HOME BANCSHARES INC - Quarter Report: 2019 March (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 March 31, 2019

or

 

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

For the Transition period from                      to                     

Commission File Number: 000-51904

 

 

HOME BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Arkansas		71-0682831
(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

 

 

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. (Check one):

 

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  ☑

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 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: 167,999,154 shares as of May 2, 2019.

 

 

 

HOME BANCSHARES, INC.

FORM 10-Q

March  31, 2019

INDEX

 

				Page No.
Part I:		Financial Information
Item 1:		Financial Statements
		Consolidated Balance Sheets – March  31, 2019 (Unaudited) and December 31, 2018			4
		Consolidated Statements of Income (Unaudited) – Three months ended March 31, 2019 and 2018			5
		Consolidated Statements of Comprehensive Income (Unaudited) – Three months ended March 31, 2019 and 2018			6
		Consolidated Statements of Stockholders’ Equity (Unaudited) – Three months ended March 31, 2019 and 2018			6
		Consolidated Statements of Cash Flows (Unaudited) – Three months ended March 31, 2019 and 2018			7
		Condensed Notes to Consolidated Financial Statements (Unaudited)			8-46
		Report of Independent Registered Public Accounting Firm			47
Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations			48-78
Item 3:		Quantitative and Qualitative Disclosures About Market Risk			79-81
Item 4:		Controls and Procedures			81
Part II:		Other Information
Item 1:		Legal Proceedings			82
Item 1A:		Risk Factors			82
Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds			82
Item 3:		Defaults Upon Senior Securities			82
Item 4:		Mine Safety Disclosures			82
Item 5:		Other Information			82
Item 6:		Exhibits			83-84
Signatures					85

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, through our recently completed acquisition of Stonegate 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)		March 31, 2019				December 31, 2018
		(Unaudited)
Assets
Cash and due from banks		$	141,027			$	175,024
Interest-bearing deposits with other banks			421,443				482,915
Cash and cash equivalents			562,470				657,939
Federal funds sold			1,700				325
Investment securities – available-for-sale			2,013,123				1,785,862
Investment securities – held-to-maturity			—				192,776
Loans receivable			10,978,935				11,071,879
Allowance for loan losses			(106,357	)			(108,791	)
Loans receivable, net			10,872,578				10,963,088
Bank premises and equipment, net			279,012				233,261
Foreclosed assets held for sale			14,466				13,236
Cash value of life insurance			149,353				148,621
Accrued interest receivable			50,288				48,945
Deferred tax asset, net			64,061				73,275
Goodwill			958,408				958,408
Core deposit and other intangibles			41,310				42,896
Other assets			172,732				183,806
Total assets		$	15,179,501			$	15,302,438
Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing		$	2,519,175			$	2,401,232
Savings and interest-bearing transaction accounts			6,650,181				6,624,407
Time deposits			1,898,096				1,874,139
Total deposits			11,067,452				10,899,778
Securities sold under agreements to repurchase			152,239				143,679
FHLB and other borrowed funds			1,105,175				1,472,393
Accrued interest payable and other liabilities			124,172				67,912
Subordinated debentures			368,979				368,790
Total liabilities			12,818,017				12,952,552
Stockholders’ equity:
Common stock, par value $0.01; shares authorized 200,000,000 in 2019 and 2018; shares issued and outstanding 168,172,838 in 2019 and 170,720,072 in 2018			1,682				1,707
Capital surplus			1,560,994				1,609,810
Retained earnings			803,629				752,184
Accumulated other comprehensive loss			(4,821	)			(13,815	)
Total stockholders’ equity			2,361,484				2,349,886
Total liabilities and stockholders’ equity		$	15,179,501			$	15,302,438

See Condensed Notes to Consolidated Financial Statements.

 

4

Home BancShares, Inc.

Consolidated Statements of Income

 

		Three Months Ended March 31,
(In thousands, except per share data)		2019				2018
		(Unaudited)
Interest income:
Loans		$	163,848			$	148,065
Investment securities
Taxable			10,706				8,970
Tax-exempt			3,379				3,006
Deposits – other banks			1,543				929
Federal funds sold			11				6
Total interest income			179,487				160,976
Interest expense:
Interest on deposits			28,006				14,806
Federal funds purchased			—				1
FHLB and other borrowed funds			6,118				4,580
Securities sold under agreements to repurchase			634				376
Subordinated debentures			5,259				5,004
Total interest expense			40,017				24,767
Net interest income			139,470				136,209
Provision for loan losses			—				1,600
Net interest income after provision for loan losses			139,470				134,609
Non-interest income:
Service charges on deposit accounts			6,401				6,075
Other service charges and fees			6,563				10,155
Trust fees			403				446
Mortgage lending income			2,435				2,657
Insurance commissions			609				679
Increase in cash value of life insurance			736				654
Dividends from FHLB, FRB, First National Bankers’ Bank & other			3,505				877
Gain on sale of SBA loans			241				182
Gain (loss) on sale of branches, equipment and other assets, net			79				7
Gain (loss) on OREO, net			206				405
Other income			2,494				3,668
Total non-interest income			23,672				25,805
Non-interest expense:
Salaries and employee benefits			37,836				35,014
Occupancy and equipment			8,823				8,983
Data processing expense			3,970				3,986
Other operating expenses			18,428				15,397
Total non-interest expense			69,057				63,380
Income before income taxes			94,085				97,034
Income tax expense			22,735				23,970
Net income		$	71,350			$	73,064
Basic earnings per share		$	0.42			$	0.42
Diluted earnings per share		$	0.42			$	0.42

See Condensed Notes to Consolidated Financial Statements.

 

5

Home BancShares, Inc.

Consolidated Statements of Comprehensive Income

 

		Three Months Ended March 31,
(In thousands)		2019				2018
		(Unaudited)
Net income available to all stockholders		$	71,350			$	73,064
Net unrealized gain (loss) on available-for-sale securities			12,797				(21,633	)
Other comprehensive income gain (loss), before tax effect			12,797				(21,633	)
Tax effect on other comprehensive income (loss)			(3,344	)			5,762
Other comprehensive income (loss)			9,453				(15,871	)
Comprehensive income		$	80,803			$	57,193

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2019 and 2018

For the three months ended March 31, 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 (loss)			—				—				—				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

 

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

For the three months ended March 31, 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 income (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

 

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

See Condensed Notes to Consolidated Financial Statements.

 

6

Home BancShares, Inc.

Consolidated Statements of Cash Flows

 

		Three Months Ended March 31,
(In thousands)		2019				2018
		(Unaudited)
Operating Activities
Net income		$	71,350			$	73,064
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization			4,939				5,123
Amortization of securities, net			3,355				3,321
Accretion of purchased loans			(9,055	)			(10,608	)
Share-based compensation			2,844				2,037
(Gain) loss on assets			(526	)			1,962
Provision for loan losses			—				1,600
Deferred income tax effect			9,214				3,998
Increase in cash value of life insurance			(736	)			(654	)
Originations of mortgage loans held for sale			(82,654	)			(72,636	)
Proceeds from sales of mortgage loans held for sale			64,345				80,250
Changes in assets and liabilities:
Accrued interest receivable			(1,343	)			347
Other assets			7,738				(8,219	)
Accrued interest payable and other liabilities			10,275				12,886
Net cash provided by operating activities			79,746				92,471
Investing Activities
Net (increase) decrease in federal funds sold			(1,375	)			22,284
Net decrease (increase) in loans			108,733				(116	)
Purchases of investment securities – available-for-sale			(107,453	)			(141,812	)
Proceeds from maturities of investment securities – available-for-sale			82,410				86,674
Proceeds from sale of investment securities – available-for-sale			—				809
Proceeds from maturities of investment securities – held-to-maturity			—				10,899
Proceeds from foreclosed assets held for sale			3,713				3,391
Proceeds from sale of SBA loans			4,645				2,837
Purchases of premises and equipment, net			(2,855	)			(3,941	)
Net cash provided by (used in) investing activities			87,818				(18,975	)
Financing Activities
Net increase in deposits			167,674				8,113
Net increase in securities sold under agreements to repurchase			8,560				2,526
Net decrease in FHLB and other borrowed funds			(367,218	)			(184,127	)
Proceeds from exercise of stock options			—				900
Repurchase of common stock			(51,685	)			(7,114	)
Dividends paid on common stock			(20,364	)			(19,126	)
Net cash used in financing activities			(263,033	)			(198,828	)
Net change in cash and cash equivalents			(95,469	)			(125,332	)
Cash and cash equivalents – beginning of year			657,939				635,933
Cash and cash equivalents – end of period		$	562,470			$	510,601

See Condensed Notes to Consolidated Financial Statements.

 

7

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 March 31, 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.

 

8

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 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.

 

9

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 March 31,
		2019				2018
		(In thousands, except per share data)
Net income		$	71,350			$	73,064
Average shares outstanding			169,592				173,761
Effect of common stock-based compensation			—				622
Average diluted shares outstanding			169,592				174,383
Basic earnings per share		$	0.42			$	0.42
Diluted earnings per share			0.42				0.42

As of March 31, 2019, options to purchase 3.6 million shares of common stock, with a weighted average exercise price of $19.61, were excluded from the computation of diluted net income per share as the majority of the options had an exercise price which was greater than the average market price of the common stock.

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.

 

10

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:

 

		March 31, 2019
		Available-for-Sale
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized (Losses)				Estimated Fair Value
		(In thousands)
U.S. government-sponsored enterprises		$	419,558			$	694			$	(3,369	)		$	416,883
Residential mortgage-backed securities			656,219				1,486				(7,241	)			650,464
Commercial mortgage-backed securities			478,843				1,256				(5,403	)			474,696
State and political subdivisions			431,160				6,989				(836	)			437,313
Other securities			33,870				195				(298	)			33,767
Total		$	2,019,650			$	10,620			$	(17,147	)		$	2,013,123

 

		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

 

11

		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 $1.26 billion and $1.32 billion at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Also, investment securities pledged as collateral for repurchase agreements totaled approximately $152.2 million and $143.7 million at March 31, 2019 and December 31, 2018, respectively.

The amortized cost and estimated fair value of securities classified as available-for-sale at March 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Available-for-Sale
		Amortized Cost				Estimated Fair Value
		(In thousands)
Due in one year or less		$	429,945			$	428,899
Due after one year through five years			1,030,952				1,024,795
Due after five years through ten years			396,169				397,294
Due after ten years			162,584				162,135
Total		$	2,019,650			$	2,013,123

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

During the three-month period ended March 31, 2019, no available-for-sale securities were sold. No realized gains or losses were recorded on the sales for the three-month period ended March 31, 2019.

During the three-month period ended March 31, 2018, no available-for-sale securities were sold. However, approximately $809,000 equity securities carried at fair value were sold. No realized gains or losses were recorded on the sales for the three-month period ended March 31, 2018. The income tax expense/benefit to net security gains and losses was 26.135% of the gross amounts. During 2018, no held-to-maturity securities were sold.

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-month period ended March 31, 2019, no securities were deemed to have other-than-temporary impairment.

 

12

For the three months ended March 31, 2019, the Company had investment securities with approximately $16.0 million in unrealized losses, which have been in continuous loss positions for more than twelve months. Excluding impairment write downs taken in prior periods, the Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates and not the issuer’s financial condition, or downgrades by rating agencies. In addition, approximately 72.2% of the Company’s investment portfolio matures in five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.

The following shows gross unrealized losses and estimated fair value of investment securities classified as available-for-sale and held-to-maturity with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of March 31, 2019 and December 31, 2018:

 

		March 31, 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		$	69,092			$	(336	)		$	248,732			$	(3,033	)		$	317,824			$	(3,369	)
Residential mortgage-backed securities			84,446				(527	)			402,496				(6,714	)			486,942				(7,241	)
Commercial mortgage-backed securities			6,128				(39	)			366,462				(5,364	)			372,590				(5,403	)
State and political subdivisions			3,114				(31	)			62,929				(805	)			66,043				(836	)
Other securities			7,314				(206	)			8,243				(92	)			15,557				(298	)
Total		$	170,094			$	(1,139	)		$	1,088,862			$	(16,008	)		$	1,258,956			$	(17,147	)

 

		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 March 31, 2019, the Company’s securities portfolio consisted of 1,315 investment securities, 598 of which were in an unrealized loss position. As noted in the table above, the total amount of the unrealized loss was $17.1 million. The U.S government-sponsored enterprises portfolio contained unrealized losses of $3.4 million on 92 securities. The residential mortgage-backed securities portfolio contained $7.2 million of unrealized losses on 291 securities, and the commercial mortgage-backed securities portfolio contained $5.4 million of unrealized losses on 116 securities. The state and political subdivisions portfolio contained $836,000 of unrealized losses on 93 securities. In addition, the other securities portfolio contained $298,000 of unrealized losses on 6 securities. The unrealized losses on the Company’s investments were a result of interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value was attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2019.

 

13

Income earned on securities for the three months ended March 31, 2019 and 2018, is as follows:

 

		Three Months Ended March 31,
		2019				2018
		(In thousands)
Taxable:
Available-for-sale		$	10,706			$	8,465
Held-to-maturity			—				505
Non-taxable:
Available-for-sale			3,379				1,349
Held-to-maturity			—				1,657
Total		$	14,085			$	11,976

4. Loans Receivable

The various categories of loans receivable are summarized as follows:

 

		March 31, 2019				December 31, 2018
		(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		$	4,623,174			$	4,806,684
Construction/land development			1,649,303				1,546,035
Agricultural			76,092				76,433
Residential real estate loans
Residential 1-4 family			1,947,119				1,975,586
Multifamily residential			538,098				560,475
Total real estate			8,833,786				8,965,213
Consumer			448,093				443,105
Commercial and industrial			1,505,773				1,476,331
Agricultural			58,966				48,562
Other			132,317				138,668
Total loans receivable		$	10,978,935			$	11,071,879

During the three-month period ended March 31, 2019, the Company sold $4.4 million of the guaranteed portion of certain Small Business Administration (“SBA”) loans, which resulted in a gain of approximately $241,000. During the three-month period ended March 31, 2018, the Company sold $2.7 million of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $182,000.

Mortgage loans held for sale of approximately $56.5 million and $64.2 million at March 31, 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 March 31, 2019 and December 31, 2018 were not material.

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.

 

14

The Company had $2.71 billion of purchased loans, which includes $106.6 million of discount for credit losses on purchased loans, at March 31, 2019. The Company had $35.7 million and $70.9 million remaining of non-accretable discount for credit losses on purchased loans and accretable discount for credit losses on purchased loans, respectively, as of March 31, 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.

5. Allowance for Loan Losses, Credit Quality and Other

The Company’s allowance for loan loss as of March 31, 2019 and December 31, 2018 was significantly impacted by Hurricane Michael, which made landfall in the Florida Panhandle as a Category 4 hurricane during the fourth quarter of 2018, and somewhat impacted by Hurricane Irma, which made initial landfall in the Florida Keys and a second landfall just south of Naples, Florida, as a Category 4 hurricane during the third quarter of 2017. As of December 31, 2018, management reevaluated the storm-related allowance for Hurricane Irma. Based on this analysis, management determined a $2.9 million storm-related allowance was still necessary. The Company’s management also performed an analysis on the loans with collateral in counties in the Florida Panhandle which were impacted by Hurricane Michael. Based on this analysis, management determined a $20.4 million storm-related provision was necessary. After establishing the storm-related provision for Hurricane Michael and adjusting the allowance for Hurricane Irma, the storm-related allowance was $23.2 million and $23.3 million as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, charge-offs of $2.6 million have been taken against the storm-related allowance for loan losses.

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

 

		Three Months Ended March 31, 2019
		(In thousands)
Allowance for loan losses:
Beginning balance		$	108,791
Loans charged off			(3,391	)
Recoveries of loans previously charged off			957
Net loans recovered (charged off)			(2,434	)
Provision for loan losses			—
Balance, March 31, 2019		$	106,357

 

15

The following tables present the balance in the allowance for loan losses for the three-month period ended March 31, 2019, and the allowance for loan losses and recorded investment in loans based on portfolio segment by impairment method as of March 31, 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 March 31, 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			(1,286	)			(339	)			(536	)			(704	)			(526	)			—				(3,391	)
Recoveries of loans previously charged off			23				191				352				182				209				—				957
Net loans recovered (charged off)			(1,263	)			(148	)			(184	)			(522	)			(317	)			—				(2,434	)
Provision for loan losses			1,848				(1,523	)			(1,105	)			231				549				—				—
Balance, March 31		$	21,887			$	40,665			$	25,445			$	14,690			$	3,670			$	—			$	106,357
		As of March 31, 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		$	103			$	386			$	87			$	19			$	—			$	—			$	595
Loans collectively evaluated for impairment			21,553				39,969				24,711				14,531				3,670				—				104,434
Loans evaluated for impairment balance, March 31			21,656				40,355				24,798				14,550				3,670				—				105,029
Purchased credit impaired loans			231				310				647				140				—				—				1,328
Balance, March 31		$	21,887			$	40,665			$	25,445			$	14,690			$	3,670			$	—			$	106,357
Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment		$	11,635			$	60,160			$	37,682			$	33,802			$	3,667			$	—			$	146,946
Loans collectively evaluated for impairment			1,628,973				4,567,658				2,416,635				1,457,839				633,716				—				10,704,821
Loans evaluated for impairment balance, March 31			1,640,608				4,627,818				2,454,317				1,491,641				637,383				—				10,851,767
Purchased credit impaired loans			8,695				71,448				30,900				14,132				1,993				—				127,168
Balance, March 31		$	1,649,303			$	4,699,266			$	2,485,217			$	1,505,773			$	639,376			$	—			$	10,978,935

 

16

The following tables present the balances in the allowance for loan losses for the three-month period ended March 31, 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			(8	)			(447	)			(779	)			(814	)			(492	)			—				(2,540	)
Recoveries of loans previously charged off			30				101				361				98				296				—				886
Net loans recovered (charged off)			22				(346	)			(418	)			(716	)			(196	)			—				(1,654	)
Provision for loan losses			(261	)			1,238				(474	)			1,617				109				(629	)			1,600
Balance, March 31			20,104				44,831				23,614				16,193				3,247				2,223				110,212
Loans charged off			(391	)			(764	)			(1,965	)			(1,407	)			(1,921	)			—				(6,448	)
Recoveries of loans previously charged off			150				426				563				526				640				—				2,305
Net loans recovered (charged off)			(241	)			(338	)			(1,402	)			(881	)			(1,281	)			—				(4,143	)
Provision for loan losses			1,439				(2,157	)			4,522				(331	)			1,472				(2,223	)			2,722
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

 

17