585
   
1,515,357
   
387
 
Agricultural and other
  
951
   
243
   
32
   
1,226
   
192,978
   
194,204
   
—
 
                             
Total
 $
16,364
  $
4,979
  $
62,802
  $
84,145
  $
10,968,984
  $
11,053,129
  $
9,961
 
                             
                             
 
December 31, 2018
 
 
Loans
Past Due
30-59
 Days
  
Loans
Past Due
60-89
 Days
  
Loans
Past Due
90 Days
or More
  
Total
Past Due
  
Current
Loans
  
Total Loans
Receivable
  
Accruing
Loans
Past Due
90 Days
or More
 
 
(In thousands)
 
Real estate:
                     
Commercial real estate loans
                     
Non-farm/non-residential
 $
3,598
  $
927
  $
24,710
  $
29,235
  $
4,777,449
  $
4,806,684
  $
9,679
 
Construction/land development
  
2,057
   
261
   
8,761
   
11,079
   
1,534,956
   
1,546,035
   
3,481
 
Agricultural
  
98
   
—  
   
20
   
118
   
76,315
   
76,433
   
—  
 
Residential real estate loans
                     
Residential
1-4
family
  
5,890
   
3,745
   
19,137
   
28,772
   
1,946,814
   
1,975,586
   
1,753
 
Multifamily residential
  
—  
   
200
   
972
   
1,172
   
559,303
   
560,475
   
—  
 
                             
Total real estate
  
11,643
   
5,133
   
53,600
   
70,376
   
8,894,837
   
8,965,213
   
14,913
 
Consumer
  
5,712
   
168
   
3,632
   
9,512
   
433,593
   
443,105
   
720
 
Commercial and industrial
  
1,237
   
87
   
6,977
   
8,301
   
1,468,030
   
1,476,331
   
1,526
 
Agricultural and other
  
1,121
   
—  
   
33
   
1,154
   
186,076
   
187,230
   
—  
 
                             
Total
 $
19,713
  $
5,388
  $
64,242
  $
89,343
  $
10,982,536
  $
11,071,879
  $
17,159
 
                             
Non-accruing
loans at June 30, 2019 and December 31, 2018 were $52.8 million and $47.1 million, respectively.
19
Table of Contents
The following is a summary of the impaired loans as of June 30, 2019 and December 31, 2018:
                             
 
June 30, 2019
 
 
 
    
 
  
Three Months Ended
  
Six Months Ended
 
 
Unpaid
Contractual
Principal
Balance
  
Total
Recorded
Investment
  
Allocation
of Allowance
for Loan
Losses
       
 
Average
Recorded
Investment
  
Interest
Recognized
  
Average
Recorded
Investment
  
Interest
Recognized
  
 
(In thousands)
 
Loans without a specific valuation allowance
                     
Real estate:
                     
Commercial real estate loans
                     
Non-farm/non-residential
 $
41
  $
41
  $
—
  $
41
  $
1
  $
41
  $
1
 
Construction/land development
  
14
   
14
   
—
   
15
   
—
   
15
   
—
 
Agricultural
  
8
   
8
   
—
   
9
   
—
   
10
   
—
 
Residential real estate loans
                     
Residential
1-4
family
  
258
   
258
   
—
   
281
   
5
   
225
   
5
 
Multifamily residential
  
—
   
—
   
—
   
—
   
—
   
—
   
—
 
                             
Total real estate
  
321
   
321
   
—
   
346
   
6
   
291
   
6
 
Consumer
  
22
   
22
   
—
   
23
   
—
   
21
   
—
 
Commercial and industrial
  
131
   
131
   
—
   
169
   
2
   
148
   
2
 
Agricultural and other
  
—
   
—
   
—
   
—
   
—
   
—
   
—
 
                             
Total loans without a specific valuation allowance
  
474
   
474
   
—
   
538
   
8
   
460
   
8
 
Loans with a specific valuation allowance
                     
Real estate:
                     
Commercial real estate loans
                     
Non-farm/non-residential
  
42,934
   
39,173
   
279
   
39,548
   
478
   
39,230
   
963
 
Construction/land development
  
7,998
   
7,142
   
101
   
8,174
   
52
   
9,480
   
139
 
Agricultural
  
655
   
659
   
8
   
592
   
5
   
493
   
10
 
Residential real estate loans
                     
Residential
1-4
family
  
26,396
   
24,420
   
43
   
23,941
   
39
   
22,839
   
114
 
Multifamily residential
  
2,511
   
2,511
   
31
   
2,530
   
16
   
2,476
   
32
 
                             
Total real estate
  
80,494
   
73,905
   
462
   
74,785
   
590
   
74,518
   
1,258
 
Consumer
  
2,651
   
2,480
   
—
   
3,045
   
8
   
3,243
   
16
 
Commercial and industrial
  
10,188
   
6,941
   
16
   
6,291
   
18
   
6,754
   
42
 
Agricultural and other
  
31
   
31
   
—
   
32
   
—
   
32
   
—
 
                             
Total loans with a specific valuation allowance
  
93,364
   
83,357
   
478
   
84,153
   
616
   
84,547
   
1,316
 
Total impaired loans
                            
Real estate:
                     
Commercial real estate loans
                     
Non-farm/non-residential
  
42,975
   
39,214
   
279
   
39,589
   
479
   
39,271
   
964
 
Construction/land development
  
8,012
   
7,156
   
101
   
8,189
   
52
   
9,495
   
139
 
Agricultural
  
663
   
667
   
8
   
601
   
5
   
503
   
10
 
Residential real estate loans
                     
Residential
1-4
family
  26,654   24,678   43   
24,222
   
44
   
23,064
   
119
 
Multifamily residential
  
2,511
   
2,511
   
31
   
2,530
   
16
   
2,476
   
32
 
                             
Total real estate
  
80,815
   
74,226
   
462
   
75,131
   
596
   
74,809
   
1,264
 
Consumer
  
2,673
   
2,502
   
—
   
3,068
   
8
   
3,264
   
16
 
Commercial and industrial
  
10,319
   
7,072
   
16
   
6,460
   
20
   
6,902
   
44
 
Agricultural and other
  
31
   
31
   
—
   
32
   
—
   
32
   
—
 
                             
Total impaired loans
 $
93,838
  $
83,831
  $
478
  $
84,691
  $
624
  $
85,007
  $
1,324
 
                             
Note
: Purchased credit impaired loans are accounted for on a pooled basis under ASC
310-30.
All of these pools are currently considered to be performing, resulting in none of the purchased credit impaired loans being classified as impaired loans as of June 30, 2019.
20
Table of Contents
                     
 
December 31, 2018
 
 
Unpaid
Contractual
Principal
Balance
  
Total
Recorded
Investment
  
Allocation
of Allowance
for Loan
Losses
  
 Year Ended
 
 
Average
Recorded
Investment
  
Interest
Recognized
  
 
(In thousands)
 
Loans without a specific valuation allowance
               
Real estate:
  
Commercial real estate loans
               
Non-farm/non-residential
 $
42
  $
42
  $
—  
  $
34
  $
3
 
Construction/land development
  
16
   
16
   
—  
   
27
   
1
 
Agricultural
  
11
   
11
   
—  
   
15
   
1
 
Residential real estate loans
               
Residential
1-4
family
  
223
   
223
   
—  
   
193
   
16
 
Multifamily residential
  
—  
   
—  
   
—  
   
—  
   
—  
 
                     
Total real estate
  
292
   
292
   
—  
   
269
   
21
 
Consumer
  
27
   
27
   
—  
   
24
   
2
 
Commercial and industrial
  
236
   
236
   
—  
   
199
   
13
 
Agricultural and other
  
—  
   
—  
   
—  
   
—  
   
—  
 
                     
Total loans without a specific valuation allowance
  
555
   
555
   
—  
   
492
   
36
 
Loans with a specific valuation allowance
               
Real estate:
               
Commercial real estate loans
               
Non-farm/non-residential
  
42,474
   
38,594
   
460
   
34,891
   
1,632
 
Construction/land development
  
13,178
   
12,091
   
732
   
12,337
   
307
 
Agricultural
  
291
   
294
   
8
   
388
   
18
 
Residential real estate loans
               
Residential
1-4
family
  
22,570
   
20,526
   
58
   
19,017
   
485
 
Multifamily residential
  
2,369
   
2,369
   
42
   
2,166
   
83
 
                     
Total real estate
  
80,882
   
73,874
   
1,300
   
68,799
   
2,525
 
Consumer
  
3,830
   
3,629
   
—  
   
1,236
   
52
 
Commercial and industrial
  
11,176
   
7,550
   
21
   
10,599
   
257
 
Agricultural and other
  
33
   
32
   
—  
   
146
   
3
 
                     
Total loans with a specific valuation allowance
  
95,921
   
85,085
   
1,321
   
80,780
   
2,837
 
Total impaired loans
               
Real estate:
               
Commercial real estate loans
               
Non-farm/non-residential
  
42,516
   
38,636
   
460
   
34,925
   
1,635
 
Construction/land development
  
13,194
   
12,107
   
732
   
12,364
   
308
 
Agricultural
  
302
   
305
   
8
   
403
   
19
 
Residential real estate loans
               
Residential
1-4
family
  
22,793
   
20,749
   
58
   
19,210
   
501
 
Multifamily residential
  
2,369
   
2,369
   
42
   
2,166
   
83
 
                     
Total real estate
  
81,174
   
74,166
   
1,300
   
69,068
   
2,546
 
Consumer
  
3,857
   
3,656
   
—  
   
1,260
   
54
 
Commercial and industrial
  
11,412
   
7,786
   
21
   
10,798
   
270
 
Agricultural and other
  
33
   
32
   
—  
   
146
   
3
 
                     
Total impaired loans
 $
96,476
  $
85,640
  $
1,321
  $
81,272
  $
2,873
 
                     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note
: Purchased credit impaired loans are accounted for on a pooled basis under ASC
310-30.
All of these pools are currently considered to be performing resulting in none of the purchased credit impaired loans being classified as impaired loans as of December 31, 2018.
Interest recognized on impaired loans during the three months ended June 30, 2019 and 2018 was approximately $624,000 and $542,000, respectively. Interest recognized on impaired loans during the six months ended June 30, 2019 and 2018 was approximately $1.3 million and $1.5 million, respectively. The amount of interest recognized on impaired loans on the cash basis is not materially different than the accrual basis.
21
Table of Contents
Credit Quality Indicators.
As part of the
on-going
monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk rating of loans, (ii) the level of classified loans, (iii) net charge-offs, (iv)
 non-performing
loans and (v) the general economic conditions in Arkansas, Florida, Alabama and New York.
The Company utilizes a risk rating matrix to assign a risk rating to each of its loans. Loans are rated on a scale from 1 to 8. Descriptions of the general characteristics of the 8 risk ratings are as follows:
Risk rating 1 – Excellent.
 Loans in this category are to persons or entities of unquestionable financial strength, a highly liquid financial position, with collateral that is liquid and well margined. These borrowers have performed without question on past obligations, and the Bank expects their performance to continue. Internally generated cash flow covers current maturities of long-term debt by a substantial margin. Loans secured by bank certificates of deposit and savings accounts, with appropriate holds placed on the accounts, are to be rated in this category.
Risk rating 2 – Good.
 These are loans to persons or entities with strong financial condition and above-average liquidity that have previously satisfactorily handled their obligations with the Bank. Collateral securing the Bank’s debt is margined in accordance with policy guidelines. Internally generated cash flow covers current maturities of long-term debt more than adequately. Unsecured loans to individuals supported by strong financial statements and on which repayment is satisfactory may be included in this classification.
Risk rating 3 – Satisfactory.
 Loans to persons or entities with an average financial condition, adequate collateral margins, adequate cash flow to service long-term debt, and net worth comprised mainly of fixed assets are included in this category. These entities are minimally profitable now, with projections indicating continued profitability into the foreseeable future. Closely held corporations or businesses where a majority of the profits are withdrawn by the owners or paid in dividends are included in this rating category. Overall, these loans are basically sound.
Risk rating 4 – Watch.
Borrowers who have marginal cash flow, marginal profitability or have experienced an unprofitable year and a declining financial condition characterize these loans. The borrower has in the past satisfactorily handled debts with the Bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit exposure.
Risk rating 5 – Other Loans Especially
Mentioned (“OLEM”).
 A loan criticized as OLEM has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. OLEM assets are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification.
Risk rating 6 – Substandard.
 A loan classified as substandard is inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual assets.
Risk rating 7 – Doubtful.
 A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the loan.
Risk rating 8 – Loss.
Assets classified as loss are considered uncollectible and of such little value that the continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may occur in the future. This classification is based upon current facts, not probabilities. Assets classified as loss should be
charged-off
in the period in which they became uncollectible.
22
Table of Contents
The Company’s classified loans include loans in risk ratings 6, 7 and 8. The following is a presentation of classified loans (excluding loans accounted for under ASC Topic
310-30)
by class as of June 30, 2019 and December 31, 2018:
                 
 
June 30, 2019
 
 
Risk Rated 6
  
Risk Rated 7
  
Risk Rated 8
  
Classified Total
 
 
(In thousands)
 
Real estate:
            
Commercial real estate loans
            
Non-farm/non-residential
 $
46,185
  $
1,834
  $
—
  $
48,019
 
Construction/land development
  
12,656
   
546
   
—
   
13,202
 
Agricultural
  
898
   
—
   
—
   
898
 
Residential real estate loans
            
Residential
1-4
family
  
31,671
   
355
   
—
   
32,026
 
Multifamily residential
  
1,173
   
—
   
—
   
1,173
 
                 
                 
Total real estate
  
92,583
   
2,735
   
—
   
95,318
 
Consumer
  
2,236
   
—
   
—
   
2,236
 
Commercial and industrial
  
19,848
   
598
   
—
   
20,446
 
Agricultural and other
  
275
   
—
   
—
   
275
 
                 
Total risk rated loans
 $
114,942
  $
3,333
  $
—
  $
118,275
 
                 
    
 
December 31, 2018
 
 
Risk Rated 6
  
Risk Rated 7
  
Risk Rated 8
  
Classified Total
 
 
(In thousands)
 
Real estate:
            
Commercial real estate loans
            
Non-farm/non-residential
 $
44,089
  $
484
  $
              
—  
  $
44,573
 
Construction/land development
  
15,236
   
—  
   
—  
   
15,236
 
Agricultural
  
301
   
3
   
—  
   
304
 
Residential real estate loans
            
Residential
1-4
family
  
34,731
   
253
   
—  
   
34,984
 
Multifamily residential
  
972
   
—  
   
—  
   
972
 
                 
Total real estate
  
95,329
   
740
   
—  
   
96,069
 
Consumer
  
3,226
   
3
   
—  
   
3,229
 
Commercial and industrial
  
16,362
   
585
   
—  
   
16,947
 
Agricultural and other
  
48
   
—  
   
—  
   
48
 
                 
Total risk rated loans
 $
114,965
  $
1,328
  $
            
—  
  $
116,293
 
                 
Loans may be classified, but not considered impaired, due to one of the following reasons: (1) The Company has established minimum dollar amount thresholds for loan impairment testing. All loans over $2.0 million that are rated 5 – 8 are individually assessed for impairment on a quarterly basis. Loans rated 5 – 8 that fall under the threshold amount are not individually tested for impairment and therefore are not included in impaired loans; (2) of the loans that are above the threshold amount and tested for impairment, after testing, some are considered to not be impaired and are not included in impaired loans.
23
Table of Contents
The following is a presentation of loans receivable by class and risk rating as of June 30, 2019 and December 31, 2018:
                             
 
June 30, 2019
 
 
Risk
Rated 1
  
Risk
Rated 2
  
Risk
Rated 3
  
Risk
Rated 4
  
Risk
Rated 5
  
Classified
Total
  
Total
 
 
(In thousands)
 
 Real estate:
                     
 Commercial real estate loans
                     
 Non-farm/non-residential
 $
—
  $
289
  $
3,455,486
  $
887,951
  $
34,820
  $
48,019
  $
4,426,565
 
 Construction/land development
  
9
   
748
   
707,143
   
1,203,472
   
184
   
13,202
   
1,924,758
 
 Agricultural
  
—
   
—
   
64,908
   
18,156
   
897
   
898
   
84,859
 
 Residential real estate loans
                     
 Residential
1-4
family
  
685
   
710
   
1,513,589
   
268,449
   
11,235
   
32,026
   
1,826,694
 
 Multifamily residential
  
—
   
—
   
363,237
   
85,848
   
72,463
   
1,173
   
522,721
 
                             
Total real estate
  
694
   
1,747
   
6,104,363
   
2,463,876
   
119,599
   
95,318
   
8,785,597
 
Consumer
  
14,059
   
1,822
   
424,573
   
10,472
   
424
   
2,236
   
453,586
 
Commercial and industrial
  
23,438
   
10,508
   
817,585
   
607,778
   
22,927
   
20,446
   
1,502,682
 
Agricultural and other
  
384
   
3,185
   
138,684
   
50,891
   
785
   
275
   
194,204
 
                             
Total risk rated loans
 $
38,575
  $
17,262
  $
7,485,205
  $
3,133,017
  $
143,735
  $
118,275
   
10,936,069
 
                             
Purchased credit impaired loans
                          
117,060
 
                          
Total loans receivable
                         $
11,053,129
 
                             
    
 
December 31, 2018
 
 
Risk
Rated 1
  
Risk
Rated 2
  
Risk
Rated 3
  
Risk
Rated 4
  
Risk
Rated 5
  
Classified
Total
  
Total
 
 
(In thousands)
 
 Real estate:
                     
 Commercial real estate loans
                     
 Non-farm/non-residential
 $
443
  $
296
  $
2,740,068
  $
1,912,191
  $
26,361
  $
44,573
  $
4,723,932
 
 Construction/land development
  
17
   
645
   
264,507
   
1,255,258
   
1,377
   
15,236
   
1,537,040
 
 Agricultural
  
—  
   
—  
   
37,377
   
38,295
   
282
   
304
   
76,258
 
 Residential real estate loans
                     
 Residential
1-4
family
  
715
   
738
   
1,453,859
   
446,557
   
7,078
   
34,984
   
1,943,931
 
 Multifamily residential
  
—  
   
—  
   
388,572
   
169,526
   
—  
   
972
   
559,070
 
                             
Total real estate
  
1,175
   
1,679
   
4,884,383
   
3,821,827
   
35,098
   
96,069
   
8,840,231
 
Consumer
  
13,432
   
4,298
   
401,209
   
18,409
   
442
   
3,229
   
441,019
 
Commercial and industrial
  
21,673
   
13,310
   
737,218
   
649,390
   
23,321
   
16,947
   
1,461,859
 
Agricultural and other
  
737
   
3,423
   
133,901
   
48,567
   
554
   
48
   
187,230
 
                             
Total risk rated loans
 $
37,017
  $
22,710
  $
6,156,711
  $
4,538,193
  $
59,415
  $
116,293
   
10,930,339
 
                             
Purchased credit impaired loans
                    
141,540
 
                             
Total loans receivable
                   $
11,071,879
 
                             
24
Table of Contents
Historically, the Company has graded loans receivable having risk ratings of 1 to 5 as “Pass,” with most of the Company’s loans being rated as “Satisfactory” (Risk rating 3) or “Watch” (Risk rating 4). The Company’s policy in recent years was to rate certain loans as “Watch” based solely on the borrower’s industry or the loan type and not due to a particular indication of weakness in the credit itself. These “Watch” loans included substantially all construction loans, accounts receivable loans, inventory lines of credit, SBA loans and agriculture loans. Over time, as the Company’s construction loan balances increased, the relative level of “Watch” loans grew. The Company determined that this policy election resulted in overestimating the overall risk in the loan portfolio, as it did not give consideration to the financial strength of the borrower. The Company determined that rating these loans as “Watch” could potentially mask the first opportunity to identify a weakness in a credit, and therefore, could lead to a later recognition of problem loans if loan quality deterioration occurred. Therefore, effective in the second quarter of 2019, the Company revised its “Watch” risk rating definition to no longer include certain loans solely based on industry and to focus on attributes such as the financial strength of the borrower/guarantor, repayment ability of the project on a global basis, equity and other relevant factors.
In the second quarter of 2019, the Company reviewed the loans previously rated as “Watch” based on the change in philosophy and determined which loans should be moved to “Satisfactory” based on the attributes noted above. This resulted in approximately $1.5 billion in loans being moved from “Watch” to “Satisfactory.” The Company believes that this change more accurately portrays the risk in the loan portfolio. This did not have a material impact on the allowance for loan losses as the grading changes were within the “Pass” category.
The following is a presentation of troubled debt restructurings (“TDRs”) by class as of June 30, 2019 and December 31, 2018:
                         
 
June 30, 2019
 
 
Number
of Loans
  
Pre-
Modification
Outstanding
Balance
  
Rate
Modification
  
Term
Modification
  
Rate
& Term
Modification
  
Post-
Modification
Outstanding
Balance
 
 
(Dollars in thousands)
 
Real estate:
                  
Commercial real estate loans
                  
Non-farm/non-residential
  
17
  $
15,227
  $
8,310
  $
376
  $
4,438
  $
13,124
 
Construction/land development
  
2
   
584
   
546
   
14
   
—  
   
560
 
Agricultural
  
3
   
451
   
388
   
11
   
—  
   
399
 
Residential real estate loans
                  
Residential
1-4
family
  
20
   
3,165
   
1,089
   
235
   
975
   
2,299
 
Multifamily residential
  
3
   
1,701
   
1,200
   
—  
   
290
   
1,490
 
                         
Total real estate
  
45
   
21,128
   
11,533
   
636
   
5,703
   
17,872
 
Consumer
  
3
   
30
   
16
   
5
   
—  
   
21
 
Commercial and industrial
  
9
   
1,554
   
840
   
50
   
—  
   
890
 
                         
Total
  
57
  
$
$
22,712
  
$
$
12,389
  $
691
  
$
$
5,703
  
$
$
18,783
 
                         
                         
 
December 31, 2018
 
 
Number
of Loans
  
Pre-
Modification
Outstanding
Balance
  
Rate
Modification
  
Term
Modification
  
Rate
& Term
Modification
  
Post-
Modification
Outstanding
Balance
 
 
(Dollars in thousands)
 
Real estate:
                  
Commercial real estate loans
                  
Non-farm/non-residential
  
17
  $
15,227
  $
8,482
  $
982
  $
4,475
  $
13,939
 
Construction/land development
  
2
   
584
   
546
   
17
   
—  
   
563
 
Agricultural
  
2
   
345
   
283
   
14
   
—  
   
297
 
Residential real estate loans
                  
Residential
1-4
family
  
22
   
3,204
   
1,059
   
281
   
1,022
   
2,362
 
Multifamily residential
  
3
   
1,701
   
1,253
   
—  
   
286
   
1,539
 
                         
Total real estate
  
46
   
21,061
   
11,623
   
1,294
   
5,783
   
18,700
 
Consumer
  
5
   
38
   
18
   
9
   
—  
   
27
 
Commercial and industrial
  
14
   
1,679
   
897
   
105
   
—  
   
1,002
 
                         
Total
  
65
  $
22,778
  $
12,538
  $
1,408
  $
5,783
  $
19,729
 
                         
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Table of Contents
The following is a presentation of TDRs on
non-accrual
status as of June 30, 2019 and December 31, 2018 because they are not in compliance with the modified terms:
                 
 
June 30, 2019
  
December 31, 2018
 
 
Number of Loans
  
Recorded Balance
  
Number  of Loans
  
Recorded Balance
 
 
(Dollars in thousands)
 
Real estate:
            
Commercial real estate loans
            
Non-farm/non-residential
  
    4
  $
    2,350
   
4
  $
2,950
 
Construction/land development
  
1
   
546
   
1
   
546
 
Agricultural
  
2
   
117
   
1
   
14
 
Residential real estate loans
            
Residential
1-4
family
  
6
   
688
   
8
   
778
 
Multifamily residential
  
1
   
135
   
1
   
142
 
                 
Total real estate
  
14
   
3,836
   
15
   
4,430
 
Consumer
  
1
   
1
   
1
   
2
 
Commercial and industrial
  
3
   
131
   
6
   
194
 
                 
Total
  
18
  $
3,968
   
22
  $
4,626
 
                 
The following is a presentation of total foreclosed assets as of June 30, 2019 and December 31, 2018:
         
 
June 30, 2019
  
December 31, 2018
 
 
(In thousands)
 
Commercial real estate loans
      
Non-farm/non-residential
 $
3,929
  $
5,555
 
Construction/land development
  
5,673
   
3,534
 
Residential real estate loans
      
Residential
1-4
family
  
4,132
   
4,142
 
Multifamily residential
  
—  
   
5
 
         
Total foreclosed assets held for sale
 $
13,734
  $
13,236
 
         
Changes in the carrying amount of the accretable yield for purchased credit impaired loans were as follows for the three-month period ended June 30, 2019 for the Company’s acquisitions:
         
 
Accretable Yield
  
Carrying
Amount of
Loans
 
 
(In thousands)
 
Balance at beginning of period
 $
    33,759
  $
    141,540
 
Reforecasted future interest payments for loan pools
  
3,765
   
—  
 
Accretion recorded to interest income
  
(8,558
)  
8,558
 
Adjustment to yield
  
4,917
   
—  
 
Transfers to foreclosed assets held for sale
  
—  
   
223
 
Payments received, net
  
—  
   
(33,261
)
         
Balance at end of period
 $
33,883
  $
117,060
 
         
The loan pools were evaluated by the Company and are currently forecasted to have a slower
run-off
than originally expected. As a result, the Company has reforecast the total accretable yield expectations for those loan pools by $3.8 million. This updated forecast does not change the expected weighted average yields on the loan pools.
During the 2019 impairment tests on the estimated cash flows of loans, the Company established that several loan pools were determined to have a materially projected credit improvement. As a result of this improvement, the Company will recognize approximately $4.9 million as an additional adjustment to yield over the weighted average life of the loans.
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Table of Contents
6. Goodwill and Core Deposits and Other Intangibles
Changes in the carrying amount and accumulated amortization of the Company’s goodwill and core deposits and other intangibles at June 30, 2019 and December 31, 2018, were as follows:
         
 
June 30, 2019
  
December 31, 2018
 
 
(In thousands)
 
Goodwill
      
Balance, beginning of period
 $
958,408
                 $
927,949
 
Acquisitions
  
—  
    
30,459
 
         
Balance, end of period
 $
958,408
  $
958,408
 
         
         
 
June 30, 2019
  
December 31, 2018
 
 
(In thousands)
 
Core Deposit and Other Intangibles
      
Balance, beginning of period
 $
42,896
               $
49,351
 
Amortization expense
  
(3,173
)  (3,250)
         
Balance, June 30
  
39,723
   46,101 
         
Amortization expense
      (3,205)
         
Balance, end of year
     $
42,896
 
         
The carrying basis and accumulated amortization of core deposits and other intangibles at June 30, 2019 and December 31, 2018 were:
         
 
June 30, 2019
  
December 31, 2018
 
 
(In thousands)
 
Gross carrying basis
 $
86,625
                $
86,625
 
Accumulated amortization
  
(46,902
)  
(43,729
)
         
Net carrying amount
 $
39,723
  $
42,896
 
         
Core deposit and other intangible amortization expense was approximately $1.6 million for the three months ended June 30, 2019 and 2018. Core deposit and other intangible amortization expense was approximately $3.2 million
and $3.3 million
 for the six months ended June 30, 2019 and 2018, respectively. HBI’s estimated amortization expense of core deposits and other intangibles for each of the years 2019 through 2023 is approximately: 2019 – $6.5 million; 2020 – $5.9 million; 2021 – $5.7 million; 2022 – $5.7 million; 2023 – $5.5 million.
The carrying amount of the Company’s goodwill was $958.4 million at June 30, 2019 and December 31, 2018. Goodwill is tested annually for impairment during the fourth quarter. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements.
7. Other Assets
Other assets consist primarily of equity securities without a readily determinable fair value and other miscellaneous assets. As of June 30, 2019 and December 31, 2018 other assets were $180.3 million and $183.8 million, respectively.
The Company has equity securities without readily determinable fair values such as stock holdings in the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“Federal Reserve”) which are outside the scope of ASC Topic 321,
Investments – Equity Securities
(“ASC Topic 321”). These equity securities without a readily determinable fair value were $125.5 million and $134.6 million at June 30, 2019 and December 31, 2018, respectively, and are accounted for at cost.
The Company has equity securities such as stock holdings in First National Bankers’ Bank and other miscellaneous holdings which are accounted for under ASC Topic 321. These equity securities without a readily determinable fair value were $
26.7
 million and $
25.1
 million at June 30, 2019 and December 31, 2018, respectively. There were no observable transactions during the period that would indicate a material change in fair value. Therefore, these investments were accounted for at cost, less impairment
.
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Table of Contents
8. Deposits
The aggregate amount of time deposits with a minimum denomination of $250,000 was $1.06 billion and $922.0 million at June 30, 2019 and December 31, 2018, respectively. The aggregate amount of time deposits with a minimum denomination of $100,000 was $1.54 billion and $1.41 billion at June 30, 2019 and December 31, 2018, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $7.6 million and $3.8 million for the three months ended June 30, 2019 and 2018, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $14.8 million and $6.7 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019 and December 31, 2018, brokered deposits were $641.9 million and $660.2 million, respectively.
Deposits totaling approximately $2.02 billion and $1.97 billion at June 30, 2019 and December 31, 2018, respectively, were public funds obtained primarily from state and political subdivisions in the United States.
9. Securities Sold Under Agreements to Repurchase
At June 30, 2019 and December 31, 2018, securities sold under agreements to repurchase totaled $142.5 million and $143.7 million, respectively. For the three-month periods ended June 30, 2019 and 2018, securities sold under agreements to repurchase daily weighted-average totaled $144.5 million and $144.0 million, respectively. For the
six-month
periods ended June 30, 2019 and 2018, securities sold under agreements to repurchase daily weighted-average totaled $
147.6
million and $148.3 million, respectively.
The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of June 30, 2019 and December 31, 2018 is presented in the following tables:
                     
 
June 30, 2019
 
 
Overnight and
Continuous
  
Up to 30
Days
  
30-90
Days
  
Greater than
90 Days
  
Total
 
 
(In thousands)
 
Securities sold under agreements to repurchase:
               
U.S. government-sponsored enterprises
 $
5,396
  $
—  
  $
—  
  $
—  
       $
5,396
 
Mortgage-backed securities
  
30,816
   
—  
   
—  
   
—  
   
30,816
 
State and political subdivisions
  
102,977
   
—  
   
—  
   
—  
   
102,977
 
Other securities
  
3,352
   
—  
   
—  
   
—  
   
3,352
 
                     
Total borrowings
 $
142,541
  $
—  
  $
—  
  $
—  
  $
142,541
 
                     
                     
 
December 31, 2018
 
 
Overnight and
Continuous
  
Up to 30
Days
  
30-90
Days
  
Greater than
90 Days
  
Total
 
 
(In thousands)
 
Securities sold under agreements to repurchase:
               
U.S. government-sponsored enterprises
 $
19,124
  $—    $—    $—        $
19,124
 
Mortgage-backed securities
  
9,184
   
—  
   
    —  
   
—  
   
9,184
 
State and political subdivisions
  
98,841
   
—  
   
—  
   
—  
   
98,841
 
Other securities
  
16,530
   
—  
   
—  
   
—  
   
16,530
 
                     
Total borrowings
 $
143,679
  $—    $—    $—    $
143,679
 
                     
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Table of Contents
10. FHLB and Other Borrowed Funds
The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $899.4 million and $1.47 billion at June 30, 2019 and December 31, 2018, respectively.
The Company had
no
other borrowed funds as of June 30, 2019.
 Other borrowed funds were $2.5 million and were classified as short-term advances as of December 31, 2018. At June 30, 2019, $225.0 million and $674.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2018, $782.6 million and $689.8 million of the outstanding balance were issued as short-term and long-term advances, respectively. The FHLB advances mature from the current year to 2033 with fixed interest rates ranging from 1.20% to 2.85% and are secured by loans and investments securities. Maturities of borrowings as of June 30, 2019 include: 2019 – $353.0 million; 2020 – $146.4 million; 2021 –
zero
; 2022 –
zero
; after 2023 – $400.0 million. Expected maturities could differ from contractual maturities because FHLB may have the right to call or HBI the right to prepay certain obligations.
Additionally, the Company had $1.29 billion and $821.3 million at June 30, 2019 and December 31, 2018, respectively, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits. 
This increase is due to the Company using more letters of credit to collateralize public deposits rather than using investment securities.
Additionally, the parent company took out a $20.0 million line of credit for general corporate purposes during 2015. The balance on this line of credit at June 30, 2019 and December 31, 2018 was
zero
.
11. Subordinated Debentures
Subordinated debentures at June 30, 2019 and December 31, 2018 consisted of guaranteed payments on trust preferred securities with the following components:
         
 
As of
June 30,
2019
  
As of
December 31,
2018
 
 
(In thousands)
 
Trust preferred securities
      
Subordinated debentures, issued in 2006, due 2036, fixed rate of
6.75
% during the first five years and at a floating rate of
1.85
% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty
 $
3,093
  $
3,093
 
Subordinated debentures, issued in 2004, due 2034, fixed rate of
6.00
% during the first five years and at a floating rate of
2.00
% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty
  
15,464
   
15,464
 
Subordinated debentures, issued in 2005, due 2035, fixed rate of
5.84
% during the first five years and at a floating rate of
1.45
% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty
  
25,774
   
25,774
 
Subordinated debentures, issued in 2004, due 2034, fixed rate of
4.29
% during the first five years and at a floating rate of
2.50
% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty
  
16,495
   
16,495
 
Subordinated debentures, issued in 2005, due 2035, floating rate of
2.15
% above the three-month LIBOR rate, reset quarterly, currently callable without penalty
  
4,378
   
4,353
 
Subordinated debentures, issued in 2006, due 2036, fixed rate of
7.38
% during the first five years and at a floating rate of
1.62
% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty
  
5,708
   
5,662
 
Subordinated debt securities
      
Subordinated notes, net of issuance costs, issued in 2017, due 2027, fixed rate of
5.625
% during the first five years and at a floating rate of
3.575
% above the then three-month LIBOR rate, reset quarterly, thereafter, callable in
2022
without penalty
  
298,258
   
297,949
 
         
Total
 $
369,170
  $
368,790
 
         
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Table of Contents
The Company holds trust preferred securities with a face amount of $73.3 million which are currently callable without penalty based on the terms of the specific agreements. The trust preferred securities are
tax-advantaged
issues that qualify for Tier 1 capital treatment subject to certain limitations. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s subordinated debentures, the sole asset of each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. The Company wholly owns the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related subordinated debentures. The Company’s obligations under the subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.
12. Income Taxes
The following is a summary of the components of the provision (benefit) for income taxes for the three and
six-month
periods ended June 30, 2019 and 2018:
                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(In thousands)
 
Current:
            
Federal
 $
13,068
  $
11,351
  $
23,226
  $
26,355
 
State
  
4,326
   
3,757
   
7,689
   
8,725
 
                 
Total current
  
17,394
   
15,108
   
30,915
   
35,080
 
                 
Deferred:
            
Federal
  
4,167
   
6,913
   
11,089
   
9,917
 
State
  
1,379
   
2,289
   
3,671
   
3,283
 
                 
Total deferred
  
5,546
   
9,202
   
14,760
   
13,200
 
                 
Income tax expense
 $
22,940
  $
24,310
  $
45,675
  $
48,280
 
                 
The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three and
six-month
periods ended June 30, 2019 and 2018:
                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Statutory federal income tax rate
  
21.00
%  
21
.00
%  
21.00
%  
21.00
%
Effect of
non-taxable
interest income
  
(0.82
)  
(0.83
)  
(0.84
)  
(0.79
)
Stock compensation
  
0.30
   
0.01
   
0.10
   
(0.21
)
State income taxes, net of federal benefit
  
4.03
   
4.16
   
4.01
   
4.57
 
Other
  
(0.39
)  
(0.11
)  
(0.13
)  
(0.11
)
                 
Effective income tax rate
  
24.12
%  
24.23
%  
24.14
%  
24.46
%
                 
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Table of Contents
The types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities, and their approximate tax effects, are as follows:
         
 
June 30, 2019
  
December 31, 2018
 
 
(In thousands)
 
Deferred tax assets:
      
Allowance for loan losses
 $
29,281
  $
30,033
 
Deferred compensation
  
2,848
   
4,037
 
Stock compensation
  
5,311
   
4,259
 
Non-accrual
interest income
  
250
   
—  
 
Real estate owned
  
1,266
   
1,382
 
Unrealized loss on securities
available-for-sale
  
—  
   
5,050
 
Loan discounts
  
21,107
   
23,755
 
Tax basis premium/discount on acquisitions
  
6,392
   
7,378
 
Investments
  
932
   
866
 
Other
  
10,034
   
10,243
 
         
Gross deferred tax assets
  
77,421
   
87,003
 
         
Deferred tax liabilities:
      
Accelerated depreciation on premises and equipment
  
557
   
87
 
Unrealized gain on securities available-for-sale  5,225   
 —
  
 
Core deposit intangibles
  
9,276
   
9,804
 
FHLB dividends
  
1,712
   
1,712
 
Other
  
2,134
   
2,125
 
         
Gross deferred tax liabilities
  
18,904
   
13,728
 
         
Net deferred tax assets
 $
58,517
  $
73,275
 
         
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and the states of Alabama, Arkansas, California, Florida, Kansas, New Jersey, New York, Ohio, Texas and Virginia. The Company is no longer subject to U.S. federal and state tax examinations by tax authorities for years before 2015.
13. Common Stock, Compensation Plans and Other
Common Stock
As of June 30, 2019, the Company’s Restated Articles of Incorporation, as amended, authorize the issuance of up to 300,000,000 shares of common stock, par value $0.01 per share.
The Company also has the authority to issue up to 5,500,000 shares of preferred stock, par value $0.01 per share under the Company’s Restated Articles of Incorporation.
Stock Repurchases
On January 18, 2019, the Company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of its common stock under the previously approved stock repurchase program, which brought the remaining amount of authorized shares to repurchase to 9,919,447 shares. During the first six months of 2019, the Company utilized a portion of this stock repurchase program.
During the first six months of 2019, the Company repurchased a total of 3,416,722 shares with a weighted-average stock price of $18.81 per share. The 2019 earnings were used to fund the repurchases during the 
first six months of 2019
. Shares repurchased under the program as of June 30, 2019 since its inception total 13,249,275 shares. The remaining balance available for repurchase is 6,502,725 shares at June 30, 2019.
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Table of Contents
Stock Compensation Plans
The Company has a stock option and performance incentive plan known as the Amended and Restated 2006 Stock Option and Performance Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate those persons to improve the Company’s business results. As of June 30, 2019, the maximum total number of shares of the Company’s common stock available for issuance under the Plan was 13,288,000. At June 30, 2019, the Company had approximately
1,665,000
 shares of common stock remaining available for future grants and approximately
5,285,500
 shares of common stock reserved for issuance pursuant to outstanding awards under the Plan.
During the third quarter of 2018, the Company granted 1,452,000 stock options and 843,500 shares of restricted stock to certain employees under the HOMB $2.00 performance incentive program (“HOMB $2.00”). The purpose of the performance-based incentive plan is to motivate employees to help the Company achieve $2.00 of diluted earnings per share, as adjusted
(non-GAAP),
over a consecutive four-quarter period.
The intrinsic value of the stock options outstanding and stock options vested at June 30, 2019 was $5.8 million and $
5.1 
million, respectively. Total unrecognized compensation cost, net of income tax benefit, related to
non-vested
stock option awards, which are expected to be recognized over the vesting periods, was approximately $11.5 million as of June 30, 2019.
The table below summarizes the stock option transactions under the Plan at June 30, 2019 and December 31, 2018 and changes during the six-month period and year then ended:
                 
 
For the Six Months
Ended June 30, 2019
  
For the Year Ended
December 31, 2018
 
 
Shares (000)
  
Weighted-
Average
Exercisable
Price
  
Shares (000)
  
Weighted-
Average
Exercisable
Price
 
Outstanding, beginning of year
  
3,617
  $
19.62
   
2,274
  $
16.23
 
Granted
  
55
   
19.15
   
1,581
   
23.24
 
Forfeited/Expired
  
(52
)  
22.41
   
(37
)  
22.30
 
Exercised
  —         
(201
)  
9.25
 
                 
Outstanding, end of period
  
3,620
   
19.57
   
3,617
   
19.62
 
                 
Exercisable, end of period
  
1,305
  $
15.70
   
1,167
  $
15.31
 
                 
Stock-based compensation expense for stock-based compensation awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options. The weighted-average fair value of options granted during the six months ended June 30, 2019 was $
4.11
per share. The weighted-average fair value of options granted during the year ended December 31, 2018 was $5.58 per share. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model based on the weighted-average assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate, and expected life of options granted.
         
 
For the Six Months Ended
June 30, 2019
  
For the Year Ended
December 31, 2018
 
Expected dividend yield
  
2.70
%  
2.05
%
Expected stock price volatility
  
26.13
%  
25.59
%
Risk-free interest rate
  
2.48
%  
2.82
%
Expected life of options
  
6.5 
years
   
6.5
 years
 
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Table of Contents
The following is a summary of currently outstanding and exercisable options at June 30, 2019:
Options Outstanding
 
Options Exercisable
Exercise Prices
 
Options
Outstanding
Shares
(000)
 
Weighted-
Average
Remaining
Contractual
Life (in years)
 
Weighted-
Average
Exercise
Price
 
Options
Exercisable
Shares (000)
 
Weighted-
Average
Exercise
Price
$
2.66
to $2.77
 
6
 
0.50
 
2.66
 
6
 
2.66
$
4.30
to $6.56
 
87
 
2.56
 
  6.56
 
87
 
  6.56
$
8.62
to $9.54
 
245
 
3.66
 
  9.01
 
245
 
  9.01
$
14.71
to $16.86
 
252
 
5.28
 
  15.97
 
222
 
  16.04
$
17.12
to $17.40
 
193
 
5.39
 
  17.20
 
160
 
  17.21
$
18.46
to $19.12
 1,064 
6.34
 18.49 433 18.46
$
20.16
to $20.58
 48 
6.28
 20.51 25 20.45
$
21.25
to $22.22
 235 
7.79
 21.71 94 21.48
$
22.70
to $23.51
 1,416 
9.06
 23.32 1 23.51
$
25.96
 
74
 7.81 
  25.96
 
32
 
  25.96
           
  
3,620
    
1,305
  
          
The table below summarized the activity for the Company’s restricted stock issued and outstanding at June 30, 2019 and December 31, 2018 and changes during the period and year then ended:
         
 
As of
June 30, 2019
  
As of
December 31, 2018
 
 
(In thousands)
 
Beginning of year
  
1,873
   
1,145
 
Issued
  
179
   
1,010
 
Vested
  
(175
)  
(233
)
Forfeited
  
(16
)  
(49
)
         
End of period
  
1,861
   
1,873
 
         
Amount of expense for six months and twelve months ended, respectively
 $
4,216
  $
7,232
 
         
Total unrecognized compensation cost, net of income tax benefit, related to
non-vested
restricted stock awards, which are expected to be recognized over the remaining vesting periods, was approximately $26.8 million as of June 30, 2019.
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Table of Contents
14.
Non-Interest
Expense
The table below shows the components of
non-interest
expense for the three and six months ended June 30, 2019 and 2018:
                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(In thousands)
 
Salaries and employee benefits
 $
37,976
  $
34,476
  $
75,812
  $
69,490
 
Occupancy and equipment
  
8,853
   
8,519
   
17,676
   
17,502
 
Data processing expense
  
3,838
   
3,339
   
7,808
   
7,325
 
Other operating expenses:
            
Advertising
  
1,095
   
1,142
   
2,146
   
2,104
 
Amortization of intangibles
  
1,587
   
1,624
   
3,173
   
3,250
 
Electronic banking expense
  
1,851
   
1,828
   
3,754
   
3,706
 
Directors’ fees
  
392
   
318
   
826
   
648
 
Due from bank service charges
  
282
   
242
   
520
   
461
 
FDIC and state assessment
  
1,655
   
2,788
   
3,365
   
4,396
 
Hurricane expense  —     —     897   —   
Insurance
  
661
   
714
   
1,358
   
1,601
 
Legal and accounting
  
989
   
858
   
1,970
   
1,636
 
Other professional fees
  
2,306
   
1,601
   
5,118
   
3,240
 
Operating supplies
  
505
   
602
   
1,041
   
1,202
 
Postage
  
293
   
323
   
619
   
667
 
Telephone
  
306
   
371
   
609
   
744
 
Other expense
  
5,035
   
4,483
   
9,989
   
8,636
 
                 
Total other operating expenses
  
16,957
   
16,894
   
35,385
   
32,291
 
                 
Total
non-interest
expense
 $
67,624
  $
63,228
  $
136,681
  $
126,608
 
                 
15. Leases
The Company leases land and office facilities under long-term,
non-cancelable
operating lease agreements. The leases expire at various dates through 2042 and do not include renewal options based on economic factors that would have implied that continuation of the lease was reasonably certain. Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. The leases generally include real estate taxes and common area maintenance (“CAM”) charges in the rental payments. Upon adoption of ASU
2016-02,
the Company recorded a $47.1 million
right-of-use
(“ROU”) asset and $49.0 million lease liability within bank premises and equipment, net, and other liabilities, respectively, within the Company’s balance sheets. No cumulative adjustment to the opening balance of retained earnings was considered necessary due to the nature of the Company’s leases. Short-term leases are leases having a term of twelve months or less. As part of the standard adoption, the Company elected the package of practical expedients whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In accordance with ASU
2018-11,
the Company also elected the practical expedient whereby we elected to not separate nonlease components from the associated lease component of our operating leases. As a result, we account for these components as a single component under Topic 842 since (i) the timing and pattern of transfer of the nonlease components and the associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease. The Company recognizes short term leases on a straight-line basis and does not record a related ROU asset and liability for such leases. In addition, equipment leases were determined to be immaterial and a related ROU asset and liability for such leases is not recorded.
As of June 30, 2019, the balances of the
right-of-use
asset and lease liability was $
46.6
 million and $
49.2
million, respectively. The
right-of-use
asset is included in bank premises and equipment, net, and the lease liability is included in accrued interest payable and other liabilities.
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Table of Contents
At June 30, 2019, the maturity of the lease liabilities for the operating leases are as follows (in thousands):
     
2019
 $
3,027
 
2020-2021
  
10,682
 
2022-2023
  
7,836
 
Thereafter
  
27,691
 
     
  $49,236 
     
At June 30, 2019, the minimum rental commitments under these noncancelable operating leases are as follows (in thousands):
     
2019
 $
3,880
 
2020
  
7,447
 
2021
  
6,478
 
2022
  
5,310
 
2023
  
4,613
 
Thereafter  32,476 
     
  $
60,204
 
     
Additional information (dollar amounts in thousands):
         
 
Three Months
Ended June 30,
  
Six Months
Ended June 30,
 
  
2019
  
2019
 
Lease expense:
        
Operating lease expense
 $
2,054
  $
4,119
 
Short-term lease expense
  
29
   
53
 
Variable lease expense
  
240
   
479
 
         
Total lease expense
 $
2,323
  $
4,651
 
         
Other information:
      
Cash paid for amounts included in the measurement of lease liabilities
 $
1,998
  $
3,938
 
Weighted-average remaining lease term
  
10.85
   10.83 
Weighted-average discount rate
  
3.61
%   3.63%
The Company currently leases three properties from three related parties. Total rent expense from the leases for the three and
six-month
periods ended June 30, 2019 was $
35,000
or
1.51
% of total lease expense and $
70,000
or 1.51% of total lease expense, respectively.
16. Significant Estimates and Concentrations of Credit Risks
Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses and certain concentrations of credit risk are reflected in Note 5, while deposit concentrations are reflected in Note 8.
The Company’s primary market areas are in Arkansas, Florida, South Alabama and New York. The Company primarily grants loans to customers located within these markets unless the borrower has an established relationship with the Company.
The diversity of the Company’s economic base tends to provide a stable lending environment. Although the Company has a loan portfolio that is diversified in both industry and geographic area, a substantial portion of its debtors’ ability to honor their contracts is dependent upon real estate values, tourism demand and the economic conditions prevailing in its market areas.
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Table of Contents
Although the Company has a diversified loan portfolio, at June 30, 2019 and December 31, 2018, commercial real estate loans represented
59.0
% and 58.1% of total loans receivable, respectively, and
268.9
% and 273.6% of total stockholders’ equity at June 30, 2019 and December 31, 2018, respectively. Residential real estate loans represented
21.5
% and 22.9% of total loans receivable and
98.2
% and 107.9% of total stockholders’ equity at June 30, 2019 and December 31, 2018, respectively.
Approximately
78.4
% of the Company’s total loans and 81.6% of the Company’s real estate loans as of June 30, 2019, are to borrowers whose collateral is located in Alabama, Arkansas, Florida and New York, the states in which the Company has its branch locations.
Although general economic conditions in the Company’s market areas have been favorable, both nationally and locally, over the past three years and have remained strong in the current year, financial institutions still face circumstances and challenges which, in some cases, have resulted and could potentially result, in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.
Any future volatility in the economy could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
17. Commitments and Contingencies
In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of their customers. These commitments and contingent liabilities include lines of credit and commitments to extend credit and issue standby letters of credit. The Company applies the same credit policies and standards as they do in the lending process when making these commitments. The collateral obtained is based on the assessed creditworthiness of the borrower.
At June 30, 2019 and December 31, 2018, commitments to extend credit of $
2.57
 billion and $2.34 billion, respectively, were outstanding. A percentage of these balances are participated out to other banks; therefore, the Company can call on the participating banks to fund future draws. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
Outstanding standby letters of credit are contingent commitments issued by the Company, generally to guarantee the performance of a customer in third-party borrowing arrangements. The term of the guarantee is dependent upon the creditworthiness of the borrower, some of which are long-term. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for
on-balance-sheet
instruments. The maximum amount of future payments the Company could be required to make under these guarantees at June 30, 2019 and December 31, 2018, is $
57.9
 million and $55.6 million, respectively.
The Company and/or its bank subsidiary have various unrelated legal proceedings, most of which involve loan foreclosure activity pending, which, in the aggregate, are not expected to have a material adverse effect on the financial position or results of operations or cash flows of the Company and its subsidiary.
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Table of Contents
18. Regulatory Matters
The Bank is subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since the Bank is also under supervision of the Federal Reserve, it is further limited if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. During the first six months of 2019, the Company requested approximately $
120.8
 million in regular dividends from its banking subsidiary. This dividend is equal to approximately 75.0% of the Company’s banking subsidiary’s year-to-date 2019 earnings.
The Company’s banking subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain
off-balance-sheet
items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s regulators could require adjustments to regulatory capital not reflected in the consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total, common Tier 1 equity and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of June 30, 2019, the Company meets all capital adequacy requirements to which it is subject.
In July 2013, the Federal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank Act (“Basel III”). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary on January 1, 2015. Basel III limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5% of common equity Tier 1 capital to risk-weighted assets, which is in addition to the amount necessary to meet its minimum risk-based capital requirements. 
The capital conservation buffer requirement began being phased in beginning
January 1, 2016
at the
0.625
% level and increased by
0.625
% on each subsequent January 
1
, until it reached
2.5
% on
January 1, 2019
when the
phase-in
period ended, and the full capital conservation buffer requirement became effective.
Basel III permanently grandfathers trust preferred securities and other non-qualifying capital instruments that were issued and outstanding as of May 19, 2010 in the Tier 1 capital of bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. 
The rule phases out of Tier
1
capital these
non-qualifying
capital instruments issued before May 
19
,
2010
by all other bank holding companies. Because our total consolidated assets were less than $
15
 billion as of December 
31
,
2009
, our outstanding trust preferred securities continue to be treated as Tier
1
capital. However, now that the Company has exceeded
$15 billion
in assets, if the Company acquires another financial institution in the future, then the Tier
1
treatment of the Company’s outstanding trust preferred securities will be phased out, but those securities will still be treated as Tier
2
capital.
Basel III also amended the prompt corrective action rules to incorporate a “common equity Tier 1 capital” requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an 8% “total risk-based capital” ratio.
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Table of Contents
The Federal Reserve Board’s risk-based capital guidelines include the definitions for (1)  a well-capitalized institution, (2)  an adequately-capitalized institution, and (3)  an undercapitalized institution. Under Basel III, the criteria for a well-capitalized institution are now: a
6.5
% “common equity Tier 1 risk-based capital” ratio, a
5
% “Tier 1 leverage capital” ratio, an
8
% “Tier 1 risk-based capital” ratio, and a
10
% “total risk-based capital” ratio. As of June  30 , 2019 , the Bank met the capital standards for a well-capitalized institution. The Company’s “common equity Tier 1 risk-based capital” ratio, “Tier 1 leverage capital” ratio, “Tier 1 risk-based capital” ratio, and “total risk-based capital” ratio were 11.57%, 10.49%, 12.15%, and 15.47%, respectively, as of June  30 , 2019 .
19. Additional Cash Flow Information
In connection with the SPF acquisition, accounted for using the purchase method, the Company acquired approximately $
377.0
 million in assets, including $376.2 million in loans, issued 1,250,000 shares of its common stock valued at approximately $28.2 million as of June 30, 2018, and paid $377.4 million in cash.
The following is a summary of the Company’s additional cash flow information during the
six-month
periods ended:
         
 
June 30,
 
 
2019
  
2018
 
 
(In thousands)
 
Interest paid
 $
80,473
  $
51,069
 
Income taxes paid
  
55,382
   
23,375
 
Assets acquired by foreclosure
  
5,764
   
7,919
 
20. Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There is a hierarchy of three levels of inputs that may be used to measure fair values:
Level 1
Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers of financial instruments between levels within the fair value hierarchy are recognized on the date management determines that the underlying circumstances or assumptions have changed.
Financial Assets and Liabilities Measured on a Recurring Basis
Available-for-sale
securities are the only material instruments valued on a recurring basis which are held by the Company at fair value. The Company does not have any Level 1 securities. Primarily all of the Company’s securities are considered to be Level 2 securities. These Level 2 securities consist primarily of U.S. government-sponsored enterprises, mortgage-backed securities plus state and political subdivisions. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. As of June 30, 2019 and December 31, 2018, Level 3 securities were immaterial. In addition, there were no material transfers between hierarchy levels during 2019 and 2018. See Note 3 for additional detail related to investment securities
38
Table of Contents
The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities with complicated structures. Pricing for the Company’s investment securities is fairly generic and is easily obtained. The Company uses a third-party comparison pricing vendor in order to reflect consistency in the fair values of the investment securities sampled by the Company each quarter.
Financial Assets and Liabilities Measured on a Nonrecurring Basis
Impaired loans that are collateral dependent are the only material financial assets valued on a
non-recurring
basis which are held by the Company at fair value. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the net realizable value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses. The fair value of loans with specific allocated losses was $83.4 million and $84.3 million as of June 30, 2019 and December 31, 2018, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $292,000 and $368,000 of accrued interest receivable when impaired loans were put on non-accrual status during the three months ended June 30, 2019 and 2018, respectively. The Company reversed approximately $480,000 and $563,000 of accrued interest receivable when impaired loans were put on
non-accrual
status during the six months ended June 30, 2019 and 2018, respectively.
Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis
Foreclosed assets held for sale are the only material
non-financial
assets valued on a
non-recurring
basis which are held by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held for sale is estimated using Level 3 inputs based on appraisals of underlying collateral. As of June 30, 2019 and December 31, 2018, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $
13.7
 million and $13.2 million, respectively.
Foreclosed assets held for sale with a carrying value of approximately $190,000 were remeasured during the six months ended June 30, 2019, resulting in a write-down of approximately $100,000. Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets held for sale on at least an annual basis. The Company’s policy is to comply with the regulatory guidelines.
The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans and foreclosed assets primarily relate to customized discounting criteria applied to the customer’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the underlying collateral. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 10% to 25% for commercial and residential real estate collateral.
39
Table of Contents
Fair Values of Financial Instruments
The following table presents the estimated fair values of the Company’s financial instruments. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
             
 
June 30, 2019
 
 
Carrying
Amount
  
Fair Value
  
Level
 
 
(In thousands)
    
Financial assets:
         
Cash and cash equivalents
 $
557,302
  $
557,302
   
1
 
Federal funds sold
  
1,075
   
1,075
   
1
 
Investment securities –
held-to-maturity
  
—  
   
—  
   
2
 
Loans receivable, net of impaired loans and allowance
  
10,863,710
   
10,624,280
   
3
 
Accrued interest receivable
  
48,992
   
48,992
   
1
 
FHLB, Federal Reserve & First National Banker’s Bank stock; other equity investments
  
152,236
   
152,236
   
3
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
         
Deposits:
         
Demand and
non-interest
bearing
 $
2,575,696
  $
2,575,696
   
1
 
Savings and interest-bearing transaction accounts
  
6,774,162
   
6,774,162
   
1
 
Time deposits
  
1,997,458
   
1,986,178
   
3
 
Securities sold under agreements to repurchase
  
142,541
   
142,541
   
1
 
FHLB and other borrowed funds
  
899,447
   
868,054
   
2
 
Accrued interest payable
  
8,735
   
8,735
   
1
 
Subordinated debentures
  
369,170
   
378,605
   
3
 
             
 
December 31, 2018
 
 
Carrying
Amount
  
Fair Value
  
Level
 
 
(In thousands)
    
Financial assets:
         
Cash and cash equivalents
 $
657,939
  $
657,939
   
1
 
Federal funds sold
  
325
   
325
   
1
 
Investment securities –
held-to-maturity
  
192,776
   
193,610
   
2
 
Loans receivable, net of impaired loans and allowance
  
10,878,769
   
10,659,428
   
3
 
Accrued interest receivable
  
48,945
   
48,945
   
1
 
FHLB, Federal Reserve & First National Banker’s Bank stock; other equity investments
  
159,775
   
159,775
   
3
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
         
Deposits:
         
Demand and
non-interest
bearing
 $
2,401,232
  $
2,401,232
   
1
 
Savings and interest-bearing transaction accounts
  
6,624,407
   
6,624,407
   
1
 
Time deposits
  
1,874,139
   
1,852,816
   
3
 
Securities sold under agreements to repurchase
  
143,679
   
143,679
   
1
 
FHLB and other borrowed funds
  
1,472,393
   
1,464,073
   
2
 
Accrued interest payable
  
8,891
   
8,891
   
1
 
Subordinated debentures
  
368,790
   
366,159
   
3
 
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Table of Contents
21. Recent Accounting Pronouncements
In January 2016, the FASB issued ASU
 2016-01,
Financial Instruments – Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU
 2016-01
clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on
available-for-sale
securities. The new guidance is effective for annual reporting period and interim reporting periods within those annual periods, beginning after December 15, 2017. The Company adopted the new standard effective January 1, 2018, and the implementation resulted in a $990,000 increase to retained earnings and a $990,000 decrease to accumulated other comprehensive income. The current accounting policies and procedures have been adjusted to comply with the accounting changes mentioned above. For additional information on fair value of assets and liabilities, see Note 20.
In February 2016, the FASB issued ASU
 2016-02,
Leases (Topic 842)
. The amendments in ASU
 2016-02
address several aspects of lease accounting with the significant change being the recognition of lease assets and lease liabilities for leases previously classified as operating leases. The new standard establishes a
right-of-use
(ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity may adopt the new guidance either by restating prior periods and recording a cumulative effect adjustment at the beginning of the earliest comparative period presented or by recording a cumulative effect adjustment at the beginning of the period of adoption. The Company adopted the standard effective January 1, 2019 and recorded a ROU asset of $47.1 million and lease liability of $49.0 million. No cumulative adjustment to the opening balance of retained earnings was considered necessary due to the nature of the Company’s leases. As part of the standard adoption, the Company elected the package of practical expedients whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In accordance with ASU
 2018-11
Leases (Topic 842) Targeted Improvements
, the Company also elected the practical expedient whereby we elected to not separate nonlease components from the associated lease component of our operating leases. As a result, we account for these components as a single component under Topic 842 since (i) the timing and pattern of the transfer of the nonlease components and the associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease. The Company has also elected to not apply the recognition requirements of ASU 
2016-02
to any short-term leases (as defined by related accounting guidance). As of June 30, 2019, the balances of the
right-of-use
asset and lease liability was $46.6 million and $49.2 million, respectively. The
right-of-use
asset is included in bank premises and equipment, net, and the lease liability is included in accrued interest payable and other liabilities.
In May 2016 , the FASB issued ASU 2016-11,
Revenue Recognition (Topic 
605) and Derivatives and Hedging (Topic 
815): Rescission of SEC Guidance Because of Accounting Standards Updates
2014-
09 and
2014-
16 Pursuant to Staff Announcements at the March 
3,
2016 EITF Meeting (SEC Update)
, which rescinds certain SEC guidance from the FASB Accounting Standards Codification in response to announcements made by the SEC staff at the Emerging Issues Task Force’s (“EITF”) March  3, 2016, meeting. ASU 
2016
-
11
is effective at the same time as ASU 
2014
-
09
and ASU 
2014
-
16
. The Company adopted the guidance effective January 1, 2018 and its adoption did not have a significant impact on our financial position or financial statement disclosures.
41
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In June 2016, the FASB issued ASU
 2016-13,
Measurement of Credit Losses on Financial Instruments
, which amends the FASB’s guidance on the impairment of financial instruments. The amendments in ASU
 2016-13
replace the incurred loss model with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates, known as the current expected credit loss (“CECL”) model. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU
 2016-13
is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. ASU
 2016-13
is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The allowance for loan losses is a material estimate of the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the allowance for loan losses at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The Company will also develop new procedures for determining an allowance for credit losses relating to
held-to-maturity
investment securities. In addition, the current accounting policy and procedures for other-than-temporary impairment on
available-for-sale
investment securities will be replaced with an allowance approach. The Company is currently evaluating the impact, if any, ASU
2016-13
will have on its financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from the amendments. It is too early to assess the impact that the implementation of this guidance will have on the Company’s consolidated financial statements; however, the Company has begun developing processes and procedures to ensure it is fully compliant with the amendments at the required adoption date. Among other things, the Company has initiated data gathering and assessment to support forecasting of asset quality, loan balances, and portfolio net charge-offs and has developed an
in-house
data warehouse, developed asset quality forecast models and selected a software vendor in preparation for the implementation of this standard. For additional information on the allowance for loan losses, see Note 5.
In January 2017, the FASB issued ASU
 2017-04, 
Intangibles - Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would
more-likely-than-not
reduce the fair value of the reporting unit below its carrying value. During 2018, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated, and therefore, the Company does not anticipate a material impact from these amendments to our financial position or results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.
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In
July 2017
, the FASB issued ASU
 2017-11,
Earnings Per Share (Topic 
260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic
815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception.
Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating
Topic 
480, Distinguishing Liabilities from Equity
, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable
non-controlling
interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted the guidance effective January 1, 2019, and its adoption did not have a significant impact on our financial position or financial statement disclosures.
In August 2017, the FASB issued ASU
 2017-12,
Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities
, which amends the hedge accounting model to provide better insight to risk management activities in the financial statements, reduces the complexity in cash flow hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, requires the entire change in the fair value of a hedging instrument included in the assessment of the hedge effectiveness to be recorded in other comprehensive income, with amounts reclassified to earnings to be presented in the same line item used to present the earnings effect of the hedged item when the hedged item affects earnings and allows the initial prospective quantitative assessment of hedge effectiveness to be performed at any time after hedge designation, but no later than the first quarterly effectiveness testing date. This ASU is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The amendments in this standard must be applied using the modified retrospective approach for cash flow and net investment hedge relationships existing on the date of adoption. The Company adopted the guidance effective January 1, 2019, and as permitted by the ASU, the Company reclassified the prepayable HTM investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to
available-for-sale
investment securities.
In February 2018, the FASB issued ASU
 2018-02,
Income 
Statement—Reporting 
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the TCJA on December 22, 2017 that changed the Company’s federal income tax rate from 35%
35
% to 21%
21
%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The Company plans to adopt the guidance January 1, 2019. As of September 30, 2018, the balance of the stranded tax effects within other comprehensive income was $534,000.

In February 2018, the FASB issued ASU2018-03,Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU2018-03 make technical corrections to certain aspects of ASU2016-01 (on recognition of financial assets and financial liabilities), including the following:

Equity securities without a readily determinable fair value – discontinuation.

Equity securities without a readily determinable fair value – adjustments.

Forward contracts and purchased options.

Presentation requirements for certain fair value option liabilities.

Fair value option liabilities denominated in a foreign currency.

Transition guidance for equity securities without a readily determinable fair value.

The amendments in ASU2018-03 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption of ASU2018-03 is permitted for all entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, if they have adopted ASU2016-01. The Company adopted the guidance effective January 1, 2018,2019, and its adoption did not haveresulted in a significant impact on our financial position or financial statement disclosures.

$

459,000
reclassification between retained earnings and accumulated other comprehensive income.
In
March 2018
, the FASB issued ASU
2018-04,
Amendments to SEC Paragraphsparagraphs Pursuant to SEC Staff Accounting Bulletin No.
117 and SEC Release No. 33-9273
33-
9273
. The ASU adds, amends, and supersedes various paragraphs that contain SEC guidance in ASC 320,
Investments – Debt Securities
, and ASC 980,
Regulated Operations
. The effective date for the amendments to ASC 320 is the same as the effective date of ASU2016-01.
2016-
01.
Other amendments are effective upon issuance. The Company has adopted the amendments to ASC 320 effective January 1, 2018, and thetheir adoption did not have a significant impact on our financial position or financial statement disclosures. The Company has adopted the other amendments effective March 9, 2018, and the adoption did not have a significant impact on our financial position or financial statement disclosures.


Table of Contents
In March 2018, the FASB issued ASU
2018-05,
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.
 118
. The ASU adds seven paragraphs to ASC 740, Income Taxes, that contain SEC guidance related to SAB 118 (codified as SEC SAB Topic 5.EE,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
). This ASU was effective upon issuance. The Company adopted the guidance effective March 13,31, 2018, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In June 2018, the FASB issued ASU
2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. ThisThe Company adopted the guidance is applicable to the Company beginningeffective January 1, 2019. The Company is currently evaluating the potential effects of this guidance2019, and its adoption did not have a significant impact on its consolidatedour financial statements.

position or financial statement disclosures.

In August 2018, the FASB issued ASUNo. 
2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
. The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. This guidance is applicable to the Company beginning January 1, 2020. The Company is currently evaluating the potential effects of this guidance on itsour consolidated financial statements.

22. Subsequent Events

Hurricane Michael made landfall

In August 2018, the FASB issued ASU
2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,
that amends the Florida Panhandledefinition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an
internal-use
software project. The
internal-use
software guidance states that only qualifying costs incurred during the application development stage can be capitalized. The effective date is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively in accordance with the applicable guidance. At the time of adoption, entities will be required to disclose the nature of its hosting arrangements that are service contracts and provide disclosures as if the deferred implementation costs were a Category 4 hurricane on October 10, 2018.separate, major depreciable asset class. The totalCompany is beginning to evaluate its cloud computing arrangements and has not yet determined how we will apply or the impact of this hurricane maynew standard.
In October 2018, the FASB issued ASU
2018-16
, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.
The amendments in this Update permit the OIS rate based on SOFR as a U.S. benchmark interest rate. Including the OIS rate based on SOFR as an eligible benchmark interest rate during the early stages of the marketplace transition will facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. For entities that have not already adopted ASU
2017-12,
the amendments in this Update are required to be knownadopted concurrently with the amendments in ASU
2017-12.
The Company adopted the guidance concurrently with ASU
2017-12
effective January 1, 2019, and its adoption did not have a significant impact on our financial position or financial statement disclosures.
In November 2018, the FASB issued ASU
2018-19,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses.
The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic
326-20.
Instead, impairment of receivables arising from operating leases should be accounted for some time; however, the Company is currently evaluating the potential impact of this hurricane on the Company’s financial conditionin accordance with Topic 842, Leases. The effective date and results of operationtransition requirements for the fourth quarteramendments in this update are the same as the effective dates and transition requirements in ASU
2016-13.
44
Table of 2018.

Contents

In December 2018, the FASB issued ASU
2018-20,
Narrow-Scope Improvements for Lessors.
The amendments in this update permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures. The amendments in this update related to certain lessor costs require lessors to exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. The amendments also require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue. The amendments in this Update related to recognizing variable payments for contracts with lease and
non-lease
components require lessors to allocate certain variable payments to the lease and
non-lease
components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation, the amount of variable payments allocated to the lease components will be recognized as income in profit or loss in accordance with Topic 842, while the amount of variable payments allocated to
non-lease
components will be recognized in accordance with other Topics, such as Topic 606. The Company adopted the standard effective January 1, 2019, and its adoption did not have a significant impact on our financial position or financial statement disclosures.
In March 2019, the FASB issued ASU
2019-01,
Leases (Topic 842) Codification Improvements
. The amendments in this Update reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers. Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of
fair value
(exit price) in Topic 820. In addition, the amendments in this Update address the concerns of lessors within the scope of Topic 942 about where “principal payments received under leases” should be presented. Specifically, lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities. Finally, the amendments in this Update clarify the FASB’s original intent by explicitly providing an exception to the paragraph
250-10-50-3
interim disclosure requirements in the Topic 842 transition disclosure requirements. The effective date for the amendments in this update is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.
In April 2019, the FASB issued ASU
2019-04,
Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.
The amendments clarify certain aspects of the accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs
2016-13, 
2017-12
and
2016-01
, respectively). The amendments made to the provisions of ASU
2016-13
are related to accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projections of interest rate environments for variable-rate financial instruments, cost to sell financial assets when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, amortized cost basis of line of credit arrangements that are converted to term loans and extension and renewal options that are not unconditionally cancelable by the entity. The effective date and transition requirements for the amendments in this update are the same as the effective dates and transition requirements in ASU
2016-13.
The significant amendments made to the provisions of ASU
2017-12
are related to partial-term fair value hedges of interest rate risk, amortization of fair value hedge basis adjustments, disclosure of fair value hedge basis adjustments, consideration of the hedged contractually specified interest rate under the hypothetical derivative method, application of a first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments and transition guidance for reclassifying prepayable debt securities from HTM to
available-for-sale.
The amendments to ASU
2017-12
are effective as of the beginning of the first annual reporting period beginning after the date of issuance of ASU
2019-04.
The amendments made to the provisions of ASU
2016-01
indicate that the measurement alternative for equity securities without readily determinable fair values represent a nonrecurring fair value measurement under ASC 820, and therefore, such securities should be remeasured at fair value when an entity identifies an orderly transaction “for an identical or similar investment of the same issuer.” The amendments related to ASU
2016-01
are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
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In May 2019, the FASB issued ASU 2019-05,
Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief
. The amendments provide transition relief for entities adopting the Board’s credit losses standard, ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that were previously recorded at amortized cost and are within the scope of the credit losses guidance in ASC 326-20, are eligible for the fair value option under ASC 825-10, and are not held-to-maturity debt securities. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
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Table of Contents
Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Home BancShares, Inc.

Conway, Arkansas

Results of Review of Interim Consolidated Financial Statements

We have reviewed the condensed consolidated balance sheet of Home BancShares, Inc. and subsidiaries (“the Company”) as of SeptemberJune 30, 2018,2019, and the related condensed consolidated statements of income, and comprehensive income, and stockholders’ equity for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20182019, and 2017, and stockholders’ equity2018, and cash flows for the nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, and the related notes (collectively referred to as the “interim financial information or statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company and subsidiaries as of December 31, 2017,2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated February 27, 2018,26, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017,2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

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

/s/
BKD,LLP

llp
Little Rock, Arkansas

November 5, 2018

August 7, 2019
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Item 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Form10-K, filed with the Securities and Exchange Commission on February 27, 2018,26, 2019, which includes the audited financial statements for the year ended December 31, 2017.2018.
Unless the context requires otherwise, the terms “Company”, “us”, “we”,“Company,” “us,” “we,” and “our” refer to Home BancShares, Inc. on a consolidated basis.

General

We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly-owned bank subsidiary, Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of SeptemberJune 30, 2018,2019, we had, on a consolidated basis, total assets of $14.91$15.29 billion, loans receivable, net of $10.72$10.95 billion, total deposits of $10.62$11.35 billion, and stockholders’ equity of $2.34$2.42 billion.

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

Table 1: Key Financial Measures

   As of or for the Three Months
Ended September 30,		  As of or for the Nine Months
Ended September 30,		 
   2018  2017  2018  2017 
   (Dollars in thousands, except per share data) 

Total assets

  $14,912,738  $14,255,967  $14,912,738  $14,255,967 

Loans receivable

   10,832,815   10,286,193   10,832,815   10,286,193 

Allowance for loan losses

   110,191   111,620   110,191   111,620 

Total deposits

   10,624,738   10,448,770   10,624,738   10,448,770 

Total stockholders’ equity

   2,341,026   2,206,716   2,341,026   2,206,716 

Net income

   80,284   14,821   229,373   111,774 

Basic earnings per share

   0.46   0.10   1.32   0.78 

Diluted earnings per share

   0.46   0.10   1.32   0.78 

Book value per share

   13.44   12.71   13.44   12.71 

Tangible book value per share(non-GAAP)

   7.68   7.06   7.68   7.06 

Annualized net interest margin – FTE

   4.46%   4.40%   4.46%   4.53% 

Efficiency ratio

   37.23   53.77   37.26   43.92 

Efficiency ratio, as adjusted(non-GAAP)

   37.40   39.12   37.46   37.79 

Annualized return on average assets

   2.14   0.54   2.12   1.41 

Annualized return on average common equity

   13.74   3.88   13.56   10.33 

                 
 
As of or for the Three Months
Ended June 30,
  
As of or for the Six Months
Ended June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands, except per share data)
 
Total assets $15,287,575  $14,924,120  $15,287,575  $14,924,120 
Loans receivable  11,053,129   10,897,970   11,053,129   10,897,970 
Allowance for loan losses  106,066   111,516   106,066   111,516 
Total deposits  11,347,316   10,736,033   11,347,316   10,736,033 
Total stockholders’ equity  2,421,406   2,314,013   2,421,406   2,314,013 
Net income  72,164   76,025   143,514   149,089 
Basic earnings per share  0.43   0.44   0.85   0.86 
Diluted earnings per share  0.43   0.44   0.85   0.86 
Book value per share  14.46   13.26   14.46   13.26 
Tangible book value per share (non-GAAP)
(1)
  8.50   7.52   8.50   7.52 
Annualized net interest margin – FTE  4.28%  4.47%  4.29%  4.47%
Efficiency ratio  39.93   36.74   40.47   37.28 
Efficiency ratio, as adjusted (non-GAAP)
(2)
  39.92   37.03   40.21   37.49 
Annualized return on average assets  1.92   2.13   1.92   2.11 
Annualized return on average common equity  12.18   13.54   12.26   13.46 

(1)See Table 19 for the non-GAAP tabular reconciliation.
(2)
See Table 23 for the non-GAAP tabular reconciliation.
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Overview

Results of Operations for the Three Months Ended SeptemberJune 30, 20182019 and 2017

2018

Our net income increased $65.5decreased $3.8 million, or 441.7%5.1%, to $80.3$72.2 million for the three-month period ended SeptemberJune 30, 2018,2019, from $14.8$76.0 million for the same period in 2017.2018. On a diluted earnings per share basis, our earnings were $0.46 per share and $0.10$0.43 per share for the three-month periodsperiod ended SeptemberJune 30, 20182019 and 2017, respectively. Excluding the $18.2 million of merger expenses associated with the Stonegate Bank ( “Stonegate”) acquisition and $33.4 million of hurricane expenses, our net income increased $33.8 million, or 72.8%, to $80.3 million$0.44 per share for the three-month period ended SeptemberJune 30, 2018, from $46.42018. Total interest expense increased $12.4 million foror 44.2%, non-interest expense increased $4.4 million or 7.0% and non-interest income decreased by $4.6 million or 16.6%. This was partially offset by an $14.7 million, or 8.8%, increase in total interest income. The primary driver of the same periodincrease in 2017 (See Table 18 for thenon-GAAP tabular reconciliation). The $33.8interest income was a $12.8 million increase in net income includes $13.4 million from tax savingsloan interest income. The primary drivers of the TCJA.decrease in non-interest income were a $1.6 million decrease in other service charges and fees, a $988,000 decrease in gain (loss) on other real estate owned (“OREO”), net, and a $982,000 decrease in other income. The remaining $20.4 million is primarily associated with additional net income fromprimary driver of the acquisition of Stonegate, increased profitability of Centennial CFG and the acquisition of Shore Premier Finance.

Our net interest margin increased from 4.40% for the three-month period ended September 30, 2017 to 4.46% for the three-month period ended September 30, 2018. The yield on loans was 6.06% and 5.66% for the three months ended September 30, 2018 and 2017, respectively, as average loans increased from $7.94 billion to $10.91 billion. The increase in loan balances is primarily due to the acquisition of Stonegate. For the three months ended September 30, 2018 and 2017, we recognized $10.7interest expense was a $11.5 million, and $7.2 millionor 63.6%, increase in total net accretion for acquired loans andinterest expense on deposits. The rate on interest-bearing deposits increased from 0.57% for the three months ended September 30, 2017 to 1.05% for the three months ended September 30, 2018 with average balances of $5.96 billion and $8.07 billion, respectively.

Our efficiency ratio was 37.23% for the three months ended September 30, 2018, compared to 53.77% for the same period in 2017. For the third quarter of 2018, our efficiency ratio, as adjusted(non-GAAP), was 37.40%, an improvement of 172 basis points from the 39.12% reported for third quarter of 2017 (See Table 23 for thenon-GAAP tabular reconciliation). Even though acquisitions tend to increase our efficiency ratio in the short term, we had a slight improvement in the efficiency ratio, as adjusted, as a result of cost savings from our Stonegate acquisition being realized soon after conversion, which was completed on February 9, 2018.

Our annualized return on average assets was 2.14% for the three months ended September 30, 2018, compared to 0.54% for the same period in 2017. Excluding merger expenses and hurricane expenses, our annualized return on average assets was 2.14% for the three months ended September 30, 2018 compared to 1.70% for the same period in 2017 (See Table 20 for thenon-GAAP tabular reconciliation). Our annualized return on average common equity was 13.74% for the three months ended September 30, 2018, compared to 3.88% for the same period in 2017. Excluding merger expenses and hurricane expenses, our annualized return on average common equity was 13.74% for the three months ended September 30, 2018 compared to 12.17% for the same period in 2017 (See Table 21 for thenon-GAAP tabular reconciliation). Excluding the $13.4 million tax effectprimary driver of the TCJA, our annualized return on average assetsincrease in non-interest expense was 1.78% for the three months ended September 30, 2018 (See Table 20 for thenon-GAAP tabular reconciliation) and our annualized return on average common equity was 11.45% (See Table 21 for thenon-GAAP tabular reconciliation).

Results of Operations for Nine Months Ended September 30, 2018 and 2017

Our net income increased $117.6 million, or 105.2%, to $229.4 million for the nine-month period ended September 30, 2018, from $111.8 million for the same period in 2017. On a diluted earnings per share basis, our earnings were $1.32 per share and $0.78 per share for the nine-month periods ended September 30, 2018 and 2017, respectively. Excluding the $3.8 million ofnon-taxable gain on acquisition, $25.7 million of merger expenses associated with the 2017 acquisitions and $33.4 million of hurricane expenses, our net income increased $84.8 million, or 58.7%, to $229.4 million for the nine-month period ended September 30, 2018, from $144.5 million for the same period in 2017 (See Table 18 for thenon-GAAP tabular reconciliation). The $84.8$3.5 million increase in net income includes $38.0 million from tax savings of the TCJA. The remaining $46.8 million increase in net income from the 2017 acquisitions, increased profitability of Centennial CFGsalaries and the acquisition of Shore Premier Finance.

employee benefits.

Our net interest margin decreased from 4.53%4.47% for the nine-monththree-month period ended SeptemberJune 30, 20172018 to 4.46%4.28% for the nine-monththree-month period ended SeptemberJune 30, 2018.2019. The yield on loansinterest earning assets was 5.95%5.50% and 5.70%5.36% for the ninethree months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, as average loansinterest earning assets increased from $7.79$12.56 billion to $10.53$13.32 billion. The increase in loan balancesearning assets is primarily due to the acquisitions we completed during 2017.result of our acquisition in 2018 and organic loan growth. For the ninethree months ended SeptemberJune 30, 20182019 and 2017,2018, we recognized $32.0$9.2 million and $23.3$10.7 million, respectively, in total net accretion for acquired loans and deposits. The rate on interest bearing liabilities was 1.61% and 1.18% for the three months ended June 30, 2019 and 2018, respectively, as average interest-bearing depositsliabilities increased from 0.49%$9.50 billion to $10.07 billion. The growth in the rate on interest bearing liabilities was only partially offset by the increase in yield, which led to a decrease in net interest margin for the nine monthsquarter ended SeptemberJune 30, 2017, to 0.91% for the nine months ended September 30, 2018, with average balances of $5.73 billion and $8.02 billion, respectively.

2019.

Our efficiency ratio was 37.26%39.93% for the ninethree months ended SeptemberJune 30, 2018,2019, compared to 43.92%36.74% for the same period in 2017.2018. For the first nine monthssecond quarter of 2018,2019, our efficiency ratio, as adjusted(non-GAAP), was 37.46%39.92%, which decreasedan increase of 295 basis points from the 37.79%36.97% reported for first nine monthsthe second quarter of 2017.2018. (See Table 23 for thenon-GAAP tabular reconciliation). Even though acquisitions tend toThe increase our efficiency ratio in the short term, we had a slight improvement in the efficiency ratio is primarily due to the increase in non-interest expense which was primarily driven by a $3.5 million or 10.2% increase in salary and employee benefits as adjusted,well as a decrease in non-interest income which is primarily due to a $1.6 million or 16.5% decrease in other service charges and fees, a $988,000 or 94.5% decrease in gain (loss) on OREO, net, and a $982,000 or 31.9% decrease in other income. The $3.5 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 cost savings from our Stonegatethe increased regulatory environment, $326,000 increase in salary expense for Centennial CFG, $831,000 of additional expense related to performance based restricted stock and stock options granted during the third quarter of 2018 under the Company’s “HOMB $2.00” performance incentive program (“HOMB $2.00”) and the completion of the acquisition of SPF during the second quarter of 2018, which accounted for $236,000 of the increase. The decrease in other service charges and fees is due to the Bank being realized soon after conversion,subject to the Durbin Amendment to the Dodd-Frank Act which restricted interchange fees beginning in the third quarter of 2018. We estimate that quarterly interchange fees are approximately $3.0 million lower as a result of the Durbin Amendment. This was completed on February 9, 2018.

partially offset by a $892,000 increase in property finance loan fees and a $223,000 increase in wire service income.

Our annualized return on average assets was 2.12%1.92% for the ninethree months ended SeptemberJune 30, 2018,2019, compared to 1.41%2.13% for the same period in 2017. Excluding merger expenses and hurricane expenses, our annualized return on average assets was 2.12% for the nine months ended September 30, 2018 compared to 1.82% for the same period in 2017 (See Table 20 for thenon-GAAP tabular reconciliation).2018. Our annualized return on average common equity was 13.56%12.18% for the ninethree months ended SeptemberJune 30, 2018,2019, compared to 10.33%13.54% for the same period in 2017. Excluding merger expenses2018.
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Results of Operations for the Six Months Ended June 30, 2019 and hurricane expenses,2018
Our net income decreased $5.6 million, or 3.74%, to $143.5 million for the
six-month
period ended June 30, 2019, from $149.1 million for the same period in 2018. On a diluted earnings per share basis, our earnings were $0.85 per share and $0.86 per share for the
six-month
periods ended June 30, 2019 and 2018, respectively. Total interest expense increased $27.6 million or 52.4%,
non-interest
expense increased $10.1 million or 8.0% and
non-interest
income decreased by $6.7 million or 12.6%. This was partially offset by a $33.2 million, or 10.1%, increase in total interest income. The primary driver of the increase in interest income was a $28.6 million increase in loan interest income. The primary drivers of the decrease in
non-interest
income were a $5.2 million decrease in other service charges and fees, a $1.2 million decrease in gain (loss) on OREO, net, and a $2.2 million decrease in other income partially offset by a $2.2 million increase in dividends from the Federal Home Loan Bank (“FHLB”), Federal Reserve Bank (“FRB”), First National Bankers’ Bank (“FNBB”) and other dividends. The primary driver of the increase in interest expense was a $24.7 million, or 75.1%, increase in interest expense on deposits. The primary drivers of the increase in
non-interest
expense were a $6.3 million increase in salaries and employee benefits and a $3.1 million increase in other operating expenses.
Our net interest margin decreased from 4.47% for the
six-month
period ended June 30, 2018 to 4.29% for the
six-month
period ended June 30, 2019. The yield on interest earning assets was 5.51% and 5.32% for the six months ended June 30, 2019 and 2018, respectively, as average interest earning assets increased from $12.52 billion to $13.31 billion. The increase in earning assets is primarily the result of our acquisition in 2018 and organic loan growth. For the six months ended June 30, 2019 and 2018, we recognized $18.3 million and $21.3 million, respectively, in total net accretion for acquired loans and deposits. The rate on interest bearing liabilities was 1.60% and 1.11% for the six months ended June 30, 2019 and 2018, respectively, as average interest-bearing liabilities increased from $9.55 billion to $10.12 billion. The growth in the rate on interest bearing liabilities was only partially offset by the increase in yield, which led to a decrease in net interest margin for the six months ended June 30, 2019.
Our efficiency ratio was 40.47% for the six months ended June 30, 2019, compared to 37.28% for the same period in 2018. For the first six months of 2019, our efficiency ratio, as adjusted
(non-GAAP),
was 40.21%, which increased from the 37.44% reported for first six months of 2018. (See Table 23 for the
non-GAAP
tabular reconciliation). The increase in the efficiency ratio is primarily due to the increase in
non-interest
expense which was primarily driven by a $6.3 million or 9.1% increase in salary and employee benefits as well as a decrease in
non-interest
income which is primarily due to a $5.2 million or 26.1% decrease in other service charges and fees, a $1.2 million or 81.8% decrease in gain (loss) on OREO, net, and a $2.2 million or 32.0% decrease in other income. The $6.3 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, $1.0 million increase in salary expense for Centennial CFG, $1.7 million of additional expense related to performance based restricted stock and stock options granted during the third quarter of 2018 under “HOMB $2.00” and the completion of the acquisition of SPF during the second quarter of 2018, which accounted for $489,000 of the increase. The decrease in other service charges and fees is due to the Bank being subject to the Durbin Amendment to the Dodd-Frank Act which restricted interchange fees beginning in the third quarter of 2018. We estimate that the year to date interchange fees are approximately $6.0 million lower as a result of the Durbin Amendment. This was partially offset by a $699,000 increase in property finance loan fees and a $350,000 increase in wire service income.
Our annualized return on average assets was 1.92% for the six months ended June 30, 2019, compared to 2.11% for the same period in 2018. Our annualized return on average common equity was 13.56%12.24% for the ninesix months ended SeptemberJune 30, 20182019, compared to 13.36%13.46% for the same period in 2017 (See 2018.
50
Table 21 for thenon-GAAP tabular reconciliation). Excluding the $38.0 million tax effect of the TCJA, our annualized return on average assets was 1.77% for the nine months ended September 30, 2018 (See Table 20 for thenon-GAAP tabular reconciliation) and our annualized return on average common equity was 11.32% (See Table 21 for thenon-GAAP tabular reconciliation).

Contents

Financial Condition as of and for the Period Ended SeptemberJune 30, 20182019 and December 31, 2017

2018

Our total assets as of SeptemberJune 30, 2018 increased $463.02019 decreased $14.9 million to $14.91$15.29 billion from the $14.45$15.30 billion reported as of December 31, 2017.2018. Cash and cash equivalents decreased $100.6 million, or 15.3%, for the six-month period ended June 30, 2019. Our loan portfolio balance declined slightly to $11.05 billion as of June 30, 2019 from $11.07 billion at December 31, 2018. Total deposits increased $501.6$447.5 million or 4.86% for the quarter ended Septemberto $11.35 billion as of June 30, 20182019 from $10.33$10.90 billion as of December 31, 20172018. Stockholders’ equity increased $71.5 million to $10.83$2.42 billion as of SeptemberJune 30, 2018. The increase is primarily due2019, compared to the acquisition of $376.2 million of loans as part of the acquisition of Shore Premier Finance (“SPF”) as well as $125.4 million of organic loan growth the nine months ended September 30, 2018. Total deposits increased $236.2 million to $10.62 billion as of September 30, 2018 from $10.39$2.35 billion as of December 31, 2017. Stockholders’ equity increased $136.7 million to $2.34 billion as of September 30, 2018, compared to $2.20 billion as of December 31, 2017.2018. The increase in stockholders’ equity is primarily associated with the $171.2$101.8 million increase in retained earnings the issuance of 1,250,000 shares of stock with a value of $28.2 million as part of the acquisition of SPF, and the issuance of $6.5$28.6 million of share-based compensation,other comprehensive income, which werewas partially offset by $27.3stock repurchases of $64.4 million of comprehensive loss and the repurchase of $43.2 million of our common stock during 2018.

As of September 30, 2018, ourin 2019.

Our non-performing loans increased to $56.5were $62.8 million, or 0.52%,0.57% of total loans from $44.7as of June 30, 2019, compared to $64.2 million, or 0.43%,0.58% of total loans as of December 31, 2017.2018. The allowance for loan losses as a percent ofnon-performing loans decreased to 195.15%168.9% as of SeptemberJune 30, 2018,2019, from 246.70%169.4% as of December 31, 2017.2018. Non-performing loans from our Arkansas franchise were $14.5$20.0 million at SeptemberJune 30, 20182019 compared to $15.5$17.4 million as of December 31, 2017.2018. Non-performing loans from our Florida franchise were $40.0$37.1 million at SeptemberJune 30, 20182019 compared to $28.2$43.3 million as of December 31, 2017.2018. Non-performing loans from our Alabama franchise were $133,000$3.3 million at SeptemberJune 30, 20182019 compared to $929,000$179,000 as of December 31, 2017.2018. Non-performing loans from our SPF franchise were $1.8$2.4 million and thereat June 30, 2019 compared to $3.4 million as of December 31, 2018. There were nonon-performing loans from our Centennial CFG franchise as of September 30, 2018 or December 31, 2017.

franchise.

As of SeptemberJune 30, 2018,2019, ournon-performing assets increaseddecreased to $70.4$77.5 million, or 0.47%0.51% of total assets, from $63.6$78.0 million, or 0.44%,0.51% of total assets, as of December 31, 2017.2018. Non-performing assets from our Arkansas franchise were $21.1$26.6 million at SeptemberJune 30, 20182019 compared to $25.6$24.0 million as of December 31, 2017.2018. Non-performing assets from our Florida franchise were $46.7$45.2 million at SeptemberJune 30, 20182019 compared to $36.4$50.2 million as of December 31, 2017.2018. Non-performing assets from our Alabama franchise were $774,000$3.3 million at SeptemberJune 30, 20182019 compared to $1.6 million$306,000 as of December 31, 2017.2018. Non-performing assets from our SPF franchise were $1.8$2.4 million and thereat June 30, 2019 compared to $3.4 million as of December 31, 2018. There were nonon-performing assets from our Centennial CFG franchise as of September 30, 2018 or December 31, 2017.

franchise.

Critical Accounting Policies

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

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

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

Service charges on deposit accounts – These represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

Other service charges and fees – These represent credit card interchange fees and Centennial CFG loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310. Interchange fees were $4.0$3.5 million, $17.3$6.8 million, $5.6$6.9 million and $17.4$13.3 million for the three and nine-monthsix-month periods ended SeptemberJune 30, 20182019 and SeptemberJune 30, 2017,2018, respectively. Centennial CFG loan fees were $3.3$925,000, $1.8 million, $6.5 million, $1.7 million$990,000 and $4.7$2.2 million for the three and nine-monthsix-month periods ended SeptemberJune 30, 2019 and June 30, 2018, and September 30, 2017, respectively.

•

Mortgage lending income – This represents fee income on secondary market lending which is accounted for under ASC Topic 310 and transfer of loans based on a “bid” agreement with the investor which is accounted for under ASC Topic 860,Transfers and Servicing.

Financial Instruments
. ASU2016-01
“Financial Instruments –- Overall (Subtopic825-10): Recognition of Financial Assets and Financial Liabilities,
(“ASU2016-01”) makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. ASU2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. The ASU requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities previously recognized in accumulated other comprehensive income (“AOCI”).AOCI. ASU2016-01 became effective for us on January 1, 2018. The adoption of the guidance resulted in a $990,000 cumulative-effect adjustment that increased retained earnings, with offsetting related adjustments to deferred taxes and AOCI. ASU2016-01 also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. Accordingly, we refined the calculation used to determine the disclosed fair value of our loans held for investment portfolio as part of adopting this standard. The refined calculation did not have a significant impact on our fair value disclosures.

Investments –Available-for-sale.
Securitiesavailable-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 asavailable-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 asavailable-for-sale.

Investments –Held-to-Maturity
. Securitiesheld-to-maturity, which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. PremiumsStarting January 1, 2018, premiums are now amortized to call date under ASU 2017-08 and discounts are amortized and accreted respectively, to interest income using the constant yield method over the period to maturity.

Effective January 1, 2019, as permitted by ASU 2017-12,

Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities
, the Company reclassified the prepayable held-to-maturity (“HTM”) investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to available-for-sale investment securities.
Loans Receivable and Allowance for Loan 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.

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The allowance for loan losses is established through a provision for loan losses charged against income. The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable credit losses on identifiable loans that may become uncollectible and probable credit losses inherent in the remainder of the loan portfolio. The amounts of provisions for loan losses are based on management’s analysis and evaluation of the loan portfolio for identification of problem credits, internal and external factors that may affect collectability, relevant credit exposure, particular risks inherent in different kinds of lending, current collateral values and other relevant factors.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. 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. The general component coversnon-classified loans and is based on historicalcharge-off experience and expected loss given default derived from the bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

Loans considered impaired, under FASB ASC310-10-35, 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 loan losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for loan 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.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

Loans are placed onnon-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 loan losses when management believes that the collectability of the principal is unlikely. Accrued interest related tonon-accrual loans is generally charged against the allowance for loan losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income onnon-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. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the purchased loans incorporates assumptions regarding credit risk. 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.

Over the life of the purchased credit impaired loans, we continue to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques. We evaluate at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has decreased and if so, recognize a provision for loan loss in its consolidated statement of income. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the pool’s remaining life.

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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 innon-interest income, and expenses used to maintain the properties are included innon-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.

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

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets themore-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 themore-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 ASC505-50,
Equity-Based Payments toNon-Employees
, the fair value of each option award is estimated on the date of grant. We recognize compensation expense for the grant-date fair value of the option award over the vesting period of the award.

Acquisitions

Acquisition of

Shore Premier Finance

On June 30, 2018, the Company completed the acquisition of Shore Premier Finance (“SPF”),SPF, a division of Union Bank & Trust of Richmond, Virginia, (“Union”), the bank subsidiary of Union Bankshares Corporation. The Company paid a purchase price of approximately $377.4 million in cash, subject to certain post-closing adjustments, and 1,250,000 shares of HBI common stock. SPF provides direct consumer financing for United States Coast Guard (“USCG”) registeredhigh-end sail and power boats. Additionally, SPF provides inventory floor plan lines of credit to marine dealers, primarily those selling USCG documented vessels.

Including the effects of known purchase accounting adjustments, as of acquisition date, SPF had approximately $377.0 million in total assets, including $376.2 million in total loans, and $1.9 million in assumed liabilities, which resulted in tentative goodwill of $30.5 million being recorded. The purchase price allocation and certain fair value measurements remain preliminary due to the timing
54
Table of the acquisition. The Company will continue to review the estimated fair values of loans and intangible assets and to evaluate the assumed tax positions and contingencies.

Contents

This portfolio of loans is now housed in a division of Centennial known as Shore Premier Finance. The SPF division of Centennial is responsible for servicing the acquired loan portfolio and originating new loan production. In connection with this acquisition, and the creation of the SPF division of Centennial Centennial has opened a new loan production office in Chesapeake, Virginia.Virginia, to house the SPF division. Through this loan production office, the SPF division, of Centennial will continue its visionis working to build out a lending platform focusing on commercial and consumer marine loans.

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

Acquisition of Stonegate Bank

On September 26, 2017, the Company completed the acquisition of all of the issued and outstanding shares of common stock of Stonegate Bank (“Stonegate”), and merged Stonegate into Centennial. The Company paid a purchase price to the Stonegate shareholders of approximately $792.4 million for the Stonegate acquisition. Under the terms of the merger agreement, shareholders of Stonegate received 30,863,658 shares of HBI common stock valued at approximately $742.3 million plus approximately $50.1 million in cash in exchange for all outstanding shares of Stonegate common stock. In addition, the holders of outstanding stock options of Stonegate received approximately $27.6 million in cash in connection with the cancellation of their options immediately before the acquisition closed, for a total transaction value of approximately $820.0 million.

Including the effects of the purchase accounting adjustments, as of acquisition date, Stonegate had approximately $2.89 billion in total assets, $2.37 billion in loans and $2.53 billion in customer deposits. Stonegate formerly operated its banking business from 24 locations in key Florida markets with significant presence in Broward and Sarasota counties.

Through our acquisition and merger of Stonegate into Centennial, we maintain a customer relationship to handle the accounts for Cuba’s diplomatic missions at the United Nations and for the Cuban Interests Section (now the Cuban Embassy) in Washington, D.C. This relationship was established in May 2015 pursuant to a special license granted to Stonegate by the U.S. Treasury Department’s Office of Foreign Assets Control in connection with the reestablishment of diplomatic relations between the U.S. and Cuba. In July 2015, Stonegate established a correspondent banking relationship with Banco Internacional de Comercio, S.A. in Havana, Cuba.

See Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements in our Annual Report on Form10-K for the year ended December 31, 2017, for additional information regarding the acquisition of Stonegate.

Acquisition of The Bank of Commerce

On February 28, 2017, the Company completed its acquisition of all of the issued and outstanding shares of common stock of The Bank of Commerce, a Florida state-chartered bank that operated in the Sarasota, Florida area (“BOC”), pursuant to an acquisition agreement, dated December 1, 2016, by and between the Company and Bank of Commerce Holdings, Inc. (“BCHI”), parent company of BOC. The Company merged BOC with and into Centennial effective as of the close of business on February 28, 2017.

The acquisition of BOC was conducted in accordance with the provisions of Section 363 of the United States Bankruptcy Code (the “Bankruptcy Code”) pursuant to a voluntary petition for relief under Chapter 11 of the Bankruptcy Code filed by BCHI with the United States Bankruptcy Court for the Middle District of Florida (the “Bankruptcy Court”). The sale of BOC by BCHI was subject to certain bidding procedures approved by the Bankruptcy Court, under which the Company submitted an initial bid to purchase the outstanding shares of BOC and was deemed to be the successful bidder after a subsequent auction was held. The Bankruptcy Court entered a final order on December 9, 2016 approving the sale of BOC to the Company pursuant to and in accordance with the acquisition agreement.

Under the terms of the acquisition agreement, the Company paid an aggregate of approximately $4.2 million in cash for the acquisition, which included the purchase of all outstanding shares of BOC common stock, the discounted purchase of certain subordinated debentures issued by BOC from the existing holders of the subordinated debentures, and an expense reimbursement to BCHI for approved administrative claims in connection with the bankruptcy proceeding.

BOC formerly operated three branch locations in the Sarasota, Florida area. Including the effects of the purchase accounting adjustments, as of acquisition date, BOC had approximately $178.1 million in total assets, $118.5 million in loans after $5.8 million of loan discounts, and $139.8 million in deposits.

See Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements in our Annual Report on Form10-K for the year ended December 31, 2017, for additional information regarding the acquisition of BOC.

Acquisition of Giant Holdings, Inc.

On February 23, 2017, the Company completed its acquisition of Giant Holdings, Inc. (“GHI”), parent company of Landmark Bank, N.A. (“Landmark”), pursuant to a definitive agreement and plan of merger whereby GHI merged with and into HBI and, immediately thereafter, Landmark merged with and into Centennial. The Company paid a purchase price to the GHI shareholders of approximately $96.0 million for the GHI acquisition. Under the terms of the agreement, shareholders of GHI received 2,738,038 shares of its common stock valued at approximately $77.5 million as of February 23, 2017, plus approximately $18.5 million in cash in exchange for all outstanding shares of GHI common stock.

GHI formerly operated six branch locations in the Ft. Lauderdale, Florida area. Including the effects of the purchase accounting adjustments, as of acquisition date, GHI had approximately $398.1 million in total assets, $327.8 million in loans after $8.1 million of loan discounts, and $304.0 million in deposits.

See Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements in our Annual Report on Form10-K for the year ended December 31, 2017, for additional information regarding the acquisition of GHI.

Future Acquisitions

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

We will continue evaluating all types of potential bank acquisitions and monitoring market conditions to determine what opportunities, if any, are feasible andis in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors. We cannot assure that we will be able to identify suitable acquisition candidates or successfully complete any future acquisitions that we may consider.

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.

During the third quarter of 2018, we opened a loan production office in Dallas, Texas.

As of SeptemberJune 30, 2018,2019, we had 159 branch locations. There were 77 branches in Arkansas, 76 branches in Florida, five branches in Alabama and one branch in New York City.

Results of Operations

For the Three and NineSix Months Ended SeptemberJune 30, 20182019 and 2017

2018

Our net income increased $65.5decreased $3.8 million, or 441.7%5.1%, to $80.3$72.2 million for the three-month period ended SeptemberJune 30, 2018,2019, from $14.8$76.0 million for the same period in 2017.2018. On a diluted earnings per share basis, our earnings were $0.46 per share and $0.10$0.43 per share for the three-month periodsperiod ended SeptemberJune 30, 20182019 and 2017, respectively. Excluding the $18.2 million of merger expenses associated with the Stonegate Bank ( “Stonegate”) acquisition and $33.4 million of hurricane expenses, our net income increased $33.8 million, or 72.8%, to $80.3 million$0.44 per share for the three-month period ended SeptemberJune 30, 2018,2018. Total interest expense increased $12.4 million or 44.2%,
non-interest
expense increased $4.4 million or 7.0% and
non-interest
income decreased by $4.6 million or 16.6%. This was partially offset by an $14.7 million, or 8.8%, increase in total interest income. The primary driver of the increase in interest income was a $12.8 million increase in loan interest income. The primary drivers of the decrease in
non-interest
income were a $1.6 million decrease in other service charges and fees, a $988,000 decrease in gain (loss) on OREO, net, and a $982,000 decrease in other income. The primary driver of the increase in interest expense was a $11.5 million, or 63.6%, increase in interest expense on deposits. The primary driver of the increase in
non-interest
expense was a $3.5 million increase in salaries and employee benefits.
Our net income decreased $5.6 million, or 3.74%, to $143.5 million for the
six-month
period ended June 30, 2019, from $46.4$149.1 million for the same period in 2017 (See Table 18 for thenon-GAAP tabular reconciliation). The $33.8 million increase in net income includes $13.4 million from tax savings of the TCJA. The remaining $20.4 million is primarily associated with additional net income from the acquisition of Stonegate, increased profitability of Centennial CFG and the acquisition of Shore Premier Finance.

Our net income increased $117.6 million, or 105.2%, to $229.4 million for the nine-month period ended September 30, 2018, from $111.8 million for the same period in 2017.2018. On a diluted earnings per share basis, our earnings were $1.32$0.85 per share and $0.78$0.86 per share for the nine-month

six-month
periods ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. Excluding the $3.8 million ofnon-taxable gain on acquisition, $25.7 million of merger expenses associated with the 2017 acquisitions and $33.4 million of hurricane expenses, our net incomeTotal interest expense increased $84.8$27.6 million or 58.7%52.4%,
non-interest
expense increased $10.1 million or 8.0% and
non-interest
income decreased by $6.7 million or 12.6%. This was partially offset by a $33.2 million, or 10.1%, to $229.4 million forincrease in total interest income. The primary driver of the nine-month period ended September 30, 2018, from $144.5 million for the same periodincrease in 2017 (See Table 18 for thenon-GAAP tabular reconciliation). The $84.8interest income was a $28.6 million increase in net income includes $38.0 million from tax savingsloan interest income. The primary drivers of the TCJA. The remaining $46.8decrease in
non-interest
income were a $5.2 million decrease in other service charges and fees, a $1.2 million decrease in gain (loss) on OREO, net, and a $2.2 million decrease in other income partially offset by a $2.2 million increase in net incomedividends from FHLB, FRB, FNBB & other. The primary driver of the 2017 acquisitions, increased profitabilityincrease in interest expense was a $24.7 million, or 75.1%, increase in interest expense on deposits. The primary drivers of Centennial CFGthe increase in
non-interest
expense were a $6.3 million increase in salaries and the acquisitionemployee benefits and a $3.1 million increase in other operating expenses.
55
Table of Shore Premier Finance.

Contents

Net Interest Income

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments, rates paid on deposits and other borrowings, the level of
non-performing
loans and the amount of
non-interest-bearing
liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing
tax-exempt
income by one minus the combined federal and state income tax rate (26.135% and 39.225% for the three andnine-month
six-month
periods ended SeptemberJune 30, 20182019 and 2017, respectively)2018).

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 Funds target rate, which is the cost to banks of immediately available overnight funds, is 2.25% to 2.50% as of June 30, 2019, which has increased 75 basis points since December 31, 2017,from the target rate of 1.75% to 2.00% as of June 30, 2018.
Our net interest margin decreased from 4.47% for the three-month period ended June 30, 2018 to 4.28% for the three-month period ended June 30, 2019. The yield on interest earning assets was 5.50% and 5.36% for the three months ended June 30, 2019 and 2018, respectively, as average interest earning assets increased from $12.56 billion to $13.32 billion. The increase in earning assets is currently at 2.00% to 2.25%.

primarily the result of our acquisition in 2018 and organic loan growth. For the three months ended SeptemberJune 30, 20182019 and 2017,2018, we recognized $9.2 million and $10.7 million, and $7.2 millionrespectively, in total net accretion for acquired loans and deposits. Purchase accountingThe rate on interest bearing liabilities was 1.61% and 1.18% for the three months ended June 30, 2019 and 2018, respectively, as average interest-bearing liabilities increased from $9.50 billion to $10.07 billion. The growth in the rate on interest bearing liabilities was only partially offset by the increase in yield, which led to a decrease in net interest margin for the quarter ended June 30, 2019.

Our net interest margin decreased from 4.47% for the
six-month
period ended June 30, 2018 to 4.29% for the
six-month
period ended June 30, 2019. The yield on interest earning assets was 5.51% and 5.32% for the six months ended June 30, 2019 and 2018, respectively, as average interest earning assets increased from $12.52 billion to $13.31 billion. The increase in earning assets is primarily the result of our acquisition in 2018 and organic loan growth. For the six months ended June 30, 2019 and 2018, we recognized $18.3 million and $21.3 million, respectively, in total net accretion onfor acquired loans and deposits. The rate on interest bearing liabilities was $10.61.60% and 1.11% for the six months ended June 30, 2019 and 2018, respectively, as average interest-bearing liabilities increased from $9.55 billion to $10.12 billion. The growth in the rate on interest bearing liabilities was only partially offset by the increase in yield, which led to a decrease in net interest margin for the six months ended June 30, 2019.
For the three months ended June 30, 2019 and 2018, we recognized $9.2 million and $7.1 million and average purchase accounting loan discounts were $151.4 million and $98.0 million for the three-month periods ended September 30, 2018 and September 30, 2017, respectively. Net accretion of time deposit premiums was $66,000 and $106,000 and net average unamortized CD premiums were $448,000 and $733,000 for the three-month periods ended September 30, 2018 and September 30, 2017, respectively.

For the nine months ended September 30, 2018 and 2017, we recognized $32.0 million and $23.3$10.7 million, respectively, in total net accretion for acquired loans and deposits. Purchase accounting accretion on acquired loans was $31.7$9.2 million and $23.0$10.6 million and average purchase accounting loan discounts were $156.9$122.2 million and $97.2$153.6 million for the nine-monththree-month periods ended SeptemberJune 30, 2019 and June 30, 2018, and September 30, 2017, respectively. Net accretionamortization of time deposit premiums was $270,000$30,000 and $300,000$102,000 and net average unamortized CD premiums were $542,000$327,000 and $721,000 for the nine-month periods ended September 30, 2018 and September 30, 2017, respectively.

Our net interest margin increased from 4.40%$538,000 for the three-month periodperiods ended SeptemberJune 30, 2017 to 4.46% for2019 and June 30, 2018, respectively.

For the three-month period ended September 30, 2018. The yield on loans was 6.06% and 5.66% for the threesix months ended SeptemberJune 30, 20182019 and 2017, respectively as average loans increased from $7.94 billion to $10.91 billion. The increase in loan balances is primarily due to the acquisition of Stonegate. For the three months ended September 30, 2018, and 2017, we recognized $10.7$18.3 million and $7.2 million in total net accretion for acquired loans and deposits. The rate on interest-bearing deposits increased from 0.57% for the three months ended September 30, 2017 to 1.05% for the three months ended September 30, 2018 with average balances of $5.96 billion and $8.07 billion, respectively.

Our net interest margin decreased from 4.53% for the nine-month period ended September 30, 2017 to 4.46% for the nine-month period ended September 30, 2018. The yield on loans was 5.95% and 5.70% for the nine months ended September 30, 2018 and 2017, respectively as average loans increased from $7.79 billion to $10.53 billion. The increase in loan balances is primarily due to the acquisitions we completed during 2017. For the nine months ended September 30, 2018 and 2017, we recognized $32.0 million and $23.3$21.3 million, respectively, in total net accretion for acquired loans and deposits. The ratePurchase accounting accretion on interest-bearing deposits increased from 0.49%acquired loans was $18.2 million and $21.1 million and average purchase accounting loan discounts were $126.9 million and $159.4 million for the nine months

six-month
periods ended SeptemberJune 30, 2017, to 0.91% for the nine months ended September2019 and June 30, 2018, withrespectively. Net amortization of time deposit premiums was $60,000 and $203,000 and net average balancesunamortized CD premiums were $342,000 and $589,000 for the
six-month
periods ended June 30, 2019 and June 30, 2018, respectively.
56
Table of $5.73 billion and $8.02 billion, respectively.

Contents

Net interest income on a fully taxable equivalent basis increased $38.8$2.3 million, or 35.7%1.6%, to $147.4$142.3 million for the three-month period ended SeptemberJune 30, 2018,2019, from $108.6$140.0 million for the same period in 2017.2018. This increase in net interest income for the three-month period ended SeptemberJune 30, 20182019 was the result of a $55.8$14.6 million increase in interest income partially offset by a $17.0$12.4 million increase in interest expense.expense, on a fully taxable equivalent basis. The $55.8$14.6 million increase in interest income was primarily the result of a higher level of earning assets accompanied by higher yields on our loans. The higher level of earning assets resulted in an increase in interest income of approximately $47.1$10.4 million. The higher yield on our interest earning assetswas primarily driven by the increased loan production in the higher rate environment as well as the repricing of floating rate loans, which resulted in an approximately $8.7a $4.3 million increase in interest income.income, which was partially offset by a decrease in loan accretion income on our historical acquisitions. The $12.4 million increase in interest expense for the three-month period ended June 30, 2019 is primarily the result of an increase in interest bearing liabilities primarily resulting from a 6.9% increase in average deposits, combined with interest bearing liabilities repricing in a higher interest rate environment.    The repricing of our interest-bearing liabilities in a higher interest rate environment resulted in an approximately $11.1$10.7 million increase in interest expense. The higher level of our interest-bearing liabilities resulted in an increase in interest expense of approximately $5.9$1.6 million.

Net interest income on a fully taxable equivalent basis increased $100.0$5.7 million, or 30.8%2.1%, to $424.8$283.1 million for the nine-monthsix-month period ended SeptemberJune 30, 2018,2019, from $324.8$277.4 million for the same period in 2017.2018. This increase in net interest income for the nine-monthsix-month period ended SeptemberJune 30, 20182019 was the result of a $144.5$33.3 million increase in interest income partially offset by a $44.5$27.6 million increase in interest expense. The $144.5$33.3 million increase in interest income was primarily the result of a higher level of earning assets accompanied by higher yields on our loans. The higher level of earning assets resulted in an increase in interest income of approximately $128.4$21.6 million. The higher yield on our interest earning assets resulted in an approximately $16.1$11.7 million increase in interest income. The repricing of our interest-bearing liabilities in a higher interest rate environment resulted in an approximately $30.0$24.5 million increase in interest expense. The higher level of our interest-bearing liabilities resulted in an increase in interest expense of approximately $14.5$3.1 million.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, as well as changes in fully taxable equivalent net interest margin for the three and nine-monthsix-month periods ended SeptemberJune 30, 20182019 compared to the same period in 2017.

2018.

Table 2: Analysis of Net Interest Income

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
   2018  2017  2018  2017 
   (Dollars in thousands) 

Interest income

  $180,051  $123,913  $507,588  $361,270 

Fully taxable equivalent adjustment

   1,489   1,846   4,101   5,873 
  

 

 

  

 

 

  

 

 

  

 

 

 

Interest income – fully taxable equivalent

   181,540   125,759   511,689   367,143 

Interest expense

   34,141   17,144   86,857   42,334 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income – fully taxable equivalent

   147,399  $108,615   424,832  $324,809 
  

 

 

  

 

 

  

 

 

  

 

 

 

Yield on earning assets – fully taxable equivalent

   5.49%   5.09%   5.38%   5.12% 

Cost of interest-bearing liabilities

   1.36   0.92   1.20   0.78 

Net interest spread – fully taxable equivalent

   4.13   4.17   4.18   4.34 

Net interest margin – fully taxable equivalent

   4.46   4.40   4.46   4.53 

                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
 
Interest income $181,287  $166,561  $360,774  $327,537 
Fully taxable equivalent adjustment  1,319   1,403   2,686   2,612 
                 
Interest income – fully taxable equivalent  182,606   167,964   363,460   330,149 
Interest expense  40,300   27,949   80,317   52,716 
                 
Net interest income – fully taxable equivalent $142,306  $140,015  $283,143  $277,433 
                 
Yield on earning assets – fully taxable equivalent  5.50%  5.36%  5.51%  5.32%
Cost of interest-bearing liabilities  1.61   1.18   1.60   1.11 
Net interest spread – fully taxable equivalent  3.89   4.18   3.91   4.21 
Net interest margin – fully taxable equivalent  4.28   4.47   4.29   4.47 
57
Table of Contents
Table 3: Changes in Fully Taxable Equivalent Net Interest Margin

   Three Months
Ended
September 30,
2018 vs. 2017		   Nine Months
Ended
September 30,
2018 vs. 2017		 
   (In thousands) 

Increase (decrease) in interest income due to change in earning assets

  $47,124   $128,435 

Increase (decrease) in interest income due to change in earning asset yields

   8,657    16,111 

(Increase) decrease in interest expense due to change in interest-bearing liabilities

   (5,890)    (14,483) 

(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities

   (11,107)    (30,040) 
  

 

 

   

 

 

 

Increase (decrease) in net interest income

  $38,784   $100,023 
  

 

 

   

 

 

 

         
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019 vs. 2018
  
2019 vs. 2018
 
 
(In thousands)
 
Increase (decrease) in interest income due to change in earning assets $10,383  $21,635 
Increase (decrease) in interest income due to change in earning asset yields  4,259   11,676 
(Increase) decrease in interest expense due to change in interest-bearing liabilities  (1,630)  (3,128)
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities  (10,721)  (24,473)
         
Increase (decrease) in net interest income $2,291  $5,710 
         

Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three and nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis.Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

Table 4: Average Balance Sheets and Net Interest Income Analysis

   Three Months Ended September 30, 
   2018  2017 
   Average
Balance		   Income /
Expense		   Yield /
Rate		  Average
Balance		   Income /
Expense		   Yield /
Rate		 
   (Dollars in thousands) 

ASSETS

           

Earnings assets

           

Interest-bearing balances due from banks

  $281,115   $1,273    1.80%  $180,368   $538    1.18% 

Federal funds sold

   524    6    4.54   878    3    1.36 

Investment securities – taxable

   1,526,455    9,011    2.34   1,326,117    7,071    2.12 

Investment securities –non-taxable

   402,355    4,507    4.44   348,920    4,908    5.58 

Loans receivable

   10,909,646    166,743    6.06   7,938,716    113,239    5.66 
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-earning assets

   13,120,095   $181,540    5.49   9,794,999   $125,759    5.09 
    

 

 

      

 

 

   

Non-earning assets

   1,760,836       1,058,560     
  

 

 

      

 

 

     

Total assets

  $14,880,931      $10,853,559     
  

 

 

      

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

       

Liabilities

           

Interest-bearing liabilities

           

Savings and interest-bearing transaction accounts

  $6,406,711   $15,596    0.97%  $4,512,785   $5,755    0.51% 

Time deposits

   1,661,129    5,816    1.39   1,444,662    2,780    0.76 
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-bearing deposits

   8,067,840    21,412    1.05   5,957,447    8,535    0.57 
  

 

 

   

 

 

    

 

 

   

 

 

   

Federal funds purchased

   —      —      —     —      —      —   

Securities sold under agreement to repurchase

   148,791    472    1.26   135,855    232    0.68 

FHLB and other borrowed funds

   1,398,738    7,055    2.00   920,754    3,408    1.47 

Subordinated debentures

   368,501    5,202    5.60   358,347    4,969    5.50 
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-bearing liabilities

   9,983,870    34,141    1.36   7,372,403    17,144    0.92 
    

 

 

      

 

 

   

Non-interest-bearing liabilities

           

Non-interest-bearing deposits

   2,512,690       1,924,933     

Other liabilities

   66,441       42,394     
  

 

 

      

 

 

     

Total liabilities

   12,563,001       9,339,730     

Stockholders’ equity

   2,317,930       1,513,829     
  

 

 

      

 

 

     

Total liabilities and stockholders’ equity

  $14,880,931      $10,853,559     
  

 

 

      

 

 

     

Net interest spread

       4.13%       4.17% 

Net interest income and margin

    $147,399    4.46%    $108,615    4.40% 
    

 

 

      

 

 

   

                         
 
Three Months Ended June 30,
 
 
2019
  
2018
 
 
Average
Balance
  
Income /
Expense
  
Yield /
Rate
  
Average
Balance
  
Income /
Expense
  
Yield /
Rate
 
 
(Dollars in thousands)
 
ASSETS
                  
Earnings assets                  
Interest-bearing balances due from banks $298,821  $1,628   2.19% $288,643  $1,206   1.68%
Federal funds sold  1,596   10   2.51   679   12   7.09 
Investment securities – taxable  1,640,883   10,650   2.60   1,528,613   8,979   2.36 
Investment securities – non-taxable  379,437   4,177   4.42   398,067   4,476   4.51 
Loans receivable  11,000,926   166,141   6.06   10,345,846   153,291   5.94 
                         
Total interest-earning assets  13,321,663   182,606   5.50   12,561,848   167,964   5.36 
                         
Non-earning assets  1,776,937         1,742,635       
                         
Total assets $15,098,600        $14,304,483       
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
            
Liabilities                  
Interest-bearing liabilities                  
Savings and interest-bearing transaction accounts $6,677,683  $20,637   1.24% $6,451,204  $13,489   0.84%
Time deposits  1,943,320   9,072   1.87   1,611,353   4,675   1.16 
                         
Total interest-bearing deposits  8,621,003   29,709   1.38   8,062,557   18,164   0.90 
                         
Federal funds purchased  —     —     —     46   —     —   
Securities sold under agreement to repurchase  144,478   630   1.75   143,952   372   1.04 
FHLB and other borrowed funds  932,365   4,722   2.03   928,357   4,245   1.83 
Subordinated debentures  369,076   5,239   5.69   368,309   5,168   5.63 
                         
Total interest-bearing liabilities  10,066,922   40,300   1.61   9,503,221   27,949   1.18 
                         
Non-interest-bearing liabilities                  
Non-interest-bearing deposits  2,553,060         2,496,701       
Other liabilities  101,900         53,149       
                         
Total liabilities  12,721,882         12,053,071       
Stockholders’ equity  2,376,718         2,251,412       
                         
Total liabilities and stockholders’ equity $15,098,600        $14,304,483       
                         
Net interest spread        3.89%        4.18%
Net interest income and margin    $142,306   4.28%    $140,015   4.47%
                         

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Table 4: Average Balance Sheets and Net Interest Income Analysis

   Nine Months Ended September 30, 
   2018  2017 
   Average
Balance		   Income /
Expense		   Yield /
Rate		  Average
Balance		   Income /
Expense		   Yield /
Rate		 
   (Dollars in thousands) 

ASSETS

           

Earnings assets

           

Interest-bearing balances due from banks

  $271,987   $3,408    1.68%  $218,324   $1,573    0.96% 

Federal funds sold

   3,595    24    0.89   1,161    9    1.04 

Investment securities – taxable

   1,538,387    26,960    2.34   1,231,619    18,983    2.06 

Investment securities –non-taxable

   382,088    12,981    4.54   347,578    14,506    5.58 

Loans receivable

   10,529,117    468,316    5.95   7,785,925    332,072    5.70 
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-earning assets

   12,725,174   $511,689    5.38   9,584,607   $367,143    5.12 
    

 

 

      

 

 

   

Non-earning assets

   1,750,456       1,033,310     
  

 

 

      

 

 

     

Total assets

  $14,475,630      $10,617,917     
  

 

 

      

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

       

Liabilities

           

Interest-bearing liabilities

           

Savings and interest-bearing transaction accounts

  $6,422,489   $40,327    0.84%  $4,316,032   $13,445    0.42% 

Time deposits

   1,595,985    14,055    1.18   1,415,383    7,386    0.70 
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-bearing deposits

   8,018,474    54,382    0.91   5,731,415    20,831    0.49 
  

 

 

   

 

 

    

 

 

   

 

 

   

Federal funds purchased

   41    1    3.26   —      —      —   

Securities sold under agreement to repurchase

   148,472    1,220    1.10   129,580    593    0.61 

FHLB and other borrowed funds

   1,159,973    15,880    1.83   1,155,503    10,707    1.24 

Subordinated debentures

   368,313    15,374    5.58   258,032    10,203    5.29 
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-bearing liabilities

   9,695,273    86,857    1.20   7,274,530    42,334    0.78 
    

 

 

      

 

 

   

Non-interest-bearing liabilities

           

Non-interest-bearing deposits

   2,464,032       1,847,843     

Other liabilities

   54,731       48,804     
  

 

 

      

 

 

     

Total liabilities

   12,214,036       9,171,177     

Stockholders’ equity

   2,261,594       1,446,740     
  

 

 

      

 

 

     

Total liabilities and stockholders’ equity

  $14,475,630      $10,617,917     
  

 

 

      

 

 

     

Net interest spread

       4.18%       4.34% 

Net interest income and margin

    $424,832    4.46%    $324,809    4.53% 
    

 

 

      

 

 

   

                         
 
Six Months Ended June 30,
 
 
2019
  
2018
 
 
Average
Balance
  
Income /
Expense
  
Yield /
Rate
  
Average
Balance
  
Income /
Expense
  
Yield /
Rate
 
 
(Dollars in thousands)
 
ASSETS
                  
Earnings assets                  
Interest-bearing balances due from banks $285,688  $3,171   2.24% $267,347  $2,135   1.61%
Federal funds sold  1,544   21   2.74   5,156   18   0.70 
Investment securities – taxable  1,618,369   21,356   2.66   1,544,451   17,949   2.34 
Investment securities – non-taxable  385,064   8,602   4.50   371,788   8,473   4.60 
Loans receivable  11,018,616   330,310   6.05   10,335,699   301,574   5.88 
                         
Total interest-earning assets  13,309,281   363,460   5.51   12,524,441   330,149   5.32 
                         
Non-earning assets  1,779,908         1,745,179       
                         
Total assets $15,089,189        $14,269,620       
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
            
Liabilities                  
Interest-bearing liabilities                  
Savings and interest-bearing transaction accounts $6,637,512  $40,174   1.22% $6,430,509  $24,731   0.78%
Time deposits  1,923,457   17,541   1.84   1,562,873   8,239   1.06 
                         
Total interest-bearing deposits  8,560,969   57,715   1.36   7,993,382   32,970   0.83 
                         
Federal funds purchased  —     —     0.00   62   1   3.25 
Securities sold under agreement to repurchase  147,623   1,264   1.73   148,310   748   1.02 
FHLB and other borrowed funds  1,045,370   10,840   2.09   1,038,612   8,825   1.71 
Subordinated debentures  368,981   10,498   5.74   368,217   10,172   5.57 
                         
Total interest-bearing liabilities  10,122,943   80,317   1.60   9,548,583   52,716   1.11 
                         
Non-interest-bearing liabilities                  
Non-interest-bearing deposits  2,496,604         2,439,299       
Other liabilities  108,866         48,779       
                         
Total liabilities  12,728,413         12,036,661       
Stockholders’ equity  2,360,776         2,232,959       
                         
Total liabilities and stockholders’ equity $15,089,189        $14,269,620       
                         
Net interest spread        3.91%        4.21%
Net interest income and margin    $283,143   4.29%    $277,433   4.47%
                         

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Table of Contents
Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine-monthsix-month periods ended SeptemberJune 30, 20182019 compared to the same period in 2017,2018, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

Table 5: Volume/Rate Analysis

   Three Months Ended
September 30, 2018 over 2017		  Nine Months Ended September 30,
2018 over 2017		 
   Volume  Yield/Rate  Total  Volume   Yield/Rate  Total 
   (In thousands) 

Increase (decrease) in:

        

Interest income:

        

Interest-bearing balances due from banks

  $382  $353  $735  $458   $1,377  $1,835 

Federal funds sold

   (1)   4   3   16    (1)   15 

Investment securities – taxable

   1,135   805   1,940   5,146    2,831   7,977 

Investment securities –non-taxable

   686   (1,087)   (401)   1,347    (2,872)   (1,525) 

Loans receivable

   44,922   8,582   53,504   121,468    14,776   136,244 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total interest income

   47,124   8,657   55,781   128,435    16,111   144,546 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Interest expense:

        

Interest-bearing transaction and savings deposits

   3,108   6,733   9,841   8,725    18,157   26,882 

Time deposits

   470   2,566   3,036   1,044    5,625   6,669 

Federal funds purchased

   —     —     —     1    —     1 

Securities sold under agreement to repurchase

   23   217   240   97    530   627 

FHLB borrowed funds

   2,147   1,500   3,647   41    5,132   5,173 

Subordinated debentures

   142   91   233   4,575    596   5,171 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total interest expense

   5,890   11,107   16,997   14,483    30,040   44,523 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Increase (decrease) in net interest income

  $41,234  $(2,450)  $38,784  $113,952   $(13,929)  $100,023 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

                         
 
Three Months Ended June 30,
  
Six Months Ended June 30,
 
 
2019 over 2018
  
2019 over 2018
 
 
Volume
  
Yield/Rate
  
Total
  
Volume
  
Yield/Rate
  
Total
 
 
(In thousands)
 
Increase (decrease) in:                  
Interest income:                  
Interest-bearing balances due from banks $44  $378  $422  $155   881  $1,036 
Federal funds sold  9   (11)  (2)  (20)  23   3 
Investment securities – taxable  687   984   1,671   889   2,518   3,407 
Investment securities – non-taxable  (206)  (93)  (299)  299   (170)  129 
Loans receivable  9,849   3,001   12,850   20,312   8,424   28,736 
                         
Total interest income  10,383   4,259   14,642   21,635   11,676   33,311 
                         
Interest expense:                  
Interest-bearing transaction and savings deposits  489   6,659   7,148   820   14,623   15,443 
Time deposits  1,111   3,286   4,397   2,234   7,068   9,302 
Federal funds purchased  —     —     —     (1)  —     (1)
Securities sold under agreement to repurchase  1   257   258   (3)  519   516 
FHLB borrowed funds  18   459   477   57   1,958   2,015 
Subordinated debentures  11   60   71   21   305   326 
                         
Total interest expense  1,630   10,721   12,351   3,128   24,473   27,601 
                         
Increase (decrease) in net interest income $8,753  $(6,462) $2,291  $18,507  $(12,797) $5,710 
                         
Provision for Loan Losses

Our management assesses the adequacy of the allowance for loan losses by applying the provisions of FASB ASC310-10-35. Specific allocations are determined for loans considered to be impaired and loss factors are assigned to the remainder of the loan portfolio to determine an appropriate level in the allowance for loan losses. The allowance is increased, as necessary, by making a provision for loan losses. The specific allocations for impaired loans are assigned based on an estimated net realizable value after a thorough review of the credit relationship. The potential loss factors associated with the remainder of the loan portfolio are based on an internal net loss experience, as well as management’s review of trends within the portfolio and related industries.

While general economic trends have continued to improve, we cannot be certain that the current economic conditions will continue in the future. Recent and ongoing events at the national and international levels can create uncertainty in the financial markets. Despite the current positivethese economic conditions,uncertainties, we continue to follow our historically conservative procedures for lending and evaluating the provision and allowance for loan losses. Our practice continues to be primarily traditional real estate lending with strongloan-to-value ratios.

Generally, commercial, commercial real estate, and residential real estate loans are assigned a level of risk at origination. Thereafter, these loans are reviewed on a regular basis. The periodic reviews generally include loan payment and collateral status, the borrowers’ financial data, and key ratios such as cash flows, operating income, liquidity, and leverage. A material change in the borrower’s credit analysis can result in an increase or decrease in the loan’s assigned risk grade. Aggregate dollar volume by risk grade is monitored on anon-going basis.

60
Table of Contents
Our management reviews certain key loan quality indicators on a monthly basis, including current economic conditions, delinquency trends and ratios, portfolio mix changes, and other information management deems necessary. This review process provides a degree of objective measurement that is used in conjunction with periodic internal evaluations. To the extent that this review process yields differences between estimated and actual observed losses, adjustments are made to the loss factors used to determine the appropriate level of the allowance for loan losses.

Our Company is

We are primarily a real estate lender in the markets we serve. As such, we are subject to declines in asset quality when real estate prices fall. The recession in the latter years of the last decade harshly impacted the real estate market in Florida. The economic conditions in virtually every asset class, particularly in our Florida markets, have improved in recent years. Our Arkansas markets’ economies remained relatively stable during and after the recession with no significant boom or bust.

The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that is considered adequate in relation to the estimated risk inherent in the loan portfolio.

We had zero$1.3 million and $35.0$2.7 million of provision for loan losses for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, reflecting a $35.0 million decrease in the provision for loan losses during the third quarter of 2018 versus the third quarter of 2017. This $35.0 million decrease is primarily a result of the $33.4 hurricane reserve recorded in the third quarter of 2017, decreased net charge-offs and negative organic loan growth.

We had $4.3 million and $39.3 million of provision for loan losses for the nine months ended September 30, 2018 and 2017, respectively, reflecting a $35.0$1.4 million decrease in the provision for loan losses for the ninesecond quarter of 2019 versus the second quarter of 2018. We had $1.3 million and $4.3 million of provision for loan losses for the six months ended SeptemberJune 30, 2019 and 2018, respectively. The decrease in the provision for loan losses during the three and

six-month
periods of 2019 versus the nine months ended September 30, 2017. This $35.0 million decrease isthree and
six-month
periods of 2018 are primarily a result of the $33.4 hurricane reserve recorded in the third quartercontinued strong asset quality with
non-performing
loans to total loans of 2017, decreased0.57% and
non-performing
assets of 0.51%. In addition, net charge-offs to average total loans was 0.06% and lower organic loan growth.

0.07% for the three and

six-month
periods ended June 30, 2019, respectively.
Based upon current accounting guidance, the allowance for loan losses is not carried over in an acquisition. As a result, none of the acquired loans had any allocation of the allowance for loan losses at merger date. This is the result of all purchased loans being recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. However, as the acquired loans payoff or renew and the acquired footprint originates new loan production, it is necessary to establish an allowance which represents an amount that, in management’s judgment, will be adequate to absorb credit losses. The allowance for loan loss methodology for all originated loans as disclosed in Note 1 to the Notes to Consolidated Financial Statements in our Form
10-K
for the year ended December 31, 2018, was used for these loans. Our current or historical provision levels should not be relied upon as a predictor or indicator of future levels going forward.

Non-Interest
Income

Total
non-interest
income was $25.8$23.1 million and $79.3$46.7 million for the three and nine-month
six-month
periods ended SeptemberJune 30, 2018,2019, compared to $21.5$27.7 million and $72.3$53.5 million for the same periods in 2017,2018, respectively. Our recurring
non-interest
income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending, insurance, increase in cash value of life insurance and dividends.


Table of Contents
Table 6 measures the various components of our
non-interest
income for the three and nine-month
six-month
periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively, as well as changes for the three and nine-month
six-month
periods ended SeptemberJune 30, 20182019 compared to the same period in 2017.

2018.

Table 6:
Non-Interest
Income

   Three Months Ended
September 30,		  2018 Change
from 2017		  Nine Months Ended
September 30,		  2018 Change
from 2017		 
   2018  2017  2018  2017 
   (Dollars in thousands) 

Service charges on deposit accounts

  $6,992  $6,408  $584   9.1%  $19,847  $18,356  $1,491   8.1% 

Other service charges and fees

   9,041   8,490   551   6.5   28,993   25,983   3,010   11.6 

Trust fees

   437   365   72   19.7   1,262   1,130   132   11.7 

Mortgage lending income

   3,691   3,172   519   16.4   9,825   9,713   112   1.2 

Insurance commissions

   463   472   (9)   (1.9)   1,668   1,482   186   12.6 

Increase in cash value of life insurance

   735   478   257   53.8   2,119   1,251   868   69.4 

Dividends from FHLB, FRB, FNBB & other

   1,288   834   454   54.4   3,765   2,455   1,310   53.4 

Gain on acquisitions

   —     —     —     —     —     3,807   (3,807)   (100.0) 

Gain on sale of SBA loans

   47   163   (116)   (71.2)   491   738   (247)   (33.5) 

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

   (102)   (1,337)   1,235   92.4   (95)   (962)   867   90.1 

Gain (loss) on OREO, net

   836   335   501   149.6   2,287   849   1,438   169.4 

Gain (loss) on securities, net

   —     136   (136)   (100.0)   —     939   (939)   (100.0) 

Other income

   2,419   1,941   478   24.6   9,163   6,603   2,560   38.8 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

Totalnon-interest income

  $25,847  $21,457  $4,390   20.5%  $79,325  $72,344  $6,981   9.6% 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

                                 
 
Three Months Ended
    
Six Months Ended
     
 
June 30,
  
2019 Change
  
June 30,
  
2019 Change
 
 
2019
  
2018
  
from 2018
  
2019
  
2018
  
from 2018
 
 
(Dollars in thousands)
 
Service charges on deposit accounts
 $
6,259
  $
6,780
  $
(521
)  
(7.7
)% $
12,660
  $
12,855
   
(195
)  
(1.5
)%
Other service charges and fees
  
8,177
   
9,797
   
(1,620
)  
(16.5
)  
14,740
   
19,952
   
(5,212
)  
(26.1
)
Trust fees
  
391
   
379
   
12
   
3.2
   
794
   
825
   
(31
)  
(3.8
)
Mortgage lending income
  
3,457
   
3,477
   
(20
)  
(0.6
)  
5,892
   
6,134
   
(242
)  
(3.9
)
Insurance commissions
  
515
   
526
   
(11
)  
(2.1
)  
1,124
   
1,205
   
(81
)  
(6.7
)
Increase in cash value of life insurance
  
740
   
730
   
10
   
1.4
   
1,476
   
1,384
   
92
   
6.6
 
Dividends from FHLB, FRB, FNBB & other
  
1,149
   
1,600
   
(451
)  
(28.2
)  
4,654
   
2,477
   
2,177
   
87.9
 
Gain on sale of SBA loans
  
355
   
262
   
93
   
35.5
   
596
   
444
   
152
   
34.2
 
Gain (loss) on sale of branches, equipment and other assets, net
  
(129
)  
—  
   
(129
)  
(100.0
)  
(50
)  
7
   
(57
)  
(814.3
)
Gain (loss) on OREO, net
  
58
   
1,046
   
(988
)  
(94.5
)  
264
   
1,451
   
(1,187
)  
(81.8
)
Other income
  
2,094
   
3,076
   
(982
)  
(31.9
)  
4,588
   
6,744
   
(2,156
)  
(32.0
)
                                 
Total
non-interest
income
 $
23,066
  $
27,673
  $
(4,607
)  
(16.6
)% $
46,738
  $
53,478
   
(6,740
)  
(12.6
)%
                                 
Non-interest
income increased $4.4decreased $4.6 million, or 20.5%16.6%, to $25.8$23.1 million for the three-month period ended SeptemberJune 30, 20182019 from $21.5$27.7 million for the same period in 2017.Non-interest income increased $7.0 million, or 9.6%, to $79.3 million for the nine-month period ended September 30, 2018 from $72.3 million for the same period in 2017.Non-interest income excluding gain on acquisitions increased $10.8 million, or 15.7%, to $79.3 million for the nine months ended September 30, 2018 from $68.5 million for the same period in 2017.

Excluding gain on acquisitions, the2018. The primary factorsfactor that resulted in this increasedecrease was the impact of the Durbin Amendment which reduced interchange fees by approximately $3.0 million for the quarter. Other factors were changes related to service charges on deposit accounts, other service charges and fees, increase in cash valuedividends from FHLB, FRB, First National Bankers’ Bank & other, gain (loss) on sale of life insurance, dividends,branches, equipment and other assets, net, gain on securities, net gain(loss) on OREO and other income.

Additional details for the three months ended SeptemberJune 30, 20182019 on some of the more significant changes are as follows:

The $584,000 increase$521,000 decrease in service charges on deposit accounts is primarily related to an increasea decrease in overdraft fees due to additional volume, the acquisition of Stonegate during the third quarter of 2017 and improved pricing.

lower volume.

The $551,000 increase$1.6 million decrease in other service charges and fees is primarily fromdue to the acquisition of Stonegate during the third quarter of 2017 and additional exitreduction in interchange fees from Centennial CFG loan payoffs during the third quarter of 2018 which were partially offset by lower fee income as a result of the Company being subject to interchange fee restrictions from the Durbin Amendment, which began during the third quarter of 2018.

The $519,000 increase in mortgage lending income is primarily related to the acquisition of Stonegate during the third quarter of 2017 which resulted in an increase in secondary market lending fees and fair market value adjustments for loan hedging which was partially offset by a decrease in the gain on sale of mortgage loans and fair market value adjustments for mortgage loans held for sale.

The $454,000 increase in dividends from FHLB, FRB, First National Bankers’ Bank & other is primarily associated with higher dividend income from Federal Reserve and FHLB stock, which is related to an increased investment balance and improved dividend rate.

The $1.2 million increase in gain (loss) on branches, equipment and other assets, net is primarily due to lower levels of sales during the third quarter of 2018. The $1.3 million loss from the third quarter of 2017 was due to losses on three vacant properties sold during the third quarter of 2017.

The $501,000 increase in gain on OREO is primarily related to realizing additional gains on sale from OREO properties during the third quarter of 2018 compared to the third quarter of 2017.

Other income includes $1.0 million of additional income for items previously charged off, $877,000 of brokerage fee income, $435,000 of rental income and $110,000 of miscellaneous income.

Amendment. We exceeded $10 billion in assets during the first quarter of 2017 and became subject to the Durbin Amendment to the Dodd-Frank Act interchange fee restrictions beginning in the third quarter of 2018. The Durbin Amendment negatively impactsimpacted debit card and ATM fees beginning in the second half of 2018. During the third quarter of 2018, we collected $3.7 million in debit cardfees. We estimate that quarterly interchange fees which wasare approximately $2.8$3.0 million lower as a result of the Durbin Amendment. This was partially offset by a $892,000 increase in property finance loan fees and a $223,000 increase in wire service income.

The $451,000 decrease in dividends from debit interchange feesFHLB, FRB, First National Bankers’ Bank & other is primarily the result of $6.6 million collecteda $309,000 decrease in dividend income from other equity investments, which is related to a special dividend received during the second quarter of 2018.

The $129,000 decrease in gain (loss) on sale of branches, equipment and other assets, net, is primarily due to a loss on the sale of a branch during the second quarter of 2019 compared to zero for the second quarter of 2018.
The $988,000 decrease in gain (loss) on OREO is primarily related to realizing fewer gains on sale from OREO properties during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.

Table of Contents
The $982,000 decrease in other income is primarily due to a $510,000 decrease in income from fair value adjustments for equity securities due to the Company selling its equity securities during the fourth quarter of 2018, a $427,000 decrease in additional income for items previously charged off and a $173,000 decrease in investment brokerage fee income.
Non-interest
income decreased $6.7 million, or 12.6%, to $46.7 million for the
six-month
period ended June 30, 2019 from $53.5 million for the same period in 2018. The primary factor that resulted in this decrease was the impact of the Durbin Amendment which reduced interchange fees by approximately $6.0 million for the six months ended June 30, 2019. Other factors were changes related to service charges on deposit accounts, other service charges and fees, mortgage lending income, dividends from FHLB, FRB, First National Bankers’ Bank & other, gain (loss) on OREO and other income.
Additional details for the ninesix months ended SeptemberJune 30, 20182019 on some of the more significant changes are as follows:

The $1.5 million increase$195,000 decrease in service charges on deposit accounts is primarily related to an increasea decrease in overdraft fees due to additional volume, the acquisition of Stonegate during the third quarter of 2017 and improved pricing.

lower volume.

The $3.0$5.2 million increasedecrease in other service charges and fees is primarily fromdue to the acquisition of Stonegate during the third quarter of 2017 and additional exitreduction in interchange fees from Centennial CFG loan payoffs which were partially offset by lower fee income as a result of the Company being subject to interchange fee restrictions from the Durbin Amendment, which began duringAmendment. We estimate that year to date interchange fees are approximately $6.0 million lower as a result of the third quarter of 2018.

Durbin Amendment. This was partially offset by a $699,000 increase in property finance loan fees and a $350,000 increase in wire service income.

The $112,000 increase$242,000 decrease in mortgage lending income is primarily primarily relateddue to the acquisition of Stonegate during the third quarter of 2017 which resulted in an increase inlower fee income which was offset by a decrease in the gain on sale of mortgage loans and fairfor secondary market value adjustment for mortgage loans held for sale.

loans.

The $1.3$2.2 million increase in dividends from FHLB, FRB, First National Bankers’ Bank & other is primarily associated with higher dividend income from Federal Reserve and FHLB stock, which is related to an increased investment balance and improved dividend rate.

The $3.8 million decrease in gain on acquisitions is athe result of no bargain purchase gain being recorded for the first nine months of 2018. Duringa $2.1 million special dividend from an equity investment in the first quarter of 2017, we acquired BOC and recorded a $3.82019.

The $1.2 million bargain purchase gain on this acquisition.

The $867,000 increase in gain (loss) on branches, equipment and other assets, net is primarily due to lower levels of sales during the first nine months of 2018. The $962,000 loss from the first nine months of 2017 was primarily related to net losses on eleven vacant properties from closed branches.

The $1.4 million increasedecrease in gain (loss) on OREO is primarily related to realizing additionalfewer gains on sale from OREO properties during the first ninesix months ended June 30, 2019 compared to the six months ended June 30, 2018.

The $2.2 million decrease in other income is primarily due to a $688,000 decrease in income from fair value adjustments for equity securities due to the Company selling its equity securities during the fourth quarter of 2018, and no revaluation expense for the first nine months of 2018 compared to $306,000 incurred during the first nine months of 2017.

Other income includes $3.4 million ofa $564,000 decrease in additional income for items previously charged off $2.2 million ofand a $490,000 decrease in investment brokerage fee income, $1.2 million of rental income, $535,000 of income related to the fair value adjustment of equity securities and $1.0 million of miscellaneous income.

Non-Interest
Expense

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


Table of Contents
Table 7 below sets forth a summary of
non-interest
expense for the three and nine-month
six-month
periods ended SeptemberJune 30, 20182019 and 2017,2018, as well as changes for the three and nine-month
six-month
periods ended SeptemberJune 30, 20182019 compared to the same period in 2017.

2018.

Table 7:
Non-Interest
Expense

   Three Months Ended
September 30,		   2018 Change
from 2017		  Nine Months Ended
September 30,		   2018 Change
from 2017		 
   2018   2017  2018   2017 
   (Dollars in thousands) 

Salaries and employee benefits

  $37,825   $28,510   $9,315   32.7%  $107,315   $83,965   $23,350   27.8% 

Occupancy and equipment

   8,148    7,887    261   3.3   25,650    21,602    4,048   18.7 

Data processing expense

   3,461    2,853    608   21.3   10,786    8,439    2,347   27.8 

Other operating expenses:

             

Advertising

   1,154    795    359   45.2   3,258    2,305    953   41.3 

Merger and acquisition expenses

   —      18,227    (18,227)   (100.0)   —      25,743    (25,743)   (100.0) 

Amortization of intangibles

   1,617    906    711   78.5   4,867    2,576    2,291   88.9 

Electronic banking expense

   1,947    1,712    235   13.7   5,653    4,885    768   15.7 

Directors’ fees

   314    309    5   1.6   962    946    16   1.7 

Due from bank service charges

   253    472    (219)   (46.4)   714    1,348    (634)   (47.0) 

FDIC and state assessment

   2,293    1,293    1,000   77.3   6,689    3,763    2,926   77.8 

Insurance

   762    577    185   32.1   2,363    1,698    665   39.2 

Legal and accounting

   761    698    63   9.0   2,397    1,799    598   33.2 

Other professional fees

   1,748    1,436    312   21.7   4,988    3,822    1,166   30.5 

Operating supplies

   510    432    78   18.1   1,712    1,376    336   24.4 

Postage

   311    280    31   11.1   978    861    117   13.6 

Telephone

   337    305    32   10.5   1,081    1,027    54   5.3 

Other expense

   4,682    4,154    528   12.7   13,318    10,835    2,483   22.9 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Totalnon-interest expense

  $66,123   $70,846   $(4,723)   (6.7)%  $192,731   $176,990   $15,741   8.9% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

                                 
 
Three Months Ended
      
Six Months Ended
     
 
June 30,
  
2019 Change
  
June 30,
  
2019 Change
 
 
2019
  
2018
  
from 2018
  
2019
  
2018
  
from 2018
 
 
(Dollars in thousands)
 
Salaries and employee benefits
 $
37,976
  $
34,476
  $
3,500
   
10.2
% $
75,812
  $
69,490
  $
6,322
   
9.1
%
Occupancy and equipment
  
8,853
   
8,519
   
334
   
3.9
   
17,676
   
17,502
   
174
   
1.0
 
Data processing expense
  
3,838
   
3,339
   
499
   
14.9
   
7,808
   
7,325
   
483
   
6.6
 
Other operating expenses:
                        
Advertising
  
1,095
   
1,142
   
(47
)  
(4.1
)  
2,146
   
2,104
   
42
   
2.0
 
Merger and acquisition expenses
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
Amortization of intangibles
  
1,587
   
1,624
   
(37
)  
(2.3
)  
3,173
   
3,250
   
(77
)  
(2.4
)
Electronic banking expense
  
1,851
   
1,828
   
23
   
1.3
   
3,754
   
3,706
   
48
   
1.3
 
Directors’ fees
  
392
   
318
   
74
   
23.3
   
826
   
648
   
178
   
27.5
 
Due from bank service charges
  
282
   
242
   
40
   
16.5
   
520
   
461
   
59
   
12.8
 
FDIC and state assessment
  
1,655
   
2,788
   
(1,133
)  
(40.6
)  
3,365
   
4,396
   
(1,031
)  
(23.5
)
Hurricane expense
  
—  
   
—  
   
—  
   
—  
   
897
   
—  
   
897
   
100.0
 
Insurance
  
661
   
714
   
(53
)  
(7.4
)  
1,358
   
1,601
   
(243
)  
(15.2
)
Legal and accounting
  
989
   
858
   
131
   
15.3
   
1,970
   
1,636
   
334
   
20.4
 
Other professional fees
  
2,306
   
1,601
   
705
   
44.0
   
5,118
   
3,240
   
1,878
   
58.0
 
Operating supplies
  
505
   
602
   
(97
)  
(16.1
)  
1,041
   
1,202
   
(161
)  
(13.4
)
Postage
  
293
   
323
   
(30
)  
(9.3
)  
619
   
667
   
(48
)  
(7.2
)
Telephone
  
306
   
371
   
(65
)  
(17.5
)  
609
   
744
   
(135
)  
(18.1
)
Other expense
  
5,035
   
4,483
   
552
   
12.3
   
9,989
   
8,636
   
1,353
   
15.7
 
                                 
Total
non-interest
expense
 $
67,624
  $
63,228
  $
4,396
   
7.0
% $
136,681
  $
126,608
  $
10,073
   
8.0
%
                                 
Non-interest
expense decreased $4.7increased $4.4 million, or 6.7%7.0%, to $66.1$67.6 million for the three months ended SeptemberJune 30, 20182019 from $70.8$63.2 million for the same period in 2017.Non-interest2018. The primary factor that resulted in this increase was the increase in salaries and employee benefits expense. Other factors were changes related to other professional fees, other expense, increased $15.7 million, or 8.9%, to $192.7 million for the nine months ended September 30, 2018 from $177.0 million for the same period in 2017.Non-interestdata processing expense excluding merger expenses, was $66.1 million and $192.7 millionFDIC and state assessment.
Additional details for the three and nine months ended SeptemberJune 30, 2018 compared to $52.62019 on some of the more significant changes are as follows:
The $3.5 million and $151.2 million for the same periodsincrease in 2017, respectively.

Included within salarysalaries and employee benefits expense is approximately $781,000primarily 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, $326,000 increase in salary expense for Centennial CFG, $831,000 of additional expense related to performance based restricted stock and stock options granted during the third quarter of 2018 under the HOMB $2.00 program. During the third quarter of 2018, the Company granted 1,452,000 stock options“HOMB $2.00” and 843,500 shares of restricted stock to certain employees under HOMB $2.00. In addition, Centennial CFG incurred $1.8 million in incentive compensation paid as a result of fees collected from several large payoffs during the 3rd quarter of 2018.

The change innon-interest expense for 2018 when compared to 2017 is primarily related to the completion of the acquisition of Stonegate inSPF during the thirdsecond quarter of 2017,2018, which accounted for $236,000 of the increase.

The $705,000 increase in other professional fees is primarily related to expenses incurred in relation to the increased regulatory environment as a result of the Company exceeding $10 billion in assets.
The $552,000 increase in other expense is primarily related to the continued growth of the Company.
The $499,000 increase in data processing expense is primarily related to an in increase in software, license, core processing and telecommunication expenses.
The $1.1 million decrease in FDIC and state assessment is primarily related to a lower assessment rate for 2019 and no surcharge expense being assessed by the FDIC during 2019.

Table of Contents
Non-interest
expense increased $10.1 million, or 8.0%, to $136.7 million for the six months ended June 30, 2019 from $126.6 million for the same period in 2018. The primary factor that resulted in this increase was the increase in salaries and employee benefits expense. Other factors were changes related to hurricane expense, other professional fees, other expense and FDIC and state assessment.
Additional details for the six months ended June 30, 2019 on some of the more significant changes are as follows:
The $6.3 million increase in salaries and employee benefits expense is primarily due to increased salary expense related to the normal increased cost of doing business, and additional costs associated withemployees hired as a result of the increased regulatory environment a $1.0 million increase in salary expense for Centennial CFG.

Centennial CFG’s branch and loan production offices incurred $7.9 million and $19.0CFG, $1.7 million ofnon-interest additional expense related to performance based restricted stock and stock options granted during the threethird quarter of 2018 under “HOMB $2.00” and nine months ended September 30, 2018, compared to $4.8 million and $13.8 millionthe completion ofnon-interest expense the acquisition of SPF during the threesecond quarter of 2018, which accounted for $489,000 of the increase.

The $897,000 in hurricane expense is related to damages from Hurricane Michael which made landfall in Mexico Beach, Florida on October 10, 2018.
The $1.9 million increase in other professional fees is primarily related to $900,000 of expense incurred in relation to a completed outsourced special project as well expenses incurred in relation to the increased regulatory environment as a result of the Company exceeding $10 billion in assets.
The $1.4 million increase in other expense is primarily related to the continued growth of the Company.
The $1.0 million decrease in FDIC and nine months ended September 30, 2017, respectively. Whilestate assessment is primarily related to a lower assessment rate for 2019 and no surcharge expense being assessed by the cost of doing business in New York City is significantly higher than our Arkansas, Florida and Alabama markets, we are still committed to cost-saving measures while achieving our goals of growing the Company.

FDIC during 2019.

Income Taxes

In December 2017, President Trump signed into law the TCJA which lowered the Company’s corporate tax rate of 35.0% to 21.0%.

Income tax expense increased $17.8decreased $1.4 million, or 236.4%5.76%, to $25.4$22.9 million for the three-month period ended SeptemberJune 30, 2018,2019, from $7.5$24.3 million for the same period in 2017.2018. The income tax expense increased $10.4decreased $2.6 million, or 16.5%5.38%, to $73.6$45.7 million for the nine-month
six-month
period ended SeptemberJune 30, 2018,2019, from $63.2$48.3 million for the same period in 2017.2018. The decline in income tax expense is primarily due to a decrease in
pre-tax
net income for the three and
six-month
periods ended June 30, 2019 compared to the same periods in 2018. The effective income tax rate was 24.00%24.12% and 24.30%24.14% for the three and nine-month
six-month
periods ended SeptemberJune 30, 2018,2019, compared to 33.71%24.23% and 36.12%24.46% for the same periods in 2017, respectively. Since January 1, 2018, the Company has benefited from a lower marginal tax rate of 26.135% from 39.225% in previous years.

2018.

Financial Condition as of and for the Period Ended SeptemberJune 30, 20182019 and December 31, 2017

2018

Our total assets as of SeptemberJune 30, 2018 increased $463.02019 decreased $14.9 million to $14.91$15.29 billion from the $14.45$15.30 billion reported as of December 31, 2017.2018. Cash and cash equivalents decreased $100.6 million, or 15.3%, for the
six-month
period ended June 30, 2019. Our loan portfolio balance declined slightly to $11.05 billion as of June 30, 2019 from $11.07 billion at December 31, 2018. Total deposits increased $501.6$447.5 million or 4.86% for the quarter ended Septemberto $11.35 billion as of June 30, 20182019 from $10.33$10.90 billion as of December 31, 20172018. Stockholders’ equity increased $71.5 million to $10.83$2.42 billion as of SeptemberJune 30, 2018. The increase is primarily due2019, compared to the acquisition of $376.2 million of loans as part of the acquisition of Shore Premier Finance (“SPF”) as well as $125.4 million of organic loan growth for the first nine months of 2018. Total deposits increased $236.2 million to $10.62 billion as of September 30, 2018 from $10.39$2.35 billion as of December 31, 2017. Stockholders’ equity increased $136.7 million to $2.34 billion as of September 30, 2018, compared to $2.20 billion as of December 31, 2017.2018. The increase in stockholders’ equity is primarily associated with the $171.2$101.8 million increase in retained earnings the issuance of 1,250,000 shares of stock with a value of $28.2 million as part of the acquisition of SPF, and the issuance of $6.5$28.6 million of share-based compensation,other comprehensive income, which werewas partially offset by $27.3stock repurchases of $64.4 million of comprehensive loss and the repurchase of $43.2 million of our common stock during 2018. The annualized improvement in stockholders’ equity for the first nine months of 2018, excluding the $28.2 million of common stock issued for the acquisition of SPF, was 6.6%

2019.

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $10.91$11.00 billion and $7.94$10.35 billion during the three-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Our loan portfolio averaged $10.53$11.02 billion and $7.79$10.34 billion during the nine-month
six-month
periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Loans receivable were $10.83$11.05 billion and $10.33$11.07 billion as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.

During the second quarter of 2018, the Company acquired $376.2 million of loans, net of known purchase accounting discounts.

From December 31, 20172018 to SeptemberJune 30, 2018,2019, the Company produced organic loan growthexperienced a decline of approximately $125.4$18.8 million in addition to the acquired loans. Centennial CFG produced $29.1experienced $121.0 million of organic loan growth during the first ninesix months of 2018,2019, while the legacy footprint produced $96.4experienced $139.8 million of organic loan growthdecline during the first ninesix months of 2018.

2019.


Table of Contents
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 SPF and Centennial CFG, franchises, the property securing these loans may not physically be located within our primary market areas of Arkansas, Florida, Alabama and New York. Loans receivable were approximately $3.59$3.75 billion, $5.17$4.98 billion, $224.7$222.8 million, $382.5$442.1 million and $1.47$1.67 billion as of SeptemberJune 30, 20182019 in our Arkansas, Florida, Alabama, SPF and Centennial CFG, franchises, respectively.

As of SeptemberJune 30, 2018,2019, we had approximately $508.4$501.6 million of construction land development loans which were collateralized by land. This consisted of approximately $230.8$235.8 million for raw land and approximately $277.6$265.8 million for land with commercial and or residential lots.

Table 8 presents our loans receivable balances by category as of SeptemberJune 30, 20182019 and December 31, 2017.

2018.

Table 8: Loans Receivable

   As of
September 30, 2018		   As of
December 31, 2017		 
   (In thousands) 

Real estate:

    

Commercial real estate loans:

    

Non-farm/non-residential

  $4,685,827   $4,600,117 

Construction/land development

   1,550,910    1,700,491 

Agricultural

   72,930    82,229 

Residential real estate loans:

    

Residential1-4 family

   1,982,666    1,970,311 

Multifamily residential

   608,608    441,303 
  

 

 

   

 

 

 

Total real estate

   8,900,941    8,794,451 

Consumer

   428,192    46,148 

Commercial and industrial

   1,303,841    1,297,397 

Agricultural

   58,644    49,815 

Other

   141,197    143,377 
  

 

 

   

 

 

 

Total loans receivable

  $10,832,815   $10,331,188 
  

 

 

   

 

 

 

         
 
As of
  
As of
 
 
June 30, 2019
  
December 31, 2018
 
 
(In thousands)
 
Real estate:
      
Commercial real estate loans:
      
Non-farm/non-residential
 $
4,495,558
  $
4,806,684
 
Construction/land development
  
1,930,838
   
1,546,035
 
Agricultural
  
85,045
   
76,433
 
Residential real estate loans:
      
Residential
1-4
family
  
1,852,784
   
1,975,586
 
Multifamily residential
  
523,789
   
560,475
 
         
Total real estate
  
8,888,014
   
8,965,213
 
Consumer
  
455,554
   
443,105
 
Commercial and industrial
  
1,515,357
   
1,476,331
 
Agricultural
  
80,621
   
48,562
 
Other
  
113,583
   
138,668
 
         
Total loans receivable
 $
11,053,129
  $
11,071,879
 
         
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 to25-year
30-year
period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a
case-by-case
basis.

As of SeptemberJune 30, 2018,2019, commercial real estate loans totaled $6.31$6.51 billion, or 58.3%58.9% of loans receivable, as compared to $6.38$6.43 billion, or 61.8%58.1% of loans receivable, as of December 31, 2017.2018. Commercial real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $2.02$2.14 billion, $3.21$3.08 billion, $120.2$121.0 million, zero and $961.2 million$1.17 billion at SeptemberJune 30, 2018,2019, 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 29.3%31.6% and 59.6%57.2% of our residential mortgage loans consist of owner occupied
1-4
family properties and
non-owner
occupied
1-4
family properties (rental), respectively, as of SeptemberJune 30, 2018.2019, with the remaining 11.2% relating to condos and mobile homes. Residential real estate loans generally have a
loan-to-value
ratio of up to 90%. These loans are underwritten by giving consideration to the borrower’s ability to pay, stability of employment or source of income,
debt-to-income
ratio, credit history and
loan-to-value
ratio.

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As of SeptemberJune 30, 2018,2019, residential real estate loans totaled $2.59$2.38 billion, or 23.9%21.5%, of loans receivable, compared to $2.41$2.54 billion, or 23.3%22.9% of loans receivable, as of December 31, 2017.2018. Residential real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $951.0$923.2 million, $1.37$1.29 billion, $67.8$71.4 million, zero and $198.1$87.5 million at SeptemberJune 30, 2018,2019, 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. 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 SeptemberJune 30, 2018,2019, consumer loans totaled $428.2$455.6 million, or 4.1% of loans receivable, compared to $443.1 million, or 4.0% of loans receivable, compared to $46.2 million, or 0.4% of loans receivable, as of December 31, 2017. The significant increase is due to our acquisition of SPF on June 30, 2018. Consumer loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $26.8$39.1 million, $24.8$15.6 million, $943,000, $375.7$1.2 million, $399.7 million and zero at SeptemberJune 30, 2018,2019, 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 60%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 SeptemberJune 30, 2018,2019, commercial and industrial loans totaled $1.30$1.52 billion, or 12.0%13.7% of loans receivable, which is comparablecompared to $1.30$1.48 billion, or 12.6%13.3% of loans receivable, as of December 31, 2017.2018. Commercial and industrial loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $495.9$546.4 million, $456.0$492.9 million, $34.1$27.8 million, $6.8$42.4 million and $311.0$405.8 million at SeptemberJune 30, 2018,2019, respectively.

Non-Performing
Assets

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

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

We have purchased loans with deteriorated credit quality in our SeptemberJune 30, 20182019 financial statements as a result of our historical acquisitions. The credit metrics most heavily impacted by our acquisitions of acquired loans with deteriorated credit quality were the following credit quality indicators listed in Table 9 below:

Allowance for loan losses to
non-performing
loans;

Non-performing
loans to total loans; and

Non-performing
assets to total assets.

On the date of acquisition, acquired credit-impaired loans are initially recognized at fair value, which incorporates the present value of amounts estimated to be collectible. As a result of the application of this accounting methodology, certain credit-related ratios, including those referenced above, may not necessarily be directly comparable with periods prior to the acquisition of the credit-impaired loans and
non-performing
assets, or comparable with other institutions.

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Table 9 sets forth information with respect to our
non-performing
assets as of SeptemberJune 30, 20182019 and December 31, 2017.2018. As of these dates, all
non-performing
restructured loans are included in
non-accrual
loans.

Table 9:
Non-performing
Assets

   As of
September 30,
2018		  As of
December 31,
2017		 
   (Dollars in thousands) 

Non-accrual loans

  $36,198  $34,032 

Loans past due 90 days or more (principal or interest payments)

   20,267   10,665 
  

 

 

  

 

 

 

Totalnon-performing loans

   56,465   44,697 
  

 

 

  

 

 

 

Othernon-performing assets

   

Foreclosed assets held for sale, net

   13,507   18,867 

Othernon-performing assets

   405   3 
  

 

 

  

 

 

 

Total othernon-performing assets

   13,912   18,870 
  

 

 

  

 

 

 

Totalnon-performing assets

   70,377  $63,567 
  

 

 

  

 

 

 

Allowance for loan losses tonon-performing loans

   195.15%   246.70% 

Non-performing loans to total loans

   0.52   0.43 

Non-performing assets to total assets

   0.47   0.44 

         
 
As of
June 30,
2019
  
As of
December 31,
2018
 
 
(Dollars in thousands)
 
Non-accrual
loans
 $
52,841
  $
47,083
 
Loans past due 90 days or more (principal or interest payments)
  
9,961
   
17,159
 
         
Total
non-performing
loans
  
62,802
   
64,242
 
         
Other
non-performing
assets
      
Foreclosed assets held for sale, net
  
13,734
   
13,236
 
Other
non-performing
assets
  
947
   
497
 
         
Total other
non-performing
assets
  
14,681
   
13,733
 
         
Total
non-performing
assets
  
77,483
  $
77,975
 
         
Allowance for loan losses to
non-performing
loans
  
168.89
%  
169.35
%
Non-performing
loans to total loans
  
0.57
   
0.58
 
Non-performing
assets to total assets
  
0.51
   
0.51
 
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 loan losses.

Total
non-performing
loans were $56.5$62.8 million and $64.2 million as of SeptemberJune 30, 2018, compared to $44.7 million as of2019 and December 31, 2017, an increase of $11.8 million. The $11.8 million increase innon-performing loans is the result of a $11.8 million increase innon-performing loans in our Florida market and a $1.8 increase innon-performing loans in our SPF market, which was partially offset by a $1.0 million decrease innon-performing loans in our Arkansas market and an $796,000 decrease innon-performing loans in our Alabama market. The majority of the increase innon-performing loans in our Florida market was the result of seven loans with the largest loan having a balance of $5.6 million as of September 30, 2018.2018, respectively.
Non-performing
loans at SeptemberJune 30, 20182019 are $14.5$20.0 million, $40.0$37.1 million, $133,000, $1.8$3.3 million, $2.4 million and zero in the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively.

Although the current state of the real estate market has improved, uncertainties still present in the economy may continue to increase our level of
non-performing
loans. While we believe our allowance for loan losses is adequate and our purchased loans are adequately discounted at SeptemberJune 30, 2018,2019, as additional facts become known about relevant internal and external factors that affect loan collectability and our assumptions, it may result in us making additions to the provision for loan losses during 2018.2019. Our current or historical provision levels should not be relied upon as a predictor or indicator of future levels going forward.

Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have
charged-off
any portion of the loan. Only
non-performing
restructured loans are included in our
non-performing
loans. As of SeptemberJune 30, 2018,2019, we had $17.1$14.8 million of restructured loans that are in compliance with the modified terms and are not reported as past due or
non-accrual
in Table 9. Our Florida market contains $11.8$9.7 million, and our Arkansas market contains $5.3$4.7 million and our Alabama market contains $388,000 of these restructured loans. Our Alabama, SPF and Centennial CFG markets do not contain any restructured loans as of September 30, 2018.

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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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 SeptemberJune 30, 2019 and December 31, 2018, the amount of TDRs was $18.9$18.8 million a decrease of 10.8% from $21.2and $19.7 million, at December 31, 2017.respectively. As of SeptemberJune 30, 20182019 and December 31, 2017, 90.3%2018, 78.9% and 89.7%76.6%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $13.5$13.7 million as of SeptemberJune 30, 2018,2019, compared to $18.9$13.2 million as of December 31, 2017, a decrease2018 for an increase of $5.4 million.$498,000. The foreclosed assets held for sale as of SeptemberJune 30, 20182019 are comprised of $6.6$6.5 million of assets located in Arkansas, $6.3$7.2 million of assets located in Florida, $641,000$34,000 located in Alabama and zero from SPF and Centennial CFG.

During the first ninesix months of 2018,2019, we had two foreclosed properties with a carrying value greater than $1.0 million. The first property was a development property in Florida acquired from BOCThe Bank of Commerce with a carrying value of $2.1 million at SeptemberJune 30, 2018.2019. The second property was a nonfarmnon-residentialdevelopment property in Florida acquired from SGB with a carrying value of $1.9$1.5 million at SeptemberJune 30, 2018.2019. The Company does not currently anticipate any additional losses on these properties. As of SeptemberJune 30, 2018,2019, no other foreclosed assets held for sale have a carrying value greater than $1.0 million.

Table 10 shows the summary of foreclosed assets held for sale as of SeptemberJune 30, 20182019 and December 31, 2017.

2018.

Table 10: Foreclosed Assets Held For Sale

   As of
September 30, 2018		   As of
December 31, 2017		 

Real estate:

   (In thousands) 

Commercial real estate loans

    

Non-farm/non-residential

  $5,858   $9,766 

Construction/land development

   3,539    5,920 

Agricultural

   155    —   

Residential real estate loans

    

Residential1-4 family

   3,885    2,654 

Multifamily residential

   70    527 
  

 

 

   

 

 

 

Total foreclosed assets held for sale

  $13,507   $18,867 
  

 

 

   

 

 

 

         
 
As of
June 30, 2019
  
As of
December 31, 2018
 
 
(In thousands)
 
Real estate:
  
Commercial real estate loans
      
Non-farm/non-residential
 $
3,929
  $
5,555
 
Construction/land development
  
5,673
   
3,534
 
Agricultural
  
—  
   
—  
 
Residential real estate loans
      
Residential
1-4
family
  
4,132
   
4,142
 
Multifamily residential
  
—  
   
5
 
         
Total foreclosed assets held for sale
 $
13,734
  $
13,236
 
         
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 SeptemberJune 30, 2018,2019, average impaired loans were $79.0$85.0 million compared to $75.6$81.3 million as of December 31, 2017, for an increase of $3.4 million.2018. As of SeptemberJune 30, 2019 and December 31, 2018, impaired loans were $83.8 million and $85.6 million, respectively. Loan balances with a specific allocation increased while the specific allocation for impaired loans decreased by approximately $843,000. As of June 30, 2019, our Arkansas, Florida, Alabama, SPF and Centennial CFG markets accounted for approximately $25.3$30.9 million, $51.8$46.9 million, $133,000, $1.8$3.7 million, $2.3 million and zero of the impaired loans, respectively.

We evaluated loans purchased in conjunction with our historical acquisitions for impairment in accordance with the provisions of FASB ASC Topic

310-30,
Loans and Debt Securities Acquired with Deteriorated Credit Quality
. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected. Purchased credit impaired loans are not classified as
non-performing
assets for the recognition of interest income as the pools are considered to be performing. However, for the purpose of calculating the
non-performing
credit metrics, we have included all of the loans which are contractually 90 days past due and still accruing, including those in performing pools. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased impaired loans.

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All purchased loans with deteriorated credit quality are considered impaired loans at the date of acquisition. Since the loans are accounted for on a pooled basis under ASC
310-30,
individual loans are not classified as impaired. Since the loans are accounted for on a pooled basis under ASC
310-30,
individual loans subsequently restructured within the pools are not classified as TDRs in accordance with ASC
310-30-40.
For purchased loans with deteriorated credit quality that were deemed TDRs prior to our acquisition of them, these loans are also not considered TDRs as they are accounted for under ASC
310-30.

As of SeptemberJune 30, 20182019 and December 31, 2017,2018, there was not a material amount of purchased loans with deteriorated credit quality on
non-accrual
status as a result of most of the loans being accounted for on the pool basis and the pools are considered to be performing for the accruing of interest income. Also, acquired loans contractually past due 90 days or more are accruing interest because the pools are considered to be performing for the purpose of accruing interest income.

Past Due and
Non-Accrual
Loans

Table 11 shows the summary of
non-accrual
loans as of SeptemberJune 30, 20182019 and December 31, 2017:

2018:

Table 11: Total
Non-Accrual
Loans

   As of
September 30, 2018		   As of
December 31, 2017		 
Real estate:  (In thousands) 

Commercial real estate loans

    

Non-farm/non-residential

  $11,223   $9,600 

Construction/land development

   4,966    5,011 

Agricultural

   30    19 

Residential real estate loans

    

Residential1-4 family

   14,312    14,437 

Multifamily residential

   983    153 
  

 

 

   

 

 

 

Total real estate

   31,514    29,220 

Consumer

   208    145 

Commercial and industrial

   4,443    4,584 

Agricultural

   32    54 

Other

   1    29 
  

 

 

   

 

 

 

Totalnon-accrual loans

  $36,198   $34,032 
  

 

 

   

 

 

 

         
 
As of
June 30, 2019
  
As of
December 31, 2018
 
 
(In thousands)
 
Real estate:
  
Commercial real estate loans
      
Non-farm/non-residential
 $
18,947
  $
15,031
 
Construction/land development
  
2,266
   
5,280
 
Agricultural
  
381
   
20
 
Residential real estate loans
      
Residential
1-4
family
  
22,227
   
17,384
 
Multifamily residential
  
1,155
   
972
 
         
Total real estate
  
44,976
   
38,687
 
Consumer
  
1,907
   
2,912
 
Commercial and industrial
  
5,926
   
5,451
 
Agricultural
  
31
   
32
 
Other
  
1
   
1
 
         
Total
non-accrual
loans
 $
52,841
  $
47,083
 
         
If
non-accrual
loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $560,000$624,000 and $479,000,$543,000, respectively, would have been recorded for the three-month periods ended SeptemberJune 30, 20182019 and 2017.2018. If
non-accrual
loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $1.6$1.3 million and $1.7$1.0 million would have been recorded for each of the nine-month
six-month
periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. The interest income recognized on
non-accrual
loans for the three and nine-month
six-month
periods ended SeptemberJune 30, 20182019 and 20172018 was considered immaterial.

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Table 12 shows the summary of accruing past due loans 90 days or more as of SeptemberJune 30, 20182019 and December 31, 2017:

2018:

Table 12: Loans Accruing Past Due 90 Days or More

   As of
September 30, 2018		   As of
December 31, 2017		 

Real estate:

   (In thousands) 

Commercial real estate loans

    

Non-farm/non-residential

  $11,405   $3,119 

Construction/land development

   3,551    3,247 

Agricultural

   —      —   

Residential real estate loans

    

Residential1-4 family

   1,509    2,175 

Multifamily residential

   —      100 
  

 

 

   

 

 

 

Total real estate

   16,465    8,641 

Consumer

   1,796    26 

Commercial and industrial

   2,006    1,944 

Agricultural and other

   —      54 
  

 

 

   

 

 

 

Total loans accruing past due 90 days or more

  $20,267   $10,665 
  

 

 

   

 

 

 

         
 
As of
June 30, 2019
  
As of
December 31, 2018
 
 
(In thousands)
 
Real estate:
  
Commercial real estate loans
      
Non-farm/non-residential
 $
6,633
  $
9,679
 
Construction/land development
  
1,546
   
3,481
 
Agricultural
  
—  
   
—  
 
Residential real estate loans
      
Residential
1-4
family
  
821
   
1,753
 
Multifamily residential
  
—  
   
—
 
         
Total real estate
  
9,000
   
14,913
 
Consumer
  
574
   
720
 
Commercial and industrial
  
387
   
1,526
 
Agricultural and other
  
—  
   
—  
 
         
Total loans accruing past due 90 days or more
 $
9,961
  $
17,159
 
         
Our ratio of total loans accruing past due 90 days or more and
non-accrual
loans to total loans was 0.52%0.57% and 0.43% as of September0.58% at June 30, 20182019 and December 31, 2017,2018, respectively.

Allowance for Loan Losses

Overview.
The allowance for loan losses is maintained at a level which our management believes is adequate to absorb all probable losses on loans in the loan portfolio. The amount of the allowance is affected by: (i) loan charge-offs, which decrease the allowance; (ii) recoveries on loans previously charged off, which increase the allowance; and (iii) the provision of possible loan losses charged to income, which increases the allowance. In determining the provision for possible loan losses, it is necessary for our management to monitor fluctuations in the allowance resulting from actual charge-offs and recoveries and to periodically review the size and composition of the loan portfolio in light of current and anticipated economic conditions. If actual losses exceed the amount of allowance for loan losses, our earnings could be adversely affected.

As we evaluate the allowance for loan losses, we categorize it as follows: (i) specific allocations; (ii) allocations for criticized and classified assets not individually evaluated for impairment; (iii) general allocations; and (iv) miscellaneous allocations.

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 loan losses, and if necessary, adjustments are made to the specific allocation provided for a particular loan.


Table of Contents
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 loan 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 $1.0$3.0 million or greater or the total loan relationship is $2.0$5.0 million or greater, our policy requires an annual credit review. OurFor these loans, our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually.

annually on these loans.

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

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

Allocations for Criticized and Classified Assets Notnot Individually Evaluated for Impairment.
We establish allocations for loans rated “special mention” through “loss” in accordance with the guidelines established by the regulatory agencies. A percentage rate is applied to each loan category to determine the level of dollar allocation.

General Allocations.
We establish general allocations for each major loan category. This section also includes allocations to loans, which are collectively evaluated for loss such as residential real estate, commercial real estate, consumer loans and commercial and industrial loans that fall below $2.0 million. The allocations in this section are based on a historical review of loan loss experience and past due accounts. We give consideration to trends, changes in loan mix, delinquencies, prior losses, and other related information.

Miscellaneous Allocations.
Allowance allocations other than specific, classified, and general are included in our miscellaneous section.

Loans Collectively Evaluated for Impairment
. Loans receivable collectively evaluated for impairment increaseddecreased by approximately $615.9 million$65,000 from $9.94$10.79 billion at December 31, 20172018 to $10.56$10.73 billion at SeptemberJune 30, 2018.2019. The percentage of the allowance for loan losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment was 1.02%0.97% and 1.06%0.98% at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. This decrease is primarily the result

Table of acquiring the SPF loans, which were not individually evaluated for impairment as a result of purchase accounting rules requiring the acquired loans to be marked to fair value at acquisition.

Contents

Hurricane

Hurricanes Irma
 & Michael
. The Company’s allowance for loan lossesloss as of SeptemberJune 30, 20182019 and December 31, 20172018 was significantly impacted by Hurricane Michael, which made landfall in the Florida Panhandle as a Category 4 hurricane during the fourth quarter of 2018, and somewhat impacted by Hurricane Irma, which made initial landfall in the Florida Keys and a second landfall just south of Naples, Florida, as a Category 4 hurricane on September 10,during the third quarter of 2017. As of December 31, 2018, management reevaluated the storm-related allowance for Hurricane Irma. Based on initial assessments ofthis analysis, management determined a $2.9 million storm-related allowance was still necessary. The Company’s management also performed an analysis on the potential credit impact and damage to the approximately $2.41 billionloans with collateral in legacy loans receivable we havecounties in the disaster area, the Company establishedFlorida Panhandle which were impacted by Hurricane Michael. Based on this analysis, management determined a $32.9$20.4 million storm-related provision was necessary. This amount was calculated by taking a 1.0% to 6.0% allocation on the loans in the impacted counties. The counties that experienced the most damage were assigned a 6.0% allocation. After establishing the storm-related provision for loan losses as ofHurricane Michael and adjusting the allowance for Hurricane Irma, the storm-related allowance was $23.2 million and $23.3 million at June 30, 2019 and December 31, 2017.2018, respectively. As of SeptemberJune 30, 2018,2019, charge-offs of $2.5$2.6 million have been taken against the storm-related provisionallowance for loan losses. Due to the uncertainty that still exists as to the timing of the full recovery of the disaster area, we believe that the storm-related provision recorded as of September 30, 2018 is appropriate.

Charge-offs and Recoveries.
Total charge-offs decreasedincreased to $2.5$2.3 million for the three months ended SeptemberJune 30, 2018,2019, compared to $4.4$2.1 million for the same period in 2017.2018. Total charge-offs decreasedincreased to $7.2$5.7 million for the ninesix months ended SeptemberJune 30, 2018,2019, compared to $10.5$4.7 million for the same period in 2017.2018. Total recoveries increaseddecreased to $1.2 million$663,000 for the three months ended SeptemberJune 30, 2018,2019, compared to $883,000$714,000 for the same period in 2017.2018. Total recoveries remained flat at $2.8$1.6 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017.2018. For the three months ended SeptemberJune 30, 2018,2019, net charge-offs were $849,000$983,000 for Arkansas, $470,000$597,000 for Florida, $6,000$43,000 for AlabamaSPF and zero for SPF and Centennial CFG, equalingwhile Alabama had $7,000 in net recoveries. These equal a net
charge-off
position of $1.3$1.6 million. For the ninesix months ended SeptemberJune 30, 2018,2019, net charge-offs were $2.8$1.9 million for Arkansas, $1.5$2.1 million for Florida, $123,000$43,000 for AlabamaSPF and zero for SPF and Centennial CFG, equalingwhile Alabama had $15,000 in net recoveries. These equal a net
charge-off
position of $4.4$4.1 million. While the 20182019 charge-offs and recoveries consisted of many relationships, there were no individual relationships consisting of charge-offs greater than $1.0 million.

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


Table of Contents
Table 13 shows the allowance for loan losses, charge-offs and recoveries as of and for the three and nine-month
six-month
periods ended SeptemberJune 30, 20182019 and 2017.

2018.

Table 13: Analysis of Allowance for Loan Losses

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
   2018  2017  2018  2017 
   (Dollars in thousands) 

Balance, beginning of period

  $111,516  $80,138  $110,266  $80,002 

Loans charged off

     

Real estate:

     

Commercial real estate loans:

     

Non-farm/non-residential

   144   796   981   2,324 

Construction/land development

   337   182   399   508 

Agricultural

   —     —     —     127 

Residential real estate loans:

     

Residential1-4 family

   608   309   2,339   2,512 

Multifamily residential

   —     —     —     85 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   1,089   1,287   3,719   5,556 

Consumer

   15   14   73   158 

Commercial and industrial

   744   2,280   1,816   3,059 

Agricultural

   —     —     —     —   

Other

   653   843   1,565   1,762 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans charged off

   2,501   4,424   7,173   10,535 
  

 

 

  

 

 

  

 

 

  

 

 

 

Recoveries of loans previously charged off

     

Real estate:

     

Commercial real estate loans:

     

Non-farm/non-residential

   195   278   383   988 

Construction/land development

   90   85   209   312 

Agricultural

   —     —     —     —   

Residential real estate loans:

     

Residential1-4 family

   307   188   801   430 

Multifamily residential

   2   38   43   50 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   594   589   1,436   1,780 

Consumer

   108   25   168   91 

Commercial and industrial

   251   140   568   392 

Agricultural

   —     —     —     —   

Other

   223   129   604   566 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total recoveries

   1,176   883   2,776   2,829 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loans charged off (recovered)

   1,325   3,541   4,397   7,706 

Provision for loan losses

   —     35,023   4,322   39,324 
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 30

  $110,191  $111,620  $110,191  $111,620 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net charge-offs (recoveries) to average loans receivable

   0.05%   0.18%   0.06%   0.13% 

Allowance for loan losses to total loans

   1.02   1.09   1.02   1.09 

Allowance for loan losses to net charge-offs (recoveries)

   2,096   795   1,874   1,083 

                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
 
Balance, beginning of period
 $
106,357
  $
110,212
  $
108,791
  $
110,266
 
Loans charged off
            
Real estate:
            
Commercial real estate loans:
            
Non-farm/non-residential
  
1,163
   
390
   
1,502
   
837
 
Construction/land development
  
26
   
54
   
1,312
   
62
 
Agricultural
  
—  
   
—  
   
—  
   
—  
 
Residential real estate loans:
  
—  
          
Residential
1-4
family
  
125
   
952
   
661
   
1,731
 
Multifamily residential
  
—  
   
—  
   
—  
   
—  
 
                 
Total real estate
  
1,314
   
1,396
   
3,475
   
2,630
 
Consumer
  
163
   
43
   
202
   
58
 
Commercial and industrial
  
305
   
258
   
1,009
   
1,072
 
Agricultural
  
—  
   
—  
   
—  
   
—  
 
Other
  
497
   
435
   
984
   
912
 
                 
Total loans charged off
  
2,279
   
2,132
   
5,670
   
4,672
 
                 
Recoveries of loans previously charged off
            
Real estate:
            
Commercial real estate loans:
            
Non-farm/non-residential
  
13
   
87
   
204
   
188
 
Construction/land development
  
95
   
89
   
118
   
119
 
Agricultural
  
—  
   
—  
   
—  
   
—  
 
Residential real estate loans:
            
Residential
1-4
family
  
149
   
167
   
496
   
494
 
Multifamily residential
  
3
   
7
   
8
   
41
 
                 
Total real estate
  
260
   
350
   
826
   
842
 
Consumer
  
17
   
33
   
37
   
60
 
Commercial and industrial
  
222
   
219
   
404
   
317
 
Agricultural
  
—  
   
—  
   
—  
   
—  
 
Other
  
164
   
112
   
353
   
381
 
                 
Total recoveries
  
663
   
714
   
1,620
   
1,600
 
                 
Net loans charged off (recovered)
  
1,616
   
1,418
   
4,050
   
3,072
 
Provision for loan losses
  
1,325
   
2,722
   
1,325
   
4,322
 
                 
Balance, June 30
 $
106,066
  $
111,516
  $
106,066
  $
111,516
 
                 
Net charge-offs (recoveries) to average loans receivable
  
0.06
%  
0.05
%  
0.07
%  
0.06
%
Allowance for loan losses to total loans
  
0.96
   
1.02
   
0.96
   
1.02
 
Allowance for loan losses to net charge-offs (recoveries)
  
1,636
   
1,961
   
1,299
   
1,800
 


Table of Contents
Allocated Allowance for Loan Losses.
We use a risk rating and specific reserve methodology in the calculation and allocation of our allowance for loan losses. While the allowance is allocated to various loan categories in assessing and evaluating the level of the allowance, the allowance is available to cover charge-offs incurred in all loan categories. Because a portion of our portfolio has not matured to the degree necessary to obtain reliable loss data from which to calculate estimated future losses, the unallocated portion of the allowance is an integral component of the total allowance. Although unassigned to a particular credit relationship or product segment, this portion of the allowance is vital to safeguard against the imprecision inherent in estimating credit losses.

The changes for the period ended SeptemberJune 30, 20182019 and the year ended December 31, 20172018 in the allocation of the allowance for loan losses for the individual types of loans are primarily associated with changes in the ASC 310 calculations, both individual and aggregate, and changes in the ASC 450 calculations. These calculations are affected by changes in individual loan impairments, changes in asset quality, net charge-offs during the period and normal changes in the outstanding loan portfolio, as well any changes to the general allocation factors due to changes within the actual characteristics of the loan portfolio.

Table 14 presents the allocation of allowance for loan losses as of SeptemberJune 30, 20182019 and December 31, 2017.

2018.

Table 14: Allocation of Allowance for Loan Losses

   As of September 30,
2018		  As of December 31,
2017		 
   Allowance
Amount		   % of
loans (1)		  Allowance
Amount		   % of
loans (1)		 
   (Dollars in thousands) 

Real estate:

       

Commercial real estate loans:

       

Non-farm/non-residential

  $44,350    43.3%  $42,893    44.5% 

Construction/land development

   19,014    14.3   20,343    16.4 

Agricultural

   1,003    0.7   1,046    0.8 

Residential real estate loans:

       

Residential1-4 family

   19,606    18.3   21,370    19.1 

Multifamily residential

   4,493    5.6   3,136    4.3 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total real estate

   88,466    82.2   88,788    85.1 

Consumer

   632    4.0   462    0.4 

Commercial and industrial

   13,777    12.0   15,292    12.6 

Agricultural

   2,854    0.5   2,692    0.5 

Other

   174    1.3   180    1.4 

Unallocated

   4,288    —   2,852    —   
  

 

 

   

 

 

  

 

 

   

 

 

 

Total allowance for loan losses

  $110,191    100.0%  $110,266    100.0% 
  

 

 

   

 

 

  

 

 

   

 

 

 

                 
 
As of June 30, 2019
  
As of December 31, 2018
 
 
Allowance
Amount
  
% of
loans
(1) 
  
Allowance
Amount
  
% of
loans
(1)
 
 
(Dollars in thousands)
 
Real estate:
            
Commercial real estate loans:
            
Non-farm/non-residential
 $
38,010
   
40.7
% $
41,721
   
43.4
%
Construction/land development
  
24,258
   
17.5
   
21,302
   
14.0
 
Agricultural
  
657
   
0.8
   
615
   
0.7
 
Residential real estate loans:
            
Residential
1-4
family
  
21,001
   
16.8
   
22,547
   
17.8
 
Multifamily residential
  
3,270
   
4.7
   
4,187
   
5.1
 
                 
Total real estate
  
87,196
   
80.5
   
90,372
   
81.0
 
Consumer
  
1,429
   
4.1
   
1,153
   
4.0
 
Commercial and industrial
  
14,853
   
13.7
   
14,981
   
13.3
 
Agricultural
  
2,477
   
0.7
   
2,175
   
0.4
 
Other
  
111
   
1.0
   
110
   
1.3
 
Unallocated
  
—  
   
—  
   
—  
   
—  
 
                 
Total allowance for loan losses
 $
106,066
   
100.0
% $
108,791
   
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 3.32.4 years as of SeptemberJune 30, 2018.

2019.

Effective January 1, 2019, as permitted by ASU
2017-12,
Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities
, the Company reclassified the prepayable
held-to-maturity
investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to
available-for-sale
investment securities.
As of September 30, 2018 and December 31, 2017,2018, we had $199.3$192.8 million and $224.8 million of
held-to-maturity securities, respectively.
securities. Of the $199.3$192.8 million of
held-to-maturity
securities as of September 30,December 31, 2018, $3.6$3.3 million were invested in U.S. Government-sponsored enterprises, $60.4$57.3 million were invested in mortgage-backed securities and $135.3$132.2 million were invested in state and political subdivisions. Of the $224.8 million

Table ofheld-to-maturity securities as of December 31, 2017, $5.8 million were invested in U.S. Government-sponsored enterprises, $73.6 million were invested in mortgage-backed securities and $145.4 million were invested in state and political subdivisions.

Contents

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 $1.74$2.05 billion and $1.66$1.79 billion as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.

As of SeptemberJune 30, 2018, $981.9 million,2019, $1.17 billion, or 56.3%56.9%, of our
available-for-sale
securities were invested in mortgage-backed securities, compared to $971.4 million,$1.03 billion, or 58.4%57.6%, of our
available-for-sale
securities as of December 31, 2017.2018. To reduce our income tax burden, $306.2$437.7 million, or 17.6%21.3%, of our
available-for-sale
securities portfolio as of SeptemberJune 30, 2018,2019, was primarily invested in
tax-exempt
obligations of state and political subdivisions, compared to $250.3$308.6 million, or 15.0%17.3%, of our
available-for-sale
securities as of December 31, 2017. Also, we2018. We had approximately $419.9$414.5 million, or 24.1%20.2%, invested in obligations of U.S. Government-sponsored enterprises as of SeptemberJune 30, 2018,2019, compared to $406.3$414.1 million, or 24.4%23.2%, of our
available-for-sale
securities as of December 31, 2017.

2018. Also, we had approximately $33.7 million, or 1.6%, invested in other securities as of June 30, 2019, compared to $34.3 million, or 1.9% of our

available-for-sale
securities as of December 31, 2018.
Certain investment securities are valued at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, we believe the declines in fair value for these securities are temporary. It is our intent to hold these securities to recovery. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, and the resulting loss recognized in net income in the period the other than temporary impairment is identified.

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

Deposits

Our deposits averaged $10.58 billion and $10.48$11.17 billion for the three and nine-month periodsthree-month period ended SeptemberJune 30, 2018.2019. Total deposits were $10.62$11.35 billion as of SeptemberJune 30, 2018,2019, and $10.39$10.90 billion as of December 31, 2017.2018. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions.

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

Table 15 reflects the classification of the brokered deposits as of SeptemberJune 30, 20182019 and December 31, 2017.

2018.

Table 15: Brokered Deposits

   September 30,
2018		   December 31,
2017		 
   (In thousands) 

Time Deposits

  $84,943   $60,022 

CDARS

   109    53,588 

Insured Cash Sweep and Other Transaction Accounts

   506,540    915,060 
  

 

 

   

 

 

 

Total Brokered Deposits

  $591,592   $1,028,670 
  

 

 

   

 

 

 

The Economic Growth, Regulatory Relief and Consumer Protection Act enacted in May 2018, provides that most reciprocal deposits are no longer treated as brokered deposits. As a result of this new law, our brokered deposits as of September 30, 2018 were approximately $421.3 million lower than they would otherwise have been.

         
 
June 30, 2019
  
December 31, 2018
 
 
(In thousands)
 
Time Deposits
 $
122,165
  $
125,610
 
CDARS
  
109
   
109
 
Insured Cash Sweep and Other Transaction Accounts
  
519,593
   
534,508
 
         
Total Brokered Deposits
 $
641,867
  $
660,228
 
         
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 of Contents
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 Funds target rate which is the cost to banks of immediately available overnight funds, has increased 75 basis points since December 31, 2017, and is currently at 2.00%2.25% to 2.25%2.50%.

Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits, for the three and nine-month
six-month
periods ended SeptemberJune 30, 20182019 and 2017.

2018.

Table 16: Average Deposit Balances and Rates

   Three Months Ended September 30, 
   2018  2017 
   Average
Amount		   Average
Rate Paid		  Average
Amount		   Average
Rate Paid		 
   (Dollars in thousands) 

Non-interest-bearing transaction accounts

  $2,512,690    —%  $1,924,933    —% 

Interest-bearing transaction accounts

   5,758,161    1.05   3,973,270    0.56 

Savings deposits

   648,550    0.19   539,515    0.10 

Time deposits:

       

$100,000 or more

   1,183,503    1.63   989,697    0.89 

Other time deposits

   477,626    0.80   454,965    0.48 
  

 

 

    

 

 

   

Total

  $10,580,530    0.80%  $7,882,380    0.43% 
  

 

 

    

 

 

   

   Nine Months Ended September 30, 
   2018  2017 
   Average
Amount		   Average
Rate
Paid		  Average
Amount		   Average
Rate
Paid		 
   (Dollars in thousands) 

Non-interest-bearing transaction accounts

  $2,464,032    —%  $1,847,843    —% 

Interest-bearing transaction accounts

   5,767,190    0.91   3,792,388    0.46 

Savings deposits

   655,299    0.19   523,644    0.09 

Time deposits:

       

$100,000 or more

   1,101,628    1.40   949,493    0.82 

Other time deposits

   494,357    0.69   465,890    0.44 
  

 

 

    

 

 

   

Total

  $10,482,506    0.69%  $7,579,258    0.37% 
  

 

 

    

 

 

   

                 
 
Three Months Ended June 30,
 
 
2019
  
2018
 
 
Average
Amount
  
Average
Rate Paid
  
Average
Amount
  
Average
Rate Paid
 
 
(Dollars in thousands)
 
Non-interest-bearing
transaction accounts
 $
2,553 060
   
—  
% $
2,496,701
   
—  
%
Interest-bearing transaction accounts
  
6,045,890
   
1.34
   
5,793,026
   
0.91
 
Savings deposits
  
631,793
   
0.27
   
658,178
   
0.20
 
Time deposits:
            
$100,000 or more
  
1,473,372
   
2.08
   
1,116,669
   
1.38
 
Other time deposits
  
469,948
   
1.24
   
494,684
   
0.68
 
                 
Total
 $
11,174,063
   
1.07
% $
10,559,258
   
0.69
%
                 
    
 
Six Months Ended June 30,
 
 
2019
  
2018
 
 
Average
Amount
  
Average
Rate Paid
  
Average
Amount
  
Average
Rate Paid
 
 
(Dollars in thousands)
 
Non-interest-bearing
transaction accounts
 $
2,496,604
   
—  
% $
2,439,299
   
—  
%
Interest-bearing transaction accounts
  
6,008,963
   
1.32
   
5,771,779
   
0.84
 
Savings deposits
  
628,549
   
0.26
   
658,730
   
0.19
 
Time deposits:
            
$100,000 or more
  
1,454,874
   
2.06
   
1,060,012
   
1.27
 
Other time deposits
  
468,583
   
1.16
   
502,861
   
0.63
 
                 
Total
 $
11,057,573
   
1.05
% $
10,432,681
   
0.64
%
                 

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 $5.6$1.1 million, or 3.8%0.8%, from $147.8$143.7 million as of December 31, 20172018 to $142.1$142.5 million as of SeptemberJune 30, 2018.

2019.

FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $1.36 billion$899.4 million and $1.30$1.47 billion at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. At SeptemberThe Company had no other borrowed funds as of June 30, 2018, $750.02019. Other borrowed funds were $2.5 million and $609.9were classified as short-term advances as of December 31, 2018. At June 30, 2019, $225.0 million and $674.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2017, $525.02018, $782.6 million and $774.2$689.8 million of the outstanding balance were issued as short-term and long-term advances, respectively. The FHLB advances mature from the current year to 2033 with fixed interest rates ranging from 1.00%1.20% to 4.80%2.85% and are secured by loans and investments securities. Maturities of borrowings as of SeptemberJune 30, 20182019 include: 2018 – $770.0 million; 2019 – $143.0$353.0 million; 2020 – $146.4 million; 2021 – zero; 2022 – zero; 2023 – zero; after 2023 – $300.4$400.0 million. Expected maturities willcould differ from contractual maturities because FHLB may have the right to call or HBI the right to prepay certain obligations. $300 million

Table of the borrowings maturing after 2023 are callable by the FHLB within one year.

Contents

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $368.6$369.2 million and $368.8 million as of SeptemberJune 30, 2019 and December 31, 2018, and $367.8 million as of September 30, 2017.

respectively.

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

During 2017, we acquired $12.5 million in trust preferred securities with a fair value of $9.8 million from the Stonegate acquisition. The difference between the fair value purchased of $9.8 million and the $12.5 million face amount will be amortized into interest expense over the remaining life of the debentures. The associated subordinated debentures are redeemable, in whole or in part, prior to maturity at our option on a quarterly basis when interest is due and payable and in whole at any time within 90 days following the occurrence and continuation of certain changes in the tax treatment or capital treatment of the debentures.

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 were issued at 99.997% of par, resulting in net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The Notes are unsecured, subordinated debt obligations of the Company and will mature on April 15, 2027. The Notes qualify as Tier 2 capital for regulatory purposes.

Stockholders’ Equity

Stockholders’ equity was $2.34$2.42 billion at SeptemberJune 30, 20182019 compared to $2.20$2.35 billion at December 31, 2017.2018. The increase in stockholders’ equity is primarily associated with the $171.2$101.8 million increase in retained earnings for the first ninesix months of 20182019 combined with the issuance of 1,250,000 shares of common stock with a value of $28.2$28.6 million as part of the acquisition of SPF, as well as 843,500 shares of restricted stock granted under HOMB $2.00. Thisincrease in comprehensive income, which was partially offset by $27.3the $64.4 million of other comprehensive losses and the repurchase of $43.2 million of our common stock.in stock repurchases. The annualized improvement in stockholders’ equity for the first ninesix months of 2018, excluding the $28.2 million of common stock issued for the acquisition of SPF,2019 was 6.6%6.1%. As of SeptemberJune 30, 20182019 and December 31, 2017,2018, our equity to asset ratio was 15.70%15.84% and 15.25%15.36%, respectively. Book value per share was $13.44$14.46 as of SeptemberJune 30, 2018,2019, compared to $12.70$13.76 as of December 31, 2017, an 7.79%2018, a 10.3% annualized increase.

Common Stock Cash Dividends.
We declared cash dividends on our common stock of $0.12$0.13 per share and $0.11 per share for the three-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. The common stock dividend payout ratio for the three months ended SeptemberJune 30, 2019 and 2018 was 30.2% and 2017 was 26.1% and 106.03%25.1%, respectively. The common stock dividend payout ratio for the ninesix months ended SeptemberJune 30, 2019 and 2018 was 29.4% and 2017 was 25.8% and 36.93%25.6%, respectively. For the fourththird quarter of 2018,2019, the Board of Directors declared a regular $0.12$0.13 per share quarterly cash dividend payable December 5, 2018,September 4, 2019, to shareholders of record NovemberAugust 14, 2018.

2019.

Stock Repurchase Program.
On February 21, 2018,January 18, 2019, the Company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of its common stock under the previously approved stock repurchase program, which brought the totalremaining amount of authorized shares to repurchase to approximately 14,752,0009,919,447 shares. During the first ninesix months of 2018,2019, the Company utilized a portion of this stock repurchase program. We repurchased a total of 1,214,0803,416,722 shares with a weighted-average stock price of $23.18$18.81 per share during the third quarterfirst six months of 2018.2019. Shares repurchased under the program as of SeptemberJune 30, 20182019 total 6,388,26413,249,275 shares. The remaining balance available for repurchase was 8,363,7366,502,725 shares at SeptemberJune 30, 2018.

2019.


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Liquidity and Capital Adequacy Requirements

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

In July 2013, the Federal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank Act (“Basel III”). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary on January 1, 2015. The capital conservation buffer requirement began being phased in beginning January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019 when the
phase-in
period ended, and the full capital conservation buffer requirement became effective.
Basel III amended the prompt corrective action rules to incorporate a “common equity Tier 1 capital” requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an 8% “total risk-based capital” ratio.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of SeptemberJune 30, 20182019 and December 31, 2017,2018, we met all regulatory capital adequacy requirements to which we were subject.

On April 3, 2017 the Company completed an underwritten public offering


Table of $300 million in aggregate principal amount of its 5.625%Fixed-to-Floating Rate Subordinated Notes due 2027 (the “Notes”). The Notes were issued at 99.997% of par, resulting in net proceeds, after underwriting discounts, of approximately $297.2 million. The Notes are unsecured, subordinated debt obligations of the Company and will mature on April 15, 2027. The Notes qualify as Tier 2 capital for regulatory purposes.

Contents

Table 17 presents our risk-based capital ratios on a consolidated basis as of SeptemberJune 30, 20182019 and December 31, 2017.

2018.

Table 17: Risk-Based Capital

   As of
September 30,
2018		  As of
December 31,
2017		 
   (Dollars in thousands) 

Tier 1 capital

   

Stockholders’ equity

  $2,341,026  $2,204,291 

Goodwill and core deposit intangibles, net

   (1,002,434)   (966,890) 

Unrealized (gain) loss onavailable-for-sale securities

   30,721   3,421 

Deferred tax assets

   —     —   
  

 

 

  

 

 

 

Total common equity Tier 1 capital

   1,369,313   1,240,822 

Qualifying trust preferred securities

   70,805   70,698 
  

 

 

  

 

 

 

Total Tier 1 capital

   1,440,118   1,311,520 
  

 

 

  

 

 

 

Tier 2 capital

   

Qualifying subordinated notes

   297,791   297,332 

Qualifying allowance for loan losses

   110,191   110,266 
  

 

 

  

 

 

 

Total Tier 2 capital

   407,982   407,598 
  

 

 

  

 

 

 

Total risk-based capital

  $1,848,100  $1,719,118 
  

 

 

  

 

 

 

Average total assets for leverage ratio

  $13,878,497  $13,147,046 
  

 

 

  

 

 

 

Risk weighted assets

  $11,752,120  $11,424,963 
  

 

 

  

 

 

 

Ratios at end of period

   

Common equity Tier 1 capital

   11.65%   10.86% 

Leverage ratio

   10.38   9.98 

Tier 1 risk-based capital

   12.25   11.48 

Total risk-based capital

   15.73   15.05 

Minimum guidelines – Basel IIIphase-in schedule

   

Common equity Tier 1 capital

   6.38%   5.75% 

Leverage ratio

   4.00   4.00 

Tier 1 risk-based capital

   7.88   7.25 

Total risk-based capital

   9.88   9.25 

Minimum guidelines – Basel III fullyphased-in

   

Common equity Tier 1 capital

   7.00%   7.00% 

Leverage ratio

   4.00   4.00 

Tier 1 risk-based capital

   8.50   8.50 

Total risk-based capital

   10.50   10.50 

Well-capitalized guidelines

   

Common equity Tier 1 capital

   6.50%   6.50% 

Leverage ratio

   5.00   5.00 

Tier 1 risk-based capital

   8.00   8.00 

Total risk-based capital

   10.00   10.00 

         
 
As of
June 30,
2019
  
As of
December 31,
2018
 
 
(Dollars in thousands)
 
Tier 1 capital
      
Stockholders’ equity
 $
2,421,406
  $
2,349,886
 
Goodwill and core deposit intangibles, net
  
(997,706
)  
(1,000,842
)
Unrealized (gain) loss on
available-for-sale
securities
  
(14,768
)  
13,815
 
Deferred tax assets
  
—  
   
—  
 
         
Total common equity Tier 1 capital
  
1,408,932
   
1,362,859
 
Qualifying trust preferred securities
  
70,912
   
70,841
 
         
Total Tier 1 capital
  
1,479,844
   
1,433,700
 
         
Tier 2 capital
      
Qualifying subordinated notes
  
298,258
   
297,949
 
Qualifying allowance for loan losses
  
106,066
   
108,791
 
         
Total Tier 2 capital
  
404,324
   
406,740
 
         
Total risk-based capital
 $
1,884,168
  $
1,840,440
 
         
Average total assets for leverage ratio
 $
14,100,894
  $
13,838,137
 
         
Risk weighted assets
 $
12,177,760
  $
12,022,576
 
         
Ratios at end of period
      
Common equity Tier 1 capital
  
11.57
%  
11.34
%
Leverage ratio
  
10.49
   
10.36
 
Tier 1 risk-based capital
  
12.15
   
11.93
 
Total risk-based capital
  
15.47
   
15.31
 
Minimum guidelines – Basel III
phase-in
schedule
      
Common equity Tier 1 capital
  
7.00
%  
6.375
%
Leverage ratio
  
4.00
   
4.00
 
Tier 1 risk-based capital
  
8.50
   
7.875
 
Total risk-based capital
  
10.50
   
9.875
 
Minimum guidelines – Basel III fully
phased-in
      
Common equity Tier 1 capital
  
7.00
%  
7.00
%
Leverage ratio
  
4.00
   
4.00
 
Tier 1 risk-based capital
  
8.50
   
8.50
 
Total risk-based capital
  
10.50
   
10.50
 
Well-capitalized guidelines
      
Common equity Tier 1 capital
  
6.50
%  
6.50
%
Leverage ratio
  
5.00
   
5.00
 
Tier 1 risk-based capital
  
8.00
   
8.00
 
Total risk-based capital
  
10.00
   
10.00
 
As of the most recent notification from regulatory agencies, our bank subsidiary was “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”,“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 of Contents
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 generally accepted accounting principles (GAAP),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 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, return on average tangible equity excluding intangible amortization, tangible equity to tangible assets and the efficiency ratio, as adjusted. The items used in these calculations are included in financial results presented in accordance with generally accepted accounting principles (“GAAP”).

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 mergerhurricane expenses and/orand certain gainsother
non-interest
income and losses.expenses. Management believes the exclusion of these items in expressing earnings provides a meaningful foundation for
period-to-period
and
company-to-company
comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These
non-GAAP
financial measures are also used by management to assess the performance of our business, because management does not consider these items to be relevant to ongoing financial performance.

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

Table 18: Earnings, As Adjusted

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2018   2017   2018   2017 
   (Dollars in thousands) 

GAAP net income available to common shareholders (A)

  $80,284   $14,821   $229,373   $111,774 

Adjustments:

        

Gain on acquisitions

   —      —      —      (3,807) 

Merger expenses

   —      18,227    —      25,743 

Hurricane expenses(2)

   —      33,445    —      33,445 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

   —      51,672    —      55,381 

Tax-effect of adjustments(1)

   —      20,045    —      22,626 
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjustmentsafter-tax (B)

   —      31,627    —      32,755 
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings, as adjusted (C)

  $80,284   $46,448   $229,373   $144,529 
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding (D)

   174,867    144,987    174,394    143,839 

GAAP diluted earnings per share: A/D

  $0.46   $0.10   $1.32   $0.78 

Adjustmentsafter-tax B/D

   —      0.22    —      0.22 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share, as adjusted: C/D

  $0.46   $0.32   $1.32   $1.00 
  

 

 

   

 

 

   

 

 

   

 

 

 

                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
 
GAAP net income available to common shareholders (A)
 $
72,164
  $
76,025
  $
143,514
  $
149,089
 
Adjustments:
            
Special dividend from equity investment
  
—  
   
—  
   
(2,134
)  
—  
 
Hurricane expenses
  
—  
   
—  
   
897
   
—  
 
Outsourced special project expense
  
—  
   
—  
   
900
   
—  
 
                 
Total adjustments
  
—  
   
—  
   
(337
)  
—  
 
Tax-effect
of adjustments
(1)
  
—  
   
���  
   
(88
)  
—  
 
                 
Adjustments
after-tax
(B)
  
—  
   
—  
   
(249
)  
—  
 
                 
Earnings, as adjusted (C)
  
72,164
  $
76,025
  $
143,265
  $
149,089
 
                 
Average diluted shares outstanding (D)
  
167,791
   
173,936
   
168,686
   
174,168
 
                 
GAAP diluted earnings per share: A/D
 $
0.43
  $
0.44
  $
0.85
  $
0.86
 
Adjustments
after-tax
B/D
  
—  
   
—  
   
—  
   
—  
 
                 
Diluted earnings per common share, as adjusted: C/D
 $
0.43
  $
0.44
  $
0.85
  $
0.86
 
                 
(1)

Effective tax rate of 39.225%, adjusted fornon-taxable gain on acquisition andnon-deductible merger-related costs26.135% for the quarterthree and

six-month
periods ended SeptemberJune 30, 2017.

2019.
(2)

Hurricane expenses includes $32,889 of provision for loan losses and $556 of damage expense related to Hurricane Irma.


Table of Contents
We had $998.1 million, $1.00 billion, $977.3 million, and $980.1 million$1.00 billion total goodwill, core deposit intangibles and other intangible assets as of SeptemberJune 30, 2018,2019, December 31, 20172018 and SeptemberJune 30, 2017,2018, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets, as adjusted, return on average tangible equity excluding intangible amortization, return on average tangible equity, as adjusted and tangible equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculation of diluted earningsbook value per share, tangible book value, return on average assets, return on average equity, and equity to assets, are presented in Tables 19 through 22, respectively.

Table 19: Tangible Book Value Per Share

   As of
September 30, 2018		   As of
December 31, 2017		 
   (In thousands, except per share data) 

Book value per share: A/B

  $13.44   $12.70 

Tangible book value per share:(A-C-D)/B

   7.68    7.07 

(A) Total equity

  $2,341,026   $2,204,291 

(B) Shares outstanding

   174,135    173,633 

(C) Goodwill

  $958,408   $927,949 

(D) Core deposit and other intangibles

   44,484    49,351 

         
 
As of
June 30, 2019
  
As of
December 31, 2018
 
 
(In thousands, except per share data)
 
Book value per share: A/B
 $
14.46
  $
13.76
 
Tangible book value per share:
(A-C-D)/B
  
8.50
   
7.90
 
         
(A) Total equity
 $
2,421,406
  $
2,349,886
 
(B) Shares outstanding
  
167,466
   
170,720
 
(C) Goodwill
 $
958,408
  $
958,408
 
(D) Core deposit and other intangibles
  
39,723
   
42,896
 
Table 20: Return on Average Assets

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
   2018  2017  2018  2017 
   (Dollars in thousands) 

Return on average assets: A/I

   2.14%   0.54%   2.12%   1.41% 

Return on average assets excluding tax effect of TCJA (A-H)/I

   1.78   0.54   1.77   1.41 

Return on average assets excluding intangible amortization: (A+C)/(I-J)

   2.33   0.59   2.31   1.49 

Return on average assets excluding gain on acquisitions, merger expenses and hurricane expenses: (A+F)/I

   2.14   1.70   2.12   1.82 

Return on average assets excluding intangible amortization, provision for loan losses, gain on acquisitions, merger expenses, hurricane expenses and income taxes (ROA, as adjusted): (A+B+D+E+G)/(I-J)

   3.07   2.94   3.09   3.14 

(A) Net income

  $80,284  $14,821  $229,373  $111,774 

(B) Intangible amortization

   1,617   906   4,867   2,576 

(C) Intangible amortization after-tax

   1,194   551   3,595   1,566 

(D) Provision for loan losses excluding hurricane provision

  $—    $2,134  $4,322  $6,435 

(E) Total adjustments

   —     51,672   —     55,381 

(F) Adjustments after-tax

   —     31,627   —     32,755 

(G) Income tax expense excluding effect of tax rate change

   25,350   7,536   73,630   63,192 

(H) Tax effect of TCJA

   13,395   —     37,952   —   

(I) Average assets

   14,880,931   10,853,559   14,475,630   10,617,917 

(J) Average goodwill, core deposits & other intangible assets

   1,001,843   462,799   984,639   440,465 

                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
 
Return on average assets: A/D
  
1.92
%  
2.13
%  
1.92
%  
2.11
%
Return on average assets excluding intangible amortization:
B/(D-E)
  
2.09
   
2.32
   
2.09
   
2.30
 
Return on average assets excluding special dividend from equity investment, merger expenses, hurricane expenses & outsourced special project expense: (ROA, as adjusted): (A+C)/D
  
1.92
   
2.13
   
1.91
   
2.11
 
                 
(A) Net income
 $
72,164
  $
76,025
  $
143,514
  $
149,089
 
Intangible amortization
after-tax
  
1,172
   
1,200
   
2,344
   
2,401
 
                 
(B) Earnings excluding intangible amortization
 $
73,336
  $
77,225
  $
145,858
  $
151,490
 
                 
(C) Adjustments
after-tax
 $
—  
  $
—  
  $
(249
) $
—  
 
(D) Average assets
  
15,098,600
   
14,304,483
   
15,089,189
   
14,269,620
 
(E) Average goodwill, core deposits and other intangible assets
  
998,898
   
975,345
   
999,692
   
975,895
 


Table of Contents
Table 21: Return on Average Tangible Equity Excluding Intangible Amortization

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
   2018  2017  2018  2017 
   (Dollars in thousands) 

Return on average equity: A/E

   13.74%   3.88%   13.56%   10.33% 

Return on average equity excluding tax effect ofTCJA (A-C)/E

   11.45   —     11.32   —   

Return on average tangible equity excluding intangible amortization:B/(E-F)

   24.56   5.80   24.39   15.06 

Return on average equity excluding gain on acquisitions, merger expenses and hurricane expenses: (A+D)/E

   13.74   12.17   13.56   13.36 

(A) Net income

  $80,284  $14,821  $229,373  $111,774 

(B) Earnings excluding intangible amortization

   81,478   15,372   232,968   113,340 

(C) Tax effect of TCJA

   13,395   —     37,952   —   

(D) Adjustments after tax

   —     31,627   —     32,755 

(E) Average equity

   2,317,930   1,513,829   2,261,594   1,446,740 

(F) Average goodwill, core deposits and other intangible assets

   1,001,843   462,799   984,639   440,465 

                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
 
Return on average equity: A/D
  
12.18
%  
13.54
%  
12.26
%  
13.46
%
Return on average common equity excluding special dividend from equity investment, merger expenses, hurricane expenses & outsourced special project expense: (ROE, as adjusted) ((A+C)/D)
  
12.18
   
13.54
   
12.24
   
13.46
 
Return on average tangible common equity:
(A/(D-E))
  
21.01
   
23.90
   
21.26
   
23.92
 
Return on average tangible equity excluding intangible amortization:
B/(D-E)
  
21.35
   
24.27
   
21.61
   
24.30
 
Return on average tangible common equity excluding special dividend from equity investment, hurricane expenses & outsourced special project expense: (ROTCE, as adjusted)
((A+C)/(D-E))
  
21.01
   
23.90
   
21.23
   
23.92
 
                 
(A) Net income
 $
72,164
  $
76,025
  $
143,514
  $
149,089
 
(B) Earnings excluding intangible amortization
  
73,336
   
77,225
   
145,858
   
151,490
 
(C) Adjustments
after-tax
  
—  
   
—  
   
(249
)  
—  
 
(D) Average equity
  
2,376,718
   
2,251,412
   
2,360,776
   
2,232,959
 
(E) Average goodwill, core deposits and other intangible assets
  
998,898
   
975,345
   
999,692
   
975,895
 
Table 22: Tangible Equity to Tangible Assets

   As of
September 30,
2018		  As of
December 31,
2017		 
   (Dollars in thousands) 

Equity to assets: B/A

   15.70%   15.25% 

Tangible equity to tangible assets:(B-C-D)/(A-C-D)

   9.62   9.11 

(A) Total assets

  $14,912,738  $14,449,760 

(B) Total equity

   2,341,026   2,204,291 

(C) Goodwill

   958,408   927,949 

(D) Core deposit and other intangibles

   44,484   49,351 

         
 
As of
June 30,
2019
  
As of
December 31,
2018
 
 
(Dollars in thousands)
 
Equity to assets: B/A
  
15.84
%  
15.36
%
Tangible equity to tangible assets:
(B-C-D)/(A-C
-D)
  
9.96
   
9.43
 
         
(A) Total assets
 $
15,287,575
  $
15,302,438
 
(B) Total equity
  
2,421,406
   
2,349,886
 
(C) Goodwill
  
958,408
   
958,408
 
(D) Core deposit and other intangibles
  
39,723
   
42,896
 

Table of Contents
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, losses and losses.other
non-interest
income and expenses. In Table 23 below, we have provided a reconciliation of the
non-GAAP
calculation of the financial measure for the periods indicated.

Table 23: Efficiency Ratio, As Adjusted

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
   2018  2017  2018  2017 
   (Dollars in thousands) 

Net interest income (A)

  $145,910  $106,769  $420,731  $318,936 

Non-interest income (B)

   25,847   21,457   79,325   72,344 

Non-interest expense (C)

   66,123   70,846   192,731   176,990 

FTE Adjustment (D)

   1,489   1,846   4,101   5,873 

Amortization of intangibles (E)

   1,617   906   4,867   2,576 

Non-fundamental items:

     

Non-interest income:

     

Gain on acquisitions

  $—    $—    $—    $3,807 

Gain (loss) on OREO, net

   836   335   2,287   849 

Gain on sale of SBA loans

   47   163   491   738 

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

   (102)   (1,337)   (95)   (962) 

Gain (loss) on securities, net

   —     136   —     939 
  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-fundamentalnon-interest income (F)

  $781  $ (703)  $2,683  $5,371 
  

 

 

  

 

 

  

 

 

  

 

 

 

Non-interest expense:

     

Merger expenses

  $—    $18,227  $—    $25,743 

Hurricane damage expense

   —     556   —     556 

Other expense (1)

   —     —     —     47 
  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-fundamentalnon-interest expense (G)

   —    $18,783   —    $26,346 
  

 

 

  

 

 

  

 

 

  

 

 

 

Efficiency ratio (reported):((C-E)/(A+B+D))

   37.23%   53.77%   37.26%   43.92% 

Efficiency ratio, as adjusted(non-GAAP):((C-E-G)/(A+B+D-F))

   37.40   39.12   37.46   37.79 

(1)

Amount includes vacant properties write-downs.

                 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
 
Net interest income (A)
 $
140,987
  $
138,612
  $
280,457
  $
274,821
 
Non-interest
income (B)
  
23,066
   
27,673
   
46,738
   
53,478
 
Non-interest
expense (C)
  
67,624
   
63,228
   
136,681
   
126,608
 
FTE Adjustment (D)
  
1,319
   
1,403
   
2,686
   
2,612
 
Amortization of intangibles (E)
  
1,587
   
1,624
   
3,173
   
3,250
 
                 
Adjustments:
            
Non-interest
income:
            
Special dividend from equity investments
 $
—  
  $
—  
  $
2,134
  $
—  
 
Gain (loss) on OREO, net
  
58
   
1,046
   
264
   
1,451
 
Gain (loss) on sale of branches, equipment and other assets, net
  
(129
)  
—  
   
(50
)  
7
 
                 
Total
non-interest
income adjustments (F)
 $
(71
) $
1,046
  $
2,348
  $
1,458
 
                 
Non-interest
expense:
            
Hurricane expenses
 $
—  
  $
—  
  $
897
  $
—  
 
Outsourced special project expense
  
—  
   
—  
   
900
   
—  
 
                 
Total
non-interest
expense adjustments (G)
 $
—  
  $
—  
  $
1,797
  $
—  
 
                 
Efficiency ratio (reported):
((C-E)/(A+B+D))
  
39.93
%  
36.74
%  
40.47
%  
37.28
%
Efficiency ratio, as adjusted
(non-GAAP): 
((C-E-G)/(A+B+D-F))
  
39.92
   
36.97
   
40.21
   
37.44
 
Recently Issued Accounting Pronouncements

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

Item 3:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Liquidity and Market Risk Management

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


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

Liquidity needs can be met from either assets or liabilities. On the asset side, our primary sources of liquidity include cash and due from banks, federal funds sold,

available-for-sale
investment securities and scheduled repayments and maturities of loans. We maintain adequate levels of cash and cash equivalents to meet our
day-to-day
needs. As of SeptemberJune 30, 2018,2019, our cash and cash equivalents were $532.1$557.3 million, or 3.6% of total assets, compared to $635.9$657.9 million, or 4.4%4.3% of total assets, as of December 31, 2017.2018. Our
available-for-sale
investment securities and federal funds sold were $1.74$2.05 billion and $1.69$1.79 billion as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.

As of SeptemberJune 30, 2018,2019, our investment portfolio was comprised of approximately 67.7%73.3% or $1.32$1.51 billion of securities which mature in less than five years. As of SeptemberJune 30, 20182019 and December 31, 2017, $1.17 billion2018, $970.1 million and $1.18$1.32 billion, respectively, of securities were pledged as collateral for various public fund deposits and securities sold under agreements to repurchase.

The decrease in investments pledged to secure public deposits is due to the Company increasing the usage of FHLB letters of credit in order to secure public deposits. The Company made this strategic decision to improve the

on-balance-sheet
liquidity as well as the liquidity ratio.
On the liability side, our principal sources of liquidity are deposits, borrowed funds, and access to capital markets. Customer deposits are our largest sources of funds. As of SeptemberJune 30, 2018,2019, our total deposits were $10.62$11.35 billion, or 71.2%74.2% of total assets, compared to $10.39$10.90 billion, or 71.9%71.2% of total assets, as of December 31, 2017.2018. We attract our deposits primarily from individuals, business, and municipalities located in our market areas.

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

As of SeptemberJune 30, 20182019 and December 31, 2017,2018, we could have borrowed up to $301.0$301.7 million and $106.4$288.0 million, respectively, on a secured basis from the Federal Reserve, up to $50.0$30.0 million from First National Bankers’ Bank on an unsecured basis, up to $20.0 million from First National Bankers’ Bank on a secured basis and up to $45.0 million in the aggregate from other financial institutions on an unsecured basis. The unsecured lines may be terminated by the respective institutions at any time.

The lines of credit we maintain with the FHLB can provide us with both short-term and long-term forms of liquidity on a secured basis. FHLB borrowed funds were $1.36 billion$899.4 million and $1.30$1.47 billion at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. At SeptemberJune 30, 2018, $750.02019, $225.0 million and $609.9$674.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2017, $525.02018, $782.6 million and $774.2$698.8 million of the outstanding balance were issued as short-term and long-term advances, respectively. Our unused FHLB borrowing availabilitycapacity was $2.55$2.70 billion and $1.96$2.62 billion as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.

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

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

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


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

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

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

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased and decreased over twelve months by 200 and 100 basis points, respectively. At SeptemberJune 30, 2018,2019, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.

Table 24 presents our sensitivity to net interest income as of SeptemberJune 30, 2018.

2019.

Table 24: Sensitivity of Net Interest Income

Interest Rate Scenario

Percentage
Change
from Base

Up 200 basis points

  6.21% 

Interest Rate Scenario
Percentage
Change
from Base
Up 100200 basis points

  3.14
6.63
%

Down

Up 100 basis points

  (5.20
3.69
) 

Down 200100 basis points

  
(10.365.95
)
Down 200 basis points
(11.65
)

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

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

Gap analysis attempts to capture the amounts and timing of balances exposed to changes in interest rates at a given point in time. As of SeptemberJune 30, 2018,2019, our gap position was asset sensitive with a
one-year
cumulative repricing gap as a percentage of total earning assets of 3.7%8.7%.

During this period, the amount of change our asset base realizes in relation to the total change in market interest rates is higher than that of the liability base. As a result, our net interest income will have a positive effect in an environment of modestly rising rates.

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

Table 25 presents a summary of the repricing schedule of our interest-earning assets and interest-bearing liabilities (gap) as of SeptemberJune 30, 2018.

2019.

86
Table of Contents
Table 25: Interest Rate Sensitivity

  Interest Rate Sensitivity Period 
  0-30
Days		  31-90
Days		  91-180
Days		  181-365
Days		  1-2
Years		  2-5
Years		  Over 5
Years		  Total 
  (Dollars in thousands) 

Earning assets

        

Interest-bearing deposits due from banks

 $323,376  $—    $—    $—    $—    $—    $—    $323,376 

Federal funds sold

  500   —     —     —     —     —     —     500 

Investment securities

  298,914   78,759   69,288   112,483   176,612   482,712   724,928   1,943,696 

Loans receivable

  3,262,719   634,382   784,590   1,284,728   1,698,675   2,467,054   700,667   10,832,815 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total earning assets

  3,885,509   713,141   853,878   1,397,211   1,875,287   2,949,766   1,425,595   13,100,387 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Interest-bearing liabilities

        

Interest-bearing transaction and savings deposits

  1,115,690   503,425   755,138   1,510,275   870,066   633,124   1,033,233   6,420,951 

Time deposits

  179,639   153,019   264,598   450,935   557,087   112,564   3,088   1,720,930 

Securities sold under repurchase agreements

  142,146   —     —     —     —     —     —     142,146 

FHLB and other borrowed funds

  401,178   371,099   24   444,329   143,752   3,469   —     1,363,851 

Subordinated debentures

  70,805   —     —     —     —     297,791   —     368,596 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-bearing liabilities

  1,909,458   1,027,543   1,019,760   2,405,539   1,570,905   1,046,948   1,036,321   10,016,474 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Interest rate sensitivity gap

 $1,976,051  $(314,402)  $(165,882)  $(1,008,321)  $304,382  $1,902,818  $389,274  $3,083,913 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cumulative interest rate sensitivity gap

 $1,976,051  $1,661,649  $1,495,767  $487,439  $791,821  $2,694,639  $3,083,913  

Cumulative rate sensitive assets to rate sensitive liabilities

  203.5%   156.6%   137.8%   107.7%   110.0%   130.0%   130.8%  

Cumulative gap as a % of total earning assets

  15.1%   12.7%   11.4%   3.7%   6.0%   20.6%   23.5%  

Item 4:    CONTROLS AND PROCEDURES

                                 
 
Interest Rate Sensitivity Period
 
 
0-30
Days
  
31-90
Days
  
91-180
Days
  
181-365

Days
  
1-2
Years
  
2-5
Years
  
Over 5
Years
  
Total
 
 
(Dollars in thousands)
 
Earning assets
                        
Interest-bearing deposits due from banks
 $
373,557
  $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
373,557
 
Federal funds sold
  
1,075
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
1,075
 
Investment securities
  
361,339
   
97,353
   
96,348
   
193,699
   
286,050
   
515,165
   
503,985
   
2,053,939
 
Loans receivable
  
3,519,779
   
649,026
   
859,919
   
1,358,874
   
1,714,032
   
2,307,751
   
643,748
   
11,053,129
 
                                 
Total earning assets
  
4,255,750
   
746,379
   
956,267
   
1,552,573
   
2,000,082
   
2,822,916
   
1,147,733
   
13,481,700
 
                                 
Interest-bearing liabilities
                        
Interest-bearing transaction and savings deposits
 $
1,209,750
  $
530,940
  $
796,409
  $
1,592,819
  $
907,804
  $
659,732
  $
1,076,709
  $
6,774,163
 
Time deposits
  
193,293
   
178,324
   
669,639
   
580,031
   
256,987
   
119,185
   
—  
   
1,997,459
 
Securities sold under repurchase agreements
  
142,541
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
142,541
 
FHLB and other borrowed funds
  
274,999
   
78,000
   
—  
   
15,000
   
131,447
   
—  
   
400,000
   
899,446
 
Subordinated debentures
  
70,876
   
—  
   
—  
   
—  
   
—  
   
298,294
   
—  
   
369,170
 
                                 
Total interest-bearing liabilities
  
1,891,459
   
787,264
   
1,466,048
   
2,187,850
   
1,296,238
   
1,077,211
   
1,476,709
   
10,182,779
 
                                 
Interest rate sensitivity gap
 $
2,364,291
  $
(40,885
) $
(509,781
) $
(635,277
) $
703,844
  $
1,745,705
  $
(328,976
) $
3,298,921
 
                                 
Cumulative interest rate sensitivity gap
 $
2,364,291
  $
2,323,406
  $
1,813,625
  $
1,178,348
  $
1,882,192
  $
3,627,897
  $
3,298,921
    
Cumulative rate sensitive assets to rate sensitive liabilities
  
225.0
%  
186.7
%  
143.8
%  
118.6
%  
124.7
%  
141.7
%  
132.4
%   
Cumulative gap as a % of total earning assets
  
17.5
%  
17.2
%  
13.5
%  
8.7
%  
14.0
%  
26.9
%  
24.5
%   
Item 4:CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls

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

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended SeptemberJune 30, 2018,2019, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Table of Contents
PART II: OTHER INFORMATION

Item 1:    Legal Proceedings

Item 1:Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or its subsidiaries are a party or of which any of their property is the subject.

Item 1A: Risk Factors

Item 1A:Risk Factors
There were no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Form
10-K
for the year ended December 31, 2017.2018. See the discussion of our risk factors in the Form
10-K,
as filed with the SEC. The risks described are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

In connection with

Item 2:Unregistered Sales of Equity Securities and Use of Proceeds
On January 18, 2019, the Company’s acquisitionBoard of SPF, on June 30, 2018,Directors authorized the Company issued 1,250,000repurchase of up to an additional 5,000,000 shares of HBIits common stock to Union in partial consideration forunder the acquisition. The shares were issued to Union pursuant to Section 4(a)(2) of the Securities Act of 1933.

During the three months ended September 30, 2018, the Company utilized a portion of itspreviously approved stock repurchase program, which was last amended and approved by the Board of Directors on February 21, 2018. This programauthorization brought the total amount of authorized theshares to repurchase of 14,752,000 shares of the Company’s common stock.to 9,919,447 shares. The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:

Period

  Number of
Shares
Purchased		   Average Price
Paid Per Share
Purchased		   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs		   Maximum
Number of
Shares That
May Yet Be
Purchased
Under the Plans
or Programs (1)		 

July 1 through July 31, 2018

   541,700   $23.02    541,700    9,036,116 

August 1 through August 31, 2018

   565,544    23.39    565,544    8,470,572 

September 1 through September 30, 2018

   106,836    22.82    106,836    8,363,736 
  

 

 

   

 

 

   

 

 

   

Total

   1,214,080    23.18    1,214,080   
  

 

 

   

 

 

   

 

 

   

                 
Period
 
Number of
Shares
Purchased
  
Average Price
Paid Per Share
Purchased
  
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the Plans
or Programs
(1)
 
April 1 through April 30, 2019
  
173,684
  $
17.74
   
173,684
   
7,029,404
 
May 1 through May 31, 2019
  
410,000
   
18.27
   
410,000
   
6,619,404
 
June 1 through June 30, 2019
  
116,679
   
17.98
   
116,679
   
6,502,725
 
                 
Total
  
700,363
      
700,373
    
                 
(1)

The above described stock repurchase program has no expiration date.

Item 3:    Defaults Upon Senior Securities

Item 3:Defaults Upon Senior Securities
Not applicable.

Item 4:    Mine Safety Disclosures

Item 4:Mine Safety Disclosures
Not applicable.

Item 5:    Other Information

Item 5:Other Information
Not applicable.


Table of ContentsItem 6:    Exhibits

Item 6:
Exhibits

Exhibit No.

 

Description

Exhibit

No.
Description of Exhibit
 3.1 
  3.1
Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s registration statement onForm S-1 (FileNo. 333-132427), as amended)
 3.2 
  3.2
Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.2 of Home BancShares’s registration statement onForm S-1 (FileNo. 333-132427), as amended)

Exhibit No.

  
  3.3
 
Second Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.3 of Home BancShares’s registration statement onForm S-1 (FileNo. 333-132427), as amended)
 3.4 
  3.4
Third Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.4 of Home BancShares’s registration statement onForm S-1 (FileNo. 333-132427), as amended)
 3.5 
  3.5
Fourth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Quarterly Report on Form10-Q for the quarter ended June 30, 2007, filed on August 8, 2007)
 3.6 
  3.6
Fifth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 4.6 of Home BancShares’s registration statement onForm S-3 (FileNo. 333-157165))
 3.7 
  3.7
Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, filed with the Secretary of State of the State of Arkansas on January 14, 2009 (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form8-K, filed on January 21, 2009)
 3.8 
  3.8
Seventh Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares’s Current Report on Form8-K, filed on April 19, 2013)
 3.9 
  3.9
Eighth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares Current Report on Form8-K filed on April 22, 2016)
 3.10 
  3.10
Ninth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares Current Report on Form 8-K filed on April 23, 2019)
  3.11
Restated Bylaws of Home BancShares, Inc. (incorporated by reference to Exhibit 3.5 of Home BancShares’s registration statement onForm S-1 (FileNo. 333-132427), as amended)
 4.1 
  4.1
Specimen Stock Certificate representing Home BancShares, Inc. Common Stock (incorporated by reference to Exhibit 4.6 of Home BancShares’s registration statement onForm S-1 (FileNo. 333-132427), as amended)
 4.2 
  4.2
Instruments defining the rights of security holders including indentures. Home BancShares hereby agrees to furnish to the SEC upon request copies of instruments defining the rights of holders of long-term debt of Home BancShares and its consolidated subsidiaries. No issuance of debt exceeds ten percent of the assets of Home BancShares and its subsidiaries on a consolidated basis.
 10.1 
10.1
Amended and Restated 2006 Stock Option and Performance Incentive Plan of Home BancShares, Inc. (incorporated by reference to Exhibit 10.1 of Home BancShares’s Current Report on Form8-K filed on March 30, 2012)
 10.2 
10.2
Amendment to Amended and Restated 2006 Stock Option and Performance Incentive Plan of Home BancShares, Inc. (incorporated by reference to Exhibit 10.1 of Home BancShares’s Quarterly Report onForm 10-Q for the period ended June 30, 2015, filed on August 6, 2015)
 10.3 
10.3
Amendment to Amended and Restated 2006 Stock Option and Performance Incentive Plan of Home BancShares, Inc. (incorporated by reference to Exhibit 10.1 of Home BancShares’s Current Report onForm 8-K filed on April 22, 2016)
 10.4 
10.4
Amendment to Amended and Restated 2006 Stock Option and Performance Incentive Plan of Home BancShares, Inc. (incorporated by reference to Exhibit 10.1 of Home BancShares’s Current Report onForm 8-K filed on April 20, 2018)
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Table of Contents
 10.5 
  10.5
Amendment to Amended and Restated 2006 Stock Option and Performance Incentive Plan of Home BancShares, Inc. (incorporated by reference to Exhibit 10.5 of Home BancShares’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2018, filed on May 7, 2018)
 12.1 Computation of Ratios of Earnings to Fixed Charges*
 
15
 
Awareness of Independent Registered Public Accounting Firm*
 31.1 CEO Certification PursuantRule 13a-14(a)/15d-14(a)*
  31.2CFO Certification PursuantRule 13a-14(a)/15d-14(a)*

Exhibit No.

  
  31.1
CEO Certification Pursuant Rule 13a-14(a)/15d-14(a)*
 32.1 
  31.2
CFO Certification Pursuant Rule 13a-14(a)/15d-14(a)*
  32.1
CEO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002*
 32.2 
  32.2
CFO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002*
 99.1 Asset Purchase Agreement by and among Home BancShares, Inc., Centennial Bank, and Union Bank & Trust, dated June  29, 2018 (incorporated by reference to Exhibit 99.3 of Home BancShares’s Current Report onForm 8-K filed on July 6, 2018)
101.INS XBRL Instance Document*
101.SCH
101.INS
 
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*

*

Filed herewith

90
Table of Contents
SIGNATURES

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

HOME BANCSHARES, INC.

(Registrant)

Date:                     November 5, 2018                    August 7, 2019
                  /s/
/s/ C. Randall Sims
C. Randall Sims, Chief Executive Officer
 
  
C. Randall Sims, Chief Executive Officer
Date:                     November 5, 2018                    August 7, 2019
                  /s/
/s/ Brian S. Davis
Brian S. Davis, Chief Financial Officer
 
  
Brian S. Davis, Chief Financial Officer
Date:                     November 5, 2018                    August 7, 2019
  
/s/ Jennifer C. Floyd
                 /s/ Jennifer C. Floyd
  
Jennifer C. Floyd, Chief Accounting Officer

98

91