HOME BANCSHARES INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period Ended September 30, 2019


☐	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 incorporation or organization)		(I.R.S. Employer Identification No.)

719 Harkrider, Suite 100, Conway, Arkansas		72032
(Address of principal executive offices)		(Zip Code)

(501) 339-2929
(Registrant's telephone number, including area code)

Not Applicable
Former name, former address and former fiscal year, if changed since last report

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


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

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

Yes ☑ No ☐

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

Yes ☑ No ☐

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

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

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

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

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

Common Stock Issued and Outstanding: 166,837,133 shares as of November 8, 2019.



HOME BANCSHARES, INC. FORM 10-Q September 30, 2019

INDEX

		Page No.
Part I:	Financial Information

Item 1:	Financial Statements

	Consolidated Balance Sheets –
	September 30, 2019 (Unaudited) and December 31, 2018	4

	Consolidated Statements of Income (Unaudited) –
	Three and nine months ended September 30, 2019 and 2018	5

	Consolidated Statements of Comprehensive Income (Unaudited) –
	Three and nine months ended September 30, 2019 and 2018	6

	Consolidated Statements of Stockholders’ Equity (Unaudited) –
	Three and nine months ended September 30, 2019 and 2018	7-8

	Consolidated Statements of Cash Flows (Unaudited) –
	Nine months ended September 30, 2019 and 2018	9

	Condensed Notes to Consolidated Financial Statements (Unaudited)	10-44

	Report of Independent Registered Public Accounting Firm	45

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46-79
9
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	79-82

Item 4:	Controls and Procedures	82

Part II:	Other Information

Item 1:	Legal Proceedings	83

Item 1A:	Risk Factors	83

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	83

Item 3:	Defaults Upon Senior Securities	83

Item 4:	Mine Safety Disclosures	83

Item 5:	Other Information	83

Item 6:	Exhibits	84-85

Signatures		86

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 applies as a result of our exceeding $10 billion in total assets;

•

legislation and regulation affecting the financial services industry as a whole, and the Company and its subsidiaries in particular, including the effects resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), recent reforms to the Dodd-Frank Act and other future legislative and regulatory changes;

•

governmental monetary and fiscal policies;

•

the effects of terrorism and efforts to combat it;

•

political instability;

•

risks associated with our customer relationship with the Cuban government and our correspondent banking relationship with Banco Internacional de Comercio, S.A. (BICSA), a Cuban commercial bank;

•

adverse weather events, including hurricanes, and other natural disasters;

•

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

•

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

•

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

•

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 26, 2019.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Home BancShares, Inc.

Consolidated Balance Sheets

(In thousands, except share data)	September 30, 2019			December 31, 2018
	(Unaudited)
Assets
Cash and due from banks	$	171,492		$	175,024
Interest-bearing deposits with other banks		270,804			482,915
Cash and cash equivalents		442,296			657,939
Federal funds sold		1,650			325
Investment securities – available-for-sale		2,087,508			1,785,862
Investment securities – held-to-maturity		—			192,776
Loans receivable		10,771,946			11,071,879
Allowance for loan losses		(104,304	)		(108,791	)
Loans receivable, net		10,667,642			10,963,088
Bank premises and equipment, net		277,966			233,261
Foreclosed assets held for sale		8,639			13,236
Cash value of life insurance		102,003			148,621
Accrued interest receivable		47,557			48,945
Deferred tax asset, net		53,436			73,275
Goodwill		958,408			958,408
Core deposit and other intangibles		38,136			42,896
Other assets		216,694			183,806
Total assets	$	14,901,935		$	15,302,438
Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing	$	2,394,207		$	2,401,232
Savings and interest-bearing transaction accounts		6,620,616			6,624,407
Time deposits		2,032,547			1,874,139
Total deposits		11,047,370			10,899,778
Federal funds purchased		50,000			—
Securities sold under agreements to repurchase		157,038			143,679
FHLB and other borrowed funds		691,443			1,472,393
Accrued interest payable and other liabilities		117,332			67,912
Subordinated debentures		369,363			368,790
Total liabilities		12,432,546			12,952,552
Stockholders’ equity:
Common stock, par value $0.01; shares authorized 300,000,000 in 2019 and 200,000,000 in 2018; shares issued and outstanding 166,859,789 in 2019 and 170,720,072 in 2018		1,669			1,707
Capital surplus		1,542,858			1,609,810
Retained earnings		904,980			752,184
Accumulated other comprehensive income (loss)		19,882			(13,815	)
Total stockholders’ equity		2,469,389			2,349,886
Total liabilities and stockholders’ equity	$	14,901,935		$	15,302,438

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Income

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands, except per share data)	2019		2018			2019			2018
	(Unaudited)
Interest income:
Loans	$	167,470	$	166,334		$	497,134		$	467,395
Investment securities
Taxable		10,343		9,011			31,699			26,960
Tax-exempt		3,193		3,427			9,755			9,801
Deposits – other banks		1,068		1,273			4,239			3,408
Federal funds sold		8		6			29			24
Total interest income		182,082		180,051			542,856			507,588
Interest expense:
Interest on deposits		29,566		21,412			87,281			54,382
Federal funds purchased		21		—			21			1
FHLB and other borrowed funds		3,683		7,055			14,523			15,880
Securities sold under agreements to repurchase		628		472			1,892			1,220
Subordinated debentures		5,207		5,202			15,705			15,374
Total interest expense		39,105		34,141			119,422			86,857
Net interest income		142,977		145,910			423,434			420,731
Provision for loan losses		—		—			1,325			4,322
Net interest income after provision for loan losses		142,977		145,910			422,109			416,409
Non-interest income:
Service charges on deposit accounts		6,492		6,992			19,152			19,847
Other service charges and fees		8,710		9,041			23,450			28,993
Trust fees		382		437			1,176			1,262
Mortgage lending income		4,610		3,691			10,502			9,825
Insurance commissions		603		463			1,727			1,668
Increase in cash value of life insurance		714		735			2,190			2,119
Dividends from FHLB, FRB, FNBB & other		1,101		1,288			5,755			3,765
Gain on sale of SBA loans		291		47			887			491
Gain (loss) on sale of branches, equipment and other assets, net		12		(102	)		(38	)		(95	)
Gain on OREO, net		334		836			598			2,287
Other income		1,500		2,419			6,088			9,163
Total non-interest income		24,749		25,847			71,487			79,325
Non-interest expense:
Salaries and employee benefits		39,919		37,825			115,731			107,315
Occupancy and equipment		9,047		8,148			26,723			25,650
Data processing expense		4,059		3,461			11,867			10,786
Other operating expenses		14,739		16,689			50,124			48,980
Total non-interest expense		67,764		66,123			204,445			192,731
Income before income taxes		99,962		105,634			289,151			303,003
Income tax expense		27,199		25,350			72,874			73,630
Net income	$	72,763	$	80,284		$	216,277		$	229,373
Basic earnings per share	$	0.44	$	0.46		$	1.29		$	1.32
Diluted earnings per share	$	0.44	$	0.46		$	1.29		$	1.32

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Comprehensive Income

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2019			2018			2019			2018
	(Unaudited)
Net income	$	72,763		$	80,284		$	216,277		$	229,373
Net unrealized gain (loss) on available-for-sale securities		6,923			(9,979	)		46,240			(35,957	)
Other comprehensive income (loss), before tax effect		6,923			(9,979	)		46,240			(35,957	)
Tax effect on other comprehensive (loss) income		(1,809	)		2,867			(12,084	)		9,647
Other comprehensive income (loss)		5,114			(7,112	)		34,156			(26,310	)
Comprehensive income	$	77,877		$	73,172		$	250,433		$	203,063

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2019 and 2018

For the Three and Nine Months Ended September 30, 2019
(In thousands, except share data)	Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances at January 1, 2019	$	1,707		$	1,609,810		$	752,184		$	(13,815	)	$	2,349,886
Comprehensive income:
Net income		—			—			71,350			—			71,350
Other comprehensive income		—			—			—			9,453			9,453
Impact of adoption of new accounting standards⁽¹⁾		—			—			459			(459	)		—
Repurchase of 2,716,359 shares of common stock		(27	)		(51,658	)		—			—			(51,685	)
Share-based compensation net issuance of 169,125 shares of restricted common stock		2			2,842			—			—			2,844
Cash dividends – Common Stock, $0.12 per share		—			—			(20,364	)		—			(20,364	)
Balances at March 31, 2019 (unaudited)	$	1,682		$	1,560,994		$	803,629		$	(4,821	)	$	2,361,484
Comprehensive income:
Net Income		—			—			72,164			—			72,164
Other comprehensive income		—			—			—			19,589			19,589
Repurchase of 700,363 shares of common stock		(7	)		(12,680	)		—			—			(12,687	)
Share-based compensation net forfeiture of 6,500 shares of restricted stock		—			2,685			—			—			2,685
Cash dividends – Common Stock, $0.13 per share		—			—			(21,829	)		—			(21,829	)
Balances at June 30, 2019 (unaudited)	$	1,675		$	1,550,999		$	853,964		$	14,768		$	2,421,406
Comprehensive income:
Net Income		—			—			72,763			—			72,763
Other comprehensive income		—			—			—			5,114			5,114
Net issuance of 23,314 shares of common stock from exercise of stock options		—			231			—			—			231
Repurchase of 615,000 shares of common stock		(6	)		(11,018	)		—			—			(11,024	)
Share-based compensation net forfeiture of 14,500 shares of restricted stock		—			2,646									2,646
Cash dividends – Common Stock, $0.13 per share								(21,747	)					(21,747	)
Balances at September 30, 2019 (unaudited)	$	1,669		$	1,542,858		$	904,980		$	19,882		$	2,469,389

(1)	Represents the impact of adopting Accounting Standard Update (“ASU”) 2018-02. See Note 1 to the consolidated financial statements for more information.

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2019 and 2018

For the Three and Nine Months Ended September 30, 2018
(In thousands, except share data)	Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances at January 1, 2018	$	1,736		$	1,675,318		$	530,658		$	(3,421	)	$	2,204,291
Comprehensive income:
Net income		—			—			73,064			—			73,064
Other comprehensive loss		—			—			—			(15,871	)		(15,871	)
Net issuance of 142,116 shares of common stock from exercise of stock options		1			899			—			—			900
Impact of adoption of new accounting standards⁽²⁾		—			—			990			(990	)		—
Repurchase of 303,637 shares of common stock		(3	)		(7,111	)		—			—			(7,114	)
Share-based compensation net issuance of 147,000 shares of restricted common stock		2			2,035			—			—			2,037
Cash dividends – Common Stock, $0.11 per share		—			—			(19,126	)		—			(19,126	)
Balances at March 31, 2018 (unaudited)	$	1,736		$	1,671,141		$	585,586		$	(20,282	)	$	2,238,181
Comprehensive income:
Net income		—			—			76,025			—			76,025
Other comprehensive loss		—			—			—			(3,327	)		(3,327	)
Issuance of common stock - 3,424 stock options		—			38			—			—			38
Issuance 1,250,000 shares of common stock from acquisition of Shore Premier Finance		13			28,188			—			—			28,201
Repurchase of 345,683 shares of common stock		(3	)		(7,878	)		—			—			(7,881	)
Share-based compensation		(1	)		1,848			—			—			1,847
Cash dividends – Common Stock, $0.11 per share		—			—			(19,071	)		—			(19,071	)
Balances at June 30, 2018 (unaudited)	$	1,745		$	1,693,337		$	642,540		$	(23,609	)	$	2,314,013
Comprehensive income:
Net income		—			—			80,284			—			80,284
Other comprehensive loss		—			—			—			(7,112	)		(7,112	)
Net issuance of 31,281 shares of common stock from exercise of stock options		1			318			—			—			319
Repurchase of 1,214,080 shares of common stock		(13	)		(28,162	)		—			—			(28,175	)
Share-based compensation net issuance of 809,125 shares of restricted common stock		8			2,613			—			—			2,621
Cash dividends – Common Stock, $0.12 per share		—			—			(20,924	)		—			(20,924	)
Balances at September 30, 2018 (unaudited)	$	1,741		$	1,668,106		$	701,900		$	(30,721	)	$	2,341,026

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

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Cash Flows

	Nine Months Ended September 30,
(In thousands)	2019			2018
	(Unaudited)
Operating Activities
Net income	$	216,277		$	229,373
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization		14,689			14,588
Amortization of securities, net		11,363			10,601
Accretion of purchased loans		(26,757	)		(32,021	)
Share-based compensation		8,175			6,505
Gain on assets		(1,060	)		(3,436	)
Provision for loan losses		1,325			4,322
Deferred income tax effect		19,840			14,593
Increase in cash value of life insurance		(2,190	)		(2,119	)
Originations of mortgage loans held for sale		(333,695	)		(258,520	)
Proceeds from sales of mortgage loans held for sale		293,868			262,900
Changes in assets and liabilities:
Accrued interest receivable		1,388			(2,377	)
Other assets		(19,933	)		(16,318	)
Accrued interest payable and other liabilities		4,376			28,547
Net cash provided by operating activities		187,666			256,638
Investing Activities
Net (increase) decrease in federal funds sold		(1,325	)		23,609
Net decrease (increase) in loans, excluding purchased loans		342,293			(119,723	)
Purchases of investment securities – available-for-sale		(439,281	)		(380,847	)
Proceeds from maturities of investment securities – available-for-sale		365,288			252,795
Proceeds from sale of investment securities – available-for-sale		—			1,064
Proceeds from maturities of investment securities – held-to-maturity		—			25,007
Redemptions (purchases) of other investments		23,385			(1,167	)
Proceeds from foreclosed assets held for sale		11,960			17,744
Proceeds from sale of SBA loans		12,534			7,938
Purchases of premises and equipment, net		(9,059	)		(5,070	)
Return of investment on cash value of life insurance		—			1,325
Net cash paid – market acquisitions		—			(377,411	)
Net cash provided by (used in) investing activities		305,795			(554,736	)
Financing Activities
Net increase in deposits		147,592			236,236
Net decrease in securities sold under agreements to repurchase		13,359			(5,643	)
Net increase in federal funds purchased		50,000			—
Net (decrease) increase in FHLB and other borrowed funds		(780,950	)		64,663
Proceeds from exercise of stock options		231			1,257
Repurchase of common stock		(75,396	)		(43,170	)
Dividends paid on common stock		(63,940	)		(59,121	)
Net cash (used in) provided by financing activities		(709,104	)		194,222
Net change in cash and cash equivalents		(215,643	)		(103,876	)
Cash and cash equivalents – beginning of year		657,939			635,933
Cash and cash equivalents – end of period	$	442,296		$	532,057

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 September 30, 2019 and 2018 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 2018 Form 10-K, filed with the Securities and Exchange Commission.

New Accounting Pronouncements

The Company adopted ASU 2016-02, Leases (Topic 842), ASU 2018-11, Leases (Topic 842) Targeted Improvements and ASU 2018-20 Narrow Scope Improvements for Lessors effective January 1, 2019. In accordance with the lease standards, the Company determines if an arrangement is a lease at inception. Operating leases are included in the right-of-use (“ROU”) lease asset and lease liability within bank premises and equipment, net and other liabilities, respectively, on the Company’s balance sheets. The ROU lease assets represent the Company’s right to use an underlying asset for the lease term, and the lease liability represents the Company’s obligation to make lease payments arising from the lease. The operating ROU lease asset and lease liability are recognized at the commencement date are based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. See Note 15 for additional disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting model to provide better insight to risk management activities in the financial statements, reduces the complexity in cash flow hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, requires the entire change in the fair value of a hedging instrument included in the assessment of the hedge effectiveness to be recorded in other comprehensive income, with amounts reclassified to earnings to be presented in the same line item used to present the earnings effect of the hedged item when the hedged item affects earnings and allows the initial prospective quantitative assessment of hedge effectiveness to be performed at any time after hedge designation, but no later than the first quarterly effectiveness testing date. This ASU is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The amendments in this standard must be applied using the modified retrospective approach for cash flow and net investment hedge relationships existing on the date of adoption. The Company adopted the guidance effective January 1, 2019, and as permitted by the ASU, the Company reclassified the prepayable held-to-maturity investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to available-for-sale investment securities.

The Company adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income effective January 1, 2019. In accordance with the standard, the Company made an election to reclassify the income tax effects of the Tax Cuts and Jobs Act (“TCJA”) from accumulated other comprehensive income (“AOCI”) to retained earnings. The stranded tax effects were a result of the decrease in the corporate tax rate from 35% to 21% on deferred tax liabilities and assets for available-for-sale and equity securities which had been recognized as an adjustment to income tax expense and included in income from continuing operations, with the tax effects initially recognized directly in other comprehensive income which caused the stranded tax effects to remain in AOCI. The Company adopted the guidance effective January 1, 2019, and its adoption resulted in a $459,000 reclassification between retained earnings and accumulated other comprehensive income. The Company’s policy for future tax rate changes is to release the future disproportionate income tax effects from AOCI using the aggregate portfolio approach.

Revenue Recognition

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

•

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

•

Other service charges and fees – These represent credit card interchange fees and Centennial Commercial Finance Group (“Centennial CFG”) loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. The Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310.

Earnings per Share

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Net income	$	72,763	$	80,284	$	216,277	$	229,373
Average shares outstanding		167,178		174,440		168,178		173,870
Effect of common stock options		—		427		—		524
Average diluted shares outstanding		167,178		174,867		168,178		174,394
Basic earnings per share	$	0.44	$	0.46	$	1.29	$	1.32
Diluted earnings per share	$	0.44	$	0.46	$	1.29	$	1.32

As of September 30, 2019, options to purchase 3.6 million shares of common stock, with a weighted average exercise price of $19.60, were excluded from the computation of diluted earnings per share as the majority of the options had an exercise price which was greater than the average market price of the common stock.

2. Business Combinations

Acquisition of Shore Premier Finance

On June 30, 2018, the Company completed the acquisition of Shore Premier Finance (“SPF”), a division of Union Bank & Trust of Richmond, Virginia, the bank subsidiary of Union Bankshares Corporation. The Company paid a purchase price of approximately $377.4 million in cash, subject to certain post-closing adjustments, and 1,250,000 shares of HBI common stock valued at approximately $28.2 million at the time of closing. SPF provides direct consumer financing for United States Coast Guard (“USCG”) registered high-end sail and power boats. Additionally, SPF provides inventory floor plan lines of credit to marine dealers, primarily those selling USCG documented vessels.

Including the purchase accounting adjustments, as of the acquisition date, SPF had approximately $377.0 million in total assets, including $376.2 million in total loans, which resulted in goodwill of $30.5 million being recorded.

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

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

3. Investment Securities

Effective January 1, 2019, as permitted by ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, the Company reclassified the prepayable held-to-maturity (“HTM”) investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to available-for-sale investment securities. The amortized cost and estimated fair value of investment securities that are classified as available-for-sale and held-to-maturity are as follows:

	September 30, 2019
	Available-for-Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	420,357	$	1,175	$	(2,169	)	$	419,363
Residential mortgage-backed securities		687,461		4,612		(1,969	)	$	690,104
Commercial mortgage-backed securities		505,844		9,981		(368	)	$	515,457
State and political subdivisions		413,860		15,370		(60	)	$	429,170
Other securities		33,070		652		(308	)	$	33,414
Total	$	2,060,592	$	31,790	$	(4,874	)	$	2,087,508

	December 31, 2018
	Available-for-Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	418,605	$	504	$	(4,976	)	$	414,133
Residential mortgage-backed securities		580,183		1,230		(8,512	)	$	572,901
Commercial mortgage-backed securities		463,084		539		(7,745	)	$	455,878
State and political subdivisions		308,835		2,311		(2,589	)	$	308,557
Other securities		34,336		304		(247	)	$	34,393
Total	$	1,805,043	$	4,888	$	(24,069	)	$	1,785,862

	Held-to-Maturity
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	3,261	$	14	$	(71	)	$	3,204
Residential mortgage-backed securities		39,707		20		(689	)	$	39,038
Commercial mortgage-backed securities		17,587		58		(267	)	$	17,378
State and political subdivisions		132,221		1,815		(46	)	$	133,990
Total	$	192,776	$	1,907	$	(1,073	)	$	193,610

Assets, principally investment securities, having a carrying value of approximately $913.2 million and $1.32 billion at September 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The decrease in investments pledged to secure public deposits is due to the Company increasing the usage of FHLB letters of credit in order to secure public deposits. Also, investment securities pledged as collateral for repurchase agreements totaled approximately $157.0 million and $143.7 million at September 30, 2019 and December 31, 2018, respectively.

The amortized cost and estimated fair value of securities classified as available-for-sale at September 30, 2019, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Estimated Fair Value
	(In thousands)
Due in one year or less	$	237,617	$	238,940
Due after one year through five years		1,251,034		1,260,699
Due after five years through ten years		398,935		411,914
Due after ten years		173,006		175,955
Total	$	2,060,592	$	2,087,508

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

During the three-month and nine-month periods ended September 30, 2019, no available-for-sale securities were sold.

During the three-month period ended September 30, 2018, approximately $1.4 million in available-for-sale securities were sold. During the nine-month period ended September 30, 2018, approximately $2.1 million in available-for-sale securities were sold. There were no realized gains or losses recorded on the sales for the three and nine-month periods ended September 30, 2018. During 2018, no held-to-maturity securities were sold.

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

During the three and nine-month periods ended September 30, 2019, no securities were deemed to have other-than-temporary impairment.

For the nine months ended September 30, 2019, the Company had investment securities with approximately $3.6 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 (not the issuer’s financial condition or downgrades by rating agencies). In addition, approximately 71.8% 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 September 30, 2019 and December 31, 2018:

	September 30, 2019
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
U.S. government-sponsored enterprises	$	103,438	$	(331	)	$	160,619	$	(1,838	)	$	264,057	$	(2,169	)
Residential mortgage-backed securities		147,350		(694	)		171,423		(1,275	)		318,773		(1,969	)
Commercial mortgage-backed securities		20,968		(32	)		61,437		(336	)		82,405		(368	)
State and political subdivisions		8,642		(29	)		5,251		(31	)		13,893		(60	)
Other securities		3,312		(212	)		8,113		(96	)		11,425		(308	)
Total	$	283,710	$	(1,298	)	$	406,843	$	(3,576	)	$	690,553	$	(4,874	)

	December 31, 2018
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
U.S. government-sponsored enterprises	$	148,392	$	(1,398	)	$	192,456	$	(3,649	)	$	340,848	$	(5,047	)
Residential mortgage-backed securities		95,001		(713	)		386,279		(8,488	)		481,280		(9,201	)
Commercial mortgage-backed securities		33,917		(337	)		368,705		(7,675	)		402,622		(8,012	)
State and political subdivisions		64,376		(763	)		77,602		(1,872	)		141,978		(2,635	)
Other securities		3,364		(154	)		8,307		(93	)		11,671		(247	)
Total	$	345,050	$	(3,365	)	$	1,033,349	$	(21,777	)	$	1,378,399	$	(25,142	)

As of September 30, 2019, the Company's securities portfolio consisted of 1,324 investment securities, 340 of which were in an unrealized loss position. As noted in the table above, the total amount of the unrealized loss was $4.9 million. The U.S government-sponsored enterprises portfolio contained unrealized losses of $2.2 million on 83 securities. The residential mortgage-backed securities portfolio contained $2.0 million of unrealized losses on 205 securities, and the commercial mortgage-backed securities portfolio contained $368,000 of unrealized losses on 33 securities. The state and political subdivisions portfolio contained $60,000 of unrealized losses on 14 securities. In addition, the other securities portfolio contained $308,000 of unrealized losses on 5 securities. The unrealized losses on the Company's investments were a result of interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value was attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.

Income earned on securities for the three and nine months ended September 30, 2019 and 2018, is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Taxable:
Available-for-sale	$	10,343	$	8,578	$	31,699	$	25,571
Held-to-maturity		—		433		—		1,389
Non-taxable:
Available-for-sale		3,193		2,205		9,755		6,006
Held-to-maturity		—		1,222		—		3,795
Total	$	13,536	$	12,438	$	41,454	$	36,761

4. Loans Receivable

The various categories of loans receivable are summarized as follows:

	September 30,		December 31,
	2019		2018
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	4,375,970	$	4,806,684
Construction/land development		1,827,454		1,546,035
Agricultural		87,087		76,433
Residential real estate loans
Residential 1-4 family		1,808,099		1,975,586
Multifamily residential		498,079		560,475
Total real estate		8,596,689		8,965,213
Consumer		469,741		443,105
Commercial and industrial		1,479,724		1,476,331
Agricultural		90,343		48,562
Other		135,449		138,668
Total loans receivable	$	10,771,946	$	11,071,879

During the three and nine-month period ended September 30, 2019, the Company sold $2.9 million and $11.6 million of the guaranteed portion of certain Small Business Administration (“SBA”) loans, which resulted in a gain of approximately $291,000 and $887,000, respectively. During the three and nine-month periods ended September 30, 2018, the Company sold $836,000 and $7.4 million, respectively, of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $47,000 and $491,000, respectively.

Mortgage loans held for sale of approximately $78.0 million and $64.2 million at September 30, 2019 and December 31, 2018, respectively, are included in residential 1-4 family loans. Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid. The Company obtains forward commitments to sell mortgage loans to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. The forward commitments acquired by the Company for mortgage loans in process of origination are considered mandatory forward commitments. Because these commitments are structured on a mandatory basis, the Company is required to substitute another loan or to buy back the commitment if the original loan does not fund. These commitments are derivative instruments and their fair values at September 30, 2019 and December 31, 2018 were not material.

The Company had $2.23 billion of purchased loans, which includes $89.6 million of discount for credit losses on purchased loans, at September 30, 2019. The Company had $27.3 million and $62.3 million remaining of non-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of September 30, 2019. The Company had $2.90 billion of purchased loans, which includes $113.6 million of discount for credit losses on purchased loans, at December 31, 2018. The Company had $39.3 million and $74.3 million remaining of non-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of December 31, 2018.

A description of our accounting policies for loans, impaired loans, non-accrual loans and allowance for loan losses are set forth in our 2018 Form 10-K filed with the SEC on February 26, 2019. There have been no significant changes to these policies since December 31, 2018.

5. Allowance for Loan Losses, Credit Quality and Other

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

	Nine Months Ended September 30, 2019
	(In thousands)
Allowance for loan losses:
Beginning balance	$	108,791
Loans charged off		(7,972	)
Recoveries of loans previously charged off		2,160
Net loans recovered (charged off)		(5,812	)
Provision for loan losses		1,325
Balance, September 30, 2019	$	104,304

The following tables present the balances in the allowance for loan losses for the three and nine-month periods ended September 30, 2019, and the allowance for loan losses and recorded investment in loans based on portfolio segment by impairment method as of September 30, 2019. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.

	Three Months Ended September 30, 2019
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	24,258		$	38,667		$	24,271		$	14,853		$	4,017		$	—	$	106,066
Loans charged off		(133	)		(858	)		(522	)		(143	)		(646	)		—		(2,302	)
Recoveries of loans previously charged off		(40	)		22			277			62			219			—		540
Net loans recovered (charged off)		(173	)		(836	)		(245	)		(81	)		(427	)		—		(1,762	)
Provision for loan losses		5,006			(2,500	)		(4,657	)		846			1,305			—		—
Balance, September 30	$	29,091		$	35,331		$	19,369		$	15,618		$	4,895		$	—	$	104,304

	Nine Months Ended September 30, 2019
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	21,302		$	42,336		$	26,734		$	14,981		$	3,438		$	—	$	108,791
Loans charged off		(1,445	)		(2,360	)		(1,183	)		(1,152	)		(1,832	)		—		(7,972	)
Recoveries of loans previously charged off		78			226			781			466			609			—		2,160
Net loans recovered (charged off)		(1,367	)		(2,134	)		(402	)		(686	)		(1,223	)		—		(5,812	)
Provision for loan losses		9,156			(4,871	)		(6,963	)		1,323			2,680			—		1,325
Balance, September 30	$	29,091		$	35,331		$	19,369		$	15,618		$	4,895		$	—	$	104,304

	As of September 30, 2019
	Construction/ Land Development		Other Commercial Real Estate		Residential Real Estate		Commercial & Industrial		Consumer & Other		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Period end amount allocated to:
Loans individually evaluated for impairment	$	99	$	229	$	58	$	20	$	—	$	—	$	406
Loans collectively evaluated for impairment		28,992		35,102		19,311		15,598		4,895		—		103,898
Loans evaluated for impairment balance, September 30		29,091		35,331		19,369		15,618		4,895		—		104,304
Purchased credit impaired loans		—		—		—		—		—		—		—
Balance, September 30	$	29,091	$	35,331	$	19,369	$	15,618	$	4,895	$	—	$	104,304
Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment	$	9,184	$	70,692	$	101,819	$	27,765	$	3,427	$	—	$	212,887
Loans collectively evaluated for impairment		1,816,712		4,341,140		2,195,820		1,445,711		692,018		—		10,491,401
Loans evaluated for impairment balance, September 30		1,825,896		4,411,832		2,297,639		1,473,476		695,445		—		10,704,288
Purchased credit impaired loans		1,558		51,225		8,539		6,248		88		—		67,658
Balance, September 30	$	1,827,454	$	4,463,057	$	2,306,178	$	1,479,724	$	695,533	$	—	$	10,771,946

The following tables present the balances in the allowance for loan losses for the nine-month period ended September 30, 2018 and the year ended December 31, 2018, and the allowance for loan losses and recorded investment in loans receivable based on portfolio segment by impairment method as of December 31, 2018. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.

	Year Ended December 31, 2018
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated			Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	20,343		$	43,939		$	24,506		$	15,292		$	3,334		$	2,852		$	110,266
Loans charged off		(399	)		(981	)		(2,339	)		(1,816	)		(1,638	)		—			(7,173	)
Recoveries of loans previously charged off		209			383			844			568			772			—			2,776
Net loans recovered (charged off)		(190	)		(598	)		(1,495	)		(1,248	)		(866	)		—			(4,397	)
Provision for loan losses		(1,139	)		2,012			1,088			(267	)		1,192			1,436			4,322
Balance, September 30		19,014			45,353			24,099			13,777			3,660			4,288			110,191
Loans charged off		—			(230	)		(405	)		(405	)		(775	)		—			(1,815	)
Recoveries of loans previously charged off		(29	)		144			80			56			164			—			415
Net loans recovered (charged off)		(29	)		(86	)		(325	)		(349	)		(611	)		—			(1,400	)
Provision for loan losses		2,317			(2,931	)		2,960			1,553			389			(4,288	)		—
Balance, December 31	$	21,302		$	42,336		$	26,734		$	14,981		$	3,438		$	—		$	108,791

	As of December 31, 2018
	Construction/ Land Development		Other Commercial Real Estate		Residential Real Estate		Commercial & Industrial		Consumer & Other		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Period end amount allocated to:
Loans individually evaluated for impairment	$	732	$	468	$	100	$	21	$	—	$	—	$	1,321
Loans collectively evaluated for impairment		20,336		41,512		25,970		14,789		3,438		—		106,045
Loans evaluated for impairment balance, December 31		21,068		41,980		26,070		14,810		3,438		—		107,366
Purchased credit impaired loans		234		356		664		171		—		—		1,425
Balance, December 31	$	21,302	$	42,336	$	26,734	$	14,981	$	3,438	$	—	$	108,791
Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment	$	14,519	$	58,706	$	29,535	$	30,251	$	3,688	$	—	$	136,699
Loans collectively evaluated for impairment		1,522,520		4,741,484		2,473,467		1,431,608		624,561		—		10,793,640
Loans evaluated for impairment balance, December 31		1,537,039		4,800,190		2,503,002		1,461,859		628,249		—		10,930,339
Purchased credit impaired loans		8,996		82,927		33,059		14,472		2,086		—		141,540
Balance, December 31	$	1,546,035	$	4,883,117	$	2,536,061	$	1,476,331	$	630,335	$	—	$	11,071,879

The following is an aging analysis for loans receivable as of September 30, 2019 and December 31, 2018:

	September 30, 2019
	Loans Past Due 30-59 Days		Loans Past Due 60-89 Days		Loans Past Due 90 Days or More		Total Past Due		Current Loans		Total Loans Receivable		Accruing Loans Past Due 90 Days or More
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	7,358	$	630	$	20,551	$	28,539	$	4,347,431	$	4,375,970	$	6,148
Construction/land development		346		261		3,430		4,037		1,823,417		1,827,454		1,530
Agricultural		118		—		1,109		1,227		85,860		87,087		282
Residential real estate loans
Residential 1-4 family		4,698		3,658		22,948		31,304		1,776,795		1,808,099		1,223
Multifamily residential		—		—		339		339		497,740		498,079		—
Total real estate		12,520		4,549		48,377		65,446		8,531,243		8,596,689		9,183
Consumer		636		375		2,042		3,053		466,688		469,741		621
Commercial and industrial		2,735		865		6,829		10,429		1,469,295		1,479,724		160
Agricultural and other		1,435		4		1,356		2,795		222,997		225,792		—
Total	$	17,326	$	5,793	$	58,604	$	81,723	$	10,690,223	$	10,771,946	$	9,964

	December 31, 2018
	Loans Past Due 30-59 Days		Loans Past Due 60-89 Days		Loans Past Due 90 Days or More		Total Past Due		Current Loans		Total Loans Receivable		Accruing Loans Past Due 90 Days or More
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	3,598	$	927	$	24,710	$	29,235	$	4,777,449	$	4,806,684	$	9,679
Construction/land development		2,057		261		8,761		11,079		1,534,956		1,546,035		3,481
Agricultural		98		—		20		118		76,315		76,433		—
Residential real estate loans
Residential 1-4 family		5,890		3,745		19,137		28,772		1,946,814		1,975,586		1,753
Multifamily residential		—		200		972		1,172		559,303		560,475		—
Total real estate		11,643		5,133		53,600		70,376		8,894,837		8,965,213		14,913
Consumer		5,712		168		3,632		9,512		433,593		443,105		720
Commercial and industrial		1,237		87		6,977		8,301		1,468,030		1,476,331		1,526
Agricultural and other		1,121		—		33		1,154		186,076		187,230		—
Total	$	19,713	$	5,388	$	64,242	$	89,343	$	10,982,536	$	11,071,879	$	17,159

Non-accruing loans at September 30, 2019 and December 31, 2018 were $48.6 million and $47.1 million, respectively.

The following is a summary of the impaired loans as of September 30, 2019 and December 31, 2018:

	September 30, 2019
							Three Months Ended				Nine Months Ended
	Unpaid Contractual Principal Balance		Total Recorded Investment		Allocation of Allowance for Loan Losses		Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
	(In thousands)
Loans without a specific valuation allowance
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	39	$	39	$	—	$	40	$	1	$	41	$	2
Construction/land development		35		35		—		25		1		20		2
Agricultural		5		5		—		7		—		9		—
Residential real estate loans
Residential 1-4 family		299		299		—		280		6		245		17
Multifamily residential		—		—		—		—		—		—		—
Total real estate		378		378		—		352		8		315		21
Consumer		28		28		—		25		1		23		2
Commercial and industrial		124		124		—		128		1		142		4
Agricultural and other		—		—		—		—		—		—		—
Total loans without a specific valuation allowance		530		530		—		505		10		480		27
Loans with a specific valuation allowance
Real estate:
Commercial real estate loans
Non-farm/non-residential		34,642		31,361		222		35,268		448		37,262		1,411
Construction/land development		7,236		6,737		99		6,939		52		8,794		190
Agricultural		1,105		1,108		7		883		5		646		15
Residential real estate loans
Residential 1-4 family		26,057		24,254		34		24,335		46		23,191		154
Multifamily residential		1,578		1,578		24		2,044		15		2,252		47
Total real estate		70,618		65,038		386		69,469		566		72,145		1,817
Consumer		2,070		2,044		—		2,262		7		2,943		22
Commercial and industrial		11,105		7,845		20		7,392		21		7,027		62
Agricultural and other		1,355		1,355		—		693		—		363		—
Total loans with a specific valuation allowance		85,148		76,282		406		79,816		594		82,478		1,901
Total impaired loans
Real estate:
Commercial real estate loans
Non-farm/non-residential		34,681		31,400		222		35,308		449		37,303		1,413
Construction/land development		7,271		6,772		99		6,964		53		8,814		192
Agricultural		1,110		1,113		7		890		5		655		15
Residential real estate loans
Residential 1-4 family		26,356		24,553		34		24,615		52		23,436		171
Multifamily residential		1,578		1,578		24		2,044		15		2,252		47
Total real estate		70,996		65,416		386		69,821		574		72,460		1,838
Consumer		2,098		2,072		—		2,287		8		2,966		24
Commercial and industrial		11,229		7,969		20		7,520		22		7,169		66
Agricultural and other		1,355		1,355		—		693		—		363		—
Total impaired loans	$	85,678	$	76,812	$	406	$	80,321	$	604	$	82,958	$	1,928

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 September 30, 2019

	December 31, 2018
							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	$	42	$	42	$	—	$	34	$	3
Construction/land development		16		16		—		27		1
Agricultural		11		11		—		15		1
Residential real estate loans
Residential 1-4 family		223		223		—		193		16
Multifamily residential		—		—		—		—		—
Total real estate		292		292		—		269		21
Consumer		27		27		—		24		2
Commercial and industrial		236		236		—		199		13
Agricultural and other		—		—		—		—		—
Total loans without a specific valuation allowance		555		555		—		492		36
Loans with a specific valuation allowance
Real estate:
Commercial real estate loans
Non-farm/non-residential		42,474		38,594		460		34,891		1,632
Construction/land development		13,178		12,091		732		12,337		307
Agricultural		291		294		8		388		18
Residential real estate loans
Residential 1-4 family		22,570		20,526		58		19,017		485
Multifamily residential		2,369		2,369		42		2,166		83
Total real estate		80,882		73,874		1,300		68,799		2,525
Consumer		3,830		3,629		—		1,236		52
Commercial and industrial		11,176		7,550		21		10,599		257
Agricultural and other		33		32		—		146		3
Total loans with a specific valuation allowance		95,921		85,085		1,321		80,780		2,837
Total impaired loans
Real estate:
Commercial real estate loans
Non-farm/non-residential		42,516		38,636		460		34,925		1,635
Construction/land development		13,194		12,107		732		12,364		308
Agricultural		302		305		8		403		19
Residential real estate loans
Residential 1-4 family		22,793		20,749		58		19,210		501
Multifamily residential		2,369		2,369		42		2,166		83
Total real estate		81,174		74,166		1,300		69,068		2,546
Consumer		3,857		3,656		—		1,260		54
Commercial and industrial		11,412		7,786		21		10,798		270
Agricultural and other		33		32		—		146		3
Total impaired loans	$	96,476	$	85,640	$	1,321	$	81,272	$	2,873

Note:

Purchased credit impaired loans are accounted for on a pooled basis under ASC 310-30. All of these pools are currently considered to be performing resulting in none of the purchased credit impaired loans being classified as impaired loans as of December 31, 2018.

Interest recognized on impaired loans during the three months ended September 30, 2019 and 2018 was approximately $604,000 and $590,000, respectively. Interest recognized on impaired loans during the nine months ended September 30, 2019 and 2018 was approximately $1.9 million and $2.1 million, respectively. The amount of interest recognized on impaired loans on the cash basis is not materially different than the accrual basis.

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

The Company’s classified loans include loans in risk ratings 6, 7 and 8. The following is a presentation of classified loans (excluding loans accounted for under ASC Topic 310-30) by class as of September 30, 2019 and December 31, 2018:

	September 30, 2019
	Risk Rated 6		Risk Rated 7			Risk Rated 8		Classified Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	39,379	$	1,834		$	—	$	41,213
Construction/land development		13,220		546			—		13,766
Agricultural		1,339		—			—		1,339
Residential real estate loans
Residential 1-4 family		37,739		121			—		37,860
Multifamily residential		339		—			—		339
Total real estate		92,016		2,501			—		94,517
Consumer		2,842		(1	)		—		2,841
Commercial and industrial		25,660		446			—		26,106
Agricultural and other		1,374		—			—		1,374
Total risk rated loans	$	121,892	$	2,946		$	—	$	124,838

	December 31, 2018
	Risk Rated 6		Risk Rated 7		Risk Rated 8		Classified Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	44,089	$	484	$	—	$	44,573
Construction/land development		15,236		—		—		15,236
Agricultural		301		3		—		304
Residential real estate loans
Residential 1-4 family		34,731		253		—		34,984
Multifamily residential		972		—		—		972
Total real estate		95,329		740		—		96,069
Consumer		3,226		3		—		3,229
Commercial and industrial		16,362		585		—		16,947
Agricultural and other		48		—		—		48
Total risk rated loans	$	114,965	$	1,328	$	—	$	116,293

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

The following is a presentation of loans receivable by class and risk rating as of September 30, 2019 and December 31, 2018:

	September 30, 2019
	Risk Rated 1		Risk Rated 2		Risk Rated 3		Risk Rated 4		Risk Rated 5		Classified Total		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	—	$	286	$	3,382,410	$	865,353	$	35,709	$	41,213	$	4,324,971
Construction/land development		7		479		681,538		1,129,946		160		13,766		1,825,896
Agricultural		—		—		67,675		17,304		543		1,339		86,861
Residential real estate loans
Residential 1-4 family		843		696		1,497,282		252,699		10,964		37,860		1,800,344
Multifamily residential		—		—		368,432		56,471		72,053		339		497,295
Total real estate		850		1,461		5,997,337		2,321,773		119,429		94,517		8,535,367
Consumer		14,622		1,810		439,857		9,565		958		2,841		469,653
Commercial and industrial		16,984		10,292		827,994		583,019		9,081		26,106		1,473,476
Agricultural and other		1,334		9,038		150,379		61,696		1,971		1,374		225,792
Total risk rated loans	$	33,790	$	22,601	$	7,415,567	$	2,976,053	$	131,439	$	124,838		10,704,288
Purchased credit impaired loans														67,658
Total loans receivable													$	10,771,946

	December 31, 2018
	Risk Rated 1		Risk Rated 2		Risk Rated 3		Risk Rated 4		Risk Rated 5		Classified Total		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	443	$	296	$	2,740,068	$	1,912,191	$	26,361	$	44,573	$	4,723,932
Construction/land development		17		645		264,507		1,255,258		1,377		15,236		1,537,040
Agricultural		—		—		37,377		38,295		282		304		76,258
Residential real estate loans												—
Residential 1-4 family		715		738		1,453,859		446,557		7,078		34,984		1,943,931
Multifamily residential		—		—		388,572		169,526		—		972		559,070
Total real estate		1,175		1,679		4,884,383		3,821,827		35,098		96,069		8,840,231
Consumer		13,432		4,298		401,209		18,409		442		3,229		441,019
Commercial and industrial		21,673		13,310		737,218		649,390		23,321		16,947		1,461,859
Agricultural and other		737		3,423		133,901		48,567		554		48		187,230
Total risk rated loans	$	37,017	$	22,710	$	6,156,711	$	4,538,193	$	59,415	$	116,293		10,930,339
Purchased credit impaired loans														141,540
Total loans receivable													$	11,071,879

Historically, the Company has graded loans receivable having risk ratings of 1 to 5 as “Pass,” with most of the Company’s loans being rated as “Satisfactory” (Risk rating 3) or “Watch” (Risk rating 4). The Company’s policy in recent years was to rate certain loans as “Watch” based solely on the borrower’s industry or the loan type and not due to a particular indication of weakness in the credit itself. These “Watch” loans included substantially all construction loans, accounts receivable loans, inventory lines of credit, SBA loans and agriculture loans. Over time, as the Company’s construction loan balances increased, the relative level of “Watch” loans grew. The Company determined that this policy election resulted in overestimating the overall risk in the loan portfolio, as it did not give consideration to the financial strength of the borrower. The Company determined that rating these loans as “Watch” could potentially mask the first opportunity to identify a weakness in a credit, and therefore, could lead to a later recognition of problem loans if loan quality deterioration occurred. Therefore, effective in the second quarter of 2019, the Company revised its “Watch” risk rating definition to no longer include certain loans solely based on industry and to focus on attributes such as the financial strength of the borrower/guarantor, repayment ability of the project on a global basis, equity and other relevant factors.

In the second quarter of 2019, the Company reviewed the loans previously rated as “Watch” based on the change in philosophy and determined which loans should be moved to “Satisfactory” based on the attributes noted above. This resulted in approximately $1.5 billion in loans being moved from “Watch” to “Satisfactory.” The Company believes that this change more accurately portrays the risk in the loan portfolio. This did not have a material impact on the allowance for loan losses as the grading changes were within the “Pass” category.

The following is a presentation of troubled debt restructurings (“TDRs”) by class as of September 30, 2019 and December 31, 2018:

	September 30, 2019
	Number of Loans		Pre- Modification Outstanding Balance		Rate Modification		Term Modification		Rate & Term Modification		Post- Modification Outstanding Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		17	$	14,633	$	8,008	$	236	$	4,417	$	12,661
Construction/land development		3		618		546		13		23		582
Agricultural		3		451		388		9		—		397
Residential real estate loans
Residential 1-4 family		21		3,240		1,020		231		1,010		2,261
Multifamily residential		3		1,701		1,080		—		290		1,370
Total real estate		47		20,643		11,042		489		5,740		17,271
Consumer		4		40		26		3		—		29
Commercial and industrial		10		3,137		828		50		387		1,265
Total		61	$	23,820	$	11,896	$	542	$	6,127	$	18,565

	December 31, 2018
	Number of Loans		Pre- Modification Outstanding Balance		Rate Modification		Term Modification		Rate & Term Modification		Post- Modification Outstanding Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		17	$	15,227	$	8,482	$	982	$	4,475	$	13,939
Construction/land development		2		584		546		17		—		563
Agricultural		2		345		283		14		—		297
Residential real estate loans
Residential 1-4 family		22		3,204		1,059		281		1,022		2,362
Multifamily residential		3		1,701		1,253		—		286		1,539
Total real estate		46		21,061		11,623		1,294		5,783		18,700
Consumer		5		38		18		9		—		27
Commercial and industrial		14		1,679		897		105		—		1,002
Total		65	$	22,778	$	12,538	$	1,408	$	5,783	$	19,729

The following is a presentation of TDRs on non-accrual status as of September 30, 2019 and December 31, 2018 because they are not in compliance with the modified terms:

	September 30, 2019				December 31, 2018
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		3	$	1,812		4	$	2,950
Construction/land development		2		569		1		546
Agricultural		2		114		1		14
Residential real estate loans
Residential 1-4 family		6		671		8		778
Multifamily residential		1		131		1		142
Total real estate		14		3,297		15		4,430
Consumer		1		—		1		2
Commercial and industrial		3		126		6		194
Total		18	$	3,423		22	$	4,626

The following is a presentation of total foreclosed assets as of September 30, 2019 and December 31, 2018:

	September 30, 2019		December 31, 2018
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	2,240	$	5,555
Construction/land development		4,712		3,534
Residential real estate loans
Residential 1-4 family		1,687		4,142
Multifamily residential		—		5
Total foreclosed assets held for sale	$	8,639	$	13,236

Changes in the carrying amount of the accretable yield for purchased credit impaired loans were as follows for the three-month period ended September 30, 2019 for the Company’s acquisitions:

	Accretable Yield			Carrying Amount of Loans
	(In thousands)
Balance at beginning of period	$	33,759		$	141,540
Reforecasted future interest payments for loan pools		2,101			—
Accretion recorded to interest income		(12,756	)		12,756
Adjustment to yield		8,604			—
Reclassification out of purchased credit impaired loans (1)		(10,288	)		(42,324	)
Transfers to foreclosed assets held for sale		—			254
Payments received, net		—			(44,568	)
Balance at end of period	$	21,420		$	67,658

(1)

At acquisition, a portion of the loans acquired from Landmark, Bay Cities, Bank of Commerce, Premier Bank, and Shore Premier Finance were recorded as purchased credit impaired loans on a pool by pool basis. In September 2019, the Company reevaluated these loan pools and determined the purchase credit impaired loan pools no longer have a material projected credit impairment. As such, the remaining loans in these pools are performing and have been reclassified out of purchased credit impaired loans.

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 $2.1 million. This updated forecast does not change the expected weighted average yields on the loan pools.

During the 2019 impairment tests on the estimated cash flows of loans, the Company established that several loan pools were determined to have a materially projected credit improvement. As a result of this improvement, the Company will recognize approximately $8.6 million as an additional adjustment to yield over the weighted average life of the loans.

6. Goodwill and Core Deposits and Other Intangibles

Changes in the carrying amount and accumulated amortization of the Company’s goodwill and core deposits and other intangibles at September 30, 2019 and December 31, 2018, were as follows:

	September 30, 2019		December 31, 2018
	(In thousands)
Goodwill
Balance, beginning of period	$	958,408	$	927,949
Acquisitions		—		30,459
Balance, end of period	$	958,408	$	958,408

	September 30, 2019			December 31, 2018
	(In thousands)
Core Deposit and Other Intangibles
Balance, beginning of period	$	42,896		$	49,351
Amortization expense		(4,760	)		(4,867	)
Balance, September 30		38,136			44,484
Amortization expense					(1,588	)
Balance, end of year				$	42,896

The carrying basis and accumulated amortization of core deposits and other intangibles at September 30, 2019 and December 31, 2018 were:

	September 30, 2019			December 31, 2018
	(In thousands)
Gross carrying basis	$	86,625		$	86,625
Accumulated amortization		(48,489	)		(43,729	)
Net carrying amount	$	38,136		$	42,896

Core deposit and other intangible amortization expense was approximately $1.6 million for the three months ended September 30, 2019 and 2018. Core deposit and other intangible amortization expense was approximately $4.8 million and $4.9 million for the nine months ended September 30, 2019 and 2018, respectively. HBI’s estimated amortization expense of core deposits and other intangibles for each of the years 2019 through 2023 is approximately: 2019 – $6.5 million; 2020 – $5.9 million; 2021 – $5.7 million; 2022 – $5.7 million; 2023 – $5.5 million.

The carrying amount of the Company’s goodwill was $958.4 million at September 30, 2019 and December 31, 2018. Goodwill is tested annually for impairment during the fourth quarter. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements.

7. Other Assets

Other assets consist primarily of equity securities without a readily determinable fair value and other miscellaneous assets. As of September 30, 2019 and December 31, 2018, other assets were $216.7 million and $183.8 million, respectively.

The Company has equity securities without readily determinable fair values such as stock holdings in the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“Federal Reserve”) which are outside the scope of ASC Topic 321, Investments – Equity Securities (“ASC Topic 321”). These equity securities without a readily determinable fair value were $111.3 million and $134.6 million at September 30, 2019 and December 31, 2018, respectively, and are accounted for at cost.

The Company has equity securities such as stock holdings in First National Bankers’ Bank and other miscellaneous holdings which are accounted for under ASC Topic 321. These equity securities without a readily determinable fair value were $27.3 million and $25.1 million at September 30, 2019 and December 31, 2018, respectively. There were no observable transactions during the period that would indicate a material change in fair value. Therefore, these investments were accounted for at cost, less impairment.

8. Deposits

The aggregate amount of time deposits with a minimum denomination of $250,000 was $1.13 billion and $922.0 million at September 30, 2019 and December 31, 2018, respectively. The aggregate amount of time deposits with a minimum denomination of $100,000 was $1.58 billion and $1.41 billion at September 30, 2019 and December 31, 2018, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $8.5 million and $4.9 million for the three months ended September 30, 2019 and 2018, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $23.3 million and $11.5 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019 and December 31, 2018, brokered deposits were $580.7 million and $660.2 million, respectively.

Deposits totaling approximately $1.95 billion and $1.97 billion at September 30, 2019 and December 31, 2018, respectively, were public funds obtained primarily from state and political subdivisions in the United States.

9. Securities Sold Under Agreements to Repurchase

At September 30, 2019 and December 31, 2018, securities sold under agreements to repurchase totaled $157.0 million and $143.7 million, respectively. For the three-month periods ended September 30, 2019 and 2018, securities sold under agreements to repurchase daily weighted-average totaled $143.6 million and $148.8 million, respectively. For the nine-month periods ended September 30, 2019 and 2018, securities sold under agreements to repurchase daily weighted-average totaled $146.3 million and $148.5 million, respectively.

The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2019 and December 31, 2018 is presented in the following tables:

	September 30, 2019
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	16,352	$	—	$	—	$	—	$	16,352
Mortgage-backed securities		32,723		—		—		—		32,723
State and political subdivisions		104,321		—		—		—		104,321
Other securities		3,642		—		—		—		3,642
Total borrowings	$	157,038	$	—	$	—	$	—	$	157,038

	December 31, 2018
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	19,124	$	—	$	—	$	—	$	19,124
Mortgage-backed securities		9,184		—		—		—		9,184
State and political subdivisions		98,841		—		—		—		98,841
Other securities		16,530		—		—		—		16,530
Total borrowings	$	143,679	$	—	$	—	$	—	$	143,679

10. FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $691.4 million and $1.47 billion at September 30, 2019 and December 31, 2018, respectively. The decrease is due to a change in the Company’s funding position whereby loan balances have decreased and deposit balance have increased. As a result, the Company used the excess cash generated by these changes to pay down FHLB advances. The Company had no other borrowed funds as of September 30, 2019. Other borrowed funds were $2.5 million and were classified as short-term advances as of December 31, 2018. At September 30, 2019, $145.0 million and $546.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2018, $782.6 million and $689.8 million of the outstanding balance were issued as short-term and long-term advances, respectively. The FHLB advances mature from the current year to 2033 with fixed interest rates ranging from 1.20% to 2.85%. Maturities of borrowings as of September 30, 2019 include: 2019 – $145.0 million; 2020 – $146.4 million; 2021 – zero; 2022 – zero; after 2023 – $400.0 million. Expected maturities could differ from contractual maturities because FHLB may have the right to call or HBI the right to prepay certain obligations.

Additionally, the Company had $1.29 billion and $821.3 million at September 30, 2019 and December 31, 2018, respectively, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits. This increase is due to the Company using more letters of credit to collateralize public deposits rather than using investment securities.

Additionally, the parent company took out a $20.0 million line of credit for general corporate purposes during 2015. The balance on this line of credit at September 30, 2019 and December 31, 2018 was zero.

11. Subordinated Debentures

Subordinated debentures at September 30, 2019 and December 31, 2018 consisted of guaranteed payments on trust preferred securities with the following components:

	As of September 30,		As of December 31,
	2019		2018
	(In thousands)
Trust preferred securities
Subordinated debentures, issued in 2006, due 2036, fixed rate of 6.75% during the first five years and at a floating rate of 1.85% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty	$	3,093	$	3,093
Subordinated debentures, issued in 2004, due 2034, fixed rate of 6.00% during the first five years and at a floating rate of 2.00% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		15,464		15,464
Subordinated debentures, issued in 2005, due 2035, fixed rate of 5.84% during the first five years and at a floating rate of 1.45% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		25,774		25,774
Subordinated debentures, issued in 2004, due 2034, fixed rate of 4.29% during the first five years and at a floating rate of 2.50% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		16,495		16,495
Subordinated debentures, issued in 2005, due 2035, floating rate of 2.15% above the three-month LIBOR rate, reset quarterly, currently callable without penalty		4,390		4,353
Subordinated debentures, issued in 2006, due 2036, fixed rate of 7.38% during the first five years and at a floating rate of 1.62% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty		5,732		5,662
Subordinated debt securities
Subordinated notes, net of issuance costs, issued in 2017, due 2027, fixed rate of 5.625% during the first five years and at a floating rate of 3.575% above the then three-month LIBOR rate, reset quarterly, thereafter, callable in 2022 without penalty		298,415		297,949
Total	$	369,363	$	368,790

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

12. Income Taxes

The following is a summary of the components of the provision (benefit) for income taxes for the three and nine-month periods ended September 30, 2019 and 2018:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Current:
Federal	$	16,618	$	17,999	$	39,844	$	44,354
State		5,501		5,958		13,190		14,683
Total current		22,119		23,957		53,034		59,037
Deferred:
Federal		3,817		1,047		14,906		10,964
State		1,263		346		4,934		3,629
Total deferred		5,080		1,393		19,840		14,593
Income tax expense	$	27,199	$	25,350	$	72,874	$	73,630

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three and nine-month periods ended September 30, 2019 and 2018:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2019				2018				2019				2018
Statutory federal income tax rate		21.00		%		21.00		%		21.00		%		21.00		%
Effect of non-taxable interest income		(0.78	)			(0.84	)			(0.82	)			(0.80	)
Stock compensation		0.11				(0.12	)			0.10				(0.18	)
State income taxes, net of federal benefit		3.33				3.30				3.77				3.60
Other		3.55				0.66				1.15				0.68
Effective income tax rate		27.21		%		24.00		%		25.20		%		24.30		%

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

	September 30, 2019		December 31, 2018
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	27,224	$	30,033
Deferred compensation		3,720		4,037
Stock compensation		5,897		4,259
Non-accrual interest income		403		—
Real estate owned		1,099		1,382
Unrealized loss on securities available-for-sale		—		5,050
Loan discounts		19,786		23,755
Tax basis premium/discount on acquisitions		7,433		7,378
Investments		408		866
Other		9,841		10,243
Gross deferred tax assets		75,811		87,003
Deferred tax liabilities:
Accelerated depreciation on premises and equipment		788		87
Unrealized gain on securities available-for-sale		7,034		—
Core deposit intangibles		8,903		9,804
FHLB dividends		2,998		1,712
Other		2,652		2,125
Gross deferred tax liabilities		22,375		13,728
Net deferred tax assets	$	53,436	$	73,275

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and the states of Alabama, Arkansas, California, Florida, Kansas, New Jersey, New York and Texas. The Company is no longer subject to U.S. federal and state tax examinations by tax authorities for years before 2015.

13. Common Stock, Compensation Plans and Other

Common Stock

As of September 30, 2019, the Company’s Restated Articles of Incorporation, as amended, authorize the issuance of up to 300,000,000 shares of common stock, par value $0.01 per share.

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

Stock Repurchases

On January 18, 2019, the Company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of its common stock under the previously approved stock repurchase program, which brought the remaining amount of authorized shares to repurchase to 9,919,447 shares. During the first nine months of 2019, the Company utilized a portion of this stock repurchase program.

During the first nine months of 2019, the Company repurchased a total of 4,031,722 shares with a weighted-average stock price of $18.67 per share. The 2019 earnings were used to fund the repurchases during the first nine months of 2019. The remaining balance available for repurchase is 5,887,725 shares at September 30, 2019.

Stock Compensation Plans

The Company has a stock option and performance incentive plan known as the Amended and Restated 2006 Stock Option and Performance Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate those persons to improve the Company’s business results. As of September 30, 2019, the maximum total number of shares of the Company’s common stock available for issuance under the Plan was 13,288,000. At September 30, 2019, the Company had approximately 1,715,000 shares of common stock remaining available for future grants and approximately 5,277,000 shares of common stock reserved for issuance pursuant to outstanding awards under the Plan.

The intrinsic value of the stock options outstanding and stock options vested at September 30, 2019 was $4.7 million and $4.4 million, respectively. Total unrecognized compensation cost, net of income tax benefit, related to non-vested stock option awards, which are expected to be recognized over the vesting periods, was approximately $11.4 million as of September 30, 2019.

The table below summarizes the stock option transactions under the Plan at September 30, 2019 and December 31, 2018 and changes during the nine-month period and year then ended:

	For the Nine Months Ended September 30, 2019					For the Year Ended December 31, 2018
	Shares (000)			Weighted- Average Exercisable Price		Shares (000)			Weighted- Average Exercisable Price
Outstanding, beginning of year		3,617		$	19.62		2,274		$	16.23
Granted		55			19.15		1,581			23.24
Forfeited/Expired		(81	)		22.87		(37	)		22.30
Exercised		(29	)		11.34		(201	)		9.25
Outstanding, end of period		3,562			19.60		3,617			19.62
Exercisable, end of period		1,417		$	16.05		1,167		$	15.31

Stock-based compensation expense for stock-based compensation awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company's employee stock options. The weighted-average fair value of options granted during the nine months ended September 30, 2019 was $4.11 per share. The weighted-average fair value of options granted during the year ended December 31, 2018 was $5.58 per share. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model based on the weighted-average assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate, and expected life of options granted.

	For the Nine Months Ended			For the Year Ended
	September 30, 2019			December 31, 2018
Expected dividend yield		2.70	%		2.05	%
Expected stock price volatility		26.13	%		25.59	%
Risk-free interest rate		2.48	%		2.82	%
Expected life of options	6.5 years			6.5 years

The following is a summary of currently outstanding and exercisable options at September 30, 2019:

Options Outstanding								Options Exercisable
Exercise Prices		Options Outstanding Shares (000)		Weighted- Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price		Options Exercisable Shares (000)		Weighted- Average Exercise Price
$2.66 to $2.77			4		0.25		2.66		4		2.66
$4.30 to $6.56			73		2.31		6.56		73		6.56
$8.62 to $9.54			245		3.41		9.01		245		9.01
$14.71 to $16.86			252		5.02		15.97		222		16.04
$17.12 to $17.40			180		5.22		17.18		147		17.20
$18.46 to $19.12			1,065		6.09		18.49		577		18.46
$20.16 to $20.58			48		6.02		20.51		25		20.45
$21.25 to $22.22			235		7.54		21.71		95		21.48
$22.70 to $23.51			1,390		8.81		23.32		1		23.28
$	25.96		70		7.56		25.96		28		25.96
			3,562						1,417

The table below summarized the activity for the Company’s restricted stock issued and outstanding at September 30, 2019 and December 31, 2018 and changes during the period and year then ended:

	As of September 30, 2019			As of December 31, 2018
	(In thousands)
Beginning of year		1,873			1,145
Issued		181			1,010
Vested		(246	)		(233	)
Forfeited		(32	)		(49	)
End of period		1,776			1,873
Amount of expense for nine months and twelve months ended, respectively	$	6,329		$	7,232

Total unrecognized compensation cost, net of income tax benefit, related to non-vested restricted stock awards, which are expected to be recognized over the vesting periods, was approximately $24.4 million as of September 30, 2019.

14. Non-Interest Expense

The table below shows the components of non-interest expense for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019			2018		2019		2018
	(In thousands)
Salaries and employee benefits	$	39,919		$	37,825	$	115,731	$	107,315
Occupancy and equipment		9,047			8,148		26,723		25,650
Data processing expense		4,059			3,461		11,867		10,786
Other operating expenses:
Advertising		1,201			1,154		3,347		3,258
Amortization of intangibles		1,587			1,617		4,760		4,867
Electronic banking expense		1,901			1,947		5,655		5,653
Directors’ fees		380			314		1,206		962
Due from bank service charges		272			253		792		714
FDIC and state assessment		(532	)		2,293		2,833		6,689
Hurricane expense		—			—		897		—
Insurance		698			762		2,056		2,363
Legal and accounting		1,414			761		3,384		2,397
Other professional fees		1,906			1,748		7,024		4,988
Operating supplies		511			510		1,552		1,712
Postage		320			311		939		978
Telephone		289			337		898		1,081
Other expense		4,792			4,682		14,781		13,318
Total other operating expenses		14,739			16,689		50,124		48,980
Total non-interest expense	$	67,764		$	66,123	$	204,445	$	192,731

15. Leases

The Company leases land and office facilities under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2042 and do not include renewal options based on economic factors that would have implied that continuation of the lease was reasonably certain. Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. The leases generally include real estate taxes and common area maintenance (“CAM”) charges in the rental payments. Upon adoption of ASU 2016-02, the Company recorded a $47.1 million right-of-use (“ROU”) asset and $49.0 million lease liability within bank premises and equipment, net, and other liabilities, respectively, within the Company’s balance sheets. No cumulative adjustment to the opening balance of retained earnings was considered necessary due to the nature of the Company’s leases. Short-term leases are leases having a term of twelve months or less. As part of the standard adoption, the Company elected the package of practical expedients whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In accordance with ASU 2018-11, the Company also elected the practical expedient whereby we elected to not separate nonlease components from the associated lease component of our operating leases. As a result, we account for these components as a single component under Topic 842 since (i) the timing and pattern of transfer of the nonlease components and the associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease. The Company recognizes short term leases on a straight-line basis and does not record a related ROU asset and liability for such leases. In addition, equipment leases were determined to be immaterial and a related ROU asset and liability for such leases is not recorded.

As of September 30, 2019, the balances of the right-of-use asset and lease liability was $45.0 million and $47.7 million, respectively. The right-of-use asset is included in bank premises and equipment, net, and the lease liability is included in accrued interest payable and other liabilities.

At September 30, 2019, the maturity of the lease liabilities for the operating leases are as follows (in thousands):

2019	$	1,523
2020-2021		11,167
2022-2023		7,435
Thereafter		27,588
	$	47,713

At September 30, 2019, the minimum rental commitments under these noncancelable operating leases are as follows (in thousands):

2019	$	3,988
2020		7,508
2021		6,606
2022		5,160
2023		4,579
Thereafter		32,418
	$	60,259

Additional information (dollar amounts in thousands):

	Three Months Ended September 30,			Nine Months Ended September 30,
Lease expense:	2019			2019
Operating lease expense	$	2,057		$	6,176
Short-term lease expense		29			82
Variable lease expense		245			724
Total lease expense	$	2,331		$	6,982
Other information:
Cash paid for amounts included in the measurement of lease liabilities	$	2,002		$	5,939
Weighted-average remaining lease term		10.67			10.78
Weighted-average discount rate		3.62	%		3.62	%

The Company currently leases three properties from three related parties. Total rent expense from the leases for the three and nine-month periods ended September 30, 2019 was $35,000 or 1.52% of total lease expense and $106,000 or 1.51% of total lease expense, respectively.

16. Significant Estimates and Concentrations of Credit Risks

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

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

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

Although the Company has a diversified loan portfolio, at September 30, 2019 and December 31, 2018, commercial real estate loans represented 58.4% and 58.1% of total loans receivable, respectively, and 254.7% and 273.6% of total stockholders’ equity at September 30, 2019 and December 31, 2018, respectively. Residential real estate loans represented 21.4% and 22.9% of total loans receivable and 93.4% and 107.9% of total stockholders’ equity at September 30, 2019 and December 31, 2018, respectively.

Approximately 78.0% of the Company’s total loans and 82.2% of the Company’s real estate loans as of September 30, 2019, are to borrowers whose collateral is located in Alabama, Arkansas, Florida and New York, the states in which the Company has its branch locations.

Although general economic conditions in the Company’s market areas have been favorable, both nationally and locally, over the past three years and have remained strong in the current year, financial institutions still face circumstances and challenges which, in some cases, have resulted and could potentially result, in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.

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

17. Commitments and Contingencies

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

At September 30, 2019 and December 31, 2018, commitments to extend credit of $2.69 billion and $2.34 billion, respectively, were outstanding. A percentage of these balances are participated out to other banks; therefore, the Company can call on the participating banks to fund future draws. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Outstanding standby letters of credit are contingent commitments issued by the Company, generally to guarantee the performance of a customer in third-party borrowing arrangements. The term of the guarantee is dependent upon the creditworthiness of the borrower, some of which are long-term. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2019 and December 31, 2018, is $57.4 million and $55.6 million, respectively.

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

18. Regulatory Matters

The Bank is subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since the Bank is also under supervision of the Federal Reserve, it is further limited if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. During the first nine months of 2019, the Company requested approximately $180.2 million in regular dividends from its banking subsidiary. This dividend is equal to approximately 75.0% of the Company’s banking subsidiary’s year-to-date 2019 earnings.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total, common Tier 1 equity and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of September 30, 2019, the Company meets all capital adequacy requirements to which it is subject.

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

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

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

The Federal Reserve Board’s risk-based capital guidelines include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. Under Basel III, the criteria for a well-capitalized institution are now: a 6.5% “common equity Tier 1 risk-based capital” ratio, a 5% “Tier 1 leverage capital” ratio, an 8% “Tier 1 risk-based capital” ratio, and a 10% “total risk-based capital” ratio. As of September 30, 2019, the Bank met the capital standards for a well-capitalized institution. The Company’s “common equity Tier 1 risk-based capital” ratio, “Tier 1 leverage capital” ratio, “Tier 1 risk-based capital” ratio, and “total risk-based capital” ratio were 12.18%, 10.89%, 12.78%, and 16.15%, respectively, as of September 30, 2019.

19. Additional Cash Flow Information

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

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

	September 30,
	2019		2018
	(In thousands)
Interest paid	$	115,361	$	80,057
Income taxes paid		67,787		47,682
Assets acquired by foreclosure		6,765		10,098

20. Financial Instruments

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

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

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

Level 3

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

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

Financial Assets and Liabilities Measured on a Recurring Basis

Available-for-sale securities are the only material instruments valued on a recurring basis which are held by the Company at fair value. The Company does not have any Level 1 securities. Primarily all of the Company's securities are considered to be Level 2 securities. These Level 2 securities consist primarily of U.S. government-sponsored enterprises, mortgage-backed securities plus state and political subdivisions. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. As of September 30, 2019 and December 31, 2018, Level 3 securities were immaterial. In addition, there were no material transfers between hierarchy levels during 2019 and 2018. See Note 3 for additional detail related to investment securities

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

Financial Assets and Liabilities Measured on a Nonrecurring Basis

Impaired loans that are collateral dependent are the only material financial assets valued on a non-recurring basis which are held by the Company at fair value. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the net realizable value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses. The fair value of loans with specific allocated losses was $76.4 million and $84.3 million as of September 30, 2019 and December 31, 2018, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $136,000 and $164,000 of accrued interest receivable when impaired loans were put on non-accrual status during the three months ended September 30, 2019 and 2018, respectively. The Company reversed approximately $617,000 and $728,000 of accrued interest receivable when impaired loans were put on non-accrual status during the nine months ended September 30, 2019 and 2018, respectively.

Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis

Foreclosed assets held for sale are the only material non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held for sale is estimated using Level 3 inputs based on appraisals of underlying collateral. As of September 30, 2019 and December 31, 2018, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $8.6 million and $13.2 million, respectively.

Foreclosed assets held for sale with a carrying value of approximately $1.0 million were remeasured during the nine months ended September 30, 2019, resulting in a write-down of approximately $230,000. Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets held for sale on at least an annual basis. The Company’s policy is to comply with the regulatory guidelines.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans and foreclosed assets primarily relate to customized discounting criteria applied to the customer’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the underlying collateral. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 10% to 25% for commercial and residential real estate collateral.

Fair Values of Financial Instruments

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

	September 30, 2019
	Carrying
	Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	442,296	$	442,296	1
Federal funds sold		1,650		1,650	1
Loans receivable, net of impaired loans and allowance		10,591,236		10,533,975	3
Accrued interest receivable		47,557		47,557	1
FHLB, Federal Reserve & First National Banker’s Bank stock; other equity investments		138,590		138,590	3
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	2,394,207	$	2,394,207	1
Savings and interest-bearing transaction accounts		6,620,616		6,620,616	1
Time deposits		2,032,547		2,036,740	3
Federal funds purchased		50,000		50,000	1
Securities sold under agreements to repurchase		157,038		157,038	1
FHLB and other borrowed funds		691,443		677,752	2
Accrued interest payable		12,952		12,952	1
Subordinated debentures		369,363		379,593	3

	December 31, 2018
	Carrying
	Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	657,939	$	657,939	1
Federal funds sold		325		325	1
Investment securities – held-to-maturity		192,776		193,610	2
Loans receivable, net of impaired loans and allowance		10,878,769		10,659,428	3
Accrued interest receivable		48,945		48,945	1
FHLB, Federal Reserve & First National Banker’s Bank stock; other equity investments		159,775		159,775	3
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	2,401,232	$	2,401,232	1
Savings and interest-bearing transaction accounts		6,624,407		6,624,407	1
Time deposits		1,874,139		1,852,816	3
Federal funds purchased		—
Securities sold under agreements to repurchase		143,679		143,679	1
FHLB and other borrowed funds		1,472,393		1,464,073	2
Accrued interest payable		8,891		8,891	1
Subordinated debentures		368,790		366,159	3

21. Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale securities. The new guidance is effective for annual reporting period and interim reporting periods within those annual periods, beginning after December 15, 2017. The Company adopted the new standard effective January 1, 2018, and the implementation resulted in a $990,000 increase to retained earnings and a $990,000 decrease to accumulated other comprehensive income. The current accounting policies and procedures have been adjusted to comply with the accounting changes mentioned above. For additional information on fair value of assets and liabilities, see Note 20.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in ASU 2016-02 address several aspects of lease accounting with the significant change being the recognition of lease assets and lease liabilities for leases previously classified as operating leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity may adopt the new guidance either by restating prior periods and recording a cumulative effect adjustment at the beginning of the earliest comparative period presented or by recording a cumulative effect adjustment at the beginning of the period of adoption. The Company adopted the standard effective January 1, 2019 and recorded a ROU asset of $47.1 million and lease liability of $49.0 million. No cumulative adjustment to the opening balance of retained earnings was considered necessary due to the nature of the Company’s leases. As part of the standard adoption, the Company elected the package of practical expedients whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In accordance with ASU 2018-11 Leases (Topic 842) Targeted Improvements, the Company also elected the practical expedient whereby we elected to not separate nonlease components from the associated lease component of our operating leases. As a result, we account for these components as a single component under Topic 842 since (i) the timing and pattern of the transfer of the nonlease components and the associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease. The Company has also elected to not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). As of September 30, 2019, the balances of the right-of-use asset and lease liability was $45.0 million and $47.7 million, respectively. The right-of-use asset is included in bank premises and equipment, net, and the lease liability is included in accrued interest payable and other liabilities.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update), which rescinds certain SEC guidance from the FASB Accounting Standards Codification in response to announcements made by the SEC staff at the Emerging Issues Task Force’s (“EITF”) March 3, 2016, meeting. ASU 2016-11 is effective at the same time as ASU 2014-09 and ASU 2014-16. The Company adopted the guidance effective January 1, 2018 and its adoption did not have a significant impact on our financial position or financial statement disclosures.

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 expects a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. Third party software has been implemented and models have been developed. The implementation team is conducting parallel runs and a model validation conducted by a third party is underway. Any needed adjustments to the models as a result of recommendations from the model validation will be made in the fourth quarter. As such, the estimated impact of CECL will be finalized in the fourth quarter. For additional information on the allowance for loan losses, see Note 5.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During 2018, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated, and therefore, the Company does not anticipate a material impact from these amendments to our financial position or results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted the guidance effective January 1, 2019, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting model to provide better insight to risk management activities in the financial statements, reduces the complexity in cash flow hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, requires the entire change in the fair value of a hedging instrument included in the assessment of the hedge effectiveness to be recorded in other comprehensive income, with amounts reclassified to earnings to be presented in the same line item used to present the earnings effect of the hedged item when the hedged item affects earnings and allows the initial prospective quantitative assessment of hedge effectiveness to be performed at any time after hedge designation, but no later than the first quarterly effectiveness testing date. This ASU is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The amendments in this standard must be applied using the modified retrospective approach for cash flow and net investment hedge relationships existing on the date of adoption. The Company adopted the guidance effective January 1, 2019, and as permitted by the ASU, the Company reclassified the prepayable HTM investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to available-for-sale investment securities.

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the TCJA on December 22, 2017 that changed the Company’s federal income tax rate from 35% 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 adopted the guidance effective January 1, 2019, and its adoption resulted in a $459,000 reclassification between retained earnings and accumulated other comprehensive income.

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 adopted the amendments to ASC 320 effective January 1, 2018, and their adoption did not have a significant impact on our financial position or financial statement disclosures. The Company 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 31, 2018, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

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

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

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, that amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The internal-use software guidance states that only qualifying costs incurred during the application development stage can be capitalized. The effective date is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively in accordance with the applicable guidance. At the time of adoption, entities will be required to disclose the nature of its hosting arrangements that are service contracts and provide disclosures as if the deferred implementation costs were a separate, major depreciable asset class. The Company is beginning to evaluate its cloud computing arrangements and has not yet determined how we will apply or the impact of this new standard.

In October 2018, the FASB issued ASU 2018-16, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the OIS rate based on SOFR as a U.S. benchmark interest rate. Including the OIS rate based on SOFR as an eligible benchmark interest rate during the early stages of the marketplace transition will facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. For entities that have not already adopted ASU 2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in ASU 2017-12. The Company adopted the guidance concurrently with ASU 2017-12 effective January 1, 2019, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

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

In December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors. The amendments in this update permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures. The amendments in this update related to certain lessor costs require lessors to exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. The amendments also require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue. The amendments in this Update related to recognizing variable payments for contracts with lease and non-lease components require lessors to allocate certain variable payments to the lease and non-lease components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation, the amount of variable payments allocated to the lease components will be recognized as income in profit or loss in accordance with Topic 842, while the amount of variable payments allocated to non-lease components will be recognized in accordance with other Topics, such as Topic 606. The Company adopted the standard effective January 1, 2019, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

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

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

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief. The amendments provide transition relief for entities adopting the Board’s credit losses standard, ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that were previously recorded at amortized cost and are within the scope of the credit losses guidance in ASC 326-20, are eligible for the fair value option under ASC 825-10, and are not held-to-maturity debt securities. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Home BancShares, Inc.

Conway, Arkansas

Results of Review of Interim Consolidated Financial Statements

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

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

Basis for Review Results

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

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

/s/ BKD, LLP

Little Rock, Arkansas

November 8, 2019

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

The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on February 26, 2019, which includes the audited financial statements for the year ended December 31, 2018. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refer to Home BancShares, Inc. on a consolidated basis.

General

We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly-owned bank subsidiary, Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of September 30, 2019, we had, on a consolidated basis, total assets of $14.90 billion, loans receivable, net of $10.67 billion, total deposits of $11.05 billion, and stockholders’ equity of $2.47 billion.

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

Table 1: Key Financial Measures

	As of or for the Three Months						As of or for the Nine Months
	Ended September 30,						Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands, except per share data)
Total assets	$	14,901,935		$	14,912,738		$	14,901,935		$	14,912,738
Loans receivable		10,771,946			10,832,815			10,771,946			10,832,815
Allowance for loan losses		104,304			110,191			104,304			110,191
Total deposits		11,047,370			10,624,738			11,047,370			10,624,738
Total stockholders’ equity		2,469,389			2,341,026			2,469,389			2,341,026
Net income		72,763			80,284			216,277			229,373
Basic earnings per share		0.44			0.46			1.29			1.32
Diluted earnings per share		0.44			0.46			1.29			1.32
Book value per share		14.80			13.44			14.80			13.44
Tangible book value per share (non-GAAP)⁽¹⁾		8.83			7.68			8.83			7.68
Annualized net interest margin – FTE		4.32	%		4.46	%		4.30	%		4.46	%
Efficiency ratio		39.16			37.23			40.03			37.26
Efficiency ratio, as adjusted (non-GAAP)⁽²⁾		40.60			37.39			40.35			37.43
Annualized return on average assets		1.93			2.14			1.92			2.12
Annualized return on average common equity		11.84			13.74			12.12			13.56

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

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

Overview

Results of Operations for the Three Months Ended September 30, 2019 and 2018

Our net income decreased $7.5 million, or 9.4%, to $72.8 million for the three-month period ended September 30, 2019, from $80.3 million for the same period in 2018. On a diluted earnings per share basis, our earnings were $0.44 per share for the three-month period ended September 30, 2019 and $0.46 per share for the three-month period ended September 30, 2018. Total interest expense increased $5.0 million or 14.5%, non-interest expense increased $1.6 million or 2.5% and non-interest income decreased by $1.1 million or 4.2%. This was partially offset by a $2.0 million, or 1.1%, increase in total interest income. The primary drivers of the increase in interest income were a $1.3 million increase in taxable investment security income and a $1.1 million increase in loan interest income. The decrease in non-interest income was primarily due to a $919,000 decrease in other income, a $502,000 decrease in gain (loss) on other real estate owned (“OREO”), net, a $500,000 decrease in service charges on deposit accounts and a $331,000 decrease in other service charges and fees which were partially offset by a $919,000 increase in mortgage lending income. The increase in interest expense was due to a $8.2 million, or 38.1%, increase in interest expense on deposits. The primary driver of the increase in non-interest expense was a $2.1 million increase in salaries and employee benefits which was partially offset by a $2.0 million decrease in other operating expense resulting from a $2.3 million FDIC small bank assessment credit received during the quarter. Income tax expense increased by $1.8 million during the quarter. During the third quarter, the Company recorded $3.7 million in tax expense due to the Company’s decision to surrender $47.5 million of its underperforming separate account bank owned life insurance (“BOLI”). This was partially offset by $763,000 in tax savings due to the State of Florida reducing its corporate income tax rate from 5.50% to 4.458% for the tax years January 1, 2019 through December 31, 2021.

Our net interest margin decreased from 4.46% for the three-month period ended September 30, 2018 to 4.32% for the three-month period ended September 30, 2019. The yield on interest earning assets was 5.50% and 5.49% for the three months ended September 30, 2019 and 2018, respectively, as average interest earning assets increased from $13.12 billion to $13.24 billion. The increase in earning assets is primarily the result of a $147.2 million increase in taxable investment securities. For the three months ended September 30, 2019 and 2018, we recognized $8.5 million and $10.7 million, respectively, in total net accretion for acquired loans and deposits. We recognized $2.8 million in loan payoff events for the three months ended September 30, 2019 compared to $4.0 million for the three months ended September 30, 2018. In addition, we experienced approximately $700,000 in increased investment premium amortization. The rate on interest bearing liabilities was 1.57% and 1.36% for the three months ended September 30, 2019 and 2018, respectively, as average interest-bearing liabilities decreased from $9.98 billion to $9.91 billion. The reduction in accretion income, decrease in loan payoff events and the increase in investment premium amortization reduced the net interest margin by 13 basis points for the quarter ended September 30, 2019.

Our efficiency ratio was 39.16% for the three months ended September 30, 2019, compared to 37.23% for the same period in 2018. For the third quarter of 2019, our efficiency ratio, as adjusted (non-GAAP) was 40.60%, an increase of 321 basis points from the 37.39% reported for the third quarter of 2018. (See Table 23 for the non-GAAP tabular reconciliation). The increase in the efficiency ratio is due to a $2.9 million decrease in net interest income, $1.1 million decrease in non-interest income and a $1.6 million increase in non-interest expense.

Our annualized return on average assets was 1.93% for the three months ended September 30, 2019, compared to 2.14% for the same period in 2018. Our annualized return on average common equity was 11.84% for the three months ended September 30, 2019, compared to 13.74% for the same period in 2018.

Results of Operations for the Nine Months Ended September 30, 2019 and 2018

Our net income decreased $13.1 million, or 5.7%, to $216.3 million for the nine-month period ended September 30, 2019, from $229.4 million for the same period in 2018. On a diluted earnings per share basis, our earnings were $1.29 per share and $1.32 per share for the nine-month periods ended September 30, 2019 and 2018, respectively. Total interest expense increased $32.6 million or 37.5%, non-interest expense increased $11.7 million or 6.1% and non-interest income decreased by $7.8 million or 9.9%. This was partially offset by a $35.3 million, or 6.9%, increase in total interest income. The increase in interest income was primarily due to a $29.7 million increase in loan interest income. The main components of the decrease in non-interest income were a $5.5 million decrease in other service charges and fees, a $1.7 million decrease in gain (loss) on OREO, net, and a $3.1 million decrease in other income which was partially offset by a $2.0 million increase in dividends from the Federal Home Loan Bank (“FHLB”), Federal Reserve Bank (“FRB”), First National Bankers’ Bank (“FNBB”) and other dividends. The primary driver of the increase in interest expense was a $32.9 million, or 60.5%, increase in interest expense on deposits. The increase in non-interest expense was driven by an $8.4 million increase in salaries and employee benefits. Income tax expense decreased by $756,000 for the nine-month period ended September 30, 2019, while net income decreased $13.1 million. During the third quarter, the Company recorded $3.7 million in tax expense due to the Company’s decision to surrender $47.5 million of its underperforming BOLI. This was partially offset by $763,000 in tax savings due to the State of Florida reducing its corporate income tax rate from 5.50% to 4.458% for the tax years January 1, 2019 through December 31, 2021.

Our net interest margin decreased from 4.46% for the nine-month period ended September 30, 2018 to 4.30% for the nine-month period ended September 30, 2019. The yield on interest earning assets was 5.50% and 5.38% for the nine months ended September 30, 2019 and 2018, respectively, as average interest earning assets increased from $12.73 billion to $13.28 billion. The increase in earning assets is primarily the result of our acquisition in June 2018 and an increase in taxable investment securities. For the nine months ended September 30, 2019 and 2018, we recognized $26.8 million and $32.0 million, respectively, in total net accretion for acquired loans and deposits. We recognized $2.8 million in loan payoff events for the nine months ended September 30, 2019 compared to $7.1 million for the three months ended September 30, 2018. In addition, we experienced approximately $1.6 million in increased investment premium amortization. The rate on interest bearing liabilities was 1.59% and 1.20% for the nine months ended September 30, 2019 and 2018, respectively, as average interest-bearing liabilities increased from $9.70 billion to $10.05 billion. The reduction in accretion income, decrease in loan payoff events and the increase in investment premium amortization reduced the net interest margin by 11 basis points for the nine months ended September 30, 2019.

Our efficiency ratio was 40.03% for the nine months ended September 30, 2019, compared to 37.26% for the same period in 2018. For the first nine months of 2019, our efficiency ratio, as adjusted (non-GAAP), was 40.35%, which increased from the 37.43% reported for the first nine months of 2018. (See Table 23 for the non-GAAP tabular reconciliation). The increase in the efficiency ratio is primarily due to an $11.7 million increase in non-interest expense and a $7.8 million decrease in non-interest income which was only partially offset by a $2.7 million increase in net interest income.

Our annualized return on average assets was 1.92% for the nine months ended September 30, 2019, compared to 2.12% for the same period in 2018. Our annualized return on average common equity was 12.12% for the nine months ended September 30, 2019, compared to 13.56% for the same period in 2018.

Financial Condition as of and for the Period Ended September 30, 2019 and December 31, 2018

Our total assets as of September 30, 2019 decreased $400.5 million to $14.90 billion from the $15.30 billion reported as of December 31, 2018. Cash and cash equivalents decreased $215.6 million, or 32.8%, for the nine-month period ended September 30, 2019. Our loan portfolio balance decreased to $10.77 billion as of September 30, 2019 from $11.07 billion at December 31, 2018. Total deposits increased $147.6 million to $11.05 billion as of September 30, 2019 from $10.90 billion as of December 31, 2018. Stockholders’ equity increased $119.5 million to $2.47 billion as of September 30, 2019, compared to $2.35 billion as of December 31, 2018. The increase in stockholders’ equity is primarily associated with the $152.8 million increase in retained earnings and $33.7 million of other comprehensive income, which was partially offset by stock repurchases of $75.4 million in 2019.

Our non-performing loans were $58.6 million, or 0.54% of total loans as of September 30, 2019, compared to $64.2 million, or 0.58% of total loans as of December 31, 2018. The allowance for loan losses as a percent of non-performing loans increased to 178.0% as of September 30, 2019, from 169.3% as of December 31, 2018. Non-performing loans from our Arkansas franchise were $19.2 million at September 30, 2019 compared to $17.4 million as of December 31, 2018. Non-performing loans from our Florida franchise were $37.0 million at September 30, 2019 compared to $43.3 million as of December 31, 2018. Non-performing loans from our Alabama franchise were $494,000 at September 30, 2019 compared to $179,000 as of December 31, 2018. Non-performing loans from our SPF franchise were $1.9 million at September 30, 2019 compared to $3.4 million as of December 31, 2018. There were no non-performing loans from our Centennial CFG franchise.

As of September 30, 2019, our non-performing assets decreased to $67.7 million, or 0.45% of total assets, from $78.0 million, or 0.51% of total assets, as of December 31, 2018. Non-performing assets from our Arkansas franchise were $23.1 million at September 30, 2019 compared to $24.0 million as of December 31, 2018. Non-performing assets from our Florida franchise were $42.2 million at September 30, 2019 compared to $50.2 million as of December 31, 2018. Non-performing assets from our Alabama franchise were $528,000 at September 30, 2019 compared to $306,000 as of December 31, 2018. Non-performing assets from our SPF franchise were $1.9 million at September 30, 2019 compared to $3.4 million as of December 31, 2018. There were no non-performing assets from our Centennial CFG franchise.

Critical Accounting Policies

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

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

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

•

Other service charges and fees – These represent credit card interchange fees and Centennial CFG loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310. Interchange fees were $3.6 million, $10.4 million, $4.0 million and $17.3 million for the three and nine-month periods ended September 30, 2019 and September 30, 2018, respectively. Centennial CFG loan fees were $2.7 million , $6.6 million, $3.3 million and $6.5 million for the three and nine-month periods ended September 30, 2019 and September 30, 2018, 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 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. Starting January 1, 2018, premiums are now amortized to call date under ASU 2017-08 and discounts are accreted to interest income using the constant yield method over the period to maturity. Effective January 1, 2019, as permitted by ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, the Company reclassified the prepayable held-to-maturity (“HTM”) investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to available-for-sale investment securities.

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

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

Shore Premier Finance

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

Including the purchase accounting adjustments, as of acquisition date, SPF had approximately $377.0 million in total assets, including $376.2 million in total loans, which resulted in goodwill of $30.5 million being recorded.

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

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

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. We anticipate that our principal acquisition focus will be to continue to expand our presence in Arkansas, Florida and Alabama and into other contiguous markets through pursuing both non-FDIC-assisted and FDIC-assisted bank acquisitions. However, as financial opportunities in other market areas arise, we may seek to expand into those areas.

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

Branches

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

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

Results of Operations

For the Three and Nine Months Ended September 30, 2019 and 2018

Net Interest Income

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments, rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (25.819% and 26.135% for the three and nine-month periods ended September 30, 2019 and 2018, 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, increased eight times from a target rate of 0.25% to 0.50% as of December 31, 2015 to a target rate of 2.25% to 2.50% as of December 31, 2018. The Federal Reserve has lowered the target rate twice during 2019. On July 31, 2019, the target rate was lowered to 2.00% to 2.25%, and the rate was lowered again on September 18, 2019 to 1.75% to 2.00%. The target rate is currently at 1.75% to 2.00% as of September 30, 2019, which has decreased from the target rate of 2.25% to 2.50% as of December 31, 2018.

Our net interest margin decreased from 4.46% for the three-month period ended September 30, 2018 to 4.32% for the three-month period ended September 30, 2019. The yield on interest earning assets was 5.50% and 5.49% for the three months ended September 30, 2019 and 2018, respectively, as average interest earning assets increased from $13.12 billion to $13.24 billion. The increase in earning assets is primarily the result of an increase in taxable investment securities. For the three months ended September 30, 2019 and 2018, we recognized $8.5 million and $10.7 million, respectively, in total net accretion for acquired loans and deposits. We recognized $2.8 million in loan payoff events for the three months ended September 30, 2019 compared to $4.0 million for the three months ended September 30, 2018. In addition, we experienced approximately $700,000 in increased investment premium amortization. The rate on interest bearing liabilities was 1.57% and 1.36% for the three months ended September 30, 2019 and 2018, respectively, as average interest-bearing liabilities decreased from $9.98 billion to $9.91 billion. The reduction in accretion income, decrease in loan payoff events and the increase in investment premium amortization reduced the net interest margin by 13 basis points for the quarter ended September 30, 2019.

For the three months ended September 30, 2019 and 2018, we recognized $8.5 million and $10.7 million, respectively, in total net accretion for acquired loans and deposits. Purchase accounting accretion on acquired loans was $8.4 million and $10.6 million and average purchase accounting loan discounts were $112.6 million and $151.4 million for the three-month periods ended September 30, 2019 and September 30, 2018, respectively. Net amortization of time deposit premiums was $30,000 and $66,000 and net average unamortized CD premiums were $297,000 and $448,000 for the three-month periods ended September 30, 2019 and September 30, 2018, respectively.

For the nine months ended September 30, 2019 and 2018, we recognized $26.8 million and $32.0 million, respectively, in total net accretion for acquired loans and deposits. Purchase accounting accretion on acquired loans was $26.7 million and $31.7 million and average purchase accounting loan discounts were $122.1 million and $156.9 million for the nine-month periods ended September 30, 2019 and September 30, 2018, respectively. Net amortization of time deposit premiums was $90,000 and $270,000 and net average unamortized CD premiums were $327,000 and $542,000 for the nine-month periods ended September 30, 2019 and September 30, 2018, respectively.

Net interest income on a fully taxable equivalent basis decreased $3.2 million, or 2.2%, to $144.2 million for the three-month period ended September 30, 2019, from $147.4 million for the same period in 2018. This decrease in net interest income for the three-month period ended September 30, 2019 was the result of a $5.0 million increase in interest expense which was only partially offset by a $1.8 million increase in interest income, on a fully taxable equivalent basis. The $1.8 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 $940,000. The higher yield was primarily driven by the increased income on loans and taxable investment securities, which resulted in a $849,000 increase in interest income, which included a decrease in loan accretion income on our historical acquisitions. The $5.0 million increase in interest expense for the three-month period ended September 30, 2019 is primarily the result of interest bearing deposits repricing in a higher interest rate environment as well as an increase in average deposits which increased interest expense by $6.2 million and $2.0 million, respectively. This increase was partially offset by a $3.4 million decrease in interest expense due to a 46.5% decrease in the balance of average FHLB and other borrowed funds. The repricing of our interest-bearing liabilities in a higher interest rate environment resulted in an approximately $6.2 million increase in interest expense. The lower level of our interest-bearing liabilities resulted in a decrease in interest expense of approximately $1.2 million.

Net interest income on a fully taxable equivalent basis increased $2.5 million, or 0.6%, to $427.4 million for the nine-month period ended September 30, 2019, from $424.8 million for the same period in 2018. This increase in net interest income for the nine-month period ended September 30, 2019 was the result of a $35.1 million increase in interest income partially offset by a $32.6 million increase in interest expense. The $35.1 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 $22.7 million. The higher yield on our interest earning assets resulted in an approximately $12.4 million increase in interest income. The repricing of our interest-bearing liabilities in a higher interest rate environment resulted in an approximately $30.6 million increase in interest expense. The higher level of our interest-bearing liabilities resulted in an increase in interest expense of approximately $1.9 million.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine-month periods ended September 30, 2019 and 2018, as well as changes in fully taxable equivalent net interest margin for the three and nine-month periods ended September 30, 2019 compared to the same period in 2018.

Table 2: Analysis of Net Interest Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Interest income	$	182,082		$	180,051		$	542,856		$	507,588
Fully taxable equivalent adjustment		1,247			1,489			3,933			4,101
Interest income – fully taxable equivalent		183,329			181,540			546,789			511,689
Interest expense		39,105			34,141			119,422			86,857
Net interest income – fully taxable equivalent		144,224			147,399			427,367			424,832
Yield on earning assets – fully taxable equivalent		5.50	%		5.49	%		5.50	%		5.38	%
Cost of interest-bearing liabilities		1.57			1.36			1.59			1.20
Net interest spread – fully taxable equivalent		3.93			4.13			3.91			4.18
Net interest margin – fully taxable equivalent		4.32			4.46			4.30			4.46

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin

	Three Months Ended September 30,			Nine Months Ended September 30,
	2019 vs. 2018			2019 vs. 2018
	(In thousands)
Increase (decrease) in interest income due to change in earning assets	$	940		$	22,706
Increase (decrease) in interest income due to change in earning asset yields		849			12,394
(Increase) decrease in interest expense due to change in interest-bearing liabilities		1,218			(1,923	)
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities		(6,182	)		(30,642	)
Increase (decrease) in net interest income	$	(3,175	)	$	2,535

Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three and nine-month periods ended September 30, 2019 and 2018, respectively. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

Table 4: Average Balance Sheets and Net Interest Income Analysis

	Three Months Ended September 30,
	2019							2018
	Average Balance		Income / Expense		Yield / Rate			Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	213,671	$	1,068		1.98	%	$	281,115	$	1,273		1.80	%
Federal funds sold		1,442		8		2.20			524		6		4.54
Investment securities – taxable		1,705,647		10,343		2.41			1,526,455		9,011		2.34
Investment securities – non-taxable		370,376		4,139		4.43			402,355		4,507		4.44
Loans receivable		10,944,638		167,771		6.08			10,909,646		166,743		6.06
Total interest-earning assets		13,235,774		183,329		5.50			13,120,095		181,540		5.49
Non-earning assets		1,757,458							1,760,836
Total assets	$	14,993,232						$	14,880,931
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	6,629,491	$	19,615		1.17	%	$	6,406,711	$	15,596		0.97	%
Time deposits		2,014,630		9,951		1.96			1,661,129		5,816		1.39
Total interest-bearing deposits		8,644,121		29,566		1.36			8,067,840		21,412		1.05
Federal funds purchased		4,801		21		1.74			—		—		—
Securities sold under agreement to repurchase		143,628		628		1.73			148,791		472		1.26
FHLB and other borrowed funds		748,577		3,683		1.95			1,398,738		7,055		2.00
Subordinated debentures		369,269		5,207		5.59			368,501		5,202		5.60
Total interest-bearing liabilities		9,910,396		39,105		1.57			9,983,870		34,141		1.36
Non-interest-bearing liabilities
Non-interest-bearing deposits		2,530,664							2,512,690
Other liabilities		114,352							66,441
Total liabilities		12,555,412							12,563,001
Stockholders’ equity		2,437,820							2,317,930
Total liabilities and stockholders’ equity	$	14,993,232						$	14,880,931
Net interest spread						3.93	%						4.13	%
Net interest income and margin			$	144,224		4.32	%			$	147,399		4.46	%

Table 4: Average Balance Sheets and Net Interest Income Analysis

	Nine Months Ended September 30,
	2019							2018
	Average Balance		Income / Expense		Yield / Rate			Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	261,419	$	4,239		2.17	%	$	271,987	$	3,408		1.68	%
Federal funds sold		1,510		29		2.57			3,595		24		0.89
Investment securities – taxable		1,647,781		31,699		2.57			1,538,387		26,960		2.34
Investment securities – non-taxable		380,115		12,741		4.48			382,088		12,981		4.54
Loans receivable		10,993,686		498,081		6.06			10,529,117		468,316		5.95
Total interest-earning assets		13,284,511		546,789		5.50			12,725,174		511,689		5.38
Non-earning assets		1,772,341							1,750,456
Total assets	$	15,056,852						$	14,475,630
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	6,634,809	$	59,788		1.20	%	$	6,422,489	$	40,327		0.84	%
Time deposits		1,954,182		27,493		1.88			1,595,985		14,055		1.18
Total interest-bearing deposits		8,588,991		87,281		1.36			8,018,474		54,382		0.91
Federal funds purchased		1,618		21		1.74			41		1		3.26
Securities sold under agreement to repurchase		146,277		1,892		1.73			148,472		1,220		1.10
FHLB and other borrowed funds		945,351		14,523		2.05			1,159,973		15,880		1.83
Subordinated debentures		369,078		15,705		5.69			368,313		15,374		5.58
Total interest-bearing liabilities		10,051,315		119,422		1.59			9,695,273		86,857		1.20
Non-interest-bearing liabilities
Non-interest-bearing deposits		2,508,082							2,464,032
Other liabilities		110,715							54,731
Total liabilities		12,670,112							12,214,036
Stockholders’ equity		2,386,740							2,261,594
Total liabilities and stockholders’ equity	$	15,056,852						$	14,475,630
Net interest spread						3.91	%						4.18	%
Net interest income and margin			$	427,367		4.30	%			$	424,832		4.46	%

Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine-month periods ended September 30, 2019 compared to the same period in 2018, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

Table 5: Volume/Rate Analysis

	Three Months Ended September 30,									Nine Months Ended September 30,
	2019 over 2018									2019 over 2018
	Volume			Yield/Rate			Total			Volume			Yield/Rate			Total
	(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks	$	(327	)	$	122		$	(205	)	$	(137	)	$	968		$	831
Federal funds sold		6			(4	)		2			(20	)		25			5
Investment securities – taxable		1,082			250			1,332			1,996			2,743			4,739
Investment securities – non-taxable		(357	)		(11	)		(368	)		(67	)		(173	)		(240	)
Loans receivable		536			492			1,028			20,934			8,831			29,765
Total interest income		940			849			1,789			22,706			12,394			35,100
Interest expense:
Interest-bearing transaction and savings deposits		558			3,461			4,019			1,374			18,087			19,461
Time deposits		1,411			2,724			4,135			3,669			9,769			13,438
Federal funds purchased		21			—			21			20			—			20
Securities sold under agreement to repurchase		(16	)		172			156			(18	)		690			672
FHLB borrowed funds		(3,203	)		(169	)		(3,372	)		(3,154	)		1,797			(1,357	)
Subordinated debentures		11			(6	)		5			32			299			331
Total interest expense		(1,218	)		6,182			4,964			1,923			30,642			32,565
Increase (decrease) in net interest income	$	2,158		$	(5,333	)	$	(3,175	)	$	20,783		$	(18,248	)	$	2,535

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 these economic uncertainties, we continue to follow our historically conservative procedures for lending and evaluating the provision and allowance for loan losses. Our practice continues to be primarily traditional real estate lending with 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.

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

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

We had no provision for loan losses for the three months ended September 30, 2019 and 2018, respectively. We had $1.3 million and $4.3 million of provision for loan losses for the nine months ended September 30, 2019 and 2018, respectively. The decrease in the provision for loan losses during the nine-month period of 2019 versus the nine-month period of 2018 is primarily a result of continued strong asset quality with non-performing loans to total loans of 0.54% and non-performing assets of 0.45%. In addition, net charge-offs to average total loans was 0.06% and 0.07% for the three and nine-month periods ended September 30, 2019, respectively.

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

Non-Interest Income

Total non-interest income was $24.7 million and $71.5 million for the three and nine-month periods ended September 30, 2019, compared to $25.8 million and $79.3 million for the same periods in 2018, respectively. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending, insurance, increase in cash value of life insurance and dividends.

Table 6 measures the various components of our non-interest income for the three and nine-month periods ended September 30, 2019 and 2018, respectively, as well as changes for the three and nine-month periods ended September 30, 2019 compared to the same period in 2018.

Table 6: Non-Interest Income

	Three Months Ended										Nine Months Ended
	September 30,					2019 Change					September 30,						2019 Change
	2019		2018			from 2018					2019			2018			from 2018
	(Dollars in thousands)
Service charges on deposit accounts	$	6,492	$	6,992		$	(500	)	(7.2	)%	$	19,152		$	19,847		$	(695	)	(3.5	)%
Other service charges and fees		8,710		9,041			(331	)	(3.7	)		23,450			28,993			(5,543	)	(19.1	)
Trust fees		382		437			(55	)	(12.6	)		1,176			1,262			(86	)	(6.8	)
Mortgage lending income		4,610		3,691			919		24.9			10,502			9,825			677		6.9
Insurance commissions		603		463			140		30.2			1,727			1,668			59		3.5
Increase in cash value of life insurance		714		735			(21	)	(2.9	)		2,190			2,119			71		3.4
Dividends from FHLB, FRB, FNBB & other		1,101		1,288			(187	)	(14.5	)		5,755			3,765			1,990		52.9
Gain on sale of SBA loans		291		47			244		519.1			887			491			396		80.7
Gain (loss) on sale of branches, equipment and other assets, net		12		(102	)		114		111.8			(38	)		(95	)		57		60.0
Gain (loss) on OREO, net		334		836			(502	)	(60.0	)		598			2,287			(1,689	)	(73.9	)
Other income		1,500		2,419			(919	)	(38.0	)		6,088			9,163			(3,075	)	(33.6	)
Total non-interest income	$	24,749	$	25,847		$	(1,098	)	(4.2	)%	$	71,487		$	79,325		$	(7,838	)	(9.9	)%

Non-interest income decreased $1.1 million, or 4.2%, to $24.7 million for the three-month period ended September 30, 2019 from $25.8 million for the same period in 2018. The factors that caused this decrease were decreases in service charges on deposit accounts, other service charges and fees, gain (loss) on OREO and other income.

Additional details for the three months ended September 30, 2019 on some of the more significant changes are as follows:

•

The $500,000 decrease in service charges on deposit accounts is primarily related to a decrease in overdraft fees.

•

The $331,000 decrease in other service charges and fees is primarily related to a decrease in property finance loan fees.

•

The $919,000 increase in mortgage lending income is primarily related to an increase in fee income on secondary market loans and gains on sales of mortgage loans due to increased volume.

•

The $244,000 increase in gain on sale of SBA loans is primarily related to realizing more gains from sales of SBA loans during the third quarter of 2019 compared to third quarter of 2018.

•

The $502,000 decrease in gain (loss) on OREO is primarily related to realizing fewer gains on sale from OREO properties during the three months ended September 30, 2019 compared to the three months ended September 30, 2018.

•

The $919,000 decrease in other income is primarily due to a $599,000 decrease in additional income for items previously charged off and a $406,000 decrease in investment brokerage fee income.

Non-interest income decreased $7.8 million, or 9.9%, to $71.5 million for the nine-month period ended September 30, 2019 from $79.3 million for the same period in 2018. The primary factor that resulted in this decrease was the impact of the Durbin Amendment which reduced interchange fees by approximately $6.0 million for the nine months ended September 30, 2019. Other factors were changes related to service charges on deposit accounts, other service charges and fees, mortgage lending income, dividends from FHLB, FRB, First National Bankers’ Bank & other, gain (loss) on OREO and other income.

Additional details for the nine months ended September 30, 2019 on some of the more significant changes are as follows:

•

The $695,000 decrease in service charges on deposit accounts is primarily related to a decrease in overdraft fees.

•

The $5.5 million decrease in other service charges and fees is primarily due to the reduction in interchange fees as a result of the Company being subject to interchange fee restrictions from the Durbin Amendment. We estimate that year to date interchange fees are approximately $6.0 million lower as a result of the Durbin Amendment. This was partially offset by a $453,000 increase in wire service income.

•

The $677,000 increase in mortgage lending income is primarily related to an increase in fee income for secondary market loans and increased gains on sales of mortgage loans due to increased volume.

•

The $2.0 million increase in dividends from FHLB, FRB, First National Bankers’ Bank & other is primarily the result of a $2.1 million special dividend from an equity investment in the first quarter of 2019.

•

The $1.7 million decrease in gain (loss) on OREO is primarily related to realizing fewer gains on sale from OREO properties during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

•

The $3.1 million decrease in other income is primarily due to a $1.2 million decrease in additional income for items previously charged off, an $896,000 decrease in investment brokerage fee income, a $535,000 decrease in income from fair value adjustments for equity securities due to the Company selling its equity securities during the fourth quarter of 2018 and a $511,000 decrease in miscellaneous income.

Non-Interest Expense

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

Table 7 below sets forth a summary of non-interest expense for the three and nine-month periods ended September 30, 2019 and 2018, as well as changes for the three and nine-month periods ended September 30, 2019 compared to the same period in 2018.

Table 7: Non-Interest Expense

	Three Months Ended										Nine Months Ended
	September 30,					2019 Change					September 30,				2019 Change
	2019			2018		from 2018					2019		2018		from 2018
	(Dollars in thousands)
Salaries and employee benefits	$	39,919		$	37,825	$	2,094		5.5	%	$	115,731	$	107,315	$	8,416		7.8	%
Occupancy and equipment		9,047			8,148		899		11.0			26,723		25,650		1,073		4.2
Data processing expense		4,059			3,461		598		17.3			11,867		10,786		1,081		10.0
Other operating expenses:
Advertising		1,201			1,154		47		4.1			3,347		3,258		89		2.7
Amortization of intangibles		1,587			1,617		(30	)	(1.9	)		4,760		4,867		(107	)	(2.2	)
Electronic banking expense		1,901			1,947		(46	)	(2.4	)		5,655		5,653		2		0.0
Directors’ fees		380			314		66		21.0			1,206		962		244		25.4
Due from bank service charges		272			253		19		7.5			792		714		78		10.9
FDIC and state assessment		(532	)		2,293		(2,825	)	(123.2	)		2,833		6,689		(3,856	)	(57.6	)
Hurricane expense		—			—		—		—			897		—		897		100.0
Insurance		698			762		(64	)	(8.4	)		2,056		2,363		(307	)	(13.0	)
Legal and accounting		1,414			761		653		85.8			3,384		2,397		987		41.2
Other professional fees		1,906			1,748		158		9.0			7,024		4,988		2,036		40.8
Operating supplies		511			510		1		0.2			1,552		1,712		(160	)	(9.3	)
Postage		320			311		9		2.9			939		978		(39	)	(4.0	)
Telephone		289			337		(48	)	(14.2	)		898		1,081		(183	)	(16.9	)
Other expense		4,792			4,682		110		2.3			14,781		13,318		1,463		11.0
Total non-interest expense	$	67,764		$	66,123	$	1,641		2.5	%	$	204,445	$	192,731	$	11,714		6.1	%

Non-interest expense increased $1.6 million, or 2.5%, to $67.8 million for the three months ended September 30, 2019 from $66.1 million for the same period in 2018. The primary factor that resulted in this increase was the increase in salaries and employee benefits expense. Other factors were changes related to occupancy and equipment expense, data processing expense, legal and accounting expense and FDIC and state assessment.

Additional details for the three months ended September 30, 2019 on some of the more significant changes are as follows:

•

The $2.1 million increase in salaries and employee benefits expense is primarily due to increased salary expense related to the normal increased cost of doing business and additional employees hired as a result of the increased regulatory environment.

•

The $899,000 increase in occupancy and equipment expense is primarily related to the normal increased cost of doing business.

•

The $598,000 increase in data processing expense is primarily related to an in increase in software, license and core processing and telecommunication expenses.

•

The $2.8 million decrease in FDIC and state assessment is primarily related to a $2.3 million FDIC small bank assessment credit recorded in the third quarter of 2019, a lower assessment rate for 2019 and no surcharge expense being assessed by the FDIC during 2019. Small banks (total consolidated assets of less than $10 billion) were awarded FDIC assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%, to be applied when the reserve ratio is at least 1.38%. The assessment regulations provide that after the reserve ratio reaches 1.38% the FDIC will automatically apply small bank credits to reduce the banks’ regular deposit insurance assessments. Centennial Bank was classified as a small bank until January 1, 2018. During the third quarter, the Company was notified that the Deposit Insurance Fund (“DIF”) reserve ratio as of June 30, 2019 was 1.40%. As a result, the Company recorded its FDIC small bank assessment credit in the amount of $2.3 million during the third quarter of 2019.

Non-interest expense increased $11.7 million, or 6.1%, to $204.4 million for the nine months ended September 30, 2019 from $192.7 million for the same period in 2018. The primary factor that resulted in this increase was the increase in salaries and employee benefits expense. Other factors were changes related occupancy and equipment expense, data processing expense, other professional fees, other expense and FDIC and state assessment.

Additional details for the nine months ended September 30, 2019 on some of the more significant changes are as follows:

•

The $8.4 million increase in salaries and employee benefits expense is primarily due to increased salary expense related to the normal increased cost of doing business, additional employees hired as a result of the increased regulatory environment, a $318,000 increase in salary expense for Centennial CFG, $1.7 million of additional expense related to performance based restricted stock and stock options granted during the third quarter of 2018 under the “HOMB $2.00” incentive program and the completion of the acquisition of SPF during the second quarter of 2018, which accounted for $479,000 of the increase.

•

The $1.1 million increase in occupancy and equipment expense is primarily related to the normal increased cost of doing business.

•

The $1.1 million increase in data processing expense is primarily related to an in increase in software and license and core processing expenses.

•

The $3.9 million decrease in FDIC and state assessment is primarily related to a $2.3 million FDIC small bank assessment credit recorded in the third quarter of 2019, a lower assessment rate for 2019 and no surcharge expense being assessed by the FDIC during 2019. Small banks (total consolidated assets of less than $10 billion) were awarded FDIC assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%, to be applied when the reserve ratio is at least 1.38%. The assessment regulations provide that after the reserve ratio reaches 1.38% the FDIC will automatically apply small bank credits to reduce the banks’ regular deposit insurance assessments. Centennial Bank was classified as a small bank until January 1, 2018. During the third quarter, the Company was notified that the DIF reserve ratio as of June 30, 2019 was 1.40%. As a result, the Company recorded its FDIC small bank assessment credit in the amount of $2.3 million during the third quarter of 2019.

•

The $897,000 in hurricane expense is related to damages from Hurricane Michael which made landfall in Mexico Beach, Florida on October 10, 2018.

•

The $2.0 million increase in other professional fees is primarily related to $900,000 of expense incurred in relation to a completed outsourced special project as well expenses incurred in relation to the increased regulatory environment as a result of the Company exceeding $10 billion in assets.

•

The $1.5 million increase in other expense is primarily related to the continued growth of the Company.

Income Taxes

During the third quarter of 2019, the State of Florida reduced its corporate income tax rate from 5.50% to 4.458% for the tax years January 1, 2019 through December 31, 2021. As a result of this reduction, our third quarter income taxes were reduced by $763,000 of which $497,000 were related to the first six months of 2019. This rate decline has lowered the Company’s marginal tax rate from 26.135% to 25.819% for 2019.

During the third quarter of 2019, the Company made a strategic decision to surrender $47.5 million of its underperforming BOLI. When a BOLI contract is surrendered the gains within the policy become taxable as well as a 10% IRS penalty on the gain. As a result of this BOLI decision, the Company recorded a $3.7 million tax expense related to this transaction.

Income tax expense increased $1.8 million, or 7.3%, to $27.2 million for the three-month period ended September 30, 2019, from $25.4 million for the same period in 2018. Excluding the BOLI tax expense, the income tax expense would have been $23.5 million for a decrease of $1.8 million, or 7.2%. The effective tax rate excluding the BOLI tax expense was 24.00% and 23.54% for the three-months period ended for September 30, 2018 and 2019, respectively.

Income tax expense decreased $756,000, or 1.0%, to $72.9 million for the nine-month period ended September 30, 2019, from $73.6 million for the same period in 2018. Excluding the BOLI tax expense, the income tax expense would have been $69.2 million for a decrease of $4.4 million, or 6.0%. The effective tax rate excluding the BOLI tax expense was 24.30% and 23.93% for the nine-months period ended for September 30, 2018 and 2019, respectively.

Financial Condition as of and for the Period Ended September 30, 2019 and December 31, 2018

Our total assets as of September 30, 2019 decreased $400.5 million to $14.90 billion from the $15.30 billion reported as of December 31, 2018. Cash and cash equivalents decreased $215.6 million, or 32.8%, for the nine-month period ended September 30, 2019. Our loan portfolio balance decreased to $10.77 billion as of September 30, 2019 from $11.07 billion at December 31, 2018. Total deposits increased $147.6 million to $11.05 billion as of September 30, 2019 from $10.90 billion as of December 31, 2018. Stockholders’ equity increased $119.5 million to $2.47 billion as of September 30, 2019, compared to $2.35 billion as of December 31, 2018. The increase in stockholders’ equity is primarily associated with the $152.8 million increase in retained earnings and $34.2 million of other comprehensive income, which was partially offset by stock repurchases of $75.4 million in 2019.

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $10.94 billion and $10.91 billion during the three-month periods ended September 30, 2019 and 2018, respectively. Our loan portfolio averaged $10.99 billion and $10.53 billion during the nine-month periods ended September 30, 2019 and 2018, respectively. Loans receivable were $10.77 billion and $11.07 billion as of September 30, 2019 and December 31, 2018, respectively.

From December 31, 2018 to September 30, 2019, the Company experienced a decline of approximately $299.9 million in loans. Centennial CFG experienced $49.9 million of organic loan decline during the first nine months of 2019, while the legacy footprint experienced $250.0 million of organic loan decline during the first nine months of 2019.

The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property. Although these loans are primarily originated within our franchises in Arkansas, Florida, South Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas of Arkansas, Florida, Alabama and New York. Loans receivable were approximately $3.69 billion, $4.90 billion, $220.1 million, $457.1 million and $1.50 billion as of September 30, 2019 in Arkansas, Florida, Alabama, SPF and Centennial CFG, respectively.

As of September 30, 2019, we had approximately $481.5 million of construction land development loans which were collateralized by land. This consisted of approximately $190.0 million for raw land and approximately $291.5 million for land with commercial and or residential lots.

Table 8 presents our loans receivable balances by category as of September 30, 2019 and December 31, 2018.

Table 8: Loans Receivable

	As of		As of
	September 30, 2019		December 31, 2018
	(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	4,375,970	$	4,806,684
Construction/land development		1,827,454		1,546,035
Agricultural		87,087		76,433
Residential real estate loans:
Residential 1-4 family		1,808,099		1,975,586
Multifamily residential		498,079		560,475
Total real estate		8,596,689		8,965,213
Consumer		469,741		443,105
Commercial and industrial		1,479,724		1,476,331
Agricultural		90,343		48,562
Other		135,449		138,668
Total loans receivable	$	10,771,946	$	11,071,879

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

As of September 30, 2019, commercial real estate loans totaled $6.29 billion, or 58.4% of loans receivable, as compared to $6.43 billion, or 58.1% of loans receivable, as of December 31, 2018. Commercial real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $2.15 billion, $3.03 billion, $117.5 million, zero and $990.0 million at September 30, 2019, respectively.

Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 31.7% and 56.7% of our residential mortgage loans consist of owner occupied 1-4 family properties and non-owner occupied 1-4 family properties (rental), respectively, as of September 30, 2019, with the remaining 11.6% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.

As of September 30, 2019, residential real estate loans totaled $2.31 billion, or 21.4% of loans receivable, compared to $2.54 billion, or 22.9% of loans receivable, as of December 31, 2018. Residential real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $881.4 million, $1.26 billion, $70.0 million, zero and $97.7 million at September 30, 2019, respectively.

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

As of September 30, 2019, consumer loans totaled $469.7 million, or 4.4% of loans receivable, compared to $443.1 million, or 4.0% of loans receivable, as of December 31, 2018. Consumer loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $41.0 million, $14.1 million, $1.1 million, $413.5 million and zero at September 30, 2019, respectively.

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

As of September 30, 2019, commercial and industrial loans totaled $1.48 billion, or 13.7% of loans receivable, compared to $1.48 billion, or 13.3% of loans receivable, as of December 31, 2018. Commercial and industrial loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $500.7 million, $496.9 million, $30.1 million, $43.6 million and $408.6 million at September 30, 2019, respectively.

Non-Performing Assets

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

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

We have purchased loans with deteriorated credit quality in our September 30, 2019 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 September 30, 2019 and December 31, 2018. As of these dates, all non-performing restructured loans are included in non-accrual loans.

Table 9: Non-performing Assets

	As of			As of
	September 30, 2019			December 31, 2018
	(Dollars in thousands)
Non-accrual loans	$	48,640		$	47,083
Loans past due 90 days or more (principal or interest payments)		9,964			17,159
Total non-performing loans		58,604			64,242
Other non-performing assets
Foreclosed assets held for sale, net		8,639			13,236
Other non-performing assets		447			497
Total other non-performing assets		9,086			13,733
Total non-performing assets	$	67,690		$	77,975
Allowance for loan losses to non-performing loans		177.98	%		169.35	%
Non-performing loans to total loans		0.54			0.58
Non-performing assets to total assets		0.45			0.51

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

Total non-performing loans were $58.6 million and $64.2 million as of September 30, 2019 and December 31, 2018, respectively. Non-performing loans at September 30, 2019 were $19.2 million, $37.0 million, $494,000, $1.9 million and zero in the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively.

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

Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan. Only non-performing restructured loans are included in our non-performing loans. As of September 30, 2019, we had $15.1 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 $9.6 million, our Arkansas market contains $5.1 million and our Alabama market contains $381,000 of these restructured loans.

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

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 September 30, 2019 and December 31, 2018, the amount of TDRs was $18.6 million and $19.7 million, respectively. As of September 30, 2019 and December 31, 2018, 81.6% and 76.6%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $8.6 million as of September 30, 2019, compared to $13.2 million as of December 31, 2018 for a decrease of $4.6 million. The foreclosed assets held for sale as of September 30, 2019 are comprised of $3.8 million of assets located in Arkansas, $4.8 million of assets located in Florida, $34,000 located in Alabama and zero from SPF and Centennial CFG.

During the first nine months of 2019, we had two foreclosed properties with a carrying value greater than $1.0 million. The first property was a development property in Florida acquired from The Bank of Commerce with a carrying value of $2.1 million at September 30, 2019. The second property was a development property in Florida with a carrying value of $1.4 million at September 30, 2019. The Company does not currently anticipate any additional losses on these properties. As of September 30, 2019, no other foreclosed assets held for sale have a carrying value greater than $1.0 million.

Table 10 shows the summary of foreclosed assets held for sale as of September 30, 2019 and December 31, 2018.

Table 10: Foreclosed Assets Held For Sale

	As of		As of
	September 30, 2019		December 31, 2018
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	2,240	$	5,555
Construction/land development		4,712		3,534
Residential real estate loans
Residential 1-4 family		1,687		4,142
Multifamily residential		—		5
Total foreclosed assets held for sale	$	8,639	$	13,236

A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and non-accrual loans), criticized and/or classified loans with a specific allocation, loans categorized as TDRs and certain other loans identified by management that are still performing (loans included in multiple categories are only included once). As of September 30, 2019, average impaired loans were $83.0 million compared to $81.3 million as of December 31, 2018. As of September 30, 2019 and December 31, 2018, impaired loans were $76.8 million and $85.6 million, respectively. Loan balances with a specific allocation decreased, and the specific allocation for impaired loans decreased by approximately $915,000. As of September 30, 2019, our Arkansas, Florida, Alabama, SPF and Centennial CFG markets accounted for approximately $27.4 million, $46.6 million, $875,000, $1.9 million and zero of the impaired loans, respectively.

We evaluated loans purchased in conjunction with our historical acquisitions for impairment in accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected. Purchased credit impaired loans are not classified as non-performing assets for the recognition of interest income as the pools are considered to be performing. However, for the purpose of calculating the non-performing credit metrics, we have included all of the loans which are contractually 90 days past due and still accruing, including those in performing pools. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased impaired loans.

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 September 30, 2019 and December 31, 2018, there was not a material amount of purchased loans with deteriorated credit quality on non-accrual status as a result of most of the loans being accounted for on the pool basis and the pools are considered to be performing for the accruing of interest income. Also, acquired loans contractually past due 90 days or more are accruing interest because the pools are considered to be performing for the purpose of accruing interest income.

Past Due and Non-Accrual Loans

Table 11 shows the summary of non-accrual loans as of September 30, 2019 and December 31, 2018:

Table 11: Total Non-Accrual Loans

	As of		As of
	September 30, 2019		December 31, 2018
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	14,403	$	15,031
Construction/land development		1,900		5,280
Agricultural		827		20
Residential real estate loans
Residential 1-4 family		21,725		17,384
Multifamily residential		339		972
Total real estate		39,194		38,687
Consumer		1,421		2,912
Commercial and industrial		6,669		5,451
Agricultural		1,355		32
Other		1		1
Total non-accrual loans	$	48,640	$	47,083

If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $604,000 and $560,000, respectively, would have been recorded for the three-month periods ended September 30, 2019 and 2018. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $1.9 million and $1.6 million would have been recorded for each of the nine-month periods ended September 30, 2019 and 2018, respectively. The interest income recognized on non-accrual loans for the three and nine-month periods ended September 30, 2019 and 2018 was considered immaterial.

Table 12 shows the summary of accruing past due loans 90 days or more as of September 30, 2019 and December 31, 2018:

Table 12: Loans Accruing Past Due 90 Days or More

	As of		As of
	September 30, 2019		December 31, 2018
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	6,148	$	9,679
Construction/land development		1,530		3,481
Agricultural		282		—
Residential real estate loans
Residential 1-4 family		1,223		1,753
Multifamily residential		—		—
Total real estate		9,183		14,913
Consumer		621		720
Commercial and industrial		160		1,526
Agricultural and other		—		—
Total loans accruing past due 90 days or more	$	9,964	$	17,159

Our ratio of total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.54% and 0.58% at September 30, 2019 and December 31, 2018, respectively.

Allowance for Loan Losses

Overview. The allowance for loan losses is maintained at a level which our management believes is adequate to absorb all probable losses on loans in the loan portfolio. The amount of the allowance is affected by: (i) loan charge-offs, which decrease the allowance; (ii) recoveries on loans previously charged off, which increase the allowance; and (iii) the provision of possible loan losses charged to income, which increases the allowance. In determining the provision for possible loan losses, it is necessary for our management to monitor fluctuations in the allowance resulting from actual charge-offs and recoveries and to periodically review the size and composition of the loan portfolio in light of current and anticipated economic conditions. If actual losses exceed the amount of allowance for loan losses, our earnings could be adversely affected.

As we evaluate the allowance for loan losses, we categorize it as follows: (i) specific allocations; (ii) allocations for criticized and classified assets not individually evaluated for impairment; (iii) general allocations; and (iv) miscellaneous allocations.

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

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

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

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

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 decreased by approximately $300.0 million from $10.79 billion at December 31, 2018 to $10.49 billion at September 30, 2019. The percentage of the allowance for loan losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment was 0.99% and 0.98% at September 30, 2019 and December 31, 2018, respectively.

Charge-offs and Recoveries. Total charge-offs decreased to $2.3 million for the three months ended September 30, 2019, compared to $2.5 million for the same period in 2018. Total charge-offs increased to $8.0 million for the nine months ended September 30, 2019, compared to $7.2 million for the same period in 2018. Total recoveries decreased to $540,000 for the three months ended September 30, 2019, compared to $1.2 million for the same period in 2018. Total recoveries decrease to $2.2 million for the nine months ended September 30, 2019, compared to $2.8 million for the same period in 2018. For the three months ended September 30, 2019, net charge-offs were $928,000 for Arkansas, $486,000 for Florida, $306,000 for Alabama, $42,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $1.8 million. For the nine months ended September 30, 2019, net charge-offs were $2.8 million for Arkansas, $2.6 million for Florida, $291,000 for Alabama, $85,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $5.8 million. While the 2019 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 nine-month periods ended September 30, 2019 and 2018.

Table 13: Analysis of Allowance for Loan Losses

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Balance, beginning of period	$	106,066		$	111,516		$	108,791		$	110,266
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		858			144			2,360			981
Construction/land development		133			337			1,445			399
Agricultural		—			—			—			—
Residential real estate loans:
Residential 1-4 family		522			608			1,183			2,339
Multifamily residential		—			—			—			—
Total real estate		1,513			1,089			4,988			3,719
Consumer		76			15			278			73
Commercial and industrial		143			744			1,152			1,816
Agricultural		—			—			—			—
Other		570			653			1,554			1,565
Total loans charged off		2,302			2,501			7,972			7,173
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		22			195			226			383
Construction/land development		(40	)		90			78			209
Agricultural		—			—			—			—
Residential real estate loans:
Residential 1-4 family		274			307			770			801
Multifamily residential		3			2			11			43
Total real estate		259			594			1,085			1,436
Consumer		61			108			98			168
Commercial and industrial		62			251			466			568
Agricultural		—			—			—			—
Other		158			223			511			604
Total recoveries		540			1,176			2,160			2,776
Net loans charged off (recovered)		1,762			1,325			5,812			4,397
Provision for loan losses		—			—			1,325			4,322
Balance, June 30	$	104,304		$	110,191		$	104,304		$	110,191
Net charge-offs (recoveries) to average loans receivable		0.06	%		0.05	%		0.07	%		0.06	%
Allowance for loan losses to total loans		0.97			1.02			0.97			1.02
Allowance for loan losses to net charge-offs (recoveries)		1,492			2,096			1,342			1,874

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.

The changes for the period ended September 30, 2019 and the year ended December 31, 2018 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 September 30, 2019 and December 31, 2018.

Table 14: Allocation of Allowance for Loan Losses

	As of September 30, 2019					As of December 31, 2018
	Allowance Amount		% of loans⁽¹⁾			Allowance Amount		% of loans⁽¹⁾
	(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	34,506		40.6	%	$	41,721		43.4	%
Construction/land development		29,091		17.0			21,302		14.0
Agricultural		825		0.8			615		0.7
Residential real estate loans:
Residential 1-4 family		16,186		16.8			22,547		17.8
Multifamily residential		3,183		4.6			4,187		5.1
Total real estate		83,791		79.8			90,372		80.97
Consumer		1,723		4.4			1,153		4.0
Commercial and industrial		15,618		13.7			14,981		13.3
Agricultural		3,172		0.8			2,175		0.4
Other		—		1.3			110		1.3
Total allowance for loan losses	$	104,304		100.0	%	$	108,791		100.0	%

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

Investment Securities

Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. The estimated effective duration of our securities portfolio was 2.4 years as of September 30, 2019.

Effective January 1, 2019, as permitted by ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, the Company reclassified the prepayable held-to-maturity investment securities, with a fair value of $193.6 million and $834,000 in net unrealized gains as of December 31, 2018, to available-for-sale investment securities.

As of December 31, 2018, we had $192.8 million of held-to-maturity securities. Of the $192.8 million of held-to-maturity securities as of December 31, 2018, $3.3 million were invested in U.S. Government-sponsored enterprises, $57.3 million were invested in mortgage-backed securities and $132.2 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 $2.09 billion and $1.79 billion as of September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019, $1.21 billion, or 57.8%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $1.03 billion, or 57.6%, of our available-for-sale securities as of December 31, 2018. To reduce our income tax burden, $429.2 million, or 20.6%, of our available-for-sale securities portfolio as of September 30, 2019, were primarily invested in tax-exempt obligations of state and political subdivisions, compared to $308.6 million, or 17.3%, of our available-for-sale securities as of December 31, 2018. We had $419.4 million, or 20.1%, invested in obligations of U.S. Government-sponsored enterprises as of September 30, 2019, compared to $414.1 million, or 23.2%, of our available-for-sale securities as of December 31, 2018. Also, we had approximately $33.4 million, or 1.6%, invested in other securities as of September 30, 2019, compared to $34.4 million, or 1.9% of our available-for-sale securities as of December 31, 2018.

Certain investment securities are valued at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, we believe the declines in fair value for these securities are temporary. It is our intent to hold these securities to recovery. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, and the resulting loss recognized in net income in the period the other than temporary impairment is identified.

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

Deposits

Our deposits averaged $11.17 billion for the three-month period ended September 30, 2019. Total deposits were $11.05 billion as of September 30, 2019, and $10.90 billion as of December 31, 2018. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions.

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

Table 15 reflects the classification of the brokered deposits as of September 30, 2019 and December 31, 2018.

Table 15: Brokered Deposits

	September 30, 2019		December 31, 2018
	(In thousands)
Time Deposits	$	100,168	$	125,610
CDARS		109		109
Insured Cash Sweep and Other Transaction Accounts		480,390		534,508
Total Brokered Deposits	$	580,667	$	660,227

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

Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits, for the three and nine-month periods ended September 30, 2019 and 2018.

Table 16: Average Deposit Balances and Rates

	Three Months Ended September 30,
	2019					2018
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	2,530,664		—	%	$	2,512,690		—	%
Interest-bearing transaction accounts		6,000,823		1.27			5,758,161		1.05
Savings deposits		628,668		0.25			648,550		0.19
Time deposits:
$100,000 or more		1,556,618		2.16			1,183,503		1.63
Other time deposits		458,012		1.28			477,626		0.80
Total	$	11,174,785		1.05	%	$	10,580,530		0.80	%

	Nine Months Ended September 30,
	2019					2018
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	2,508,082		—	%	$	2,464,032		—	%
Interest-bearing transaction accounts		6,006,220		1.30			5,767,190	0.91
Savings deposits		628,589		0.26			655,299	0.19
Time deposits:
$100,000 or more		1,489,161		2.09			1,101,628		1.40
Other time deposits		465,021		1.20			494,357	0.69
Total	$	11,097,073		1.05	%	$	10,482,506		0.69	%

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 increased $13.4 million, or 9.3%, from $143.7 million as of December 31, 2018 to $157.0 million as of September 30, 2019.

FHLB and Other Borrowed Funds

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $369.4 million and $368.8 million as of September 30, 2019 and December 31, 2018, respectively.

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

Stockholders’ Equity

Stockholders’ equity was $2.47 billion at September 30, 2019 compared to $2.35 billion at December 31, 2018. The increase in stockholders’ equity is primarily associated with a $152.8 million increase in retained earnings for the first nine months of 2019 combined with a $33.7 million increase in comprehensive income, which was partially offset by the $75.4 million in stock repurchases. The annualized improvement in stockholders’ equity for the first nine months of 2019 was 6.8%. As of September 30, 2019 and December 31, 2018, our equity to asset ratio was 16.57% and 15.36%, respectively. Book value per share was $14.80 as of September 30, 2019, compared to $13.76 as of December 31, 2018, a 10.0% annualized increase.

Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.13 per share and $0.12 per share for the three-month periods ended September 30, 2019 and 2018, respectively. The common stock dividend payout ratio for the three months ended September 30, 2019 and 2018 was 29.9% and 26.1%, respectively. The common stock dividend payout ratio for the nine months ended September 30, 2019 and 2018 was 29.6% and 25.8%, respectively. For the fourth quarter of 2019, the Board of Directors declared a regular $0.13 per share quarterly cash dividend payable December 4, 2019, to shareholders of record November 13, 2019.

Stock Repurchase Program. On January 18, 2019, the Company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of its common stock under the previously approved stock repurchase program, which brought the remaining amount of authorized shares to repurchase to 9,919,447 shares. During the first nine months of 2019, the Company utilized a portion of this stock repurchase program. We repurchased a total of 4,031,722 shares with a weighted-average stock price of $18.67 per share during the first nine months of 2019. The remaining balance available for repurchase was 5,887,725 shares at September 30, 2019.

Liquidity and Capital Adequacy Requirements

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

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

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

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018.

Table 17: Risk-Based Capital

	As of September 30, 2019			As of December 31, 2018
	(Dollars in thousands)
Tier 1 capital
Stockholders’ equity	$	2,469,389		$	2,349,886
Goodwill and core deposit intangibles, net		(996,119	)		(1,000,842	)
Unrealized (gain) loss on available-for-sale securities		(19,882	)		13,815
Deferred tax assets		—			—
Total common equity Tier 1 capital		1,453,388			1,362,859
Qualifying trust preferred securities		70,947			70,841
Total Tier 1 capital		1,524,335			1,433,700
Tier 2 capital
Qualifying subordinated notes		298,416			297,949
Qualifying allowance for loan losses		104,304			108,791
Total Tier 2 capital		402,720			406,740
Total risk-based capital	$	1,927,055		$	1,840,440
Average total assets for leverage ratio	$	13,997,113		$	13,838,137
Risk weighted assets	$	11,929,012		$	12,022,576
Ratios at end of period
Common equity Tier 1 capital		12.18	%		11.34	%
Leverage ratio		10.89			10.36
Tier 1 risk-based capital		12.78			11.93
Total risk-based capital		16.15			15.31
Minimum guidelines – Basel III phase-in schedule
Common equity Tier 1 capital		7.00	%		6.375	%
Leverage ratio		4.00			4.00
Tier 1 risk-based capital		8.50			7.875
Total risk-based capital		10.50			9.875
Minimum guidelines – Basel III fully phased-in
Common equity Tier 1 capital		7.00	%		7.00	%
Leverage ratio		4.00			4.00
Tier 1 risk-based capital		8.50			8.50
Total risk-based capital		10.50			10.50
Well-capitalized guidelines
Common equity Tier 1 capital		6.50	%		6.50	%
Leverage ratio		5.00			5.00
Tier 1 risk-based capital		8.00			8.00
Total risk-based capital		10.00			10.00

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

Non-GAAP Financial Measurements

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

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

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

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

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

Table 18: Earnings, As Adjusted

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
	(Dollars in thousands)
GAAP net income available to common shareholders (A)	$	72,763		$	80,284	$	216,277		$	229,373
Adjustments:
FDIC Small Bank Assessment Credit		(2,291	)		—		(2,291	)		—
Special dividend from equity investment		—			—		(2,134	)		—
Hurricane expenses		—			—		897			—
Outsourced special project expense		—			—		900			—
Total adjustments		(2,291	)		—		(2,628	)		—
Tax-effect of adjustments ⁽¹⁾		(592	)		—		(679	)		—
Adjustments after-tax		(1,699	)		—		(1,949	)		—
Florida tax savings		(497	)		—		—			—
BOLI redemption tax		3,667			—		3,667			—
Total Adjustments after-tax (B)		1,471			—		1,718			—
Earnings, as adjusted (C)	$	74,234		$	80,284	$	217,995		$	229,373
Average diluted shares outstanding (D)		167,178			174,867		168,178			174,394
GAAP diluted earnings per share: A/D	$	0.44		$	0.46	$	1.29		$	1.32
Adjustments after-tax B/D		—			—		0.01			—
Diluted earnings per common share, as adjusted: C/D	$	0.44		$	0.46	$	1.30		$	1.32

(1)	Blended statutory tax rate of 25.819% for the three and nine-month periods ended September 30, 2019 and 26.135% for the three and nine-month periods ended September 30, 2018.

We had $996.5 million, $1.00 billion, and $1.00 billion total goodwill, core deposit intangibles and other intangible assets as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets, as adjusted, return on average tangible equity excluding intangible amortization, return on average tangible equity, as adjusted and tangible equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculation of book value per share, return on average assets, return on average equity, and equity to assets, are presented in Tables 19 through 22, respectively.

Table 19: Tangible Book Value Per Share

	As of September 30, 2019		As of December 31, 2018
	(In thousands, except per share data)
Book value per share: A/B	$	14.80	$	13.76
Tangible book value per share: (A-C-D)/B		8.83		7.90
(A) Total equity	$	2,469,389	$	2,349,886
(B) Shares outstanding		166,860		170,720
(C) Goodwill	$	958,408	$	958,408
(D) Core deposit and other intangibles		38,136		42,896

Table 20: Return on Average Assets

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Return on average assets: A/D		1.93	%		2.14	%		1.92	%		2.12	%
Return on average assets excluding intangible amortization: B/(D-E)		2.10			2.33			2.09			2.31
Return on average assets excluding FDIC Small Bank Assessment Credit, Florida tax savings, BOLI redemption tax, special dividend from equity investment, hurricane expenses & outsourced special project expense: (ROA, as adjusted): (A+C)/D		1.96			2.14			1.94			2.12
(A) Net income	$	72,763		$	80,284		$	216,277		$	229,373
Intangible amortization after-tax		1,177			1,194			3,531			3,595
(B) Earnings excluding intangible amortization	$	73,940		$	81,478		$	219,808		$	232,968
(C) Adjustments after-tax	$	1,471		$	—		$	1,718		$	—
(D) Average assets		14,993,232			14,880,931			15,056,852			14,475,630
(E) Average goodwill, core deposits and other intangible assets		997,309			1,001,843			998,889			984,639

Table 21: Return on Average Tangible Equity Excluding Intangible Amortization

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Return on average equity: A/D		11.84	%		13.74	%		12.12	%		13.56	%
Return on average common equity excluding FDIC Small Bank Assessment Credit, Florida tax savings, BOLI redemption tax, special dividend from equity investment, hurricane expenses & outsourced special project expense: (ROE, as adjusted) ((A+C)/D)		12.08			13.74			12.21			13.56
Return on average tangible common equity: (A/(D-E))		20.04			24.20			20.84			24.02
Return on average tangible equity excluding intangible amortization: B/(D-E)		20.36			24.56			21.18			24.39
Return on average tangible common equity excluding FDIC Small Bank Assessment Credit, Florida tax savings, BOLI redemption tax, special dividend from equity investment, hurricane expenses & outsourced special project expense: (ROTCE, as adjusted) ((A+C)/(D-E))		20.45			24.20			21.00			24.02
(A) Net income	$	72,763		$	80,284		$	216,277		$	229,373
(B) Earnings excluding intangible amortization		73,940			81,478			219,808			232,968
(C) Adjustments after-tax		1,471			—			1,718			—
(D) Average equity		2,437,820			2,317,930			2,386,740			2,261,594
(E) Average goodwill, core deposits and other intangible assets		997,309			1,001,843			998,889			984,639

Table 22: Tangible Equity to Tangible Assets

	As of September 30, 2019			As of December 31, 2018
	(Dollars in thousands)
Equity to assets: B/A		16.57	%		15.36	%
Tangible equity to tangible assets: (B-C-D)/(A-C-D)		10.59			9.43
(A) Total assets	$	14,901,935		$	15,302,438
(B) Total equity		2,469,389			2,349,886
(C) Goodwill		958,408			958,408
(D) Core deposit and other intangibles		38,136			42,896

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

Table 23: Efficiency Ratio, As Adjusted

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Net interest income (A)	$	142,977		$	145,910		$	423,434		$	420,731
Non-interest income (B)		24,749			25,847			71,487			79,325
Non-interest expense (C)		67,764			66,123			204,445			192,731
FTE Adjustment (D)		1,247			1,489			3,933			4,101
Amortization of intangibles (E)		1,587			1,617			4,760			4,867
Adjustments:
Non-interest income:
Special dividend from equity investments	$	—		$	—		$	2,134		$	—
Gain (loss) on OREO, net		334			836			598			2,287
Gain (loss) on sale of branches, equipment and other assets, net		12			(102	)		(38	)		(95	)
Total non-interest income adjustments (F)	$	346		$	734		$	2,694		$	2,192
Non-interest expense:
FDIC Small Bank Assessment Credit	$	(2,291	)	$	—		$	(2,291	)	$	—
Hurricane expenses		—			—			897			—
Outsourced special project expense		—			—			900			—
Total non-interest expense adjustments (G)	$	(2,291	)	$	—		$	(494	)	$	—
Efficiency ratio (reported): ((C-E)/(A+B+D))		39.16	%		37.23	%		40.03	%		37.26	%
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F))		40.60	%		37.39	%		40.35	%		37.43	%

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, unpledged available-for-sale investment securities and scheduled repayments and maturities of loans. We maintain adequate levels of cash and cash equivalents to meet our day-to-day needs. As of September 30, 2019, our cash and cash equivalents were $442.3 million, or 3.0% of total assets, compared to $657.9 million, or 4.3% of total assets, as of December 31, 2018. Our unpledged available-for-sale investment securities and federal funds sold were $1.18 billion and $611.1 million as of September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019, our investment portfolio was comprised of approximately 72.2% or $1.49 billion of securities which mature in less than five years. As of September 30, 2019 and December 31, 2018, $913.2 million and $1.32 billion, respectively, of securities were pledged as collateral for various public fund deposits and securities sold under agreements to repurchase. The decrease in investments pledged to secure public deposits is due to the Company increasing the usage of FHLB letters of credit in order to secure public deposits. The Company made this strategic decision to improve the on-balance-sheet liquidity as well as the liquidity ratio. The Company defines the liquidity ratio as the sum of cash, unpledged securities and federal funds sold divided by total liabilities. The Company’s liquidity ratio was 13.02% as of September 30, 2019 compared to 9.80% as of December 31, 2018.

On the liability side, our principal sources of liquidity are deposits, borrowed funds, and access to capital markets. Customer deposits are our largest sources of funds. As of September 30, 2019, our total deposits were $11.05 billion, or 74.1% of total assets, compared to $10.90 billion, or 71.2% of total assets, as of December 31, 2018. We attract our deposits primarily from individuals, business, and municipalities located in our market areas.

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

As of September 30, 2019 and December 31, 2018, we could have borrowed up to $307.4 million and $288.0 million, respectively, on a secured basis from the Federal Reserve, up to $30.0 million from First National Bankers’ Bank on an unsecured basis, up to $20.0 million from First National Bankers’ Bank on a secured basis and up to $45.0 million in the aggregate from other financial institutions on an unsecured basis. The unsecured lines may be terminated by the respective institutions at any time.

The lines of credit we maintain with the FHLB can provide us with both short-term and long-term forms of liquidity on a secured basis. FHLB borrowed funds were $691.4 million and $1.47 billion at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, $145.0 million and $546.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. At December 31, 2018, $782.6 million and $698.8 million of the outstanding balance were issued as short-term and long-term advances, respectively. Our FHLB borrowing capacity was $2.91 billion and $2.62 billion as of September 30, 2019 and December 31, 2018, respectively.

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

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

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

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

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

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

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased and decreased over twelve months by 200 and 100 basis points, respectively. At September 30, 2019, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.

Table 24 presents our sensitivity to net interest income as of September 30, 2019.

Table 24: Sensitivity of Net Interest Income

	Percentage
	Change
Interest Rate Scenario	from Base
Up 200 basis points		9.12	%
Up 100 basis points		4.63
Down 100 basis points		(6.21	)
Down 200 basis points		(12.02	)

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.

As of September 30, 2019, our gap position was asset sensitive with a one-year cumulative repricing gap as a percentage of total earning assets of 8.8%.

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 September 30, 2019.

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	$	270,804		$	—		$	—		$	—		$	—		$	—		$	—		$	270,804
Federal funds sold		1,650			—			—			—			—			—			—			1,650
Investment securities		386,910			90,746			109,814			218,414			270,932			519,830			490,862			2,087,508
Loans receivable		3,274,272			787,368			757,492			1,505,853			1,592,247			2,212,486			642,228			10,771,946
Total earning assets		3,933,636			878,114			867,306			1,724,267			1,863,179			2,732,316			1,133,090			13,131,908
Interest-bearing liabilities
Interest-bearing transaction and savings deposits	$	1,177,051		$	520,336		$	780,504		$	1,561,008		$	886,093		$	643,729		$	1,051,895		$	6,620,616
Time deposits		427,106			398,111			324,178			497,035			258,158			125,822			2,137			2,032,547
Federal funds purchased		50,000			—			—			—			—			—			—			50,000
Securities sold under repurchase agreements		157,038			—			—			—			—			—			—			157,038
FHLB and other borrowed funds		95,000			50,000			—			143,000			3,443			—			400,000			691,443
Subordinated debentures		70,948			—			—			—			—			298,415			—			369,363
Total interest-bearing liabilities		1,977,143			968,447			1,104,682			2,201,043			1,147,694			1,067,966			1,454,032			9,921,007
Interest rate sensitivity gap	$	1,956,493		$	(90,333	)	$	(237,376	)	$	(476,776	)	$	715,485		$	1,664,350		$	(320,942	)	$	3,210,901
Cumulative interest rate sensitivity gap	$	1,956,493		$	1,866,160		$	1,628,784		$	1,152,008		$	1,867,493		$	3,531,843		$	3,210,901
Cumulative rate sensitive assets to rate sensitive liabilities		199.0	%		163.4	%		140.2	%		118.4	%		125.2	%		141.7	%		132.4	%
Cumulative gap as a % of total earning assets		14.9	%		14.2	%		12.4	%		8.8	%		14.2	%		26.9	%		24.5	%

Item 4:CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls

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

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2019, 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, 2018. See the discussion of our risk factors in the Form 10-K, as filed with the SEC. The risks described are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

On January 18, 2019, the Company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of its common stock under the previously approved stock repurchase program, which was last amended and approved on February 21, 2018. This authorization brought the total amount of authorized shares to repurchase to 9,919,447 shares. The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:

Period	Number of Shares Purchased		Average Price Paid Per Share Purchased		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs⁽¹⁾
July 1 through July 31, 2019		—	$	—		—		6,502,725
August 1 through August 31, 2019		570,000		17.93		570,000		5,932,725
September 1 through September 30, 2019		45,000		17.54		45,000		5,887,725
Total		615,000				615,000

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

Item 3: Defaults Upon Senior Securities

Not applicable.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

Not applicable.

Item 6: Exhibits

Exhibit No.		Description of Exhibit

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		Ninth Amendment to the Restated Articles of Incorporation of Home BancShares, Inc. (incorporated by reference to Exhibit 3.1 of Home BancShares Current Report on Form 8-K filed on April 23, 2019)

3.11		Restated Bylaws of Home BancShares, Inc. (incorporated by reference to Exhibit 3.5 of Home BancShares’s registration statement 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)

15		Awareness of Independent Registered Public Accounting Firm*

31.1		CEO Certification Pursuant Rule 13a-14(a)/15d-14(a)*

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

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

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

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*

101.SCH		Inline XBRL Taxonomy Extension Schema Document*

101.CAL		InlineXBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document*
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

*	Filed herewith

SIGNATURES

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

HOME BANCSHARES, INC.

(Registrant)

Date:	November 8, 2019	/s/ John W. Allison
		John W. Allison, Chairman and Acting Chief Executive Officer

Date:	November 8, 2019	/s/ Brian S. Davis
		Brian S. Davis, Chief Financial Officer

Date:	November 8, 2019	/s/ Jennifer C. Floyd
		Jennifer C. Floyd, Chief Accounting Officer