HOME BANCSHARES INC - Quarter Report: 2020 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, 2020


☐	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 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 practicable date.

Common Stock Issued and Outstanding: 165,167,539 shares as of November 5, 2020.



HOME BANCSHARES, INC. FORM 10-Q September 30, 2020

INDEX

		Page No.
Part I:	Financial Information

Item 1:	Financial Statements

	Consolidated Balance Sheets –
	September 30, 2020 (Unaudited) and December 31, 2019	4

	Consolidated Statements of Income (Unaudited) –
	Three and nine months ended September 30, 2020 and 2019	5

	Consolidated Statements of Comprehensive Income (Unaudited) –
	Three and nine months ended September 30, 2020 and 2019	6

	Consolidated Statements of Stockholders’ Equity (Unaudited) –
	Three and nine months ended September 30, 2020 and 2019	7-8

	Consolidated Statements of Cash Flows (Unaudited) –
	Nine months ended September 30, 2020 and 2019	9

	Condensed Notes to Consolidated Financial Statements (Unaudited)	10-45

	Report of Independent Registered Public Accounting Firm	46

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47-87

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	88-90

Item 4:	Controls and Procedures	91

Part II:	Other Information

Item 1:	Legal Proceedings	92

Item 1A:	Risk Factors	92

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	93

Item 3:	Defaults Upon Senior Securities	93

Item 4:	Mine Safety Disclosures	93

Item 5:	Other Information	93

Item 6:	Exhibits	94-95

Signatures		96

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, a decrease in commercial real estate and residential housing values and unemployment;

•

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;

•

disruptions, uncertainties and related effects on our business and operations as a result of the ongoing COVID-19 pandemic and measures that have been or may be implemented or imposed in response to the pandemic, including the impact on, among other things, credit quality and liquidity;

•

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, legislation and regulations in response to the COVID-19 pandemic and other future legislative and regulatory changes;

•

changes in 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;

•

potential claims, expenses and other adverse effects related to current or future litigation, regulatory examinations or other government actions;

•

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, including the adoption of the current expected credit loss (CECL) model on January 1, 2020;

•

higher defaults on our loan portfolio than we expect; and

•

the failure of assumptions underlying the establishment of our allowance for credit losses or changes in our estimate of the adequacy of the allowance for credit 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, 2020 and this Form 10-Q.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Home BancShares, Inc.

Consolidated Balance Sheets

(In thousands, except share data)	September 30, 2020			December 31, 2019
	(Unaudited)
Assets
Cash and due from banks	$	144,197		$	168,914
Interest-bearing deposits with other banks		899,140			321,687
Cash and cash equivalents		1,043,337			490,601
Investment securities – available-for-sale, net of allowance for credit losses		2,361,900			2,083,838
Loans receivable		11,691,470			10,869,710
Allowance for credit losses		(248,224	)		(102,122	)
Loans receivable, net		11,443,246			10,767,588
Bank premises and equipment, net		280,364			280,103
Foreclosed assets held for sale		4,322			9,143
Cash value of life insurance		102,989			102,562
Accrued interest receivable		72,599			45,086
Deferred tax asset, net		75,167			44,301
Goodwill		973,025			958,408
Core deposit and other intangibles		32,149			36,572
Other assets		160,660			213,845
Total assets	$	16,549,758		$	15,032,047
Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing	$	3,207,967		$	2,367,091
Savings and interest-bearing transaction accounts		8,011,200			6,933,964
Time deposits		1,718,299			1,977,328
Total deposits		12,937,466			11,278,383
Federal funds purchased		—			5,000
Securities sold under agreements to repurchase		158,447			143,727
FHLB and other borrowed funds		403,428			621,439
Accrued interest payable and other liabilities		139,485			102,410
Subordinated debentures		370,133			369,557
Total liabilities		14,008,959			12,520,516
Stockholders’ equity:
Common stock, par value $0.01; shares authorized 300,000,000 in 2020 and 2019; shares issued and outstanding 165,162,539 in 2020 and 166,373,346 in 2019		1,652			1,664
Capital surplus		1,520,103			1,537,091
Retained earnings		980,699			956,555
Accumulated other comprehensive income		38,345			16,221
Total stockholders’ equity		2,540,799			2,511,531
Total liabilities and stockholders’ equity	$	16,549,758		$	15,032,047

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)	2020			2019		2020			2019
	(Unaudited)
Interest income:
Loans	$	154,787		$	167,470	$	471,931		$	497,134
Investment securities
Taxable		7,227			10,343		25,696			31,699
Tax-exempt		4,367			3,193		11,179			9,755
Deposits – other banks		252			1,068		1,579			4,239
Federal funds sold		—			8		21			29
Total interest income		166,633			182,082		510,406			542,856
Interest expense:
Interest on deposits		13,200			29,566		52,514			87,281
Federal funds purchased		—			21		13			21
FHLB and other borrowed funds		2,235			3,683		7,589			14,523
Securities sold under agreements to repurchase		237			628		959			1,892
Subordinated debentures		4,823			5,207		14,801			15,705
Total interest expense		20,495			39,105		75,876			119,422
Net interest income		146,138			142,977		434,530			423,434
Provision for credit loss - loans		14,000			—		102,113			1,325
Provision for credit loss - acquired loans		—			—		9,309			—
Provision for credit loss - investment securities		—			—		842			—
Total credit loss expense		14,000			—		112,264			1,325
Net interest income after provision for credit losses		132,138			142,977		322,266			422,109
Non-interest income:
Service charges on deposit accounts		4,910			6,492		15,837			19,152
Other service charges and fees		8,539			8,710		22,261			23,450
Trust fees		378			382		1,213			1,176
Mortgage lending income		10,177			4,610		18,994			10,502
Insurance commissions		271			603		1,482			1,727
Increase in cash value of life insurance		548			714		1,666			2,190
Dividends from FHLB, FRB, FNBB & other		3,433			1,101		11,505			5,755
Gain on sale of SBA loans		—			291		341			887
(Loss) gain on sale of branches, equipment and other assets, net		(27	)		12		109			(38	)
Gain on OREO, net		470			334		982			598
Fair value adjustment for marketable securities		(1,350	)		—		(6,249	)		—
Other income		2,602			1,500		9,760			6,088
Total non-interest income		29,951			24,749		77,901			71,487
Non-interest expense:
Salaries and employee benefits		41,511			39,919		120,928			115,731
Occupancy and equipment		9,566			9,047		28,611			26,723
Data processing expense		4,921			4,059		13,861			11,867
Other operating expenses		15,714			14,739		66,733			50,124
Total non-interest expense		71,712			67,764		230,133			204,445
Income before income taxes		90,377			99,962		170,034			289,151
Income tax expense		21,057			27,199		37,380			72,874
Net income	$	69,320		$	72,763	$	132,654		$	216,277
Basic earnings per share	$	0.42		$	0.44	$	0.80		$	1.29
Diluted earnings per share	$	0.42		$	0.44	$	0.80		$	1.29

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)	2020			2019			2020			2019
	(Unaudited)
Net income	$	69,320		$	72,763		$	132,654		$	216,277
Net unrealized (loss) gain on available-for-sale securities		(896	)		6,923			29,952			46,240
Other comprehensive income (loss), before tax effect		(896	)		6,923			29,952			46,240
Tax effect on other comprehensive income (loss)		234			(1,809	)		(7,828	)		(12,084	)
Other comprehensive (loss) income		(662	)		5,114			22,124			34,156
Comprehensive income	$	68,658		$	77,877		$	154,778		$	250,433

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2020 and 2019

For the Three and Nine Months Ended September 30, 2020
(In thousands, except share data)	Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances at January 1, 2020	$	1,664		$	1,537,091		$	956,555		$	16,221		$	2,511,531
Cumulative change in accounting principle (adoption of ASC 326)		—			—			(43,956	)		—			(43,956	)
Balance at January 1, 2020 (as adjusted for change in accounting principle)	$	1,664		$	1,537,091		$	912,599		$	16,221		$	2,467,575
Comprehensive income:
Net income		—			—			507			—			507
Other comprehensive income		—			—			—			4,750			4,750
Net issuance of 22,864 shares of common stock from exercise of stock options		—			422			—			—			422
Repurchase of 1,423,560 shares of common stock		(14	)		(23,843	)		—			—			(23,857	)
Share-based compensation net issuance of 175,249 shares of restricted common stock		1			2,481			—			—			2,482
Cash dividends – Common Stock, $0.13 per share		—			—			(21,608	)		—			(21,608	)
Balances at March 31, 2020 (unaudited)	$	1,651		$	1,516,151		$	891,498		$	20,971		$	2,430,271
Comprehensive income:
Net Income		—			—			62,827			—			62,827
Other comprehensive income		—			—			—			18,036			18,036
Share-based compensation net forfeiture of 58,140 shares of restricted stock		1			2,480			—			—			2,481
Cash dividends – Common Stock, $0.13 per share		—			—			(21,469	)		—			(21,469	)
Balances at June 30, 2020 (unaudited)	$	1,652		$	1,518,631		$	932,856		$	39,007		$	2,492,146
Comprehensive income:
Net Income		—			—			69,320			—			69,320
Other comprehensive loss		—			—			—			(662	)		(662	)
Share-based compensation net forfeiture of 43,500 shares of restricted stock		—			1,472			—			—			1,472
Cash dividends – Common Stock, $0.13 per share		—			—			(21,477	)		—			(21,477	)
Balances at September 30, 2020 (unaudited)	$	1,652		$	1,520,103		$	980,699		$	38,345		$	2,540,799

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2020 and 2019

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 loss		—			—			—			9,453			9,453
Impact of adoption of new accounting standards (adoption of ASU 2018-02)		—			—			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 loss		—			—			—			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 loss		—			—			—			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

See Condensed Notes to Consolidated Financial Statements.

Home BancShares, Inc.

Consolidated Statements of Cash Flows

	Nine Months Ended September 30,
(In thousands)	2020			2019
	(Unaudited)
Operating Activities
Net income	$	132,654		$	216,277
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization		15,236			14,689
Decrease in value of equity securities		6,249			—
Amortization of securities, net		14,292			11,363
Accretion of purchased loans		(21,640	)		(26,757	)
Share-based compensation		6,435			8,175
Gain on assets		(1,432	)		(1,060	)
Provision for credit losses		112,264			1,325
Deferred income tax effect		(30,866	)		19,840
Increase in cash value of life insurance		(1,666	)		(2,190	)
Originations of mortgage loans held for sale		(607,494	)		(333,695	)
Proceeds from sales of mortgage loans held for sale		571,623			293,868
Changes in assets and liabilities:
Accrued interest receivable		(27,283	)		1,388
Other assets		(5,277	)		(19,933	)
Accrued interest payable and other liabilities		37,075			4,376
Net cash provided by operating activities		200,170			187,666
Investing Activities
Net increase in federal funds sold		—			(1,325	)
Net (increase) decrease in loans, excluding purchased loans		(372,691	)		342,293
Purchases of investment securities – available-for-sale		(819,629	)		(439,281	)
Proceeds from maturities of investment securities – available-for-sale		556,386			365,288
Purchases of equity securities		(15,015	)		—
Redemptions of other investments		13,414			23,385
Proceeds from foreclosed assets held for sale		7,476			11,960
Proceeds from sale of SBA loans		4,057			12,534
Purchases of premises and equipment, net		(10,282	)		(9,059	)
Return of investment on cash value of life insurance		47,258			—
Net cash paid – market acquisitions		(421,211	)		—
Net cash (used in) provided by investing activities		(1,010,237	)		305,795
Financing Activities
Net increase in deposits		1,659,083			147,592
Net increase (decrease) in securities sold under agreements to repurchase		14,720			13,359
Net decrease in federal funds purchased		(5,000	)		50,000
Net decrease in FHLB and other borrowed funds		(218,011	)		(780,950	)
Proceeds from exercise of stock options		422			231
Repurchase of common stock		(23,857	)		(75,396	)
Dividends paid on common stock		(64,554	)		(63,940	)
Net cash provided by (used in) financing activities		1,362,803			(709,104	)
Net change in cash and cash equivalents		552,736			(215,643	)
Cash and cash equivalents – beginning of year		490,601			657,939
Cash and cash equivalents – end of period	$	1,043,337		$	442,296

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 credit 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 credit 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, 2020 and 2019 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 2019 Form 10-K, filed with the Securities and Exchange Commission.

New Accounting Pronouncements

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

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

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In 2019, the Company reevaluated its loan pools of purchased loans with deteriorated credit quality. These loans pools related specifically to acquired loans from the Heritage, Liberty, Landmark, Bay Cities, Bank of Commerce, Premier Bank, Stonegate and Shore Premier Finance acquisitions. At acquisition, a portion of these loans was recorded as purchased credit impaired loans on a pool by pool basis. Through the reevaluation of these loan pools, management determined that estimated losses for purchase credit impaired loans should be processed against the credit mark of the applicable pools. The remaining non-accretable mark was then moved to accretable mark to be recognized over the remaining weighted average life of the loan pools. The projected losses for these loans were less than the total credit mark. As such, the remaining $107.6 million of loans in these pools along with the $29.3 million in accretable yield was deemed to be immaterial and was reclassified out of the purchased credit impaired loans category. As of December 31, 2019, the Company no longer held any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption on of ASC 326 as of January 1, 2020.

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit loss.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As of December 31, 2019, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not material. However, the Company evaluated the investment portfolio during the nine months of 2020 and determined that an $842,000 provision for credit losses was necessary as of September 30, 2020 as a result of the Coronavirus (“COVID-19”) pandemic. See Note 3 for further discussion.

The following table illustrates the impact of the adoption of ASC 326 on the Company’s consolidated balance sheet.

	January 1, 2020
	As Reported Under ASC 326		Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
	(In thousands)
Assets:
Allowance for credit losses on loans	$	146,110	$	102,122	$	43,988
Liabilities:
Allowance for credit losses on OBS credit exposures (included in other liabilities)		15,521		—		15,521

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,
	2020		2019		2020		2019
	(In thousands)
Net income	$	69,320	$	72,763	$	132,654	$	216,277
Average shares outstanding		165,200		167,178		165,458		168,178
Average diluted shares outstanding		165,200		167,178		165,458		168,178
Basic earnings per share	$	0.42	$	0.44	$	0.80	$	1.29
Diluted earnings per share	$	0.42	$	0.44	$	0.80	$	1.29

As of September 30, 2020 and September 30, 2019, options to purchase 3.3 million and 3.6 million shares of common stock, respectively, with a weighted average exercise price of $19.56 and $19.60, respectively, 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 LH-Finance

On February 29, 2020, the Company completed the acquisition of LH-Finance, the marine lending division of People’s United Bank, N.A. The Company paid a purchase price of approximately $421.2 million in cash. LH-Finance provides direct consumer financing for United States Coast Guard (“USCG”) registered high-end sail and power boats. Additionally, LH-Finance provides inventory floor plan lines of credit to marine dealers, primarily those selling USCG documented vessels.

Including the purchase accounting adjustments, as of the acquisition date, LH-Finance had approximately $409.1 million in total assets, including $407.4 million in total loans, which resulted in goodwill of $14.6 million being recorded.

The acquired portfolio of loans is now housed in the Shore Premier Finance (“SPF”) division. 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 Baltimore, Maryland.

3. Investment Securities

The following table summarizes the amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

	September 30, 2020
	Available-for-Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	303,105	$	2,375	$	(1,146	)	$	304,334
Residential mortgage-backed securities		651,370		11,206		(1,348	)		661,228
Commercial mortgage-backed securities		472,298		19,930		(51	)		492,177
State and political subdivisions		846,146		23,441		(3,179	)		866,408
Other securities		37,909		283		(439	)		37,753
Total	$	2,310,828	$	57,235	$	(6,163	)	$	2,361,900

	December 31, 2019
	Available-for-Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(In thousands)
U.S. government-sponsored enterprises	$	398,870	$	1,001	$	(2,321	)	$	397,550
Residential mortgage-backed securities		689,955		4,735		(1,241	)		693,449
Commercial mortgage-backed securities		514,287		6,647		(642	)		520,292
State and political subdivisions		425,989		13,824		(257	)		439,556
Other securities		32,748		409		(166	)		32,991
Total	$	2,061,849	$	26,616	$	(4,627	)	$	2,083,838

Assets, principally investment securities, having a carrying value of approximately $1.18 billion and $865.4 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, as collateral for repurchase agreements, and for other purposes required or permitted by law. Investment securities pledged as collateral for repurchase agreements totaled approximately $158.4 million and $143.7 million at September 30, 2020 and December 31, 2019, respectively.

The amortized cost and estimated fair value of securities classified as available-for-sale at September 30, 2020, 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. Securities not due at a single maturity date are shown separately.

	Available-for-Sale
	Amortized Cost		Estimated Fair Value
	(In thousands)
Due in one year or less	$	15,488	$	15,540
Due after one year through five years		50,971		51,773
Due after five years through ten years		228,635		231,961
Due after ten years		890,066		907,221
Mortgage - backed securities: Residential		651,370		661,228
Mortgage - backed securities: Commercial		472,298		492,177
Other		2,000		2,000
Total	$	2,310,828	$	2,361,900

During the three and nine months ended September 30, 2020 and 2019, no available-for-sale securities were sold. There were no realized gains or losses recorded on the sales for the three and nine months ended September 30, 2020 and 2019.

The following shows gross unrealized losses and estimated fair value of investment securities classified as available-for-sale, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of September 30, 2020 and December 31, 2019.

	September 30, 2020
	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	$	11,933	$	(7	)	$	117,177	$	(1,139	)	$	129,110	$	(1,146	)
Residential mortgage-backed securities		166,111		(1,297	)		5,129		(51	)		171,240		(1,348	)
Commercial mortgage-backed securities		14,895		(25	)		3,308		(26	)		18,203		(51	)
State and political subdivisions		202,806		(3,179	)		—		—			202,806		(3,179	)
Other securities		6,364		(137	)		7,770		(302	)		14,134		(439	)
Total	$	402,109	$	(4,645	)	$	133,384	$	(1,518	)	$	535,493	$	(6,163	)

	December 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	$	129,951	$	(553	)	$	143,287	$	(1,768	)	$	273,238	$	(2,321	)
Residential mortgage-backed securities		141,877		(640	)		90,058		(601	)		231,935		(1,241	)
Commercial mortgage-backed securities		78,750		(330	)		40,894		(312	)		119,644		(642	)
State and political subdivisions		27,376		(245	)		4,206		(12	)		31,582		(257	)
Other securities		947		(2	)		9,539		(164	)		10,486		(166	)
Total	$	378,901	$	(1,770	)	$	287,984	$	(2,857	)	$	666,885	$	(4,627	)

Beginning January 1, 2020, the Company evaluates all securities quarterly to determine if any debt securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. For the three months ended March 31, 2020, the Company determined a provision for credit losses of $842,000 was necessary for the state and political subdivision portfolio as a result of economic uncertainties related to COVID-19. For the three months ended September 30, 2020, the Company determined that no additional provision for credit losses was necessary for the portfolio.

	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
			(In thousands)
Allowance for credit losses:
Beginning balance	$	842	$	—
Provision for credit loss - investment securities		—		842
Balance, September 30, 2020	$	842	$	842

For the nine months ended September 30, 2020, the Company had investment securities with approximately $1.5 million in unrealized losses, which have been in continuous loss positions for more than twelve months. Excluding the $842,000 allowance for credit losses on the state and political subdivision portfolio as a result of economic uncertainties related to COVID-19, 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 63.2% of the principal balance from the Company’s investment portfolio will mature and be repaid to the Company within five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.

As of September 30, 2020, the Company's securities portfolio consisted of 1,394 investment securities, 239 of which were in an unrealized loss position. As noted in the table above, the total amount of the unrealized loss was $6.2 million. The U.S government-sponsored enterprises portfolio contained unrealized losses of $1.1 million on 57 securities. The residential mortgage-backed securities portfolio contained $1.3 million of unrealized losses on 101 securities, and the commercial mortgage-backed securities portfolio contained $51,000 of unrealized losses on 7 securities. The state and political subdivisions portfolio contained $3.2 million of unrealized losses on 67 securities. In addition, the other securities portfolio contained $439,000 of unrealized losses on 7 securities. The unrealized losses on the Company's investments were a result of interest rate changes. With the exception of $842,000 allowance for credit losses on the state and political subdivision portfolio as a result of economic uncertainties related to COVID-19, 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 an allowance for credit losses on the other portions of the investment portfolio necessary as of September 30, 2020.

Income earned on available-for sale securities for the three and nine months ended September 30, 2020 and 2019, is as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)

Taxable	$	7,227	$	10,343	$	25,696	$	31,699
Non-taxable		4,367		3,193		11,179		9,755
Total	$	11,594	$	13,536	$	36,875	$	41,454

4. Loans Receivable

The various categories of loans receivable are summarized as follows:

	September 30,			December 31,
	2020			2019
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	4,342,141		$	4,412,769
Construction/land development		1,748,928			1,776,689
Agricultural		89,476			88,400
Residential real estate loans
Residential 1-4 family		1,665,628			1,819,221
Multifamily residential		491,380			488,278
Total real estate		8,337,553			8,585,357
Consumer		883,568			511,909
Commercial and industrial		2,161,818			1,528,003
Agricultural		85,365			63,644
Other		223,166			180,797
Total loans receivable		11,691,470			10,869,710
Allowance for credit losses		(248,224	)		(102,122	)
Loans receivable, net	$	11,443,246		$	10,767,588

During the three months ended September 30, 2020, the Company did not sell any guaranteed portions of certain Small Business Administration (“SBA”) loans. However, during the nine months ended September 30, 2020, the Company sold $3.7 million of the guaranteed portion of certain SBA loans, which resulted in a gain of approximately $341,000. During the three and nine months ended September 30, 2019, the Company sold $2.9 million and $11.6 million of the guaranteed portion of certain SBA loans, which resulted in gains of approximately $291,000 and $887,000, respectively.

Mortgage loans held for sale of approximately $118.9 million and $83.1 million at September 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019 were not material.

A description of our accounting policies for loans, impaired loans and non-accrual loans are set forth in our 2019 Form 10-K filed with the SEC on February 26, 2020. The Company adopted ASC 326 effective January 1, 2020. See Notes 1 and 5 for further discussion.

5. Allowance for Credit Losses, Credit Quality and Other

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credits, financial guarantees, and other similar instruments. The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $44.0 million which was recognized through a $32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $146.1 million as of January 1, 2020. In addition, the Company recorded a $15.5 million reserve on unfunded commitments as of January 1, 2020, which was recognized through an $11.5 million adjustment to retained earnings, net of tax.

The Company uses the discounted cash flow (“DCF”) method to estimate expected losses for all of Company’s loan pools. These pools are as follows: construction & land development; other commercial real estate; residential real estate; commercial & industrial; and consumer & other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council. For each of these loan pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. The identified loss drivers by segment are included below.

Loss Driver Segment	Call Report Segment(s)	Modeled Economic Factors
1-4 Family Construction	1a1	National Unemployment (%) & Housing Price Index (%)
All Other Construction	1a2	National Unemployment (%) & Commercial Real Estate Price Index (%)
1-4 Family Revolving HELOC & Junior Liens	1c1, 1c2b	National Unemployment (%) & Housing Price Index (%)
1-4 Family Senior Liens	1c2a	National Unemployment (%) & Housing Price Index (%)
Multifamily	1d	National Unemployment (%) & Housing Price Index (%)
Owner Occupied CRE	1e1	National Unemployment (%) & Commercial Real Estate Price Index (%)
Non-Owner Occupied CRE	1e2,1b,8	National Unemployment (%) & Commercial Real Estate Price Index (%)
Commercial & Industrial, Agricultural, Non-Depository Financial Institutions, Purchase/Carry Securities, Other	4a, 3, 9a, 9b1, 9b2, Other	National Unemployment (%) & National Retail Sales (%)
Consumer Auto	6c	National Unemployment (%) & National Retail Sales (%)
Other Consumer	6b, 6d	National Unemployment (%) & National Retail Sales (%)

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

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

Construction/Land Development and Other 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.

Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to many factors including the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.

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, 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.

Consumer & Other Loans. Our consumer & other loans are primarily composed of loans to finance USCG registered high-end sail and power boats as a result of our acquisitions of SPF on June 30, 2018 and LH-Finance on February 29, 2020. The performance of consumer & other 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.

Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit loss on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The Company uses the DCF method to estimate expected losses for all of Company’s off-balance sheet credit exposures through the use of the existing DCF models for the Company’s loan portfolio pools. The off-balance sheet credit exposures exhibit similar risk characteristics as loans currently in the Company’s loan portfolio.

As of September 30, 2020, the Company expects that the markets in which it operates will continue to experience economic uncertainty along with a continued elevated unemployment rate and level and trend of delinquencies. As a result of COVID-19, the unemployment rate projections significantly increased from January 1, 2020 to September 30, 2020 which had a significant impact on the Company’s allowance for credit losses at September 30, 2020, under the loss driver analysis. As a result, the Company recorded $88.1 million in provision for credit losses on loans specifically related to the elevated unemployment rate projections for the nine months ended September 30, 2020. During the three months ended September 30, 2020, the Company recorded $14.0 million of credit loss expense due to the Company increasing reserves on deferred loans resulting from ongoing uncertainties related to the COVID-19 pandemic. As of September 30, 2020, the Company had deferrals of $933.8 million on 330 loans. The elevated unemployment rate projections and the higher reserves on deferred loans increased the allowance for credit losses to $248.2 million for the period ended September 30, 2020. In addition, the Company recorded a $17.0 million expense for the increase in the Company’s unfunded commitment reserve for the nine months ended September 30, 2020 which was due to an increase in the expected funding percentages for the Company’s unfunded commitments as well as an increase in the unemployment rate projections from January 1, 2020 to September 30, 2020, due to COVID-19.

ASC 326 requires that both a discount and an allowance for credit losses be recorded on loans during an acquisition. During the first quarter of 2020, we completed the acquisition of $406.2 million of loans from LH-Finance. As a result, the Company recorded a $6.6 million loan discount and a $9.3 million increase in the allowance for credit losses for this acquisition. A small portion of the loans acquired during the quarter were purchase credit deteriorated (“PCD”) loans, so the Company recorded a $357,000 allowance for credit losses on these loans.

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

	Nine Months Ended September 30, 2020
	(In thousands)
Allowance for credit losses:
Beginning balance	$	102,122
Impact of adopting ASC 326		43,988
Allowance for credit losses on PCD loans		357
Loans charged off		(11,446	)
Recoveries of loans previously charged off		1,781
Net loans charged off		(9,665	)
Provision for credit loss - loans		102,113
Provision for credit loss - acquired loans		9,309
Balance, September 30, 2020	$	248,224

The following tables present the activity in the allowance for credit losses for the three and nine months ended September 30, 2020:

	Three Months Ended September 30, 2020
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated		Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	45,025		$	83,335		$	39,918		$	44,199		$	25,863		$	—	$	238,340
Allowance for credit losses on PCD loans		—			—			—			—			—			—		—
Loans charged off		—			(994	)		(93	)		(3,057	)		(455	)		—		(4,599	)
Recoveries of loans previously charged off		79			129			68			36			171			—		483
Net loans (charged off) recovered		79			(865	)		(25	)		(3,021	)		(284	)		—		(4,116	)
Provision for credit loss - loans		(6,289	)		15,494			5,327			(1,021	)		489			—		14,000
Provision for credit loss - acquired loans		—			—			—			—			—			—		—
Balance, September 30	$	38,815		$	97,964		$	45,220		$	40,157		$	26,068		$	—	$	248,224

	Nine Months Ended September 30, 2020
	Construction/ Land Development			Other Commercial Real Estate			Residential Real Estate			Commercial & Industrial			Consumer & Other			Unallocated		Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	26,433		$	33,529		$	20,135		$	16,615		$	5,410		$	—	$	102,122
Impact of adopting ASC 326		(5,296	)		15,912			16,680			11,584			5,108			—		43,988
Allowance for credit losses on PCD loans		—			—			—			—			357			—		357
Loans charged off		(443	)		(3,003	)		(450	)		(6,207	)		(1,343	)		—		(11,446	)
Recoveries of loans previously charged off		94			614			305			142			626			—		1,781
Net loans charged off		(349	)		(2,389	)		(145	)		(6,065	)		(717	)		—		(9,665	)
Provision for credit loss - loans		18,027			50,912			8,550			18,023			6,601			—		102,113
Provision for credit loss - acquired loans		—			—			—			—			9,309			—		9,309
Balance, September 30	$	38,815		$	97,964		$	45,220		$	40,157		$	26,068		$	—	$	248,224

The following tables present the balances in the allowance for loan losses for the nine month period ended September 30, 2019 and the year ended December 31, 2019 and the allowance for loan losses and recorded investment in loans receivable based on portfolio segment by impairment method as of December 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.

	Year Ended December 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		(1,445	)		(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 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
Loans charged off		(5	)		(381	)		(478	)		(1,175	)		(592	)		—		(2,631	)
Recoveries of loans previously charged off		17			18			145			38			231			—		449
Net loans recovered charged off		12			(363	)		(333	)		(1,137	)		(361	)		—		(2,182	)
Provision for loan losses		(2,670	)		(1,439	)		1,099			2,134			876			—		—
Balance, December 31	$	26,433		$	33,529		$	20,135		$	16,615		$	5,410		$	—	$	102,122

	As of December 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	$	97	$	164	$	2,014	$	2,401	$	—	$	—	$	4,676
Loans collectively evaluated for impairment		26,336		33,365		18,121		14,214		5,410		—		97,446
Loans evaluated for impairment balance, December 31		26,433		33,529		20,135		16,615		5,410		—		102,122
Purchased credit impaired loans		—		—		—		—		—		—		—
Balance, December 31	$	26,433	$	33,529	$	20,135	$	16,615	$	5,410	$	—	$	102,122
Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment	$	8,933	$	58,676	$	56,192	$	82,434	$	3,195	$	—	$	209,430
Loans collectively evaluated for impairment		1,767,756		4,442,493		2,251,307		1,445,569		753,155		—		10,660,280
Loans evaluated for impairment balance, December 31		1,776,689		4,501,169		2,307,499		1,528,003		756,350		—		10,869,710
Purchased credit impaired loans		—		—		—		—		—		—		—
Balance, December 31	$	1,776,689	$	4,501,169	$	2,307,499	$	1,528,003	$	756,350	$	—	$	10,869,710

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing as of September 30, 2020:

						Loans Past Due
				Nonaccrual		Over 90 Days
		Nonaccrual		With Reserve		Still Accruing
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		$	14,790	$	6,794	$	3,706
Construction/land development			1,479		2,122		1,351
Agricultural			898		—		—
Residential real estate loans
Residential 1-4 family			20,498		3,000		2,766
Multifamily residential			176		—		—
Total real estate			37,841		11,916		7,823
Consumer			3,624		—		812
Commercial and industrial			22,588		—		—
Agricultural & other			1,095		—		—
Total		$	65,148	$	11,916	$	8,635

The Company had $65.1 million and $47.6 million in nonaccrual loans for the periods ended September 30, 2020 and December 31, 2019, respectively. In addition, the Company had $8.6 million and $7.2 million in loans past due 90 days or more and still accruing for the periods ended September 30, 2020 and December 31, 2019, respectively.

The Company had $11.9 million in nonaccrual loans with a specific reserve as of September 30, 2020. The Company did not recognize any interest income on nonaccrual loans during the period ended September 30, 2020.

The following table presents the amortized cost basis of collateral-dependent impaired loans by class of loans as of September 30, 2020:

	Commercial		Residential
	Real Estate		Real Estate		Other
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	39,205	$	—	$	—
Construction/land development		6,168		—		—
Agricultural		898		—		—
Residential real estate loans
Residential 1-4 family		—		36,259		—
Multifamily residential		—		176		—
Total real estate		46,271		36,435		—
Consumer		—		—		4,450
Commercial and industrial		—		—		26,130
Agricultural & other		—		—		1,094
Total	$	46,271	$	36,435	$	31,674

The Company had $114.4 million and $78.9 million in collateral-dependent impaired loans for the periods ended September 30, 2020 and December 31, 2019, respectively.

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral-dependent impaired loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the

operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the fair value of the underlying collateral less estimated costs to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

The following is a summary of the impaired loans as of December 31, 2019:

	December 31, 2019
							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	$	38	$	38	$	—	$	40	$	3
Construction/land development		30		30		—		22		2
Agricultural		—		—		—		7		—
Residential real estate loans
Residential 1-4 family		288		288		—		253		22
Multifamily residential		—		—		—		—		—
Total real estate		356		356		—		322		27
Consumer		27		27		—		24		3
Commercial and industrial		55		55		—		124		3
Agricultural and other		—		—		—		—		—
Total loans without a specific valuation allowance		438		438		—		470		33
Loans with a specific valuation allowance
Real estate:
Commercial real estate loans
Non-farm/non-residential		24,533		24,010		159		34,612		1,729
Construction/land development		6,718		6,491		97		8,334		247
Agricultural		1,095		1,095		5		736		20
Residential real estate loans
Residential 1-4 family		25,476		25,099		2,008		23,574		202
Multifamily residential		620		620		6		1,925		52
Total real estate		58,442		57,315		2,275		69,181		2,250
Consumer		1,980		1,949		—		2,744		27
Commercial and industrial		18,070		17,952		2,401		9,212		91
Agricultural and other		1,219		1,219		—		534		—
Total loans with a specific valuation allowance		79,711		78,435		4,676		81,671		2,368
Total impaired loans
Real estate:
Commercial real estate loans
Non-farm/non-residential		24,571		24,048		159		34,652		1,732
Construction/land development		6,748		6,521		97		8,356		249
Agricultural		1,095		1,095		5		743		20
Residential real estate loans
Residential 1-4 family		25,764		25,387		2,008		23,827		224
Multifamily residential		620		620		6		1,925		52
Total real estate		58,798		57,671		2,275		69,503		2,277
Consumer		2,007		1,976		—		2,768		30
Commercial and industrial		18,125		18,007		2,401		9,336		94
Agricultural and other		1,219		1,219		—		534		—
Total impaired loans	$	80,149	$	78,873	$	4,676	$	82,141	$	2,401

The following is an aging analysis for loans receivable as of September 30, 2020 and December 31, 2019:

	September 30, 2020
	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	$	5,599	$	8,115	$	18,496	$	32,210	$	4,309,931	$	4,342,141	$	3,706
Construction/land development		1,294		—		2,830		4,124		1,744,804		1,748,928		1,351
Agricultural		281		—		898		1,179		88,297		89,476		—
Residential real estate loans														—
Residential 1-4 family		3,151		6,482		23,264		32,897		1,632,731		1,665,628		2,766
Multifamily residential		—		—		176		176		491,204		491,380		—
Total real estate		10,325		14,597		45,664		70,586		8,266,967		8,337,553		7,823
Consumer		2,040		1,457		4,436		7,933		875,635		883,568		812
Commercial and industrial		520		149		22,588		23,257		2,138,561		2,161,818		—
Agricultural & other		1,233		247		1,095		2,575		305,956		308,531		—
Total	$	14,118	$	16,450	$	73,783	$	104,351	$	11,587,119	$	11,691,470	$	8,635

	December 31, 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	$	1,628	$	454	$	14,160	$	16,242	$	4,396,527	$	4,412,769	$	3,194
Construction/land development		358		1,042		3,180		4,580		1,772,109		1,776,689		1,821
Agricultural		698		—		1,094		1,792		86,608		88,400		—
Residential real estate loans
Residential 1-4 family		3,150		3,956		21,928		29,034		1,790,187		1,819,221		1,614
Multifamily residential		—		—		331		331		487,947		488,278		—
Total real estate		5,834		5,452		40,693		51,979		8,533,378		8,585,357		6,629
Consumer		659		179		1,949		2,787		509,122		511,909		317
Commercial and industrial		1,835		104		10,984		12,923		1,515,080		1,528,003		292
Agricultural and other		646		3		1,219		1,868		242,573		244,441		—
Total	$	8,974	$	5,738	$	54,845	$	69,557	$	10,800,153	$	10,869,710	$	7,238

Non-accruing loans at September 30, 2020 and December 31, 2019 were $65.1 million and $47.6 million, respectively.

Interest recognized on impaired loans during the three and nine months ended September 30, 2020 was approximately $337,000 and $1.0 million, respectively. Interest recognized on impaired loans during the three and nine months ended September 30, 2019 was approximately $604,000 and $1.9 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 by class as of September 30, 2020 and December 31, 2019:

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.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		25		25
Risk rating 3		159,847		352,054		577,635		281,226		275,179		1,001,965		277,410		2,925,316
Risk rating 4		39,007		98,914		159,567		276,311		200,136		331,714		17,097		1,122,746
Risk rating 5		453		2,102		60,960		7,504		90,092		82,407		746		244,264
Risk rating 6		—		860		8,484		6,465		4,602		28,739		88		49,238
Risk rating 7		—		—		—		—		—		552		—		552
Risk rating 8		—		—		—		—		—		—		—		—
Total non-farm/non-residential		199,307		453,930		806,646		571,506		570,009		1,445,377		295,366		4,342,141
Construction/land development
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		289		—		289
Risk rating 3		129,438		203,707		133,677		59,563		56,784		64,980		117,032		765,181
Risk rating 4		119,365		484,770		83,374		66,196		30,688		39,631		124,228		948,252
Risk rating 5		—		—		392		20,624		—		1,217		—		22,233
Risk rating 6		—		777		98		64		176		11,826		—		12,941
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		1		—		31		—		32
Total construction/land development		248,803		689,254		217,541		146,448		87,648		117,974		241,260		1,748,928
Agricultural
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		13,956		9,284		5,824		6,965		3,971		19,251		5,957		65,208
Risk rating 4		1,147		896		1,220		686		5,506		11,981		744		22,180
Risk rating 5		—		—		—		—		—		116		—		116
Risk rating 6		—		—		—		—		—		1,972		—		1,972
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural		15,103		10,180		7,044		7,651		9,477		33,320		6,701		89,476
Total commercial real estate loans	$	463,213	$	1,153,364	$	1,031,231	$	725,605	$	667,134	$	1,596,671	$	543,327	$	6,180,545
Residential real estate loans
Residential 1-4 family
Risk rating 1	$	—	$	48	$	—	$	—	$	77	$	7	$	208	$	340
Risk rating 2		—		—		—		—		—		432		2,151		2,583
Risk rating 3		200,165		205,149		172,640		150,086		131,422		372,153		136,601		1,368,216
Risk rating 4		1,162		13,307		30,473		22,731		18,439		71,450		78,723		236,285
Risk rating 5		—		—		1,120		4,103		1,248		6,166		962		13,599
Risk rating 6		97		5,477		1,636		2,247		2,711		21,535		10,655		44,358
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		102		145		247
Total residential 1-4 family		201,424		223,981		205,869		179,167		153,897		471,845		229,445		1,665,628
Multifamily residential
Risk rating 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Risk rating 2		—		—		—		—		—		—		—		—
Risk rating 3		17,132		61,312		69,283		12,482		9,248		64,128		3,779		237,364
Risk rating 4		349		316		138,527		64,409		1,927		18,917		3,121		227,566
Risk rating 5		—		—		—		—		—		26,162		—		26,162
Risk rating 6		—		—		—		—		—		288		—		288
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total multifamily residential		17,481		61,628		207,810		76,891		11,175		109,495		6,900		491,380
Total real estate	$	682,118	$	1,438,973	$	1,444,910	$	981,663	$	832,206	$	2,178,011	$	779,672	$	8,337,553

	Term Loans Amortized Cost Basis by Origination Year, Continued
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Consumer
Risk rating 1	$	3,082	$	2,822	$	1,925	$	563	$	875	$	1,617	$	2,030	$	12,914
Risk rating 2		—		48		937		—		—		13		57		1,055
Risk rating 3		188,948		214,688		166,579		107,948		74,370		78,045		19,410		849,988
Risk rating 4		3,601		2,654		2,867		233		744		1,970		135		12,204
Risk rating 5		—		3		509		—		201		482		—		1,195
Risk rating 6		16		359		225		1,358		1,402		2,843		9		6,212
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total consumer		195,647		220,574		173,042		110,102		77,592		84,970		21,641		883,568
Commercial and industrial
Risk rating 1	$	776,764	$	546	$	312	$	186	$	20,211	$	1,856	$	11,232	$	811,107
Risk rating 2		19		191		2,164		99		89		626		780		3,968
Risk rating 3		54,201		218,623		108,914		40,497		41,506		56,822		135,181		655,744
Risk rating 4		60,721		148,240		153,748		67,021		15,885		37,906		111,941		595,462
Risk rating 5		200		141		11,398		199		714		554		458		13,664
Risk rating 6		222		3,956		31,042		22,797		11,244		6,228		3,744		79,233
Risk rating 7		—		3		2,553		—		—		64		—		2,620
Risk rating 8		2		1		1		1		14		—		1		20
Total commercial and industrial		892,129		371,701		310,132		130,800		89,663		104,056		263,337		2,161,818
Agricultural and other
Risk rating 1	$	72,245	$	53	$	53	$	—	$	113	$	29	$	1,275	$	73,768
Risk rating 2		16		4,570		—		—		—		2,871		1,262		8,719
Risk rating 3		91,754		14,478		5,381		6,231		18,637		50,158		9,196		195,835
Risk rating 4		4,096		6,019		1,615		1,069		905		9,576		4,291		27,571
Risk rating 5		—		—		—		—		—		605		—		605
Risk rating 6		—		—		—		—		223		1,810		—		2,033
Risk rating 7		—		—		—		—		—		—		—		—
Risk rating 8		—		—		—		—		—		—		—		—
Total agricultural and other		168,111		25,120		7,049		7,300		19,878		65,049		16,024		308,531
Total	$	1,938,005	$	2,056,368	$	1,935,133	$	1,229,865	$	1,019,339	$	2,432,086	$	1,080,674	$	11,691,470

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. The Company also evaluates credit quality based on the aging status of the loan, which was previously presented and by payment activity. The following table presents the amortized cost of performing and nonperforming loans.

	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential
Performing	$	199,307	$	453,930	$	804,352	$	571,177	$	569,848	$	1,409,044	$	295,278	$	4,302,936
Non-performing		—		—		2,294		329		161		36,333		88		39,205
Total non-farm/ non-residential		199,307		453,930		806,646		571,506		570,009		1,445,377		295,366		4,342,141
Construction/land development
Performing		248,803		688,477		217,517		146,383		87,490		112,830		241,260		1,742,760
Non-performing		—		777		24		65		158		5,144		—		6,168
Total construction/ land development		248,803		689,254		217,541		146,448		87,648		117,974		241,260		1,748,928
Agricultural
Performing	$	15,103	$	10,180	$	7,044	$	7,651	$	9,477	$	32,422	$	6,701	$	88,578
Non-performing		—		—		—		—		—		898		—		898
Total agricultural		15,103		10,180		7,044		7,651		9,477		33,320		6,701		89,476
Total commercial real estate loans	$	463,213	$	1,153,364	$	1,031,231	$	725,605	$	667,134	$	1,596,671	$	543,327	$	6,180,545
Residential real estate loans
Residential 1-4 family
Performing	$	201,263	$	217,949	$	204,313	$	173,652	$	151,629	$	458,290	$	222,273	$	1,629,369
Non-performing		161		6,032		1,556		5,515		2,268		13,555		7,172		36,259
Total residential 1-4 family		201,424		223,981		205,869		179,167		153,897		471,845		229,445		1,665,628
Multifamily residential
Performing	$	17,481	$	61,628	$	207,810	$	76,891	$	11,175	$	109,319	$	6,900	$	491,204
Non-performing		—		—		—		—		—		176		—		176
Total multifamily residential		17,481		61,628		207,810		76,891		11,175		109,495		6,900		491,380
Total real estate	$	682,118	$	1,438,973	$	1,444,910	$	981,663	$	832,206	$	2,178,011	$	779,672	$	8,337,553
Consumer
Performing	$	195,641	$	220,256	$	172,336	$	109,384	$	77,037	$	82,830	$	21,634	$	879,118
Non-performing		6		318		706		718		555		2,140		7		4,450
Total consumer		195,647		220,574		173,042		110,102		77,592		84,970		21,641		883,568
Commercial and industrial
Performing	$	892,129	$	367,907	$	298,971	$	127,783	$	87,085	$	99,636	$	262,177	$	2,135,688
Non-performing		—		3,794		11,161		3,017		2,578		4,420		1,160		26,130
Total commercial and industrial		892,129		371,701		310,132		130,800		89,663		104,056		263,337		2,161,818
Agricultural and other
Performing	$	168,111	$	25,120	$	7,049	$	7,300	$	19,655	$	64,178	$	16,024	$	307,437
Non-performing		—		—		—		—		223		871		—		1,094
Total agricultural and other		168,111		25,120		7,049		7,300		19,878		65,049		16,024		308,531
Total	$	1,938,005	$	2,056,368	$	1,935,133	$	1,229,865	$	1,019,339	$	2,432,086	$	1,080,674	$	11,691,470

The Company had approximately $92.4 million or 289 total revolving loans convert to term loans for the nine months ended September 30, 2020. These loans were considered immaterial for vintage disclosure inclusion.

The following is a presentation of troubled debt restructurings (“TDRs”) by class as of September 30, 2020 and December 31, 2019:

	September 30, 2020
	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	$	14	$	11,306	$	4,616	$	388	$	4,415	$	9,419
Construction/land development		2		58		—		9		11		20
Agricultural		1		282		273		—		—		273
Residential real estate loans
Residential 1-4 family		21		2,733		1,180		213		447		1,840
Total real estate		38		14,379		6,069		610		4,873		11,552
Consumer		1		17		14		—		—		14
Commercial and industrial		10		2,705		157		604		89		850
Total	$	49	$	17,101	$	6,240	$	1,214	$	4,962	$	12,416

	December 31, 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		14	$	12,738	$	6,622	$	232	$	4,397	$	11,251
Construction/land development		3		618		546		12		19		577
Agricultural		2		387		387		—		—		387
Residential real estate loans
Residential 1-4 family		21		2,774		1,068		227		704		1,999
Multifamily residential		2		457		128		—		290		418
Total real estate		42		16,974		8,751		471		5,410		14,632
Consumer		3		39		24		3		—		27
Commercial and industrial		9		3,069		598		615		382		1,595
Total		54	$	20,082	$	9,373	$	1,089	$	5,792	$	16,254

The following is a presentation of TDRs on non-accrual status as of September 30, 2020 and December 31, 2019 because they are not in compliance with the modified terms:

	September 30, 2020				December 31, 2019
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
	(Dollars in thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		1	$	11		2	$	1,363
Construction/land development		1		12		2		565
Agricultural		1		273		2		387
Residential real estate loans
Residential 1-4 family		8		675		7		530
Multifamily residential		—		—		1		128
Total real estate		11		971		14		2,973
Commercial and industrial		7		770		4		1,159
Total		18	$	1,741		18	$	4,132

The following is a presentation of total foreclosed assets as of September 30, 2020 and December 31, 2019:

	September 30, 2020		December 31, 2019
	(In thousands)
Commercial real estate loans
Non-farm/non-residential	$	819	$	3,528
Construction/land development		3,341		3,218
Agriculture		—		—
Residential real estate loans
Residential 1-4 family		162		2,397
Multifamily residential		—		—
Total foreclosed assets held for sale	$	4,322	$	9,143

The Company has purchased loans for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The purchase price of the loans at acquisition was $1.3 million, and a $357,000 allowance for credit losses was recorded on these loans at acquisition along with a $17,000 non-credit premium. The allowance and non-credit premium resulted in a par value of $1.0 million for these loans at acquisition. As of September 30, 2020, the balance of purchase credit deteriorated loans was approximately $773,000.

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, 2020 and December 31, 2019, were as follows:

	September 30, 2020		December 31, 2019
	(In thousands)
Goodwill
Balance, beginning of period	$	958,408	$	958,408
Acquisitions		14,617		—
Balance, end of period	$	973,025	$	958,408

	September 30, 2020			December 31, 2019
	(In thousands)
Core Deposit and Other Intangibles
Balance, beginning of period	$	36,572		$	42,896
Amortization expense		(4,423	)		(4,760	)
Balance, September 30		32,149			38,136
Amortization expense					(1,564	)
Balance, end of year				$	36,572

The carrying basis and accumulated amortization of core deposits and other intangibles at September 30, 2020 and December 31, 2019 were:

	September 30, 2020			December 31, 2019
	(In thousands)
Gross carrying basis	$	86,625		$	86,625
Accumulated amortization		(54,476	)		(50,053	)
Net carrying amount	$	32,149		$	36,572

Core deposit and other intangible amortization expense was approximately $1.4 million and $1.6 million for the three months ended September 30, 2020 and 2019, respectively. Core deposit and other intangible amortization expense was approximately $4.4 million and $4.8 million for the nine months ended September 30, 2020 and 2019. The Company’s estimated amortization expense of core deposits and other intangibles for each of the years 2020 through 2024 is approximately: 2020 – $5.9 million; 2021 – $5.7 million; 2022 – $5.7 million; 2023 – $5.5 million; 2024 - $4.3 million.

The carrying amount of the Company’s goodwill was $973.0 million and $958.4 million at September 30, 2020 and December 31, 2019, respectively. Goodwill is tested annually for impairment during the fourth quarter. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements.

7. Other Assets

Other assets consist primarily of equity securities without a readily determinable fair value and other miscellaneous assets. As of September 30, 2020 and December 31, 2019, other assets were $160.7 million and $213.8 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 $86.6 million and $100.0 million at September 30, 2020 and December 31, 2019, 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 $27.9 million and $27.3 million at September 30, 2020 and December 31, 2019. 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 $1.00 billion and $1.12 billion at September 30, 2020 and December 31, 2019, respectively. The aggregate amount of time deposits with a minimum denomination of $100,000 was $1.32 billion and $1.54 billion at September 30, 2020 and December 31, 2019, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $5.6 million and $8.5 million for the three months ended September 30, 2020 and 2019, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $18.8 million and $23.3 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and December 31, 2019, brokered deposits were $623.6 million and $579.7 million, respectively.

Deposits totaling approximately $2.13 billion and $2.21 billion at September 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, securities sold under agreements to repurchase totaled $158.4 million and $143.7 million, respectively. For the three-month periods ended September 30, 2020 and 2019, securities sold under agreements to repurchase daily weighted-average totaled $157.2 million and $143.6 million, respectively. For the nine months ended September 30, 2020 and 2019, securities sold under agreements to repurchase daily weighted-average totaled $150.0 million and $146.3 million, respectively.

The remaining contractual maturity of securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2020 and December 31, 2019 is presented in the following tables:

	September 30, 2020
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
	(In thousands)
Securities sold under agreements to repurchase:
U.S. government-sponsored enterprises	$	10,686	$	—	$	—	$	—	$	10,686
Mortgage-backed securities		19,871		—		—		—		19,871
State and political subdivisions		124,785		—		—		—		124,785
Other securities		3,105		—		—		—		3,105
Total borrowings	$	158,447	$	—	$	—	$	—	$	158,447

	December 31, 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	$	22,714	$	—	$	—	$	—	$	22,714
Mortgage-backed securities		30,708		—		—		—		30,708
State and political subdivisions		84,540		—		—		—		84,540
Other securities		5,765		—		—		—		5,765
Total borrowings	$	143,727	$	—	$	—	$	—	$	143,727

10. FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $403.4 million and $621.4 million at September 30, 2020 and December 31, 2019, respectively. The Company had no other borrowed funds as of September 30, 2020 or December 31, 2019. At September 30, 2020, all of the outstanding balances were classified as long-term advances. At December 31, 2019, $75.0 million and $546.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. The FHLB advances mature from 2020 to 2033 with fixed interest rates ranging from 1.76% to 2.85%. Maturities of borrowings as of September 30, 2020 include: 2020 – $3.4 million; 2021 – zero; 2022 – zero; 2023 – zero; 2024 – zero; after 2024 – $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 $1.23 billion and $1.26 billion at each of September 30, 2020 and December 31, 2019, in letters of credit under a FHLB blanket borrowing line of credit, which are used to collateralize public deposits at September 30, 2020 and December 31, 2019, respectively.

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, 2020 and December 31, 2019 was zero.

11. Subordinated Debentures

Subordinated debentures at September 30, 2020 and December 31, 2019 consisted of subordinated debt securities and guaranteed payments on trust preferred securities with the following components:

	As of September 30,		As of December 31,
	2020		2019
	(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		4,439		4,402
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		5,826		5,756
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		299,042		298,573
Total	$	370,133	$	369,557

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

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

Subordinated Debt Securities. On April 3, 2017, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The Notes are unsecured, subordinated debt obligations and mature on April 15, 2027. From and including the date of issuance to, but excluding April 15, 2022, the Notes bear interest at an initial rate of 5.625% per annum. From and including April 15, 2022 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination plus a spread of 3.575%; provided, however, that in the event three-month LIBOR is less than zero, then three-month LIBOR shall be deemed to be zero.

The Company may, beginning with the interest payment date of April 15, 2022, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the Notes at any time, including prior to April 15, 2022, at its option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date. The Notes provide the Company with additional Tier 2 regulatory capital to support expected future growth.

12. Income Taxes

The following is a summary of the components of the provision (benefit) for income taxes for the three and nine months ended September 30, 2020 and 2019:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020			2019
	(In thousands)
Current:
Federal	$	14,344	$	16,618	$	51,273		$	39,844
State		4,748		5,501		16,973			13,190
Total current		19,092		22,119		68,246			53,034
Deferred:
Federal		1,476		3,817		(23,189	)		14,906
State		489		1,263		(7,677	)		4,934
Total deferred		1,965		5,080		(30,866	)		19,840
Income tax (benefit) expense	$	21,057	$	27,199	$	37,380		$	72,874

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three and nine months ended September 30, 2020 and 2019:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2020				2019				2020				2019
Statutory federal income tax rate		21.00		%		21.00		%		21.00		%		21.00		%
Effect of non-taxable interest income		(1.03	)			(0.78	)			(1.48	)			(0.82	)
Stock compensation		1.17				0.11				0.53				0.10
State income taxes, net of federal benefit		3.82				3.33				3.00				3.77
Executive officer compensation & other		(1.66	)			3.55				(1.07	)			1.15
Effective income tax rate		23.30		%		27.21		%		21.98		%		25.20		%

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, 2020			December 31, 2019
	(In thousands)
Deferred tax assets:
Allowance for credit losses	$	72,846		$	25,829
Deferred compensation		3,932			4,416
Stock compensation		4,838			5,960
Non-accrual interest income		833			—
Real estate owned		792			1,080
Loan discounts		7,676			11,996
Tax basis premium/discount on acquisitions		5,556			6,921
Investments		603			327
Deposits		(25	)		—
Other		6,817			8,940
Gross deferred tax assets		103,868			65,469
Deferred tax liabilities:
Accelerated depreciation on premises and equipment		2,052			1,417
Unrealized gain on securities available-for-sale		11,912			5,717
Core deposit intangibles		7,386			8,419
FHLB dividends		2,711			2,608
Other		4,640			3,007
Gross deferred tax liabilities		28,701			21,168
Net deferred tax assets	$	75,167		$	44,301

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and the states of Alabama, Arizona, Arkansas, California, Florida, Georgia, Illinois, New York, Oklahoma, Missouri, Pennsylvania, Tennessee and Texas. The Company is no longer subject to U.S. federal and state tax examinations by tax authorities for years before 2016.

13. Common Stock, Compensation Plans and Other

Common Stock

As of September 30, 2020, 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

During the first nine months of 2020, the Company repurchased a total of 1,423,560 shares with a weighted-average stock price of $16.73 per share. Shares repurchased under the program as of September 30, 2020 since its inception total 15,798,335 shares. The remaining balance available for repurchase is 3,953,665 shares at September 30, 2020.

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, 2020, 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, 2020, the Company had approximately 1,723,000 shares of common stock remaining available for future grants and approximately 5,040,000 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, 2020 was $2.2 million. The intrinsic value of stock options exercised during the nine months ended September 30, 2020 was approximately $32,000. 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 $8.4 million as of September 30, 2020.

The table below summarizes the stock option transactions under the Plan at September 30, 2020 and December 31, 2019 and changes during the three-month period and year then ended:

	For the Nine Months Ended September 30, 2020					For the Year Ended December 31, 2019
	Shares (000)			Weighted- Average Exercisable Price		Shares (000)			Weighted- Average Exercisable Price
Outstanding, beginning of year		3,411		$	19.60		3,617		$	19.62
Granted		—			—		55			19.15
Forfeited/Expired		(71	)		21.85		(163	)		22.43
Exercised		(23	)		18.46		(98	)		15.21
Outstanding, end of period		3,317			19.56		3,411			19.60
Exercisable, end of period		1,589		$	16.46		1,353		$	16.03

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. There were no options granted during the nine months ended September 30, 2020. The weighted-average fair value of options granted during the year ended December 31, 2019 was $4.11 per share. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model based on the weighted-average assumptions for expected dividend yield, expected stock price volatility, risk-free interest rate, and expected life of options granted.

	For the Nine Months Ended September 30, 2020	For the Year Ended December 31, 2019
Expected dividend yield	Not Applicable		2.70	%
Expected stock price volatility	Not Applicable		26.13	%
Risk-free interest rate	Not Applicable		2.48	%
Expected life of options	Not Applicable	6.5 years

The following is a summary of currently outstanding and exercisable options at September 30, 2020:

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
$6.56 to $8.62		213		1.96	$	7.91		213	$	7.91
$9.54 to $14.71		205		3.40		12.06		205		12.06
$16.77 to $16.86		152		3.84		16.80		152		16.80
$17.12 to $17.36		125		4.48		17.13		125		17.13
$17.40 to $18.46		938		4.88		18.45		672		18.45
$18.50 to $20.16		63		8.08		19.21		19		19.53
$20.58 to $21.25		160		5.42		21.08		119		21.12
$21.31 to $22.22		100		7.55		22.22		40		22.22
$22.70 to $23.32		1,279		7.81		23.32		1		22.70
$23.51 to $25.96		82		6.74		25.60		43		25.90
		3,317						1,589

The table below summarized the activity for the Company’s restricted stock issued and outstanding at September 30, 2020 and December 31, 2019 and changes during the period and year then ended:

	As of September 30, 2020			As of December 31, 2019
	(In thousands)
Beginning of year		1,636			1,873
Issued		264			181
Vested		(367	)		(340	)
Forfeited		(74	)		(78	)
End of period		1,459			1,636
Amount of expense for nine months and twelve months ended, respectively	$	5,095		$	8,427

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 $19.5 million as of September 30, 2020.

14. Non-Interest Expense

The table below shows the components of non-interest expense for the three and nine months ended September 30, 2020 and 2019:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020		2019			2020		2019
	(In thousands)
Salaries and employee benefits	$	41,511	$	39,919		$	120,928	$	115,731
Occupancy and equipment		9,566		9,047			28,611		26,723
Data processing expense		4,921		4,059			13,861		11,867
Other operating expenses:
Advertising		902		1,201			2,923		3,347
Merger and acquisition expenses		—		—			711		—
Amortization of intangibles		1,420		1,587			4,423		4,760
Electronic banking expense		2,426		1,901			6,195		5,655
Directors’ fees		429		380			1,265		1,206
Due from bank service charges		259		272			721		792
FDIC and state assessment		1,607		(532	)		5,001		2,833
Hurricane expense		—		—			—		897
Insurance		766		698			2,223		2,056
Legal and accounting		1,235		1,414			3,432		3,384
Other professional fees		1,661		1,906			6,622		7,024
Operating supplies		460		511			1,548		1,552
Postage		328		320			968		939
Telephone		321		289			955		898
Unfunded commitments		—		—			16,989		—
Other expense		3,900		4,792			12,757		14,781
Total other operating expenses		15,714		14,739			66,733		50,124
Total non-interest expense	$	71,712	$	67,764		$	230,133	$	204,445

15. Leases

The Company leases land and office facilities under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2041 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. 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 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, 2020, the balances of the right-of-use asset and lease liability was $41.1 million and $43.9 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.

The minimum rental commitments under these noncancelable operating leases are as follows (in thousands) as of September 30, 2020 and December 31, 2019:

	September 30, 2020			December 31, 2019
2020	$	2,300		$	7,740
2021		8,180			6,774
2022		6,434			5,336
2023		5,700			4,760
2024		5,241			4,328
Thereafter		32,191			28,260
Total future minimum lease payments	$	60,046		$	57,198
Discount effect of cash flows		(16,128	)		(10,193	)
Present value of net future minimum lease payments	$	43,918		$	47,005

Additional information (dollar amounts in thousands):

	For the Three Months Ended September 30,			For the Three Months Ended September 30,			For the Nine Months Ended September 30,			For the Nine Months Ended September 30,
Lease expense:	2020			2019			2020			2019
Operating lease expense	$	2,044		$	2,057		$	6,085		$	6,176
Short-term lease expense		9			29			41			82
Variable lease expense		253			245			772			724
Total lease expense	$	2,306		$	2,331		$	6,898		$	6,982
Other information:
Cash paid for amounts included in the measurement of lease liabilities	$	2,021		$	2,002		$	6,013		$	5,939
Weighted-average remaining lease term (in years)		10.08			10.67			10.21			10.78
Weighted-average discount rate		3.60	%		3.62	%		3.61	%		3.62	%

The Company currently leases three properties from three related parties. Total rent expense from the leases was $27,000 or 1.17% of total lease expense and $89,000 or 1.29% of total lease expense for the three and nine months ended September 30, 2020, 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 credit 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, 2020 and December 31, 2019, commercial real estate loans represented 52.9% and 57.8% of total loans receivable, respectively, and 243.3% and 250.0% of total stockholders’ equity at September 30, 2020 and December 31, 2019, respectively. Residential real estate loans represented 18.4% and 21.2% of total loans receivable and 84.9% and 91.9% of total stockholders’ equity at September 30, 2020 and December 31, 2019, respectively.

Approximately 74.0% of the Company’s total loans and 77.6% of the Company’s real estate loans as of September 30, 2020, are to borrowers whose collateral is located in Alabama, Arkansas, Florida and New York, the states in which the Company has its branch locations.

Beginning in the first quarter of 2020, the COVID-19 pandemic has negatively impacted the U.S. and global economy; disrupted U.S. and global supply chains; lowered equity market valuations; created significant volatility and disruption in financial markets; contributed to a decrease in the rates and yields on U.S. Treasury securities; resulted in ratings downgrades, credit deterioration, and defaults in many industries; increased demands on capital and liquidity; increased unemployment levels and decreased consumer confidence. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in our footprint. The pandemic has caused the Company, and could continue to cause the Company, to recognize credit losses in our loan portfolios and increases in our allowance for credit losses and could cause further volatility in the valuation of real estate and other collateral supporting loans. As a result of COVID-19, the unemployment rate projections significantly increased from January 1, 2020 to September 30, 2020, which had a significant impact on the Company’s allowance for credit losses at September 30, 2020 under the loss driver analysis. As a result, the Company recorded $88.1 million in provision for credit losses on loans specifically related to the elevated unemployment rate projections for the nine months ended September 30, 2020. During the three months ended September 30, 2020, the Company recorded $14.0 million of credit loss expense due to the Company increasing reserves on deferred loans resulting from ongoing uncertainties related to the COVID-19 pandemic. As of September 30, 2020, the Company had deferrals of $933.8 million on 330 loans. The elevated unemployment rate projections and the higher reserves on deferred loans increased the allowance for credit losses to $248.2 million for the period ended September 30, 2020. In addition, the Company recorded a $17.0 million expense for the increase in the Company’s unfunded commitment reserve for the nine months ended September 30, 2020, which was due to an increase in the expected funding percentages for the Company’s unfunded commitments as well as an increase in the unemployment rate projections from January 1, 2020 to September 30, 2020, due to COVID-19. The financial statements have been prepared using values and information currently available to the Company. The Company is continuing to closely monitor the situation.

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 credit 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, 2020 and December 31, 2019, commitments to extend credit of $2.87 billion and $2.77 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, 2020 and December 31, 2019, is $61.8 million and $58.9 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 2020, the Company requested approximately $128.4 million in regular dividends from its banking subsidiary.

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, 2020, 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, 2020, 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 12.64%, 10.40%, 13.22%, and 16.90%, respectively, as of September 30, 2020.

19. Additional Cash Flow Information

In connection with the LH-Finance acquisition, accounted for using the purchase method, the Company acquired approximately $409.1 million in assets, including $407.4 million in loans and paid $421.2 million in cash.

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

	September 30,
	2020		2019
	(In thousands)
Interest paid	$	72,909	$	115,361
Income taxes paid		54,698		67,787
Assets acquired by foreclosure		1,673		6,765

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, 2020 and December 31, 2019, Level 3 securities were immaterial. In addition, there were no material transfers between hierarchy levels during 2020 and 2019. 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 credit 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 credit losses to require an increase, such increase is reported as a component of the provision for credit losses. The fair value of loans with specific allocated losses was $102.3 million and $74.2 million as of September 30, 2020 and December 31, 2019, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral. The Company reversed approximately $388,000 and $136,000 of accrued interest receivable when impaired loans were put on non-accrual status during the three months ended September 30, 2020 and 2019, respectively. The Company reversed approximately $811,000 and $617,000 of accrued interest receivable when impaired loans were put on non-accrual status during the nine months ended September 30, 2020 and 2019, 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 credit 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, 2020 and December 31, 2019, the fair value of foreclosed assets held for sale, less estimated costs to sell, was $4.3 million and $9.1 million, respectively.

Foreclosed assets held for sale with a carrying value of approximately $112,000 were remeasured during the nine months ended September 30, 2020, resulting in a write-down of $112,000. 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 20% to 50% for commercial and residential real estate collateral.

Fair Values of Financial Instruments

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

	September 30, 2020
	Carrying
	Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	1,043,337	$	1,043,337	1
Loans receivable, net of impaired loans and allowance		11,340,937		11,726,241	3
Accrued interest receivable		72,599		72,599	1
FHLB, Federal Reserve & First National Bankers Bank stock; other equity investments		114,484		114,484	3
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	3,207,967	$	3,207,967	1
Savings and interest-bearing transaction accounts		8,011,200		8,011,200	1
Time deposits		1,718,299		1,738,863	3
Securities sold under agreements to repurchase		158,447		158,447	1
FHLB and other borrowed funds		403,428		431,667	2
Accrued interest payable		10,968		10,968	1
Subordinated debentures		370,133		380,006	3

	December 31, 2019
	Carrying
	Amount		Fair Value		Level
	(In thousands)
Financial assets:
Cash and cash equivalents	$	490,601	$	490,601	1
Loans receivable, net of impaired loans and allowance		10,693,391		10,680,071	3
Accrued interest receivable		45,086		45,086	1
FHLB, Federal Reserve & First National Bankers Bank stock; other equity investments		127,267		127,267	3
Financial liabilities:
Deposits:
Demand and non-interest bearing	$	2,367,091	$	2,367,091	1
Savings and interest-bearing transaction accounts		6,933,964		6,933,964	1
Time deposits		1,977,328		1,991,120	3
Federal funds purchased		5,000		5,000	1
Securities sold under agreements to repurchase		143,727		143,727	1
FHLB and other borrowed funds		621,439		621,742	2
Accrued interest payable		8,001		8,001	1
Subordinated debentures		369,557		380,237	3

21. Recent Accounting Pronouncements

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. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the guidance effective January 1, 2020 and recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $44.0 million which was recognized through a $32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $146.1 million as of January 1, 2020. In addition, the Company recorded a $15.5 million reserve on unfunded commitments which was recognized through an $11.5 million adjustment to retained earnings, net of tax. The adoption of the standard has required significant changes to the processes and procedures required to calculate the allowance for credit 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. For additional information on the allowance for credit losses, see Notes 1 and 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 was 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 2019, 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. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures. The current accounting policies and processes have not changed, except for the elimination of the Step 2 analysis.

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. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In August 2018, the FASB issued ASU 2018-15, 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. 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. The Company adopted the guidance effective January 1, 2020, 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 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. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

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. The Company adopted the guidance effective January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

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. The Company adopted the standard guidance January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The amendments clarify that the allowance for credit losses for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. The amendments also clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, the expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cash flows after acquisition. Also, the amendments provide transition relief by permitting entities an accounting policy election to adjust the effective interest rate on existing TDRs using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumption in effect immediately before the restructuring. The amendments extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis. In addition, the amendments clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing financial asset to apply the practical expedient. The entity applying the practical expedient should estimate the expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral that is greater than the fair value of the collateral securing the financial asset. An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard guidance January 1, 2020, and its adoption did not have a significant impact on our financial position or financial statement disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in the update simplify the accounting for income taxes by removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in the update also simplify the accounting for income taxes by requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; however, an entity may elect to do so on an entity-by-entity basis for a legal entity that is both not subject to tax and disregarded by the taxing authority. The amendments require that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Section 4013 of the CARES Act provides financial institutions the temporary option to not apply ASC Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, to certain loan modifications related to COVID-19 made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after termination of the President’s national emergency declaration for COVID-19. Further, financial institutions do not need to determine impairment associated with certain loan concessions that would otherwise have been required for TDRs (e.g., interest rate concessions, payment deferrals, or loan extensions). The Company has not relied on Section 4013 of the CARES Act in accounting for loan modifications as of September 30, 2020; however, it is likely that the Company will use this optional accounting treatment.

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, 2020, and the related condensed consolidated statements of income, comprehensive income, and stockholder's equity for the three-month and nine-month periods ended September 30, 2020 and 2019, and cash flows for the nine-month periods ended September 30, 2020 and 2019, 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, 2019, 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, 2020, 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, 2019, 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.

Emphasis of Matter

As discussed in Notes 1 and 5 to the condensed consolidated financial statements, the Company has changed its method of accounting for loans and the allowance for credit losses in 2020 due to the adoption of Topic 326.

/s/ BKD, LLP

Little Rock, Arkansas

November 5, 2020

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, 2020, which includes the audited financial statements for the year ended December 31, 2019. 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, 2020, we had, on a consolidated basis, total assets of $16.55 billion, loans receivable, net of $11.44 billion, total deposits of $12.94 billion, and stockholders’ equity of $2.54 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 Ended						As of or for the Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(Dollars in thousands, except per share data)
Total assets	$	16,549,758		$	14,901,935		$	16,549,758		$	14,901,935
Loans receivable		11,691,470			10,771,946			11,691,470			10,771,946
Allowance for credit losses		248,224			104,304			248,224			104,304
Total deposits		12,937,466			11,047,370			12,937,466			11,047,370
Total stockholders’ equity		2,540,799			2,469,389			2,540,799			2,469,389
Net income		69,320			72,763			132,654			216,277
Basic earnings per share		0.42			0.44			0.80			1.29
Diluted earnings per share		0.42			0.44			0.80			1.29
Book value per share		15.38			14.80			15.38			14.80
Tangible book value per share (non-GAAP)⁽¹⁾		9.30			8.83			9.30			8.83
Annualized net interest margin – FTE		3.92	%		4.32	%		4.08	%		4.30	%
Efficiency ratio		39.56			39.16			43.69			40.03
Efficiency ratio, as adjusted (non-GAAP)⁽²⁾		40.08			40.60			40.25			40.35
Annualized return on average assets		1.66			1.93			1.11			1.92
Annualized return on average common equity		10.97			11.84			7.13			12.12

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

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

Overview

Recent Developments – COVID-19

The rapid spread of the novel coronavirus (“COVID-19”) hit the United States during the first quarter of 2020 and has continued through the third quarter of 2020. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the economic activity in our markets. In response to the COVID-19 pandemic, the state governments have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These actions have had a significant impact on markets driven by supply chain and production disruptions, workforce restrictions, travel restrictions, retail closures, and reduced consumer spending and sentiment, amongst other factors. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors.

While our business has been designated an essential business, which allows us to continue to serve our customers, we serve many customers that have been deemed, or who are employed by businesses that have been deemed, to be non-essential. Further, many of our customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have been adversely affected by the COVID-19 pandemic.

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic has had a significant impact on our business and operations. We have reopened our banking lobbies in order to serve customers in person, while still offering service through drive-thru tellers as well as electronic and online means. To support the health and well-being of our employees, we continue to support working remotely. To support our customers or to comply with law, we have deferred loan payments for certain consumer and commercial customers, and we have suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions, and are offering fee waivers, payment deferrals, and other expanded assistance for automobile, mortgage, small business and personal lending customers. Future governmental actions may require these and other types of customer-related responses.

As of September 30, 2020, our loan deferrals decreased to $933.8 million on 330 loans from the June 30, 2020 balance of $3.18 billion on 4,209 loans, with approximately 70% of the initially deferred loan balances returning to full payments of principal and interest following the initial deferral period. Of the 272 customers currently on deferment, 79 of our customers totaling $347 million chose principal deferment only and now have returned to paying interest monthly. The remaining customers with loans totaling $586.8 million, which represents only 5.0% of our total loans, have continued full deferment. The hospitality sector has been most negatively impacted by COVID-19 and represents nearly half of the deferment balance as of September 30, 2020. The geographic distribution of these deferrals is similar through all of our markets. Our review of second-round deferment requests required updated interim operating statements, balance sheet and liquidity verifications, and validation of the current risk rating.

In April 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) established a new federal economic relief program administered by the Small Business Administration (“SBA”) called the Paycheck Protection Program (“PPP”), which provides for 100% federally guaranteed loans to be issued by participating private financial institutions to small businesses for payroll and certain other permitted expenses. As of September 30, 2020, as a participating lender, we have generated 8,702 loans to both existing and new customers totaling $848.7 million. The average loan size is $98,000.

We also are monitoring the impact of COVID-19 on the valuation of goodwill. Our stock price has historically traded above its per share book value and tangible book value (non-GAAP). However, at certain times during the first nine months of 2020, our stock price fell below book value. This drop in stock was in reaction to the COVID-19 pandemic, which has affected stock prices of companies in almost all industries. During the first nine months of 2020, our common stock has traded as low as $9.71 per share and closed on September 30, 2020 at $15.16 per share, which was below book value of $15.38 per share but above tangible book value (non-GAAP) of $9.30 per share. The Company updated its valuation of the carrying value of goodwill as of September 30, 2020 based on the drop in the Company’s stock price in the first three quarters of 2020. However, taking into account the effect that the COVID-19 pandemic has had and continues to have on our local economy, we determined that no impairment charge to goodwill was necessary at this time. While our common stock price has closed above book value each day beginning October 1, 2020 through the date of this filing, we will continue to monitor the impact of COVID-19 on the Company’s business, operating results, cash flows and financial condition and will reevaluate any impairment of our goodwill should economic or market conditions further deteriorate as a result of the pandemic.

Results of Operations for the Three Months Ended September 30, 2020 and 2019

Our net income decreased $3.4 million, or 4.7%, to $69.3 million for the three-month period ended September 30, 2020, from $72.8 million for the same period in 2019. On a diluted earnings per share basis, our earnings were $0.42 per share for the three-month period ended September 30, 2020 and $0.44 per share for the three-month period ended September 30, 2019. During the three-month period ended September 30, 2020, the Company recorded $14.0 million of total credit loss expense which was primarily due to the Company increasing reserves on deferred loans resulting from the ongoing uncertainties related to the COVID-19 pandemic. The Company also recorded a $1.4 million write-down for the fair value adjustment on marketable securities. These items were partially offset by $3.2 million of special dividend income from one of our equity investments. The summation of all these items resulted in net additional expense of $12.2 million, or $9.0 million after tax.

Total interest income decreased $15.4 million or 8.5%, and non-interest expense increased $3.9 million or 5.8%. This was offset by a $18.6 million, or 47.6%, decrease in total interest expense and a $5.2 million, or 21.0%, increase in non-interest income. The primary drivers of the decrease in interest income were a $12.7 million decrease in loan interest income, a $1.9 million decrease in investment security income and a $816,000 decrease in interest income on deposits with other banks. The primary driver of the increase in non-interest expense was a $1.6 million increase in salaries and employee benefits, a $519,000 increase in occupancy and equipment expense, a $862,000 increase in data processing expense and an $975,000 increase in other operating expenses. The decrease in interest expense was primarily due to a $16.4 million decrease in interest on deposits and a $1.4 million decrease in interest on FHLB borrowed funds. The increase in non-interest income was primarily due to a $5.6 million increase in mortgage lending income, a $2.3 million increase in dividend income from FHLB, FRB, FNBB and other equity investments, and a $1.1 million increase in other income, partially offset by a $1.6 million decrease in service charges on deposit accounts and a $1.4 million decrease in the fair value adjustment on marketable securities. Income tax expense decreased by $6.1 million during the quarter due a reduction in net income as well as $3.7 million in tax expense incurred in the third quarter of 2019 due to the Company surrendering $47.5 million of underperforming separate account bank owned life insurance.

Our net interest margin decreased from 4.32% for the three-month period ended September 30, 2019 to 3.92% for the three-month period ended September 30, 2020. The yield on interest earning assets was 4.47% and 5.50% for the three months ended September 30, 2020 and 2019, respectively, as average interest earning assets increased from $13.24 billion to $14.98 billion. The increase in average earning assets is primarily the result of an $813.5 million increase in average loans receivable, a $713.1 million increase in average interest-bearing balances due from banks and a $214.1 million increase in average investment securities. Average PPP loan balances were $822.0 million for the three months ended September 30, 2020. These loans bear interest at 1.00% plus the accretion of the origination fee. We recognized total interest income of $5.9 million on PPP loans for the three months ended September 30, 2020. The PPP loans were dilutive to the net interest margin by 6 basis points for the three months ended September 30, 2020. The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market. As a result, we had an increase of $713.1 million in average interest-bearing cash balances for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This excess liquidity was dilutive to the net interest margin by 20 basis points. For the three months ended September 30, 2020 and 2019, we recognized $7.0 million and $8.5 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 4 basis points. We recognized no event interest income for the three months ended September 30, 2020 compared to $2.8 million for the three months ended September 30, 2019. This lowered the net interest margin by 8 basis points. The rate on interest bearing liabilities was 0.76% and 1.57% for the three months ended September 30, 2020 and 2019, respectively, as average interest-bearing liabilities increased from $9.91 billion to $10.67 billion. The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the absence of loan payoff events, reduced the net interest margin by 38 basis points for the quarter ended September 30, 2020.

Our efficiency ratio was 39.56% for the three months ended September 30, 2020, compared to 39.16% for the same period in 2019. For the third quarter of 2020, our efficiency ratio, as adjusted (non-GAAP), was 40.08%, an improvement of 52 basis points from the 40.60% reported for the third quarter of 2019. (See Table 23 for the non-GAAP tabular reconciliation).

Our annualized return on average assets was 1.66% for the three months ended September 30, 2020, compared to 1.93% for the same period in 2019. Our annualized return on average common equity was 10.97% for the three months ended September 30, 2020, compared to 11.84% for the same period in 2019.

Results of Operations for the Nine Months Ended September 30, 2020 and 2019

Our net income decreased $83.6 million, or 38.7%, to $132.7 million for the nine-month period ended September 30, 2020, from $216.3 million for the same period in 2019. On a diluted earnings per share basis, our earnings were $0.80 per share for the nine-month period ended September 30, 2020 and $1.29 per share for the nine-month period ended September 30, 2019. As a result of COVID-19, the unemployment rate projections significantly increased from January 1, 2020 through September 30, 2020. Additionally, the ongoing uncertainties related to the COVID-19 pandemic have resulted in the Company increasing reserves on deferred loans. These impacts of COVID-19 have resulted in the Company recording a $102.1 million provision for credit losses on loans, an $842,000 provision for credit losses on investment securities, and a $6.2 million write-down for the fair value adjustment on marketable securities. The Company also recorded $17.0 million in unfunded commitments expense which was due to an increase in the expected funding percentages for the Company’s unfunded commitments as well as an increase in the unemployment rate projections from January 1, 2020 to September 30, 2020, due to COVID-19. We incurred $10.0 million of expense as a result of our LH-Finance acquisition, which we completed on February 29, 2020, including $9.3 million for the provision for credit losses and $711,000 of acquisition expenses. The acquired loan portfolio is now housed in our Shore Premier Finance (“SPF”) division. The Company also had $1.1 million of expense for outsourced special projects, $10.2 million of special dividend income from one of our equity investments and $981,000 of increased depreciation expense related to the second quarter write-off of the Company’s Marathon, Florida branch office, which the Company made the strategic decision to demolish and rebuild at its existing location. The summation of all these items resulted in net additional expense of $128.1 million, or $94.6 million after tax.

Total interest income decreased $32.5 million, or 6.0% and non-interest expense increased $25.7 million, or 12.6%. This was partially offset by a $43.5 million, or 36.5%, decrease in total interest expense and a $6.4 million, or 9.0%, increase in non-interest income. The primary drivers of the decrease in interest income were a $25.2 million decrease in loan interest income, a $4.6 million decrease in investment security income and a $2.7 million decrease in interest income on deposits with other banks. The increase in non-interest expense was primarily due to a $5.2 million increase in salaries and employee benefits, $1.9 million increase in occupancy and equipment expense, a $2.0 million increase in data processing expense and a $16.6 million increase in other operating expenses resulting from a $17.0 million increase in our reserve for unfunded commitments during the nine months ended September 30, 2020. The decrease in interest expense was due to a $34.8 million decrease in interest on deposits and a $6.9 million decrease in interest on FHLB borrowed funds. The increase in non-interest income was primarily due to a $8.5 million increase in mortgage lending income, a $5.8 million increase in dividend income from FHLB, FRB, FNBB and other equity investments , and a $3.7 million increase in other income, which were partially offset by a $6.2 million write-down for the fair value adjustment on marketable securities, a $3.3 million decrease in service charges on deposit accounts and a $1.2 million decrease in other service charges and fees. Income tax expense decreased by $35.5 million due to a reduction in net income as well as $3.7 million in tax expense incurred in the third quarter of 2019 due to the Company surrendering $47.5 million of underperforming separate account bank owned life insurance.

Our net interest margin decreased from 4.30% for the nine-month period ended September 30, 2019 to 4.08% for the nine-month period ended September 30, 2020. The yield on interest earning assets was 4.79% and 5.50% for the nine months ended September 30, 2020 and 2019, respectively, as average interest earning assets increased from $13.28 billion to $14.36 billion. The increase in average earning assets is primarily the result of a $526.0 million increase in average loans receivable, a $409.8 million in average interest-bearing balances due from banks, and a $141.3 million increase in average investment securities. Average PPP loan balances from the Company’s participation in the Paycheck Protection Program beginning in the second quarter of 2020 were $470.6 million for the nine months ended September 30, 2020. We recognized total interest income of $10.4 million on PPP loans for the nine months ended September 30, 2020. The PPP loans were dilutive to the net interest margin by 4 basis points for the nine months ended September 30, 2020. As a result of the significant amount of excess liquidity in the market created by the COVID-19 pandemic and the resulting governmental response, we had an increase of $409.8 million in average interest-bearing cash balances for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This excess liquidity was dilutive to the net interest margin by 12 basis points. For the nine months ended September 30, 2020 and 2019, we recognized $21.6 million and $26.8 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 5 basis points. We recognized $2.1 million in event interest income for the nine months ended September 30, 2020 compared to $2.8 million for the nine months ended September 30, 2019. This lowered the net interest margin by 1 basis point. The rate on interest bearing liabilities was 0.97% and 1.59% for the nine months ended September 30, 2020 and 2019, respectively, as average interest-bearing liabilities increased from $10.05 billion to $10.49 billion. The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the absence of loan payoff events, reduced the net interest margin by 22 basis points for the nine months ended September 30, 2020.

Our efficiency ratio was 43.69% for the nine months ended September 30, 2020, compared to 40.03% for the same period in 2019. For the first nine months of 2020, our efficiency ratio, as adjusted (non-GAAP) was 40.25%, an decrease of 10 basis points from the 40.35% reported for the first nine months of 2019. (See Table 23 for the non-GAAP tabular reconciliation).

Our annualized return on average assets was 1.11% for the nine months ended September 30, 2020, compared to 1.92% for the same period in 2019. Our annualized return on average common equity was 7.13% for the nine months ended September 30, 2020, compared to 12.12% for the same period in 2019.

Financial Condition as of and for the Period Ended September 30, 2020 and December 31, 2019

Our total assets as of September 30, 2020 increased $1.52 billion to $16.55 billion from the $15.03 billion reported as of December 31, 2019. Cash and cash equivalents increased $552.7 million, or 112.7%, for the nine months ended September 30, 2020. The increase in cash and cash equivalents is primarily due to the Company’s strategic decision to increase our liquidity position as a result of the COVID-19 pandemic . Our loan portfolio balance increased to $11.69 billion as of September 30, 2020 from $10.87 billion at December 31, 2019. The increase in the loan portfolio is primarily due to the $848.7 million of PPP loans as well as the acquisition of $406.2 million of loans from LH-Finance during the first quarter of 2020. Total deposits increased $1.66 billion to $12.94 billion as of September 30, 2020 from $11.28 billion as of December 31, 2019, which was due customers holding higher deposit balances in response to the COVID-19 pandemic. Stockholders’ equity increased $29.3 million to $2.54 billion as of September 30, 2020, compared to $2.51 billion as of December 31, 2019. The $29.3 million increase in stockholders’ equity is primarily associated with the $132.7 million in net income and $22.1 million in other comprehensive income for the nine months ended September 30, 2020 which was partially offset by the $44.0 million impact of the adoption of ASC 326, $64.6 million of shareholder dividends paid and stock repurchases of $23.9 million in 2020.

Our non-performing loans were $73.8 million, or 0.63% of total loans as of September 30, 2020, compared to $54.8 million, or 0.50% of total loans as of December 31, 2019. The allowance for credit losses as a percent of non-performing loans increased to 336.4% as of September 30, 2020, from 186.2% as of December 31, 2019. Non-performing loans from our Arkansas franchise were $23.3 million at September 30, 2020 compared to $17.9 million as of December 31, 2019. Non-performing loans from our Florida franchise were $40.2 million at September 30, 2020 compared to $34.7 million as of December 31, 2019. Non-performing loans from our Alabama franchise were $489,000 at September 30, 2020 compared to $429,000 as of December 31, 2019. Non-performing loans from our SPF franchise were $4.3 million at September 30, 2020 compared to $1.8 million as of December 31, 2019. Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $5.4 million at September 30, 2020 compared to zero as of December 31, 2019.

As of September 30, 2020, our non-performing assets increased to $78.4 million, or 0.47% of total assets, from $64.4 million, or 0.43% of total assets, as of December 31, 2019. Non-performing assets from our Arkansas franchise were $24.8 million at September 30, 2020 compared to $22.9 million as of December 31, 2019. Non-performing assets from our Florida franchise were $43.3 million at September 30, 2020 compared to $39.2 million as of December 31, 2019. Non-performing assets from our Alabama franchise were $523,000 at September 30, 2020 compared to $463,000 as of December 31, 2019. Non-performing assets from our SPF franchise were $4.4 million at September 30, 2020 compared to $1.8 million as of December 31, 2019. Non-performing assets from our CFG franchise were $5.4 million at September 30, 2020 compared to zero as of December 31, 2019.

The $5.4 million balance of non-accrual loans for our Centennial CFG market consists of two loans that are assessed for Credit risk by the Federal Reserve under the Shared National Credit Program. The decision to place these loans on non-accrual status was made by the Federal Reserve and not the Company. The two loans that make up the total balance are still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because the Federal Reserve required us to place these loans on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve.

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 revenue recognition and the accounting for the allowance for credit losses, foreclosed assets, investments, intangible assets, income taxes and stock options.

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

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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 $3.8 million, $11.0 million, $3.6 million and $10.4 million for the three and nine months ended September 30, 2020 and 2019, respectively. Centennial CFG loan fees were $2.7 million, $5.6 million, $2.7 million, and $6.6 million for the three and nine months ended September 30, 2020 and 2019, respectively.

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

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

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In 2019, the Company reevaluated its loan pools of purchased loans with deteriorated credit quality. These loans pools related specifically to acquired loans from the Heritage, Liberty, Landmark, Bay Cities, Bank of Commerce, Premier Bank, Stonegate and Shore Premier Finance acquisitions. At acquisition, a portion of these loans were recorded as purchased credit impaired loans on a pool by pool basis. Through the reevaluation of these loan pools, management determined that estimated losses for purchase credit impaired loans should be processed against the credit mark of the applicable pools. The remaining non-accretable mark was then moved to accretable mark to be recognized over the remaining weighted average life of the loan pools. The projected losses for these loans were less than the total credit mark. As such, the remaining $107.6 million of loans in these pools along with the $29.3 million in accretable yield was deemed to be immaterial and was reclassified out of the purchased credit impaired loans category. As of December 31, 2019, the Company no longer held any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption on of ASC 326 as of January 1, 2020.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As of December 31, 2019, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined than an allowance for credit losses on available-for-sale securities was not deemed material. However, the Company evaluated the investment portfolio during the first quarter of 2020 and determined that an $842,000 provision for credit losses was necessary. No additional provision was deemed necessary during the second and third quarters of 2020. See Note 3 for further discussion.

Investments – Available-for-sale. Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

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

The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

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

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

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1-4 family construction

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All other construction

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

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1-4 family senior liens

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Multifamily

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Owner occupies commercial real estate

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Non-owner occupied commercial real estate

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

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Consumer auto

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Other consumer

The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

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

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

Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Purchase credit deteriorated (“PCD”) loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit loss.

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

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

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

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

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

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

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

Acquisitions

Acquisition of LH-Finance

The acquired portfolio of loans is now housed in our SPF division. The SPF division is responsible for servicing the acquired loan portfolio and originating new loan production. In connection with this acquisition, we opened a new loan production office in Baltimore, Maryland.

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

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, 2020, we had 161 branch locations. There were 77 branches in Arkansas, 78 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, 2020 and 2019

Our net income decreased $83.6 million, or 38.7%, to $132.7 million for the nine-month period ended September 30, 2020, from $216.3 million for the same period in 2019. On a diluted earnings per share basis, our earnings were $0.80 per share for the nine-month period ended September 30, 2020 and $1.29 per share for the nine-month period ended September 30, 2019. As a result of COVID-19, the unemployment rate projections significantly increased from January 1, 2020 through September 30, 2020. Additionally, the ongoing uncertainties related to the COVID-19 pandemic have resulted in the Company increasing reserves on deferred loans. These impacts of COVID-19 have resulted in the Company recording a $102.1 million provision for credit losses on loans, an $842,000 provision for credit losses on investment securities, and a $6.2 million write-down for the fair value adjustment on marketable securities. The Company also recorded $17.0 million in unfunded commitments expense, which was due to an increase in the expected funding percentages for the Company’s unfunded commitments as well as an increase in the unemployment rate projections from January 1, 2020 to September 30, 2020, due to COVID-19. We incurred $10.0 million of expense as a result of our LH-Finance acquisition, which we completed on February 29, 2020, including $9.3 million for the provision for credit losses and $711,000 of acquisition expenses. The acquired loan portfolio is now housed in our SPF division. The Company also had $1.1 million of expense for outsourced special projects, $10.2 million of special dividend income from one of our equity investments and $981,000 of increased depreciation expense related to the second quarter write-off of the Company’s Marathon, Florida branch office, which the Company made the strategic decision to demolish and rebuild at its existing location. The summation of all these items resulted in net additional expense of $128.1 million, or $94.6 million after tax.

Net Interest Income

Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments, rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (26.135% for the three and nine months ended September 30, 2020, 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 Reserve lowered the target rate three times during 2019. First, the target rate was lowered to 2.00% to 2.25% on July 31, 2019; second, the rate was lowered on September 18, 2019 to 1.75% to 2.00%; and third, the rate was lowered on October 30, 2019 to 1.50% to 1.75%. The Federal reserve lowered the target rate two times in 2020. First, the target rate was lowered to 1.00% to 1.25% on March 3, 2020; second, the rate was lowered to 0.00% to 0.25% on March 15, 2020. The target rate is currently at 0.00% to 0.25% as of September 30, 2020, which has decreased from the target rate of 1.75% to 2.00% as of September 30, 2019.

Our net interest margin decreased from 4.32% for the three-month period ended September 30, 2019 to 3.92% for the three-month period ended September 30, 2020. The yield on interest earning assets was 4.47% and 5.50% for the three months ended September 30, 2020 and 2019, respectively, as average interest earning assets increased from $13.24 billion to $14.98 billion. The increase in average earning assets is primarily the result of an $813.5 million increase in average loans receivable, a $713.1 million increase in average interest-bearing balances due from banks and a $214.1 million increase in average investment securities. Average PPP loan balances were $822.0 million for the three months ended September 30, 2020. These loans bear interest at 1.00% plus the accretion of the origination fee. We recognized total interest income of $5.9 million on PPP loans for the three months ended September 30, 2020. The PPP loans were dilutive to the net interest margin by 6 basis points for the three months ended September 30, 2020. The COVID-19 pandemic and the resulting governmental response has created a significant amount of excess liquidity in the market. As a result, we had an increase of $713.1 million in average interest-bearing cash balances for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This excess liquidity was dilutive to the net interest margin by 20 basis points. For the three months ended September 30, 2020 and 2019, we recognized $7.0 million and $8.5 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive the net interest margin by 4 basis points. We recognized no event interest income for the three months ended September 30, 2020 compared to $2.8 million for the three months ended September 30, 2019. This lowered the net interest margin by 8 basis points. The rate on interest bearing liabilities was 0.76% and 1.57% for the three months ended September 30, 2020 and 2019, respectively, as average interest-bearing liabilities increased from $9.91 billion to $10.67 billion. The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the absence of loan payoff events, reduced the net interest margin by 38 basis points for the quarter ended September 30, 2020.

Our net interest margin decreased from 4.30% for the nine-month period ended September 30, 2019 to 4.08% for the nine-month period ended September 30, 2020. The yield on interest earning assets was 4.79% and 5.50% for the nine months ended September 30, 2020 and 2019, respectively, as average interest earning assets increased from $13.28 billion to $14.36 billion. The increase in average earning assets is primarily the result of a $526.0 million increase in average loans receivable, a $409.8 million in average interest-bearing balances due from banks, and a $141.3 million increase in average investment securities. Average PPP loan balances from the Company’s participation in the Paycheck Protection Program beginning in the second quarter of 2020 were $470.6 million for the nine months ended September 30, 2020. We recognized total interest income of $10.4 million on PPP loans for the nine months ended September 30, 2020. The PPP loans were dilutive to the net interest margin by 4 basis points for the nine months ended September 30, 2020. As a result of the significant amount of excess liquidity in the market created by the COVID-19 pandemic and the resulting governmental response, we had an increase of $409.8 million in average interest-bearing cash balances for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This excess liquidity was dilutive to the net interest margin by 12 basis points. For the nine months ended September 30, 2020 and 2019, we recognized $21.6 million and $26.8 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive the net interest margin by 5 basis points. We recognized $2.1 million in event interest income for the nine months ended September 30, 2020 compared to $2.8 million for the nine months ended September 30, 2019. This lowered the net interest margin by 1 basis point. The rate on interest bearing liabilities was 0.97% and 1.59% for the nine months ended September 30, 2020 and 2019, respectively, as average interest-bearing liabilities increased from $10.05 billion to $10.49 billion. The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the absence of loan payoff events, reduced the net interest margin by 22 basis points for the nine months ended September 30, 2020.

Net interest income on a fully taxable equivalent basis increased $3.5 million, or 2.4%, to $147.7 million for the three-month period ended September 30, 2020, from $144.2 million for the same period in 2019. This increase in net interest income for the three-month period ended September 30, 2020 was the result of a $18.6 million decrease in interest expense which was partially offset by a $15.1 million decrease in interest income, on a fully taxable equivalent basis. The $15.1 million decrease in interest income was primarily the result of lower yields on our earning assets, partially offset by a higher level of earning assets. The lower yield on earning assets resulted in a decrease in interest income of approximately $30.2 million, and the higher level of earning assets resulted in an increase in interest income of approximately $15.0 million. The lower yield was primarily driven by the decrease in income on loans of $12.8 million, a decrease in income on investment securities of $1.5 million and a $816,000 decrease in income on interest-bearing balances due from banks. The decrease in interest income also reflected a $1.5 million decrease in loan accretion income. The $18.6 million decrease in interest expense for the three-month period ended September 30, 2020 is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment which lowered interest expense by $19.4 million, partially offset by a $742,000 in increased interest expense resulting from an increase in average interest bearing liabilities.

Net interest income on a fully taxable equivalent basis increased $11.4 million, or 2.7%, to $438.8 million for the nine-month period ended September 30, 2020, from $427.4 million for the same period in 2019. This increase in net interest income for the nine-month period ended September 30, 2020 was the result of a $43.5 million decrease in interest expense which was partially offset by a $32.1 million decrease in interest income, on a fully taxable equivalent basis. The $32.1 million decrease in interest income was primarily the result of lower yields on our earning assets, partially offset by a higher level of earning assets. The lower yield on earning assets resulted in a decrease in interest income of approximately $62.3 million, and the higher level of earning assets resulted in an increase in interest income of approximately $30.1 million. The lower yield was primarily driven by the decrease in income on loans of $25.4 million, a decrease in income on investment securities of $4.0 million and a $2.7 million decrease in income on interest-bearing balances from banks. The decrease in interest income also reflected a $5.1 million decrease in loan accretion income. The $43.5 million decrease in interest expense for the nine-month period ended September 30, 2020 is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which lowered interest expense by $44.5 million.

Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2020 and 2019, as well as changes in fully taxable equivalent net interest margin for the three and nine months ended September 30, 2020 compared to the same period in 2019.

Table 2: Analysis of Net Interest Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Interest income	$	166,633		$	182,082		$	510,406		$	542,856
Fully taxable equivalent adjustment		1,576			1,247			4,237			3,933
Interest income – fully taxable equivalent		168,209			183,329			514,643			546,789
Interest expense		20,495			39,105			75,876			119,422
Net interest income – fully taxable equivalent		147,714			144,224			438,767			427,367
Yield on earning assets – fully taxable equivalent		4.47	%		5.50	%		4.79	%		5.50	%
Cost of interest-bearing liabilities		0.76			1.57			0.97			1.59
Net interest spread – fully taxable equivalent		3.71			3.93			3.82			3.91
Net interest margin – fully taxable equivalent		3.92			4.32			4.08			4.30

Table 3: Changes in Fully Taxable Equivalent Net Interest Margin

	Three Months Ended September 30,			Nine Months Ended September 30,
	2020 vs. 2019			2020 vs. 2019
	(In thousands)
Increase (decrease) in interest income due to change in earning assets	$	15,044		$	30,142
Increase (decrease) in interest income due to change in earning asset yields		(30,164	)		(62,288	)
(Increase) decrease in interest expense due to change in interest-bearing liabilities		(742	)		(931	)
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities		19,352			44,477
Increase (decrease) in net interest income	$	3,490		$	11,400

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 months ended September 30, 2020 and 2019, 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,
	2020							2019
	Average Balance		Income / Expense		Yield / Rate			Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	926,754	$	252		0.11	%	$	213,671	$	1,068		1.98	%
Federal funds sold		124		—		0.00			1,442		8		2.20
Investment securities – taxable		1,618,058		7,227		1.78			1,705,647		10,343		2.41
Investment securities – non-taxable		672,067		5,731		3.39			370,376		4,139		4.43
Loans receivable		11,758,143		154,999		5.24			10,944,638		167,771		6.08
Total interest-earning assets		14,975,146		168,209		4.47	%		13,235,774		183,329		5.50	%
Non-earning assets		1,619,349							1,757,458
Total assets	$	16,594,495						$	14,993,232
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	7,937,412	$	6,651		0.33	%	$	6,629,491	$	19,615		1.17	%
Time deposits		1,745,279		6,549		1.49			2,014,630		9,951		1.96
Total interest-bearing deposits		9,682,691		13,200		0.54			8,644,121		29,566		1.36
Federal funds purchased		—		—		0.00			4,801		21		1.74
Securities sold under agreement to repurchase		157,172		237		0.60			143,628		628		1.73
FHLB and other borrowed funds		464,799		2,235		1.91			748,577		3,683		1.95
Subordinated debentures		370,038		4,823		5.19			369,269		5,207		5.59
Total interest-bearing liabilities		10,674,700		20,495		0.76	%		9,910,396		39,105		1.57	%
Non-interest-bearing liabilities
Non-interest-bearing deposits		3,259,501							2,530,664
Other liabilities		146,502							114,352
Total liabilities		14,080,703							12,555,412
Stockholders’ equity		2,513,792							2,437,820
Total liabilities and stockholders’ equity	$	16,594,495						$	14,993,232
Net interest spread						3.71	%						3.93	%
Net interest income and margin			$	147,714		3.92	%			$	144,224		4.32	%

Table 4: Average Balance Sheets and Net Interest Income Analysis

	Nine Months Ended September 30,
	2020							2019
	Average Balance		Income / Expense		Yield / Rate			Average Balance		Income / Expense		Yield / Rate
	(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks	$	671,231	$	1,579		0.31	%	$	261,419	$	4,239		2.17	%
Federal funds sold		1,775		21		1.58			1,510		29		2.57
Investment securities – taxable		1,665,900		25,696		2.06			1,647,781		31,699		2.57
Investment securities – non-taxable		503,253		14,712		3.90			380,115		12,741		4.48
Loans receivable		11,519,706		472,635		5.48			10,993,686		498,081		6.06
Total interest-earning assets		14,361,865		514,643		4.79	%		13,284,511		546,789		5.50	%
Non-earning assets		1,655,973							1,772,341
Total assets	$	16,017,838						$	15,056,852
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction accounts	$	7,544,763	$	30,272		0.54	%	$	6,634,809	$	59,788		1.20	%
Time deposits		1,847,833		22,242		1.61			1,954,182		27,493		1.88
Total interest-bearing deposits		9,392,596		52,514		0.75			8,588,991		87,281		1.36
Federal funds purchased		2,080		13		0.83			1,618		21		1.74
Securities sold under agreement to repurchase		150,020		959		0.85			146,277		1,892		1.73
FHLB and other borrowed funds		579,805		7,589		1.75			945,351		14,523		2.05
Subordinated debentures		369,846		14,801		5.35			369,078		15,705		5.69
Total interest-bearing liabilities		10,494,347		75,876		0.97	%		10,051,315		119,422		1.59	%
Non-interest-bearing liabilities
Non-interest-bearing deposits		2,904,159							2,508,082
Other liabilities		134,281							110,715
Total liabilities		13,532,787							12,670,112
Stockholders’ equity		2,485,051							2,386,740
Total liabilities and stockholders’ equity	$	16,017,838						$	15,056,852
Net interest spread						3.82	%						3.91	%
Net interest income and margin			$	438,767		4.08	%			$	427,367		4.30	%

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 months ended September 30, 2020 compared to the same period in 2019, 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,
	2020 over 2019									2020 over 2019
	Volume			Yield/Rate			Total			Volume			Yield/Rate			Total
	(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks	$	938		$	(1,754	)	$	(816	)	$	2,969		$	(5,629	)	$	(2,660	)
Federal funds sold		(4	)		(4	)		(8	)		4			(12	)		(8	)
Investment securities – taxable		(508	)		(2,608	)		(3,116	)		345			(6,348	)		(6,003	)
Investment securities – non-taxable		2,753			(1,161	)		1,592			3,749			(1,778	)		1,971
Loans receivable		11,865			(24,637	)		(12,772	)		23,075			(48,521	)		(25,446	)
Total interest income		15,044			(30,164	)		(15,120	)		30,142			(62,288	)		(32,146	)
Interest expense:
Interest-bearing transaction and savings deposits		3,271			(16,235	)		(12,964	)		7,298			(36,814	)		(29,516	)
Time deposits		(1,216	)		(2,186	)		(3,402	)		(1,437	)		(3,814	)		(5,251	)
Federal funds purchased		(11	)		(10	)		(21	)		5			(13	)		(8	)
Securities sold under agreement to repurchase		54			(445	)		(391	)		47			(980	)		(933	)
FHLB borrowed funds		(1,367	)		(81	)		(1,448	)		(5,015	)		(1,919	)		(6,934	)
Subordinated debentures		11			(395	)		(384	)		33			(937	)		(904	)
Total interest expense		742			(19,352	)		(18,610	)		931			(44,477	)		(43,546	)
Increase (decrease) in net interest income	$	14,302		$	(10,812	)	$	3,490		$	29,211		$	(17,811	)	$	11,400

Provision for Credit Losses

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

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

Acquired loans. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. This is commonly referred to as “double accounting.”

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

•

1-4 family construction

•

All other construction

•

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

•

1-4 family senior liens

•

Multifamily

•

Owner occupies commercial real estate

•

Non-owner occupied commercial real estate

•

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

•

Consumer auto

•

Other consumer

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

During the three months ended September 30, 2020, we recorded $14.0 million of total credit loss expense compared to recording zero credit loss expense for the three months ended September 30, 2019. For the nine months ended September 30, 2020, we recorded $112.3 million of total credit loss expense compared to $1.3 million for the nine months ended September 30. 2019. This expense is comprised of the following components – investment securities, CECL double accounting for LH-Finance and CECL COVID-19 loan provision. During the nine months ended September 30, 2020, we recorded $842,000 for credit losses on the state and political subdivision portfolio as a result of economic uncertainties related to COVID-19, $9.3 million for CECL double accounting for LH-Finance and $102.1 million for the CECL COVID-19 loan provision. Our CECL provisioning model is significantly tied to projected unemployment rates. As a result of COVID-19, the unemployment rate projections significantly increased from January 1 to the end of September 2020. Additionally, the ongoing uncertainties related to the COVID-19 pandemic have resulted in the Company increasing reserves on deferred loans. These impacts of COVID-19 have resulted in the Company recording the $102.1 million provision. In addition, net charge-offs to average total loans increased to 0.14% for the three months ended September 30, 2020 from 0.06% for the three months ended September 30, 2019. Net charge-offs to average total loans increased to 0.11% for the nine months ended September 30, 2020 from 0.07% for the nine months ended September 30, 2019.

Non-Interest Income

Total non-interest income was $30.0 million and $77.9 million for the three and nine months ended September 30, 2020, compared to $24.7 million and $71.5 million for the same periods in 2019. 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 months ended September 30, 2020 and 2019, respectively, as well as changes for three and nine months ended September 30, 2020 compared to the same period in 2019.

Table 6: Non-Interest Income

	Three Months Ended										Nine Months Ended
	September 30,					2020 Change					September 30,						2020 Change
	2020			2019		from 2019					2020			2019			from 2019
	(Dollars in thousands)
Service charges on deposit accounts	$	4,910		$	6,492	$	(1,582	)	(24.4	)%	$	15,837		$	19,152		$	(3,315	)	(17.3	)%
Other service charges and fees		8,539			8,710		(171	)	(2.0	)		22,261			23,450			(1,189	)	(5.1	)
Trust fees		378			382		(4	)	(1.0	)		1,213			1,176			37		3.1
Mortgage lending income		10,177			4,610		5,567		120.8			18,994			10,502			8,492		80.9
Insurance commissions		271			603		(332	)	(55.1	)		1,482			1,727			(245	)	(14.2	)
Increase in cash value of life insurance		548			714		(166	)	(23.2	)		1,666			2,190			(524	)	(23.9	)
Dividends from FHLB, FRB, FNBB & other		3,433			1,101		2,332		211.8			11,505			5,755			5,750		99.9
Gain on sale of SBA loans		—			291		(291	)	(100.0	)		341			887			(546	)	(61.6	)
Gain (loss) on sale of branches, equipment and other assets, net		(27	)		12		(39	)	(325.0	)		109			(38	)		147		386.8
Gain (loss) on OREO, net		470			334		136		40.7			982			598			384		64.2
Fair value adjustment for marketable securities		(1,350	)		—		(1,350	)	(100.0	)		(6,249	)		—			(6,249	)	(100.0	)
Other income		2,602			1,500		1,102		73.5			9,760			6,088			3,672		60.3
Total non-interest income	$	29,951		$	24,749	$	5,202		21.0	%	$	77,901		$	71,487		$	6,414		9.0	%

Non-interest income increased $5.2 million, or 21.0%, to $30.0 million for three months ended September 30, 2020 from $24.7 million for the same period in 2019. The primary factor that resulted in this increase was the impact of mortgage lending income which increased non-interest income by $5.6 million. Other factors were changes related to service charges on deposit accounts, mortgage lending income, dividends from FHLB, Federal Reserve Bank (“FRB”), First National Bankers Bank (“FNBB”) & other, fair value adjustment for marketable securities, and other income.

Additional details for the three months ended September 30, 2020 on some of the more significant changes are as follows:

•

The $1.6 million decrease in service charges on deposit accounts is primarily related to a decrease in overdraft fees resulting from changes in consumer spending habits leading consumers to hold higher deposit balances in response to the COVID-19 pandemic.

•

The $5.6 million increase in mortgage lending income is primarily due to the increase in volume of secondary market loan sales driven by the current low interest rate environment. In addition, reduced hedging expense led to higher margins on secondary market loan sales.

•

The $2.3 million increase in dividends from FHLB, FRB, FNBB & other is primarily the result of a $3.2 million special dividend from an equity investment. This was partially offset by a decrease in dividend income from the FRB and FHLB.

•

The $1.4 million loss on the fair value adjustment for marketable securities is related to the decrease in the fair market value of a marketable security held by the Company.

•

The $1.1 million increase in other income is primarily due to a $812,000 increase in additional income for items previously charged off, a $142,000 increase in investment brokerage fee income, and a $125,000 increase in miscellaneous income.

Non-interest income increased $6.4 million, or 9.0%, to $77.9 million for the nine months ended September 30, 2020 from $71.5 million for the same period in 2019. The primary factor that resulted in this increase was the impact of the mortgage lending income which increased non-interest income by $8.5 million for the nine months ended September 30, 2020. Other factors were changes related to service charges on deposit accounts, other service charges and fees, increase in cash value of life insurance, dividends from FHLB, FRB, FNBB & other, gain on sale of SBA loans, fair value adjustment of marketable securities and other income.

Additional details for the nine months ended September 30, 2020 on some of the more significant changes are as follows:

•

The $3.3 million decrease in service charges on deposit accounts is primarily related to a decrease in overdraft fees resulting from changes in consumer spending habits leading consumers to hold higher deposit balances in response to the COVID-19 pandemic.

•

The $1.2 million decrease in other service charges and fees is primarily related to a decrease in Centennial CFG property finance loan fees.

•

The $524,000 decrease in the cash value of life insurance is due to the Company surrendering $47.5 million of underperforming separate account bank owned life insurance during 2019.

•

The $8.5 million increase in mortgage lending income is primarily due to the increase in volume of secondary market loan sales driven by the current low interest rate environment. In addition, reduced hedging expense led to higher margins on secondary market loan sales.

•

The $5.8 million increase in dividends from FHLB, FRB, FNBB & other is primarily the result of $10.2 million in special dividends from an equity investment received during the nine months ended September 30, 2020, compared to $2.1 million received during the nine months ended September 30, 2019. This was partially offset by a decrease in dividend income from the FRB and FHLB.

•

The $546,000 decrease in SBA loans is due to no loans being sold during the second and third quarters of 2020.

•

The $6.2 million loss in the fair value adjustment for marketable securities is related to the decline in the fair market value of a marketable security held by the Company.

•

The $3.7 million increase in other income is primarily due to a $2.8 million increase in additional income for items previously charged off, a $452,000 increase in gain on life insurance and a $522,000 increase in investment brokerage fee 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, other professional fees and unfunded commitments expense.

Table 7 below sets forth a summary of non-interest expense for the three and nine months ended September 30, 2020 and 2019, as well as changes for the three and nine months ended September 30, 2020 compared to the same period in 2019.

Table 7: Non-Interest Expense

	Three Months Ended										Nine Months Ended
	September 30,					2020 Change					September 30,				2020 Change
	2020		2019			from 2019					2020		2019		from 2019
	(Dollars in thousands)
Salaries and employee benefits	$	41,511	$	39,919		$	1,592		4.0	%	$	120,928	$	115,731	$	5,197		4.5	%
Occupancy and equipment		9,566		9,047			519		5.7			28,611		26,723		1,888		7.1
Data processing expense		4,921		4,059			862		21.2			13,861		11,867		1,994		16.8
Other operating expenses:
Advertising		902		1,201			(299	)	(24.9	)		2,923		3,347		(424	)	(12.7	)
Merger and acquisition expense		—		—			—		—			711		—		711		100.0
Amortization of intangibles		1,420		1,587			(167	)	(10.5	)		4,423		4,760		(337	)	(7.1	)
Electronic banking expense		2,426		1,901			525		27.6			6,195		5,655		540		9.5
Directors’ fees		429		380			49		12.9			1,265		1,206		59		4.9
Due from bank service charges		259		272			(13	)	(4.8	)		721		792		(71	)	(9.0	)
FDIC and state assessment		1,607		(532	)		2,139		402.1			5,001		2,833		2,168		76.5
Hurricane expense		—		—			—		—			—		897		(897	)	(100.0	)
Insurance		766		698			68		9.7			2,223		2,056		167		8.1
Legal and accounting		1,235		1,414			(179	)	(12.7	)		3,432		3,384		48		1.4
Other professional fees		1,661		1,906			(245	)	(12.9	)		6,622		7,024		(402	)	(5.7	)
Operating supplies		460		511			(51	)	(10.0	)		1,548		1,552		(4	)	(0.3	)
Postage		328		320			8		2.5			968		939		29		3.1
Telephone		321		289			32		11.1			955		898		57		6.3
Unfunded commitments		—		—			—		—			16,989		—		16,989		100.0
Other expense		3,900		4,792			(892	)	(18.6	)		12,757		14,781		(2,024	)	(13.7	)
Total non-interest expense	$	71,712	$	67,764		$	3,948		5.8	%	$	230,133	$	204,445	$	25,688		12.6	%

Non-interest expense increased $3.9 million, or 5.8%, to $71.7 million for the three months ended September 30, 2020 from $67.8 million for the same period in 2019. The primary factor that resulted in this increase was the changes related to FDIC and state assessment fees. Other factors were changes related to salaries and employee benefits expense, occupancy and equipment expenses, data processing expenses, and other expenses.

Additional details for the three months ended September 30, 2020 on some of the more significant changes are as follows:

•

The $1.6 million increase in salaries and employee benefits expense is primarily due to increased salary expense related to the normal increased cost of doing business, additional employees hired as a result of the increased regulatory environment, and the acquisition of LH-Finance on February 29, 2020.

•

The $519,000 increase in occupancy and equipment is primarily related to an increase in janitorial services and supplies expenses as a result of the ongoing COVID-19 pandemic.

•

The $862,000 increase in data processing expense is primarily related to an increase in software, licensing, and software maintenance fees.

•

The $2.1 million increase in FDIC and state assessment is primarily related to a $2.3 million FDIC small bank assessment credit recorded in the third quarter of 2019.

•

The $892,000 decrease in other expenses is primarily due to the decrease in other professional fees, legal expenses, and general travel expenses.

•

Non-interest expense increased $25.7 million, or 12.6%, to $230.1 million for the nine months ended September 30, 2020 from $204.4 million for the same period in 2019. The primary factor that resulted in this increase was the unfunded commitments expense incurred as a result of the Company adopting ASC 326. Other factors were changes related to salaries and employee benefits expense, occupancy and equipment expenses, data processing expenses, merger and acquisition expenses, FDIC and state assessment fees, unfunded commitments expense and other expenses.

Additional details for the nine months ended September 30, 2020 on some of the more significant changes are as follows:

•

The $5.2 million increase in salaries and employee benefits expense is primarily due to increased salary expense related to the normal increased cost of doing business, additional employees hired as a result of the increased regulatory environment and the acquisition of LH-Finance on February 29, 2020.

•

The $1.9 million increase in occupancy and equipment is primarily related to an increase in janitorial services and supplies expense resulting from the ongoing COVID-19 pandemic and the increased depreciation expense due to the write-off of the Company’s Marathon, Florida branch office during the second quarter of 2020. The Company made the strategic decision to demolish and rebuild the branch at its existing location.

•

The $2.0 million increase in data processing expense is primarily related to an increase in software, licensing, software maintenance and internet banking/cash management expenses.

•

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

•

The $2.2 million increase in FDIC and state assessment is primarily related to a $2.3 million FDIC small bank assessment credit recorded in the third quarter of 2019.

•

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

•

The $17.0 million increase in unfunded commitments expense is due to an increase in the expected funding percentages for the Company’s unfunded commitments as well as an increase in the unemployment rate projections from January 1, 2020 to September 30, 2020, due to COVID-19, as the Company’s provisioning model is significantly tied to projected unemployment rates.

•

The $2.0 million decrease in other expenses is primarily due to the decreases in other professional fees and electronic interchange network expense.

Income Taxes

Income tax expense decreased $6.1 million, or 22.6%, to $21.1 million for the three-month period ended September 30, 2020, from $27.2 million for the same period in 2019. Income tax expense decreased $35.5 million, or 48.7%, to $37.4 million for the nine-month period ended September 30, 2020, from $72.9 million for the same period in 2019. The effective income tax rate was 23.30% and 21.98% for the three and nine-month period ended September 30, 2020, compared to 27.21% and 25.20% for the same periods in 2019. The reduction in income tax expense and the effective tax rate for the three and nine-month periods ended September 30, 2020 compared to the same periods in 2019 was due to the decrease in pre-tax net income for the three and nine-month periods ended September 31, 2020 compared to the same periods in 2019 as well as $3.7 million in tax expense incurred in the third quarter of 2019 due to the Company surrendering $47.5 million of underperforming separate account bank owned life insurance.

Financial Condition as of and for the Period Ended September 30, 2020 and December 31, 2019

Our total assets as of September 30, 2020 increased $1.52 billion to $16.55 billion from the $15.03 billion reported as of December 31, 2019. Cash and cash equivalents increased $552.7 million, or 112.7%, for the nine months ended September 30, 2020. The increase in cash and cash equivalents is primarily due to the Company’s strategic decision to increase our liquidity position as a result of the COVID-19 pandemic. Our loan portfolio balance increased to $11.69 billion as of September 30, 2020 from $10.87 billion at December 31, 2019. The increase in the loan portfolio is primarily due to the $848.7 million of PPP loans as well as the acquisition of $406.2 million of loans from LH-Finance during the first quarter of 2020. Total deposits increased $1.66 billion to $12.94 billion as of September 30, 2020 from $11.28 billion as of December 31, 2019, which was due customers holding higher deposit balances in response to the COVID-19 pandemic. Stockholders’ equity increased $29.3 million to $2.54 billion as of September 30, 2020, compared to $2.51 billion as of December 31, 2019. The $29.3 million increase in stockholders’ equity is primarily associated with the $132.7 million in net income and $22.1 million in other comprehensive income for the nine months ended September 30, 2020, which was partially offset by the $44.0 million impact of the adoption of ASC 326, $64.6 million of shareholder dividends paid and stock repurchases of $23.9 million in 2020.

Loan Portfolio

Loans Receivable

Our loan portfolio averaged $11.76 billion and $10.94 billion during the three months ended September 30, 2020 and 2019, respectively. Our loan portfolio averaged $11.52 billion and $10.99 billion during the nine months ended September 30, 2020 and 2019, respectively. Loans receivable were $11.69 billion and $10.87 billion as of September 30, 2020 and December 31, 2019, respectively.

The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act includes an allocation for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program. PPP loans are forgivable, in whole or in part, so long as employee and compensation levels of the borrower are maintained, and the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1.00% to 5.00%, based on the size of the loan. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/HCEA Act”) was passed by Congress on April 23, 2020 and signed into law on April 24, 2020. The PPP/HCEA Act authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA. As of September 30, 2020, the Company had $848.7 million of PPP loans. This balance consists of $776.5 million in commercial & industrial loans and $72.2 million in other loans. From December 31, 2019 to September 30, 2020, the Company experienced an increase of approximately $821.8 million in loans. The increase in the loan portfolio is primarily due to the $848.7 million of PPP loans held as of September 30, 2020 as well as the acquisition of $406.2 million of loans from LH-Finance during the first quarter of 2020. Including the effects of PPP loan originations, Centennial CFG experienced $89.1 million of organic loan growth during the first nine months of 2020, while the remaining footprint, excluding the acquisition of LH-Finance, experienced $326.5 million of organic loan growth during the first nine months of 2020.

The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property. Although these loans are primarily originated within our franchises in Arkansas, Florida, South Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas of Arkansas, Florida, Alabama and New York. Loans receivable were approximately $3.80 billion, $5.06 billion, $242.9 million, $912.9 million and $1.68 billion as of September 30, 2020 in Arkansas, Florida, Alabama, SPF and Centennial CFG, respectively.

As of September 30, 2020, we had approximately $431.1 million of construction land development loans which were collateralized by land. This consisted of approximately $119.1 million for raw land and approximately $312.0 million for land with commercial and or residential lots.

Table 8 presents our loans receivable balances by category as of September 30, 2020 and December 31, 2019.

Table 8: Loans Receivable

	As of		As of
	September 30, 2020		December 31, 2019
	(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	4,342,141	$	4,412,769
Construction/land development		1,748,928		1,776,689
Agricultural		89,476		88,400
Residential real estate loans:
Residential 1-4 family		1,665,628		1,819,221
Multifamily residential		491,380		488,278
Total real estate		8,337,553		8,585,357
Consumer		883,568		511,909
Commercial and industrial		2,161,818		1,528,003
Agricultural		85,365		63,644
Other		223,166		180,797
Total loans receivable	$	11,691,470	$	10,869,710

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, 2020, commercial real estate loans totaled $6.18 billion, or 52.9% of loans receivable, as compared to $6.28 billion, or 57.8% of loans receivable, as of December 31, 2019. Commercial real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $2.15 billion, $2.82 billion, $117.9 million, zero and $1.10 billion at September 30, 2020, 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 34.9% and 53.8% 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, 2020, with the remaining 11.3% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to 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, 2020, residential real estate loans totaled $2.16 billion, or 18.4% of loans receivable, compared to $2.31 billion, or 21.2% of loans receivable, as of December 31, 2019. Residential real estate loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $752.9 million, $1.15 billion, $68.1 million, zero and $183.5 million at September 30, 2020, respectively.

Consumer Loans. Our consumer loans are composed of secured and unsecured loans originated by our bank, the primary portion of which consists of loans to finance USCG registered high-end sail and power boats as a result of our acquisition of SPF on June 30, 2018 as well as our acquisition of LH-Finance on February 29, 2020. The performance of consumer loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.

As of September 30, 2020, consumer loans totaled $883.6 million, or 7.6% of loans receivable, compared to $511.9 million, or 4.7% of loans receivable, as of December 31, 2019. Consumer loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $40.2 million, $10.5 million, $1.1 million, $831.8 million ($331.4 million of which was acquired from LH-Finance during the first quarter of 2020) and zero at September 30, 2020, respectively.

As of September 30, 2020, commercial and industrial loans totaled $2.16 billion, or 18.5% of loans receivable, compared to $1.53 billion, or 14.1% of loans receivable, as of December 31, 2019. Commercial and industrial loans originated in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $683.9 million, $938.4 million, $53.4 million, $81.1 million ($74.8 million of which was acquired from LH-Finance during the first quarter of 2020) and $405.1 million at September 30, 2020, 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.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as PCI and accounted for under ASC 310-30. In 2019, the Company reevaluated its loan pools of purchased loans with deteriorated credit quality. These loans pools related specifically to acquired loans from the Heritage, Liberty, Landmark, Bay Cities, Bank of Commerce, Premier Bank, Stonegate and Shore Premier Finance acquisitions. At acquisition, a portion of these loans were recorded as purchased credit impaired loans on a pool by pool basis. Through the reevaluation of these loan pools, management determined that estimated losses for purchase credit impaired loans should be processed against the credit mark of the applicable pools. The remaining non-accretable mark was then moved to accretable mark to be recognized over the remaining weighted average life of the loan pools. The projected losses for these loans were less than the total credit mark. As such, the remaining $107.6 million of loans in these pools along with the $29.3 million in accretable yield was deemed to be immaterial and was reclassified out of the purchased credit impaired loans category. As of December 31, 2019, the Company no longer held any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption on of ASC 326 as of January 1, 2020.

Table 9 sets forth information with respect to our non-performing assets as of September 30, 2020 and December 31, 2019. 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, 2020			December 31, 2019
	(Dollars in thousands)
Non-accrual loans	$	65,148		$	47,607
Loans past due 90 days or more (principal or interest payments)		8,635			7,238
Total non-performing loans		73,783			54,845
Other non-performing assets
Foreclosed assets held for sale, net		4,322			9,143
Other non-performing assets		247			447
Total other non-performing assets		4,569			9,590
Total non-performing assets	$	78,352		$	64,435
Allowance for credit losses to non-performing loans		336.42	%		186.20	%
Non-performing loans to total loans		0.63			0.50
Non-performing assets to total assets		0.47			0.43

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

Total non-performing loans were $73.8 million and $54.8 million as of September 30, 2020 and December 31, 2019, respectively. Non-performing loans at September 30, 2020 were $23.3 million, $40.2 million, $489,000, $4.3 million and $5.4 million in the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively.

During the first nine months of 2020, the COVID-19 pandemic has had a significant impact on global markets driven by supply chain and production disruptions, workforce restrictions, travel restrictions, retail closures, and reduced consumer spending and sentiment, amongst other factors. The global and economic impacts of the coronavirus continue to evolve, and the Company is continuing to closely monitor the situation. While the Company believes our allowance for credit losses is adequate at September 30, 2020, 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 credit losses during 2020. Our CECL provisioning model is significantly tied to projected unemployment rates. As a result of COVID-19, the unemployment rate projections significantly increased from January 1 to the end of September 2020. Additionally, the ongoing uncertainties related to the COVID-19 pandemic have resulted in the Company increasing reserves on deferred loans. These impacts of COVID-19 have resulted in a $102.1 million provision for the nine months ended September 30, 2020.

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, 2020, we had $10.7 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 $8.6 million and our Arkansas market contains $2.1 million of these restructured loans.

A loan modification that might not otherwise be considered may be granted resulting in classification as a TDR. These loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on an accrual status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of 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.

Section 4013 of the CARES Act enacted in March 2020 provides financial institutions optional temporary relief from the TDR classification requirements for certain COVID-19 related loan modifications. Specifically, financial institutions may elect to suspend TDR classification for certain loan modifications related to COVID-19 made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after termination of the President’s national emergency declaration for COVID-19. Further, financial institutions do not need to determine impairment associated with certain loan concessions that would otherwise have been required for TDRs (e.g., interest rate concessions, payment deferrals, or loan extensions). On April 7, 2020, the Federal Reserve Board and the other federal bank regulatory agencies issued an interagency statement clarifying the relationship between the Section 4013 of the CARES Act and previous guidance issued by the agencies on March 22, 2020. This interagency statement encourages financial institutions to work prudently with borrowers who are or may be unable to meet their payment obligations because of COVID-19 and states that the agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The Company has not relied on Section 4013 of the CARES Act in accounting for loan modifications as of September 30, 2020; however, it is likely that the Company will use this optional accounting treatment.

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, lengthening 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, 2020 and December 31, 2019, the amount of TDRs was $12.4 million and $16.3 million, respectively. As of September 30, 2020 and December 31, 2019, 86.0% and 74.6%, respectively, of all restructured loans were performing to the terms of the restructure.

Total foreclosed assets held for sale were $4.3 million as of September 30, 2020, compared to $9.1 million as of December 31, 2019 for a decrease of $4.8 million. The foreclosed assets held for sale as of September 30, 2020 are comprised of $1.4 million of assets located in Arkansas, $2.9 million of assets located in Florida, $34,000 located in Alabama and zero from SPF and Centennial CFG.

During the first nine months of 2020, we had one foreclosed property with a carrying value greater than $1.0 million. The property was a development property in Florida acquired from The Bank of Commerce with a carrying value of $2.1 million at September 30, 2020. The Company does not currently anticipate any additional losses on this property. As of September 30, 2020, 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, 2020 and December 31, 2019.

Table 10: Foreclosed Assets Held For Sale

	As of		As of
	September 30, 2020		December 31, 2019
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	819	$	3,528
Construction/land development		3,341		3,218
Residential real estate loans
Residential 1-4 family		162		2,397
Total foreclosed assets held for sale	$	4,322	$	9,143

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, 2020 and December 31, 2019, impaired loans were $114.4 million and $78.9 million, respectively. The amortized cost balance for loans with a specific allocation increased from $11.9 million to $41.6 million, and the specific allocation for impaired loans increased by approximately $7.6 million for the period ended September 30, 2020 compared to the period ended December 31, 2019. As of September 30, 2020, our Arkansas, Florida, Alabama, SPF and Centennial CFG markets accounted for approximately $49.3 million, $54.9 million, $489,000, $4.3 million and $5.4 million of the impaired loans, respectively.

As of September 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019:

Table 11: Total Non-Accrual Loans

	As of		As of
	September 30, 2020		December 31, 2019
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	14,790	$	10,966
Construction/land development		1,479		1,359
Agricultural		898		1,094
Residential real estate loans
Residential 1-4 family		20,498		20,314
Multifamily residential		176		331
Total real estate		37,841		34,064
Consumer		3,624		1,632
Commercial and industrial		22,588		10,692
Agricultural		1,095		1,218
Other		—		1
Total non-accrual loans	$	65,148	$	47,607

If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $944,000 and $604,000, respectively, would have been recorded for the three-month periods ended September 30, 2020 and 2019. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $2.8 million and $1.9 million, respectively, would have been recorded for the nine-month periods ended September 30, 2020 and 2019. The interest income recognized on non-accrual loans for the three and nine months ended September 30, 2020 and 2019 was considered immaterial.

Table 12 shows the summary of accruing past due loans 90 days or more as of September 30, 2020 and December 31, 2019:

Table 12: Loans Accruing Past Due 90 Days or More

	As of		As of
	September 30, 2020		December 31, 2019
	(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential	$	3,706	$	3,194
Construction/land development		1,351		1,821
Residential real estate loans
Residential 1-4 family		2,766		1,614
Total real estate		7,823		6,629
Consumer		812		317
Commercial and industrial		—		292
Total loans accruing past due 90 days or more	$	8,635	$	7,238

Our ratio of total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.63% and 0.50% at September 30, 2020 and December 31, 2019, respectively.

Allowance for Credit Losses

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credits, financial guarantees, and other similar instruments. The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $44.0 million, which was recognized through a $32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $146.1 million as of January 1, 2020. In addition, the Company recorded a $15.5 million reserve on unfunded commitments, as of January 1, 2020, which was recognized through an $11.5 million adjustment to retained earnings, net of tax.

Overview. The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

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

•

1-4 family construction

•

All other construction

•

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

•

1-4 family senior liens

•

Multifamily

•

Owner occupies commercial real estate

•

Non-owner occupied commercial real estate

•

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

•

Consumer auto

•

Other consumer

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

•

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

•

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

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

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

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

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

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

Loans Collectively Evaluated for Impairment. Loans receivable collectively evaluated for impairment increased by approximately $640.0 million from $10.66 billion at December 31, 2019 to $11.30 billion at September 30, 2020. The percentage of the allowance for credit losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment was 2.09% and 0.91% at September 30, 2020 and December 31, 2019, respectively.

Charge-offs and Recoveries. Total charge-offs increased to $4.6 million for the three months ended September 30, 2020, compared to $2.3 million for the same period in 2019. Total charge-offs increased to $11.4 million for the nine months ended September 30, 2020, compared to $8.0 million for the same period in 2019. Total recoveries decreased to $483,000 for the three months ended September 30, 2020, compared to $540,000 for the same period in 2019. Total recoveries decreased to $1.8 million for the nine months ended September 30, 2020, compared to $2.2 million for the same period in 2019. For the three months ended September 30, 2020, net charge-offs were $1.6 million for Arkansas, $2.5 million for Florida, $1,000 for Alabama, $8,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $4.1 million. For the nine months ended September 30, 2020, net charge-offs were $2.7 million for Arkansas, $7.0 million for Florida, $7,000 for Alabama, $8,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $9.7 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 credit losses, charge-offs and recoveries as of and for the three and nine months ended September 30, 2020 and 2019.

Table 13: Analysis of Allowance for Credit Losses

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Balance, beginning of period	$	238,340		$	106,066		$	102,122		$	108,791
Impact of adopting ASC 326		—			—			43,988			—
Allowance for credit losses on acquired loans		—			—			357			—
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		994			858			3,003			2,360
Construction/land development		—			133			443			1,445
Agricultural		—			—			—			—
Residential real estate loans:
Residential 1-4 family		93			522			450			1,183
Multifamily residential		—			—			—			—
Total real estate		1,087			1,513			3,896			4,988
Consumer		133			76			161			278
Commercial and industrial		3,057			143			6,207			1,152
Agricultural		—			—			—			—
Other		322			570			1,182			1,554
Total loans charged off		4,599			2,302			11,446			7,972
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential		129			22			614			226
Construction/land development		79			(40	)		94			78
Agricultural		—			—			—			—
Residential real estate loans:
Residential 1-4 family		59			274			296			770
Multifamily residential		9			3			9			11
Total real estate		276			259			1,013			1,085
Consumer		24			61			77			98
Commercial and industrial		36			62			142			466
Agricultural		—			—			—			—
Other		147			158			549			511
Total recoveries		483			540			1,781			2,160
Net loans charged off (recovered)		4,116			1,762			9,665			5,812
Provision for credit losses		14,000			—			111,422			1,325
Balance, September 30	$	248,224		$	104,304		$	248,224		$	104,304
Net charge-offs (recoveries) to average loans receivable		0.14	%		0.06	%		0.11	%		0.07	%
Allowance for credit losses to total loans		2.12			0.97			2.12			0.97
Allowance for credit losses to net charge-offs (recoveries)		1,516			1,492			1,923			1,342

Table 14 presents the allocation of allowance for credit losses as of September 30, 2020 and December 31, 2019.

Table 14: Allocation of Allowance for Credit Losses

	As of September 30, 2020					As of December 31, 2019
	Allowance Amount		% of loans⁽¹⁾			Allowance Amount		% of loans⁽¹⁾
	(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential	$	96,641		37.1	%	$	32,776		40.6	%
Construction/land development		38,815		15.0			26,433		16.3
Agricultural		1,323		0.8			753		0.8
Residential real estate loans:
Residential 1-4 family		41,454		14.2			16,758		16.7
Multifamily residential		3,766		4.2			3,377		4.5
Total real estate		181,999		71.3			80,097		78.9
Consumer		23,195		7.6			1,906		4.7
Commercial and industrial		39,660		18.5			16,615		14.1
Agricultural		497		0.7			3,504		0.6
Other		2,873		1.9			—		1.7
Total allowance for credit losses	$	248,224		100.0	%	$	102,122		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 2.6 years as of September 30, 2020.

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 $2.36 billion and $2.08 billion as September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020, $1.15 billion, or 48.8%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $1.21 billion, or 58.2%, of our available-for-sale securities as of December 31, 2019. To reduce our income tax burden, $866.4 million, or 36.7%, of our available-for-sale securities portfolio as of September 30, 2020, were primarily invested in tax-exempt obligations of state and political subdivisions, compared to $439.6 million, or 21.1%, of our available-for-sale securities as of December 31, 2019. We had $304.3 million, or 12.9%, invested in obligations of U.S. Government-sponsored enterprises as of September 30, 2020, compared to $397.6 million, or 19.1%, of our available-for-sale securities as of December 31, 2019. Also, we had approximately $37.8 million, or 1.6%, invested in other securities as of September 30, 2020, compared to $33.0 million, or 1.6% of our available-for-sale securities as of December 31, 2019.

Beginning January 1, 2020, the Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. For the three months ended March 30, 2020, the Company determined a provision for credit losses of $842,000 was necessary for the state and political subdivision portfolio as a result of economic uncertainties related to COVID-19. For the three months ended June 30, 2020 and three months ended September 30, 2020, the Company determined that no additional provision for credit losses was necessary for the portfolio.

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 $12.94 billion and $12.30 billion for the three and nine months ended September 30, 2020, respectively. Total deposits were $12.94 billion as of September 30, 2020, and $11.28 billion as of December 31, 2019. 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, 2020 and December 31, 2019.

Table 15: Brokered Deposits

	September 30, 2020		December 31, 2019
	(In thousands)
Time Deposits	$	30,000	$	95,399
CDARS		—		109
Insured Cash Sweep and Other Transaction Accounts		593,621		484,169
Total Brokered Deposits	$	623,621	$	579,677

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 months ended September 30, 2020 and 2019.

Table 16: Average Deposit Balances and Rates

	Three Months Ended September 30,
	2020					2019
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	3,259,501		—	%	$	2,530,664		—	%
Interest-bearing transaction accounts		7,197,123		0.36			6,000,823		1.27
Savings deposits		740,289		0.09			628,668		0.25
Time deposits:
$100,000 or more		1,340,508		1.66			1,556,618		2.16
Other time deposits		404,771		0.94			458,012		1.28
Total	$	12,942,192		0.41	%	$	11,174,785		1.05	%

	Nine Months Ended September 30,
	2020					2019
	Average Amount		Average Rate Paid			Average Amount		Average Rate Paid
	(Dollars in thousands)
Non-interest-bearing transaction accounts	$	2,904,159		—	%	$	2,508,082		—	%
Interest-bearing transaction accounts	$	6,852,251		0.58			6,006,220		1.30
Savings deposits	$	692,512		0.14			628,589		0.26
Time deposits:
$100,000 or more		1,430,542		1.76			1,489,161		2.09
Other time deposits		417,291		1.10			465,021		1.20
Total	$	12,296,755		0.57	%	$	11,097,073		1.05	%

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 $14.7 million, or 10.2%, from $143.7 million as of December 31, 2019 to $158.4 million as of September 30, 2020.

FHLB and Other Borrowed Funds

The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $403.4 million and $621.4 million at September 30, 2020 and December 31, 2019, respectively. The Company had no other borrowed funds as of September 30, 2020 or December 31, 2019. At September 30, 2020, all of the outstanding balances were classified as long-term advances. At December 31, 2019, $75.0 million and $546.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. Our remaining FHLB borrowing capacity was $2.95 billion and $2.79 billion as of September 30, 2020 and December 31, 2019, respectively. The FHLB advances mature from 2020 to 2033 with fixed interest rates ranging from 1.76% to 2.85%. Maturities of borrowings as of September 30, 2020 include: 2020 – $3.43 million; 2021 – zero; 2022 – zero; 2023 – zero; 2024 – zero; after 2024 – $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.

Subordinated Debentures

Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $370.1 million and $369.6 million as of September 30, 2020 and December 31, 2019, 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.

On April 3, 2017, the Company completed an underwritten public offering of $300 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “Notes”). The Notes were issued at 99.997% of par, resulting in net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The Notes are unsecured, subordinated debt obligations of the Company and will mature on April 15, 2027. The Notes qualify as Tier 2 capital for regulatory purposes.

Stockholders’ Equity

Stockholders’ equity was $2.54 billion at September 30, 2020 compared to $2.51 billion at December 31, 2019. The $29.3 million increase in stockholders’ equity is primarily associated with $22.1 million in other comprehensive income and $132.7 million in net income for nine months ended September 30, 2020, which was partially offset by the $44.0 million impact of the adoption of ASC 326, $64.6 million of shareholder dividends paid and stock repurchases of $23.9 million in 2020. The annualized increase in stockholders’ equity for the first nine months of 2020 was 1.6%. As of September 30, 2020 and December 31, 2019, our equity to asset ratio was 15.4% and 16.7%, respectively. Book value per share was $15.38 as of September 30, 2020, compared to $15.10 as of December 31, 2019, a 2.5% annualized increase.

Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.13 per share for the three months ended September 30, 2020 and 2019. The common stock dividend payout ratio for the three months ended September 30, 2020 and 2019 was 31.0% and 29.9%, respectively. The common stock dividend payout ratio for the nine months ended September 30, 2020 and 2019 was 48.7% and 29.6%, respectively. On October 16, 2020, the Board of Directors declared a regular $0.14 per share quarterly cash dividend payable December 2, 2020, to shareholders of record November 11, 2020.

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. We repurchased a total of 1,423,560 shares with a weighted-average stock price of $16.73 per share during the first three months of 2020. The Company did not repurchase any stock during the second or third quarter of 2020. The remaining balance available for repurchase was 3,953,665 shares at September 30, 2020.

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, 2020 and December 31, 2019, we met all regulatory capital adequacy requirements to which we were subject.

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

Table 17 presents our risk-based capital ratios on a consolidated basis as of September 30, 2020 and December 31, 2019.

Table 17: Risk-Based Capital

	As of September 30, 2020			As of December 31, 2019
	(Dollars in thousands)
Tier 1 capital
Stockholders’ equity	$	2,540,799		$	2,511,531
ASC 326 transitional period adjustment		58,020			—
Goodwill and core deposit intangibles, net		(1,004,709	)		(994,554	)
Unrealized gain on available-for-sale securities		(38,345	)		(16,221	)
Total common equity Tier 1 capital		1,555,765			1,500,756
Qualifying trust preferred securities		71,091			70,984
Total Tier 1 capital		1,626,856			1,571,740
Tier 2 capital
Allowance for credit losses		248,224			102,122
ASC 326 transitional period adjustment		(58,020	)		—
Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets)		(35,638	)		—
Qualifying allowance for credit losses		154,566			102,122
Qualifying subordinated notes		299,042			298,573
Total Tier 2 capital		453,608			400,695
Total risk-based capital	$	2,080,464		$	1,972,435
Average total assets for leverage ratio	$	15,647,806		$	13,949,814
Risk weighted assets	$	12,307,369		$	12,066,643
Ratios at end of period
Common equity Tier 1 capital		12.64	%		12.44	%
Leverage ratio		10.40			11.27
Tier 1 risk-based capital		13.22			13.03
Total risk-based capital		16.90			16.35
Minimum guidelines – Basel III phase-in schedule
Common equity Tier 1 capital		7.00	%		7.00	%
Leverage ratio		4.00			4.00
Tier 1 risk-based capital		8.50			8.500
Total risk-based capital		10.50			10.500
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 certain non-interest income and expenses that management believes are not indicative of our primary business operating results. 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.

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,
	2020			2019			2020			2019
	(Dollars in thousands)
GAAP net income available to common shareholders (A)	$	69,320		$	72,763		$	132,654		$	216,277
Adjustments:
Outsourced special project		—			—			1,092			900
Merger and acquisition expense		—			—			711			—
Fair value adjustment for marketable securities		1,350			—			6,249			—
Unfunded commitment expense⁽¹⁾		—			—			16,989			—
Provision for credit losses⁽²⁾		14,000			—			112,264			1,325
Special dividend from equity investment		(3,181	)		—			(10,185	)		(2,134	)
FDIC Small Bank Assessment credit		—			(2,291	)		—			(2,291	)
Branch write-off expense		—			—			981			—
Hurricane expense		—			—			—			897
Total adjustments		12,169			(2,291	)		128,101			(1,303	)
Tax-effect of adjustments ⁽³⁾		3,181			(592	)		33,479			(336	)
Adjustments after-tax		8,988			(1,699	)		94,622			(967	)
Florida tax savings		—			(497	)		—			—
BOLI redemption tax		—			3,667			—			3,667
Total adjustments after-tax (B)		8,988			1,471			94,622			2,700
Earnings, as adjusted (C)	$	78,308		$	74,234		$	227,276		$	218,977
Average diluted shares outstanding (D)		165,200			167,178			165,458			168,178
GAAP diluted earnings per share: A/D	$	0.42		$	0.44		$	0.80		$	1.29
Adjustments after-tax B/D		0.05			—			0.57			0.01
Diluted earnings per common share, as adjusted: C/D	$	0.47		$	0.44		$	1.37		$	1.30

(1)

The total amount of the unfunded commitment expense was due to an increase in the expected funding percentages for the Company’s unfunded commitments as well as an increase in the unemployment rate projections from January 1, 2020 to September 30, 2020, due to COVID-19, as the Company’s provisioning model is significantly tied to projected unemployment rates.

(2)

The provision for credit losses for the three months ended September 30, 2020 is entirely related to COVID-19, and the provision for credit losses for the nine months ended September 30, 2020 consists of the following components: provision for credit loss – investment securities: $842,000; provision for credit loss – acquired loans: $9.3 million; COVID-19 provision for credit loss - loans: $102.1 million.

(3)	Blended statutory tax rate of 25.819% for the three and nine months ended September 30, 2019 and 26.135% for the three and nine months ended September 30, 2020.

We had $1.01 billion, $995.0 million, and $996.5 million total goodwill, core deposit intangibles and other intangible assets as of September 30, 2020, December 31, 2019 and September 30, 2019, 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 calculations 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, 2020		As of December 31, 2019
	(In thousands, except per share data)
Book value per share: A/B	$	15.38	$	15.10
Tangible book value per share: (A-C-D)/B		9.30		9.12
(A) Total equity	$	2,540,799	$	2,511,531
(B) Shares outstanding		165,163		166,373
(C) Goodwill	$	973,025	$	958,408
(D) Core deposit and other intangibles		32,149		36,572

Table 20: Return on Average Assets

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Return on average assets: A/D		1.66	%		1.93	%		1.11	%		1.92	%
Return on average assets excluding intangible amortization: B/(D-E)		1.80			2.10			1.21			2.09
Return on average assets excluding special dividend from equity investment, provision for credit losses, fair value adjustment for marketable securities, branch write-off expense, unfunded commitment expense, outsourced special project expense, merger and acquisition expenses, FDIC Small Bank Assessment Credit, hurricane expense, Florida tax savings and BOLI redemption tax: (ROA, as adjusted): (A+C)/D		1.88			1.96			1.90			1.94
(A) Net income	$	69,320		$	72,763		$	132,654		$	216,277
Intangible amortization after-tax		1,049			1,177			3,268			3,531
(B) Earnings excluding intangible amortization	$	70,369		$	73,940		$	135,922		$	219,808
(C) Adjustments after-tax	$	8,988		$	1,471		$	94,622		$	2,700
(D) Average assets		16,594,495			14,993,232			16,017,838			15,056,852
(E) Average goodwill, core deposits and other intangible assets		1,005,864			997,309			1,004,065			998,889

Table 21: Return on Average Tangible Equity Excluding Intangible Amortization

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Return on average equity: A/D		10.97	%		11.84	%		7.13	%		12.12	%
Return on average common equity excluding special dividend from equity investment, provision for credit losses, fair value adjustment for marketable securities, branch write-off expense, unfunded commitment expense, outsourced special project expense, merger and acquisition expenses, FDIC Small Bank Assessment Credit, hurricane expense, Florida tax savings and BOLI redemption tax: (ROE, as adjusted) ((A+C)/D)		12.39			12.08			12.22			12.27
Return on average tangible common equity: (A/(D-E))		18.29			20.04			11.96			20.84
Return on average tangible equity excluding intangible amortization: B/(D-E)		18.56			20.36			12.26			21.18
Return on average tangible common equity excluding special dividend from equity investment, provision for credit losses, fair value adjustment for marketable securities, branch write-off expense, unfunded commitment expense, outsourced special project expense, merger and acquisition expenses, FDIC Small Bank Assessment Credit, hurricane expense, Florida tax savings and BOLI redemption tax: (ROTCE, as adjusted) ((A+C)/(D-E))		20.66			20.45			20.50			21.10
(A) Net income	$	69,320		$	72,763		$	132,654		$	216,277
(B) Earnings excluding intangible amortization		70,369			73,940			135,922			219,808
(C) Adjustments after-tax		8,988			1,471			94,622			2,700
(D) Average equity		2,513,792			2,437,820			2,485,051			2,386,740
(E) Average goodwill, core deposits and other intangible assets		1,005,864			997,309			1,004,065			998,889

Table 22: Tangible Equity to Tangible Assets

	As of September 30, 2020			As of December 31, 2019
	(Dollars in thousands)
Equity to assets: B/A		15.35	%		16.71	%
Tangible equity to tangible assets: (B-C-D)/(A-C-D)		9.88			10.80
(A) Total assets	$	16,549,758		$	15,032,047
(B) Total equity		2,540,799			2,511,531
(C) Goodwill		973,025			958,408
(D) Core deposit and other intangibles		32,149			36,572

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,
	2020			2019			2020			2019
	(Dollars in thousands)
Net interest income (A)	$	146,138		$	142,977		$	434,530		$	423,434
Non-interest income (B)		29,951			24,749			77,901			71,487
Non-interest expense (C)		71,712			67,764			230,133			204,445
FTE Adjustment (D)		1,576			1,247			4,237			3,933
Amortization of intangibles (E)		1,420			1,587			4,423			4,760
Adjustments:
Non-interest income:
Special dividend from equity investments	$	3,181		$	—		$	10,185		$	2,134
Fair value adjustment for marketable securities		(1,350	)		—			(6,249	)		—
Gain (loss) on OREO, net		470			334			982			598
Gain (loss) on sale of branches, equipment and other assets, net		(27	)		12			109			(38	)
Total non-interest income adjustments (F)	$	2,274		$	346		$	5,027		$	2,694
Non-interest expense:
Branch write-off expense	$	—		$	—		$	981		$	—
FDIC Small Bank Assessment Credit		—			(2,291	)		—		$	(2,291	)
Merger expense		—			—			711			—
Hurricane expenses		—			—			—			897
Outsourced special project expense		—			—			1,092			900
Unfunded commitment expense		—			—			16,989			—
Total non-interest expense adjustments (G)	$	—		$	(2,291	)	$	19,773		$	(494	)
Efficiency ratio (reported): ((C-E)/(A+B+D))		39.56	%		39.16	%		43.69	%		40.03	%
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F))		40.08	%		40.60	%		40.25	%		40.35	%

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.

Due to the COVID-19 pandemic, the Company made a strategic decision to increase our liquidity position for the period ended September 30, 2020. 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, 2020, our cash and cash equivalents were $1.04 billion, or 6.3% of total assets, compared to $490.6 million, or 3.3% of total assets, as of December 31, 2019. Our unpledged available-for-sale investment securities and federal funds sold were $1.18 billion and $2.08 billion as of September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020, our investment portfolio was comprised of approximately $1.49 billion or 63.2% of securities which mature in less than five years. As of September 30, 2020 and December 31, 2019, $1.18 billion and $865.4 million, respectively, were pledged to secure public deposits, as collateral for repurchase agreements, and for other purposes required or permitted by law. 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 15.9% as of September 30, 2020 compared to 13.7% as of December 31, 2019.

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, 2020, our total deposits were $12.94 billion, or 78.2% of total assets, compared to $11.28 billion, or 75.0% of total assets, as of December 31, 2019. 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, 2020 and December 31, 2019, we could have borrowed under these lines of credit up to $481.3 million and $325.6 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 $403.4 million and $621.4 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, all of the outstanding balances were classified as long-term advances. At December 31, 2019, $75.0 million and $546.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. Our FHLB borrowing capacity was $2.95 billion and $2.79 billion as of September 30, 2020 and December 31, 2019, respectively.

We also have the ability to borrow funds under the Federal Reserve’s Paycheck Protection Program Liquidity Facility (the “PPPLF”) which was established to facilitate lending by financial institutions to small businesses under the PPP by providing term financing to participating financial institutions. Under the PPPLF, the Federal Reserve will lend to eligible and participating financial institutions on a non-recourse basis up to the aggregate principal balance of the PPP loans originated or purchased by the financial institution, with the PPP loans serving as collateral for the PPPLF borrowing. As of September 30, 2020, we could have borrowed up to $848.7 million from the Federal Reserve under the PPPLF. Borrowings under the PPPLF mature upon the maturity of each underlying PPP loan and will be accelerated in the event the underlying PPP loan goes into default or the eligible borrower sells the PPP loan to the SBA to realize on the SBA guarantee, and to the extent the eligible borrower receives any loan forgiveness reimbursement from the SBA. Extensions of credit under the PPPLF are available through December 31, 2020.

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, 2020, 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, 2020.

Table 24: Sensitivity of Net Interest Income

	Percentage
	Change
Interest Rate Scenario	from Base
Up 200 basis points		11.33	%
Up 100 basis points		5.98
Down 100 basis points		(3.26	)
Down 200 basis points		(7.03	)

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, 2020, our gap position was asset sensitive with a one-year cumulative repricing gap as a percentage of total earning assets of 17.3%. During the COVID-19 pandemic, the Company has participated in the PPP loan program under the CARES Act. The Company had $848.7 million of PPP loans as of September 30, 2020. In addition, total deposits have increased by $1.66 billion, $840.9 million of which were demand and non-interest-bearing deposits, for the nine months ended September 30, 2020. This has left the Company with over $800.0 million at the Federal Reserve as of September 30, 2020. For the Company’s gap analysis, the PPP loans fell into the 0-12 months and 1-2 year time periods due to maturities and prepayment factors applied to PPP loans. The outflow of PPP funds from the Bank has been slow and, in some cases, has been offset by inflows of other non-interest-bearing deposits. This, along with the rise in demand and non-interest-bearing deposits and the resulting increase in cash on hand, has caused an uneven shift in the sensitivity of the repricing gap between short-term assets and liabilities. Although PPP loans have maturities of two years, a large percentage of these loans are anticipated to receive SBA forgiveness and be repaid in advance of stated maturities. The Company feels that funding these loans was both beneficial and necessary for our customers in light of the current economic environment and believes the one-year repricing gap increase is temporary in nature. The Company believes the repricing gap would have been more in line with historical experiences had it not been for the funding of the PPP loans, and the excess liquidity that we have with the Federal Reserve.

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 negative effect in an environment of decreasing 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, 2020.

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	$	899,140		$	—		$	—		$	—		$	—		$	—		$	—		$	899,140
Federal funds sold		—			—			—			—			—			—			—			—
Investment securities		383,510			109,415			107,631			172,979			286,242			562,611			739,512			2,361,900
Loans receivable		3,583,221			862,402			1,120,222			1,948,735			1,924,896			1,905,253			346,741			11,691,470
Total earning assets		4,865,871			971,817			1,227,853			2,121,714			2,211,138			2,467,864			1,086,253			14,952,510
Interest-bearing liabilities
Interest-bearing transaction and savings deposits	$	1,676,266		$	605,172		$	907,759		$	1,815,518		$	944,369		$	775,909		$	1,286,207		$	8,011,200
Time deposits		393,834			271,504			348,736			346,293			301,997			54,026			1,909			1,718,299
Federal funds purchased		—			—			—			—			—			—			—			—
Securities sold under repurchase agreements		158,447			—			—			—			—			—			—			158,447
FHLB and other borrowed funds		—			—			3,428			—			—			—			400,000			403,428
Subordinated debentures		71,091			—			—			—			299,042			—			—			370,133
Total interest-bearing liabilities		2,299,638			876,676			1,259,923			2,161,811			1,545,408			829,935			1,688,116			10,661,507
Interest rate sensitivity gap	$	2,566,233		$	95,141		$	(32,070	)	$	(40,097	)	$	665,730		$	1,637,929		$	(601,863	)	$	4,291,003
Cumulative interest rate sensitivity gap	$	2,566,233		$	2,661,374		$	2,629,304		$	2,589,207		$	3,254,937		$	4,892,866		$	4,291,003
Cumulative rate sensitive assets to rate sensitive liabilities		211.6	%		183.8	%		159.3	%		139.2	%		140.0	%		154.5	%		140.2	%
Cumulative gap as a % of total earning assets		17.2	%		17.8	%		17.6	%		17.3	%		21.8	%		32.7	%		28.7	%

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, 2020, 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

Except for the risk factor set forth below, 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, 2019. 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.

The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

Beginning in the first quarter of 2020, the COVID-19 pandemic has negatively impacted the U.S. and global economy; disrupted U.S. and global supply chains; lowered equity market valuations; created significant volatility and disruption in financial markets; contributed to a decrease in the rates and yields on U.S. Treasury securities; resulted in ratings downgrades, credit deterioration, and defaults in many industries; increased demands on capital and liquidity; and increased unemployment levels and decreased consumer confidence. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in our footprint. The pandemic has caused us, and could continue to cause us, to recognize credit losses in our loan portfolios and increases in our allowance for credit losses and could cause further volatility in the valuation of real estate and other collateral supporting loans. Furthermore, the pandemic could cause us to recognize impairment of our goodwill and our financial assets. Sustained adverse effects may also increase our cost of capital, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, or result in downgrades in our credit ratings. The extent to which the COVID-19 pandemic impacts our business, financial condition, liquidity, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our customers, employees, counterparties and service providers, and actions taken by governmental authorities and other third parties in response to the pandemic.

Governmental authorities have taken significant measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth. The success of these measures is unknown, and they may not be sufficient to fully mitigate the negative impact of the pandemic. Additionally, governmental programs and policies, including the CARES Act Paycheck Protection Program in which we are participating, may impact our ability to resolve credit delinquencies as well as create heightened litigation risk and risk of holding loans at unfavorable interest rates. We also face an increased risk of governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions.

The potential global and economic impacts of the coronavirus continue to evolve rapidly, and the length of the pandemic and the effectiveness of the measures being put in place to address it are unknown. Until the effects of the pandemic subside, we expect continued reduced revenues in our businesses and increased customer defaults. Furthermore, the anticipated volatility in the economy and any prolonged recession could further materially and adversely affect our business, financial condition, liquidity, or results of operations.

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 available to repurchase to 9,919,447 shares. The Company did not purchase any shares of the Company’s common stock during the three months ended September 30, 2020.

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’s 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’s 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		Form of Change in Control Agreement by and between Home BancShares, Inc., Centennial Bank and Executive Officer (incorporated by reference to Exhibit 10.1 of Home BancShares’s Current Report on Form 8-K filed on August 10, 2020)

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 5, 2020	/s/ John W. Allison
		John W. Allison, Chairman and Chief Executive Officer

Date:	November 5, 2020	/s/ Brian S. Davis
		Brian S. Davis, Chief Financial Officer

Date:	November 5, 2020	/s/ Jennifer C. Floyd
		Jennifer C. Floyd, Chief Accounting Officer