Edgar Filing: HOME BANCSHARES INC

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Smaller reporting company

Emerging growth company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2018

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

For the Transition period from to

Commission File Number: 000-51904

HOME BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Arkansas		71-0682831
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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: 174,662,674 shares as of August 3, 2018.

HOME BANCSHARES, INC.

FORM 10-Q

June 30, 2018

INDEX


		Page No.
Part I:	Financial Information

Item 1:	Financial Statements

	Consolidated Balance Sheets – June 30, 2018 (Unaudited) and December 31, 2017		4

	Consolidated Statements of Income (Unaudited) – Three and six months ended June 30, 2018 and 2017		5

	Consolidated Statements of Comprehensive Income (Unaudited) – Three and six months ended June 30, 2018 and 2017		6

	Consolidated Statements of Stockholders’ Equity (Unaudited) – Six months ended June 30, 2018 and 2017		6

	Consolidated Statements of Cash Flows (Unaudited) – Six months ended June 30, 2018 and 2017		7

	Condensed Notes to Consolidated Financial Statements (Unaudited)		8-52

	Report of Independent Registered Public Accounting Firm		53

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		54-91

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

Item 4:	Controls and Procedures		94

Part II:	Other Information

Item 1:	Legal Proceedings		94

Item 1A:	Risk Factors		95

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

Item 3:	Defaults Upon Senior Securities		95

Item 4:	Mine Safety Disclosures		95

Item 5:	Other Information		95

Item 6:	Exhibits		96-97

Signatures			98

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•

the effects of future local, regional, national and international economic conditions, including inflation 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 will apply as a result of our exceeding $10 billion in total assets;

•

legislation and regulation affecting the financial services industry as a whole, and the Company and its subsidiaries in particular, 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 the Dodd-Frank Act;

•

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;

•

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 acquisition of Stonegate Bank;

•

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

•

an increase in the incidence or severity of fraud, illegal payments, security breaches or other illegal acts impacting our bank subsidiary 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.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Home BancShares, Inc.

Consolidated Balance Sheets


(In thousands, except share data)	June 30, 2018			December 31, 2017
	(Unaudited)
Assets
Cash and due from banks	$	197,658		$	166,915
Interest-bearing deposits with other banks		298,085			469,018

Cash and cash equivalents		495,743			635,933
Federal funds sold		500			24,109
Investment securities – available-for-sale		1,718,704			1,663,517
Investment securities – held-to-maturity		204,401			224,756
Loans receivable		10,897,970			10,331,188
Allowance for loan losses		(111,516	)		(110,266	)

Loans receivable, net		10,786,454			10,220,922
Bank premises and equipment, net		234,634			237,439
Foreclosed assets held for sale		17,853			18,867
Cash value of life insurance		147,281			146,866
Accrued interest receivable		45,682			45,708
Deferred tax asset, net		78,435			76,564
Goodwill		956,418			927,949
Core deposit and other intangibles		46,101			49,351
Other assets		191,914			177,779

Total assets	$	14,924,120		$	14,449,760


Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing	$	2,523,553		$	2,385,252
Savings and interest-bearing transaction accounts		6,573,902			6,476,819
Time deposits		1,638,578			1,526,431

Total deposits		10,736,033			10,388,502
Securities sold under agreements to repurchase		139,750			147,789
FHLB and other borrowed funds		1,309,950			1,299,188
Accrued interest payable and other liabilities		55,971			41,959
Subordinated debentures		368,403			368,031

Total liabilities		12,610,107			12,245,469

Stockholders’ equity:
Common stock, par value $0.01; shares authorized 200,000,000 in 2018 and 2017; shares issued and outstanding 174,510,874 in 2018 and 173,632,983 in 2017		1,745			1,736
Capital surplus		1,693,337			1,675,318
Retained earnings		642,540			530,658
Accumulated other comprehensive loss		(23,609	)		(3,421	)

Total stockholders’ equity		2,314,013			2,204,291

Total liabilities and stockholders’ equity	$	14,924,120		$	14,449,760

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Income


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2018		2017		2018		2017
	(Unaudited)
Interest income:
Loans	$	152,996	$	112,732	$	301,061	$	218,494
Investment securities
Taxable		8,979		6,434		17,949		11,912
Tax-exempt		3,368		2,966		6,374		5,910
Deposits – other banks		1,206		727		2,135		1,035
Federal funds sold		12		4		18		6

Total interest income		166,561		122,863		327,537		237,357

Interest expense:
Interest on deposits		18,164		6,810		32,970		12,296
Federal funds purchased		—		—		1		—
FHLB and other borrowed funds		4,245		3,710		8,825		7,299
Securities sold under agreements to repurchase		372		196		748		361
Subordinated debentures		5,168		4,795		10,172		5,234

Total interest expense		27,949		15,511		52,716		25,190

Net interest income		138,612		107,352		274,821		212,167
Provision for loan losses		2,722		387		4,322		4,301

Net interest income after provision for loan losses		135,890		106,965		270,499		207,866

Non-interest income:
Service charges on deposit accounts		6,780		5,966		12,855		11,948
Other service charges and fees		9,797		8,576		19,952		17,493
Trust fees		379		309		825		765
Mortgage lending income		3,477		3,750		6,134		6,541
Insurance commissions		526		465		1,205		1,010
Increase in cash value of life insurance		730		463		1,384		773
Dividends from FHLB, FRB, FNBB & other		1,600		472		2,477		1,621
Gain on acquisitions		—		—		—		3,807
Gain on sale of SBA loans		262		387		444		575
Gain (loss) on sale of branches, equipment and other assets, net		—		431		7		375
Gain (loss) on OREO, net		1,046		393		1,451		514
Gain (loss) on securities, net		—		380		—		803
Other income		3,076		2,825		6,744		4,662

Total non-interest income		27,673		24,417		53,478		50,887

Non-interest expense:
Salaries and employee benefits		34,476		28,034		69,490		55,455
Occupancy and equipment		8,519		7,034		17,502		13,715
Data processing expense		3,339		2,863		7,325		5,586
Other operating expenses		16,894		13,072		32,291		31,388

Total non-interest expense		63,228		51,003		126,608		106,144

Income before income taxes		100,335		80,379		197,369		152,609
Income tax expense		24,310		30,282		48,280		55,656

Net income	$	76,025	$	50,097	$	149,089	$	96,953

Basic earnings per share	$	0.44	$	0.35	$	0.86	$	0.68

Diluted earnings per share	$	0.44	$	0.35	$	0.86	$	0.68

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Comprehensive Income


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2018			2017			2018			2017
	(Unaudited)
Net income	$	76,025		$	50,097		$	149,089		$	96,953
Net unrealized gain (loss) on available-for-sale securities		(4,345	)		9,318			(25,978	)		10,746
Less: reclassification adjustment for realized (gains) losses included in income		—			(380	)		—			(803	)

Other comprehensive (loss) income, before tax effect		(4,345	)		8,938			(25,978	)		9,943
Tax effect on other comprehensive income		1,018			(3,506	)		6,780			(3,901	)

Other comprehensive income (loss)		(3,327	)		5,432			(19,198	)		6,042

Comprehensive income	$	72,698		$	55,529		$	129,891		$	102,995

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2018 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		—			—			96,953			—			96,953
Other comprehensive income (loss)		—			—			—			6,042			6,042
Net issuance of 135,108 shares of common stock from exercise of stock options		1			645			—			—			646
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
Repurchase of 420,000 shares of common stock		(4	)		(10,276	)								(10,280	)
Share-based compensation net issuance of 145,500 shares of restricted common stock		2			3,425			—			—			3,427
Cash dividends – Common Stock, $0.1800 per share		—			—			(25,563	)		—			(25,563	)

Balances at June 30, 2017 (unaudited)	$	1,431		$	940,821		$	527,338		$	6,442		$	1,476,032
Comprehensive income:
Net income		—			—			38,130			—			38,130
Other comprehensive income (loss)		—			—			—			(9,863	)		(9,863	)
Net issuance of 50,008 shares of common stock from exercise of stock options		1			435			—			—			436
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 437,800 shares of common stock		(5	)		(10,540	)		—			—			(10,545	)
Share-based compensation net issuance of 86,266 shares of restricted common stock		—			3,278			—			—			3,278
Cash dividends – Common Stock, $0.2200 per share		—			—			(34,810	)		—			(34,810	)

Balances at December 31, 2017	$	1,736		$	1,675,318		$	530,658		$	(3,421	)	$	2,204,291
Comprehensive income:
Net Income		—			—			149,089			—			149,089
Other comprehensive income (loss)		—			—			—			(19,198	)		(19,198	)
Net issuance of 145,540 shares of common stock from exercise of stock options		1			937			—			—			938
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 649,320 shares of common stock		(6	)		(14,989	)		—			—			(14,995	)
Share-based compensation net issuance of 147,000 shares of restricted common stock		1			3,883			—			—			3,884
Cash dividends – Common Stock, $0.2200 per share		—			—			(38,197	)		—			(38,197	)

Balances at June 30, 2018 (unaudited)	$	1,745		$	1,693,337		$	642,540		$	(23,609	)	$	2,314,013

(1)	Represents the impact of adopting Accounting Standard Update (“ASU”) 2016-01. See Note 1 to the consolidated financial statements for more information.

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Cash Flows


	Six Months Ended June 30,
(In thousands)	2018			2017
	(Unaudited)
Operating Activities
Net income	$	149,089		$	96,953
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		6,241			5,636
Amortization/(accretion)		10,403			7,698
Share-based compensation		3,884			3,427
(Gain) loss on assets		(2,268	)		(3,379	)
Gain on acquisitions		—			(3,807	)
Provision for loan losses		4,322			4,301
Deferred income tax effect		13,200			(2,680	)
Increase in cash value of life insurance		(1,384	)		(773	)
Originations of mortgage loans held for sale		(171,616	)		(182,918	)
Proceeds from sales of mortgage loans held for sale		176,029			193,406
Changes in assets and liabilities:
Accrued interest receivable		850			(276	)
Other assets		(22,423	)		(5,733	)
Accrued interest payable and other liabilities		14,012			(28,362	)

Net cash provided by operating activities		180,339			83,493

Investing Activities
Net decrease in federal funds sold		23,609			1,550
Net increase in loans, excluding purchased loans		(204,906	)		(29,021	)
Purchases of investment securities – available-for-sale		(254,851	)		(391,375	)
Proceeds from maturities of investment securities – available-for-sale		166,403			69,847
Proceeds from sale of investment securities – available-for-sale		809			27,134
Purchases of investment securities – held-to-maturity		—			(163	)
Proceeds from maturities of investment securities – held-to-maturity		20,048			29,057
Proceeds from sale of investment securities – held-to-maturity		—			491
Proceeds from foreclosed assets held for sale		10,384			9,671
Proceeds from sale of SBA Loans		7,055			10,393
Purchases of premises and equipment, net		(3,422	)		(2,425	)
Return of investment on cash value of life insurance		1,325			592
Net cash (paid) proceeds received – market acquisitions		(384,983	)		41,363

Net cash used in investing activities		(618,529	)		(232,886	)

Financing Activities
Net increase in deposits, excluding deposits acquired		347,531			381,206
Net (decrease) increase in securities sold under agreements to repurchase		(8,039	)		12,451
Net increase (decrease) in FHLB and other borrowed funds		10,762			(262,234	)
Proceeds from exercise of stock options		938			646
Proceeds from issuance of subordinated notes		—			297,201
Repurchase of common stock		(14,995	)		(10,280	)
Common stock issuance costs – market acquisitions		—			(195	)
Tax benefits from stock options exercised		—			—
Dividends paid on common stock		(38,197	)		(25,563	)

Net cash provided by used in financing activities		298,000			393,232

Net change in cash and cash equivalents		(140,190	)		243,839
Cash and cash equivalents – beginning of year		635,933			216,649

Cash and cash equivalents – end of period	$	495,743		$	460,488

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

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

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

Operating Segments

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

Use of Estimates

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

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for 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 June 30, 2018 and 2017 have been prepared in condensed format, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2017 Form 10-K, filed with the Securities and Exchange Commission.

Revenue Recognition.

Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance

obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our income statements as components of non-interest income are as follows:

•

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

•

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 June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(In thousands)
Net income	$	76,025	$	50,097	$	149,089	$	96,953
Average shares outstanding		173,403		143,282		173,581		142,538
Effect of common stock options		533		834		587		732

Average diluted shares outstanding		173,936		144,116		174,168		143,270

Basic earnings per share	$	0.44	$	0.35	$	0.86	$	0.68
Diluted earnings per share	$	0.44	$	0.35	$	0.86	$	0.68

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 $375.0 million in cash, subject to certain post-closing adjustments, and 1,250,000 shares of HBI common stock valued at approximately $28.2 million. SPF currently provides direct consumer financing to 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 effects of known purchase accounting adjustments, as of acquisition date, SPF had approximately $374.7 million in total assets, including $373.9 million in total loans which resulted in tentative goodwill of $28.5 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 will now be housed in a division of Centennial known as Shore Premier Finance. The SPF division of Centennial will be 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. 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 and non-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 Topic 310-20, Nonrefundable Fees 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 loans within the provisions of FASB ASC Topic 310-30, 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.

Bank 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 unaudited pro-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
Total non-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 unaudited pro-forma consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented and had the impact of possible significant revenue enhancements and expense efficiencies from in-market cost savings, among other factors, been considered and, accordingly, does not attempt to predict or suggest future results. 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 and non-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.

The Company evaluated $106.8 million of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic 310-20, 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 Topic 310-30, 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.

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 no pro-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 and non-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.

The Company evaluated $315.6 million of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic 310-20, 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 Topic 310-30, 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.

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 as available-for-sale and held-to-maturity are as follows:


	June 30, 2018
	Available-for-Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	403,496	$	235	$	(5,792	)	$	397,939
Residential mortgage-backed securities		509,610		404		(13,274	)		496,740
Commercial mortgage-backed securities		489,706		47		(14,000	)		475,753
State and political subdivisions		308,956		2,361		(2,827	)		308,490
Other securities		38,055		2,047		(320	)		39,782

Total	$	1,749,823	$	5,094	$	(36,213	)	$	1,718,704


	Held-to-Maturity
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	3,790	$	—	$	(44	)	$	3,746
Residential mortgage-backed securities		50,886		21		(1,207	)		49,700
Commercial mortgage-backed securities		13,239		18		(309	)		12,948
State and political subdivisions		136,486		1,803		(139	)		138,150

Total	$	204,401	$	1,842	$	(1,699	)	$	204,544


	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 $1.14 and $1.18 billion at June 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 $139.8 and $147.8 million at June 30, 2018 and December 31, 2017, respectively.

The amortized cost and estimated fair value of securities classified as available-for-sale and held-to-maturity at June 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		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(In thousands)
Due in one year or less	$	243,377	$	240,962	$	69,491	$	70,423
Due after one year through five years		947,593		930,579		89,707		89,298
Due after five years through ten years		425,364		416,479		11,975		11,762
Due after ten years		133,489		130,684		33,228		33,061

Total	$	1,749,823	$	1,718,704	$	204,401	$	204,544

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 June 30, 2018, there were no available-for-sale securities sold. During 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 the three and six-month periods ended June 30, 2017, approximately $12.0 million and $27.1 million, respectively, in available-for-sale securities were sold. The gross realized gains and losses on the sales for the three-month period ended June 30, 2017 totaled approximately $514,000 and $127,000, respectively. The gross realized gains and losses on the sales for the six-month period ended June 30, 2017 totaled approximately $937,000 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 and six-month periods ended June 30, 2017, one held-to-maturity security experienced its second downgrade in its credit rating. The Company made a strategic decision to sell this held-to-maturity security for approximately $483,000, which resulted in a gross realized loss on the sale for the three and six-month periods ended June 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 six-month periods ended June 30, 2018, no securities were deemed to have other-than-temporary impairment.

At June 30, 2018, the Company had investment securities with approximately $11.6 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 69.2% 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, 2018 and December 31, 2017:


	June 30, 2018
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
U.S. government-sponsored enterprises	$	303,332	$	(4,514	)	$	48,149	$	(1,322	)	$	351,481	$	(5,836	)
Residential mortgage-backed securities		358,975		(9,328	)		152,329		(5,153	)		511,304		(14,481	)
Commercial mortgage-backed securities		359,275		(10,405	)		116,060		(3,904	)		475,335		(14,309	)
State and political subdivisions		111,726		(2,018	)		21,126		(948	)		132,852		(2,966	)
Other securities		2,990		(10	)		9,717		(310	)		12,707		(320	)

Total	$	1,136,298	$	(26,275	)	$	347,381	$	(11,637	)	$	1,483,679	$	(37,912	)


	December 31, 2017
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		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 six months ended June 30, 2018 and 2017, is as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(In thousands)
Taxable:
Available-for-sale	$	8,528	$	5,680	$	16,993	$	10,474
Held-to-maturity		451		754		956		1,438
Non-taxable:
Available-for-sale		2,452		1,583		3,801		3,130
Held-to-maturity		916		1,383		2,573		2,780

Total	$	12,347	$	9,400	$	24,323	$	17,822

4. Loans Receivable

The various categories of loans receivable are summarized as follows:


	June 30,		December 31,
	2018		2017
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	4,734,315	$	4,600,117
Construction/land development		1,662,199		1,700,491
Agricultural		77,053		82,229
Residential real estate loans
Residential 1-4 family		1,960,841		1,970,311
Multifamily residential		540,526		441,303

Total real estate		8,974,934		8,794,451
Consumer		417,499		46,148
Commercial and industrial		1,287,637		1,297,397
Agricultural		55,768		49,815
Other		162,132		143,377

Total loans receivable	$	10,897,970	$	10,331,188

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. During the three and six-month periods ended June 30, 2017, the Company sold $5.8 million and $9.8 million, respectively, of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $387,000 and $575,000, respectively.

Mortgage loans held for sale of approximately $39.9 million and $44.3 million at June 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017 were not material.

The Company had $3.52 billion of purchased loans, which includes $129.9 million of discount for credit losses on purchased loans, at June 30, 2018. The Company had $47.9 million and $82.0 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, 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 of non-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of December 31, 2017.

5. Allowance for Loan Losses, Credit Quality and Other

The Company’s allowance for loan loss as of June 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 June 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:


	Six Months Ended June 30, 2018
	(In thousands)
Allowance for loan losses:
Beginning balance	$	110,266
Loans charged off		(4,672	)
Recoveries of loans previously charged off		1,600

Net loans recovered (charged off)		(3,072	)

Provision for loan losses		4,322

Balance, June 30, 2018	$	111,516

The following tables present the balance in the allowance for loan losses for the three and six-month period ended June 30, 2018, and the allowance for loan losses and recorded investment in loans based on portfolio segment by impairment method as of June 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 June 30, 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	$	20,104		$	44,831		$	23,614		$	16,193		$	3,247		$	2,223		$	110,212
Loans charged off		(54	)		(390	)		(952	)		(258	)		(478	)		—			(2,132	)
Recoveries of loans previously charged off		89			87			174			219			145			—			714

Net loans recovered (charged off)		35			(303	)		(778	)		(39	)		(333	)		—			(1,418	)
Provision for loan losses		104			1,457			1,369			39			604			(851	)		2,722

Balance, June 30	$	20,243		$	45,985		$	24,205		$	16,193		$	3,518		$	1,372		$	111,516


	Six Months Ended June 30, 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


	As of June 30, 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	$	1,166	$	619	$	130	$	2,054	$	—	$	—	$	3,969
Loans collectively evaluated for impairment		19,024		44,451		23,273		13,882		3,510		1,372		105,512

Loans evaluated for impairment balance, June 30		20,190		45,070		23,403		15,936		3,510		1,372		109,481

Purchased credit impaired loans		53		915		802		257		8		—		2,035

Balance, June 30	$	20,243	$	45,985	$	24,205	$	16,193	$	3,518	$	1,372	$	111,516

Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment	$	21,300	$	144,590	$	21,019	$	33,853	$	386	$	—	$	221,148
Loans collectively evaluated for impairment		1,627,159		4,574,063		2,439,468		1,241,038		632,784		—		10,514,512

Loans evaluated for impairment balance, June 30		1,648,459		4,718,653		2,460,487		1,274,891		633,170		—		10,735,660

Purchased credit impaired loans		13,740		92,715		40,880		12,746		2,229		—		162,310

Balance, June 30	$	1,662,199	$	4,811,368	$	2,501,367	$	1,287,637	$	635,399	$	—	$	10,897,970

The following tables present the balances in the allowance for loan losses for the six-month period ended June 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
	(In thousands)
Allowance for loan losses:
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, June 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
	(In thousands)
Allowance for loan losses:
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 June 30, 2018 and December 31, 2017:


	June 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
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	4,295	$	3,654	$	21,482	$	29,431	$	4,704,884	$	4,734,315	$	10,634
Construction/land development		455		417		8,844		9,716		1,652,483		1,662,199		3,482
Agricultural		—		—		247		247		76,806		77,053		—
Residential real estate loans
Residential 1-4 family		4,424		1,162		16,529		22,115		1,938,726		1,960,841		1,932
Multifamily residential		879		—		1,274		2,153		538,373		540,526		798

Total real estate		10,053		5,233		48,376		63,662		8,911,272		8,974,934		16,846
Consumer		1,522		448		950		2,920		414,579		417,499		801
Commercial and industrial		3,804		1,846		7,277		12,927		1,274,710		1,287,637		2,049
Agricultural and other		420		16		175		611		217,289		217,900		—

Total	$	15,799	$	7,543	$	56,778	$	80,120	$	10,817,850	$	10,897,970	$	19,696


	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
	(In thousands)
Real estate:
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
Residential 1-4 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 June 30, 2018 and December 31, 2017 were $37.1 million and $34.0 million, respectively.

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


	June 30, 2018
							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	$	28	$	28	$	—	$	29	$	—	$	29	$	1
Construction/land development		18		18		—		19		—		34		1
Agricultural		14		14		—		16		—		17		—
Residential real estate loans
Residential 1-4 family		187		187		—		171		3		152		6
Multifamily residential		—		—		—		—		—		—		—

Total real estate		247		247		—		235		3		232		8
Consumer		30		30		—		23		1		21		1
Commercial and industrial		248		248		—		225		4		185		7
Agricultural and other		—		—		—		—		—		—		—

Total loans without a specific valuation allowance		525		525		—		483		8		438		16
Loans with a specific valuation allowance
Real estate:
Commercial real estate loans
Non-farm/non-residential		41,716		38,175		610		34,728		8		32,832		378
Construction/land development		13,852		12,782		1,166		12,495		53		12,382		139
Agricultural		514		518		9		530		1		448		8
Residential real estate loans
Residential 1-4 family		20,852		18,115		77		19,313		1		19,105		323
Multifamily residential		2,896		2,717		53		2,215		73		2,019		92

Total real estate		79,830		72,307		1,915		69,281		136		66,786		940
Consumer		186		181		—		188		39		184		57
Commercial and industrial		13,527		9,932		2,054		12,909		358		12,942		508
Agricultural and other		175		175		—		177		1		221		4

Total loans with a specific valuation allowance		93,718		82,595		3,969		82,555		534		80,133		1,509
Total impaired loans
Real estate:
Commercial real estate loans
Non-farm/non-residential		41,744		38,203		610		34,757		8		32,861		379
Construction/land development		13,870		12,800		1,166		12,514		53		12,416		140
Agricultural		528		532		9		546		1		465		8
Residential real estate loans
Residential 1-4 family		21,039		18,302		77		19,484		4		19,257		329
Multifamily residential		2,896		2,717		53		2,215		73		2,019		92

Total real estate		80,077		72,554		1,915		69,516		139		67,018		948
Consumer		216		211		—		211		40		205		58
Commercial and industrial		13,775		10,180		2,054		13,134		362		13,127		515
Agricultural and other		175		175		—		177		1		221		4

Total impaired loans	$	94,243	$	83,120	$	3,969	$	83,038	$	542	$	80,571	$	1,525

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, 2018.


	December 31, 2017
							Year Ended
	Unpaid Contractual Principal Balance		Total Recorded Investment		Allocation of Allowance for Loan Losses		Average Recorded Investment		Interest Recognized
	(In thousands)
Loans without a specific valuation allowance
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
Residential 1-4 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
Residential 1-4 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
Residential 1-4 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 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, 2017.

Interest recognized on impaired loans during the three months ended June 30, 2018 and 2017 was approximately $542,000 and $509,000, respectively. Interest recognized on impaired loans during the six months ended June 30, 2018 and 2017 was approximately $1.5 million and $1.0 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 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. 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 be charged-off in the period in which they became uncollectible.

The Company’s classified loans include loans in risk ratings 6, 7 and 8. The following is a presentation of classified loans (excluding loans accounted for under ASC Topic 310-30) by class as of June 30, 2018 and December 31, 2017:


	June 30, 2018
	Risk Rated 6		Risk Rated 7		Risk Rated 8		Classified Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	39,479	$	456	$	—	$	39,935
Construction/land development		22,649		—		—		22,649
Agricultural		539		—		—		539
Residential real estate loans
Residential 1-4 family		22,097		386		—		22,483
Multifamily residential		1,258		—		—		1,258

Total real estate		86,022		842		—		86,864
Consumer		834		—		—		834
Commercial and industrial		17,774		298		—		18,072
Agricultural and other		193		—		—		193

Total risk rated loans	$	104,823	$	1,140	$	—	$	105,963


	December 31, 2017
	Risk Rated 6		Risk Rated 7		Risk Rated 8		Classified Total
	(In thousands)
Real estate:
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
Residential 1-4 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 June 30, 2018 and December 31, 2017:


	June 30, 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	$	1,003	$	327	$	2,682,429	$	1,800,969	$	117,133	$	39,935	$	4,641,796
Construction/land development		23		710		274,805		1,349,109		1,163		22,649		1,648,459
Agricultural		—		—		47,667		27,505		1,146		539		76,857
Residential real estate loans
Residential 1-4 family		694		769		1,456,314		435,575		9,592		22,483		1,925,427
Multifamily residential		—		—		346,984		186,818		—		1,258		535,060

Total real estate		1,720		1,806		4,808,199		3,799,976		129,034		86,864		8,827,599
Consumer		13,779		583		387,476		12,992		937		834		416,601
Commercial and industrial		22,218		8,158		579,862		617,680		28,901		18,072		1,274,891
Agricultural and other		1,263		3,385		142,585		68,608		535		193		216,569

Total risk rated loans	$	38,980	$	13,932	$	5,918,122	$	4,499,256	$	159,407	$	105,963		10,735,660

Purchased credit impaired loans														162,310

Total loans receivable													$	10,897,970


	December 31, 2017
	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	$	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
Residential 1-4 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 June 30, 2018 and December 31, 2017:


	June 30, 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		15	$	16,320	$	9,410	$	—	$	5,462	$	14,872
Construction/land development		3		641		555		70		—		625
Agricultural		2		345		281		18		—		299
Residential real estate loans
Residential 1-4 family		18		3,846		1,033		356		1,093		2,482
Multifamily residential		3		1,701		1,305		—		287		1,592

Total real estate		41		22,853		12,584		444		6,842		19,870
Consumer		4		36		17		13		—		30
Commercial and industrial		13		1,344		446		106		—		552

Total		58	$	24,233	$	13,047	$	563	$	6,842	$	20,452


	December 31, 2017
	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		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
Residential 1-4 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 on non-accrual status as of June 30, 2018 and December 31, 2017 because they are not in compliance with the modified terms:


	June 30, 2018				December 31, 2017
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		1	$	1,158		2	$	1,161
Agricultural		1		18		1		22
Residential real estate loans
Residential 1-4 family		7		744		8		850
Multifamily residential		1		149		1		153

Total real estate		10		2,069		12		2,186

Commercial and industrial		3		56		1		—

Total		13	$	2,125		13	$	2,186

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


	June 30, 2018		December 31, 2017
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	7,311	$	9,766
Construction/land development		5,261		5,920
Residential real estate loans
Residential 1-4 family		5,145		2,654
Multifamily residential		136		527

Total foreclosed assets held for sale	$	17,853	$	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 six-month period ended June 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		(724	)		—
Accretion recorded to interest income		(8,516	)		8,516
Acquisitions		808			2,403
Adjustment to yield		2,056			—
Transfers to foreclosed assets held for sale		—			(1,115	)
Payments received, net		—			(45,546	)

Balance at end of period	$	35,427		$	162,310

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 $724,000. 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 $2.1 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 June 30, 2018 and December 31, 2017, were as follows:


	June 30, 2018		December 31, 2017
	(In thousands)
Goodwill
Balance, beginning of period	$	927,949	$	377,983
Acquisitions		28,469		549,966

Balance, end of period	$	956,418	$	927,949


	June 30, 2018			December 31, 2017
	(In thousands)
Core Deposit and Other Intangibles
Balance, beginning of period	$	49,351		$	18,311
Acquisition		—			4,378
Amortization expense		(3,250	)		(1,670	)

Balance, June 30	$	46,101			21,019

Acquisitions					30,869
Amortization expense					(2,537	)

Balance, end of year				$	49,351

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


	June 30, 2018			December 31, 2017
	(In thousands)
Gross carrying basis	$	86,625		$	86,625
Accumulated amortization		(40,524	)		(37,274	)

Net carrying amount	$	46,101		$	49,351

Core deposit and other intangible amortization expense was approximately $1.6 million and $866,000 for the three months ended June 30, 2018 and 2017, respectively. Core deposit and other intangible amortization expense was approximately $3.3 million and $1.7 million for the six months ended June 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 2022 is approximately: 2018 – $6.6 million; 2019 – $6.5 million; 2020 – $5.9 million; 2021 – $5.7 million; 2022 – $5.7 million.

The carrying amount of the Company’s goodwill was $956.4 million and $927.9 million at June 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 June 30, 2018 and December 31, 2017, other assets were $191.9 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 $132.8 million and $132.1 million at June 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 $24.2 million and $23.9 million at June 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 $777.2 million and $636.9 million at June 30, 2018 and December 31, 2017, respectively. The aggregate amount of time deposits with a minimum denomination of $100,000 was $1.16 billion and $998.3 million at June 30, 2018 and December 31, 2017, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $3.8 million and $1.9 million for the three months ended June 30, 2018 and 2017, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $6.7 million and $3.6 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018 and December 31, 2017, brokered deposits were $580.7 million and $1.03 billion, respectively.

Deposits totaling approximately $1.85 billion and $1.51 billion at June 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 June 30, 2018 and December 31, 2017, securities sold under agreements to repurchase totaled $139.8 million and $147.8 million, respectively. For the three-month periods ended June 30, 2018 and 2017, securities sold under agreements to repurchase daily weighted-average totaled $144.0 million and $128.7 million, respectively. For the six-month periods ended June 30, 2018 and 2017, securities sold under agreements to repurchase daily weighted-average totaled $148.3 million and $126.4 million, respectively.

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


	June 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	$	10,706	$	—	$	—	$	—	$	10,706
Mortgage-backed securities		10,911		—		—		—		10,911
State and political subdivisions		96,535		—		—		—		96,535
Other securities		21,598		—		—		—		21,598

Total borrowings	$	139,750	$	—	$	—	$	—	$	139,750


	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 $1.31 billion and $1.30 billion at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, $885.0 million and $425.0 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 2025 with fixed interest rates ranging from 0.89% to 4.80% and are secured by loans and investments securities. Maturities of borrowings as of June 30, 2018 include: 2018 – $1.02 billion; 2019 – $143.0 million; 2020 – $146.4 million; 2021 – zero; 2025 – $389,000. Expected maturities will differ from contractual maturities because FHLB may have the right to call or HBI the right to prepay certain obligations.

Additionally, the Company had $915.3 million and $695.3 million at June 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 June 30, 2018 and December 31, 2017, respectively.

11. Other Borrowings

The Company had zero other borrowings at June 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 June 30, 2018 and December 31, 2017 was zero.

12. Subordinated Debentures

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


	As of June 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		4,328		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		5,615		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		297,634		297,332

Total	$	368,403	$	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 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.

The Bank acquired $12.5 million in trust preferred securities with a carrying value of $9.9 million and $9.8 million at June 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.

ASC 740 requires a company to record the effects of a tax law change in the period of enactment; however, shortly after the enactment of the TCJA, the SEC staff issued SAB 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

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, 2018 and 2017:


	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018		2017
	(In thousands)
Current:
Federal	$	11,351	$	29,278		$	26,355	$	48,669
State		3,757		5,815			8,725		9,667

Total current		15,108		35,093			35,080		58,336

Deferred:
Federal		6,913		(4,014	)		9,917		(2,236	)
State		2,289		(797	)		3,283		(444	)

Total deferred		9,202		(4,811	)		13,200		(2,680	)

Income tax expense	$	24,310	$	30,282		$	48,280	$	55,656

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, 2018 and 2017:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Statutory federal income tax rate		21.00	%		35.00	%		21.00	%		35.00	%
Effect of non-taxable interest income		(0.83	)		(1.36	)		(0.79	)		(1.43	)
Effect of gain on acquisitions		—			—			—			(0.87	)
Stock compensation		0.01			(0.07	)		(0.21	)		(0.55	)
State income taxes, net of federal benefit		4.16			4.12			4.57			4.03
Other		(0.11	)		(0.02	)		(0.11	)		0.29

Effective income tax rate		24.23	%		37.67	%		24.46	%		36.47	%

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, 2018		December 31, 2017
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	30,364	$	29,515
Deferred compensation		1,769		1,142
Stock compensation		3,326		2,731
Real estate owned		1,537		1,731
Unrealized loss on securities available-for-sale		8,251		1,471
Loan discounts		27,005		32,784
Tax basis premium/discount on acquisitions		8,754		8,802
Investments		975		1,155
Other		11,137		11,663

Gross deferred tax assets	$	93,118		90,994

Deferred tax liabilities:
Accelerated depreciation on premises and equipment		944		291
Core deposit intangibles		10,526		11,258
FHLB dividends		1,712		1,625
Other		1,501		1,256

Gross deferred tax liabilities		14,683		14,430

Net deferred tax assets	$	78,435	$	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 six months of 2018, the Company repurchased a total of 649,320 shares with a weighted-average stock price of $23.07 per share. The 2018 earnings were used to fund the repurchases during the year. Shares repurchased under the program as of June 30, 2018 total 5,174,184 shares. The remaining balance available for repurchase is 9,577,816 shares at June 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 and non-qualified stock options and other equity awards, including the issuance of restricted shares. As of June 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 June 30, 2018, the Company had approximately 2,239,000 shares of common stock remaining available for future grants and approximately 6,316,000 shares of common stock reserved for issuance pursuant to outstanding awards under the Plan.

The intrinsic value of the stock options outstanding and stock options vested at June 30, 2018 was $12.7 million and $8.5 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 $5.3 million as of June 30, 2018. For the first six months of 2018, the Company has expensed approximately $821,000 for the non-vested awards.

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


	For the Six Months Ended June 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		110			22.22		80			25.96
Forfeited/Expired		—			—		—			—
Exercised		(145	)		8.87		(203	)		7.82

Outstanding, end of period		2,239			17.00		2,274			16.23

Exercisable, end of period		1,058		$	14.54		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 six months ended June 30, 2018 was $5.85 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 Six Months Ended			For the Year Ended
	June 30, 2018			December 31, 2017
Expected dividend yield		1.98	%		1.39	%
Expected stock price volatility		27.92	%		28.47	%
Risk-free interest rate		2.87	%		2.06	%
Expected life of options		6.5 years			6.5 years

The following is a summary of currently outstanding and exercisable options at June 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	0.97	2.60	12	2.60
$5.68 to $6.56	99	3.16	6.45	99	6.45
$8.62 to $9.54	264	4.67	9.05	264	9.05
$14.71 to $16.86	262	6.26	16.00	178	16.09
$17.12 to $17.40	201	6.41	17.19	124	17.22
$18.46 to $18.46	1,010	7.15	18.46	289	18.46
$20.16 to $20.58	80	7.27	20.37	28	20.34
$21.25 to $22.22	230	8.77	21.71	48	21.25
$25.96 to $25.96	80	8.81	25.96	16	25.96

	2,238			1,058

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


	As of June 30, 2018			As of December 31, 2017
	(In thousands)
Beginning of year		1,145			958
Issued		162			232
Vested		(156	)		(45	)
Forfeited		(15	)		—

End of period		1,136			1,145

Amount of expense for six months and twelve months ended, respectively	$	3,133		$	5,237

Total unrecognized compensation cost, net of income tax benefit, related to non-vested restricted stock awards, which are expected to be recognized over the vesting periods, was approximately $13.4 million as of June 30, 2018.

15. Non-Interest Expense

The table below shows the components of non-interest expense for the three and six months ended June 30, 2018 and 2017:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
	(In thousands)
Salaries and employee benefits	$	34,476	$	28,034	$	69,490	$	55,455
Occupancy and equipment		8,519		7,034		17,502		13,715
Data processing expense		3,339		2,863		7,325		5,586
Other operating expenses:
Advertising		1,142		812		2,104		1,510
Merger and acquisition expenses		—		789		—		7,516
Amortization of intangibles		1,624		866		3,250		1,670
Electronic banking expense		1,828		1,654		3,706		3,173
Directors’ fees		318		324		648		637
Due from bank service charges		242		456		461		876
FDIC and state assessment		2,788		1,182		4,396		2,470
Insurance		714		543		1,601		1,121
Legal and accounting		858		474		1,636		1,101
Other professional fees		1,601		1,233		3,240		2,386
Operating supplies		602		477		1,202		944
Postage		323		295		667		581
Telephone		371		398		744		722
Other expense		4,483		3,569		8,636		6,681

Total other operating expenses		16,894		13,072		32,291		31,388

Total non-interest expense	$	63,228	$	51,003	$	126,608	$	106,144

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 59.4% and 61.8% of total loans receivable at June 30, 2018 and December 31, 2017, respectively, and 279.8% and 289.6% of total stockholders’ equity at June 30, 2018 and December 31, 2017, respectively. Residential real estate loans represented 23.0% and 23.3% of total loans receivable and 108.1% and 109.4% of total stockholders’ equity at June 30, 2018 and December 31, 2017, respectively.

Approximately 91.1% of the Company’s total loans and 89.0% of the Company’s real estate loans as of June 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 June 30, 2018 and December 31, 2017, commitments to extend credit of $2.28 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 for on-balance-sheet instruments. The maximum amount of future payments the Company could be required to make under these guarantees at June 30, 2018 and December 31, 2017, is $65.4 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 six months of 2018, the Company requested approximately $93.9 million in regular dividends from its banking subsidiary. This dividend is equal to approximately 58.7% of the Company’s banking subsidiary’s year-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 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, 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 the phase-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 June 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 11.12%, 10.57%, 11.71%, and 15.11%, respectively, as of June 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 $374.7 million in assets, including $373.9 million in loans, issued 1,250,000 shares of its common stock valued at approximately $28.2 million as of June 29, 2018, and paid $375.0 million in cash.

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


	June 30,
	2018		2017
	(In thousands)
Interest paid	$	51,069	$	20,491
Income taxes paid		23,375		74,542
Assets acquired by foreclosure		7,919		9,137

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 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 June 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 footnote 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 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 $79.2 million and $72.5 million as of June 30, 2018 and December 31, 2017, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $368,000 and $111,000 of accrued interest receivable when non-covered impaired loans were put on non-accrual status during the three months ended June 30, 2018 and 2017, respectively. The Company reversed approximately $563,000 and $209,000 of accrued interest receivable when non-covered impaired loans were put on non-accrual status during the six months ended June 30, 2018 and 2017, 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, 2018 and December 31, 2017, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $17.9 million and $18.9 million, respectively.

No foreclosed assets held for sale were remeasured during the six months ended June 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 50% for commercial and residential real estate collateral.

Fair Values of Financial Instruments

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


	June 30, 2018
	Carrying Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	495,743	$	495,743		1
Federal funds sold		500		500		1
Investment securities – held-to-maturity		204,401		204,544		2
Loans receivable, net of impaired loans and allowance		10,707,303		10,537,866		3
Accrued interest receivable		45,682		45,682		1
Financial liabilities:
Deposits:
Demand and non-interest-bearing	$	2,523,553	$	2,523,553		1
Savings and interest-bearing transaction accounts		6,573,902		6,573,902		1
Time deposits		1,638,578		1,612,077		3
Securities sold under agreements to repurchase		139,750		139,750		1
FHLB and other borrowed funds		1,309,950		1,305,602		2
Accrued interest payable		7,231		7,231		1
Subordinated debentures		368,403		377,553		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 and non-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 ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 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 ASU No. 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 ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends certain aspects of the guidance in ASU 2014-09 (FASB’s new revenue standard) on (1) identifying performance obligations and (2) licensing. ASU 2014-10’s effective date and transition provisions are aligned with the requirements in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of the FASB’s new revenue standard, ASU 2014-09. ASU 2016-12’s effective date and transition provisions are aligned with the requirements in ASU 2014-09.

The guidance issued in ASU 2014-09, ASU 2015-14, ASU 2016-10 and ASU 2016-12 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 ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): 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. ASU 2016-01 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, 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 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 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. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in ASU 2016-02 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 a right-of-use asset which will represent its right to use the underlying asset for the lease term. The Company is currently reviewing the amendments to ensure it is fully compliant by the adoption date and does not expect to early adopt. The impact is not expected to have a material effect on the Company’s financial position or results of operations as the Company does not have a material amount of lease agreements. In addition, the Company will change its current accounting policies to comply with the amendments with such changes as mentioned above. For additional information on the Company’s leases, see Note 18 “Leases” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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 the Company’s financial position or financial statement disclosures.

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 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 ASU 2016-15, 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 ASU 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15’s amendments add or clarify guidance on eight cash flow issues including debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest 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. ASU 2016-15 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 ASU 2016-16, 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 ASU 2016-18, 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 ASU 2017-01, 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 ASU 2017-03, 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 ASU 2016-02, Leases, and ASU 2014-09, 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 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 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, the Company does not anticipate a material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.

In February 2017, the FASB issued ASU 2017-05, Other Income: Gains and Losses from the Derecognition of Nonfinancial Assets, which clarifies the scope of the FASB’s guidance on nonfinancial asset derecognition (ASC 610-20) 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 or in-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 ASC 610-20-55-15 and 55-16. 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 ASU 2017-08, 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 ASU 2017-09, 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 ASU 2017-09 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 ASU 2017-09 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 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. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact, if any, ASU 2017-11 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, ASU 2017-12 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 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 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% to 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 June 30, 2018, the balance of the stranded tax effects within other comprehensive income was $612,000.

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2018-03 make technical corrections to certain aspects of ASU 2016-01 (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 ASU 2018-03 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 ASU 2018-03 is permitted for all entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, if they have adopted ASU 2016-01. 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 March 2018, the FASB issued ASU 2018-04, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 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 ASU 2016-01. Other amendments are effective upon issuance. The Company has adopted the amendments to ASC 320 effective January 1, 2018, and the 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.

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, 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. This guidance is applicable to the Company beginning January 1, 2019. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

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. (“the Company”) as of June 30, 2018, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2018 and 2017, and stockholders’ equity and cash flows for the six-month periods ended June 30, 2018 and 2017, and the related notes (collectively referred to as the “interim financial 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, 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, 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, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

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

/s/ BKD, LLP

Little Rock, Arkansas

August 6, 2018

Item 2:

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

The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on February 27, 2018, which includes the audited financial statements for the year ended December 31, 2017. Unless the context requires otherwise, the terms “Company”, “us”, “we”, and “our” refer to Home BancShares, Inc. on a consolidated basis.

General

We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly-owned bank subsidiary, Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of June 30, 2018, we had, on a consolidated basis, total assets of $14.92 billion, loans receivable, net, of $10.79 billion, total deposits of $10.74 billion, and stockholders’ equity of $2.31 billion.

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

Table 1: Key Financial Measures


	As of or for the Three Months Ended June 30,						As of or for the Six Months Ended June 30,
	2018			2017			2018			2017
	(Dollars in thousands, except per share data)
Total assets	$	14,924,120		$	10,872,228		$	14,924,120		$	10,872,228
Loans receivable		10,897,970			7,834,475			10,897,970			7,834,475
Allowance for loan losses		111,516			80,138			111,516			80,138
Total deposits		10,736,033			7,767,388			10,736,033			7,767,388
Total stockholders’ equity		2,314,013			1,476,032			2,314,013			1,476,032
Net income		76,025			50,097			149,089			96,953
Basic earnings per share		0.44			0.35			0.86			0.68
Diluted earnings per share		0.44			0.35			0.86			0.68
Book value per share		13.26			10.32			13.26			10.32
Tangible book value per share (non-GAAP)		7.52			7.23			7.52			7.23
Annualized net interest margin – FTE		4.47	%		4.50	%		4.47	%		4.60	%
Efficiency ratio		36.74			37.48			37.28			39.12
Efficiency ratio, as adjusted (non-GAAP)		37.03			37.29			37.49			37.13
Annualized return on average assets		2.13			1.86			2.11			1.86
Annualized return on average common equity		13.54			13.83			13.46			13.84

Overview

Results of Operations for the Three Months Ended June 30, 2018 and 2017

Our net income increased $25.9 million, or 51.8%, to $76.0 million for the three-month period ended June 30, 2018, from $50.1 million for the same period in 2017. On a diluted earnings per share basis, our earnings were $0.44 per share and $0.35 per share for the three-month periods ended June 30, 2018 and 2017, respectively. Excluding the $789,000 of merger expenses associated with the 2017 acquisitions, our net income increased $25.3 million, or 50.0%, to $76.0 million for the three-month period ended June 30, 2018, from $50.7 million for the same period in 2017 (See Table 18 for the non-GAAP tabular reconciliation). Of the $25.3 million increase in net income excluding the $789,000 of merger expenses associated with the 2017 acquisitions, $12.5 million was due to tax savings from the TCJA. The remaining $12.8 million is primarily associated with additional net income largely resulting from our acquisition of Stonegate.

Our net interest margin decreased from 4.50% for the three-month period ended June 30, 2017 to 4.47% for the three-month period ended June 30, 2018. The yield on loans was 5.94% and 5.78% for the three months ended June 30, 2018 and 2017, respectively as average loans increased from $7.83 billion to $10.35 billion. The increase in loan balances is primarily due to the acquisition of Stonegate. For the three months ended June 30, 2018 and 2017, we recognized $10.7 million and $8.5 million in total net accretion for acquired loans and deposits. The rate on interest-bearing deposits increased from 0.48% for the three months ended June 30, 2017 to 0.90% for the three months ended June 30, 2018 with average balances of $5.74 billion and $8.06 billion, respectively. The growth of average interest earning assets of $2.82 billion, which was primarily due to the acquisition of Stonegate, and the increase in yield were offset by the increase in interest-bearing liabilities and the rate on interest bearing liabilities, which led to a decrease in net interest margin for the quarter ended June 30, 2018.

Our efficiency ratio was 36.74% for the three months ended June 30, 2018, compared to 37.48% for the same period in 2017. For the second quarter of 2018, our efficiency ratio, as adjusted (non-GAAP), was 37.03%, an improvement of 26 basis points from the 37.29% reported for second quarter of 2018 (See Table 23 for the non-GAAP tabular reconciliation). Even though acquisitions tend to increase our efficiency ratio in the short term, we had an improvement in the efficiency ratio primarily associated with 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 2.13% for the three months ended June 30, 2018, compared to 1.86% for the same period in 2017. Our annualized return on average common equity was 13.54% for the three months ended June 30, 2018, compared to 13.83% for the same period in 2017. Excluding the $12.5 million tax effect of the TCJA, our annualized return on average assets was 1.78% for the three months ended June 30, 2018 and our annualized return on average common equity was 11.32%.

Results of Operations for Six Months Ended June 30, 2018 and 2017

Our net income increased $52.1 million, or 53.8%, to $149.1 million for the six-month period ended June 30, 2018, from $97.0 million for the same period in 2017. On a diluted earnings per share basis, our earnings were $0.86 per share and $0.68 per share for the six-month periods ended June 30, 2018 and 2017, respectively. Excluding the $3.8 million of one-time non-taxable gain on acquisition and $7.5 million of merger expenses associated with the 2017 acquisitions, our net income increased $51.0 million, or 52.0%, to $149.1 million for the six-month period ended June 30, 2018, from $98.1 million for the same period in 2017 (See Table 18 for the non-GAAP tabular reconciliation). Of the $51.0 million increase in net income excluding the $3.8 million of gain on acquisition and $7.5 million of merger expense associated with the 2017 acquisitions, $24.6 million was due to tax savings from the TCJA. The remaining $26.4 million increase in net income, excluding gain on acquisitions and merger expenses, is primarily associated with additional net income largely resulting from our acquisitions.

Our net interest margin decreased from 4.60% for the six-month period ended June 30, 2017 to 4.47% for the six-month period ended June 30, 2018. The yield on loans was 5.88% and 5.72% for the six months ended June 30, 2018 and 2017, respectively as average loans increased from $7.71 billion to $10.34 billion. The increase in loan balances is primarily due to the acquisitions we completed during 2017. For the six months ended June 30, 2018 and 2017, we recognized $21.3 million and $16.1 million, respectively, in total net accretion for acquired loans and deposits. The rate on interest-bearing deposits increased from 0.44% for the six months ended June 30, 2017, to 0.83% for the six months ended June 30, 2018, with average balances of $5.62 billion and $7.99 billion, respectively. The growth of average interest earning assets of $3.05 billion, which was primarily due to acquisitions completed in 2017, and the increase in yield were offset by the increase in interest-bearing liabilities and the rate on interest-bearing liabilities, which led to a decrease in net interest margin for the quarter ended June 30, 2018.

Our efficiency ratio was 37.28% for the six months ended June 30, 2018, compared to 39.12% for the same period in 2017. For the first six months of 2018, our efficiency ratio, as adjusted (non-GAAP), was 37.49%, which increased from the 37.13% reported for first six months of 2017. (See Table 23 for the non-GAAP tabular reconciliation). Even though acquisitions tend to increase our efficiency ratio in the short term, we had an improvement in the efficiency ratio primarily associated with 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 2.11% for the six months ended June 30, 2018, compared to 1.86% for the same period in 2017. Our annualized return on average common equity was 13.46% for the six months ended June 30, 2018, compared to 13.84% for the same period in 2017. Excluding the $24.6 million tax effect of the TCJA, our annualized return on average assets was 1.76% for the six months ended June 30, 2018 and our annualized return on average common equity was 11.25%.

Financial Condition as of and for the Period Ended June 30, 2018 and December 31, 2017

Our total assets as of June 30, 2018 increased $474.4 million to $14.92 billion from the $14.45 billion reported as of December 31, 2017. Our loan portfolio increased $566.8 million or 5.49% for the quarter ended June 30, 2018 from $10.33 billion as of December 31, 2017 to $10.90 billion as of June 30, 2018. The increase is primarily due to the acquisition of $373.9 million of loans as part of the acquisition of Shore Premier Finance (“SPF”) as well as $192.9 million of organic loan growth for the first six months of 2018. Total deposits increased $347.5 million to $10.74 billion as of June 30, 2018 from $10.39 billion as of December 31, 2017. Stockholders’ equity increased $109.7 million to $2.31 billion as of June 30, 2018, compared to $2.20 billion as of December 31, 2017. The increase in stockholders’ equity is primarily associated with the $111.9 million increase in retained earnings as well as the issuance of 1,250,000 shares of stock with a value of $28.2 million as part of the acquisition of SPF, which were partially offset by $20.2 million of comprehensive loss and the repurchase of $15.0 million of our common stock during 2018. The annualized improvement in stockholders’ equity for the first six months of 2018, excluding the $28.2 million of common stock issued for the acquisition of SPF, was 7.4%.

As of June 30, 2018, our non-performing loans increased to $56.8 million, or 0.52%, of total loans from $44.7 million, or 0.43%, of total loans as of December 31, 2017. The allowance for loan losses as a percent of non-performing loans decreased to 196.41% as of June 30, 2018, from 246.70% as of December 31, 2017. Non-performing loans from our Arkansas franchise were $13.0 million at June 30, 2018 compared to $15.5 million as of December 31, 2017. Non-performing loans from our Florida franchise were $43.0 million at June 30, 2018 compared to $28.2 million as of December 31, 2017. Non-performing loans from our Alabama franchise were $52,000 at June 30, 2018 compared to $929,000 as of December 31, 2017. Non-performing loans from our SPF franchise were $769,000, and there were no non-performing loans from our Centennial CFG franchise as of June 30, 2018.

As of June 30, 2018, our non-performing assets increased to $74.6 million, or 0.50%, of total assets from $63.6 million, or 0.44%, of total assets as of December 31, 2017. Non-performing assets from our Arkansas franchise were $21.0 million at June 30, 2018 compared to $25.6 million as of December 31, 2017. Non-performing assets from our Florida franchise were $51.5 million at June 30, 2018 compared to $36.4 million as of December 31, 2017. Non-performing assets from our Alabama franchise were $1.4 million at June 30, 2018 compared to $1.6 million as of December 31, 2017. Non-performing assets from our SPF franchise were $769,000, and there were no non-performing assets from our Centennial CFG franchise as of June 30, 2018.

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.

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

•

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

•

Other service charges and fees – These represent credit card interchange fees and Centennial CFG loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310. Interchange fees were $6.9 million, $13.3 million, $5.7 million and $11.8 million for the three and six-month periods ended June 30, 2018 and June 30, 2017, respectively. Centennial CFG loan fees were $1.3 million, $3.2 million, $1.5 million and $3.0 million for the three and six-month periods ended June 30, 2018 and June 30, 2017, respectively.

•

Financial Instruments. ASU 2016-01 “Financial Instruments—Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities, (“ASU 2016-01”) makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 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”). ASU 2016-01 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. ASU 2016-01 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. Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale.

Investments – Held-to-Maturity. Securities held-to-maturity, which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity.

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.

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 covers non-classified loans and is based on historical charge-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 ASC 310-10-35, 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 on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for loan losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.

Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. 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.

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

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

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

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

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

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

Acquisitions

Acquisition of 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 $375.0 million in cash, subject to certain post-closing adjustments, and 1,250,000 shares of HBI common stock. SPF currently provides direct consumer financing to 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.

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.

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 Form 10-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.

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.

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, 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 expand into those areas.

We will continue evaluating all types of potential bank acquisitions to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.

Branches

As opportunities arise, we will continue to open new (commonly referred to as de novo) branches in our current markets and in other attractive market areas.

During the second quarter of 2018, we opened one branch in the Northeast Arkansas Region. Additionally, in connection with the acquisition and creation of the SPF division of Centennial, we established a new loan production office in Chesapeake, Virginia.

As of June 30, 2018, 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 Six Months Ended June 30, 2018 and 2017

Our net income increased $25.9 million, or 51.8%, to $76.0 million for the three-month period ended June 30, 2018, from $50.1 million for the same period in 2017. On a diluted earnings per share basis, our earnings were $0.44 per share and $0.35 per share for the three-month periods ended June 30, 2018 and 2017, respectively. Excluding the $789,000 of merger expenses associated with the 2017 acquisitions our net income increased $25.3 million, or 50.0%, to $76.0 million for the three-month period ended June 30, 2018, from $50.7 million for the same period in 2017 (See Table 18 for the non-GAAP tabular reconciliation). Of the $25.3 million increase in net income excluding the $789,000 of merger expenses associated with the 2017 acquisitions, $12.5 million was due to tax savings from the TCJA. The remaining $12.8 million is primarily associated with additional net income largely resulting from our acquisition of Stonegate.

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 and six-month periods ended June 30, 2018 and 2017, respectively).

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 50 basis points since December 31, 2017 and is currently at 2.00% to 1.75%.

For the three months ended June 30, 2018 and 2017, we recognized $10.7 million and $8.5 million in total net accretion for acquired loans and deposits. Purchase accounting accretion on acquired loans was $10.6 million and $8.4 million and average purchase accounting loan discounts were $153.6 million and $104.4 million for the three-month periods ended June 30, 2018 and June 30, 2017, respectively. Net accretion of time deposit premiums was $102,000 and $106,000 and net average unamortized CD premiums were $538,000 and $832,000 for the three-month periods ended June 30, 2018 and June 30, 2017, respectively.

For the six months ended June 30, 2018 and 2017, we recognized $21.3 million and $16.1 million, respectively, in total net accretion for acquired loans and deposits. Purchase accounting accretion on acquired loans was $21.1 million and $16.0 million and average purchase accounting loan discounts were $159.4 million and $101.4 million for the six-month periods ended June 30, 2018 and June 30, 2017, respectively. Net accretion of time deposit premiums was $203,000 and $194,000 and net average unamortized CD premiums were $589,000 and $715,000 for the six-month periods ended June 30, 2018 and June 30, 2017, respectively.

Our net interest margin decreased from 4.50% for the three-month period ended June 30, 2017 to 4.47% for the three-month period ended June 30, 2018. The yield on loans was 5.94% and 5.78% for the three months ended June 30, 2018 and 2017, respectively, as average loans increased from $7.83 billion to $10.35 billion. The increase in loan balances is primarily due to the acquisition of Stonegate. For the three months ended June 30, 2018 and 2017, we recognized $10.7 million and $8.5 million in total net accretion for acquired loans and deposits. The rate on interest-bearing deposits increased from 0.48% for the three months ended June 30, 2017 to 0.90% for the three months ended June 30, 2018 with average balances of $5.74 billion and $8.06 billion, respectively. The growth of average interest earning assets of $2.82 billion, which was primarily due to acquisition of Stonegate, and the increase in yield were offset by the increase in interest-bearing liabilities, and the rate on interest-bearing liabilities, which led to a decrease in net interest margin for the quarter ended June 30, 2018.

Our net interest margin decreased from 4.60% for the six-month period ended June 30, 2017 to 4.47% for the six-month period ended June 30, 2018. The yield on loans was 5.88% and 5.72% for the six months ended June 30, 2018 and 2017, respectively, as average loans increased from $7.71 billion to $10.34 billion. The increase in loan balances is primarily due to the acquisitions we completed during 2017. For the six months ended June 30, 2018 and 2017, we recognized $21.3 million and $16.1 million, respectively, in total net accretion for acquired loans and deposits. The rate on interest-bearing deposits increased from 0.44% for the six months ended June 30, 2017 to 0.83% for the six months ended June 30, 2018, with average balances of $5.62 billion and $7.99 billion, respectively. The growth of average interest earning assets of $3.05 billion, which was primarily due to acquisitions completed in 2017, and the increase in yield were offset by the increase in interest-bearing liabilities and the rate on interest-bearing liabilities, which led to a decrease in net interest margin for the quarter ended June 30, 2018.

Net interest income on a fully taxable equivalent basis increased $30.6 million, or 28.0%, to $140.0 million for the three-month period ended June 30, 2018, from $109.4 million for the same period in 2017. This increase in net interest income for the three-month period ended June 30, 2018 was the result of a $43.1 million increase in interest income partially offset by a $12.4 million increase in interest expense. The $43.1 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 $39.3 million. The higher yield on our interest earning assets resulted in an approximately $3.8 million increase in interest income. The repricing of our interest-bearing liabilities in a higher interest rate environment resulted in an approximately $9.8 million increase in interest expense. The higher level of our interest-bearing liabilities resulted in an increase in interest expense of approximately $2.6 million.

Net interest income on a fully taxable equivalent basis increased $61.2 million, or 28.3%, to $277.4 million for the six-month period ended June 30, 2018, from $216.2 million for the same period in 2017. This increase in net interest income for the six-month period ended June 30, 2018 was the result of a $88.8 million increase in interest income partially offset by a $27.5 million increase in interest expense. The $88.8 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 $81.3 million. The higher yield on our interest earning assets resulted in an approximately $7.4 million increase in interest income. The repricing of our interest-bearing liabilities in a higher interest rate environment resulted in an approximately $18.5 million increase in interest expense. The higher level of our interest-bearing liabilities resulted in an increase in interest expense of approximately $9.0 million.

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

Table 2: Analysis of Net Interest Income


	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Interest income	$	166,561		$	122,863		$	327,537		$	237,357
Fully taxable equivalent adjustment		1,403			2,016			2,612			4,027

Interest income – fully taxable equivalent		167,964			124,879			330,149			241,384
Interest expense		27,949			15,511			52,716			25,190

Net interest income – fully taxable equivalent	$	140,015		$	109,368		$	277,433		$	216,194

Yield on earning assets – fully taxable equivalent		5.36	%		5.14	%		5.32	%		5.14	%
Cost of interest-bearing liabilities		1.18			0.84			1.11			0.70
Net interest spread – fully taxable equivalent		4.18			4.30			4.21			4.44
Net interest margin – fully taxable equivalent		4.47			4.50			4.47			4.60

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin


	Three Months Ended June 30, 2018 vs. 2017			Six Months Ended June 30, 2018 vs. 2017
	(In thousands)
Increase (decrease) in interest income due to change in earning assets	$	39,331		$	81,321
Increase (decrease) in interest income due to change in earning asset yields		3,754			7,444
(Increase) decrease in interest expense due to change in interest-bearing liabilities		(2,592	)		(9,016	)
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities		(9,846	)		(18,510	)

Increase (decrease) in net interest income	$	30,647		$	61,239

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

Table 4: Average Balance Sheets and Net Interest Income Analysis



	Three Months Ended June 30,
	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	$	288,643	$	1,206		1.68	%	$	303,997	$	727		0.96	%
Federal funds sold		679		12		7.09			1,427		4		1.12
Investment securities – taxable		1,528,613		8,979		2.36			1,256,202		6,434		2.05
Investment securities – non-taxable		398,067		4,476		4.51			346,708		4,812		5.57
Loans receivable		10,345,846		153,291		5.94			7,829,615		112,902		5.78

Total interest-earning assets		12,561,848	$	167,964		5.36			9,737,949	$	124,879		5.14

Non-earning assets		1,742,635							1,055,821

Total assets	$	14,304,483						$	10,793,770

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	6,451,204	$	13,489		0.84	%	$	4,292,389	$	4,313		0.40	%
Time deposits		1,611,353		4,675		1.16			1,443,228		2,497		0.69

Total interest-bearing deposits		8,062,557		18,164		0.90			5,735,617		6,810		0.48

Federal funds purchased		46		—		—			—		—		—
Securities sold under agreement to repurchase		143,952		372		1.04			128,661		196		0.61
FHLB and other borrowed funds		928,357		4,245		1.83			1,177,510		3,710		1.26
Subordinated debentures		368,309		5,168		5.63			351,659		4,795		5.47

Total interest-bearing liabilities		9,503,221		27,949		1.18			7,393,447		15,511		0.84

Non-interest-bearing liabilities
Non-interest-bearing deposits		2,496,701							1,899,865
Other liabilities		53,149							47,359

Total liabilities		12,053,071							9,340,671
Stockholders’ equity		2,251,412							1,453,099

Total liabilities and stockholders’ equity	$	14,304,483						$	10,793,770

Net interest spread						4.18	%						4.30	%
Net interest income and margin			$	140,015		4.47	%			$	109,368		4.50	%

Table 4: Average Balance Sheets and Net Interest Income Analysis


	Six Months Ended June 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	$	267,347	$	2,135		1.61	%	$	237,617	$	1,035		0.88	%
Federal funds sold		5,156		18		0.70			1,305		6		0.93
Investment securities – taxable		1,544,451		17,949		2.34			1,183,588		11,912		2.03
Investment securities – non-taxable		371,788		8,473		4.60			346,895		9,598		5.58
Loans receivable		10,335,699		301,574		5.88			7,708,264		218,833		5.72

Total interest-earning assets		12,524,441		330,149		5.32			9,477,669		241,384		5.14

Non-earning assets		1,745,179							1,020,474

Total assets	$	14,269,620						$	10,498,143

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	6,430,509	$	24,731		0.78	%	$	4,216,025	$	7,690		0.37	%
Time deposits		1,562,873		8,239		1.06			1,400,501		4,606		0.66

Total interest-bearing deposits		7,993,382		32,970		0.83			5,616,526		12,296		0.44

Federal funds purchased		62		1		3.25			—		—		—
Securities sold under agreement to repurchase		148,310		748		1.02			126,390		361		0.58
FHLB and other borrowed funds		1,038,612		8,825		1.71			1,274,823		7,299		1.15
Subordinated debentures		368,217		10,172		5.57			207,043		5,234		5.10

Total interest-bearing liabilities		9,548,583		52,716		1.11			7,224,782		25,190		0.70

Non-interest-bearing liabilities
Non-interest-bearing deposits		2,439,299							1,808,660
Other liabilities		48,779							52,062

Total liabilities		12,036,661							9,085,504
Stockholders’ equity		2,232,959							1,412,639

Total liabilities and stockholders’ equity	$	14,269,620						$	10,498,143

Net interest spread						4.21	%						4.44	%
Net interest income and margin			$	277,433		4.47	%			$	216,194		4.60	%

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

Table 5: Volume/Rate Analysis


	Three Months Ended June 30,									Six Months Ended June 30,
	2018 over 2017									2018 over 2017
	Volume			Yield/Rate			Total			Volume			Yield/Rate			Total
	(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks	$	(39	)	$	518		$	479		$	143		$	957		$	1,100
Federal funds sold		(3	)		11			8			13			(1	)		12
Investment securities – taxable		1,517			1,028			2,545			4,005			2,032			6,037
Investment securities – non-taxable		653			(989	)		(336	)		653			(1,778	)		(1,125	)
Loans receivable		37,203			3,186			40,389			76,507			6,234			82,741

Total interest income		39,331			3,754			43,085			81,321			7,444			88,765

Interest expense:
Interest-bearing transaction and savings deposits		2,914			6,262			9,176			5,478			11,563			17,041
Time deposits		320			1,858			2,178			587			3,046			3,633
Federal funds purchased		—			—			—			—			1			1
Securities sold under agreement to repurchase		25			151			176			72			315			387
FHLB borrowed funds		(898	)		1,433			535			(1,533	)		3,059			1,526
Subordinated debentures		231			142			373			4,412			526			4,938

Total interest expense		2,592			9,846			12,438			9,016			18,510			27,526

Increase (decrease) in net interest income	$	36,739		$	(6,092	)	$	30,647		$	72,305		$	(11,066	)	$	61,239

Provision for Loan Losses

Our management assesses the adequacy of the allowance for loan losses by applying the provisions of FASB ASC 310-10-35. 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 positive economic conditions, 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 strong loan-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 an on-going basis.

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 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 $2.7 million and $387,000 of provision for loan losses for the three months ended June 30, 2018 and 2017, respectively, reflecting a $2.3 million increase in the provision for loan losses during the second quarter of 2018 versus the second quarter of 2017. This $2.3 million increase is primarily a result of increased net charge-offs and higher organic loan growth.

We had $4.3 million of provision for loan losses for the six months ended June 30, 2018 and 2017. The provision remained substantially flat as net charge-offs as a percentage of total loans remained consistent at 0.05% as of June 30, 2017, compared to 0.03% as of June 30, 2018. In addition, the allowance for loan losses to total loans remained unchanged at 1.02% as of June 30, 2018 and 2017.

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 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 $27.7 million and $53.5 million for the three and six-month periods ended June 30, 2018, compared to $24.4 million and $50.9 million for the same periods in 2017, 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 6 measures the various components of our non-interest income for the three and six-month periods ended June 30, 2018 and 2017, respectively, as well as changes for the three and six-month periods ended June 30, 2018 compared to the same period in 2017.

Table 6: Non-Interest Income


	Three Months Ended									Six Months Ended
	June 30,				2018 Change					June 30,				2018 Change
	2018		2017		from 2017					2018		2017		from 2017
	(Dollars in thousands)
Service charges on deposit accounts	$	6,780	$	5,966	$	814		13.6	%	$	12,855	$	11,948	$	907		7.6	%
Other service charges and fees		9,797		8,576		1,221		14.2			19,952		17,493		2,459		14.1
Trust fees		379		309		70		22.7			825		765		60		7.8
Mortgage lending income		3,477		3,750		(273	)	(7.3	)		6,134		6,541		(407	)	(6.2	)
Insurance commissions		526		465		61		13.1			1,205		1,010		195		19.3
Increase in cash value of life insurance		730		463		267		57.7			1,384		773		611		79.0
Dividends from FHLB, FRB, FNBB & other		1,600		472		1,128		239.0			2,477		1,621		856		52.8
Gain on acquisitions		—		—		—		—			—		3,807		(3,807	)	(100.0	)
Gain on sale of SBA loans		262		387		(125	)	(32.3	)		444		575		(131	)	(22.8	)
Gain (loss) on sale of branches, equipment and other assets, net		—		431		(431	)	(100.0	)		7		375		(368	)	(98.1	)
Gain (loss) on OREO, net		1,046		393		653		166.2			1,451		514		937		182.3
Gain (loss) on securities, net		—		380		(380	)	(100.0	)		—		803		(803	)	(100.0	)
Other income		3,076		2,825		251		8.9			6,744		4,662		2,082		44.7

Total non-interest income	$	27,673	$	24,417	$	3,256		13.3	%	$	53,478	$	50,887	$	2,591		5.1	%

Non-interest income increased $3.3 million, or 13.3%, to $27.7 million for the three-month period ended June 30, 2018 from $24.4 million for the same period in 2017. Non-interest income increased $2.6 million, or 5.1%, to $53.5 million for the six-month period ended June 30, 2018 from $50.9 million for the same period in 2017. Non-interest income excluding gain on acquisitions increased $6.4 million, or 13.6%, to $53.5 million for the six months ended June 30, 2018 from $47.1 million for the same period in 2017.

Excluding gain on acquisitions, the primary factors that resulted in this increase were changes related to other service charges and fees, increase in cash value of life insurance, dividends, net gain on securities, net gain on OREO and other income.

Additional details for the three months ended June 30, 2018 on some of the more significant changes are as follows:

•

The $814,000 increase in service charges on deposit accounts is primarily related to an increase in overdraft fees due to additional volume, the acquisition of Stonegate during the third quarter of 2017 and improved pricing.

•

The $1.2 million increase in other service charges and fees is primarily from additional interchange fees as well as the acquisition of Stonegate during the third quarter of 2017.

•

The $267,000 increase in cash value of life insurance is primarily due to the additional life insurance held by the Company as a result of the acquisition of Stonegate during the third quarter of 2017.

•

The $1.1 million increase in dividends from FHLB, FRB, First National Bankers’ Bank & other is primarily associated with higher dividend income from Federal Reserve stock and other equity investments, which increased $660,000 and $424,000 from the second quarter of 2017 to the second quarter of 2018, respectively. The increase in the Federal Reserve stock dividend is related to an increased investment balance and improved dividend rate. The increase in the other equity investments dividend is related to two dividends being paid during the second quarter of 2018 as no dividend was paid during the first quarter of 2018.

•

The $653,000 increase in gain on OREO is primarily related to realizing additional gains on sale from OREO properties during the second quarter of 2018 compared to the second quarter of 2017.

•

The $431,000 decrease in gain sale of branches, equipment and other assets, net, is a result of no sales of branches, equipment or other assets during the second quarter of 2018 compared to the second quarter of 2017.

•

The 380,000 decrease in gain on securities, net, is a result of no sales of securities in the second quarter of 2018.

We exceeded $10 billion in assets during the first quarter of 2017 and will become subject to the Durbin Amendment to the Dodd-Frank Act interchange fee restrictions beginning in July 2018. The Durbin Amendment will negatively impact debit card and ATM fees beginning in the second half of 2018. During the second quarter of 2018, we collected $6.9 million in debit card interchange fees. We estimate that our interchange fee revenue will be reduced by approximately 35.0% for the third quarter of 2018 compared to the second quarter of 2018.

Additional details for the six months ended June 30, 2018 on some of the more significant changes are as follows:

•

The $907,000, increase in service charges on deposit accounts is primarily related to an increase in overdraft fees due to additional volume, the acquisition of Stonegate during the third quarter of 2017 and improved pricing.

•

The $2.5 million increase in other service charges and fees is primarily from the acquisition of Stonegate during the third quarter of 2017 as well as increased interchange fees.

•

The $611,000 increase in cash value of life insurance is primarily due to the additional life insurance held by the Company as a result of the acquisition of Stonegate during the third quarter of 2017.

•

The $856,000 increase in dividends from FHLB, FRB, First National Bankers’ Bank & other is primarily associated with higher dividend income from Federal Reserve stock which is related to an increased investment balance and improved dividend rate.

•

The $937,000 increase in gain (loss) on OREO is primarily related to realizing additional gains on sale from OREO properties during the first six-months of 2018 and no revaluation expense for the first six months of 2018 compared to $144,000 incurred during the first quarter of 2017.

•

The $3.8 million decrease in gain on acquisitions is a result of no bargain purchase gain being recorded for the first six months of 2018. During the first quarter of 2017, we acquired BOC and recorded a $3.8 million bargain purchase gain on this acquisition.

•

The 803,000 decrease in gain on securities, net, is a result of no sales of securities for the first six months of 2018 compared to the first six months of 2017.

•

Other income includes $1.3 million of additional income for items previously charged off and $688,000 of income related to the fair value adjustment of equity securities.

Non-Interest Expense

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

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

Table 7: Non-Interest Expense


	Three Months Ended									Six Months Ended
	June 30,				2018 Change					June 30,				2018 Change
	2018		2017		from 2017					2018		2017		from 2017
	(Dollars in thousands)
Salaries and employee benefits	$	34,476	$	28,034	$	6,442		23.0	%	$	69,490	$	55,455	$	14,035		25.3	%
Occupancy and equipment		8,519		7,034		1,485		21.1			17,502		13,715		3,787		27.6
Data processing expense		3,339		2,863		476		16.6			7,325		5,586		1,739		31.1
Other operating expenses:
Advertising		1,142		812		330		40.6			2,104		1,510		594		39.3
Merger and acquisition expenses		—		789		(789	)	(100.0	)		—		7,516		(7,516	)	(100.0	)
Amortization of intangibles		1,624		866		758		87.5			3,250		1,670		1,580		94.6
Electronic banking expense		1,828		1,654		174		10.5			3,706		3,173		533		16.8
Directors’ fees		318		324		(6	)	(1.9	)		648		637		11		1.7
Due from bank service charges		242		456		(214	)	(46.9	)		461		876		(415	)	(47.4	)
FDIC and state assessment		2,788		1,182		1,606		135.9			4,396		2,470		1,926		78.0
Insurance		714		543		171		31.5			1,601		1,121		480		42.8
Legal and accounting		858		474		384		81.0			1,636		1,101		535		48.6
Other professional fees		1,601		1,233		368		29.8			3,240		2,386		854		35.8
Operating supplies		602		477		125		26.2			1,202		944		258		27.3
Postage		323		295		28		9.5			667		581		86		14.8
Telephone		371		398		(27	)	(6.8	)		744		722		22		3.0
Other expense		4,483		3,569		914		25.6			8,636		6,681		1,955		29.3

Total non-interest expense	$	63,228	$	51,003	$	12,225		24.0	%	$	126,608	$	106,144	$	20,464		19.3	%

Non-interest expense increased $12.2 million, or 24.0%, to $63.2 million for the three months ended June 30, 2018 from $51.0 million for the same period in 2017. Non-interest expense increased $20.5 million, or 19.3%, to $126.6 million for the six months ended June 30, 2018 from $106.1 million for the same period in 2017. Non-interest expense, excluding merger expenses, was $63.2 million and $126.6 million for the three and six months ended June 30, 2018 compared to $50.2 million and $98.6 million for the same periods in 2017, respectively.

The change in non-interest expense for 2018 when compared to 2017 is primarily related to the completion of the acquisition of Stonegate in the third quarter of 2017, the normal increased cost of doing business and Centennial CFG.

Centennial CFG’s branch and loan production offices incurred $5.7 million and $11.1 million of non-interest expense during the three and six months ended June 30, 2018, compared to $4.5 million and $9.1 million of non-interest expense during the three and six months ended June 30, 2017, respectively. While 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.

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 decreased $6.0 million, or 19.7%, to $24.3 million for the three-month period ended June 30, 2018, from $30.3 million for the same period in 2017. The income tax expense decreased $7.4 million, or 13.3%, to $48.3 million for the six-month period ended June 30, 2018, from $55.7 million for the same period in 2017. The effective income tax rate was 24.2% and 24.5% for the three and six-month periods ended June 30, 2018, compared to 37.67% and 36.47% 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.

Financial Condition as of and for the Period Ended June 30, 2018 and December 31, 2017

Our total assets as of June 30, 2018 increased $474.4 million to $14.92 billion from the $14.45 billion reported as of December 31, 2017. Our loan portfolio increased $566.8 million or 5.49% for the quarter ended June 30, 2018 from $10.33 billion as of December 31, 2017 to $10.90 billion as of June 30, 2018. The increase is primarily due to the acquisition of $373.9 million of loans as part of the acquisition of SPF as well as $192.9 million of organic loan growth for the first six months of 2018. Total deposits increased $347.5 million to $10.74 billion as of June 30, 2018 from $10.39 billion as of December 31, 2017. Stockholders’ equity increased $109.7 million to $2.31 billion as of June 30, 2018, compared to $2.20 billion as of December 31, 2017. The increase in stockholders’ equity is primarily associated with the $111.9 million increase in retained earnings as well as the issuance of 1.3 million shares of stock with a value of $28.2 million as part of the acquisition of SPF, which were partially offset by $20.2 million of comprehensive loss and the repurchase of $15.0 million of our common stock during 2018. The annualized improvement in stockholders’ equity for the first six months of 2018, excluding the $28.2 million of common stock issued for the acquisition of SPF, was 7.4%.

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $10.35 billion and $7.83 billion during the three-month periods ended June 30, 2018 and 2017, respectively. Our loan portfolio averaged $10.34 billion and $7.71 billion during the six-month periods ended June 30, 2018 and 2017, respectively. Loans receivable were $10.90 billion and $10.33 billion as of June 30, 2018 and December 31, 2017, respectively.

During the second quarter of 2018, the Company acquired $373.9 million of loans, net of known purchase accounting discounts. From December 31, 2017 to June 30, 2018, the Company produced organic loan growth of approximately $192.9 million in addition to the acquired loans. Centennial CFG produced $204.1 million of organic loan growth during the first six months of 2018, while the legacy footprint experienced $10.8 million of organic loan decline during the first six months of 2018.

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 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 $3.46 billion, $5.19 billion, $226.0 million, $373.9 million and $1.65 billion as of June 30, 2018 in our Arkansas, Florida, Alabama, SPF and Centennial CFG franchises, respectively.

As of June 30, 2018, we had approximately $533.7 million of construction land development loans which were collateralized by land. This consisted of approximately $244.7 million for raw land and approximately $288.9 million for land with commercial or residential lots.

Table 8 presents our loans receivable balances by category as of June 30, 2018 and December 31, 2017.

Table 8: Loans Receivable


	As of		As of
	June 30, 2018		December 31, 2017
	(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	4,734,315	$	4,600,117
Construction/land development		1,662,199		1,700,491
Agricultural		77,053		82,229
Residential real estate loans:
Residential 1-4 family		1,960,841		1,970,311
Multifamily residential		540,526		441,303

Total real estate		8,974,934		8,794,451
Consumer		417,499		46,148
Commercial and industrial		1,287,637		1,297,397
Agricultural		55,768		49,815
Other		162,132		143,377

Total loans receivable	$	10,897,970	$	10,331,188

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 over a 15 to 25-year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.

As of June 30, 2018, commercial real estate loans totaled $6.47 billion, or 59.4% of loans receivable, as compared to $6.38 billion, or 61.8% of loans receivable, as of December 31, 2017. Commercial real estate loans originated in our Arkansas, Florida, Alabama and Centennial CFG markets were $1.97 billion, $3.23 billion, $124.4 million and $1.14 billion at June 30, 2018, 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 29.7% and 59.3% of our residential mortgage loans consist of owner occupied 1-4 family properties and non-owner occupied 1-4 family properties (rental), respectively, as of June 30, 2018. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.

As of June 30, 2018, residential real estate loans totaled $2.50 billion, or 23.0%, of loans receivable, compared to $2.41 billion, or 23.3% of loans receivable, as of December 31, 2017. Residential real estate loans originated in our Arkansas, Florida, Alabama and Centennial CFG markets were $872.8 million, $1.35 billion, $69.7 million and $204.7 million at June 30, 2018, 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 June 30, 2018, consumer loans totaled $417.5 million, or 3.8% 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 $22.6 million, $30.3 million, $877,000, $363.7 million and zero at June 30, 2018, 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% (with no work in process) depending on the borrower and nature of inventory. We require a first lien position for those loans.

As of June 30, 2018, commercial and industrial loans totaled $1.29 billion, or 11.8% of loans receivable, which is comparable to $1.30 billion, or 12.6% of loans receivable, as of December 31, 2017. Commercial and industrial loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $492.0 million, $458.9 million, $29.6 million, $10.2 million and $297.0 million at June 30, 2018, 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 June 30, 2018 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.

Table 9 sets forth information with respect to our non-performing assets as of June 30, 2018 and December 31, 2017. As of these dates, all non-performing restructured loans are included in non-accrual loans.

Table 9: Non-performing Assets


	As of			As of
	June 30,			December 31,
	2018			2017
	(Dollars in thousands)
Non-accrual loans	$	37,082		$	34,032
Loans past due 90 days or more (principal or interest payments)		19,696			10,665

Total non-performing loans		56,778			44,697

Other non-performing assets
Foreclosed assets held for sale, net		17,853			18,867
Other non-performing assets		3			3

Total other non-performing assets		17,856			18,870

Total non-performing assets	$	74,634		$	63,567

Allowance for loan losses to non-performing loans		196.41	%		246.70	%
Non-performing loans to total loans		0.52			0.43
Non-performing assets to total assets		0.50			0.44

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 $56.8 million as of June 30, 2018, compared to $44.7 million as of December 31, 2017, an increase of $12.1 million. The $12.1 million increase in non-performing loans is the result of a $14.8 million increase in non-performing loans in our Florida market and a $769,000 increase in non-performing loans in our SPF market, which was partially offset by a $2.6 million decrease in non-performing loans in our Arkansas market and an $877,000 decrease in non-performing loans in our Alabama market. The majority of the increase in non-performing loans in our Florida market was the result of four loans with the largest loan having a balance of $5.8 million as of June 30, 2018. Non-performing loans at June 30, 2018 are $13.0 million, $43.0 million, $52,000, $769,000 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 June 30, 2018, 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. 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 June 30, 2018, we had $18.3 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 $12.9 million and our Arkansas market contains $5.4 million of these restructured loans. Our Alabama, SPF and Centennial CFG markets do not contain any restructured loans as of June 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.

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 June 30, 2018, the amount of TDRs was $20.5 million, a decrease of 3.5% from $21.2 million at December 31, 2017. As of June 30, 2018 and December 31, 2017, 89.6% and 89.7%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $17.9 million as of June 30, 2018, compared to $18.9 million as of December 31, 2017 for an increase of $1.0 million. The foreclosed assets held for sale as of June 30, 2018 are comprised of $8.0 million of assets located in Arkansas, $8.4 million of assets located in Florida, $1.4 million located in Alabama and zero from SPF and Centennial CFG.

During the first six months of 2018, we had three foreclosed properties with a carrying value greater than $1.0 million. The first property was a development property in Florida acquired from BOC with a carrying value of $2.1 million at June 30, 2018. The second property was a nonfarm non-residential property in Florida acquired from Stonegate with a carrying value of $1.9 million at June 30, 2018. The last property was a nonfarm non-residential property in Florida that used to be the Naples branch for Stonegate with a carrying value of $1.7 million at June 30, 2018. The Company does not currently anticipate any additional losses on these properties. As of June 30, 2018, 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 June 30, 2018 and December 31, 2017.

Table 10: Foreclosed Assets Held For Sale


	As of June 30, 2018		As of December 31, 2017
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	7,311	$	9,766
Construction/land development		5,261		5,920
Agricultural		—		—
Residential real estate loans
Residential 1-4 family		5,145		2,654
Multifamily residential		136		527

Total foreclosed assets held for sale	$	17,853	$	18,867

A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and non-accrual loans), criticized and/or classified loans with a specific allocation, loans categorized as TDRs and certain other loans identified by management that are still performing (loans included in multiple categories are only included once). As of June 30, 2018, average impaired loans were $80.6 million compared to $87.2 million as of December 31, 2017. As of June 30, 2018, impaired loans were $83.1 million compared to $75.6 million as of December 31, 2017, for an increase of $7.5 million. This increase is primarily associated with the increase in loan balances with a specific allocation, and the specific allocation for impaired loans increased by approximately $785,000. As of June 30, 2018, our Arkansas, Florida, Alabama, SPF and Centennial CFG markets accounted for approximately $24.7 million, $58.3 million, $52,000, $769,000 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.

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 June 30, 2018 and December 31, 2017, 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 June 30, 2018 and December 31, 2017:

Table 11: Total Non-Accrual Loans


	As of June 30, 2018		As of December 31, 2017
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	10,848	$	9,600
Construction/land development		5,362		5,011
Agricultural		247		19
Residential real estate loans
Residential 1-4 family		14,597		14,437
Multifamily residential		476		153

Total real estate		31,530		29,220
Consumer		149		145
Commercial and industrial		5,228		4,584
Agricultural		174		54
Other		1		29

Total non-accrual loans	$	37,082	$	34,032

If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $543,000 and $549,000, respectively, would have been recorded for the three-month periods ended June 30, 2018 and 2017. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $1.0 million and $1.1 million would have been recorded for each of the six-month periods ended June 30, 2018 and 2017, respectively. The interest income recognized on non-accrual loans for the three and six-month periods ended June 30, 2018 and 2017 was considered immaterial.

Table 12 shows the summary of accruing past due loans 90 days or more as of June 30, 2018 and December 31, 2017:

Table 12: Loans Accruing Past Due 90 Days or More


	As of June 30, 2018		As of December 31, 2017
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	10,634	$	3,119
Construction/land development		3,482		3,247
Agricultural		—		—
Residential real estate loans
Residential 1-4 family		1,932		2,175
Multifamily residential		798		100

Total real estate		16,846		8,641
Consumer		801		26
Commercial and industrial		2,049		1,944
Agricultural and other		—		54

Total loans accruing past due 90 days or more	$	19,696	$	10,665

Our total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.52% and 0.43% as of June 30, 2018 and December 31, 2017, 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.

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 million or greater or the total loan relationship is $2.0 million or greater, our policy requires an annual credit review. Our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually.

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

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

Allocations for Criticized and Classified Assets not 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 increased by approximately $575.2 million from $9.94 billion at December 31, 2017 to $10.51 billion at June 30, 2018. 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 1.00% and 1.06% at June 30, 2018 and December 31, 2017, respectively. This decrease is primarily the result 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.

Hurricane Irma. The Company’s allowance for loan losses as of June 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 June 30, 2018, charge-offs of $2.5 million have been taken against the storm-related provision 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 June 30, 2018 is appropriate.

Charge-offs and Recoveries. Total charge-offs increased to $2.1 million for the three months ended June 30, 2018, compared to $1.4 million for the same period in 2017. Total charge-offs decreased to $4.7 million for the six months ended June 30, 2018, compared to $6.1 million for the same period in 2017. Total recoveries decreased to $714,000 for the three months ended June 30, 2018, compared to $845,000 for the same period in 2017. Total recoveries decreased to $1.6 million for the six months ended June 30, 2018, compared to $1.9 million for the same period in 2017. For the three months ended June 30, 2018, net charge-offs were $660,000 for Arkansas, $716,000 for Florida, $43,000 for Alabama and zero for SPF and Centennial CFG, equaling a net charge-off position of $1.4 million. For the six months ended June 30, 2018, net charge-offs were $1.9 million for Arkansas, $1.0 million for Florida, $117,000 for Alabama and zero for SPF and Centennial CFG, equaling a net charge-off position of $3.1 million. While the 2018 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 13 shows the allowance for loan losses, charge-offs and recoveries as of and for the three and six-month periods ended June 30, 2018 and 2017.

Table 13: Analysis of Allowance for Loan Losses


	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Balance, beginning of period	$	110,212		$	80,311		$	110,266		$	80,002
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		390			189			837			1,528
Construction/land development		54			119			62			326
Agricultural		—			2			—			127
Residential real estate loans:
Residential 1-4 family		952			326			1,731			2,203
Multifamily residential		—			71			—			85

Total real estate		1,396			707			2,630			4,269
Consumer		43			122			58			144
Commercial and industrial		258			134			1,072			779
Agricultural		—			—			—			—
Other		435			442			912			919

Total loans charged off		2,132			1,405			4,672			6,111

Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		87			379			188			710
Construction/land development		89			28			119			227
Agricultural		—			—			—			—
Residential real estate loans:
Residential 1-4 family		167			114			494			242
Multifamily residential		7			7			41			12

Total real estate		350			528			842			1,191
Consumer		33			33			60			66
Commercial and industrial		219			70			317			252
Agricultural		—			—			—			—
Other		112			214			381			437

Total recoveries		714			845			1,600			1,946

Net loans charged off (recovered)		1,418			560			3,072			4,165
Provision for loan losses		2,722			387			4,322			4,301

Balance, June 30	$	111,516		$	80,138		$	111,516		$	80,138

Net charge-offs (recoveries) to average loans receivable		0.05	%		0.03	%		0.06	%		0.11	%
Allowance for loan losses to total loans		1.02			1.02			1.02			1.02
Allowance for loan losses to net charge-offs (recoveries)		1,961			3,568			1,800			954

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 June 30, 2018 and the year ended December 31, 2017 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 June 30, 2018 and December 31, 2017.

Table 14: Allocation of Allowance for Loan Losses


	As of June 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	$	44,949		43.4	%	$	42,893		44.5	%
Construction/land development		20,243		15.3			20,343		16.4
Agricultural		1,036		0.7			1,046		0.8
Residential real estate loans:
Residential 1-4 family		20,062		18.0			21,370		19.1
Multifamily residential		4,143		5.0			3,136		4.3

Total real estate		90,433		82.4			88,788		85.1
Consumer		386		3.8			462		0.4
Commercial and industrial		16,193		11.8			15,292		12.6
Agricultural		2,958		0.5			2,692		0.5
Other		174		1.5			180		1.4
Unallocated		1,372		—			2,852		—

Total allowance for loan losses	$	111,516		100.0	%	$	110,266		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 3.3 years as of June 30, 2018.

As of June 30, 2018 and December 31, 2017, we had $204.4 million and $224.8 million of held-to-maturity securities, respectively. Of the $204.4 million of held-to-maturity securities as of June 30, 2018, $3.8 million were invested in U.S. Government-sponsored enterprises, $64.1 million were invested in mortgage-backed securities and $136.5 million were invested in state and political subdivisions. Of the $224.8 million of held-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.

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 $1.72 billion and $1.66 billion as of June 30, 2018 and December 31, 2017, respectively.

As of June 30, 2018, $972.5 million, or 56.6%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $971.4 million, or 58.4%, of our available-for-sale securities as of December 31, 2017. To reduce our income tax burden, $308.5 million, or 17.9%, of our available-for-sale securities portfolio as of June 30, 2018, was primarily invested in tax-exempt obligations of state and political subdivisions, compared to $250.3 million, or 15.0%, of our available-for-sale securities as of December 31, 2017. Also, we had approximately $397.9 million, or 23.2%, invested in obligations of U.S. Government-sponsored enterprises as of June 30, 2018, compared to $406.3 million, or 24.4%, of our available-for-sale securities as of December 31, 2017.

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 $10.56 billion and $10.43 billion for the three and six-month periods ended June 30, 2018. Total deposits were $10.74 billion as of June 30, 2018, and $10.39 billion as of December 31, 2017. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions.

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

Table 15 reflects the classification of the brokered deposits as of June 30, 2018 and December 31, 2017.

Table 15: Brokered Deposits


	June 30, 2018		December 31, 2017
	(In thousands)
Time Deposits	$	44,971	$	60,022
CDARS		109		53,588
Insured Cash Sweep and Other Transaction Accounts		535,662		915,060

Total Brokered Deposits	$	580,742	$	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 June 30, 2018, were approximately $429.3 million lower than they would otherwise have been.

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

Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits, for the three and six-month periods ended June 30, 2018 and 2017.

Table 16: Average Deposit Balances and Rates


	Three Months Ended June 30,
	2018					2017
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	2,496,701		—	%	$	1,899,865		—	%
Interest-bearing transaction accounts		5,793,026		0.91			3,768,958		0.45
Savings deposits		658,178		0.20			523,431		0.09
Time deposits:
$100,000 or more		1,116,669		1.38			961,172		0.81
Other time deposits		494,684		0.68			482,056		0.47

Total	$	10,559,258		0.69	%	$	7,635,482		0.36	%


	Six Months Ended June 30,
	2018					2017
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	2,439,299		—	%	$	1,808,660		—	%
Interest-bearing transaction accounts		5,771,779		0.84			3,700,448		0.41
Savings deposits		658,730		0.19			515,577		0.08
Time deposits:
$100,000 or more		1,060,012		1.27			929,057		0.78
Other time deposits		502,861		0.63			471,444		0.43

Total	$	10,432,681		0.64	%	$	7,425,186		0.33	%

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 $8.0 million, or 5.4%, from $147.8 million as of December 31, 2017 to $139.8 million as of June 30, 2018.

FHLB Borrowed Funds

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $368.4 million as of June 30, 2018, and $357.8 million as of June 30, 2017.

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.

Stockholders’ Equity

Stockholders’ equity was $2.31 billion at June 30, 2018 compared to $2.20 billion at December 31, 2017. The increase in stockholders’ equity is primarily associated with the $111.9 million increase in retained earnings for the first six months of 2018 combined with the issuance of 1,250,000 shares of common stock with a value of $28.2 million as part of the acquisition of SPF, partially offset by $20.2 million of other comprehensive losses and the repurchase of $15.0 million of our common stock. The annualized improvement in stockholders’ equity for the first six months of 2018, excluding the $28.2 million of common stock issued for the acquisition of SPF, was 7.4%. As of June 30, 2018 and December 31, 2017, our equity to asset ratio was 15.51% and 15.25%, respectively. Book value per share was $13.26 as of June 30, 2018, compared to $12.70 as of December 31, 2017, an 8.82% annualized increase.

Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.11 per share and $0.09 per share for the three-month periods ended June 30, 2018 and 2017, respectively. The common stock dividend payout ratio for the three months ended June 30, 2018 and 2017 was 25.1% and 25.8%, respectively. The common stock dividend payout ratio for the six months ended June 30, 2018 and 2017 was 25.6% and 26.4%, respectively. For the third quarter of 2018, the Board of Directors declared a regular $0.12 per share quarterly cash dividend payable September 5, 2018, to shareholders of record August 15, 2018.

Stock Repurchase Program. 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 approximately 14,752,000 shares. During the first six months of 2018, the Company utilized a portion of this stock repurchase program. We repurchased a total of 345,683 shares with a weighted-average stock price of $22.77 per share during the second quarter of 2018. Shares repurchased under the program as of June 30, 2018 total 5,174,184 shares. The remaining balance available for repurchase was 9,577,816 shares at June 30, 2018.

Liquidity and Capital Adequacy Requirements

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

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of June 30, 2018 and December 31, 2017, we met all regulatory capital adequacy requirements to which we were subject.

Table 17 presents our risk-based capital ratios on a consolidated basis as of June 30, 2018 and December 31, 2017.

Table 17: Risk-Based Capital


	As of June 30, 2018			As of December 31, 2017
	(Dollars in thousands)
Tier 1 capital
Stockholders’ equity	$	2,314,013		$	2,204,291
Goodwill and core deposit intangibles, net		(1,002,066	)		(966,890	)
Unrealized (gain) loss on available-for-sale securities		23,609			3,421
Deferred tax assets		—			—

Total common equity Tier 1 capital		1,335,556			1,240,822
Qualifying trust preferred securities		70,769			70,698

Total Tier 1 capital		1,406,325			1,311,520

Tier 2 capital
Qualifying subordinated notes		297,634			297,332
Qualifying allowance for loan losses		111,516			110,266

Total Tier 2 capital		409,150			407,598

Total risk-based capital	$	1,815,475		$	1,719,118

Average total assets for leverage ratio	$	13,302,417		$	13,147,046

Risk weighted assets	$	12,013,508		$	11,424,963

Ratios at end of period
Common equity Tier 1 capital		11.12	%		10.86	%
Leverage ratio		10.57			9.98
Tier 1 risk-based capital		11.71			11.48
Total risk-based capital		15.11			15.05
Minimum guidelines – Basel III phase-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 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”, we, as well as our banking subsidiary, must maintain minimum common equity Tier 1 capital, leverage, Tier 1 risk-based capital, and total risk-based capital ratios as set forth in the table. There are no conditions or events since that notification that we believe have changed the bank subsidiary’s category.

Non-GAAP Financial Measurements

Our accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, this report contains financial information determined by methods other than in accordance with generally accepted accounting principles (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; 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”).

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

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

Table 18: Earnings, As Adjusted


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(Dollars in thousands)
GAAP net income available to common shareholders (A)	$	76,025	$	50,097	$	149,089	$	96,953
Adjustments:
Gain on acquisitions		—		—		—		(3,807	)
Merger expenses		—		789		—		7,516

Total adjustments		—		789		—		3,709
Tax-effect of adjustments ⁽¹⁾		—		199		—		2,581

Adjustments after-tax (B)		—		590		—		1,128

Earnings, as adjusted (C)	$	76,025	$	50,687	$	149,089	$	98,081

Average diluted shares outstanding (D)		173,936		144,116		174,168		143,270
GAAP diluted earnings per share: A/D	$	0.44	$	0.35	$	0.86	$	0.68
Adjustments after-tax B/D		—		—		—		—

Diluted earnings per common share, as adjusted: C/D	$	0.44	$	0.35	$	0.86	$	0.68

(1)	Effective tax rate of 39.225%, adjusted for non-taxable gain on acquisition and non-deductible merger-related costs for the quarter ended June 30, 2017.

We had $1.00 billion, $977.3 million, and $442.0 million total goodwill, core deposit intangibles and other intangible assets as of June 30, 2018, December 31, 2017 and June 30, 2017, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets, return on average tangible equity excluding intangible amortization and tangible equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculation of diluted earnings 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 June 30, 2018		As of December 31, 2017
	(In thousands, except per share data)
Book value per share: A/B	$	13.26	$	12.70
Tangible book value per share: (A-C-D)/B		7.52		7.07
(A) Total equity	$	2,314,013	$	2,204,291
(B) Shares outstanding		174,511		173,633
(C) Goodwill	$	956,418	$	927,949
(D) Core deposit and other intangibles		46,101		49,351

Table 20: Return on Average Assets


	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Return on average assets: A/D		2.13	%		1.86	%		2.11	%		1.86	%
Return on average assets excluding intangible amortization: B/(D-E)		2.32			1.96			2.30			1.96
Return on average assets excluding gain on acquisitions and merger expenses: (A+C)/D
(A) Net income	$	76,025		$	50,097		$	149,089		$	96,953
Intangible amortization after-tax		1,200			526			2,401			1,015

(B) Earnings excluding intangible amortization	$	77,225		$	50,623		$	151,490		$	97,968

(C) Adjustments after-tax	$	—		$	590		$	—		$	1,128
(D) Average assets		14,304,483			10,793,770			14,269,620			10,498,143
(E) Average goodwill, core deposits and other intangible assets		975,345			442,380			975,895			429,113

Table 21: Return on Average Tangible Equity Excluding Intangible Amortization


	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Return on average equity: A/C		13.54	%		13.83	%		13.46	%		13.84	%
Return on average tangible equity excluding intangible amortization: B/(C-D)		24.27			20.09			24.30			20.09
(A) Net income	$	76,025		$	50,097		$	149,089		$	96,953
(B) Earnings excluding intangible amortization		77,225			50,623			151,490			97,968
(C) Average equity		2,251,412			1,453,099			2,232,959			1,412,639
(D) Average goodwill, core deposits and other intangible assets		975,345			442,380			975,895			429,113

Table 22: Tangible Equity to Tangible Assets


	As of June 30, 2018			As of December 31, 2017
	(Dollars in thousands)
Equity to assets: B/A		15.51	%		15.25	%
Tangible equity to tangible assets: (B-C-D)/(A-C-D)		9.42			9.11
(A) Total assets	$	14,924,120		$	14,449,760
(B) Total equity		2,314,013			2,204,291
(C) Goodwill		956,418			927,949
(D) Core deposit and other intangibles		46,101			49,351

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

Table 23: Efficiency Ratio, As Adjusted


	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Net interest income (A)	$	138,612		$	107,352		$	274,821		$	212,167
Non-interest income (B)		27,673			24,417			53,478			50,887
Non-interest expense (C)		63,228			51,003			126,608			106,144
FTE Adjustment (D)		1,403			2,016			2,612			4,027
Amortization of intangibles (E)		1,624			866			3,250			1,670
Non-fundamental items:
Non-interest income:
Gain on acquisitions	$	—		$	—		$	—		$	3,807
Gain (loss) on OREO, net		1,046			393			1,451			514
Gain on sale of SBA loans		262			387			444			575
Gain (loss) on sale of branches, equipment and other assets, net		—			431			7			375
Gain (loss) on securities, net		—			380			—			803

Total non-fundamental non-interest income (F)	$	1,308		$	1,591		$	1,902		$	6,074

Non-interest expense:
Merger expenses	$	—		$	789		$	—		$	7,516
Other expense⁽¹⁾		—			47			—			47

Total non-fundamental non-interest expense (G)	$	—		$	836		$	—		$	7,563

Efficiency ratio (reported): ((C-E)/(A+B+D))		36.74	%		37.48	%		37.28	%		39.12	%
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F))		37.03			37.29			37.49			37.13

(1)	Amount includes vacant properties write-downs.

Recently Issued Accounting Pronouncements

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

Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Liquidity and Market Risk Management

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

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

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 June 30, 2018, our cash and cash equivalents were $495.7 million, or 3.3% of total assets, compared to $635.9 million, or 4.4% of total assets, as of December 31, 2017. Our available-for-sale investment securities and federal funds sold were $1.72 billion and $1.69 billion as of June 30, 2018 and December 31, 2017, respectively.

As of June 30, 2018, our investment portfolio was comprised of approximately 69.2% or $1.33 billion of securities which mature in less than five years. As of June 30, 2018 and December 31, 2017, $1.14 billion and $1.18 billion, respectively, of securities were pledged as collateral for various public fund deposits and securities sold under agreements to repurchase.

On the liability side, our principal sources of liquidity are deposits, borrowed funds, and access to capital markets. Customer deposits are our largest sources of funds. As of June 30, 2018, our total deposits were $10.74 billion, or 71.9% of total assets, compared to $10.39 billion, or 71.9% of total assets, as of December 31, 2017. 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 three other financial institutions.

As of June 30, 2018 and December 31, 2017, we could have borrowed up to $145.1 million and $106.4 million, respectively, on a secured basis from the Federal Reserve, up to $50.0 million from First National Bankers’ Bank on an unsecured 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 $1.31 billion and $1.30 billion at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, $885.0 million and $425.0 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. Our unused FHLB borrowing availability was $1.74 billion and $1.96 billion as of June 30, 2018 and December 31, 2017, respectively.

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

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

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

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

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

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

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased and decreased over twelve months by 200 and 100 basis points, respectively. At June 30, 2018, 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 June 30, 2018.

Table 24: Sensitivity of Net Interest Income


	Percentage
	Change
Interest Rate Scenario	from Base
Up 200 basis points		6.71	%
Up 100 basis points		3.75
Down 100 basis points		(6.18	)
Down 200 basis points		(12.23	)

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

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

Gap analysis attempts to capture the amounts and timing of balances exposed to changes in interest rates at a given point in time. As of June 30, 2018, our gap position was asset sensitive with a one-year cumulative repricing gap as a percentage of total earning assets of 5.9%.

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 June 30, 2018.

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	$	298,085		$	—		$	—		$	—		$	—		$	—		$	—		$	298,085
Federal funds sold		500			—			—			—			—			—			—			500
Investment securities		278,105			59,440			95,180			116,119			190,303			489,882			694,076			1,923,105
Loans receivable		3,486,891			604,364			756,152			1,275,858			1,592,588			2,578,701			603,416			10,897,970

Total earning assets		4,063,581			663,804			851,332			1,391,977			1,782,891			3,068,583			1,297,492			13,119,660

Interest-bearing liabilities
Interest-bearing transaction and savings deposits		1,152,566			515,897			773,846			1,547,692			886,677			644,791			1,052,433			6,573,902
Time deposits		139,156			141,059			222,608			460,647			560,342			112,597			2,169			1,638,578
Securities sold under repurchase agreements		139,750			—			—			—			—			—			—			139,750
FHLB and other borrowed funds		510,010			240,065			270,024			15,044			143,048			131,759			—			1,309,950
Subordinated debentures		70,769			—			—			—			—			297,634			—			368,403

Total interest-bearing liabilities		2,012,251			897,021			1,266,478			2,023,383			1,590,067			1,186,781			1,054,602			10,030,583

Interest rate sensitivity gap	$	2,051,330		$	(233,217	)	$	(415,146	)	$	(631,406	)	$	192,824		$	1,881,802		$	242,890		$	3,089,077

Cumulative interest rate sensitivity gap	$	2,051,330		$	1,818,113		$	1,402,967		$	771,561		$	964,385		$	2,846,187		$	3,089,077
Cumulative rate sensitive assets to rate sensitive liabilities		201.9	%		162.5	%		133.6	%		112.4	%		112.4	%		131.7	%		130.8	%
Cumulative gap as a % of total earning assets		15.6	%		13.9	%		10.7	%		5.9	%		7.4	%		21.7	%		23.5	%

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 June 30, 2018, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

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

Item 1A: Risk Factors

There were no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2017. 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 the Company’s acquisition of SPF, on June 30, 2018, the Company issued 1,250,000 shares of HBI common stock to Union in partial consideration for 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 June 30, 2018, the Company utilized a portion of its stock repurchase program last amended and approved by the Board of Directors on February 21, 2018. This program authorized the repurchase of 14,752,000 shares of the Company’s common stock. The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:


Period	Number of Shares Purchased		Average Price Paid Per Share Purchased		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs⁽¹⁾
April 1 through April 30, 2018		231,463	$	22.66		231,463		9,692,036
May 1 through May 31, 2018		—		—		—		9,692,036
June 1 through June 30, 2018		114,220		22.99		114,220		9,577,816

Total		345,683		22.77		345,683

(1)	The above described stock repurchase program has no expiration date.

Item 3: Defaults Upon Senior Securities

Not applicable.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

Not applicable.

Item 6: Exhibits


Exhibit No.

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

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

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

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

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

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

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

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

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

3.10		Restated Bylaws of Home BancShares, Inc. (incorporated by reference to Exhibit 3.5 of Home BancShares’s registration statement on Form S-1 (File No. 333-132427), as amended)

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

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

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 Form 8-K filed on March 30, 2012)

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 on Form 10-Q for the period ended June 30, 2015, filed on August 6, 2015)

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 on Form 8-K filed on April 22, 2016)

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 on Form 8-K filed on April 20, 2018)

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 on Form 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 Pursuant Rule 13a-14(a)/15d-14(a)*

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



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

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

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 on Form 8-K filed on July 6, 2018)

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

*	Filed herewith

SIGNATURES

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


HOME BANCSHARES, INC.
(Registrant)

Date: August 6, 2018				/s/ C. Randall Sims
				C. Randall Sims, Chief Executive Officer

Date: August 6, 2018				/s/ Brian S. Davis
				Brian S. Davis, Chief Financial Officer

Date: August 6, 2018				/s/ Jennifer C. Floyd
				Jennifer C. Floyd, Chief Accounting Officer